Follow-up on Internal Audit of the Close-In Weapons System (CIWS) In-Service Support Contracts

December 2013

7050-28-4 (CRS)

Reviewed by CRS in accordance with the Access to Information Act (AIA). Information UNCLASSIFIED.

Caveat

The result of this work does not constitute an audit of the CIWS support contract. Rather, this report was prepared to provide reasonable assurance that the Management Action Plans (MAP) that resulted from the November 2008 CIWS support contract audit were implemented as stated and as such have addressed the associated recommendations.

Acronyms and Abbreviations

Introduction

In keeping with the Treasury Board Policy on Internal Audit,¹ Chief Review Services (CRS) is required to undertake audit follow-ups to assess the implementation status of MAPs developed in response to previous CRS audit recommendations. In accordance with the CRS Risk-based Audit Plan for Fiscal Year (FY) 2013/14 to 2015/16, this audit follow-up of the CIWS in-service support contracts was selected to ensure that controls had improved in a follow-on contract to optimize value for money.

In November 2008, CRS completed an audit of two Phalanx CIWS in-service support contracts worth a combined $148 million. These contracts were for the repair, overhaul and upgrade of 24 CIWS mounts found on Royal Canadian Navy ships. The objective of the 2008 audit was to assess whether adequate governance, risk and management controls were in place to administer the CIWS support contracts. The audit concluded that improvements were needed in the risk management and control frameworks. The audit findings are summarized as follows:

Certification of Payments. Additional supporting documentation would allow improved oversight by Department of National Defence (DND) contract managers of inter-company profit.

Materiel Management. Improved DND oversight of vendor-held inventory and recommended buys of spare parts are required to ensure that assets are safeguarded and that value for money is realized.

Repair and Overhaul Component Management. Assigning proper DND repairable component Repair Priority Codes could defer repair costs until there is a greater need for serviceable items. Appropriate Maximum Repair Cost settings and using in-house maintenance resources could reduce annual repair and overhaul costs.

Vendor Reports. DND did not ensure that the vendor provided complete and relevant reports to support decision making.

Basis of Payment. The basis of payment for the CIWS support contracts did not assure value for money.

Risk Management. Risk management was not fully exercised by DND or requested from the vendor.

Methodology

This audit follow-up is an assessment of the progress made in implementing the MAP. The following methods were used:

• Interviews and inquiries with DND contract management staff in the Assistant Deputy Minister (Materiel) (ADM(Mat)), in the Director General Maritime Equipment Project Management (DGMEPM), and the Director General Materiel Systems and Supply Chain (DGMSSC) divisions—specifically, the Technical Authority in the Director Naval Combat Systems (DNCS), the Requisitioning Authority in the Director of Maritime Procurement (D Mar P), National Defence Quality Assurance Representatives (NDQAR) in the Director Quality Assurance (DQA), and other headquarters staff.
• Interview with the Public Works and Government Services Canada (PWGSC) Contracting Authority.
• Review and analysis of key contract documentation that pertained to the MAP.

• Analysis of data from the Audit and Evaluation Recommendation Management System (AERMS).2

Statement of Conformance

The audit follow-up conclusions contained in this report are based on sufficient and appropriate audit evidence gathered in accordance with procedures that meet the Institute of Internal Auditors’ International Standards for the Professional Practice of Internal Auditing. The audit follow-up thus conforms to the Internal Auditing Standards for the Government of Canada, as supported by the results of the quality assurance and improvement program. The opinions expressed in this report are based on conditions as they existed at the time of the audit follow-up, and apply only to the entity examined.

Overall Assessment

The follow-up of the 2008 audit of the CIWS in-service support contract has concluded that positive progress has been made on the implementation of the MAPs. As a result of the audit, DND arranged for a profit audit of the vendor, the stocktaking of contractor-held DND spare parts was enforced, a yearly process of reviewing maximum repair costs and repair priority codes of repairable spare parts was implemented, and improved risk management was put in place.

At the time of follow-up, there were six recommendations and 11 MAPs designated as fully implemented in AERMS. Upon further examination, 9 of 11 MAPs were confirmed by the audit team as fully implemented. Therefore, the majority of the management action items have been addressed. This is outlined more specifically in the Summary of the MAP Status at Annex A.

For the purpose of monitoring the implementation status of the MAPs that have not yet been fully implemented, the AERMS status will be revised by CRS to reflect the results of this audit follow-up.

Annex A—Summary of Management Action Plan Status

Certification of Payments

Management Action Plan and AERMS Status

The vendor is to provide supporting documentation to verify actual profit amount and take action, as necessary, to recover excess profit. This will commence during the Progress Review Meeting in November 2008.

OPI: ADM(Mat)/DGMEPM/D Mar P

Target Date: February 2009

AERMS Status: Full implementation

A formal request will be sent to PWGSC for an audit on CIWS materiel subcontracts.

OPI: ADM(Mat)/DGMEPM/D Mar P

Target Date: December 2008

AERMS Status: Full implementation

Assessment of Progress by CRS

The vendor provided actual cost documentation to the contract management team for an Audit Services Canada audit in February 2009. A memorandum of understanding was initiated by DND for an Audit Services Canada Profit and Overhead audit of the contract after its completion. This audit was completed in May 2013. ▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓▓

Management Action Plan Summary Status:

Target Date: November 2014

Preparation for implementation

Materiel Management

Management Action Plan and AERMS Status

2.a) During the National Inventory Control Point procurement of spares, the requirement to add credit clauses for surplus spares will be included. The Procurement Administration Manual will be amended to include the requirement for credit contract clauses⁵ for surplus, excess and inactive spares for procurement as a result of a vendor’s recommendation.

OPI: ADM(Mat)/DGMEPM/DNCS

Target Date: February 2010

AERMS Status: Full implementation

2.b) D Mar P will notify the vendor of stocktaking requirements, and DQA will supervise the stocktaking and make the appropriate stocktaking adjustments.

OPI: ADM(Mat)/DGMEPM/DNCS

Target Date: Ongoing

AERMS Status: Full implementation

2.c) DQA will perform a review of the continuing effectiveness of the contractor controls through a sample of stocktaking prior to the end of FY 2008/09.

OPI: ADM(Mat)/DGMEPM/DNCS

Target Date: March 2009

AERMS Status: Full implementation

2.d) DGMSSC, through the Director Supply Chain Operations and DQA, is conducting a review of materiel not held in the CFSS, with a view to identifying all holdings by end FY 2008/09 and implementing appropriate actions and oversight in FY 2009/10.

OPI: ADM(Mat)/DGMEPM/DNCS

Target Date: March 2010

AERMS Status: Full implementation

Assessment of Progress by CRS

2.a) The policy regarding the use of credit clauses has been included in the DND Procurement Administration Manual. However, the vendor does not recommend on the buy quantity of material on this contract, so no credit clause was required.

Management Action Plan Status: Full implementation

2.b) Stocktaking of the two vendor-held repair parts accounts was conducted by the vendor and overseen by the DND Quality Assurance Representative in December 2009 and 2011, in accordance with policy. Most surpluses or deficiencies found were the result of data entry errors that were subsequently corrected by the NDQAR through adjustments to materiel records.

Management Action Plan Status: Full implementation

2.c) DQA conducted a stocktaking initiative to review several contractors’ repair parts accounts in March 2007. Contractor representatives have access to the DND supply system but do not have the authority to make adjustments to inventory records.

Management Action Plan Status: Full implementation

2.d) An overall review by DGMSSC of vendor-held DND materiel across all contracts not held in the CFSS was not conducted. However, an updated plan is being developed to use the new capabilities of the Defence Resource Management Information System to track contractor-held inventory not currently visible in real-time.

OPI: ADM(Mat) DGMSSC/DMPP

Target Date: March 2014 complete planning

MAP Status: Planning stage

Management Action Plan Summary Status

The policy to avoid the acquisition of unnecessary spare parts has been modified, and the controls over contractor-held DND inventory are continually monitored by DND Quality Assurance Representatives. However, one of the four management actions (2.d)) regarding the review of materiel not held in the CFSS is not complete.

Repair and Overhaul Component Management

Management Action Plan and AERMS Status

The Supply Manager, in collaboration with the Technical Authority, will review the Selection Notice and Priority Summary yearly, and make the appropriate adjustments to the Maximum Repair Codes and review Repair Priority Codes, as well as CFSS reorder points. The supply manager and technical authority will review the CFSS assets to see if any excess items can be used in the repair and overhaul facility, and employment of in-house resources will be examined for the four repair and overhaul components currently repaired by the vendor.

OPI: ADM(Mat)/DGMEPM/DNCS

Target Date: Yearly

AERMS Status: Full implementation

Assessment of Progress by CRS

The objective of improving the cost-efficiency of repairing the CIWS has been met. The yearly reviews of inventory codes are an improvement over the previous contract. The in-house repair line for two items observed by CRS has been completed. The third item has sufficient stock at this time, so no repair line will be opened. When stock is insufficient, Fleet Maintenance Facility Cape Breton will be tasked with the repair.

Management Action Plan Summary Status

Full implementation

Vendor Reports

Management Action Plan and AERMS Status

In accordance with the appropriate DND standards, a separate Contract Data Requirements List and Data Item Description Statement of Work are being developed and will be implemented in the new contract.

Director Materiel Policy and Procedures (DMPP) in coordination with Director Maritime Procurement (D Mar P) will review the list of reports, validate its requirements, develop templates and amend the repair and overhaul logistics’ Statement of Work.

OPI: ADM(Mat)/DGMEPM/DNCS

OCI: ADM(Mat)/DGMSSC/DMPP/D Mar P

Target Date: March 2009

AERMS Status: Full implementation

Assessment of Progress by CRS

In accordance with the appropriate DND standards, a separate Contract Data Requirements List and Data Item Description Statement of Work were developed and submitted as part of the requisition package to PWGSC, and are being implemented in the new CIWS contract. The efforts to improve vendor reporting went beyond the letter of the recommendation, in that policy was also updated to influence other in-service support contracts.

Management Action Plan Summary Status

Full implementation

Basis of Payment

Management Action Plan and AERMS Status

During the negotiations, D Mar P will address the following items: just-in-time materiel deliveries, efficiency gains for work, and for holdbacks. The Procurement Authority will review every milestone on the previous contract to see if we can firm up fixed prices, as there is a long history of the work performed.

OPI: ADM(Mat)/DGMPEM/D Mar P

Target Date: February 2009

AERMS Status: Full implementation

Assessment of Progress by CRS

Instead of negotiating just-in-time materiel deliveries, there was an opportunity for the vendor to purchase the weapon system upgrade kits in a bulk buy, which reduced the unit cost per kit. DND requested that holdbacks form part of the terms of the new contract; however, it was PWGSC’s position that holdbacks were not needed to mitigate risk given that this is the third CIWS repair and overhaul contract with the same vendor. The procurement team considered a fixed price basis of payment during negotiations, but determined that a time and materials basis of payment for this particular contract would result in a lower overall cost to DND as the weapons systems are in various states of condition when received by the vendor.

Management Action Plan Summary Status

Full implementation

Risk Management

Management Action Plan and AERMS Status

A risk management plan is under development to support the project and link this to the vendor risk management plan in order to improve this issue.

OPI: ADM(Mat)/DGMEPM/DNCS

Target Date: September 2009

AERMS Status: Full implementation

Assessment of Progress by CRS

A DND internal risk management plan was developed and a Risk Registry was fully established in the DND software “Risk Radar.” The risk management plan and the risk registry are reviewed and updated on a regular basis by DND project staff and semi-annually with the contractor during the Project Review Meetings. The internal risk management plan was developed in accordance with the Software Engineering Institute project management principles.

The vendor was asked to develop a risk and opportunity management plan and provided this in June 2009. The DND contract management team has requested that this plan be even further improved.

Management Action Plan Summary Status

Full implementation

___________________________________________________________________________________________________________________________

Footnote 1 Policy on Internal Audit http://www.tbs-sct.gc.ca/pubs_pol/dcgpubs/ia-vi/ia-vi_e.asp.

Footnote 2 AERMS is a system that tracks the progress of the MAP items.

Footnote 3 Advance Accountable Spares are funded by DND but procured and managed by the contractor. They are not visible in the Canadian Forces Supply System (CFSS), and/or the Defence Resource Management Information System, and do not have North Atlantic Treaty Organisation (NATO) stock numbers. They are held on the contractor’s system of record and reported annually.

Footnote 4 Contractor Repair Parts Accounts holdings are items with NATO stock numbers issued by DND and are visible within the CFSS and/or Defence Resource Management Information System.

Footnote 5 A credit clause allows DND to return a spare part that was recommended by the vendor but was surplus to the actual requirement. The value of the surplus spare may be used to procure other spares that are in higher demand.

Footnote 6 A contractor must request DND to authorize a repair that exceeds the Maximum Repair Cost set for each repairable item.

Footnote 7 Repair Priority Codes are set by DND depending on the amount of serviceable repairable items that are in stock in DND warehouses.