DMO Business Model
The DMO has three main areas of business:
- Acquisition. Arranging for purchase, construction or modification of equipment and systems for the Australian Defence Force.
- Sustainment. Arranging maintenance support for existing Defence Force equipment and systems.
- Policy. Providing policy advice to the Government in areas like contracting and Defence industry development.
These three business areas align with the DMO Outputs defined in Chapter 2.
The third area of business—policy—represents less than $60m per annum in expenditure, mainly for staff, and is largely funded as a direct appropriation by the Parliament to the DMO.
In the first two areas of business, which together comprise over 99 percent of the DMO's annual expenditure, funding comes not as a direct appropriation but as a payment from Defence (with some small supplementary amounts obtained from the sale of goods and services to other government agencies, and to foreign governments—associated with collaborative activity). The DMO acquisition business is akin to a construction contractor in the private sector, who receives cash from a client to construct a product to the client's specifications. The sustainment business is akin to the 'local garage' in the private sector, with payments received for servicing a customer's assets to achieve an agreed level of performance.
The funding from Defence for acquisition and sustainment is provided in two parts—a 'contracted' component and a 'service fee' component. The former represents the cost of the goods (construction and procurement activity) and services the DMO will deliver to Defence. The service fee represents the cost of DMO operations—staff costs, business systems, office requisites, travel and training. The Chief Executive Officer has full discretion over allocation of the service fee, but the contracted component must be spent in accordance with the outcomes agreed with Defence in signed agency agreements. The service fee covers the cost of both civilian and military staff, but the military staff are considered to be 'owned' by Defence. The DMO pays a fee (reported in the DMO accounts as suppliers expenses) for those military staff that Defence provides—akin to the funding arrangements for contractor staff from the private sector. Defence, not the DMO, is liable for the payment of employee entitlements to military staff.
The DMO receives funding from Defence as a cash advance (mainly at the start of the financial year, but topped up periodically as Defence raises new or amended requirements and as the Government approves new projects from the Defence Capability Plan). The cash is initially held on the DMO balance sheet, but with an offsetting liability—unearned revenue—which reflects that the DMO has an obligation to provide Defence with goods and services in accordance with agreed outcomes. The DMO financial statements will include a combination of cash held at bank and an appropriation receivable, representing the undrawn component of the cash advance from Defence, offset by an unearned revenue liability. Through the year, both amounts will decline as the DMO delivers goods and services to Defence, thereby 'earning' the cash advance. By the end of the financial year, as reflected in the accounts in this report, the DMO will normally hold only a small level of cash, in accordance with the Government's requirement for just-in-time appropriation drawdown, and a small 'unearned revenue', representing any residual work yet to be delivered or performed that will carry over to the next financial year.
The DMO enters into contracts with industry to deliver the goods and services sought by Defence under the agency agreements signed between Defence and the DMO. Many of these DMO contracts with industry are large in value and long term in duration—up to a decade or two, or more in some cases. In many instances, the DMO will agree in the contracts to make cash advance payments to a company at certain defined milestones—commonly at contract signature. These cash payments are reported in the DMO financial accounts as 'prepayments'. This is akin to the deposit people commonly pay in the retail world when ordering goods. Such payments are agreed in DMO contracts only where they are judged to represent value for money for the Commonwealth in net present value terms—for example, where it results in a net reduction in contract price because industry does not need to borrow capital at rates higher than are available to the Government. These prepayments to industry are reflected on the DMO balance sheet as an asset—recognising the fact that they are underpinned by a contractual obligation from industry to deliver goods and services to the DMO of that value. When work associated with a prepayment is completed, the DMO will recognise that it has earned revenue, and will advise of the recognition of any assets to Defence and reduce both the DMO prepayment and unearned revenue liability accordingly.
The business model provides for symmetry between the Defence and the DMO financial statements. Cash payments between agencies can be seen on both sides. Unearned revenue to the DMO will be recognised by Defence as a prepayment asset.