1.1 PREFACE

1.1.1 The Department of Defence is involved in a number of large acquisition projects which are highly visible and of major significance to Australia's industrial base. It is clearly important that the Department and Australian Industry manage these projects well.

1.1.2 An important element in successful management is the effective control of cost and schedule aspects of contracts. The Cost Schedule Control Systems Criteria (CSCSC-The Criteria) approach to this area of project management, which was introduced in the USA by the Department of Defense in the 1960s, has been widely adopted elsewhere and was formally introduced in Australia in 1989. This approach requires selected major contractors to have performance management control systems that are consistent with standards laid down by Defence. This requirement applies to the contractor's management control systems not just to specific contracts.

1.1.3 Contractor conformance with the Criteria is in the best interests of both Defence and its contractors. This Standard describes the processes whereby the Department mandates the requirement in the context of a specified contract, the procedures for implementation into contractor's systems, demonstration of compliance to Defence, and subsequent maintenance.

1.1.4 The key features of the implementation processes addressed in this document are:

• Determination by Defence to apply the requirement in the context of a specific equipment contract.
  
• Evaluation of a prospective contractor's systems as part of a source selection process.
  
• Implementation by the contractor and review by Defence, following contract award, comprising:
  

1. Implementation Visit
   
2. Baseline Review
   
3. Readiness Assessment
   
4. Formal Documentation Review
   
5. Acceptance and Validation of contractors' systems
   

• Ongoing system maintenance by the contractor and surveillance by Defence.
  

1.1.5 Effect on Contracts. Contractors' performance management control systems should be designed to facilitate the effective execution of any contract. Necessary upgrading of those systems and conduct of the Demonstration Review process is not to hamper contractors meeting contractual obligations. Similarly, the application of the Criteria does not vary the terms of any other contract.

1.1.6 The Criteria are designed to test whether a contractor has effective integrated systems in place. It is not expected that CSCSC compliance will necessarily introduce any new concepts into a contractor's management systems, except perhaps the concept of earned value.

1.1.7 Effect on Payment. The Criteria are not intended as a payment system and nothing in the Criteria is intended to affect the basis on which costs are reimbursed or progress payments are made. Earned value may, or may not, be a reasonable basis for payments to a contractor depending upon the contractor's system design and the nature of the contract. Therefore, payments to a contractor is an issue that should be separately addressed in the contract along with any Defence requirements for funds reports and forecasts.

1.2 INTRODUCTION

1.2.1 Australian Defence Standard DEF(AUST) 5655 establishes the Criteria for contractors' performance management control systems for specified contracts and provides guidelines for their application. The Department of Defence may, depending on anticipated contract price and perceived technical, cost or schedule risk, require contractors to use management control systems which meet the Criteria.

1.2.2 This document is intended to provide guidance and procedures for the implementation of the Criteria. It is a basis for assisting both Defence and contractors in understanding the Criteria and assessing the compliance of contractors' systems with the Criteria.

1.2.3 Requirements for management systems and progress reporting for major contracts which are not selected for application of the Criteria are addressed in DEF(AUST) 5658, Cost Schedule Status Reporting Specification and Implementation Guide.

1.2.4 Interpretation. Within this guide "Defence" refers to the Department of Defence of the Commonwealth of Australia. For contracts where the Commonwealth is not the client, reference to the Commonwealth or its agent should be interpreted as the client and or its agent. The term "performance" means Cost Schedule performance. Any word importing a gender includes the other gender.

1.3 DEPARTMENTAL AUTHORITY

1.3.1 Within Defence, responsibility for implementation of the Criteria is vested in the First Assistant Secretary, Capital Equipment Program (FASCEP). The Director of Project Management Systems (DPMS) acts as a focal point within Defence and is responsible to FASCEP for policy advice and carriage of matters not otherwise delegated. FASCEP delegates responsibility for acceptance or validation of contractors' systems to an authority known as the 'Review Director'; this is normally DPMS or a nominated representative. Following acceptance, FASCEP normally delegates responsibility for ongoing surveillance in respect of particular contracts to the relevant Project Authority.

1.3.2 The Criteria, per se, are not negotiable. However, problems can arise in their interpretation or specific aspects of implementation. Such misunderstandings can be normally avoided or minimised by discussion between the relevant authority in Defence and contractors.

1.3.3 Supplemental Guidance. Instructions to supplement this Standard may be issued by FASCEP to provide additional guidance. These may be promulgated as amendments.

1.4 CRITERIA OBJECTIVES

1.4.1 The objectives of the Criteria are to ensure that:

• contractors use effective internal management control systems, and
  
• Defence can rely on timely and auditable data produced by those systems for determining contract status.
  

When management control systems acceptable to both the contractor and Defence are applied at a given contractor's facility, the systems will provide a common source of information for all management levels in Defence and the contractor's organisation.

1.5 THE CRITERIA CONCEPT

1.5.1 No single set of management control systems will meet every Defence and contractor management requirement for performance measurement. Due to variations in organisations, products, and working relationships, it is not feasible to prescribe a universal system for cost and schedule controls. Therefore, Defence has adopted an approach which simply defines the Criteria that contractors' management control systems must meet.

1.5.2 The Criteria are not a system! They are a set of Criteria designed to identify the characteristics of an adequate contractor cost and schedule management control system. Changes to a contractor's existing management system are required only to the extent that the existing system is inconsistent with the Criteria. The Criteria do not purport to address all of a contractor's management needs. Subjects such as cash or funds management and the need for day-to-day or week-to-week internal control (eg., expenses versus payments, informal communications, progress/technical reviews, and similar management tools) are not covered. These management tools are important and are not intended to be replaced by the Criteria requirements.

1.5.3 Interpretation. The Criteria are intended to be general, to permit their use in evaluating contractors' management control systems for development, construction, and production contracts. Since these types of contracts tend to differ significantly, it is impossible to provide detailed guidance which will apply specifically in all cases. Users of the Criteria should be alert for areas in which distinctions in detailed interpretation seem appropriate or reasonable, whether or not they are specifically identified. Use of the Criteria must be based on common sense. This means that interpretations must also be based on common sense and that they must be practical and sensitive to the overall requirements for performance measurement.

1.5.4 Flexibility. By applying the Criteria, rather than prescribing specific management control systems, contractors have the latitude and flexibility necessary to meet their individual management needs. This approach allows contractors to use existing management control systems, or other systems of their choice, provided the chosen system is consistent with the Criteria.

1.5.5 Earned Value. The Criteria require that actual work progress be quantified through earned value, which is an objective measure of how much work has been accomplished on the contract. Without earned value, one can only compare actual expenditure against planned expenditure with no objective indication of how much of the planned work was actually accomplished. The Criteria require the contractor to plan, budget, and schedule work in time-phased, planned-value increments which constitute a performance measurement baseline (time-phased budget). As work is accomplished, value is earned on the same budget-dollar basis. Earned value compared with planned value provides a measure of work accomplishment against plan, referred to as schedule variance.

1.5.6 The contractors' accounting systems must accumulate the actual cost of work performed. That cost is compared with earned value, providing a cost variance for the work accomplished and an indication of whether the work is over/under-running its plan. Planned value, earned value, and actual cost data provide an objective measure of performance, enabling trend analyses and evaluation of estimates of cost at completion at all levels of the contract.

1.5.7 The Criteria require information to be broken down by product as well as by organisation or function. Measurement of accomplishment against plan is required at relatively low levels with summary reporting to higher management. Discipline is required in reporting variances, their analysis and determining appropriate corrective action.

1.5.8 The extent of effort needed for a contractor to meet these requirements depends on how much change, if any, is needed for the existing systems to meet the Criteria.

1.6 MANAGEMENT'S DATA NEEDS

1.6.1 There are no specific external reporting requirements in the Criteria. Reporting requirements are usually product and contract specific and will be negotiated separately and specified in each contract. However, the Criteria are intended to facilitate performance reports which are of fundamental importance to ensure visibility of contractors' progress. To achieve this in selected contracts, the Project Authority will need to receive and review cost and schedule performance data. This data must:

• relate time-phased budgets to specific contract tasks and/or statements of work;
  
• indicate work progress;
  
• properly relate cost, schedule, and technical accomplishment;
  
• be valid, timely, and auditable;
  
• supply Defence with aggregate information summarised at an appropriate level; and
  
• be derived from the same internal management control systems used by the contractor to manage the contract.
  
  

1.7 PERFORMANCE REPORTING

1.7.1 Effective management of a contract does not, of itself, require any particular form of performance reporting. Various forms of report may be acceptable as long as the need for contract status information by product and functional organisation is satisfied.

1.7.2 The Criteria require that contractors establish and use effective internal management control systems. Performance reports from these systems are normally submitted monthly and are intended to report summary information from the contractor's internal cost and schedule control system. Summary reporting suffices because the Criteria discipline assures that the contractor uses objective performance measurement information to manage at levels where work is performed, allowing management attention to be directed to areas where significant problems are indicated. The preferred format of these reports is the Cost Performance Report (CPR). ANNEX G to this Guide contains examples of the typical data reported on each of the CPR formats. These are designed to facilitate reporting from Criteria compliant systems and comprises five formats to provide:

• cost and schedule performance data broken down by both product (work breakdown structure) and contractor responsible organisation;
  
• baseline information; and
  
• planned versus actual manpower usage and problem analysis (the problem analysis section is also used to reconcile the dollar-based CPR schedule information and actual time-phased schedules).
  

1.7.3 When a problem surfaces in a report, progressively more detailed data may be requested until the cause of the problem is identified. It is important to recognise that reporting frequency, levels of detail, variance analysis thresholds, and formats are all subject to negotiation, and adjustments may be proposed by either party during contract execution (see ANNEX C).

1.7.4 In addition to earned value, two important reporting data elements in the CPR are the estimated cost at completion (EAC) and management reserve (MR).

EAC - The EAC is of prime interest and must be updated periodically by the contractor using procedures approved during system acceptance. EAC analysis should include evaluation of cost and schedule variance trends in concert with information from other management tools.

MR - MR is an amount of the contract budget base set aside by the contractor for management control purposes, such as performance of unanticipated tasks that are within the scope of the contract. MR is not a contingency fund and may neither be eliminated from contract prices by Defence nor used to absorb the cost of contract changes.

1.7.5 Report Timeliness. Reporting formats and timing will be specified in the contract. The timing is usually a compromise between constraints on the contractor's systems and time to check and analyse data, and the Project Authority's need for timely information. The negotiated timing should be appropriate for their intended purposes--to provide an objective indication of contract status, a basis for observing trends, and formal communication between the contractor and Defence. Modern communications and techniques should facilitate shorter periods than the 25 days historically specified in the US. Negotiation may result in shorter submission time, using such techniques as submitting the data before analysis, or substituting the contractor's internal report formats, provided they contain adequate data in a form suitable for use by Defence.

1.7.6 Use of Criteria Reports. Performance reports are no substitute for day-to-day contract management or communication between the contractor and Defence. Such reports may not reveal many new problems, but they are valuable for confirming and quantifying the problems reported by the contractor. For example, the performance reports would confirm a previously anticipated schedule slippage or previously known technical problem, allowing analysis of the effect on current and future contract performance. Defence may also use performance reports to monitor cost and schedule variance trends and to project the trends to contract completion to determine the validity of the EACs and forecasted completion dates.

1.7.7 Funds Reporting. In certain contracts, performance reports may be directly related to a contractor's funds (cash) requirements. Items such as mobilisation payments (which should not be a basis for planning and earning value) and the timing of payment for material (which may be very different to the timing of earned value for that material) can cause legitimate and significant differences between the two. When necessary, Defence will require separate funds status and forecasting reports from the contractor.

1.8 IMPLEMENTATION PROCESS SUMMARY

1.8.1 When a request for tender or request for proposal specifies application of the Criteria, an element in the evaluation of the responses to such requests will be the prospective contractor's proposed systems for planning and controlling contract performance. The prospective contractor will describe the systems to be used to permit evaluation for consistency with the Criteria.

1.8.2 The responsibility for developing and applying specific performance management control system procedures which comply with the Criteria rests with the contractor. Defence approval of this system is a requirement of a contract which specifies application of the Criteria. Where a contractor's system does not comply with the Criteria, Defence will require adjustments as necessary to achieve compliance.

1.8.3 Baseline Establishment. An initial and critical step in applying Criteria to a contract is to establish the baseline for performance measurement (Performance Measurement Baseline - PMB). The work by the contractor to establish a baseline may be substantial, but must not be avoided or delayed because valid performance data depend on it. It should be planned and developed during the tender phase and completed as soon as possible after contract award.

1.8.4 Baseline Implementation. When the contract is awarded, a contractor's internal documentation must be updated and work planned in greater detail. Work authorisation, schedules, and budgets must be negotiated between the contractor's program manager and the various functional organisations and managers who are responsible for accomplishing the work. This process can be time consuming, but it is necessary to develop a baseline that is meaningful for reporting and control purposes. Some additional time may also be needed to verify the data produced after the baseline is finalised.

1.8.5 PMB/Schedule Cushion. The PMB represents the contractor's internal work plan, the schedule, expressed in dollar terms, for performing the contract. It must be clearly relatable to any network or other scheduling tool used for planning and monitoring. It may allow a cushion with respect to the contract delivery schedules. These cushions (or set-back schedules) anticipate typical problems such as late vendor deliveries and rework. If not understood, set-back schedules can cause confusion because a negative schedule variance might not affect contract deliveries if the cushion can absorb the delay.

1.8.6 Review Process. At the effective date of the contract, the contractor is required to commence a Review Process. The objective is to demonstrate to a Defence Criteria Review Team the effective application of the management control systems in planning and controlling the work under the contract and that the systems are consistent with the Criteria.

1.8.7 Validation. Reviews are conducted by a Review Director appointed by FASCEP. Following successful review, and subject to the concurrence of the Project Authority for the contract concerned, a recommendation for the acceptance of the contractor's management control system by Defence will be made by the Review Director to the Deputy Secretary, Acquisition and Logistics (DEPSEC (A&L)). The initial acceptance constitutes "validation". Validation is universally accepted within the Australian and United States' Departments of Defence.

1.8.8 Types of Demonstration. Depending on the work being performed, a comprehensive review may not always be possible. Where necessary, a review will be conducted, for research and development, or demonstration for production work, as appropriate.

1.8.9 SAR. Shorter and less comprehensive Subsequent Application Reviews (SARs) are conducted for follow-on contracts of the same or similar type requiring compliance with the Criteria. The duration and depth of the SAR is determined by Defence and is dependent upon the degree of change in the follow-on contract circumstances from those of the original demonstration.

1.8.10 Disputes/Appeals. Differences between Defence and the contractor in interpretation or application of the Criteria which cannot be resolved by the Review Director or Project Authority (depending on whether the system is under review or surveillance) may be referred to FASCEP for adjudication. Participants in an appeal will have the opportunity to table all appropriate information required to support their positions. Pending resolution of appeals during a review, the Review Director will continue assessment of the contractor's compliance with the Criteria or the contractor's System Description, as appropriate.

1.8.11 Failure to Comply. In extreme cases, for example where a contractor has failed to maintain a previously accepted system and fails to take action to restore it to compliance with the Criteria, FASCEP may consider withdrawing or suspending acceptance of the contractor's management system. When such a situation occurs, Defence will advise the contractor to show cause within a reasonable period (nominally, 30 days) why the acceptance should not be withdrawn. If the contractor disagrees with this position, then the contractor may appeal to DEPSEC (A&L). However, if the contractor does not respond satisfactorily, or appeal, system acceptance may be withdrawn or suspended. Once system acceptance has been withdrawn or suspended, the contractor may not claim in future tender/proposal responses to have an accepted system until a new letter of acceptance has been issued. Additionally, if the terms and conditions of the contract permit, all, or portions of, progress payments may be withheld pending satisfactory resolution.

1.8.12 Process Summary. This Guide contains general procedures which may be adapted to specific situations as they arise. Details for each implementation will be consistent with the guidance contained herein. A matrix summarising typical actions is provided in FIGURE 1-1.

Typical CSCS Lifecycle process	Action Agency
	Project Authority	Review Director	Contractor
1. Criteria specified in RFT.	X	X
2. Description of system submitted in proposals.			X
3. Evaluation of System Description in proposals.	X	X
4. Tender Evaluation Board considers findings of evaluation review.	X
5. Criteria requirements in contract.	X	X
6. Review Team Organised .	X	X	X
7. Implementation Visit/Readiness Assessment/Demonstration, Baseline Reviews.			X
8. Demonstrates performance management control systems.			X
9. Determines compliance.		X
10. Official acceptance. (Note 1)		X
11. Continuous surveillance.	X
12. Continuous operation of systems meeting the Criteria.			X

NOTE 1: Official Acceptance is by the Director General, Materiel Management Policy and Services.