A view of Washington – The Capital Building, Washington Monument, Lincoln Memorial and Mall.

Procurement
Part one, CONDMAT Washington series

Defence importers and exporters, Defence Materiel Organisation (DMO) and Australian defence industry respectively must navigate complex foreign policy and varying acquisition processes to achieve objectives. Counsellor Defence Materiel (CONDMAT) Branch in Washington aims to smooth these processes for North America.

CONDMAT Washington performs three key roles: procurement, the principal responsibility of the office; researching and influencing the United States (US) regulatory environment including legislation, policy interpretation and procedures on Australia/US procurement and releasability; and an export support function for Australian companies.

PROCUREMENT

At CONDMAT Washington the central part of business is procurement. The office makes purchases on behalf of the Australian Defence Force (ADF), to procure and sustain ADF capability, with the highest priority on procurement in support of operations. The procurement area of CONDMAT is broken into two directorates, one looking at commercial procurement the other Foreign Military Sales (FMS).

CONDMAT Washington, Mark Reynolds, said the most challenging element of the CONDMAT role is understanding the maze of politics and bureaucracy within which the US Department of Defense (DoD) operates and procures.

He said there are a number of essential differences between the US DoD and ADF methods of procurement.

‘In Australia we have a centralised procurement and sustainment system within DMO. The US has a separate acquisition and sustainment agency for each of the services and then a separate policy organisation that does not control implementation within the Services,’ he said.

‘The Australian Government approves and funds our acquisition programs in their entirety. While in the US, programs are funded in two year cycles with major US programs like the stealth fighter, F-22 Raptor; and Aegis-guided missile destroyers, DDG-51s requiring repeated funding approval and getting Congressional manipulation.

‘In Australia we get an annual appropriation based on our predictions of spend over the financial year, whereas in the US their annual appropriations allow them up to three financial years (five for ships) to contract for the spend and then up to an additional five years to actually make the spend, but they cannot use those funds for new obligation during that period.

‘In the US there are the Federal Acquisition Regulations, and a Defence Supplement, which mandate how procurement specialists and contracting specialists will contract for work. The nature of these documents means the room to manoeuvre is very limited. In Australia the Commonwealth procurement guidelines, departmental Chief Executive Instructions, the defence procurement policy manual and DMO contracting templates inform the way DMO project managers contract for work. While both systems are legislatively based, we have far greater ability to manoeuvre in negotiations and contracts, perhaps sometimes to our detriment as the companies can also manoeuvre,’ Mr Reynolds said.

Mr Reynolds said in many ways the US FMS system is actually more straight forward for Australia than undertaking a direct commercial sale in the US.

‘The US Systems Program Offices undertake the contracting and management of production and delivery. We simply pay them to undertake those activities rather than setting ourselves up to do it. There is an overhead cost, but projects and programs need to weigh up the costs; assuming that the equipment or capability we want is even available through Direct Commercial Sale,’ he said.

A few complexities do exist in applying the FMS system for Australian purchases. Mr Reynolds said the US system is required to operate at no cost to the US tax payer, and this generates a number of problems.

‘The first is that the cost placed on the FMS case by the US is likely to be some percentage higher than the actual cost when completed. This is because the US builds in contingency as well as several other cost elements that are applied, including a termination risk payment,’ he said.

‘Until the FMS financial management system actually recredits the funds to Australia , the project or program is unable to commit those funds.

‘Then there is the problem that the US estimates our cost in advance, based on overall program expenditure during the previous 12 months, so they will not be out-of-pocket at any time; this often means that the Australian predictions of expenditure on individual programs may not be realised, causing considerable angst when they are required to meet their budgeted expenditure in a financial year.

‘The US financial management system uses the US contract model based on the Federal Acquisition Regulations and the Defense supplement. This means that the terms and conditions set for our purchases can be very different to those we would normally apply in our contracts. In particular, aspects such as ownership transfer, warranty and liability, and liquidated damages and excusable delay arrangements can be very different to our own.

‘Finally, the US FMS system can be slow to respond to requirements, primarily because of the US regulatory systems and their need to ensure there will be no cost to the US taxpayer. But, this can also be the case when tackling commercial procurements, and in recent years we have had some spectacular results with FMS, such as the contract to procure four Boeing C-17ER Globemaster III and the excellent work getting ammunition, radios, and threat detection counter measures suites for the Chinooks deploying to Afghanistan,’ Mr Reynolds said.