Management of the M113 Armoured Personnel Carrier Upgrade Project
The objectives of this audit were to assess the progress of the M113 Armoured Personnel Carrier Upgrade Project against stated schedule, cost and technical performance objectives; and Defence Materiel Organisation's (DMO's) progress in implementing the recommendations and addressing the findings of ANAO Audit Report No. 3 2005–06, Management of the M113 Armoured Personnel Carrier Upgrade Project.
M113s are the only tracked vehicle in the Australian Defence Force's (ADF's) fleet of armoured troop transports used for transporting and supporting infantry in a battlefield. M113s first saw service with the ADF during the Vietnam War and are undergoing a major upgrade to improve protection, lethality, mobility and habitability.
Currently, 431 upgraded M113s are on order for delivery by the end of 2011 under Project Land 106: Upgrade of M113 Armoured Vehicles. The initial purchase in July 2002 of 350 upgraded vehicles for delivery by December 2010 was extended in December 2008 to include an additional 81 upgraded M113s as part of the Enhanced Land Force (ELF) initiative.1
With total anticipated expenditure in the order of $1 billion,2 the upgrade is one of Defence's top 30 projects by forecast 2008–09 expenditure, with some $100 million in expenditure under Project Land 106 forecast for this financial year.3
Upgraded M113s are to be a core component of the ADF's capability. They are fundamental equipment for Army's two mechanised battalions, the 5th and 7th Royal Australian Regiments (7 RAR and 5 RAR), and are currently forecast to be in service until 2020.4
The Australian National Audit Office (ANAO) previously examined the Department of Defence's (Defence's) progress in delivering this project in Audit Report No.3 2005–06, Management of the M113 Armoured Personnel Carrier Upgrade Project. Given the continuing significance of this project and developments since the 2005–06 audit, the ANAO scheduled this audit to provide updates on the progress against Project Land 106's stated schedule, cost and technical performance objectives, and on Defence's implementation of the recommendations and findings of the previous audit.
Audit objectives and scope
The objectives of this audit were to assess:
- the progress of the M113 Armoured Personnel Carrier Upgrade Project against stated schedule, cost and technical performance objectives; and
- Defence Materiel Organisation's (DMO's) progress in implementing the recommendations and addressing the findings of ANAO Audit Report No. 3 2005–06, Management of the M113 Armoured Personnel Carrier Upgrade Project.
The audit covers significant developments since the previous audit, including contract negotiations and outcomes, the commencement of final production, and the initial introduction into service of the upgraded vehicles. The ANAO visited production facilities to examine the arrangements for final production of the upgraded M113s, and 7 RAR at 1 Brigade in Darwin to examine vehicle logs, reports of defects and faults, and the current state of the upgraded M113 capability.
The M113 Major Upgrade Project commenced in July 2002 and has suffered a series of delays. Army has so far received 42 of the 350 vehicles to be upgraded (see Table 1.3). Of these, 16 are in service with 7 RAR, five are awaiting issue to units and the remaining 21 are allocated primarily to driver and crew training units.
Many of the initial technical difficulties with the Project were resolved by the end of 2007, at which time extensive negotiations with the Prime Contractor were successfully concluded. Those negotiations enabled final production to get underway and reaffirmed the December 2010 delivery date.
Subsequently, however, production has been slow. In July 2008, the Prime Contractor informed Defence that the existing production facilities at Bandiana, Victoria, were not adequate to the task and, at December 2008, there was a potential shortfall of around 100 upgraded vehicles by December 2010.
Defence is currently working with the Prime Contractor on measures to improve and expand the M113 production facilities and recover the anticipated production shortfall. On 28 October 2008, the Minister for Defence announced that additional production will occur at Williamstown, Victoria, and Wingfield, South Australia. ANAO notes that recovering the production schedule will be challenging.
Defence advised that the upgraded M113s achieved a limited Initial Operational Capability as of December 2007 and could, if circumstances required, be deployed. However, Defence has yet to complete the Operational Testing and Evaluation of the upgraded vehicles, which is necessary to achieve Operational Release. In light of increasing threats, Defence is considering additional protection for its M113s, at a potential additional cost of up to $0.2 million per vehicle, if they are deployed on more hazardous missions.
As of September 2008, the 16 upgraded M113s delivered to 7 RAR had travelled less than 1000 kilometres. They were first used in a training exercise in November 2008 and, by December 2008, had travelled almost 9 000 kilometres. Defence advised ANAO in December 2008 that, notwithstanding delays in the delivery of the upgraded M113s, demands on capability had been manageable. This was due, in part, to Defence's ability to use alternative armoured troop transports, and because troops who would otherwise have been assigned to M113s were necessarily deployed elsewhere on operations. Defence advised ANAO in December 2008 that:
The development of the [upgraded M113] capability is adversely impacted by support to operations. This cost has been assessed and accepted by Chief of Army as Capability Manager. Indeed, the cost is manageable within Army's wider priorities and strategic guidance.
Until it receives all its upgraded vehicles, Defence will continue to operate its fleet of original M113s, many of which are over 35 years old. At the time of this audit, Defence's assessment was that there were no viable alternatives to the upgraded M113.
In respect of the recommendations and findings of the previous audit, Defence has made significant progress. To control scope changes, Defence has specified and applied financial thresholds for the approval of changes to capital acquisition projects. To complement these arrangements, ANAO has recommended Defence develop additional guidance to ensure that appropriate levels of approval are sought for scope changes that affect capability.
Defence has successfully recovered against deliverables outstanding prepayments identified in the previous audit. However, it was difficult to establish with certainty the financial and other benefits accruing to the Commonwealth by making substantial prepayments under the Major Upgrade Contract. Consequently, ANAO has recommended that Defence develop clear policy guidance on the circumstances in which prepayments will be considered for inclusion in future major acquisition contracts.
Defence has put in place a suite of guidance and instructions to staff responsible for administering liquidated damages. In the case of the Major Upgrade Contract, administration was hampered by complex arrangements that applied liquidated damages to approximately 3100 contract milestones. ANAO has recommended that liquidated damages arrangements in future major acquisition contracts apply to clearly identified, key contract milestones.
Defence provided evidence of its effective oversight of technical issues in the development of the upgraded M113s.
Key findings by chapter
Chapter 2 – Progress in addressing the recommendations and findings of the previous audit
In July 2005, ANAO reported to Parliament on the management of the M113 upgrade project,5 concluding that that the initial minimum upgrade phase of the Project suffered from poor project management practices; ineffective project planning; inadequately defined project objectives; and technical problems.6
ANAO made three recommendations to DMO, the first of which was that DMO ‘put in place control mechanisms to ensure that changes in project scope are approved at the appropriate level.' ANAO found that this had occurred, with the issue of Defence Material Instruction 7/2005 (DMI 7/2005), which prescribes progressively higher levels of approval corresponding to higher levels of financial impact. However, ANAO found that there were varying views on what constituted a scope change and, hence, when to apply DMI 7/2005. Consequently, ANAO has recommended in this audit that, to remove uncertainty, Defence set suitable threshold criteria for the approval of scope changes affecting capability.
ANAO's second recommendation from 2005 was that DMO ‘recover against deliverables, the outstanding amount of the May 1997 mobilisation payment remaining from the Phase 1(a) M113 Upgrade Contract at the earliest opportunity.' Defence provided ANAO with evidence that this occurred.
This audit also examined subsequent mobilisation payments of $80 million made under the Major Upgrade Contract. These advance payments are recovered gradually over the full life of the contract. Defence advised ANAO that the costs of these advance payments, estimated by ANAO to be over $10 million to September 2008, had been offset by a reduction in contract price during contract negotiations in 2002. However, the basis of Defence's statement was not clear and ANAO has recommended that Defence develop clear policy guidance on the circumstances in which prepayments will be considered for inclusion in future major acquisition contracts.
In response to ANAO's third recommendation from 2005 that DMO ‘review contracting policy and its application of the collection of liquidated damages, to be received either by way of financial or agreed compensation, to ensure that they are collected in a timely manner,'7 ANAO has confirmed that Defence has put in place a suitable suite of guidance, templates and instructions.
ANAO's examinations in the course of this audit extended to DMO's administration of liquidated damages under the M113 Major Upgrade Contract. ANAO observed that effective administration was hindered by complexity and uncertainty in the relevant contract provisions, to the extent that Defence had not been able to apply the Commonwealth's standard position.8 Settling the amount of liquidated damages was central to Defence's 2007 contract negotiations with the Prime Contractor.
Chapter 3 – Global Settlement
To overcome a range of technical, production and contractual issues and to enable final production to commence, in October 2007 Defence successfully negotiated a Global Settlement with the Prime Contractor. The negotiations were triggered by substantial delays in delivery, by uncertainty as to the responsibilities of the parties, and by the perceived underperformance of the Prime Contractor. At the time of the negotiations, Defence considered alternatives to the M113 and concluded that the upgraded vehicles remained the best solution. In May 2007, Defence advised Parliament that:
Defence has reviewed the capability requirement and confirmed the continued suitability and need for this family of vehicles. The option of cancelling the [M113 upgrade] project would leave a significant gap in the ADF's capability and is not being considered at this stage.9
Over the course of the negotiations, Defence and the Prime Contractor continued work to remedy major technical defects in the design and construction of the upgraded armoured personnel carrier (APC), armoured fitter (AF) and armoured recovery vehicle (ARVL). At the conclusion of negotiations, Defence was in a position to authorise the start of the final production of these variants. The negotiations also settled other important matters, such as:
- a commitment by the Prime Contractor to deliver the first 350 upgraded vehicles by December 2010 under a compressed delivery schedule;
- a process for designing and building the remaining four variants of the upgraded M113s;10 and
- compensation to the Commonwealth for shortfalls in vehicle performance and the recovery of liquidated damages, both taken in the form of work-in-kind.
Given the state of the Major Upgrade Contract and the Prime Contractor's position, the negotiated outcome was reasonable in the circumstances.
Chapter 4 – Production and Capability
Defence and the Prime Contractor have successfully established M113 production facilities at Bandiana, Victoria. At these facilities, original M113s are stripped, cut and extended under a separate maintenance contract held by the Prime Contractor for the M113 upgrade.
Under the Major Upgrade Contract, the extended hull then enters an assembly line, where it is progressively fitted with new or refurbished equipment, including a new engine and gearbox and a turret to carry a 50 calibre machine gun. Defence personnel are on-site to inspect and accept or reject the work of the Prime Contractor.
Meeting the compressed delivery schedule agreed at Global Settlement depends on a smooth flow of hulls and vehicles through the Bandiana facilities. However, during a visit to Bandiana in August 2008, ANAO observed a backlog of work, indicating that schedule risks previously identified by Defence had been realised. The backlog is caused chiefly by delays in extending the hulls. This is proving to be more complex than anticipated, and is taking longer than expected.
In July 2008, the Prime Contractor notified Defence that it would not be able to meet the required level of production at Bandiana and that it would not be able to deliver 350 upgraded vehicles by December 2010. Defence is currently negotiating arrangements with the Prime Contractor on measures to recover the delivery schedule. On 28 October 2008, the Minister for Defence stated that production would be extended to Wingfield in South Australia and Williamstown in Melbourne, Victoria. The expansion of production facilities is part of the Government's decision to purchase 81 additional upgraded M113s at an additional cost of at least $221 million.
ANAO visited Robertson Barracks, Darwin, in September 2008 to examine the 16 upgraded M113s in service with 1 Brigade, 7 RAR. At this time, the re-designed brakes were demonstrated and ANAO was advised that the vehicles were a marked improvement over the original M113s.
However, 7 RAR had been able to make only very limited use of the 16 upgraded vehicles, which had travelled a combined total of less than 1 000 kilometres since their delivery in November 2007. Defence advised ANAO that 7 RAR first used the upgraded vehicles in a training exercise in November 2008. To date, the major users of upgraded M113s have been training teams, which have travelled over 60 000 kilometres training M113 drivers and crew.
Defence advised ANAO in December 2008 that a limited Initial Operating Capability for the upgraded M113s was achieved late in 2007 and that the vehicles could be deployed if circumstances required. ANAO found that Operational Testing and Evaluation of the upgraded vehicles was yet to occur and there was still some way to go before Operational Release would be achieved.
While Defence has found delays in delivery to be manageable to date, prolonged delays in achieving full development of the upgraded M113 capability will raise other issues. These include the logistic problems of running mixed fleets of old M113s alongside upgraded vehicles that share few common parts and require some different crew training.
The Department of Defence provided a response to this report on behalf of Defence and the Defence Materiel Organisation (DMO):
The M113 Armoured Personnel Carrier vehicle fleet is undergoing a major upgrade under Project Land 106 which will realise a significant capability improvement over its current design. The Defence Materiel Organisation is charged with managing the $850 million Project and will deliver 350 upgraded M113 vehicles by December 2010 and additional 81 upgraded vehicles under the Enhanced Land Force initiative by 2011.
Defence welcomes the Australian National Audit Office (ANAO) report on the Project and agrees to all three recommendations made in the report. ANAO notes in the report that “significant progress” has been made to improve key elements of the Project's management since the previous ANAO audit in 2005 including: the introduction of a new approval process for controlling scope changes in capital acquisition projects; successful recovery of prepayments against outstanding deliverables; and the introduction of a suite of guidance and instructions for administering liquidated damages.
 See the Hon Joel Fitzgibbon MP, Minister for Defence (2008), Government approves additional armoured personnel carriers, Media Release 148/2008, 28 October. In December 2008, the Government purchased the additional vehicles as part of the ELF initiative, announced in 2006 at a total approximate cost of $4.1 billion. ELF is intended to provide Army with a range of additional equipment, among which are additional upgraded M113s.
 Expressed in January 2009 prices. The estimate comprises the approved budget of $648 million for the first 350 vehicles, an additional $241 million for the 81 ELF vehicles, along with estimates of the additional costs of preparing and extending the vehicle hulls prior to upgrade, and those of Defence project staff. The breakdown of costs for the first 350 vehicles is shown in Table 1.4 and estimates for the additional costs of the ELF vehicles were provided by Defence in March 2009 (see paragraph 1.59).
 Department of Defence (2008), Portfolio Budget Statements 2008–09, p. 166.
 The 81 additional ELF vehicles will allow these two mechanised battalions (established under the Hardened and Networked Army initiative announced in 2005 at a cost of approximately $1.5 billion) to operate M113s exclusively rather than mixed fleets of M113s and Bushmasters. See Department of Defence (2007), Australia's National Security: A Defence Update 2007, p. 51.
 ANAO Audit Report No.3 2005–06, Management of the M113 Armoured Personnel Carrier Upgrade Project.
 ibid., p. 14.
 ibid., p. 20.
 Defence's General Counsel advised DMO in July 2006 that the Commonwealth's standard position is to allow 90 days grace to rectify a default, after which liquidated damages are calculated from day 1, rather than from day 91 as has been the case for this project.
 Department of Defence (2007), responses to questions taken on notice from Senate Committee on Foreign Affairs, Defence and Trade, Budget estimates 2007–2008, W31 questions I and o.
 The other four variants are the Armoured Command Vehicles (ACV), the Armoured Logistics Vehicle (ALV) the Armoured Ambulance (AA) and the Armoured Mortar (AM). The numbers and roles of each are summarised in Table 1.1.