Introduction

1.1 The two Commonwealth-owned munitions factories at Mulwala and Benalla are national strategic assets that provide much of the industrial foundations to support and expand domestic production of guided weapons, explosive ordnance and other types of munitions.³ The Mulwala facilities were established in 1943 (83 years ago) and the Benalla facilities were established in 1994 (32 years ago). Thales Australia (trading as Australian Munitions) is the current operator of these facilities.

1.2 On 29 June 2020, the Australian government announced that Defence had signed a new 10-year agreement valued at $1.1 billion (GST exclusive) with Thales for the continued management and operation of the Mulwala and Benalla sites under the Strategic Domestic Munitions Manufacturing (SDMM) contract. On the same day, the government also announced that a new contract between Defence and NIOA Munitions (NIOA) for a tenancy at the Benalla site had been signed.

1.3 The intention of these arrangements, among other things, is to: provide surety of supply of key munitions and components for the Australian Defence Force (ADF); strengthen and diversify the supply chain; maintain domestic munitions manufacturing capability; and identify, develop, and manufacture new types of munitions to expand domestic capacity and meet Defence’s capability requirements into the future.⁴

Defence industry policies

1.4 Since the commencement of the SDMM contract in 2020 Defence’s strategic environment and capability priorities have shifted materially. Successive strategic documents — including the National Defence Strategy and the Australian Guided Weapons and Explosive Ordnance (GWEO) Plan — place increased emphasis on the industrialisation of munitions production, manufacturing uplift and the development of domestic capacity for a wider range of products.⁵ Within this strategic context, the objectives of the SDMM contract align with and support the strategic priorities set out in the 2024 and 2026 versions of the National Defence Strategy and the Australian Guided Weapons and Explosive Ordnance Plan.⁶ Among other things, these documents identify:

• the importance of advanced munitions manufacturing, with an immediate focus on establishing a domestic manufacturing capability⁷;
• domestic manufacture of guided weapons and explosive ordnance (GWEO) and munitions as one of seven ‘Sovereign Defence Industrial Priorities’⁸;
• government investment of $26–36 billion in GWEO between 2025–26 and 2035–36 to:
  • maintain existing capabilities to manufacture munitions and explosive ordnance;
  • develop sovereign ability to produce, maintain, repair and overhaul selected weapons;
  • construct additional storage and distribution facilities to accommodate Defence’s growing GWEO inventory⁹; and
  • invest in facilities, equipment and infrastructure to support capability development activities.¹⁰

Contracting arrangements

1.5 Defence is responsible for contract management and operation of the Benalla and Mulwala facilities. Both contracts — the SDMM with Thales and the Munitions Manufacturing Arrangement (MMA) with NIOA Munitions— have an initial term of 10 years (to 30 June 2030) and maximum terms of 15 years (to 30 June 2035).

1.6 The SDMM contract is comprised of an agreement to manage the facilities and provide services and supplies to the ADF. The MMA contract comprises a lease covering a number of buildings at the Benalla site, which were operated and managed by Thales prior to 1 July 2020. The contract requires NIOA to manage and maintain the facilities within its tenancy area and work with Defence to develop opportunities for new or upgraded munitions manufacturing capabilities. A side-by-side comparison of the key features of the SDMM and MMA contracts is at Appendix 7.

Rationale for undertaking the audit

1.7 Defence has contracted with Thales Australia as its long-term ‘strategic partner’ for the management and operation of the Commonwealth-owned Benalla and Mulwala munitions factories. The contract — the Strategic Domestic Munitions Manufacturing (SDMM) — has an initial term of ten years and by June 2026 had a reported value of $1.9 billion (GST inclusive). This audit examined the effectiveness of Defence’s management of the SDMM contract to date and the achievement of value for money through Defence’s contract management activities.

1.8 This audit builds on previous ANAO work examining Defence’s management of the Benalla and Mulwala facilities over time and provides independent assurance to the Parliament on Defence’s contracting, governance, and management of the SDMM contract to date.

Audit approach

Audit objective, criteria and scope

1.9 The audit objective was to examine whether Defence’s management of the Strategic Domestic Munitions Manufacturing (SDMM) contract has achieved value for money and the effective delivery of the contracted arrangements.

1.10 To form a conclusion against the objective, the following high-level criteria were adopted.

• Does Defence have effective contracting and governance arrangements in place?
• Has Defence managed the contract effectively and achieved value for money?

1.11 This audit is the second of two performance audit reports examining Defence’s arrangements for the operation of the facilities from July 2020. This audit focused on Defence’s management of the 2020–30 SDMM contract with Thales for the operation and maintenance of the facilities. Auditor-General Report No. 47 2023–24, focused on Defence’s establishment of the 2020–30 contract, including the tender process, advice to decision-makers and the decision to conduct a sole source procurement.

1.12 The first report was tabled in Parliament on 25 June 2024. It concluded that Defence’s conduct of the sole source procurement for the operation and maintenance of the Benalla and Mulwala facilities beyond June 2020 was partly effective and that Defence’s management of probity was not effective. Defence agreed to the eight recommendations.

Audit methodology

1.13 The audit procedures included:

• reviewing Defence records, including advice to decision-makers and contract documentation;
• on-site fieldwork at the Mulwala and Benalla facilities; and
• meetings with Defence personnel and Defence contractors.

1.14 The audit was conducted in accordance with ANAO Auditing Standards at a cost to the ANAO of approximately $1,110,000.

2.1 The Australian Government Contract Management Guide states that contracts should reflect the complexity, risk profile and value of the goods or services being delivered. For higher risk contracts, this can include additional mechanisms — such as performance management or continuous improvement arrangements and bespoke payment models — to support effective oversight and value for money.¹¹

Was a fit-for-purpose contract established, including clear performance requirements?

2.2 The Strategic Domestic Munitions Manufacturing (SDMM) contract with Thales took effect on 1 July 2020. It has an initial term of 10 years and a maximum term of 15 years. The contract is a long-term arrangement for operating, maintaining and managing the Commonwealth’s munitions facilities at Benalla and Mulwala, while also supporting Defence’s ability to meet evolving munitions capability requirements over the life of the contract.

2.3 Figure 2.1 illustrates the contract’s principal components — the core services, survey and quote provisions, price and payment mechanisms, and the performance management framework. The survey and quote provisions provide a means for Defence to commission additional work beyond the core services, including additional munitions orders, capital works and research and development activities, within the overarching contractual framework. The price and payment mechanisms and the performance management framework are used by Defence to manage performance, cost and capability outcomes over the life of the contract.

Scope and focus of the core services

2.4 The core services are primarily structured around the operation, maintenance and management of the Benalla and Mulwala sites. The contract places emphasis on maintaining safe, secure and legally compliant facilities, reducing the total cost of ownership to Defence, and delivering efficiencies over time. The extent to which these services have been implemented and delivered is examined in Chapter 3 (see paragraphs 3.5 and 3.51–3.74). These services were intended by Defence to maintain a level of ‘industrial preparedness’ within Australia’s explosive ordnance manufacturing base in support of Australian Defence Force (ADF) capability needs.

2.5 Industrial preparedness, as reflected in the contract and its statement of work, extends beyond day-to-day production. It encompasses the readiness of the facilities, systems and workforce to meet future Defence requirements, including adapting or scaling production to accommodate different types of munitions, when requested by Defence, over the life of the contract.¹² It also allows for Thales to use the facilities, subject to Defence approval, to manufacture non-ADF products for sale to commercial markets.

Survey and quote work orders

2.6 As outlined by Figure 2.1, the survey and quote provisions under the contract are used by Defence to place orders for munitions and commission other services such as capital works and research and development activities. There are three categories of munitions products that are supplied or offered by Thales under the contract:

• mature products, including products subject to exclusive supply arrangements¹³;
• products subject to Thales’ first-right-of-offer; and
• developmental and emerging products.

2.7 Orders for munitions are placed annually and Defence is contractually obligated to place minimum orders totalling $25 million per year for munitions, explosive ordnance and other ADF products for the period 2020–21 to 2024–25 (years one to five), and $20 million per year for 2025–26 to 2029–30 (years six to ten). Additional munitions orders, including for developmental and emerging products, can also be placed outside of the annual ordering cycle. As set out in Table 2.1, the total cost for munitions and munitions-related services over the first six years of the contract to May 2026 was $633 million (GST inclusive).

2.8 Some first-right-of-offer products have been treated by Defence as developmental and emerging where they had not previously been manufactured by Thales. These distinctions are relevant to how performance expectations and commercial levers apply across different categories of activity under the contract.

Pricing and payment mechanisms

2.9 The SDMM contract was designed so that its total value would vary over time rather than remain fixed. The contract includes a recurring facilities operations payment to cover the ongoing costs of operating and maintaining the facilities, alongside mechanisms that allow Defence to commission additional work through the survey and quote arrangements. These arrangements enable Defence to fund activities beyond the contract’s baseline operating and maintenance services — such as capital works and capability-related tasks — within the overarching contractual framework.

2.10 The contract had an initial value of $1,261.0 million (GST inclusive) at contract signature.¹⁴ As at June 2026, the estimated contract value, as reported on AusTender for the initial 10 year period (2020–21 to 2029–30) has increased by $607.6 million (48.2 per cent) to $1,868.6 million (GST inclusive), largely through the commissioning of additional work and the application of the price adjustment mechanisms. Table 2.1 sets out the value of each pricing component of the SDMM contract, as publicly reported, for the initial 10-year period.

Table 2.1: Value of each price component of the Strategic Domestic Munitions Manufacturing (SDMM) contract — as at June 2026

Note a: The minimum order value comprises $27.5 million per year for the first five years and $22 million per year for the remaining five years of the initial contract term.

Source: ANAO analysis of Defence records.

2.11 The values in Table 2.1 are those reported by Defence on AusTender, as at June 2026. The ANAO has found that this value does not accurately reflect the total value of work that has been placed under the SDMM contract, using the survey and quote provisions (see paragraphs 3.80 and 3.81).

Facilities operations payment and commissioning mechanisms

2.12 The facilities operations payment is the largest price component of the contract.¹⁵ It is paid six-monthly in advance and the individual cost elements of the component are escalated¹⁶, reconciled, and adjusted in accordance with the assurance mechanisms in the contract.¹⁷ These mechanisms are designed to provide assurance to Defence that the facilities operation payments have been calculated and paid in line with the agreed financial cost model. They are also intended to manage cost pressures over time while maintaining fixed-price discipline for defined operating costs.

2.13 In addition to the facilities operations payment and minimum munitions order value over the initial term, the contract provides for additional munitions and non-munitions work to be commissioned. These work orders are priced separately using specified mark-ups depending on the type of service requested for example, capital works, munitions orders, and or research and development-related activities.

2.14 The contract also includes mechanisms intended to adjust the facilities operations payment over time, including through financial cost model audits, periodic cost reviews, and provisions intended to capture efficiency savings, as well as annual retrospective escalation of the facilities’ operating costs component.

Performance measures in the SDMM contract

2.15 Since the commencement of the SDMM contract in 2020, Defence’s strategic environment and capability priorities have shifted materially (see paragraph 1.4). As a result, the SDMM contract has increasingly been used not only to support the operation and sustainment of established facilities and product lines, but also as a vehicle to uplift domestic capacity to manufacture and deliver strategically important developmental and emerging products and support Defence’s longer-term industrial and capability uplift objectives.

2.16 The SDMM contract includes a multi-tiered performance management framework, comprised of key performance indicators (KPIs), strategic performance measures (SPMs) and system health indicators (SHIs). KPIs are directly linked to performance payments. Strategic performance measures and SHIs provide additional visibility of service quality, behaviours, capability and supporting systems, but are not linked to performance payments in the same way as KPIs. Performance against the measures is assessed on a scheduled basis and reported by Thales in its quarterly contract status reports.¹⁸

2.17 The KPIs measure performance in four areas: return on operating costs; logistics efficiency; maintenance conduct; and delivery in full, on time (DIFOT) for certain munitions orders. Each KPI result falls into performance bands (A through D). Thales performance against the KPIs is linked to the retention or loss of profit. Collectively, the KPIs provide visibility of operational activity and the effectiveness of the controls associated with operating the facilities and maintaining the infrastructure, including services such as storage and waste management; maintenance of buildings, plant and equipment; and delivery of established munitions products and those treated as applicable for KPI assessment.¹⁹

2.18 The SPM and SHI components cover more qualitative or long-term aspects not easily captured in KPIs such as capability development, collaboration, safety culture, and contractor behaviours.²⁰ These measures were expected to provide Defence with visibility over how the contractor was managing the facilities and workforce to respond to evolving strategic requirements. For example, SPM-02 (Capability Preparedness) assesses the contractor’s ability to operate and maintain the facilities to deliver capability in accordance with the Joint Strategic Plan and includes a performance attribute on timely implementation of the plan’s obligations. Under the contract, two of the five strategic performance measures SPM-02 and SPM-05 (Facility Stewardship) are self-assessed by Thales, with the other three measures assessed by Defence. This means that Defence’s assessment of Thales’ performance against the SPMs may not be accurately reflected in the reported ratings.

2.19 The SHIs comprise dashboard-style measures intended to provide visibility of safety, asset management, maintenance compliance and facility utilisation. Some indicators support trend monitoring rather than outcome-level assessment, depending on how underlying attributes are defined and applied over time.

2.20 Defence is required to consider Thales’ performance against the KPIs and SPMs when making determinations on award term extensions. As part of this process Thales is required to provide the underlying data for all measures, which Defence is to review during performance assessment reviews. Following a 12-month implementation period all performance measures were intended to operate in full and form Defence’s primary mechanisms for applying performance-linked commercial consequences under the contract. Figure 2.2 illustrates the aspects covered by the performance measures.

Alignment of the performance measures with evolving strategic and industrial objectives

2.21 As indicated by Figure 2.1, the KPIs are focused on operation of the factories and timely delivery of munitions orders. This focus reflects the contract’s original design and was inherited from the interim contract.²¹ As Defence’s strategic priorities expanded to include the industrialisation of developmental and emerging products, an increasing proportion of contract activity — including non-munitions survey and quote work orders and work associated with emerging and first-right-of-offer products — sits outside the areas directly assessed by KPIs. While KPI results demonstrate whether specified controls and outputs have been achieved, they do not provide a complete basis for assessing delivery against the contract’s broader long-term outcomes and evolving industrial objectives.

2.22 The SHIs present similar limitations. Some indicators are assessed as satisfactory or unsatisfactory, and not all indicators were defined with measurable performance attributes at contract execution.²² This structure supports visibility and trend reporting, but it does not necessarily provide outcome-level measurement unless underlying attributes and thresholds are clearly defined and consistently applied.

Joint Strategic Plan and its role

2.23 The SDMM contract required Defence to develop a Joint Strategic Plan with Thales to guide strategic capability decisions relating to the operation, maintenance, outputs and future investment of the Benalla and Mulwala facilities. The plan was intended to establish a shared strategic framework to inform capability, operational and investment decisions under the SDMM contract, aligned with Defence’s priorities as set out in the National Defence Strategy and the Australian Guided Weapons and Explosive Ordnance Plan. The plan is defined in the contract as a document setting the intended strategic direction for informed decision-making, rather than a performance assessment tool.

2.24 The Joint Strategic Plan was finalised on 8 September 2025. It provides a framework to agree capability uplift priorities and associated investment planning and establishes governance and reporting arrangements, including oversight through a Joint Strategic Planning Board. The plan explicitly states that its metrics do not replace the performance measures within the SDMM performance management framework.

2.25 Accordingly, the Joint Strategic Plan and the performance management framework serve different but complementary purposes under the contract. The performance framework is intended to provide structured, periodic visibility of operational performance and applies defined commercial consequences where thresholds are met or missed. The Joint Strategic Plan is intended to operate as a strategic governance and planning mechanism, supporting Defence’s longer-term capability and industrial preparedness decisions that sit outside the scope of KPI-linked performance payments.

2.26 The practical consequence is that Defence’s strongest day-to-day commercial leverage is concentrated in areas measured by the KPIs, while accountability for broader capability uplift and longer-term outcomes relies on strategic governance, planning and decision-making mechanisms established through the Joint Strategic Plan and associated forums. As Defence’s reliance on the SDMM contract to support manufacturing uplift and emerging capability outcomes increased, this separation between performance-linked commercial levers and strategic planning mechanisms became more pronounced.

Implementation and evolution of the framework

2.27 The contract included a performance implementation period ending July 2021 to validate and refine performance measures and reporting processes before profit moderation commenced.²³ Defence and Thales concluded that the framework was operating as intended at the end of this period, with limited changes made to specific performance attributes and thresholds.²⁴ At that point, contract activity was largely focused on operating the facilities and delivering established munitions, consistent with the contract’s original design assumptions.

2.28 Following the implementation period, Defence and Thales continued to review aspects of the framework where performance measurement had evolved in practice. By 2023, this work included maintenance-related measures, after concerns emerged that the maintenance KPI did not provide a sufficiently accurate measure of maintenance efficiency. This reflected a growing emphasis by Defence on maintenance performance as an indicator of facility condition and operational readiness as demands on the sites evolved, even though the contracted maintenance performance measures were structured primarily around activity completion rather than whether maintenance approaches supported efficient operations and sustained asset performance (see paragraphs 3.23 to 3.28).

2.29 From 2023, this work developed into a broader review of the performance management framework.²⁵ The review considered whether the framework was providing accurate, outcome-focused and sufficient performance information across the full range of contracted activities to improve the clarity, consistency and usefulness of performance information for decision making. As at June 2026, Defence and Thales were continuing to progress amendments through the performance management framework refresh.

Commercial levers

2.30 The SDMM contract includes a range of commercial levers to encourage satisfactory performance and address under performance. These include profit moderation linked to KPI performance, payment suspension and contract termination in specified circumstances, and the granting or withholding of award term extensions based on assessed performance against contractual criteria.

2.31 Profit moderation is Defence’s most routinely applied day-to-day commercial mechanism under the contract, as the remaining levers generally apply only in cases of contractual default or sustained underperformance. The contract provides that 60 per cent of the facilities operations payment and munitions order profit is intended to be ‘at-risk’, with the amount retained by Thales determined by its performance against the KPIs.²⁶ As facilities operations payment profit is paid in advance, the application of profit moderation may require Defence to recover profit already paid to Thales.

2.32 The application of profit moderation is limited to the KPIs and does not apply to the SPMs or SHIs of the SDMM. As a result, profit moderation does not apply to the following categories of activity under the contract:

• non-munitions survey and quote work orders;
• work orders for industrialising and delivering developmental and emerging products; and
• work orders for first-right-of-offer products where they have not been treated as munitions for the relevant assessment period.²⁷

Payment suspension and contract termination

2.33 In circumstances involving significant performance concerns, Defence may suspend some or all of the facilities operations payment or require Thales to develop a remediation plan. These measures may be applied where Thales has not delivered or complied with a remediation plan, or where Thales’ performance against one or more SPMs and/or KPIs performance has fallen short. A remediation plan may also be triggered where munitions orders are delayed by more than three months.²⁸

2.34 Contract termination represents Defence’s most severe commercial lever. The contract permits termination where Thales fails to remedy a default within a specified period or breaches the contract in a manner that cannot be remedied, or where KPI performance has consistently fallen short across three out of four consecutive periods. The contract also includes provisions that allow Defence broad discretion, including the ability to terminate the contract or reduce its scope, for convenience, at any time.

Award terms

2.35 The contract allows for two possible award term extensions — of three years and two years respectively — that are contingent on satisfactory performance. Defence is to determine whether to grant these extensions at the seven and nine-year point of the initial contract term (July 2027 and July 2029). Defence may also decide to not offer an extension for reasons including national security, withdrawal of the facilities from service, or significant changes in the domestic explosive ordnance landscape, by 30 June 2027.

2.36 Award term determinations are informed by periodic performance assessments conducted on a two-yearly cycle from 2024–25 (year four) of the contract. The third assessment period (1 July 2025 to 30 June 2027) carries the greatest weight for the first award term decision, and the fourth period (1 July 2027 to 30 June 2029) for the second. If both extensions are granted, three further assessments apply to the remaining years of the 15-year maximum contract term.

2.37 Under the contract, Defence is to assess Thales’ performance against five award term criteria, with at least four required to be met to achieve an overall ‘satisfactory’ rating. These criteria include limits on lower-band performance outcomes, such that Thales may have no more than:

• three KPI assessments, where Thales’ performance has been assessed as tolerable for a short term, but unsatisfactory over the medium to longer term; and
• two SPM ratings of ‘fair or amber’ and one ‘poor or red’.

2.38 Award term assessments are to take into account outcomes of the periodic cost reviews and performance outcomes from previous periods, although the contract does not specify how this is to occur. The contract also allows a ‘satisfactory’ rating to be awarded where a remediation plan remains in place. These features provide Defence with discretion in determining how historical performance and remediation activity influence award term outcomes.

Probity and conflicts of interest

2.39 The Australian Government Contract Management Guide states that where significant risks are identified, entities should prepare additional plans — such as probity plans — to support contract delivery.²⁹ The SDMM arrangement includes several recognised probity risk drivers, including its long duration, partnership-style operating model, and the high level of routine interaction and information-sharing between Defence and Thales. Defence’s Complex Procurement Guide identifies such characteristics — high value, sensitivity and intensive industry engagement — as indicators of elevated probity risk, for which a contract-specific probity approach is regarded as better practice.³⁰

2.40 The SDMM contract includes provisions intended to manage probity risks during contract delivery, including post-separation employment requirements that require Thales to seek approval before engaging former Defence personnel or service providers who were involved in the contract within the previous 12 months. These provisions address post-separation risks, Thales’ disclosure obligations, and allow Defence to request that staff reassignment for probity reasons. Defence did not undertake a documented assessment of probity risks at contract establishment, or afterwards, and the SDMM contract management plan does not address probity risks.

2.41 In January 2024, Defence became aware of a close personal relationship between SDMM staff from Defence and Thales. Defence applied its internal procedures, including staff reassignment, probity training, and exclusion from relevant procurement activities. While these actions were consistent with Defence policy, the absence of a documented contract specific probity plan limits the assurance available to Defence that probity risks arising from close working relationships are being identified in a timely manner and managed consistently.

Has Defence established and implemented appropriate governance, monitoring and reporting arrangements?

Governance arrangements

2.43 The governance arrangements for the SDMM and Munitions Manufacturing Arrangement (MMA) are set out in the contracts. Each contract establishes a Contract Steering Committee, Contract Management Board and subordinate Contract Management Working Groups. The roles of the governance bodies include monitoring contractor performance and progress against contract objectives, reviewing quarterly contract status reports, managing risk, and supporting performance assessment reviews and other assurance activities. The relationships and reporting lines between the individual bodies within the governance framework are illustrated at Appendix 3.

Contract steering committee

2.44 The Contract Steering Committee is the senior forum for strategic oversight, relationship management and contract governance for the SDMM contract. It is co-chaired by Defence and Thales, first met in September 2020, and between 2020 and 2025 has met bi-annually. The committee’s remit has included oversight of the development of key plans, the establishment of the annual munitions ordering process, and delivery of munitions and other work orders. It is also responsible for considering business cases seeking Defence approval to invest in specialist equipment and/or modify building use and has been involved in managing issues arising from the multi-tenancy.

Contract management board

2.45 The Contract Management Board reports to the Contract Steering Committee and provides direction to the contract working groups. It is the main interface between the working groups and the Contract Steering Committee and its functions include reviewing contractor performance, helping to resolve issues, setting priorities, and supporting performance assessment reviews. The board meets up to three times a year and is authorised to endorse contract change proposals; direct, seek input from, and monitor the working groups; resolve disputes and/or escalate matters to the Contract Steering Committee; monitor and evaluate implementation of the continuous improvement and efficiency program; and review and endorse business cases for consideration by the Contract Steering Committee.

Contract working groups

2.46 Three contract working groups operate under the SDMM contract: the Munitions and Supplies Contract Working Group; the Facilities and Properties Working Group; and the Commercial Contract Working Group. Their areas of focus are as follows.

• Munitions and Supplies contract working group — munitions and supplies to be delivered and new products and energetics (explosive, propellant and pyrotechnic inputs into munitions).
• Facilities and Properties contract working group — facilities and property matters, including capital and minor works, asset management and maintenance, environment, and work, health and safety.
• Commercial contract working group — commercial, contractual, finance and administrative matters arising from, or referred by, the other working groups or related to the contract, and matters outside the other working groups’ remits.

Multi-tenancy agreement

2.47 The tripartite Benalla Multi-Tenancy Agreement (MTA) between the Commonwealth, Thales and NIOA requires two additional forums: a Joint Safety Committee and a Multi-Tenancy Working Group. The Joint Safety Committee was established in August 2020 and the Multi-Tenancy Working Group was established in November 2021.

2.48 The Joint Safety Committee’s purpose is to support safe operation of the facilities and compliance by Thales and NIOA with legislative workplace health and safety and environmental obligations. Between 2020 and 2025, the committee provided a forum for reporting incidents, identifying and assessing safety risks, requesting information and resolving disputes.

2.49 The Multi-Tenancy Working Group reports to the Joint Safety Committee and provides a forum for Thales and NIOA to share information to support safe and effective coordination of operations at the Benalla site. The working group provides a mechanism to address matters requiring coordination across the site, including land, waste and emergency management, shared infrastructure and other enabling services (such as utilities and telecommunications).

Contract management plan

2.50 While the contract sets out governance, risk management and monitoring and reporting arrangements Defence policy and procedures also state that a contract management plan is to be developed prior to contract award, in consultation with the contractor, jointly signed and maintained as a ‘living document’.³¹ Development of a contract management plan for the SDMM contract commenced in June 2020, however the plan was not approved until 29 February 2024, 43 months after the contract was awarded.

Risk management

2.52 The SDMM contract requires Thales to address and manage risks in accordance with the approved Support Services Management Plan (SSMP). Defence is required to manage risks, including contract management risks, in line with the Defence Risk Management Framework and the Guided Weapons and Explosive Ordnance Division, Infrastructure Delivery Branch (GWEO IDB) Risk Management Plan. Defence is also required to record all relevant risks in its mandated risk management system, Predict!.

Risk management plan

2.53 The SDMM contract does not require Thales to develop and maintain a separate risk management plan. The SSMP serves this purpose. The SSMP was approved in July 2020, last updated in March 2025 and sets out procedures to identify and record, assess and analyse, treat, report, and monitor and review risks.

2.54 Defence is to manage the risks associated with the services contracted under the SDMM contract in line with the GWEO Industrial Delivery Branch (IDB) Risk Management Plan.³² This plan was approved in July 2023 and was due to be updated in July 2025. The plan included a risk appetite statement, as required, and authorised the individual business unit to manage ‘low’ to ‘medium’ risks, with risks rated ‘high’ or above, after treatment, to be managed at the branch level. In October 2025, the GWEO Group Risk Management Plan was released, superseding the GWEO IDB Risk Management plan. The plan specifies that it applies to all risk management activities conducted within the GWEO Group and requires each division, branch, and project to establish a risk management plan. As at June 2026, a new risk management plan that reflects the establishment of the Factories Operations Branch within the Domestic Manufacturing Branch, (previously known as the Industrial Delivery Branch) is being developed however the plan has not been finalised or approved and as such is not yet in place.

Identification, analysis and assessment

2.55 Thales has identified, analysed and assessed risks in its risk and opportunities register. Between 2020 and 2025, the register had identified 60 risks and opportunities. The register records the risk analysis (including an assessment of control effectiveness), the risk rating (very high, high, medium, low and very low), and the proposed risk response (treat, avoid, transfer or accept).

2.56 Defence used Thales’ risk and opportunities register to inform development of its risk register. This risk register was last updated in October 2023. The Defence register identified nine risks rated ‘high’ before treatment and one risk rated ‘high’ after treatment. The high risks identified for treatment included supply chain interruptions; management of business cases; resourcing (availability of skilled, qualified and experienced personnel); total cost of ownership reduction; and loss of or reduced capability. Unlike Thales’ register, Defence’s register did not include an assessment of control effectiveness.

2.57 Defence is recording risks relevant to its management of the SDMM contract and the Benalla and Mulwala sites in Predict!, the mandated risk management system. In December 2025, Defence was managing three ‘very high’ and three ‘high’ risks. By May 2026, three ‘very high’ and three ‘high’ risks had been retired and two new ‘high risks’ had been raised (see Table 2.2).

Table 2.2: Very high and high risks as at May 2026

Source: ANAO analysis of Defence documentation.

Monitoring, review and reporting

2.58 Risks and opportunities identified by Thales are recorded in its register and reported in quarterly contract status reports. These are monitored and reviewed through the contract governance structure, including the Contract Working Groups, Contract Management Board and Contract Steering Committee (see paragraphs 2.46 to 2.48). Between 2020 and 2025, Thales reported risks, opportunities, problems and issues in each contract status report and maintained its register in accordance with contract requirements. The Contract Working Groups, Contract Management Board and Contract Steering Committee monitored and reviewed these matters, together with risks identified by Defence.

Monitoring and assurance arrangements

2.59 The SDMM contract includes a range of monitoring and assurance mechanisms. These comprise performance assessment reviews, regular audits of the agreed financial cost model, periodic cost reviews, and business reviews conducted by subject matter experts.

Performance assessment reviews

2.60 The contract requires Defence and Thales to conduct six-monthly performance assessment reviews. These reviews are intended to validate performance scores, assess claims for adjustment or performance relief, determine performance payments, and consider proposed and approved efficiencies. The outcomes of these reviews inform Defence’s decisions on awarding contract term extensions. As at May 2026, performance assessment reviews had been completed covering the period 1 July 2021 to 30 June 2025. Thales’ performance over the four periods covering 2021–22 to 2022–23 was rated as ‘satisfactory’. Thales’ performance assessment across the four periods covering 2023–24 to 2024–25 has not been completed with a performance rating yet to be determined.

Audits of the financial cost model

2.61 The contract permits Defence to audit the approved SDMM financial cost model and the facilities operations payment twice a year, with additional audits able to be undertaken where audits identify errors or discrepancies or where there is a material change in contract scope or operations. Through its audit program, Defence has identified recurring issues, including incorrect or missing values and formula errors, see Table 3.6. As at June 2026, Defence has completed five financial audits of the SDMM. A financial cost model audit for the first half of 2025–26 (year six) was in progress at the time of this performance audit.

Periodic cost reviews

2.62 The contract required a periodic cost review in August–September 2021 (year two), with subsequent reviews every three years and additional reviews linked to each potential award term. The first periodic cost review was conducted between October 2021 and June 2022 and completed in September 2022. The second periodic cost review commenced in February 2025, was completed in April 2026, and the contract change proposal executed in May 2026. These reviews are intended to assess: whether costs incurred are allowable; quantify efficiency savings; and assess the likely cost of proposed award terms to support value for money decisions. They also provide a mechanism to consider and negotiate proposed changes to the financial cost model.

Subject matter expert business reviews

2.63 The contract allows Defence or Thales to appoint an independent subject matter expert to examine specific aspects of site operations and facilities management, including asset management, facilities maintenance, and utilisation, including the use of excess capacity. The subject matter expert provides recommendations in the form of a business review, which are intended to identify opportunities to improve value for money and reduce the Commonwealth’s total cost of ownership.

2.64 As at November 2025, seven such reviews had been undertaken. The reviews have identified savings opportunities and areas for improvement in asset management, maintenance and security. The recurring themes from these reviews are detailed at Table 3.2. While reviews have been conducted the contract does not include mechanisms to provide assurance that recommendations from the reviews have been implemented. Thales has reported progress on implementing some recommendations through its quarterly contract status reports.

Reporting requirements

Contract status reports

2.65 Thales must submit quarterly contract status reports (CSRs) to Defence covering financial and non-financial performance, efficiencies, workforce, asset management, risks, opportunities and issues, and munitions orders. Thales has provided the CSRs as required and Defence has reviewed all submissions, provided comments to Thales, and sought clarification on maintenance performance, efficiencies, and workforce movements.

Monthly sustainment reporting

2.66 Defence has used its Sustainment Performance Management System (SPMS) to monitor and report on performance of the facilities as a sustainment product.³³ SPMS reporting to Defence leadership and stakeholders, including its Ministers, has largely focused on Australian Industry Content, availability and budget expenditure.

2.67 Between March and July 2023, Defence prepared fortnightly dashboard reports to support coordination of projects and priorities for the facilities’ sustainment. Following the establishment of GWEO group in May 2023, Defence commenced work to develop updated performance reporting arrangements. From July 2024 performance reports have included a dashboard view of all GWEO acquisition projects and sustainment products (including the manufacturing facilities at Benalla and Mulwala).³⁴ These dashboards are presented at the GWEO Manufacturing Monthly Management Meetings.³⁵

3.1 The Department of Finance’s (Finance) Contract Management Guide states that value for money is first assessed at the evaluation phase of a procurement but is not fully realised until the contract is completed.³⁶ The guide further states that effective contract management will assist in achieving the realisation of the value for money proposition approved by the delegate.³⁷

Has the contract reduced the cost of the facilities for Defence and reduced financial reliance on the Commonwealth?

Cost reduction mechanisms under the SDMM contract

3.2 The objectives of the Strategic Domestic Munitions Manufacturing (SDMM) contract included increasing production efficiency, reducing the costs to maintain the facilities and minimising financial reliance on the Commonwealth. To support these aims, the contract included a requirement for Thales to develop and implement a Continuous Improvement and Efficiencies (CIE) Program — supported by a total cost of ownership model — and validated through periodic cost reviews. The associated plan to implement the program was to be provided by Thales to Defence in June 2020 and approved and in place by 1 July 2020. These arrangements were intended to address information gaps identified during SDMM contract negotiations and provide assurance over allowable costs, reported efficiencies and forward pricing.

3.3 As at 30 June 2025, Defence had expended $812.4 million under the SDMM contract (GST exclusive). Over the first five years of the contract, the Facility Operations Payments (FOP) accounted for 56 per cent of annual expenditure on average. When combined with the non-munitions costs (the FOP and non-munitions survey and quote work orders) represented 70 per cent of expenditure. Over the term to date, overall expenditure under the SDMM contract has trended upward due to increased munitions orders and capital and other non-munitions work orders (see Figure 3.1).

Figure 3.1: Strategic Domestic Munitions Manufacturing (SDMM) contract budget versus actual (1 July 2020 to 30 June 2025)

Source: ANAO analysis.

3.4 The contract includes offsets intended to reduce the facilities operations payments payable by Defence when the facilities are used to manufacture and supply ADF and non-ADF products to other commercial entities and governments. Payment reductions are provided in the form of an ‘offset’ and are comprised of guaranteed minimum amount on ADF products and non-ADF products and a percentage of the activity provision and usage allowance included in the financial cost model. As at 30 June 2025, offsets totalled $32.4 million, reducing the FOP by an average of $6.5 million (seven per cent) per year. The value of the reductions achieved between 2020–21 to 2024–25, are illustrated below (see Figure 3.2).

Figure 3.2: Facilities Operations Payments — Offsets — Budget versus Actuals — 1 July 2020 to 30 June 2025

Note: This chart presents the offsets in the financial year in which they were incurred.

Note: Non-ADF usage allowance is calculated from the costs of direct materials and labour used to manufacture and sell non-ADF products at the Mulwala and Benalla sites.

Note: The non-ADF activity provision is calculated from the mark up applied. The SDMM contract sets out the per cent of the allowance and provision that is to be included in the calculations used to determine the Return on the Facilities Operation Payment.

Source: ANAO analysis.

The Continuous Improvement and Efficiency Program

3.5 The stated purpose of the CIE program is to identify and implement initiatives to reduce Defence’s total cost of ownership. Under the contract, the program’s requirements include:

• development and maintenance of a total cost of ownership model;
• preparation of an efficiency implementation plan that describes the processes and tools for modelling and analysing cost drivers; and
• implementation of approved efficiency initiatives in accordance with that plan.³⁸

3.6 Thales reported in its January–March (Q3 2025–26) contract status report that the CIE program had achieved $14.7 million in savings from approved efficiency initiatives, with projected savings totalling $22.4 million to 2028–29.³⁹ Thales advised the ANAO in June 2026 that savings under the CIE program may be realised through reductions to Facility Operations Payments (FOP), reductions in the rate of annual FOP increases, or lower prices for ADF products delivered under the contract.

3.7 The value of the savings reported has not been verified by Defence as an agreed total cost of ownership model was not in place. In the absence of this verification, Defence has had limited assurance that reported efficiencies have translated into measurable reductions in the cost of facility ownership.

3.8 In October 2025, Defence identified that it was unable to validate cost reductions from proposed efficiency initiatives without a working and usable total cost of ownership model. Defence has paused the assessment of all efficiency proposals until the model meets its expectations. This action was undertaken as part of a broader Defence review of the CIE program, initiated in June 2025 and scheduled to conclude in September 2026. One of the desired outcomes of the review is the delivery of a revised efficiency implementation plan. The review includes examining the scope of the total cost of ownership model and assessing and verifying the processes for proposed efficiencies. In February 2026, Defence advised Thales of its concern that the CIE program was not achieving adequate cost reductions.

Total cost of ownership model

3.9 The total cost of ownership model is central to assessing whether approved efficiencies have reduced, or are likely to reduce, Defence’s cost of ownership. The model is linked to the Financial Cost Model and the Strategic Asset Management Plan (see Table 3.1 and paragraph 3.21). Under the contract, the model is required to identify the costs of operating and supporting the facilities, providing contracted services, and delivering cost savings through approved efficiencies. It also supports periodic cost reviews.

3.10 Thales was required to develop and maintain the total cost of ownership model as part of the contract’s capability assurance transformation activities. The November 2023 Contract Steering Committee minutes stated that Defence had endorsed a working model.⁴⁰ This did not resolve all matters relating to the model, with Defence continuing to review it and raising issues including undocumented assumptions and limited functionality. As at April 2026, an agreed total cost of ownership model meeting Defence’s requirements was not in place (see paragraph 3.14).

3.11 The unresolved status of the model limited its utility for robust cost analysis. Thales considered that the model had been delivered and put into use, while Defence continued to raise concerns about whether it could reliably support scenario analysis, pricing decisions, and validation of reported efficiency savings. Despite successive revisions, the model had not been agreed as meeting Defence’s requirements.

Periodic cost reviews

3.12 Periodic cost reviews (PCRs) were introduced because Defence lacked the information needed to validate Thales’ pricing during contract negotiations. Defence uses the PCRs to determine allowable costs incurred, assess savings achieved from approved efficiency initiatives, update the financial cost model, and set an agreed price for subsequent years. The reviews are also intended to support assurance that the contract represents, and continues to represent, value for money, and to verify the accuracy of the total cost of ownership model.

3.13 In April 2022, Defence noted that no progress on the development of the total cost of ownership model had been reported since the contract commenced in June 2020. Thales provided a model in March 2022 to support the first periodic cost review, conducted between October 2021 and May 2022. Defence found that the model: could not be used to identify and support the analysis of cost drivers; had not been developed using a ‘bottom-up’ approach; relied on pricing that had been reversed engineered from the previous contract; and was not mature enough to support the periodic cost review. Nevertheless, Defence proceeded to use the model to set the FOP for years three to five and achieved an $8.8 million contract reduction through the first cost review process.

3.14 In response to these deficiencies, Defence advised Thales in August 2022 that it intended to conduct a verification and validation activity and requested that Thales update and resubmit the total cost of ownership model for review. A revised model was resubmitted in March 2023 and again in November 2023.⁴¹ In August 2024, Defence wrote to Thales to advise them that the model had been reviewed and assessed as ‘not being fit for purpose’. Thales responded in October 2024 that the model had been endorsed and was in use. Defence and Thales continue to disagree on the status of the model and as at April 2026, the matter has not been resolved. The absence of an agreed total cost of ownership model continues to limit Defence’s ability to validate pricing and verify efficiency claims, reducing assurance over whether the contract’s cost-reduction objectives are being met.

Has Defence ensured that Commonwealth land and assets are used and managed effectively?

3.16 The contract requires Thales to maintain and operate the sites in a ‘safe and continuous manner’. This includes maintaining the assets at the sites in a serviceable and working condition that enables them to be used to perform their intended function. It also specifies permitted uses of the land and assets comprising the sites and associated asset management requirements.

Use of Commonwealth land and assets

3.17 At contract signature, Defence approved the use of Commonwealth land and assets for non-ADF production for the first two years (2020–21 to 2021–22). From 2022–23, there are two mechanisms that can be used to approve the use of Commonwealth land and assets for non-ADF production. The first mechanism is the annual order cycle — the Capability Assurance Cycle Munitions Recommendations (CACMR) process. Where Thales proposes to use the facilities to produce additional quantities or new products that have not been approved as part of the annual ordering cycle, a second mechanism, requiring submission of a business case can be used.

3.18 The submission of a business case is intended to ensure that proposed changes to product types, volumes or manufacturing activity are subject to Defence assessment and approval, including consideration of the impact on agreed production and capability settings. Defence records reviewed by the ANAO indicated that the applicable approval pathway was not always clear or completed before related activities were progressed. Where the applicable approval pathway is not clear or has not been completed before related activities are progressed, there is reduced assurance that proposals have been subjected to appropriate scrutiny and risks assessed to provide assurance that the activity will not adversely impact Thales’ ability to meet Defence’s needs.

Asset management and maintenance

3.19 Thales is contractually required to develop and maintain asset management plans for the Benalla and Mulwala sites. As at February 2026, all plans were current and had been approved as required. Table 3.1 provides further detail on each plan.

Table 3.1: Key plans governing asset management under the Strategic Domestic Munitions Manufacturing (SDMM) contract

Note: Thales provided draft submissions in February and April 2025. In June 2025, Defence and Thales agreed to delay the next submission from October 2025 to February 2026. It was submitted in February 2026.

Source: ANAO analysis of Defence records.

3.20 The Strategic Asset Management Plan (StAMP) is a standing agenda item at Facilities and Properties Contract Working Group meetings. Defence advised the ANAO in August 2024 that the StAMP was the ‘main mechanism’ for informing funding decisions for asset, equipment and infrastructure maintenance.

3.21 Between August 2023 and April 2024, Defence reviewed the Asset Management Plan (AMP) and Maintenance Management Plan (MMP), identifying the need for improved asset condition and performance data, maintenance record-keeping and access to Thales’ maintenance management system.⁴²

3.22 The contract requires Thales to commission maintenance audits every two years in accordance with the MMP and to provide the audit reports to Defence on request.⁴³ In April 2025, Defence requested copies of the two completed biennial Maintenance Audit Program reports. The reports provided by Thales were a 2022 benchmarking study, and a maintenance audit report in July 2024 (see Table 3.2). Thales advised the ANAO in June 2026 that the next biennial maintenance audit is scheduled to commence by July 2026.

External review findings

3.23 External reviews commissioned by either Defence or Thales between 2021 and 2025 have provided insights into Thales’ asset management approaches and maintenance practices, and the underlying condition of key production assets at the Benalla and Mulwala sites. Together, they provide insight into how maintenance is being conducted, how well it aligns with industry standards, and the extent to which the available data supports effective planning. Across the reviews, common themes were identified. These are summarised in Table 3.2.

Table 3.2: Themes identified in external reviews — 2021 to 2025

Note a: Corrective maintenance is reactive maintenance and is intended to address equipment that is not functioning as required.

Note b: Breakdown maintenance is reactive maintenance required to remedy breakdowns or address equipment failure.

Note c: Maintenance cost rates at Benalla (0.9 per cent) and Mulwala (1.1 per cent) were below a benchmark of 2–3 per cent. These rates reflected annual maintenance costs of $4.3 million at Benalla and $15.3 million at Mulwala as percentages of asset replacement values of $465.5 million at Benalla and $1.4 billion at Mulwala. In July 2025, Defence estimated the combined maintenance cost rate to be no higher than 1.8 per cent based on the same asset replacement values used by GHD advisory, which were assessed in 2018.

Note d: ISO 55001 is the international standard for asset management systems.

Note e: Breakdown maintenance rates were within the benchmark range of five to 10 per cent, although the review noted that these rates, in combination with observed corrective maintenance rates, might suggest breakdown maintenance was being captured as corrective maintenance, reducing transparency around asset reliability and performance.

Source: ANAO analysis of Defence records.

3.24 The collective results of these reviews indicate that while partial improvements in preventative maintenance have been made, a pattern of reactive maintenance, misalignment with industry benchmarks and standards, data quality and transparency issues, and constraints on the visibility of the condition of assets persist.

Implementation of external review findings

3.25 In response to the findings of the external reviews, Defence commenced work in August 2024 to assess replacement and upgrade needs for major equipment. This work was subsequently incorporated into a broader asset remediation program, established in November 2024. The objective of this program is to implement the recommendations from the external reviews conducted since 2021 (see Table 3.2) and address the identified maintenance, data, and asset-condition deficiencies.

3.26 The asset condition assessment under this program was finalised in February 2026. It found systemic issues affecting asset management maturity, including incomplete technical baselines, limited visibility of system interdependencies and insufficient linkage between asset condition and investment planning. It stated that these issues constrained Defence’s ability to prioritise remediation work, assess residual risk, and develop sound sustainment and capital investment proposals.

3.27 The asset condition assessment also found that a significant proportion of assets at both the Benalla and Mulwala sites were below target condition. In December 2025, Thales reported that the estimated cost to replace several assets was substantially higher than their original acquisition value. As at February 2026, a business case to support advice to government on future sustainment investment proposals and associated funding requirements was being developed. In March 2026, Defence advised government that additional investment would be required to improve the condition of the facilities to a level capable of supporting production requirements, achieving strategic objectives and meeting government priorities.

3.28 The asset condition assessment found that while a number of projects had been identified in the Strategic Asset Management Plan, to address asset condition issues, only a small proportion of the projects were included in the planned works. The assessment recommended Defence prioritise uplifting assets assessed as below target condition and establish projects to manage the work required.

Performance management framework findings and limitations

3.29 The contract’s performance management framework provides Defence with a basis to assess and monitor aspects of asset use and maintenance at the Benalla and Mulwala sites. The respective assessment results have highlighted issues consistent with those identified by the external reviews into maintenance practices and asset condition.⁴⁴ In particular, maintenance work order data indicates that the mix of preventative, corrective and breakdown maintenance at the sites is broadly consistent with the findings from the reviews, (see Table 3.2). A detailed analysis of the maintenance work orders raised between June 2020 and September 2025 is at Appendix 5. Preventative maintenance between December 2020 and September 2025 remained below the industry benchmark, (see Figure 3.3). In July 2025, Defence identified that breakdown maintenance had increased by 70 per cent since April 2022. These results present an ongoing risk to long-term asset reliability and sustainability.

Figure 3.3: Completion of maintenance work by category at Benalla and Mulwala — December 2020 to September 2025

Note: The industry benchmark for preventative maintenance is (75 per cent to 85 per cent). For corrective maintenance (10 per cent to 20 per cent) and for breakdown maintenance (five per cent to 10 per cent).

Source: ANAO analysis.

3.30 While assessments under the performance framework have highlighted issues to date, the current measures provide limited information about whether asset and maintenance management is effective over the longer term. Thales’ reported performance against the strategic performance measures (SPMs) and key performance indicators (KPIs) has largely been rated favourably, including Band A results for relevant KPIs and ‘satisfactory’ self-assessments for system health indicators to June 2025. However, analysis of the underlying performance attributes, or sub-measures, and other data indicates deficiencies in areas such as maintenance effectiveness and asset utilisation that are not captured by the headline ratings alone. As at June 2026, Defence and Thales were undertaking a staged refresh of the framework, with correction and clarification activities scheduled between June and August 2026 and a further review of updated measures scheduled to commence in July 2027.

3.31 The design of the KPI set contributes to this limitation. Of the four KPIs, only one relates to maintenance (KPI-03, ‘Maintenance Conduct’), and there are no KPIs that measure asset management effectiveness. KPI-03 measures completion of maintenance activities against planned maintenance, rather than whether the planned maintenance approach is supporting efficient operations and sustained asset performance. The KPI relies on measures such as the number of outstanding safety-critical maintenance issues, work orders completed, and the maintenance backlog.

3.32 In July 2024, Defence advised the ANAO that it intended to replace KPI-03 with an ‘Overall Equipment Effectiveness’ (OEE) measure as part of the performance management framework refresh. Defence’s stated intent was that OEE would better capture equipment availability, performance and quality loss, and provide a stronger basis to incentivise maintenance approaches that support efficient production and reduce failures.⁴⁵ To support this work, Thales provided precinct-level OEE data for January 2022 to June 2024, indicating average precinct-level scores ranging from 68 to 82 per cent and site-level averages of 74 per cent at Benalla and 78 per cent at Mulwala (see Appendix 4).

3.33 Other performance data indicates that, despite increasing production demands linked to higher ADF orders, underutilisation of site capacity has persisted over the life of the contract. For the ‘Facility Utilisation and Output’ SHI, utilisation was consistently below 59 per cent for three precincts between October 2020 and December 2025, including two precincts that were consistently below 48 per cent.

3.34 Taken together, the maintenance and utilisation information indicates that the performance management framework is identifying persistent issues but is limited in its ability to measure whether asset and maintenance management arrangements are supporting the longer-term reliability, sustainability and efficient use of Commonwealth land and assets and will reduce the total cost of ownership over time.

Impact of asset condition on current and future manufacturing capability

3.36 The age and condition of the assets at the Benalla and Mulwala factories is affecting their capability and capacity to meet current and future manufacturing needs.

3.37 Thales advised Defence in July 2020 that investment was required to maintain certain existing manufacturing capability at Benalla. In June 2025, Thales further advised Defence that a specific manufacturing line was nearing the end of its useful life and required upgrades to continue supporting existing production. Thales stated that a major failure of obsolete equipment and unsupported control systems could impair certain production for up to 18 months while a replacement system was procured.

3.38 Defence subsequently approved the development of a detailed business case for upgrades to maintain the existing capability in November 2025. The business case was submitted by Thales in January 2026 and provided two options for Defence to consider. The business case stated that both options were expected to take the equipment out of service and impair the existing capability for at least 12 months. Defence evaluated the options, and in March 2026, approved an order for priority equipment replacement and associated engineering work.

3.39 More broadly, Defence advised the ANAO during the course of this performance audit that the Benalla and Mulwala facilities had ‘suboptimal production capacity’, ‘a dependence on offshore precursors and raw materials’, and required further investment to meet the 2024 and 2026 National Defence Strategy priorities. Defence further advised government in March 2026 that the performance of the sites was constrained by ageing plant, equipment and infrastructure that was increasingly costly to maintain and did not align with contemporary production requirements.⁴⁶

Impact on future needs

3.40 The ability of the Benalla and Mulwala factories to meet future needs is also affected by the condition and configuration of key assets, and by the maturity of supporting production processes. These factors are evident in Thales’ work to expand the large calibre manufacturing capability to include the production of 155mm M795 High Explosive filled projectiles (see Case study 1). In July 2020, Thales advised Defence that upgrades would be required before the capability could be relied on for 155mm M795 manufacture.

3.41 In June 2026, Thales advised the ANAO that the key equipment used to manufacture the existing range of large calibre projectiles was designed to be capable of producing 155mm M795 projectiles. Information from Defence and Thales indicates that, although the equipment was designed with this capability, the facilities still require adaptation to establish the production, testing and quality control processes needed to successfully certify the production line and manufacture the projectiles in the quantities required to meet Defence’s needs.

Has Defence effectively managed the multi-tenancy arrangements in place at the Benalla site?

Multi-tenancy arrangements at the Benalla site

3.42 Establishing multi-tenancy at the Benalla site was intended to increase competition, reduce operating costs, expand ADF munitions production, and improve site utilisation.⁴⁷ These objectives were to be achieved through Defence’s contracts with NIOA and Thales. The site, built between 1993 and 1996, comprises purpose-built buildings for specific manufacturing processes.⁴⁸ Under the SDMM contract and the Munitions Manufacturing Arrangement (MMA) contract with NIOA, designated buildings were to be transferred to NIOA from 1 July 2022.

Governance arrangements and administrative processes

3.43 Before multi-tenancy commenced in July 2020, Defence’s responsibilities at Benalla were limited to managing its contract with Thales and its associated governance arrangements. Introducing the multi-tenancy required Defence to implement additional governance structures to coordinate tenants, allocate risk and establish joint safety oversight — significantly increasing Defence’s administrative burden.

Implementation of the multi-tenancy agreement

3.44 The MMA contract operates as a lease, with Defence paying NIOA a fee for asset and maintenance management. The contract requires NIOA and Defence to collaboratively identify and develop opportunities for new or upgraded munitions manufacturing capabilities within NIOA’s tenancy, to maximise its utilisation.

3.45 To progress identified opportunities, NIOA must submit a business case for approval before using Commonwealth-owned equipment for production. In December 2020, Defence, NIOA and Thales discussed draft principles to guide the development and submission of munitions manufacturing proposals as set out below.

• Where Defence-leased facilities are designed and can only be used for a specific purpose, the facility should be operated by the allocated tenant for that intended purpose.
• Defence will not support Commonwealth investment in duplicate capabilities, such as multiple domestic large calibre forging capabilities, without a compelling justification.

3.46 As at November 2025, Defence has approved three NIOA business cases (see Table 3.3). The multi-tenancy has seen minimal improvement in site utilisation or the range and volume of munitions manufactured for ADF use, and it has not delivered the expected utilisation or production-diversification benefits previously identified by Defence as central to its value-for-money rationale for entering into a multi-tenancy.⁴⁹

Table 3.3: Munitions manufacturing business cases submitted by NIOA and Thales and assessed by Defence, as at November 2025

Note a: Paused business cases were neither approved nor rejected as at November 2025, with the relevant tenant advised by Defence to pause any further work pending further consideration of relevant matters by Defence.

Source: ANAO analysis.

Impact of the transition on munitions production

3.47 On 1 July 2022, buildings housing key manufacturing capabilities at the Benalla site used in ADF munitions were transferred from Thales to NIOA. This transition necessitated a change of manufacturer for some ADF products and split production across both tenants for others. Risk assessments prepared by Defence focussed on commercial and legal risks and did not consider potential capability impacts arising from supply chain disruptions. Further, Defence depended on Thales and NIOA to establish arrangements to effect the transition. Implementation of these arrangements was delayed due to commercial, intellectual property and regulatory compliance issues. To address these, NIOA and Thales negotiated a temporary licence agreement allowing Thales to access buildings within NIOA’s tenancy between November 2022 and June 2024.

3.48 Defence provided both tenants until 31 January 2025 to reach a solution and reserved its right to seek alternative suppliers if the issues preventing placement of munitions orders for 2025–26 could not be resolved by 1 February 2025. By then, notice requirements in NIOA’s contract precluded directing NIOA to licence buildings to Thales or surrender part of its tenancy to ensure supply for 2025–26. In response to this direction, Thales and NIOA presented a plan to establish enduring cross-tenancy production arrangements. Oversight of the implementation required significant additional engagement by Defence from November 2024 to January 2025.

3.49 By 1 February 2025, Defence was unable to place 2025–26 munitions orders but did not engage its contractual rights to consider alternative sources of supply. By August 2025 cumulative delays and supply chain challenges where NIOA inputs were required, but could not be produced due to the licencing issues, had been encountered. Thales subsequently advised Defence that delivery of the products, scheduled for delivery in 2026–27 would now be delayed until 2027–28. It wasn’t until October 2025, that NIOA and Thales completed the work necessary to support cross-tenancy production.

Has Defence effectively managed supply of munitions, including developmental and emerging products?

3.50 The SDMM contract states that, among other things, ‘the parties recognise the intent of the arrangement is to ensure industrial preparedness of explosive manufacturing in support of ADF capabilities’, including the ability to identify, develop and manufacture new types of munitions aligned with Defence’s ongoing capability requirements.⁵⁰ This intent aligns with government’s strategic priorities outlined in the GWEO Strategic Plan and National Defence Strategy (NDS).⁵¹

Munitions orders placed under the contract

3.51 The contract identifies three categories of munitions products: mature products for which Thales has supplier exclusivity rights; products for which Thales has first right of offer; and developmental and emerging products. The contract lists the specific product or type of munitions included in each category. For simplicity, mature products and first right of offer products are referred to as routine munitions.

Routine munitions

3.52 The munitions orders are determined annually using the Capability Assurance Cycle Munitions Recommendations (CACMR) process. The process established by the contract is used to identify the routine munitions — mature products and first right of offer products — that are to be produced at the Benalla and Mulwala sites over a four-year period.⁵² The process applies to ADF and non-ADF products, and involves Defence providing inventory data to Thales in February of each year. Developing, assessing and approving the CACMR, and submitting the resulting Requests for Quotation (RFQ)s is to happen in May. Thales is to provide its response to the RFQs by mid-June for orders to be placed in July.⁵³

3.53 To provide assurance that the routine munitions orders have been delivered Thales’ quarterly contract status reports include a munitions and supplies component. The munitions and supplies contract working group, established as part of the governance framework, reviews the contract status reports and the development of the CACMR.

3.54 Over the period examined (2021 to 2025) the contract status reports have identified the products that have been delivered, products where delivery was deemed to be ‘at risk’, products that have been delayed, and the work underway to resolve any delays that have been encountered. The munitions and supplies working group reviews the munitions and supplies report, the Capability Assurance Cycle and Munitions Recommendation process, and monitors the planned and actual delivery of munitions.

3.55 The performance management framework includes a KPI that measures the proportion of planned orders delivered in full and on time each financial year.⁵⁴ Since the contract was awarded in June 2020, Thales has reported that it has consistently delivered over 90 per cent of munitions orders on time and in full. In April 2024, as part of a Performance Assessment Review, Defence assessed Thales’ reported performance against KPI-04 and found that for 2020–21 and 2023–24 Thales’ reported performance had been overstated due to a lack of clarity in the underlying business rules. Despite that overstatement, Defence subsequently found that Thales delivered munitions orders on time, as planned, 89 per cent of the time on average and Thales’ performance largely meet contractual requirements.

Developmental and emerging products

3.56 The SDMM contract states that the arrangement is intended to support industrial preparedness for explosive ordnance manufacturing, including the ability to identify, develop and manufacture new types of munitions aligned with the Commonwealth’s ongoing capability requirements. Consistent with this, one of the objectives of the contract is:

to deliver assurance to the ADF that explosive ordnance capability preparedness requirements have been met … through either planning, prepositioning or manufacture of: ADF munitions; approved non ADF munitions; emerging ADF munitions through collaborative development.

3.57 While the delivery of developmental and emerging products is not a contracted requirement, the intent and objective of the contract include supporting Defence’s ability to develop sovereign capability and strengthen supply chains to meet the strategic priorities outlined in the GWEO Strategic Plan and NDS. Therefore, the contract includes a list of developmental and emerging products that Defence considers to be within Thales’ manufacturing capability.⁵⁵

3.58 Since the contract was awarded in June 2020, Defence has engaged Thales to build domestic capacity and strengthen supply chains by developing production processes to manufacture and deliver developmental and emerging products. Table 3.4 shows that Defence has spent $42.5 million to manufacture and deliver two new types of developmental and emerging products that have not been delivered as scheduled or where the order has been cancelled. The supporting case study illustrates that between 2020 and 2025 Defence issued seven separate survey and quotes to Thales to establish domestic production of a type of large calibre ammunition, the 155mm M795 projectile.⁵⁶

Table 3.4: Delivery of developmental and emerging products

Note a: Expenditure and status as at December 2025.

Source: ANAO analysis of defence documentation.

Note a: ‘Qualification/certification’ refers to the testing and approval steps required before product can be accepted for supply against the relevant specification.

Note b: The rounds were listed as such because they had not been previously manufactured in Australia.

Note c: Further payments totalling $13.4 million were to fall due in May 2026 and June 2027 under the additional quantities order regardless of progress on certification.

3.59 The qualification issues were largely attributed to differences between the facilities, equipment and environmental conditions at Benalla and those used at US manufacturing sites.

3.60 Thales reports on progress to deliver munitions orders, including those for developmental and emerging products, in its quarterly contract status reports and the munitions and supplies contract working group monitors status. The working group escalates matters as required to the contract management board and the contract steering committee. For matters that have a broader impact across the GWEO enterprise, the contract governance bodies provide input into the performance reports presented to the GWEO Monthly Munitions Manufacturing Meeting (see paragraph 2.67).

3.61 There is no KPI within the performance management framework that applies to the delivery of developmental and emerging products. There is a strategic performance measure that applies — SPM-02 Capability Preparedness — which is intended to assess the Contractor’s ability to operate and maintain the Benalla and Mulwala facilities to enable capability in accordance with the Joint Strategic Plan, however the Joint Strategic Plan was not in place until September 2025 (see paragraph 2.26).

3.63 Over the period examined (2020 to 2025), delivery of developmental and emerging munitions has encountered technical challenges including, quality, certification and production, issues exacerbated by the poor condition of infrastructure and facilities. These challenges have reduced Defence’s ability to enhance domestic munitions manufacturing capabilities and build the necessary capacity to support achievement of the intent and objectives of the contract, as well as government’s strategic priorities outlined in the Guided Weapons and Explosive Ordnance Strategic Plan and National Defence Strategy.⁵⁷

Has Defence managed any performance shortfalls?

3.64 The SDMM contract with Thales includes a range of provisions to manage performance, including provisions to verify and validate the effectiveness of service delivery; identify and address performance shortfalls; and address any failure to deliver services in accordance with agreed remediation plans.

Verification and validation

3.65 Under the contract, Thales is to develop and implement a verification and validation plan and once approved the plan is to be maintained ‘as required’. The verification and validation plan was approved by Defence in August 2020 and sets out how Thales’ performance will be measured, reported and assured. The plan sets out that Thales’ performance will be: measured in accordance with the performance management framework; reported in the quarterly contract status reports; and discussed at the contract management working groups, contract management board and contract steering committee. In December 2025, Thales reported that the verification and validation plan will be updated after the performance management framework refresh has been completed.

Identification and management of performance shortfalls

3.66 Defence is able to use the mechanisms within the performance management framework to identify and manage performance shortfalls. Where shortfalls have been identified the contract authorises Defence to direct Thales to develop and implement a remediation plan to rectify the issue. Where Defence determines that the performance shortfall is not the fault of, or not within the control of the contractor, Defence can provide performance relief.

Performance management framework

3.67 The performance management framework of the contract consists of three types of performance measures, strategic performance measures (SPMs), key performance indicators (KPIs), and system health indicators (SHIs).

3.68 Thales’ performance against the SPMs, KPIs and SHIs are reported in the quarterly contract status reports and discussed at the relevant working groups. These reports are also assessed through the Performance Assessment Review (PAR) process. The KPIs have performance payments attached and Thales’ entitlement to performance payments is subject to its performance against the KPIs. While there are no specific performance payments identified in the price and payment schedule of the contract, Thales’ performance against the KPIs is used to determine the percentage of profit ‘at risk’ that Thales is able to retain.⁵⁸

3.69 As the KPIs are the only performance measure tied to a financial lever, it is important that Defence validates the accuracy of the performance information provided. Until July 2023 — three years into the contract, and two years after the performance implementation period concluded — Defence accepted Thales’ reported KPI scores without validating the underlying calculations. When Defence attempted to validate the 2022–23 results in July 2023, it identified calculation errors and missing data for KPI-01 (Return on operating costs), but accepted the reported scores and requested supporting calculations. In April 2024, after receiving calculations for all prior periods, Defence’s position was that Thales had incorrectly calculated this KPI for 2020–21 to 2022–23. Defence and Thales subsequently recognised errors in the contracted KPI-01 formula, and Defence and Thales worked between April 2024 and September 2025 to resolve the calculation methodology issue.

3.70 In correspondence issued to Thales in September 2025 Defence noted that neither party had identified the error during contract negotiations, the performance implementation period, or as part of the performance assessment reviews for 2020–21 to 2022–23. Defence also recognised that the current formula unintentionally incentivised Thales’ to increase production of non-ADF products, contrary to the stated intent of the contract.

3.71 As a result of the misalignment Defence and Thales agreed to review the KPI during the performance management framework refresh and Defence approved performance relief for the KPI for 2023–24 and 2024–25. Thales advised the ANAO in June 2026 that a ‘correction to the formula, addressing the mathematical error, is scheduled to be completed via [contract change proposal] by the end of June 2026.’

Remediation plans

3.72 Where Defence has identified a performance shortfall or Thales has failed to deliver munitions orders within the timeframes specified in the contract, or as otherwise agreed, the contract enables Defence to require the contractor to prepare and implement a remediation plan.

3.73 As at December 2025, Defence had requested and Thales had submitted three remediation plans.

• In September 2024, Defence requested that a remediation plan to address the delay in achieving accreditation requirements for the Mulwala Inert Storage Warehouse Project be developed and implemented. Defence advised the ANAO in June 2026 that Thales resubmitted the remediation plan in October 2024 and that work to implement the plan commenced in November 2024. In April 2025, Defence recommended that the activity be cancelled and the future storage needs be incorporated into a separate project being managed by the security and estate group.
• In November 2025, Defence formally requested that Thales develop and submit a remediation plan to address the issues that had been encountered regarding the production of mature capability, specifically a type of large calibre naval ammunition (the 5 inch naval projectile). Thales submitted its remediation plan in December 2025 and in February 2026, Defence had agreed to extend the due date for the remediation plan until late March 2026. In April 2026, Defence approved the remediation plan and as at June 2026, work to implement the plan has commenced.
• In August 2025, Defence requested that Thales develop a remediation plan to address the production issues that had been identified regarding the manufacture of the 155mm M795 projectile, a type of large calibre ammunition (see Table 3.4 and Case Study 1). Defence approved the remediation plan in May 2026 and as at June 2026, Thales and Defence were working to agree a path forward to implement the remediation plan and address the issues that had been encountered.

3.74 Over the period examined (2021 to 2025) Thales has reported its performance, including its progress to develop and implement approved remediation plans in the quarterly contract status reports. Thales’ progress to develop and implement actions undertaken to implement the agreed remediation plans is discussed at the contract management working groups, contract management board and contract steering committee as required. Progress is also monitored by the GWEO Monthly Munitions Manufacturing Meeting through the provision of performance reports to the forum (see paragraph 2.67).

Has Defence’s financial management and reporting been effective?

Financial management

3.75 The SDMM contract is financially material, valued at $1.9 billion (GST inclusive) as at June 2026, and includes a range of price and payment mechanisms to fund operations of the Benalla and Mulwala facilities, manufacture munitions and explosive ordnance, fund capital works, and engage in research and development activities. Due to the variety of services, the value, and duration of the contract effective financial management and accurate reporting is critical to support transparency.

Price and payment arrangements

3.76 The price and payments schedule of the SDMM contract sets out the different types of payments to be made and the mechanisms that apply. The payments include:

• Facilities operation payments — calculated in accordance with the agreed financial cost model, paid in July and January each financial year, and then adjusted to reflect the outcomes from the annual reconciliation ‘true-up’ process.
• Munitions orders — calculated in accordance with the agreed financial cost model and paid in line with the contracted milestones of the order. Over the initial 10 year term of the contract Defence has committed to placing a minimum of $25 million (GST exclusive) per annum in munitions orders for 2020–21 to 2024–25 and $20 million (GST exclusive) for 2025–26 to 2029–30.
• Other survey and quote orders — calculated in accordance with the agreed financial cost model and paid in line with the agreed price basis (not to exceed or firm price).

3.77 Thales may claim payment by submitting an invoice for the facilities operations payment, munitions orders, and survey and quote services. For the facilities operations payment, Defence established a pre-payment model requiring invoices on the first business day after 1 July and 1 January.⁵⁹ Other payments are to be processed as invoiced.

Contract variations and price escalation

3.78 The SDMM contract was designed to operate over an extended period and includes mechanisms to adjust the contract price over time and to authorise additional activities through placing work orders. By November 2025⁶⁰, Defence had executed five contract variations, including two that changed the contract price. The mechanisms that Defence has used to vary the SDMM contract are listed in Box 1 below.

Price escalation

3.79 In June 2023, Defence paid $13.3 million (GST exclusive) for escalation relating to years three and four without requiring Thales to submit a contract change proposal or documenting the delegate’s approval under section 23 of the PGPA Act. Year five escalation payments were also made in a manner that was inconsistent with the contracted approach and resulted in an overpayment that later required a credit adjustment.

3.80 In January 2025, Defence advised the ANAO that the price escalation payments applied to years three to five of the contract (2022–23 to 2024–25) had breached section 23 of the PGPA Act because funds were committed above the agreed contract price without delegate approval. In July 2025, Defence approved $86.3 million to meet actual escalation costs for years three to five. The funding required exceeded the sustainment budget, leaving insufficient capacity to fund years eight to 10 of the contract — the remainder of the initial ten-year term.

AusTender reporting

3.82 Defence reported the original SDMM contract notice on AusTender 13 days after contract execution, within the timeframe set by the CPRs.By 30 June 2025, Defence had reported multiple amendments, increasing the reported contract value by $107.3 million (8.5 per cent) to $1,368.3 million (GST inclusive).⁶¹A further variation executed on 5 August 2025 increased the contract price by $95.1 million and was reported on AusTender on 4 November 2025, 49 days later than required under Commonwealth Procurement Rules (CPRs) reporting timeframes.⁶²

3.83 As at 17 June 2026, the ANAO has identified a gap of at least $109 million between the publicly reported total contract value on AusTender of $1,868.6 million and Defence’s total financial commitments under the contract. The total value of the work awarded under the SDMM has been calculated to be at least $1,977.5 million. This gap is largely due to the inconsistent treatment and reporting of work orders.

Work orders

3.84 Prior to March 2023, work orders under the contract were reported as separate contracts on AusTender and not as amendments to the SDMM contract. In March 2023, Defence undertook a data cleansing exercise to consolidate SDMM purchase orders under a single identifier, however following completion of this exercise, Defence approved 60 additional work orders. Of these, 32 were separately reported on AusTender and 28 were identified as amendments to the SDMM contract.⁶³ By 30 June 2025, Defence had approved 219 work orders with a total value of $483.0 million. Of these, 70 work orders (32 per cent), valued at $251.4 million were reported as separate contracts rather than as an amendment to the contract (see Table 3.5).

Table 3.5: Comparison of AusTender-reported values and actual work order values at 30 June 2025

Note a: Approved survey and quote work orders in the munitions category include both munitions orders and related services such as disposal, introduction into service and remediation activities.

Note b: Other amendments’ are amendments to the AusTender value but not linked to a work order.

Note: Values may not add up due to rounding and are all GST inclusive.

Source: ANAO analysis.

Value for money assessments

3.86 To assess whether work orders were supported by appropriate approvals and records, the ANAO tested 180 work orders approved between 1 July 2020 and 30 June 2024. Most of these work orders (135, or 75 per cent) exceeded the relevant $200,000 procurement threshold and required delegate approval before approaching the market.⁶⁴ Fifteen work orders with a combined value of $22.2 million were identified where delegate approval was not documented (14 work orders) and one instance where the requesting official for the work order also provided the approval.⁶⁵

3.87 A separate value for money assessment for fifty-seven, (32 per cent) of the 180 work orders, with a combined value of $28.8 million was not completed. The approval documentation referred to the value for money assessment undertaken for the original SDMM head contract, rather than assessing the specific activities and outputs to be delivered under the work order. These work orders were for capital works, munitions deliveries, testing, research and development activities, and temporary leasing arrangements. These activities were not within the scope of the original value for money assessment for the head contract and required consideration of their own costs, risks and expected benefits.⁶⁶

Financial cost audits

3.89 As the price for the varying services provided, and that can be ordered, are to be calculated in line with the agreed financial cost model (see paragraph 3.75) the contract authorises Defence to audit the costs incurred up to two times each financial year. As at June 2026, Defence has completed five financial cost audits.⁶⁷ Each concluded that the costs incurred were materially correct and represented actual costs incurred. The ANAO has reviewed the results of the cost audits and has identified 10 cost categories where recurring findings or issues have been observed (see Table 3.6).

Are the Australian Government’s industrial policy objectives being supported by Defence’s administration of the contract?

Strategic planning and capability upgrades

3.90 The SDMM contract required Defence to develop a Joint Strategic Plan with Thales and NIOA to guide capability decisions at Benalla and Mulwala. Originally focussed on operational and sustainment decisions, by late 2023 the plan’s scope had expanded to align with the new strategic priorities articulated in the Defence Strategic Review (DSR), National Defence Strategy (NDS) and the GWEO Plan.

3.91 Defence finalised the Joint Strategic Plan on 8 September 2025. It outlines a program to guide progressive development of the Benalla and Mulwala facilities into a more resilient and adaptable munitions base. Prior to its finalisation, Defence did not have an agreed long-term planning framework to ensure prioritisation and sequencing of capability investments at the sites were aligned with strategic priorities set out in key strategic policy documents.

3.92 Defence provided advice to government in June 2023 and June 2024 that further investment across the Benalla and Mulwala sites was required to provide the capability and capacity uplift required to achieve the strategic priorities. In response, between June 2023 and June 2024 government approved $280.2 million in funding to support capability and capacity upgrades at the Benalla and Mulwala sites.

3.93 In addition to these measures, in June 2024 government agreed Defence would, subject to value for money, establish a forge and fill capability for US M795 155mm artillery ammunition by 2028. This commitment was reflected in the GWEO Plan, which stated that Defence would establish the capability by the end of the decade to produce 15,000 rounds annually, with a surge capacity of 100,000.⁶⁸ This was one of four manufacturing projects prioritised under the plan. The commitment was restated in the 2026 Integrated Investment Program.⁶⁹

3.94 Defence ran a limited tender for the forging element of the 155mm M795 capability from September 2023 to May 2025. Defence terminated the procurement on 27 May 2025 due to changes in the strategic environment and announced on 27 June 2025 that it would refine its requirements and re-approach the market to support delivering the capability by 2028.⁷⁰ The market was re-approached in August 2025 and in June 2026 the government announced that Defence had entered into a contract with Rheinmetall NIOA Munitions to deliver a 155mm M795 domestic forging capability.

3.95 Other challenges in manufacturing developmental and emerging products are the age and condition of the assets. Maintenance data and external review findings suggest that the asset management approach and sustainment funding profile for the sites are contributing factors (see Table 3.2). As at February 2026, Defence was not well placed to deliver key elements of the Australian Guided Weapons and Explosive Ordnance Plan (GWEO Plan) due to the condition of the facilities, shortcomings in the contract and inadequate capital investment and sustainment funding.

3.96 In March 2026, Defence requested and government approved an additional $240.5 million in funding over 2025–26 to 2029–30 to meet cost increases and fund further investment in asset maintenance and management across this period.

Appendix 1 Entity responses

Department of Defence

Thales Australia Limited

Appendix 2 Improvements observed by the ANAO

1. The existence of independent external audit, and the accompanying potential for scrutiny improves performance. Improvements in administrative and management practices usually occur: in anticipation of ANAO audit activity; during an audit engagement; as interim findings are made; and/or after the audit has been completed and formal findings are communicated.

2. The Joint Committee of Public Accounts and Audit (JCPAA) has encouraged the ANAO to consider ways in which the ANAO could capture and describe some of these impacts. The ANAO’s Corporate Plan states that the ANAO’ s annual performance statements will provide a narrative that will consider, amongst other matters, analysis of key improvements made by entities during a performance audit process based on information included in tabled performance audit reports.

3. Performance audits involve close engagement between the ANAO and the audited entity as well as other stakeholders involved in the program or activity being audited. Throughout the audit engagement, the ANAO outlines to the entity the preliminary audit findings, conclusions and potential audit recommendations. This ensures that final recommendations are appropriately targeted and encourages entities to take early remedial action on any identified matters during the course of an audit. Remedial actions entities may take during the audit include:

• strengthening governance arrangements;
• introducing or revising policies, strategies, guidelines or administrative processes; and
• initiating reviews or investigations.

4. In this context, the below actions were observed by the ANAO during the course of the audit. It is not clear whether these actions and/or the timing of these actions were planned in response to proposed or actual audit activity. The ANAO has not sought to obtain assurance over the source of these actions or whether they have been appropriately implemented.

• Defence and Thales commenced work for a broader review of the performance management framework from July 2023, see paragraph 2.28 and 2.29.
• Defence commenced a review of the Continuous Improvement and Efficiency Program under the contract in June 2025, see paragraph 3.8.
• Defence commenced developing an asset remediation program for the Benalla and Mulwala sites in November 2024, see paragraphs 3.21 and 3.22.
• As discussed in paragraphs 3.48 to 3.49, since October 2024 Defence has taken a more active role in managing the multi-tenancy arrangements at the Benalla site.
• Defence commenced validation and verification of performance information reported by Thales in contract status reports in July 2023, see paragraph 3.70.
• As discussed in paragraph 3.92, Defence finalised a strategic plan for the Benalla and Mulwala facilities in September 2025.

Appendix 3 Contract governance for the Benalla and Mulwala sites as of November 2025

1. Figure A.1 identifies the individual governance bodies, relationships and reporting lines within the governance framework for the Benalla and Mulwala sites as of November 2025, as established by the Strategic Domestic Munitions Manufacturing (SDMM) and Munitions Manufacturing Arrangement (MMA) contracts and Multi-Tenancy Arrangement.

Appendix 5 Maintenance work orders (both sites) December 2020 to September 2025

Appendix 6 Key features of the Strategic Domestic Munitions Manufacturing and Munitions Manufacturing Arrangement contracts as of November 2025