Defense Logistics: Air Force Lacks Data to Assess Contractor	 
Logistics Support Approaches (07-SEP-01, GAO-01-618).		 
								 
The Department of Defense has directed the services to pursue	 
logistics "reengineering" efforts to reduce logistics support	 
costs. To this end, the Air Force has several efforts under way  
that involve commercial best practices and have, as a key	 
feature, increased reliance on private-sector capabilities for	 
logistics support. It is impossible to determine whether	 
cost-effectiveness estimates for proposed contractor logistics	 
support approaches are being achieved during implementation	 
because the Air Force does not have the data required to do so.  
Consequently, the Air Force may be testing and adopting support  
approaches without sufficient information to assess whether	 
expected readiness improvements and cost reduction goals are	 
being met. The Air Force's limited experience to date in	 
repairing the same aircraft and components in both the public and
private sectors and the lack of comparable and reliable 	 
historical financial data make it difficult to assess the	 
cost-effectiveness of private versus public repair facilities. In
addition, concerns raised about the impact of the increased use  
of contractor logistics support on the management of day-to-day  
activities have not been fully addressed.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-618 					        
    ACCNO:   A01322						        
    TITLE:   Defense Logistics: Air Force Lacks Data to Assess        
             Contractor Logistics Support Approaches                          
     DATE:   09/07/2001 
  SUBJECT:   Air Force procurement				 
	     Cost effectiveness analysis			 
	     Logistics						 
	     Weapons						 
	     Weapons systems					 
	     Contractors					 
	     B-1 Aircraft					 
	     B-2 Aircraft					 
	     C-17 Aircraft					 
	     F-117 Aircraft					 
	     F-16 Aircraft					 
	     Globemaster Aircraft				 
	     KC-135 Aircraft					 
	     Stealth Aircraft					 
	     DOD Defense Reform Initiative			 
	     DOD Quadrennial Defense Review			 

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GAO-01-618
     
Report to Congressional Committees

United States General Accounting Office

GAO

September 2001 DEFENSE LOGISTICS Air Force Lacks Data to Assess Contractor
Logistics Support Approaches

GAO- 01- 618

Page i GAO- 01- 618 Defense Logistics Letter 1

Results in Brief 2 Background 4 Data to Assess Contractor Logistics Support
Approaches Are

Insufficient 5 Data Are Insufficient to Compare Depot Maintenance Performed

by Contractors With Maintenance Performed by Military Depots 11 Major
Commands? Concerns About Expansion of Contractor

Logistics Support Have Not Been Fully Addressed 14 Conclusions 17
Recommendations for Executive Action 17 Agency Comments and Our Evaluation
18 Scope and Methodology 20

Appendix I Recent Department of Defense Studies on Logistics Restructuring
23

Appendix II Details on the Air Force?s B- 2 Source of Repair Decision

26

Appendix III Comments From the Department of Defense 29

Appendix IV Staff Acknowledgements 33

Tables

Table 1: Contractors? Overall Performance Ratings From 1994 Through 1999 9
Table 2: Workload Placement for B- 2 Depot Support Based on

DOD?s February 1995 Report to Congress 26 Contents

Page ii GAO- 01- 618 Defense Logistics Figures

Figure 1: Comparison of Contractors? and Military Depots? Performance in
Meeting Air Combat Command Spare Parts Standards for 16 Aircraft Systems,
Fiscal Years 1990- 2000 10 Figure 2: Comparison of Average Airframe Overhaul
Prices for

KC- 135 Aircraft as Performed by Air Force Depots and Contractors, Fiscal
Years 1996- 2000 12

Abbreviations

DOD Department of Defense GAO General Accounting Office

Page 1 GAO- 01- 618 Defense Logistics

September 7, 2001 The Honorable Carl Levin Chairman The Honorable John W.
Warner Ranking Minority Member Committee on Armed Services United States
Senate

The Honorable Bob Stump Chairman The Honorable Ike Skelton Ranking Minority
Member Committee on Armed Services House of Representatives

Since the end of the Cold War, the Department of Defense (DOD) has
dramatically reduced its fighting forces and logistics infrastructure. At
the same time, the armed services have significantly reduced their
procurements of new weapons systems and are now keeping their weapons
longer. The Department estimates that it is spending about $59 billion a
year on logistics support to operate and sustain weapons systems 1 but
believes that it could reduce these costs by 20 percent or more by adopting
a variety of different logistics support practices. DOD has directed the
services to pursue logistics ?reengineering? efforts to achieve these
savings. To this end, the Air Force has several efforts under way that
involve commercial best practices and have, as a key feature, increased
reliance on private- sector capabilities for logistics support. 2

The Air Force?s acquisition process provides for developing a system?s
logistics support concept prior to completing the production of a weapon
system. DOD and Air Force policy provide a preference for using long

1 DOD does not routinely capture these costs in its accounting and
estimating systems. However, beginning in 1999, the Undersecretary of
Defense for Acquisition and Technology hired a contractor to estimate the
amount of funds that DOD spends annually on logistics support.

2 The Air Force uses different terms to describe logistics support provided
by the private sector, including ?contractor logistics support,? ?total
system performance responsibility,?

?total system sustainment responsibility,? ?total system support,? and
?flexible

sustainment.?

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 618 Defense Logistics

term contractor logistics support. Nonetheless, the process for making
logistics support decisions involves conducting an analysis comparing
whether the private sector or Air Force activities will provide the most
cost- effective and technically sound logistics support approach. These
initial cost and performance expectations form the basis for the Air Force?s
decision to rely on a contractor, the government, or some combination of the
two for support. If a contractor logistics support approach is selected, the
Air Force develops and implements its contracting strategy, which includes
an analysis of what performance and costs the Air Force expects from the
selected contractor. After selection, the Air Force monitors the
contractor?s performance against the negotiated performance and cost
expectations, not against the initial cost and performance estimates that
led to the decision to use contractor logistics support.

Your committees have expressed concerns about the cost- effectiveness of
these new contractor logistics support approaches and the management
challenges that these approaches may create for major commands. As agreed
with your office, we reviewed the Air Force?s practices because the Air
Force has had broader experience with contractor logistics support than the
other services. You asked us to (1) analyze the differences between the
cost- effectiveness estimates for proposed contractor logistics support
approaches and actual implementation experience, (2) compare the performance
of contractors and Air Force depots in terms of cost and responsiveness for
the same or similar work, and (3) determine to what extent the Air Force has
addressed concerns raised by major commands regarding the increased use of
long- term contractor support. We will address the Army?s and Navy?s
experience with contractor logistics support approaches in a subsequent
report. DOD is currently engaged in a strategic review of its war- fighting
goals, objectives, and capabilities, which could influence the way it
approaches its use of contractor logistics support when completed.

In general, it is impossible to determine whether the cost- effectiveness
estimates for proposed contractor logistics support approaches are being
achieved during implementation because the Air Force does not have the data
required to do so. Consequently, the Air Force may be testing and adopting
support approaches without sufficient information to assess whether expected
readiness improvements and cost- reduction goals are being met. The Air
Force established and retained documentation supporting proposed contractor
logistics support approaches for only 2 of the 35 systems we reviewed (the
C- 17 and the B- 2 aircraft). Data for the Results in Brief

Page 3 GAO- 01- 618 Defense Logistics

C- 17 do not permit a comparison between the proposed approaches and the
contractor?s actual performance, while the available cost data for the B- 2
indicate a significant cost increase over the Air Force?s initial estimate.
The Air Force?s analysis shows that while a portion of this increase was due
to changes in work requirements, the large majority was due to the
contractor?s cost omissions and cost increases. Furthermore, the Air Force?s
10 ongoing pilot programs- which are intended to provide a basis for
evaluating new contractor logistics support approaches- are unlikely to
provide the information needed to evaluate the cost- effectiveness of these
approaches. The Air Force does have data to compare the contractor?s
performance with the criteria established in the contract and with the
weapons systems? performance standards set by operating commands. These data
indicate that contract requirements are being met.

A comparison of the same or similar depot maintenance work performed by Air
Force depots and contractors does not provide a sufficient basis for
determining the most cost- effective option. Available cost data indicate
that Air Force depots were more cost- effective than contractors in
overhauls of the KC- 135 and B- 1 aircraft, while Air Force depots and
contractors were equally cost- effective in repairing various aircraft
components. Nonetheless, the Air Force?s limited experience to date in
repairing the same aircraft and components in both the public and private
sectors and the lack of comparable and reliable historical financial data
make it difficult to assess the cost- effectiveness of private versus public
repair facilities. Consequently, the Air Force does not have the data to
assess whether greater reliance on the private sector will help it achieve
the Department?s goal of a 20- percent reduction in logistics support costs.

Major commands have raised concerns about the impact of the increased use of
contractor logistics support on the management of their day- to- day
operations that have not been fully addressed. Operating commands are
especially concerned that the increased use of contractor logistics support
may limit their funding flexibility. According to the Air Force, past
experience has shown that the operating commands have had adequate
flexibility with contractor- provided logistics support. The officials noted
that this past experience has not been on the same scale as might occur
under current logistics reengineering plans and therefore may indeed
constrain the funding flexibility of operating commands. According to
operating command officials, such constraints eventually may affect their
ability to support missions by committing large amounts of funds to
previously established support agreements. The Air Force has taken actions
in response to other concerns raised by major commands- about possible
reductions in their ability to perform essential logistics

Page 4 GAO- 01- 618 Defense Logistics

management functions and possible reductions in their command authority, and
about the lacking availability of technical data- but all issues have not
been fully addressed.

We are making recommendations aimed at improving the Air Force?s ability to
assess the cost- effectiveness of contractor logistics support approaches
and to address the management concerns raised by major commands that are
associated with these approaches. In commenting on a draft of this report,
DOD generally concurred with our recommendations.

The Department of Defense is moving to greater reliance on the private
sector for the logistics support of new weapons systems and major upgrades.
3 For example, DOD has 30 pilot programs under way to test various logistics
support reengineering concepts that place greater reliance on the private
sector. At the same time, defense manufacturers are increasingly interested
in expanding their participation in weapons systems support.

Various DOD studies- including the 1995 Commission on Roles and Missions and
Defense Science Board reports, and the 1997 Defense Reform Initiative and
Quadrennial Defense Review reports- discussed the adoption of long- term
contractor logistics support to improve logistics processes and achieve
savings. (See app. I for details of these studies.) Generally, each study
focused on increasing reliance on the private sector to meet DOD?s
logistical support needs as well as on making greater use of improved
technologies, new business processes, and commercial transportation.

However, as we have previously reported, the support for these projected
savings contained little substantive data to support their savings
projections or they made inaccurate assumptions about how experiences in the
private sector might relate to depot maintenance activities. For example,
DOD used projected savings from the outsourcing of commercial- type
activities as the basis for its estimated savings of 20 percent or more for
outsourcing logistics support activities. However, the projected savings
were based on conditions that do not currently exist for

3 See Defense Depot Maintenance: DOD Shifting More Workload for New Weapon
Systems to the Private Sector (GAO/ NSIAD- 98- 8, Mar. 31, 1998). Background

Page 5 GAO- 01- 618 Defense Logistics

most military depot maintenance work. 4 The commercial- type activities are
unlike military depot maintenance in that they involve relatively simple,
routine, and repetitive tasks that do not generally require large capital
investment or highly skilled and trained personnel. Additionally, the
commercial activity contracts were awarded in a competitive environment- a
condition not generally present for depot maintenance contracts. As a
result, projected savings generally resulted from competition rather than
from contractor performance, whereas most DOD depot maintenance contracts
are not competitively awarded.

The Air Force has not routinely captured the data necessary to assess
contractor logistics support approaches for sustaining weapons systems
against actual experience. Furthermore, those limited cases where data are
available show mixed results. The available data are not sufficiently
detailed or reliable to provide the basis for evaluating the cost of support
approaches for certain weapons systems. Also, the Air Force?s ongoing pilot
programs have a similar limitation and are unlikely to provide the data
needed to assess the support approaches? expectations against actual
results. DOD does assess contractors? performance against contract
requirements. With regard to contract performance standards, available
indicators show that contractors have met or exceeded the contract criteria
and supply performance standards established by operating commands.

The Air Force either did not perform a cost benefit analysis or did not
retain information on the analysis that was used to support its decisions to
use the private sector to support weapons systems. Consequently, it cannot
determine whether contractor logistics support approaches have performed
better or worse than initially expected.

The Air Force?s program offices are responsible for analyzing the
costeffectiveness of contractor logistics support approaches in developing
lifecycle support plans. These analyses are supposed to form the basis for
deciding to what extent the private and public sectors will be relied upon
to provide logistics support. However, program offices have not generally

4 See Defense Depot Maintenance: Commission on Roles and Mission?s
Privatization Assumptions Are Questionable (GAO/ NSIAD- 96- 161, July 15,
1996) and Outsourcing DOD Logistics: Savings Achievable but Defense Science
Board?s Projections Are Overstated

(GAO/ NSIAD- 98- 48, Dec. 8, 1997). Data to Assess

Contractor Logistics Support Approaches Are Insufficient

The Air Force Does Not Have Sufficient Data to Assess the CostEffectiveness
of Proposed Approaches

Page 6 GAO- 01- 618 Defense Logistics

retained the initial cost and performance estimates used to make these
contractor logistics support approach decisions. The Air Force does not have
an established requirement to assess the cost- effectiveness of these
decisions after they are implemented. Air Force Instruction 63- 107, which
provides guidance on logistics support decisions for weapons systems, does
not require assessing the cost- effectiveness of these decisions after they
are made against initial expectations. While the instruction requires the
documentation of the analyses supporting the logistics support approach
decisions for weapons systems, the instruction does not specify retention
requirements for the documentation. Once a contractor support decision has
been made, the contractor?s performance is measured against the contract-
not the initial expectations supporting the decisions. As a result, the Air
Force has not had sufficient data to determine whether the logistics support
provided by contractors achieved the cost and performance expectations that
initially supported the logistics support approach decisions. A recently
added provision to Air Force Instruction 63- 107 requires that program
managers review how effectively their sustainment strategy for weapons
systems is working and, if needed, adjust the strategy to improve
performance and cost- effectiveness. 5 However, the instruction does not
require program managers to compare actual logistics sustainment performance
with initial cost and performance expectations.

Thirty- three of the 35 contractor- supported systems that we reviewed did
not retain sufficient historical data to compare estimated cost and
performance expectations with implementation results. Seventeen of these
systems had no documentation of original cost and performance expectations,
8 had incomplete documentation, and 8 had not developed any cost or other
performance expectations. The only systems that had established expectations
and retained supporting documentation were those for the C- 17 and B- 2
aircraft, and the documentation for these systems was available only because
it had been included in reports to Congress. 6 The Air Force has not
compared the C- 17 contractor?s performance with initial expectations, and
program office officials said

5 The revised version of Air Force Instruction 63- 107, Integrated Product
Support Planning and Assessment, was issued in May 2001. 6 The Office of the
Secretary of Defense?s 1995 Report on the Most Efficient and Effective
Utilization of Both Public and Private Facilities for Depot Maintenance
Support of the B- 2 Advanced Technology Bomber, the Air Force?s 1994 Report
to Congress: B- 2 Depot Support Plan, and the Air Force?s 1997 Report to
Senate Appropriations Committee: Depot Support Strategy: Flexible
Sustainment, which addressed the C- 17.

Page 7 GAO- 01- 618 Defense Logistics

that such a comparison is impossible because the available data are not
detailed enough and the logistics support approach taken does not match the
approach initially anticipated in the Air Force?s report to Congress. For
example, the approach being used for C- 17 logistics support relies on the
private sector for approximately 99 percent of the depot maintenance
workload, while the report to Congress estimated that this depot maintenance
work would be more or less evenly divided between the private sector and
military depots.

The Air Force recently completed a detailed analysis of scheduled airframe
depot maintenance costs for the B- 2 aircraft, comparing the service?s 1995
estimate (when the Air Force decided to contract for B- 2 support) with the
contractor?s actual costs. The review found that scheduled depot maintenance
of the airframe cost more than twice what was originally estimated and that
while a portion of this increase was due to changes in work requirements,
the large majority was due to the contractor?s cost omissions and cost
increases. This analysis concluded that having the Air Force perform
airframe maintenance at any of four military facilities would cost less over
the system?s estimated 20- year life span. 7 Furthermore, the Air Force?s
ongoing reassessment of the B- 2 depot support approach for components and
avionics items thus far indicates that the contractor?s total cost estimate
for these items for 1995 may have been understated by at least 52 percent.
(For details on the Air Force?s 1995 decision to contract for B- 2 logistics
support and its latest review of the 1995 decision, see app. II.)

DOD?s pilot programs that are meant to test the cost- effectiveness of
contractor logistics support may not provide data useful enough to
adequately assess the different logistics support approaches. The pilots
will not provide sufficient measurable results for several years, and the
results will not differentiate between the effects of the various changes
being tested in a specific weapon system. We found that the pilot programs?
test schedules are unlikely to produce sufficient and timely data and that
test results may not demonstrate a clear link to specific concepts. The Air
Force believes that lessons learned from 10 Air Force, 10 Navy, and 10 Army
pilot programs will provide sufficient evidence to support a decision to
expand reliance on the private sector for logistics support.

7 The quality of the data generated by the Air Force?s financial systems
creates a degree of uncertainty regarding these estimates, but it represents
the best data available. Pilot Programs May Not

Provide Data to Support Expansion of Reengineering Approach

Page 8 GAO- 01- 618 Defense Logistics

However, the pilot programs face problems in evaluating the
costeffectiveness of logistics reengineering concepts, such as the long-
term use of contractors to replace government personnel. Consequently, even
if savings do eventually occur, it will not be clear whether they come from
any one reengineering concept or from other program changes.

One example of such uncertainty is the F- 117 pilot program, which is
testing ways to reduce sustainment costs and improve aircraft performance
through such initiatives as downsizing the system program office,
transferring some aspects of performance responsibility to a contractor,
using a long- term contract, providing stabilized funding, and modernizing
through spares. 8 However, according to the F- 117 program office, the data
will not allow the Air Force to differentiate each initiative?s impact on
the pilot program?s overall success. The transfer of logistics functions,
such as transferring supply management to the contractor, for example, is
supposed to reduce program management costs by $80 million. But the pilot
program?s approach analyzes overall system performance measures, not
discreet tasks, and the program office is not collecting detailed
information on individual support tasks.

While data are not available to compare contractor logistics support
approach expectations with actual results, information on actual contractor
performance against contract requirements indicates that, generally, the Air
Force is satisfied with contractors? performance and weapons systems?
performance. Overall indicators show that contractors generally meet or
exceed established performance criteria contained in their contracts and
that weapons systems that use contractor logistics support meet the
operating commands? supply performance standards.

According to the Air Force Materiel Command?s contractor performance
reports, program mangers evaluated most contractor performance as having met
and in some cases exceeded all contractual requirements from 1994 through
1999. Contractors? performance is evaluated through various measures
specified in their contracts, such as meeting delivery schedules and product
quality standards. Program offices conducted periodic assessments of whether
contractors met these measures in order to make award fee decisions, and
they completed annual performance assessment

8 Modernization through spares involves replacing outdated components with
new components with greater reliability, maintainability, or supportability.
Management Data Show

Satisfaction With Contractor Logistics Support

Contractors? Performance Generally Meets Contractual Requirements

Page 9 GAO- 01- 618 Defense Logistics

reports. 9 While not all contractors met contractual expectations, most did.
(See table 1.)

Table 1: Contractors? Overall Performance Ratings From 1994 Through 1999

Percent

Rating Calendar year 1994 1995 1996 1997 a 1998 1999

Exceptional 19 22 24 N/ A 26 25 Satisfactory to very good b 70 68 66 N/ A 64
68 Marginal 9 8 9 N/ A 9 6 Unsatisfactory 2 2 1 N/ A 1 1

Legend N/ A = not applicable a Data for calendar year 1997 are not
available.

b In calendar year 1998, DOD split the ?satisfactory? category into two
categories-? satisfactory? and ?very good.? For consistency, we combined
these two categories for calendar years 1998 and 1999. Source: Air Force?s
contractor performance reports.

Operating commands reported that weapons systems supported by contractors
met their supply- related performance standards. We compared the Air Combat
Command?s supply- related performance data with the command?s standards 10
for 16 aircraft systems supported by contractors and military depots and
found that the systems supported by contractors typically met or exceeded
applicable performance standards. (See fig. 1.)

9 Air Force Material Command Instruction 64- 107 provides guidance on the
preparation and reporting of contractor performance assessments. 10 The
military has various metrics for measuring weapons systems? readiness and
performance. We used the ?nonmission capable supply? metric to assess how
well contractor logistics support affects aircraft readiness. According to
Air Combat Command officials, this is the metric that best reflects
contractors? performance. Contractor- Supported Weapons

Systems Met Supply- Related Performance Standards

Page 10 GAO- 01- 618 Defense Logistics

Figure 1: Comparison of Contractors? and Military Depots? Performance in
Meeting Air Combat Command Spare Parts Standards for 16 Aircraft Systems,
Fiscal Years 1990- 2000

Note: Because each aircraft system has a different spare parts
nonavailability standard, we normalized the standards so that 100 percent
represents the standard for each aircraft system. Consequently, data points
on this chart above 100 percent indicate that, on average, the standards
were exceeded. Also, of the 16 systems reflected in this chart, military
depots support 9 systems, and contractors support 7.

Source: Air Force?s data.

In fiscal year 2000, the Air Combat Command established interim goals for
the availability of parts that took into account reported shortfalls in the
funding for spare parts. Using these interim goals for the performance
comparison instead of the parts availability standards, military depots?
performance would have closely matched that of contractors in fiscal year
2000.

Air Force Combat Command officials stated that funding priorities should be
considered when assessing these data. They pointed out that contractor-
supported systems are usually in high demand and have few aircraft. As a
result, they have a higher funding priority than military depot- supported
systems, which generally have large numbers of aircraft. Air Combat Command,
for example, has 44 F- 117 fighters, which are high-

Page 11 GAO- 01- 618 Defense Logistics

demand aircraft managed and supported by a contractor, and 303 F- 16
fighters, which are managed by an Air Logistics Center and supported by
military depots and contractors. According to command officials, whenever
the budget faces reductions or unforeseen requirements for contingency
operations, the F- 16 typically faces a proportionally greater budget cut
than the F- 117 or other contractor- supported aircraft.

The Air Force?s limited amount of experience with using both the Air Force
depots and contractors to perform like depot maintenance work does not
provide a sufficient basis to evaluate performance. Furthermore, a
comparison of contractors? and Air Force depots? repair prices may be
limited because the quality of financial data generated by the Air Force?s
accounting systems is questionable, and for contractor- managed systems,
data that are reported under contract may not provide detail at the
component- level. 11 Notwithstanding these concerns, the few cases where
price data were available to make such a comparison showed mixed results. We
found only three such cases involving large and comparable depot- level
maintenance: overhauls of KC- 135 and B- 1 aircraft, and repairs of
components for aircraft and missile guidance systems.

Contractors? prices for overhauling these two aircraft systems were
relatively higher than those of Air Force depots?. 12 Figure 2 shows the
average airframe overhaul price for 447 KC- 135 aircraft (245 at Air Force
depots and 202 at contractor facilities). The higher price of Air Force
overhauls in 1996 was due to wiring modifications that Air Force depots
began that year. The contractor began performing the same modifications in
1997. As for the B- 1, we previously reported that overhauls performed

11 See Air Force Supply Management: Analysis of Activity Groups? Financial
Reports, Prices, and Cash Management (GAO/ AIMD/ NSIAD- 98- 118, June 8,
1998). As discussed in our May 2001 testimony on the results of auditors?
review of the Department?s fiscal year 2000 financial statements (GAO- 01-
681T), DOD does not yet have the systems and processes in place to capture
the required cost information.

12 The KC- 135 is the only Air Force aircraft that currently uses both
contractors and Air Force depots for overhauling airframes in the United
States (the Air Force uses foreign contractors to support some aircraft
overseas). Until 1998, both an Air Force depot and a contractor overhauled
the B- 1 bomber. Currently, all B- 1 overhauls are performed at an Air Force
depot. Data Are Insufficient

to Compare Depot Maintenance Performed by Contractors With Maintenance
Performed by Military Depots

KC- 135 and B- 1 Overhauls

Page 12 GAO- 01- 618 Defense Logistics

by a contractor were priced twice as high as they would have been if an Air
Force depot had performed them. 13

Figure 2: Comparison of Average Airframe Overhaul Prices for KC- 135
Aircraft as Performed by Air Force Depots and Contractors, Fiscal Years
1996- 2000

Source: Air Force?s data.

The Air Force initially estimated that it would save about $5 million a year
by privatizing the repair of components for aircraft and missile guidance
systems at a Newark, Ohio, facility. Instead, as we reported in 1997, the
Air Force was paying about 16 percent more than it would have, had it
continued to operate the facility. 14 Cost increases were due to material
costs, government costs for contract administration and oversight, and

13 See Air Force Depot Maintenance: Information on the Cost- Effectiveness
of B- 1 and B- 52 Support Options (GAO/ NSIAD- 97- 210BR, Sept. 12, 1997).
14 See Military Base Closures: Lack of Data Inhibits the Cost- Effectiveness
Analyses of Privatization- in- Place Initiatives (GAO/ NSIAD- 00- 23, Dec.
20, 1999). Components for Aircraft

and Missile Guidance System

Page 13 GAO- 01- 618 Defense Logistics

award fees. The facility was privatized in response to a 1993 recommendation
by the Base Realignment and Closure Commission.

Comparisons of contractors? and the Air Force depots? repair price data for
similar component repair workloads is inconclusive in determining whether
one entity is a more cost- effective source of component repair. Contractors
and Air Force depots both repaired 28 components in ways and under
conditions that allow for an objective comparison of their performance. 15
In addition, pricing data were available for both Air Force and contractor
component repairs. However, as discussed previously, DOD?s pricing data are
of questionable reliability. Such reliability concerns notwithstanding,
pricing comparisons are not conclusive. The Air Force depots? prices were
lower for 16 of the 28 components. For example, a contractor repaired a
radio circuit card for $1,680 each, while the Air Force depot did so for
$624 (63 percent less); another contractor repaired an engine augmentor 16
for $4,742 each, while the Air Force depot made the repair for $1,930 (59
percent less). However, contractors? repair prices were lower for the other
12 components. For example, an Air Force depot repaired an F- 16
multifunction display for $4,583 each, while the contractor repaired it for
$2, 118 (46 percent less); another Air Force depot repaired an F- 16 radar
receiver circuit card for $2,754 each, while the contractor repaired it for
$775 (72 percent less).

Our analysis also showed that, overall, Air Force depots and contractors
performed their work at acceptable levels for the components comprising our
sample. Air Force officials stated they had no problems with the quality of
the Air Force depots? recent performance. However, two contractors have
recently had problems with meeting their delivery schedules, a third
contractor was replaced by an Air Force depot because of concerns over the
decreasing quality of the contractor?s repair work, and a fourth contractor
was replaced by another firm because the original contractor defaulted on
the work.

15 We reviewed 54 components from an Air Force list of components repaired
at both Air Force depots and contractor facilities. These components had
significant variances between the Air Force depots? and contractors? repair
prices. For 26 of the 54 components, the repairs performed by Air Force
depots and contractors were not the same or did not have sufficient data
available to analyze relative cost and performance.

16 The augmentor drives afterburner fuel nozzles. Component Repairs

Page 14 GAO- 01- 618 Defense Logistics

According to Air Force Materiel Command officials, the cost of repair is not
the condition driving where repairs are performed. In some cases, we found
that meeting the depots? core capability requirements and fully utilizing
depots? repair capacity in order to comply with the laws governing the
public- private depot workload mix were the reasons for using a military
depot when available data indicated that the contractor was the less
expensive repair source. 17 For example, the Air Force repairs expandable
program display generators for the F- 16 at one of its depots to satisfy
these requirements, even though a contractor repairs this item for 19
percent less. More expensive repairs by contractors were used to supplement
shortfalls in depots? capacity and to facilitate workload transfers brought
on by the closure of two Air Force depots. Additionally, according to these
officials, the Air Force?s approach is to maintain both a commercial and in-
house source of repair to meet potential surge and contingency requirements
for some components.

Major operating command officials have raised concerns about the impact on
their operations that may result from the expanded use of contractor
logistics support. They are concerned that expanding the approach may (1)
limit their funding flexibility, (2) limit their operational authority, and
(3) reduce program offices? ability to perform essential management
functions. Additionally, Air Force Material Command logistics officials are
concerned that not acquiring technical data for a new weapon system, along
with the widespread use of contractor logistics support, may, in effect,
force the Air Force to obtain support from a single private source, limiting
competition among suppliers. The Air Force is taking actions on these
concerns, but all issues have not been fully addressed.

Funding flexibility. Air Force operating command, program office, and budget
officials generally believe that logistics support contracts, to a degree,
represent fixed obligations and limit operating commands? ability to
transfer funds in and out of various weapons systems? budget accounts to
adjust for changing requirements or budget cuts. Air Force headquarters
officials stated that the operating commands have always been able to
accomplish their missions in spite of funding constraints and that they will

17 10 U. S. C. 2466 prohibits the use of more than 50 percent of funds made
available in a fiscal year for depot- level maintenance and repair for
private- sector performance. 10 U. S. C. 2464 provides for a core logistics
capability that is to be identified by the Secretary of Defense and is
government owned and operated. These provisions can limit the amount of
depot- level maintenance and repair work that can be performed by
contractors. Major Commands?

Concerns About Expansion of Contractor Logistics Support Have Not Been Fully
Addressed

Page 15 GAO- 01- 618 Defense Logistics

continue to do so, notwithstanding decreased funding flexibility. Command
officials agreed that they have been able to accomplish their missions in
spite of funding constraints but reiterated that such constraints may
increase as their ability to transfer funds decreases. These officials could
not specify at what point the reduced funding flexibility associated with
the expansion of contractor logistics support might adversely affect their
ability to accomplish their missions.

Operational authority. According to Air Force Space Command officials,
including unit- level maintenance in sustainment contracts managed by Air
Force Materiel Command would give another command the final decision- making
authority over this aspect of unit operations. The officials were concerned
that this could potentially diminish a unit commander?s ability to
effectively manage the basic maintenance of the unit?s equipment. They cited
the example of a fiscal year 2000 Air Force Materiel Command proposal for
sustaining the Global Positioning System, which included unit- level
maintenance. These officials stated that sustainment contractors?
responsiveness to a unit?s requests for critical maintenance functions under
such a management arrangement could be slow or nonresponsive to the
operating unit?s needs and could thus affect readiness. In response to this
concern, Air Force headquarters officials stated that final decisions on
changes to operational- level maintenance that result from reengineering
logistics initiatives can occur only with the operating command?s approval.

Program office functions. Program office and command officials alike are
concerned that the widespread contracting of logistics support may create a
?brain drain? that would limit the Air Force?s ability to effectively manage
logistics support and deplete the resources and expertise needed to monitor
program performance and oversee contractors. For example, the F- 117 program
office?s staff was reduced by three- fourths as a result of the new support
contract, and officials fear that similar staff cuts in other programs would
severely curtail the service?s ability to perform such fundamental tasks as
evaluating the cost- effectiveness of modifications and upgrades proposed by
contractors, being aware of a system?s overall health, and evaluating or
negotiating contract proposals. In other words, these officials are
concerned that the Air Force may lose the technical resources needed to
ensure that the government?s best interests are taken into account during
subsequent contract negotiations or new workload competitions. The Air Force
expects to complete an ongoing assessment of the necessary logistics
management functions by September 2001. However, discussions with the
assessment team managers indicated that not all logistics functions are
being addressed in this assessment.

Page 16 GAO- 01- 618 Defense Logistics

Consequently, the effort likely will not adequately address the concerns
raised.

Program offices do not always obtain the technical data of a new weapon
system. Air Force Materiel Command logistics officials are concerned about
the way the Air Force acquires technical data 18 for weapons systems because
the current trend may hinder efforts to develop a competitive base of
logistics support providers. Competitive sourcing support is a key element
of the logistics reengineering strategy, and DOD?s acquisition regulations
19 require that program managers provide long- term access to the technical
data needed for competing a system?s support throughout its life cycle.

In October 2000, the command completed a review of 31 repair source
decisions for Air Force systems and concluded that in at least 9 cases,
program offices either had not included a provision in the acquisition
contract to obtain rights to technical data or had secured rights to the
data through an unpriced contract option. If the Air Force does not purchase
technical data with a new system, the program office will have to rely
heavily on a single contractor (usually the system?s manufacturer) for
maintenance and will have little or no opportunity to compete the workload.
Furthermore, when the time comes to negotiate a price, the data can be
prohibitively expensive because the production contract will have been
awarded by this time and the contractor will have less incentive to offer a
lower price. Air Force officials believe that, in order to avoid this
problem, program offices should include a priced option for the purchase of
technical data when proposals for new weapons systems or modifications to
existing systems are being considered- in other words, when program offices
are still in a position to bargain. Air Force headquarters officials agreed
that affordable technical data have not always been available, but they have
not yet adopted an approach for addressing this concern.

18 Technical data include descriptions and drawings that provide the
necessary level of detail to repair and maintain items or equipment
purchased and, in some cases, to produce needed component repair parts.

19 Mandatory Procedures for Major Defense Acquisition Programs (MDAP) and
Major Automated Information System Acquisition Programs, DOD 5000. 2- R
(June 2001). Technical Data Needed to

Ensure Competitive Pricing

Page 17 GAO- 01- 618 Defense Logistics

The Air Force is unable to assess the cost- effectiveness of past contractor
logistics support decisions for weapons systems and ongoing pilot programs.
The Air Force monitors contractors? performance against the negotiated
performance and costs expectations- not against the initial cost and
performance estimates that led to the decision to use contractor logistics
support. Also, the Air Force is uncertain of which logistics support
approaches are most appropriate to the different characteristics of various
weapons systems, such as the number of aircraft in a fleet and the
uniqueness of equipment and spares contained in a system. Without this basic
management information, the Air Force is uncertain of which logistics
support approaches will provide the best return on investment in terms of
cost and system readiness for the service?s constrained logistics support
dollars. The B- 2 program, which retained its documentation for logistics
sustainment decisions, is using these data to reassess its initial logistics
support decisions and explore more cost- effective alternatives.

Also, the overall impact of implementing contractor logistics support
approaches may cause adverse operational and contract management situations.
These relate to the areas of funding flexibility and operational authority
for operational commands, loss of program office capability, and ensuring
the consideration of technical data needs for future maintenance actions and
workload competitions. However, these have not been fully considered as the
contractor logistics support approach decisions are being made and expanded.

We recommend that the Secretary of Defense direct the Secretary of the Air
Force to enhance accountability over logistics support decisions by (1)
developing a requirement to have program managers of weapons systems retain
documentation for logistics support decisions, including that for the
ongoing pilot programs, and conduct periodic assessments of these decisions
to assess their cost- effectiveness; (2) using the data from those
assessments to develop lessons learned information that can be used to
assess existing support strategies and new programs to identify the
conditions under which the various support approaches are likely to achieve
the most cost- effective results; and (3) using an existing corporate
senior- level forum to address issues raised by major commands about
expanding the use of contractor logistics support and to formally report on
solutions recommended and actions taken to address these issues. Conclusions

Recommendations for Executive Action

Page 18 GAO- 01- 618 Defense Logistics

In providing written comments on a draft of this report, the Department of
Defense generally concurred with our recommendations. (See app. III.) The
Air Force provided technical comments, which we incorporated as appropriate.

With regard to the first recommendation that the Air Force develop a
requirement to retain documentation for logistics support decisions and
periodically assess the cost- effectiveness of these decisions, the
Department?s response concurred with the intent of the recommendation.
Nonetheless, the Department stated that as DOD migrates toward performance-
based logistics support arrangements, program managers should focus on the
current environment, rather than on historical baselines. We agree that
managers should ensure that contractors? performance meets current
requirements. In fact, our report notes that the requirements for logistics
support contracts are being met. However, in performing baseline studies,
which determined that contractor support would be used to provide long- term
logistics support, the Air Force established an expectation that the
contractor logistics support approach was the most cost- effective
alternative. By not using baseline studies and data to evaluate the extent
to which the selected logistics support option met the baseline
expectations, the Air Force has created an expectation gap as to whether
contractor support was the most cost- effective and responsive logistics
support alternative. This type of assessment can provide a better basis for
improving logistics support approaches for the assessed system as well as
providing lessons learned as input to future logistics support decisions.
Furthermore, while DOD plans to expand the use of performance- based support
arrangements, the degree to which the Department will be successful in
expanding this concept is uncertain. Consequently, we continue to believe
that assessing actual cost and performance against historical baselines
would provide a useful tool for managing logistics support approaches for
weapons system programs.

With regard to the second recommendation that the Air Force use assessments
of documentation for logistics support decisions to develop lessons learned
for improving support strategies for existing and new programs, the
Department concurred and stated that the Air Force is developing a product-
support knowledge- management Web site as a means for sharing logistics
support lessons learned among weapons system programs. While this a step in
the right direction, unless the historical baseline documentation discussed
in our first recommendation is retained and assessed against actual
performance, the Air Force may not have the information needed to develop
lessons learned information regarding the cost- effectiveness of a weapon
system?s initial support Agency Comments

and Our Evaluation

Page 19 GAO- 01- 618 Defense Logistics

approach decision. Furthermore, the expectation gap will not be resolved,
and questions will remain regarding whether the contractor logistics support
option is the most cost- effective long- term support approach.

With regard to the third recommendation in our draft report that the Air
Force establish a panel process for addressing the issues being raised by
major commands about expanding the use of contractor logistics support, the
Department did not concur with establishing a panel process to address
supportability issues raised by the Air Force?s major commands. In its
comments, DOD stated that the major commands? interests are maintained
throughout the Air Force?s acquisition process, which includes the
development of the logistics support strategy. In addition, the Department
identified the Air Force?s corporate- level reviews that it believes serve
as effective forums for addressing the major commands? concerns regarding
the expanded use of contractor logistics support. Finally, DOD?s comments
specifically addressed the major commands? issue of long- term access to the
technical data needed for the logistics support for weapons systems. This
comment concluded that both DOD?s and the Air Force?s policies requiring
that program managers provide for long- term access to technical data are
sufficient. We believe that the weapons systems acquisition process, which
focuses on the individual weapon system rather than on the major commands?
operational and funding issues that cut across multiple Air Force programs,
will not adequately address the overarching issues we raised in our report.
Furthermore, while we agree that existing Air Force forums provide an
opportunity for discussing and addressing the major commands? concerns, the
fact that these commands raised issues during our review evidences that more
work is needed. Accordingly, we modified our draft report?s recommendation
to state that the Secretary of the Air Force should task one of its existing
forums to review and address the issues that major commands have raised on
expanding the use of contractor logistics support and to formally report on
the solutions recommended and actions taken to address the issues raised.
Finally, we believe that the Department?s comment on technical data missed
our primary point, since it did not address the concern that the high cost
of technical data when they are not acquired or priced at the time the
system?s initial acquisition may preclude the adoption of more cost-
effective support options in the future. Thus, while our revised
recommendation no longer specifically refers to ?technical data? as one of
the support issues to be addressed by an Air Force forum, we continue to
believe that it is important for the Air Force to explore this concern. The
Air Force may want to consider having this important issue addressed.

Page 20 GAO- 01- 618 Defense Logistics

To determine the differences between cost- effectiveness estimates for
contractor logistics support approaches and actual implementation
experiences, we identified weapons systems that primarily relied on
contractor- provided logistics support through discussions with officials at
Air Force headquarters, system program offices, and logistics centers. For
these systems, we collected and reviewed available cost and performance
data, and to the extent that sufficient information was available, compared
initial estimates with actual results of contractors? performance. For Air
Combat Command aircraft, we compared contractors? and Air Force depots?
performance with the command?s parts- availability standards as an indicator
of relative performance. We also reviewed data from the Air Force?s
assessment reports database on contractors? performance to determine how
contractors performed against contract requirements. Finally, we discussed
the quality of contractors? performance with weapons systems program
managers and representatives of major defense contractors. We did not
independently verify the quality of contractor performance of logistics
support.

To compare the performance of contractors and Air Force depots in terms of
cost and responsiveness for the same or similar work, we reviewed cost and
performance data for weapons systems and components repaired by both Air
Force depots and contractors. We collected, analyzed, and discussed data
regarding the relative performance of contractors and Air Force depots for
the workloads with logistics center and program office officials, in
addition to relying on our prior work and analyses to the extent practical.
In addition, for components, we obtained an Air Force listing of the
components repaired at both military depots and contractor facilities, 20
and reviewed 54 components for an analysis of repair costs and performance.
For the components selected, we met with the responsible item managers,
contracting officers, and equipment specialists to ensure that the same
repairs were being performed at both military and contractor facilities. As
a result, we determined that the repairs being performed by the military and
contractors were comparable for 39 components. We relied on the military?s
and contractors? repair cost data provided by Air Force item managers,
contracting officers, equipment specialists, and production specialist. Of
the 39 components with comparable repairs, we determined that the
circumstances surrounding

20 The Air Force developed this dual- source list as part of an exercise to
find depot- level workloads that could be transferred from contractors to
Air Force depots in order to avoid not meeting the congressionally mandated
requirement that at least 50 percent of depotlevel work must be performed in
Air Force depots. Scope and

Methodology

Page 21 GAO- 01- 618 Defense Logistics

the repairs of 11 components did not permit an objective comparison of
contractors? and the military?s repair costs. For example, the Air Force
could not always identify the cost of government material provided to the
contractor for item repair when more than one type of component was repaired
under the same contract. In other cases, the contractors were performing
more extensive repairs or upgrading components in conjunction with those
repairs that the Air Force depots were not doing.

To determine to what extent the Air Force has addressed concerns raised by
major commands regarding the increased use of long- term contractor support,
we identified concerns with this logistics support approach through
discussions with Air Combat Command, Air Force Space Command, Air Education
and Training Command, Air Mobility Command, and Air Force Materiel Command
officials. We determined whether Air Force headquarters had taken actions to
address these concerns in its pursuit of the expanded use of long- term
contractor logistics support. We then assessed the sufficiency of the
actions through follow- on discussions with major command officials and a
review of the information collected during the review relevant to each
concern.

We met with officials at headquarters, U. S. Air Force; headquarters, Air
Force Materiel Command; System Program Offices; Air Combat Command; Air
Force Space Command; Air Mobility Command; Air Education and Training
Command; Aeronautical Systems Center; Ogden, Oklahoma City, and Warner
Robins Air Logistics Centers; Lockheed Martin Palmdale; Northrop Grumman
Palmdale; Boeing Aircraft Company- Long Beach; Defense Contract Audit
Agency- El Segundo, Defense Contract Audit Agency- Palmdale; and Defense
Contract Management AgencyPalmdale.

We conducted our review from November 2000 through June 2001 in accordance
with generally accepted government auditing standards.

We are sending copies of this report to the appropriate congressional
committees; the Secretary of Defense; the Secretary of the Army; the
Secretary of the Navy; the Secretary of the Air Force; and the Director,

Page 22 GAO- 01- 618 Defense Logistics

Office of Management and Budget. We will also make copies available to
others upon request. Please contact me on (202) 512- 8412 if you or your
staff have any questions concerning this report. Key contributors to this
report are listed in appendix IV.

David R. Warren, Director Defense Capabilities and Management

Appendix I: Recent Department of Defense Studies on Logistics Restructuring

Page 23 GAO- 01- 618 Defense Logistics

The May 1995 report of the Commission on Roles and Missions of the Armed
Forces- Directions for Defense- identified a number of commercial
activities, including depot maintenance, that could be performed by the
private sector. The Commission concluded that the privatization of such
commercial activities through meaningful competition was the primary path to
more efficient support. It noted that such competition typically lowers cost
by 20 percent. The Commission recommended that the Department of Defense
(DOD) privatize most existing depot maintenance work and all logistics
support for new and future weapons systems. In July 1996, we reported that
the savings and readiness assumptions of the Commission on Roles and
Missions study were based on conditions that do not currently exist for many
military depot workloads. 1 The study?s assumptions were based mainly on the
reported savings from public- private competitions for commercial activities
under Office Management and Budget Circular A- 76. These commercial
activities were generally dissimilar to military depot maintenance
activities because they involved relatively simple routine and repetitive
tasks that did not require large capital investment or highly skilled and
trained personnel.

The Defense Science Board, a civilian advisory board to DOD, reported in
1996 that DOD could realize savings of 30 to 40 percent of logistics costs
and achieve broad improvements in service delivery and responsiveness by
outsourcing support service traditionally done by government personnel. 2
However, in reviewing the estimated savings from logistics activities in the
continental United States, the DOD Program Analysis and Evaluation Office
and we concluded that the board?s logistics savings estimates were not well
supported and were unlikely to be as large as estimated. 3

The 1997 Quadrennial Defense Review called on DOD to reduce its support
infrastructure and streamline its business practices. It proposed

1 See Defense Depot Maintenance: Commission on Roles and Mission?s
Privatization Assumptions Are Questionable (GAO/ NSIAD- 96- 161, July 15,
1996). 2 See Report of the Defense Science Board Task Force on Outsourcing
and Privatization

(Aug. 1996) and Report on the Defense Science Board 1996 Summer Study on
Achieving an Innovative Support Structure for 21st Century Military
Superiority: Higher Performance at Lower Costs (Nov. 1996).

3 See Outsourcing DOD Logistics: Savings Achievable But Defense Science
Board?s Projections Are Overstated (GAO/ NSIAD- 98- 48, Dec. 8, 1997).
Appendix I: Recent Department of Defense

Studies on Logistics Restructuring

Appendix I: Recent Department of Defense Studies on Logistics Restructuring

Page 24 GAO- 01- 618 Defense Logistics

that DOD (1) improve the efficiency and performance of support functions by
adopting innovative management and business practices, including
reengineering, downsizing, and commercializing operations, and (2) consider
outsourcing more non- combat- related DOD support functions, inviting
commercial companies to compete with the public sector to undertake certain
support functions. Regarding outsourcing, the

Quadrennial Defense Review stated that DOD?s experience thus far shows that
it can enjoy many of the benefits that private industry has gained,
including better service quality, more responsiveness and agility, better
access to new technologies, and lower costs. The report asserts that
outsourcing and privatizing would help to reduce infrastructure and
personnel costs and that savings would be achieved as a result of
publicprivate competitions for the depot maintenance workload. However, the
report did not provide evidence to support the cost- effectiveness of these
proposed initiatives. Furthermore, as previously discussed, it is
questionable whether a sufficiently competitive market exists for the depot
maintenance workloads included in the Quadrennial Defense Review?s
initiatives.

The 1997 Defense Reform Initiative called for DOD to expand the use of
competitive sources to open DOD?s commercial activities to competition from
the private sector. The Defense Reform Initiative study anticipated that DOD
would be able to streamline its logistics support through competition,
citing reported savings from Office Management and Budget Circular A- 76
competitions and the C- 5 aircraft competition. The study reports that
increased public- private competition will improve the performance of
military depot maintenance. As discussed above, the Circular A- 76
competitions involved commercial activities that were generally dissimilar
to depot maintenance activities and, consequently, do not provide evidence
to support the cost- effectiveness of outsourcing depot maintenance
workloads. However, our reviews of the workload competitions for C- 5
aircraft maintenance and other Air Force depot maintenance support DOD?s
conclusion regarding the benefits of publicprivate competition for this
workload. In total, the competitions resulted in reported savings of $638
million over the life of the contracts. These competitions involved capable
competitors, which may not exist in all cases. In a previous review, we
reported that 91 percent of nonship depot maintenance contracts were awarded
on a sole- source basis. 4 Therefore, in

4 See Depot Maintenance: Contracting Approaches Should Address Workload
Characteristics (GAO/ NSIAD- 98- 130, June 15, 1998).

Appendix I: Recent Department of Defense Studies on Logistics Restructuring

Page 25 GAO- 01- 618 Defense Logistics

the absence of viable competition, the cost- effectiveness of the Air
Force?s ongoing outsourcing of depot maintenance and logistics support may
be limited.

Appendix II: Details on the Air Force?s B- 2 Source of Repair Decision

Page 26 GAO- 01- 618 Defense Logistics

In fiscal year 2000, the Air Force began to assess the contractor?s
performance as part of the reexamination of its B- 2 depot maintenance
support plan. This assessment has determined that airframe maintenance costs
are significantly higher than initial estimates. Furthermore, initial
estimates for component and avionics repair appear to be significantly
understated. DOD?s 1995 B- 2 depot support report concluded that the B- 2
depot maintenance workload for the various system modules should be split
between the contractor and the Air Force?s depot system. (See table 2.)

Table 2: Workload Placement for B- 2 Depot Support Based on DOD?s February
1995 Report to Congress

Dollars in millions

Module Air Force depot Contractor

Airframe maintenance $415 Avionics repair $107 Software support 2, 613
Components 49 11 Engine maintenance 125 Training systems 190

Total $281 $3,229

The Air Force has experienced a significant cost increase for airframe
depot- level maintenance over the contractor?s original estimates. While the
Air Force initially estimated that the contract cost for airframe
maintenance would be 18 percent higher than the Air Force?s depot costs, DOD
concluded that because the B- 2 system was highly complex, had not yet
reached configuration maturity, and would inevitably have future system
modification requirements, the contractor should perform airframe
maintenance at the Air Force?s Palmdale facilities. 1 At the time of its
1995 depot support decision, DOD estimated that the scheduled depot
maintenance for the B- 2 airframe would be $6.57 million per aircraft.
However, recent cost figures for this maintenance equated to $14.65

1 The contractor maintains B- 2 aircraft at Air Force Plant 42, a
government- owned, contractor- operated facility in Palmdale, California.
Appendix II: Details on the Air Force?s B- 2

Source of Repair Decision Airframe Depot Maintenance Contract?s Cost Is
Significantly Greater Than Originally Estimated

Appendix II: Details on the Air Force?s B- 2 Source of Repair Decision

Page 27 GAO- 01- 618 Defense Logistics

million per aircraft, an increase of about 123 percent. 2 The Air Force has
analyzed the reasons for the cost growth and concluded that several factors
contributed to the increases.

 47 percent of this cost growth was due to the contractor?s cost increases;
the most significant portion was due to increases in the estimated labor
rate.

 36 percent of the cost growth was due to the contractor?s omitting the
costs for various requirements, such as engineering design and testing,
product support, and fire and security.

 17 percent of the cost growth was due to maintenance requirements added or
changed by the government after the original cost estimates were calculated.

After analyzing the estimated increases in the programmed depot maintenance
for the B- 2, the Air Force began to evaluate alternative support options
for the airframe maintenance and concluded that three alternative approaches
are feasible for reducing airframe maintenance costs. First, the study
indicated that transferring the workload and using government labor at any
one of three existing government facilities would be less costly
alternatives over the system?s estimated 25- year life. Second, the analysis
determined that converting the contractor?s Palmdale operations to
performance by government employees would also be less costly than the
current approach. Third, the analysis determined that if the contractor
could establish a separate B- 2 cost center within its costaccounting
system, the result would mean a less costly approach than is currently being
used.

The Air Force has not made a decision on which if any of the three
alternatives it may adopt to address increased airframe maintenance costs
for the B- 2. Regarding the first and second alternatives, the Air Force
determined that each alternative would require an up- front investment cost
of $112 million to $144 million, and program officials doubted whether the
program could secure such funding. Regarding the third alternative, the Air
Force began pursuing the establishment of a separate B- 2 cost center at the
Palmdale facility in 1995. While the contractor

2 The estimated average depot- maintenance- cost- per- airframe increase is
based on comparisons between 1994 estimates and 1999 estimates, and both
figures are expressed in calendar year 2000 dollars.

Appendix II: Details on the Air Force?s B- 2 Source of Repair Decision

Page 28 GAO- 01- 618 Defense Logistics

established its separate B- 2 cost center in January 2001, its cost impact
on the B- 2 and other military programs has not yet been analyzed by the Air
Force or the Defense Contract Management Agency. Consequently, whether the
separate cost center will achieve the desired cost reductions for the B- 2
program are not yet known.

The Air Force?s reassessment of the 1995 B- 2 depot support report indicates
that the original contractor?s cost estimates for all components and
avionics items were understated by at least 52 percent on the basis of the
contractor?s cost estimates for nine B- 2 subsystems. In 1999, the B- 2
program office began a cost reassessment by reviewing the original cost
estimates for avionics and components from nine B- 2 subsystems. In
comparing the revised estimates with the original estimates, the costs for
the nine subsystems exceeded the total original cost for all components and
avionics items included in the 1995 report. Because of the limited detail in
the 1995 report, we were not able to evaluate variances between the 1995 and
1999 cost estimates for all of the components and avionics items included in
the 1999 reassessment. However, the 1995 report included sufficient detail
to compare revised and original cost estimates for two items- the antenna
and the defensive management subsystem. For both items, the Air Force?s cost
calculations, which are based on the contractor?s current costs and
estimates, indicate that the 1995 estimates were understated by about 79
percent for the antenna and 96 percent for the defensive management
subsystem. The program office is currently reassessing another seven B- 2
subsystems, but the results are not yet available. Consequently, we are not
able to make a comprehensive determination of the variance between the
contractor?s earlier cost estimates and estimates based on the contractor?s
current cost performance. Original Estimate for

B- 2 Components? and Avionics? Depot Maintenance Costs Were Significantly
Understated

Appendix III: Comments From the Department of Defense Page 29 GAO- 01- 618
Defense Logistics

Appendix III: Comments From the Department of Defense

Appendix III: Comments From the Department of Defense Page 30 GAO- 01- 618
Defense Logistics

Appendix III: Comments From the Department of Defense Page 31 GAO- 01- 618
Defense Logistics

Appendix III: Comments From the Department of Defense Page 32 GAO- 01- 618
Defense Logistics

Appendix IV: Staff Acknowledgements

Page 33 GAO- 01- 618 Defense Logistics

Julia Denman, Larry Junek, Robert Malpass, John Strong, Bobby Worrell, John
Brosnan, and Stefano Petrucci made key contributions to this report.
Appendix IV: Staff Acknowledgements

(350022)

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