Land: Will legal battles delay DMMA for everyone? | ADM October 2013

The Domestic Munitions Manufacturing Arrangements (DMMA) program is looking at replacing the 17-year old SAMS and Mulwala agreements come mid-2015 once they expire. After a downselect was made earlier this year to three contenders, there have been concerns that the schedule may slip.

ADM understands that the Domestic Munitions Manufacturing Arrangements (DMMA) program office is looking at a contract extension with current provider Thales Australia.

The proposed contract extension would see the plant essentially ‘kept warm’ at a cost of between $60 and $80 million a year for both the Mulwala and Benalla sites, not producing any product for the ADF during this time. Allegedly there would be enough inventory to last between five and six years if the plants were mothballed. Allegedly, the negotiation would see an initial shut down period of one year with a possible one-year extension.

The Commonwealth and Thales have been negotiating roughly $150 million worth of capital equipment at the sites over the last 12 months. ADM understands that $144 million of that plant has been found to be owned by the Commonwealth and therefore able to be part of the DMMA process. The other $6 million is still being discussed.

Thales is now claiming that they own the Intellectual Property attached to the plant. This claim would see at least another 12 months of legal battles delaying the DMMA process.

One industry player close to the program has questioned whether the Commonwealth really needs access to the IP of the plant equipment from Thales Australia.

“Whichever team wins DMMA, they will have to go through a training and certification process for the plant where the IP would have to be tested with new processes. The current IP is that essential in that context.”

When this news was first released in ADM’s Defence Week online newsletter last month, there were many angry SMEs who contacted ADM about the information of the possible mothballing. One company director had to reassure his staff that they would have jobs post 2015 given their heavy reliance on a contract they hold with Thales for ammunition related work.

Timeline

In terms of timelines, DMMA is already behind the ball. There were originally five teams in the running:

1. Alliant Techsystems Inc (ATK) teaming with NIOA Nominees Pty Ltd, American Ordnance LLC, and Day & Zimmerman Inc;
2. BAE Systems Australia Limited teaming with Expal Systems SA;
3. Raytheon Australia Pty Ltd teaming with Chemring Australia Pty Ltd and Poongsan Corporation;
4. Rheinmetall Waffe Munitions GMBH teaming with Nitrochemie and RUAG Ammotec; and
5. Thales Australia Pty Ltd teaming with General Dynamics-OTS, NAMMO and Winchester Australia under the Australian Munitions banner

An announcement of a downselect to three companies was made by then Defence Materiel Minister Dr Mike Kelly in July this year where the Thales, ATK and BAE Systems led teams where selected. ADM has confirmed with sources close to the project that Thales was only kept in the running at this point because of the ongoing legal battles surrounding plant and IP rather than any reason based on a proposed business case.

A further decision point was estimated to be ‘in the third quarter of 2014’, alarmingly close to 30 June 2015. The drop dead date that contenders have to keep in mind is 30 June 2015; this is when both the SAMS and Mulwala agreements expire.

The RFP responses that were submitted in March this year were all based around a ‘hot transition’ at both sites for the winner of DMMA. If the proposed contract extension does eventuate, the offerings in the RFP responses will need to be reviewed in light of a schedule change. An RFT is supposedly ready to go but is waiting on the outcome of the legal battles.

Both ATK and BAE Systems are familiar with the Thales tactics being used: ATK used them against BAE Systems US in the Radford competition in the US. ATK knew they had lost the facility but managed to get several more years of work out of the US government by using such delaying measures. BAE Systems US had a challenging time in transitioning the workforce and capability at the plant but the facility is now a good model for how to transition under hostile conditions. It must be said however that ATK used the measures, all fully allowable under the contract, to prolong its business at the site.

Given that companies up until this point would be lucky to get change of $5 million in bid costs, bidders must be considering whether continuing in the competition is financially viable. DMMA would cease to be a competition with no competitors.

But what are Benalla and Mulwala offering the ADF these days anyway? The DMO 2011-12 Financial Year Contracts Listing shows the Benalla share of munitions purchases by DMO at less than 20 per cent.  In other words, 80 per cent of Australia’s munitions are coming from foreign sources.  A rough trawl through the contracts lists reveals:

Source:  Amount in $ millions
US FMS:         $156.5
SAAB: $59.6
Other O/S:      $7.8
Chemring:       $19.9
Thales:            $59.6 (18.8 per cent)
Other
Australian:     $13.8
Total:  $317.2

MRP

As ADM has mentioned in previous editions, the Mulwala Redevelopment Project (MRP) under JP2086 is overdue both in terms of schedule and budget. Primed by Lend Lease with ATK on the ground doing the majority of the work, the MRP is now being managed as a Project of Concern.

“During 2013-14, the design and construction contractor will continue the task of commissioning the modernised facility using trained operators from the Thales workforce,” according to the DMO.

“This commissioning process will include the manufacture and qualification of military grade propellants. Following acceptance by the Commonwealth in 2014, the modernised facility will be transitioned for operation.

“The key risk for this project is the successful transition of propellant production from the existing facility to the modernised facility. This risk is being mitigated by this project obtaining appropriate technical expertise and engaging closely with key internal and external project stakeholders.”

There have been concerns raised that the MRP schedule delay has fed into the wider DMMA delays.

DMMA statement by Thales

“Suggestions by ADM that there has been a delay to the DMMA process caused by Thales are wrong,” Kevin Wall, Executive General Manager for Australian Munitions, said. Given the nature of the article ADM gave the Thales led team a right of response. This is their complete statement.

“In regard to extensions to the current contracts, the DMO has been clear that they will not continue past 30 June 2015. Naturally, the DMO has discussed all facets of project contingency planning, as this is normal project discipline.

“Thales is approaching the end of long term contracts that were part and parcel of the sale of government-owned ADI in 1999. Some of the terms of sale and the contractual terms and conditions are quite complex and require careful, professional handling. This has been acknowledged by the DMO.

“We are working through these matters with them as part of a very cooperative transition process. This is not causing any delay to the DMMA schedule.

“The JP2086 Mulwala Redevelopment Project (MRP) where Lend Lease and DMMA competitor ATK are teamed to deliver a world-class modernised propellant plant was due to be delivered in June 2011.

“When DMO commenced the DMMA industry brief in November 2010, the MRP was nearly a year behind schedule. By the time the DMO called for the ITR in February 2012, it was 20 months late. At the launch of the RFP in January 2014, it was 30 months late.

“Today we are looking optimistically at a safe and effective site being three years late.

“Thales has worked cooperatively with DMO to ensure that the capability to manufacture ammunition, explosives and propellants is sustained, while at the same time increasing its non-ADF product sales to ensure that the factories can operate effectively and safely when ADF order requirements are reduced – this reduces the overall reliance on the ADF.”