2.1 GENERAL

2.1.1 Purpose. In Australia the Criteria were introduced as much in the interest of improving the standard of management in Australian Industry as for ensuring the accuracy of reports to Defence. Hence system compliance is important as an end in itself and is not justified solely on quality of reports to Defence. Even when earned value based reporting may not be mandated, it is expected that the management control systems will be fully utilised for effective internal reporting.

2.1.2 Consistency with the USA Criteria. The Criteria required for Defence contracts are the same as those used by the USA Department of Defense (DoD). They are intended to achieve the same ends but minor variations occur because of the different environment in which they are applied.

2.1.3 Criteria Application. Decisions on the application of the Criteria will be made before tenders are sought. The decisions may be influenced by a range of factors including anticipated price, perceived technical and/or schedule risk, strategic importance, or the critical nature of the contract. Price guidelines are contained in DEF (AUST)5655. Flow-down of the Criteria from prime contractors to subcontractors will be negotiated with the prime utilising the same factors and guidelines.

2.1.4 Criteria Relationship to Contract. It is important to understand that the Criteria are applied to the contractor's systems as implemented on specific contracts; not to a contract. Furthermore, it will be commonplace for a contractor to use its compliant systems to manage more than one contract at a time. The application of Criteria affects facets of the contractor's systems that are not directly concerned in the execution of any one contract. For example, the Criteria concerning overhead cost management apply to the whole of the company's operations.

2.1.5 Contract as a Pre-condition for Demonstration Review. While the Criteria apply to a contractor's performance management system rather than a contract, it is necessary for a contract to be in the process of being executed before compliance can be demonstrated. This is necessary because compliance is demonstrated by observing the way in which the contractors manage a contract. Also, significant resources are required to conduct the demonstration and these are not normally committed in anticipation of a specific Defence requirement.

2.1.6 Criteria Without Cost Reporting. Contractor's internal management systems may be required to comply with the Criteria with no concomitant requirement for reporting of actual costs. In this event, Defence wishes to be assured that the contractor has at least sound internal management systems. The contractor's system must nevertheless comply with all of the requirements set out below except in so far as they relate to the provision of reports to Defence in respect of actual cost data. Irrespective of contract requirements, contractors are encouraged to generate internal management reports similar to the Cost Performance Report, or at least presenting the same data elements.

2.1.7 System Requirements. Contractors' management control systems are expected to provide a framework for defining work, assigning work responsibility, establishing budgets, controlling costs, and summarising, with respect to planned versus actual accomplishments, the detailed cost, schedule, and related technical achievement information for appropriate management levels. The systems must provide for:

a. realistic budgets for work scheduled within responsibility assignments;

b. accurate accumulation of costs related to progress of the planned work;

c. comparison between the actual resources applied and the estimated resources planned for specific work assignments;

d. preparation of reliable estimates of costs to complete remaining work; and

e. support of an overall capability for managers to analyse information to identify problem areas in sufficient time to take remedial action.

2.1.8 There are thirty five Criteria grouped in five areas. These are in approximate chronological relationship to the areas of a management control system that would be exercised as a contract progresses from initial planning to maturity and various controls are utilised and amendments are incorporated. The Criteria areas are:

• ORGANISATION
• PLANNING AND BUDGETING
• ACCOUNTING
• ANALYSIS
• REVISIONS AND ACCESS TO DATA
  
  

2.2 TERMS EXPLAINED

2.2.1 The following terms supplement or amplify those defined in DEF(AUST)5655.

a. Cost. The sum of all direct and indirect costs applicable to a contract, or specified element thereof.

b. Budget at Completion (BAC). The total budget allocated for the completion of work within the Performance Measurement Baseline.

c. Fee. The dollar difference between the actual or anticipated cost and the negotiated price of a contract or specified portion thereof.

d. Fixed Price Contract. A contract in which the price remains unchanged for the period of the contract except for agreed contract scope changes or variations in escalation and exchange rates if applicable. This type of contract relies on the premise that a contractor is able to estimate the cost of producing and supplying the required goods/services with reasonable accuracy.

e. Earned Value. See Budgeted Cost for Work Performed in DEF(AUST) 5655.

f. General and Administrative Expense (G&A). Costs associated with maintaining the company operation. Normally includes all company office expense (wages and fringe benefits of executives and supporting staffs such as accounting and personnel departments), costs associated with the facilities in which they work, and marketing costs. G&A is included within Overheads.

g. Incentive Contract. A contract which utilises the profit motive of the contractor as an inducement to meet or improve upon obligations, whether expressed in terms of contract costs or delivery schedules. This is achieved by relating the contractor's return to the achievement of specified performance targets and/or the assumption of greater degrees of risk, the contractor benefiting through greater profit if the target is bettered and suffering through less profit if it is not achieved. This type of contract is most appropriate where management risks associated with the contract preclude a fixed price contract but do not justify a cost-plus format. It is especially appropriate where a significant amount of developmental work is required.

h. Margin. See "fee".

i. Performance. Cost Schedule performance.

j. Price. The sum of cost and fee/profit for a contract, or specified portion thereof.

k. Profit. See "fee".

l. Project Authority. The authority responsible for monitoring contractor performance, including technical and financial aspects and overall coordination of all work under the contract. Certain other authorities (eg. Production Authority, Technical Authority and Design Authority) act as advisers to the Project Authority and are not mentioned in the contract unless necessary.

2.3 CRITERIA REQUIREMENTS

2.3.1 The following six chapters are devoted to a discussion of the Criteria. The explanations and interpretations in this guide are intended to ensure a uniform and consistent implementation of performance measurement requirements. These chapters are intended to clarify Defence requirements and objectives for Defence and contractor organisations which must operate performance management control systems which satisfy the Criteria.

2.3.2 Terminology. The terminology used in this Guide is based on DEF(AUST) 5655 and the definitions above. Contractor cost schedule control systems may use differing terminology, but such terminology must be able to be directly translated with relative ease to the terminology of this Guide so as to facilitate reviews to determine Criteria compliance.