The OneSKY contract doubled in value before the work started. The incentive model did the rest.

The failure of Australia’s OneSKY air traffic management system is usually described as a contract management problem. It is not. It is a story about an incentive structure designed to contain costs, with its ceiling set at twice the supplier’s original bid, that then produced the outcome that structure guaranteed.

ANAO Auditor-General Report No. 46 of 2024-25, tabled in July 2025, found that Airservices Australia’s management of the joint civil-military air traffic management system (CMATS) was ‘partly effective’. The incentive-based pricing model ‘has not been fully effective in containing costs’. Performance management mechanisms exist but ‘do not provide associated consequences for supplier underperformance’. Forty-seven contract variations have produced cost increases and schedule extensions. The total estimated programme cost is $4.1 billion. Delivery is ten years behind schedule. This is the third ANAO audit of OneSKY.

The incentive model’s failure is not a mystery. The winning tender for OneSKY was submitted at $630 million on a firm fixed-price basis. Between tender award and contract signing, the successful tenderer — which the 2019 ANAO audit noted had a ‘strong determination’ to migrate to a cost-plus model — succeeded. The acquisition contract signed in February 2018 set a target price of $1.22 billion and a ceiling price of $1.32 billion. That is more than double the fixed-price bid, renegotiated by the party with the most to gain from renegotiating it.

Under a target cost incentive model with a ceiling at $1.32 billion, Airservices reimburses Thales for actual costs up to the ceiling. Costs and savings against the target are shared. The structure creates an incentive to incur costs toward the ceiling while accruing shared-savings benefits on any underspend against target. The ceiling was not set in relation to what the work should cost. It was set at twice a recently submitted fixed-price bid for the same work by the same supplier. The resulting incentive is not to deliver efficiently. It is to deliver expensively, but short of the ceiling.

In 2024, after OneSKY was placed on the Projects of Concern list, programme-level KPIs were introduced as a remedial action. The 2025 audit found those KPIs ‘do not provide associated consequences for supplier underperformance where relevant’. The remedy applied to a programme of concern did not address underperformance. It documented it.

A value for money case for converting a $630 million fixed-price contract to a $1.32 billion cost-incentive model would require demonstrating that the risks being transferred to the Commonwealth under the new arrangement were worth the additional $690 million. The 2019 ANAO audit found the rationale for the migration was thin. The 2025 audit found the same structural problem, seven years later, and recommends updating the contract management plan.

The contract management plan is not the problem. The incentive structure was the problem, and it was set at contract signing in February 2018 at twice the supplier’s own assessment of what the work should cost. Three audits over nine years have recommended improving the plan. None has named what was locked in before the work began.