Air Force Depot Maintenance: Management Improvements Needed for Backlog of Funded Contract Maintenance Work

Air Force Depot Maintenance: Management Improvements Needed for Backlog of Funded Contract Maintenance Work (06/20/2002, GAO-02-623}

-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-623
TITLE: Air Force Depot Maintenance: Management Improvements Needed for Backlog of Funded Contract Maintenance Work
DATE: 06/20/2002

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United States General Accounting Office:
GAO:

Report to the Chairman, Subcommittee on Defense, Committee on
Appropriations, House of Representatives:

June 2002:

Air Force Depot Maintenance:

Management Improvements Needed for Backlog of Funded Contract
Maintenance Work:

GA0-02-623:

Contents:

Letter:

Results in Brief:

Background:

Reported Carryover Exceeded DOD Standard but Is Unreliable and
Understated:

Causes of Reported Carryover:

Conclusions:

Recommendations for Executive Action:

Agency Comments and Our Evaluation:

Appendixes:

Appendix I: Scope and Methodology:

Appendix II: Sample Element Disposition Table:

Appendix III: Comments From the Department of Defense:

Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Acknowledgments:

Tables:

Table 1: Unfilled Orders, Work-In-Process, and Carryover at the End of
Fiscal Year 2000 and Fiscal Year 2001:

Table 2: Causes of the Depot Maintenance Activity Group's Unfilled
Orders as of September 30, 2000:

Table 3: Delayed Repair Times for KC-135 Aircraft Due to Unanticipated
Work:

Table 4: Population Estimates as of September 30, 2000, for Normal and
Problem Carryover Balances:

[End of section]

United States General Accounting Office:
Washington, D.C. 20548:

June 20, 2002:

The Honorable Jerry Lewis:
Chairman, Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:

Dear Mr. Chairman:

This is the second in a planned series of reports that discusses the
Defense Working Capital Fund fiscal year-end workload funding issue,
generally referred to as "carryover." Section 1051 of the National
Defense Authorization Act For Fiscal Year 2001 (Public Law 106-398)
required that we review various aspects of the Department of Defense
(DOD) policy that allows Defense Working Capital Fund activities to
carry over a 3-month level of work from one fiscal year to the next.
In May 2001, we reported[Footnote 1] that (1) DOD did not have a sound
analytical basis for its current 3-month carryover standard, (2)
military services used different methods to calculate the number of
months of carryover, and (3) some activity groups underestimated their
budgeted carryover year after year, thereby providing decisionmakers
with misleading year-end carryover information resulting in more
funding being provided than was intended.

As requested and agreed to with your office, this report assesses
carryover[Footnote 2] related to the contract portion of the Air Force
depot maintenance activity group. The DOD 3-month carryover standard
applies to all DOD activity groups except for the contract portion of
the Air Force depot maintenance activity group, for which DOD
established a 4.5-month carryover standard because of the additional
administrative functions associated with awarding contracts.
Specifically, our objectives were to (1) determine if the reported
carryover balance accurately reflected the amount of unfinished work
on hand at the end of fiscal year 2000 and (2) identify the causes of
carryover at the end of fiscal year 2000.

In February 2002, the Air Force began to consider removing the
contract portion of the depot maintenance activity group from the
working capital fund. In April 2002, Air Force headquarters directed
the Air Force Materiel Command to begin planning for this transition.
If the contract portion is removed from the working capital fund, all
of the issues identified in this report will still need to be
addressed except for matters dealing with carryover under the DOD
working capital fund requirements.

Our review was performed from July 2001 through May 2002 in accordance
with U. S. generally accepted government auditing standards. The
production and financial information we used and referred to in this
report was provided by the Air Force, and we did not verify it. We
worked with Air Force officials to validate the reliability of the
information in its system in determining the reasons for the work not
being completed at the end of fiscal year 2000. We did not assess the
work performed by the in-house operations of the depot maintenance
activity group. Further details on our scope and methodology can be
found in appendixes I and II. We requested comments on a draft of this
report from the Secretary of Defense or his designee. Written comments
from the Under Secretary of Defense (Comptroller) are reprinted in
appendix III.

Results in Brief:

Reported carryover balances for fiscal years 2000 and 2001 were
inaccurate and, therefore, the balances were not reliable for decision-
making or budget review purposes. The reported carryover balances were
not accurate due to (1) faulty assumptions used in calculating work-in-
process and (2) records not accurately reflecting work that was
actually completed by year-end. As a result, the amount of carryover
reported by the Air Force was understated by tens of millions of
dollars and customers' funds were idle that could have been used for
other purposes during the fiscal year. Even though the carryover was
understated, Air Force reports show that the contract portion of the
depot maintenance activity group exceeded the 4.5-month carryover
standard at the end of fiscal year 2000 and fiscal year 2001 by about
$44 million and $134 million, respectively. Air Force headquarters
officials stated that the primary reason that they exceeded the 4.5-
month standard for fiscal year 2001 was the receipt of a large amount
of orders late in the fiscal year.

Our analysis of about $1.6 billion of reported unfilled orders showed
that a substantial amount of the work that the activity group carried
over into fiscal year 2001 was work that it had planned to, but did
not, complete prior to the end of fiscal year 2000 due to logistical
and production problems. Specifically, we estimated that about $530
million[Footnote 3] of work was not completed for two key reasons.
First, repairs took longer than planned primarily because (1) parts
needed to perform the repairs were not available from DOD, (2) more
work was needed to repair the assets than originally planned by the
Air Force, and (3) contractors had capacity constraints related to
personnel, facilities, and equipment. Second, work on some assets was
not started as planned because of the delayed induction of items into
production at contractors' facilities. Further, we could not determine
the causes for an estimated $191 million[Footnote 4] of work not being
done primarily because reliable information was not available on the
status of contracts that were previously managed by the two air
logistics centers that were closed in fiscal year 2001. In addition,
we estimate that about $913 million[Footnote 5] of unfilled orders was
for work that either (1) had not been planned for completion until
after fiscal year 2000�normal carryover or (2) had actually been
completed but not recorded as completed in the production and cost
system.

We are making recommendations to the Secretary of the Air Force to
improve the management and reporting of the carryover for the contract
portion of the Air Force depot maintenance activity group, including
(1) improving the assumptions used in calculating work-in-process, (2)
improving the accuracy of the data in systems, and (3) correcting the
problems associated with work not being completed as planned, such as
the long-standing problem related to the lack of parts to fix assets.
In its comments on a draft of this report, DOD agreed with our
recommendations and briefly outlined its planned actions for
addressing them.

Background:

The Air Force depot maintenance activity group supports combat
readiness by providing depot repair services necessary to keep Air
Force units operating worldwide. The group generates between $5
billion to $6 billion in annual revenue principally by repairing and
overhauling a wide range of assets including aircraft, missiles,
aircraft engines, software, and exchangeable inventory items for
military services, other government agencies, and foreign governments.
In performing these services, the group performs the work in-house at
its depots or through contracts with private industry or other
government agencies. The group operates under the working capital fund
concept, where customers are to be charged the anticipated actual
costs of providing goods and services to them.

Contract Depot Maintenance Process and Key Controls Used to Manage
Contracted Work:

Customers place orders with the Air Force depot maintenance activity
group. When the activity group accepts the order, the customer's funds
are obligated. The customer uses the activity group as its purchasing
agent when it needs a contractor to perform depot-level maintenance
work. The activity group awards the contract and manages the work
performed by the contractor. The contract portion of the depot
maintenance activity group generates between $2 billion and $3 billion
in annual revenue. In accomplishing this work, the Air Force has about
5,000 contracts with about 750 contractors that are located in the
United States as well as overseas.

The Air Force air logistics centers use the contract depot maintenance
production and cost system (known as G072D) as a means of combining
financial and production data for the management of work that is being
performed by contractors. The Air Force has also established
procedures and internal controls for the contract portion of the depot
maintenance activity group, which are described in two Air Force
Materiel Command Instructions. Command Instruction 21-113 discusses
the contract maintenance program for the depot maintenance activity
group and Command Instruction 21-134 discusses the end item
transaction reporting system (known as G009) and the reporting
procedures for contractors. Some of the procedures and controls in
these two instructions follow.

* Contracts can be awarded for a 12-month period anytime during the
year. All the items to be repaired will be funded from the
appropriation of the initial fiscal year. However, work must be
started on at least one item during the initial fiscal year for the
entire job cost to be properly charged to appropriated funds for that
year.

* At a minimum, assets planned to be sent to contractors for repair
should be reviewed quarterly. If the assets are not received by the
contractors and will not be received within a reasonable amount of
time (60 days), the planned quantities to be repaired and related
obligated dollars must be reduced accordingly and the contract
amended, if necessary.

* Contractors are required to report, at least monthly, on the status
of the assets being repaired, such as when the (1) assets were
received, (2) assets were inducted for repair, and (3) work was
completed on the assets. The production management specialists at the
air logistics centers are responsible for ensuring that the
information provided by the contractors is accurate.

* A review of the contract maintenance ledger produced from the
production and cost system must be performed quarterly. Particular
attention should be directed to (1) contractors beginning work on
assets compared to the plan and (2) contractors completing work on
assets compared to the plan. Any questionable information must be
annotated and reviewed and corrections made prior to the next monthly
processing cycle.

What Is Carryover and Why Is It Important?

Carryover is the dollar value of work that has been ordered and funded
(obligated) by customers but not yet completed by working capital fund
activities at the end of the fiscal year. Carryover consists of both
the unfinished portion of work started but not yet completed, as well
as requested work that has not yet commenced. To manage carryover, DOD
converts the dollar amount of carryover to months of work. This is
done to put the magnitude of the carryover in proper perspective. For
example, if an activity group performs $100 million of work in a year
and had $100 million in carryover at year-end, it would have 12 months
of carryover. However, if another activity group performs $400 million
of work in a year and had $100 million in carryover at year-end, this
group would have 3 months of carryover.

A DOD regulation allows for some carryover at fiscal year-end to allow
working capital funds to operate efficiently and effectively. In 1996,
DOD established a 3-month carryover standard for all the working
capital fund activities except for the contract portion of the Air
Force depot maintenance activity group. The Air Force is the only
military service that includes its contract depot maintenance
operation in its working capital fund. To reflect this difference, DOD
established a 4.5-month carryover standard to account for the
additional administrative functions associated with awarding
contracts. In May 2001, we reported[Footnote 6] that DOD did not have
a basis for its carryover standard and recommended that Defense
determine the appropriate carryover standard for the depot
maintenance, ordnance, and research and development activity groups.
DOD is in the process of assessing its carryover standards. Too little
carryover could result in some depot maintenance activity not having
work to perform at the beginning of the fiscal year, resulting in the
inefficient use of personnel. On the other hand, too much carryover
could result in an activity group receiving funds from customers in
one fiscal year but not performing the work until well into the next
fiscal year or subsequent years. By minimizing the amount of the
carryover, DOD can use its resources most effectively and minimize the
"banking" of funds for work and programs to be performed in subsequent
years.

Plans to Remove the Contract Portion of Depot Maintenance from the
Working Capital Fund:

In February 2002, the Air Force began to consider financing the
contract portion of the depot maintenance activity group with direct
appropriations. In an April 19, 2002, memorandum, the Air Force stated
that the overall financial health of the depot maintenance activity
group has been negatively impacted by the contract operations.
Further, without direct control over contractor costs, the working
capital fund mechanism is an inappropriate choice for the contract
operations. The memorandum directed the Air Force Materiel Command to
begin planning for the transition of contract depot maintenance
operations out of the working capital fund immediately. This would be
a significant change in the financing and accounting for these
contracts. Under the plan, contracts would be financed with direct
appropriations, which is how the Army and Navy finance contract depot
maintenance work, and carryover would no longer be associated with the
work being performed by the contractor. Instead, funds would be
managed in terms of the percent of funds obligated and expensed during
a fiscal year. Further, the Air Force plans on using existing direct
appropriation fund systems to track repairs and account for the funds
and would not use its current working capital fund systems.

Reported Carryover Exceeded DOD Standard but Is Unreliable and
Understated:

The lack of accurate carryover information results in the Congress and
DOD officials not having the information they need to oversee and
manage the repair of assets. Air Force reports show that the contract
portion of the depot maintenance activity group exceeded the 4.5-month
carryover standard at the end of fiscal years 2000 and 2001 by about
$44 million and $134 million, respectively, thereby resulting in more
funds being provided than allowed by the DOD carryover standard.
However, we found that the reported carryover balance did not
accurately reflect the amount of unfinished work on hand at the end of
fiscal year 2000 due to (1) faulty assumptions used in calculating
work-in-process and (2) records not accurately reflecting work that
was actually completed by year-end. As a result, the amount of
carryover reported by the Air Force was understated by tens of
millions of dollars.

Air Force reports show that the contract portion of the depot
maintenance activity group exceeded the 4.5-month carryover standard
at the end of fiscal years 2000 and 2001. The Air Force reported that
it had about $835 million, which is 4.7 months, of carryover at the
end of fiscal year 2000, and about $1.1 billion, which is 5.1 months,
at the end of fiscal year 2001. In the past, the Office of the Under
Secretary of Defense (Comptroller) and/or the congressional defense
committees used carryover information to determine whether the working
capital fund activity groups had too much carryover. For example, the
Congress reduced the Army's and Air Force's fiscal year 2001 Operation
and Maintenance appropriations by $40.5 million and $52.2 million,
respectively, because the depot maintenance operations in their
working capital funds had too much carryover. Similarly, in 2001, the
Under Secretary of Defense (Comptroller) reduced the Air Force's
fiscal year 2003 customers' budget requests by $185 million because
the contract portion of the depot maintenance activity group would
have too much carryover at the end of fiscal year 2003.

Work-In-Process Calculation Is Based on Faulty Assumptions:

As stated previously, carryover is the amount of unfilled orders less
the amount of work-in-process. We found that the Air Force does not
have actual information on the amount of work-in-process performed by
contractors and, therefore, uses a formula to estimate the amount
based on the assumption that the contractor will start and complete
work as planned. However, the assumptions were faulty because the
contractors did not always start and/or complete the work as planned.
Using its formula, the Air Force reduced the amount of unfilled orders
due to work-in-process by about $1 billion, which is 5.6 months, and
$835 million, which is 4.1 months, in fiscal year 2000 and fiscal year
2001, respectively, to determine the amount of carryover for these 2
years.

The amount of work-in-process recorded monthly is affected or is
determined by the nature of the work, the estimated/actual start date
of the work, and the expected time to complete the work. For work that
is planned to be completed in less than 150 days, the Air Force
assumes that one-fifth of the work will be completed each month and
records work-in-process accordingly. The calculation for the different
workload categories is outlined below.

* For workload categories involving exchangeable inventory items,
other major end items, and software, the amount of work-in-process is
based on when the work is planned to begin and assumes that the work
will be completed within 5 months. Thus, the contractor does not have
to begin actual work, and the items to be repaired do not even have to
be at the contractors' plant in order to record work-in-process on
those specific orders.

* For workload categories involving aircraft, engines, and missiles,
the amount of work-in-process is based on when the work actually
begins at the contractor's plant and assumes that the work will be
completed within 5 months from that point in time.

For work planned to be completed in more than 150 days, the Air Force
has a different calculation to determine the amount of work-in-
process. The calculation for the different workload categories is
outlined below.

* For workload categories involving exchangeable inventory items,
other major end items, and software, the amount of work-in-process is
based on when the work is planned to begin and assumes that the work
will be completed in the estimated number of days as planned. For
example, if the Air Force estimates that the work will be completed in
1 year, it will record one-twelfth of the amount of the order as work-
in-process each month. The contractor does not have to begin actual
work in order to start recording work-in-process.

For fiscal years 2000 and 2001, the amount of reported work-in-process
had a significant impact on the amount of carryover, reducing each
fiscal year's carryover by at least $835 million. Table 1 shows the
actual reported year-end unfilled orders, work-in process, and
carryover, in dollars and months for fiscal year 2000 and fiscal year
2001. It also shows the amount of carryover in excess of the 4.5-month
standard.

Table 1: Unfilled Orders, Work-In-Process, and Carryover at the End of
Fiscal Year 2000 and Fiscal Year 2001:

Description: Unfilled orders;
Fiscal year 2000 Dollar amount: $1.819 billion;
Fiscal year 2000 Number of months: 10.3;
Fiscal year 2001 Dollar amount: $1.966 billion;
Fiscal year 2001 Number of months[A]: 9.5.

Description: Less work-in-process;
Fiscal year 2000 Dollar amount: $984.9 million;
Fiscal year 2000 Number of months: 5.6;
Fiscal year 2001 Dollar amount: $835.5 million;
Fiscal year 2001 Number of months[A]: 4.1.

Description: Carryover;
Fiscal year 2000 Dollar amount: $834.5 million;
Fiscal year 2000 Number of months: 4.7;
Fiscal year 2001 Dollar amount: $1.130.2 billion;
Fiscal year 2001 Number of months[A]: 5.5;.

Description: Air Force adjustment to carryover[B];
Fiscal year 2000 Dollar amount: $0.0;
Fiscal year 2000 Number of months: 0.0;
Fiscal year 2001 Dollar amount: $68.9 million;
Fiscal year 2001 Number of months[A]: 0.3.

Description: Revised carryover;
Fiscal year 2000 Dollar amount: $834.5 million;
Fiscal year 2000 Number of months: 4.7;
Fiscal year 2001 Dollar amount: $1.061 billion;
Fiscal year 2001 Number of months[A]: 5.1.

Description: Carryover in excess of 4.5 month standard;
Fiscal year 2000 Dollar amount: $43.5 million;
Fiscal year 2001 Dollar amount: $133.6 million;

[A] Figures do not add due to rounding.

[B]In accordance with DOD policy, beginning in fiscal year 2001, the
Air Force began excluding certain work, such as work for foreign
countries, from its carryover. In May 2001, we recommended in GA0-01-
559 that DOD clarify its policy on these adjustments, and DOD is
currently reviewing its policy on calculating carryover.

Source: Air Force budget and accounting reports.

[End of table]

According to Air Force Materiel Command officials, the primary reason
that they exceeded the 4.5-month standard for fiscal year 2001 was the
receipt of a large amount of orders late in the fiscal year.
Specifically, actual customer orders exceeded planned customer orders
by $311 million for fiscal year 2001, with $292 million of that amount
received in August 2001. Large quantities of orders placed late in the
fiscal year provide the Air Force limited opportunity to perform the
work by the end of the fiscal year.

Air Force officials also stated that the current systems used by
contract depot maintenance cannot produce a reliable work-in-process
amount. They further stated that the assumptions used for calculating
work-in-process do not provide an accurate work-in-process amount,
particularly the assumption that the work will begin as planned. Air
Force officials told us, and we agree, that a more accurate way to
calculate work-in-process would be to eliminate the assumption that
the contractor will start work as planned and base all work-in-process
calculations on when the contractor actually starts work. The
officials said making such a change to the calculation would provide a
financial incentive for contract depot maintenance to ensure that data
on when the work actually started is entered into the system in a
timely manner. The incentive to do so stems from the fact that
contract depot maintenance bills customers based on the work-in-
process amount that is recorded in the production and cost system. If
work-in-process is based on when the contractor actually starts work,
the depot maintenance activity group cannot bill customers until the
date that the work actually started is recorded in the system.

Unfilled Order Data in the Production and Cost System Are Unreliable:

As previously discussed, because the air logistics centers use the
production and cost system to manage the work performed by
contractors, it is critical that the unfilled order data be entered
into the system in an accurate and timely manner. The data in this
system are also used in the Air Force's budget process and are the
basis for determining the amount of carryover, which is reported to
the Congress each fiscal year. However, we found that much of the
unfilled order data in the system was inaccurate or incomplete because
the production management specialists, who are primarily responsible
for data accuracy, did not always (1) ensure that contractor
production data in the system were correct or (2) enter contract
information for new customer orders into the production and cost
system in a timely manner, as the following two examples illustrate.

* Based on our analysis of a stratified random sample of unfilled
maintenance requirements at the end of fiscal year 2000, we estimate
that $256 million[Footnote 7] of the work was actually completed but
not reflected in the system because the production management
specialists did not ensure that the data were correct.

* When contract depot maintenance receives a customer order for work,
it enters into a contractual relationship for the performance of the
work and then records information on the contract in the production
and cost system. Any customer order for which there is no contractual
information in the system is referred to as "unscheduled" work. We
found that as of September 30, 2000, contract depot maintenance had at
least $59.9 million of unscheduled work for which the contracts were
awarded but the contract information was not recorded in the system.
Our analysis of the $59.9 million showed that $8.6 million was not
entered into the system for at least 3 months to 5 months after the
contracts were awarded, while about $15 million was not entered for at
least 6 months or longer. For example, in one case, an order for
$3.6 million was not entered in the system for 7 months after the
contract was awarded. In another case, an order for $802,000 was not
entered into the system for 20 months after the contract was awarded.
In both cases, the lack of production management specialist oversight
due to either heavy workload or inexperience was cited as the reason
for not entering the data in a timely manner. Without the contract
data in the system, there was no information in the system for
managing repair actions and monitoring the status of the contracts.

We found that (1) in some cases, the production management specialists
were not following the regulations regarding data accuracy, (2) in
other cases, the production management specialists did not know the
correct treatment for recording data accurately, and (3) standard
operating procedures for use by the production management specialists
did not exist to provide detailed instructions on their
responsibilities for data accuracy.

Air logistics center officials also told us that production management
specialists need training that is specific to their day-to-day
responsibilities and that such training would enhance the production
management specialists' awareness of the importance of data accuracy.
Air Force Materiel Command officials stated there is a data discipline
problem that centered around the production management specialists not
ensuring that the data in the production and cost system are correct
and up to date. The officials attributed this problem, in part, to the
lack of clear guidance and detailed operating procedures related to
how the production management specialists should go about performing
their day-to-day responsibilities. The officials further told us that
there is a lack of internal controls or processes to ensure data
accuracy, such as the use of metrics that could act as "red flags" to
alert management to possible data problems. In discussing the data
accuracy problem with Air Force headquarter officials, they told us
that a contributing factor was the disruption to operations when the
Air Force hired about 150 new production management specialists in
fiscal year 2000 because of the closing of two air logistics centers
and transferring the oversight of their contracts to the remaining
centers.

New System Effort Terminated:

Since 1996, the Air Force has recognized the need to improve the
reliability of the data in the production and cost system and, until
February 2002, was developing a new system, the Contract Maintenance
Accounting and Production System�-known as G501-�to accomplish this.
According to Air Force officials, implementing the new system would
have helped alleviate the type of data problems we found because it
was to be a single, fully integrated real-time web-based system,
which, among other things, would have streamlined contractor reporting
of production data. The Air Force had planned to implement the new
system at the three air logistics centers and at approximately 900
contractor facilities. The development of the new system initially
started in 1996 as an effort to redesign the existing production and
cost system. It was later decided that this system and two other
legacy systems that currently perform production and accounting
functions for the contract portion of the depot maintenance activity
group needed to be replaced since they interacted with each other.
Thus, in September 1999, a contract was awarded for the development
project with an estimated completion date of December 2001, which was
later revised to fiscal year 2005.

In February 2002, the Air Force began to consider stopping its
financing of the contract portion of the depot maintenance activity
group in the working capital fund. As a result, the Air Force has
stopped working on developing the new system after spending about $7.8
million. The Air Force plans to use other systems to perform the
production and accounting functions.

Causes of Reported Carryover:

Our analysis of about $1.6 billion of reported unfilled orders showed
that a substantial amount of the work that the activity group carried
over into fiscal year 2001 was work that it had planned to complete
prior to the end of fiscal year 2000 but did not due to logistical and
production problems. Specifically, we estimated that about $530
million[Footnote 8] of work was not completed for two key reasons.
First, repairs took longer than planned primarily because (1) parts
needed to perform the repairs were not available from DOD, (2) more
work was needed to repair the assets than originally planned by the
Air Force, and (3) contractors had capacity constraints related to
personnel, facilities, and equipment. Second, work on some assets was
not started as planned because of the delayed induction of items into
production at contractors' facilities. Further, we could not determine
the causes for an estimated $191 million[Footnote 9] of work not being
done primarily because Air Force officials could not provide reliable
information on the status of contracts that were previously managed by
the two air logistics centers that were closed in fiscal year 2001.

In addition, we estimated that about $657 million[Footnote 10] of the
unfilled orders that the activity group carried over into fiscal year
2001 was for work that was planned to be completed in fiscal year
2001. Since this work was expected to be carried over, we classified
it as normal carryover. The results of our analysis are summarized in
table 2 and discussed in greater detail in the following sections.

Table 2: Causes of the Depot Maintenance Activity Group's Unfilled
Orders as of September 30, 2000:

Cause: Repair problem;
Point estimate: $322.4 million;
Confidence interval at 95% confidence level: +/- $61.7 million.

Cause: Induction problem;
Point estimate: $208.0 million;
Confidence interval at 95% confidence level: +/- $53.2 million.

Cause: Unknown problem;
Point estimate: $191.3 million;
Confidence interval at 95% confidence level: +/- $57.5 million.

Cause: Normal carryover;
Point estimate: $656.8 million;
Confidence interval at 95% confidence level: +/- $58.3 million.

[End of table]

Repair Problems Are a Major Cause of Carryover:

As shown in table 2, we estimated that about $322 million[Footnote 11]
of the activity group's unfilled orders as of September 30, 2000, were
for work that was scheduled to be completed prior to September 30, but
was not completed by then because of longer than expected repair
times. As the following examples illustrate, our work showed that the
primary causes of these longer than expected repair times were (1)
shortages of component parts, (2) unanticipated problems, and (3)
contractor capacity constraints.

Shortages of Component Parts:

For the exchangeable and engine workload categories, a shortage of
component parts was a major cause of untimely repairs. For example, a
requirement for the repair of a leading-edge aircraft part[Footnote
12] was placed on a contract in December 1999 for a unit sales price
of $39,268 and with an expected completion date of June 2000. In
January 2000, the contractor inspected the item and determined that
defective seals would have to be replaced. Because the seals were
government-furnished material, the contractor submitted a requisition
to the Defense Logistics Agency. When the seals had not arrived by the
expected delivery date (May 2000), the contractor requisitioned them
again and, when the Defense Logistics Agency subsequently advised the
contractor that the seals were not available, the contractor requested
and was granted permission to manufacture them. As of November 2001,
the projected completion date for the manufacture of the seals was
March 2002, and the leading-edge aircraft part was expected to be
repaired and available for shipment to the customer almost immediately
after that�about 21 months longer than expected.

The Air Force Materiel Command recently completed a study of this
longstanding and well-documented problem[Footnote 13] that the Air
Force refers to as "awaiting parts." Additionally, it developed an
action plan to correct some of the underlying causes of the awaiting
parts problem that were identified in the study. The scope of both the
study and the action plan was limited to depot maintenance work that
is performed in-house at the three air logistics centers and did not
cover the contract portion of the activity group.

Air Force Materiel Command officials have acknowledged that contract
depot maintenance has unique awaiting parts problems because the
contract portion of this activity group uses different systems than
the in-house portion of the group. They indicated that the plan to
remove contract depot maintenance operations from the Air Force
Working Capital Fund and to discontinue, as previously discussed, the
development of the new production and cost system have caused them to
put virtually all contract depot maintenance initiatives on hold.

Unanticipated Problems:

Unanticipated problems were another major cause of repairs not being
performed as planned, especially for the aircraft workload category.
For example, for the last several years, the contract repair of KC-135
aircraft, which have an average age of about 40 years, has been a
large and problematic workload. Specifically, due primarily to
unanticipated problems, such as the need for major structural repairs,
work on these aircraft has taken much longer than expected to
complete. According to data in the production and cost system, as of
September 30, 2000, a contractor had not completed work on 11 KC-135
aircraft that were originally scheduled to be completed during fiscal
year 2000 and two aircraft that were originally scheduled to be
completed during fiscal years 1997 and 1999, respectively.
Additionally, as of September 30, 2000, another contractor had not
completed work on 16 KC-135 aircraft that were originally scheduled to
be completed during fiscal years 1999 and 2000.

The magnitude of this problem is illustrated in table 3, which
compares the initial and actual repair times for KC-135 aircraft at
the second contractor's facilities during fiscal years 1999 and 2000.

Table 3: Delayed Repair Times for KC-135 Aircraft Due to Unanticipated
Work:

Fiscal year: 1999;
Number of aircraft repaired:11[A];
Average negotiated repair days: 202;
Average actual repair days: 433;
Variance: 231.

Fiscal year: 2000;
Number of aircraft repaired:21[B];
Average negotiated repair days: 175;
Average actual repair days: 418;
Variance: 243.

[A] Does not include one aircraft that work was started on in
September 1999 and was still not finished as of February 2002.

[B] Does not include one aircraft that work was started on in November
1999 and was still not finished as of February 2002.

Source: Aircraft and Missile Maintenance Production/Compression Report.

[End of table]

Altogether, the 29 KC-135 aircraft that were scheduled to be completed
prior to the end of fiscal year 2000, but were not, had an unfilled
order value of about $86.6 million.

Contractor Capacity Constraints:

Contractor capacity constraints are a third cause of repair problems.
For example, one of the items in the sample was a $1.4 million
requirement to repair 15 power supply units at a unit sales price of
$94,879 and with an estimated repair time of 45 days. All work on this
item, which is a component of an electronic warfare system, was
scheduled to be completed by June 30, 2000. However, as of September
30, 2000, only eight items had been repaired and, as of September 30,
2001, one item had still not been repaired. The prime contractor
attributed the delayed repairs to personnel constraints. Specifically,
at one time, there was a steady repair workload for this item, and a
subcontractor employed three to four people to work on nothing but
this requirement. When the workload declined, the subcontractor
released all but one of the employees trained to make the repairs.
According to the prime contractor, when an order was received in late
1999, the subcontractor had difficulty finding qualified people to do
the work. However, the prime contractor also indicated that the
subcontractor has gradually redeveloped a repair capability in this
area, is now repairing two items a month, and expects to build up his
capability to three a month in the near future.

Delayed Induction of Assets Is Another Major Cause of Carryover:

As shown in table 2, we estimated that about $208 million[Footnote 14]
of the activity group's unfilled orders as of September 30, 2000, were
for work that was scheduled to be completed prior to September 30, but
was not completed by then because work on the items was not started as
planned at contractors' facilities. A $9.8 million order to repair 24
exchangeable inventory items is an example of a requirement that we
placed in the delayed induction category. In this case, the estimated
repair time was 90 days, and data in the production and cost system
indicated that the contractor was expected to complete work on all 24
items by the end of fiscal year 1999. However, as of the end of fiscal
year 2000, the contractor had received only 19 of the inventory items.
The remaining five inventory items�which had an unfilled customer
order value of about $2 million�were not received by the contractor
until the third quarter of fiscal year 2001 and we, therefore,
included $2 million in the delayed induction category.

One of the underlying causes of the activity group's induction problem
is that the Air Force Materiel Command has not established effective
internal control procedures to ensure that production management
specialists are complying with its policy guidance. For example, Air
Force Materiel Command Instruction 21-113 states that, at a minimum,
"review of asset generation should be done on a quarterly basis and,
if assets will not generate within a reasonable period of time (60
days), the scheduled input quantities and obligated dollars must be
reduced accordingly." However, our analysis showed and the Air Force
Materiel Command agreed that there is no systematic process or
effective internal controls to ensure that the production management
specialists are complying with this guidance. A second cause is that
some of the guidance is inconsistent. For example, Air Force Materiel
Command Instruction 21-113, "Contract Maintenance Program for Depot
Maintenance Activity Group (DMAG)," states that work must be started
on at least one asset during the fiscal year that an order is placed.
However, the Air Force Logistics Command supplement to Air Force
Regulation 170-8 states that the contract depot maintenance activity
group has until December 31 to get a customer's requirement in a
contract (January 31 for some requirements). Accordingly, one
regulation requires work to be started on an asset before the fiscal
year-end, but another regulation does not even require that the
contract be awarded until the end of the calendar year.

The Activity Group Is Not Managing a Major Portion of Its Contract
Workload:

As shown in table 2, we could not determine the cause of the problem
for about $191 million[Footnote 15] of unfilled orders that were
scheduled to be completed prior to September 30, 2000, but were not.
We could not make this determination because production management
specialists did not have documentation on the status of the repairs
needed to make this determination. The two primary reasons that
information was not available were that production management
specialists (1) did not have required documentation for many of the
contracts that were transferred from the Sacramento and San Antonio
Air Logistics Centers to two of the three remaining centers in October
2000 and (2) did not maintain information on the status of software
projects.[Footnote 16]

Inadequate Documentation on Transferred Contracts Prevents Effective
Management:

In October 2000, the Sacramento and San Antonio Air Logistics Centers
discontinued their contract depot maintenance operations[Footnote 17]
and transferred management responsibility for their contracts to the
three remaining centers (Warner Robins, Oklahoma City, and Ogden). As
part of this management transfer, the Sacramento and San Antonio
centers shipped contract files and related customer order files to the
three centers that assumed responsibility for the work. However, in
many instances, two of the centers that assumed responsibility for the
work either did not receive the required files or received incomplete
files. Additionally, for the files they did receive, they found
numerous and significant discrepancies between the information in the
contract files and related customer files. Discrepancies were also
found between these manual records and the data in the production and
cost system. As a result of these problems, two of the three remaining
centers have had to reconstruct many of the files and reconcile
numerous discrepancies.[Footnote 18] Because the Air Force does not
know the status of these contracts, (1) it is potentially vulnerable
to paying for goods and services not received or performed and is
subject to fraud, waste, and abuse, (2) work may have been
accomplished but not recorded in the system, or (3) the Air Force may
not be taking prompt and appropriate action to resolve problems that
are delaying the completion of the work.

A contract depot maintenance manager at one of the remaining centers
characterized this records reconstruction and reconciliation effort as
"overwhelming." Specifically, he noted that his center had assumed
responsibility for 627 contracts (about 20 percent of its total
workload), and pointed out that the contracts went back to 1981 and
each contract could have as many as 800 line items. The manager also
stated that, as of October 2001 (1 year after the transfer), center
staff had not even looked at many of the contracts and had
unreconciled problems with many of the contracts that they had
reviewed. To further illustrate the magnitude of the reconciliation
problem, he pointed out that their research thus far had determined
that (1) they did not have contracts for $41 million of work that was
recorded in the production and cost system and about $3 million in
contractor payments, (2) the production and cost system contained no
information on 74 contracts with a total contract amount of $12.6
million, and (3) contractors were providing automated production data
for less than 15 percent of the transferred contracts.

The lack of documentation for contracts that were transferred from a
closing facility had resulted in the lack of management oversight. For
example, 10 of the sample items, with a total unfilled order value of
$4.5 million as of September 30, 2000, were requirements for work on
hush houses[Footnote 19] that were contracted for by one of the
closing air logistics centers.

Work on several of these hush houses was supposed to be completed
prior to the end of fiscal year 2000, and work on all of them was
supposed to be completed prior to the end of fiscal year 2001.
However, as of December 2001, the air logistics center that assumed
management responsibility for the contracts was still trying to
determine the status of the work since it had not received the
required documentation from the closing center.

The two centers that have a significant problem in this area have
recently dedicated several personnel to the resolution of problems
related to the transferred contracts. However, this work is a time-
consuming and labor-intensive process, and the Air Force Materiel
Command has not established either a milestone for completing the work
or a methodology for monitoring progress. Consequently, it is
uncertain when the centers will have all of the information they need
to manage these transferred contracts.

Lack of Actual Production Data Makes Software Unfilled Order Data
Highly Questionable:

We estimate that $68 million' of the unfilled orders in the software
workload category of the sample was for work that was scheduled to be
completed prior to September 30, 2000, but was not completed as of
that date. However, we were unable to determine why the completion of
this work was delayed because production management specialists are
not required to monitor the status of software projects and did not
have the documentation needed to identify problems and determine their
underlying causes.

For most nonsoftware workloads, the requirement is to repair a
specific quantity of items within a specified period of time, and
contractors are required to submit automated production reports that
show when they (1) receive the items that are to be repaired, (2)
started work on the items, (3) complete the repairs, and (4) ship
repaired items to customers. Additionally, production management
specialists are required to develop schedules that show when work on
the items is scheduled to start and when repairs are expected to be
completed. If done properly, this approach ensures that production
management specialists have the information they need to (1) monitor
the status of the work, (2) identify problems, and (3) take prompt
corrective action, when appropriate.

However, for software workloads, the requirement is not to repair a
certain number of items, but rather to accomplish certain tasks. For
example, the task could be to (1) attend and support any lab, ground,
and flight tests performed on a weapon system, (2) analyze test data,
or (3) revise weapon system software that does not perform as
intended, such as an electronic warfare system that does not perform
effectively in high electro-static environments. As a result, most
software workloads are expressed as a level of effort, such as in
number of hours or months to be worked.

Because production management specialists do not have reliable data on
the status of software projects, the "actual" production data that
they enter into the production and cost system are estimates that are
based on the frequently erroneous assumption that work will begin and
be accomplished as planned. This problem, which is similar to the
previously discussed problem with the activity group's work-in-process
data, makes the reported value of software unfilled orders highly
questionable. Further, because the reported value of software
carryover is based on highly questionable estimates for both work-in-
process and undelivered orders, it cannot be relied on.

Conclusions:

The Air Force does not have reliable information on the dollar amount
of carryover for its contract depot maintenance operation due to
faulty assumptions used in calculating work-in-process and records not
accurately reflecting work done at year-end. Until the problems are
corrected, congressional and Defense decisionmakers will be forced to
make key budget decisions, such as whether or not to enhance or reduce
customer budgets, based on unreliable information. In addition, due to
logistical and production problems, hundreds of millions of dollars of
work was not done as planned and was carried over into the next fiscal
year. These problems resulted in idle funds that could have been used
for near-term readiness or other priorities. For the contract portion
of this activity group to operate more effectively, managers at the
Air Force Materiel Command and the air logistics centers must be held
accountable for (1) the accuracy and timeliness of the production and
financial management information used for decision-making and (2)
ensuring that the work is completed as planned. Until these weaknesses
are resolved, concerns will continue to be raised about the amount of
carryover related to the contract portion of this activity group.

Recommendations for Executive Action:

We recommend that the Secretary of the Air Force direct the Commander,
Air Force Materiel Command, to do the following.

* Use the date contractors actually start work, rather than the
planned start date, to calculate work-in-process for all workload
categories as long as the contract portion of the activity group
remains in the working capital fund.

* Improve the accuracy of the data in its systems that track repair
actions and account for costs by (1) holding managers accountable for
ensuring the accuracy of the data, (2) developing standard operating
procedures that provide detailed guidance on production management
specialists' day-to-day responsibilities, particularly in the area of
ensuring data accuracy, (3) providing additional training to
production management specialists on these procedures, and (4)
developing metrics that act as "red flags" to alert management of
possible data problems. At a minimum, the systems should provide
timely and accurate information on when contractors receive broken
items for repair, repair work starts on the items, repairs are
completed, and repaired items are returned to customers.

* Develop accurate and complete information on contracts that were
awarded by the San Antonio and Sacramento Air Logistics Centers and
subsequently transferred to the three remaining centers to avoid loss
of control that may result in fraud, waste, and abuse. This will
require, at a minimum, (1) establishing milestones for completing both
the review of transferred contracts and resolving data problems
identified during the reviews, (2) using metrics to monitor progress,
and (3) ensuring that sufficient resources are dedicated to the
resolution of the problem.

* Identify the underlying causes of the contract depot maintenance
"awaiting parts" problem.

* Develop an action plan to address the underlying causes for the
"awaiting parts" problems similar to the plan that was recently
developed to address the "awaiting parts" problems for the air
logistics centers' in-house depot maintenance operations.

* Provide clear and consistent guidance on how, when, and by whom the
induction of assets should be monitored.

* Establish internal control procedures to ensure that the guidance on
the induction of assets is followed.

Agency Comments and Our Evaluation:

DOD provided written comments on a draft of this report. DOD concurred
with our seven recommendations and identified actions it was taking to
correct the identified deficiencies. For example, to improve the
accuracy of the data in its systems that track repair actions and
account for costs, the Air Force is in the process of developing and
providing training courses to the production management specialists.
DOD's comments are reprinted in appendix III.

We are sending copies of this report to the Secretary of Defense; the
Secretary of the Air Force; the Chairmen and Ranking Minority Members
of the Senate Committee on Armed Services; the Subcommittee on
Readiness and Management Support, Senate Committee on Armed Services;
the Subcommittee on Defense, Senate Committee on Appropriations; the
House Committee on Armed Services; the Subcommittee on Military
Readiness, House Committee on Armed Services; the Ranking Minority
Member, Subcommittee on Defense, House Committee on Appropriations;
and other interested parties. Copies will be made available to others
upon request. Please contact Greg Pugnetti, Assistant Director, at
(703) 695-6922 if you or your staff have any questions concerning this
report. Other key contributors to this report are listed in appendix
IV.

Sincerely yours,

Signed by:

Gregory D. Kutz:
Director, Financial Management and Assurance:

Signed by:

David R. Warren:
Director, Defense Capabilities and Management:

[End of section]

Appendix I: Scope and Methodology:

To determine if the reported carryover balances accurately reflected
the amount of unfinished work on hand at the end of fiscal year 2000,
we obtained and analyzed the air logistics centers' logistical and
financial reports that provided information on unfilled orders. We
also reviewed the computation that the Air Force uses to determine the
dollar amount and number of months of carryover. This computation is
the dollar amount of unfilled orders at fiscal year-end less the
dollar amount of work-in-process which equates to the amount of funds
that carryover to the next fiscal year. We reviewed the two factors
(unfilled orders and work-in-process) that are used in the computation
and obtained documentation that supported the information. Since the
work-in-process amount is a calculated figure and is not based on
actual work performed by the contractors, we obtained and analyzed the
methodology used by the Air Force Materiel Command and the air
logistics centers to compute the amount of work-in-process. In
addition, to determine if any of the work had actually been completed,
we selected and reviewed a stratified random sample of unfilled orders.

To identify the primary causes of contract depot maintenance
carryover, we reviewed a stratified random sample of 369 contract
depot maintenance requirements that, according to the group's
production and cost system, had been funded by customers, but not yet
completed by contractors as of September 30, 2000. These 369 depot
maintenance requirements were selected from five major workload
categories (aircraft, engines, exchangeable inventory items, missiles
and other major end items, and software). They accounted for $744.1
million, about 41.2 percent, of the $1.806 billion of unfilled orders
that the activity group reported at the end of fiscal year 2000. Of
the $1.806 billion, about $124 million of the September 30, 2000,
unfilled orders were customer requirements that, according to the
production and cost system, had not yet been placed on contract. These
requirements and an additional $48 million of relatively small orders
were excluded from our analysis. The remaining $1.634 billion
represents total unfilled orders. The confidence level used for
estimating the value of completed and uncompleted work was 95 percent
and the expected tolerable amount in error (test materiality) was
$163,392,642. See appendix II for the Sample Element Disposition
Table. Table 4 discloses the estimates and confidence intervals in
total and individually for normal carryover, total problem carryover,
and each of the carryover problems for the carryover balances as of
September 30, 2000.

Table 4: Population Estimates as of September 30, 2000, for Normal and
Problem Carryover Balances:

Description: Point estimate;
Normal carryover[A]: $656.8 million;
Problem carryover and type of problem: Total problem carryover[B]:
$721.3 million;
Problem carryover and type of problem: Induction problems[C]: $208.0
million;
Problem carryover and type of problem: Repair problems[D]: $322.4
million;
Problem carryover and type of problem: Unknown problems[E]: $191.3
million;
Reporting problems[F]: $255.8 million.

Description: Confidence interval +(-) @ 95% confidence level;
Normal carryover[A]: $58.3 million;
Problem carryover and type of problem: Total problem carryover[B]:
$72.2 million;
Problem carryover and type of problem: Induction problems[C]: $53.2
million;
Problem carryover and type of problem: Repair problems[D]: $61.7
million;
Problem carryover and type of problem: Unknown problems[E]: $57.5
million;
Reporting problems[F]: $65.3 million.

Description: Lower error limit;
Normal carryover[A]: $598.5 million;
Problem carryover and type of problem: Total problem carryover[B]:
$649.2 million;
Problem carryover and type of problem: Induction problems[C]: $154.8
million;
Problem carryover and type of problem: Repair problems[D]: $260.7
million;
Problem carryover and type of problem: Unknown problems[E]: $133.8
million;
Reporting problems[F]: $190.5 million.

Description: Upper error limit;
Normal carryover[A]: $715.1 million;
Problem carryover and type of problem: Total problem carryover[B]:
$793.5 million;
Problem carryover and type of problem: Induction problems[C]: $261.2
million;
Problem carryover and type of problem: Repair problems[D]: $384.0
million;
Problem carryover and type of problem: Unknown problems[E]: $248.8
million;
Reporting problems[F]: $321.0 million.

[A] Normal carryover--an unfilled order at the end of a fiscal year
that is planned to be completed after fiscal year 2000 because the
order arrived too late in the fiscal year for production to be
completed or the nature of the work required a long time.

[B] Problem carryover--an unfilled order at the end of a fiscal year
that was planned to be completed by the end of the fiscal year but for
various reasons was not completed, according to the contract
production and cost system.

[C] Induction problem--work not started at contractor facilities as of
September 30, 2000, as scheduled or was started late in the fiscal
year, which prevented the work from being completed as planned.

[D] Repair problem--work not repaired by the contractor as planned
because of a parts problem, a capacity problem, such as manpower
shortages, or more work needed to be performed than originally planned.

[E] Unknown problem--neither air logistics center officials nor we
could determine the cause or the dollar amount of work not completed
as planned as of September 30, 2000, because the information was not
available.

[F] Reporting problem--work that was completed as of September 30,
2000, but shown as not completed in the contract production and cost
system.

[End of table]

We obtained information on the contractor performing the work,
financial data, and production data for each item in the sample from
the production and cost system. This information follows: (1) contract
number, (2) contract line item number, (3) end item identity, (4)
fiscal year of order financing the work, (5) production management
specialist office responsible for overseeing the work, (6) unit sales
price for the work, (7) quantities of items planned to be repaired and
when, (8) quantities of items repaired as of September 30, 2000, and
September 30, 2001, and (9) dollar amount of unfilled orders as of
September 30, 2000. We analyzed the above information to determine if
the work was accomplished in fiscal year 2000 as planned and, if not,
we obtained explanations from the air logistics centers about why the
work was not completed.

We performed our review at the headquarters offices of the Under
Secretary of Defense (Comptroller) and the Secretary of the Air Force,
Washington, D.C.; Air Force Materiel Command, Wright-Patterson Air
Force Base, Ohio; the Oklahoma City Air Logistics Center, Tinker Air
Force Base, Oklahoma; the Ogden Air Logistics Center, Hill Air Force
Base, Utah; and the Warner Robins Air Logistics Center, Robins Air
Force Base, Georgia. Our review was performed from July 2001 through
May 2002 in accordance with U. S. generally accepted government
auditing standards. The production and financial information referred
to in this report was provided by the Air Force. We worked with Air
Force officials to validate the reliability of the information in the
system to determine the reasons for the work not being completed at
the end of fiscal year 2000. We requested comments on a draft of this
report from the Secretary of Defense or his designee. DOD provided
written comments and these comments are presented in the "Agency
Comments and Our Evaluation" section of this report and are reprinted
in appendix III.

[End of section]

Appendix II: Sample Element Disposition Table:

Category: Aircraft:

Stratum #: 1;
Stratum range (Low): $50,000.00;
Stratum range (High): $1,000,000.00;
Total number of transactions in the population: 238;
Total number of items sampled: 30.

Stratum #: 2;
Stratum range (Low): $1,000,000.00;
Stratum range (High): $4,600,000.00;
Total number of transactions in the population: 60;
Total number of items sampled: 30.

Stratum #: 3;
Stratum range (Low): $4,600,000.00;
Stratum range (High): $55,000,000.00;
Total number of transactions in the population: 12;
Total number of items sampled: 12.

Total:
Total number of transactions in the population: 310;
Total number of items sampled: 72.

Category: Engines:

Stratum #: 1;
Stratum range (Low): $50,000.00;
Stratum range (High): $2,000,000.00;
Total number of transactions in the population: 36;
Total number of items sampled: 30.

Stratum #: 2;
Stratum range (Low): $2,000,000.00;
Stratum range (High): $42,000,000.00;
Total number of transactions in the population: 9;
Total number of items sampled: 9.

Total:
Total number of transactions in the population: 45;
Total number of items sampled: 39.

Category: Exchangeable:

Stratum #: 1;
Stratum range (Low): $20,000.00;
Stratum range (High): $175,000.00;
Total number of transactions in the population: 3,270;
Total number of items sampled: 30.

Stratum #: 2;
Stratum range (Low): $175,000.00;
Stratum range (High): $725,000.00;
Total number of transactions in the population: 748;
Total number of items sampled: 30.

Stratum #: 3;
Stratum range (Low): $725,000.00;
Stratum range (High): $4,000,000.00;
Total number of transactions in the population: 178;
Total number of items sampled: 30.

Stratum #: 4;
Stratum range (Low): $4,000,000.00;
Stratum range (High): $43,000,000.00;
Total number of transactions in the population: 19;
Total number of items sampled: 19

Total:
Total number of transactions in the population: 4,215;
Total number of items sampled: 109.

Category: Missiles & Other:

Stratum #: 1;
Stratum range (Low): $50,000.00;
Stratum range (High): $250,000.00;
Total number of transactions in the population: 160;
Total number of items sampled: 30.

Stratum #: 2;
Stratum range (Low): $250,000.00;
Stratum range (High): $900,000.00;
Total number of transactions in the population: 67;
Total number of items sampled: 30.

Stratum #: 3;
Stratum range (Low): $900,000.00;
Stratum range (High): $2,600,000.00;
Total number of transactions in the population: 15;
Total number of items sampled: 15.

Total:
Total number of transactions in the population: 242;
Total number of items sampled: 75.

Category: Software:

Stratum #: 1;
Stratum range (Low): $50,000.00;
Stratum range (High): $500,000.00;
Total number of transactions in the population: 189;
Total number of items sampled: 30.

Stratum #: 2;
Stratum range (Low): $500,000.00;
Stratum range (High): $2,000,000.00;
Total number of transactions in the population: 61;
Total number of items sampled: 30.

Stratum #: 3;
Stratum range (Low): $2,000,000.00;
Stratum range (High): $27,000,000.00;
Total number of transactions in the population: 14;
Total number of items sampled: 14.

Total:
Total number of transactions in the population: 264;
Total number of items sampled: 74.

Totals:
Total number of transactions in the population: 5,076;
Total number of items sampled: 369.

Source: GAO.

[End of table]

[End of section]

Appendix III: Comments from the Department of Defense:

Under Secretary Of Defense:
Comptroller:
1100 Defense Pentagon
Washington, DC 20301-1100:

May 30, 2002:

Mr. Greg Kutz:
Director, Financial Management and Assurance:
U.S. General Accounting Office:
Washington, D.C. 20548:

Dear Mr. Kutz:

This is the Department of Defense (DoD) response to the General
Accounting Office (GAO) draft report, "Air Force Depot Maintenance:
Management Improvements Needed for Backlog of Funded Contract
maintenance Work� dated April 22, 2002 (GAO 02-623).

The DoD has reviewed the draft report and concurs with the
recommendations. Specific comments for each recommendation are
enclosed. My point of contact is Mr. Robert Donnelly, 703-697-1880.
The Department appreciates the opportunity to comment on the draft
report. An identical letter is being sent to Mr. Warren, who was also
responsible for this audit.

Sincerely,

Signed by:

Dov S. Zakheim:

Enclosure: As stated.

cc:
Under Secretary of Defense for Acquisition, Technology & Logistics:
DoD Inspector General:
Defense Finance & Accounting Service:
Joint Staff (J4):

[End of letter]

DoD Comments On The Draft General Accounting Office Report, Air Force
Depot Maintenance: "Management Improvements Needed for Backlog of
Funded Contract Maintenance Work" GA0-02-623:

The following comments are provided for each recommendation and its
associated findings.

Recommendation 1: Use the date contractors actually start work rather
than the planned start date to calculate work-in-process for all
workload categories as long as the contract portion of the activity
group remains in the working capital fund.

DoD Comments: Concur. The Air Force has indicated that they intend to
request authority to remove contract depot maintenance from the
Working Capital Fund (WCF). If this request is approved, work in
process (WIP) will no longer be a valid measure of performance. If
removed from the WCF, contract depot maintenance efforts will be
monitored and reported in the same manner as any other appropriated
entity would monitor them.

Recommendation 2: Improve the accuracy of the data in its systems that
track repair actions and account for costs by (1) holding managers
accountable for ensuring the accuracy of the data; (2) developing
standard operating procedures that provide detailed guidance on
production management specialists' day-to-day responsibilities,
particularly in the area of ensuring data accuracy; (3) providing
additional training to production management specialists on these
procedures; and (4) developing metrics that act as "red flags" to
alert management of possible data problems. At a minimum, the systems
should provide timely and accurate information on when contractors
receive broken items, items are input into work, repairs are completed,
and repaired items are returned to customers.

DoD Comments: Concur. The recommendations address problems that must
be dealt with even if contract depot maintenance is removed from the
WCF. To improve performance in this area, the Air Force has hired a
number of production management specialists (PMS) and they are in
the process of providing various training courses. Air Force has
identified and/or developed several training courses to address these
weaknesses.

Recommendation 3: Develop accurate and complete information on
contracts that were awarded by the San Antonio and Sacramento Air
Logistic Centers and subsequently transferred to the three remaining
centers to avoid loss of control that may result in fraud, waste, and
abuse. This will require, at a minimum: (1) establishing milestones
for completing both the review of transferred contracts and resolving
data problems identified during the reviews; (2) using metrics to
monitor progress; and (3) ensuring that sufficient resources are
dedicated to the resolution of the problem.

DoD Comments: Concur. The Air Force is taking a two-tiered approach to
manage contracts that were transferred from closed Air Logistics
Centers (ALC). First, the ALCs have established a formal group that is
systematically investigating and reconciling contracts that were
transferred from the closed ALCs. During the course of this process,
the status of reconciliation will be provided to each respective ALC
Commander.

Recommendation 4: Identify the underlying causes of the contract depot
maintenance awaiting parts problem. Additionally, develop an action
plan to address the underlying causes for the awaiting parts problems
similar to the plan that was recently developed to address the
awaiting parts problems for the ALC's in-house depot maintenance
operations.

DoD Comments: Concur. The Air Force has established a team to address
the awaiting parts issue for both in-house and contract workload.

Recommendation 5: Provide clear and consistent guidance on how, when,
and by whom the induction of assets should be monitored.

DoD Comments: Concur. The Air Force will update guidance to address
how, when, and by whom the induction of assets should be monitored.

Recommendation 6: Establish internal control procedures to ensure that
the guidance on the induction of assets is followed.

DoD Comments: Concur. The culmination of the above actions will
strengthen the Air Force's internal control over the induction of
assets.

[End of section]

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact:

Greg Pugnetti, (703) 695-6922.

Acknowledgments:

Staff who made key contributions to this report were Sharon Byrd,
Francine DelVecchio, Karl Gustafson, William Hill, Ron Tobias, and
Eddie Uyekawa.

[End of section]

Footnotes:

[1] U.S. General Accounting Office, Defense Working Capital Fund:
Improvements Needed for Managing the Backlog of Funded Work,
[hyperlink, http://www.gao.gov/products/GAO-01-559] (Washington, D.C.:
May 30, 2001).

[2] The carryover amount includes work for which obligations have been
made but which has not yet started and the cost to complete work that
has been started. The Air Force calculates carryover by subtracting
the amount of work-in-process from the amount of unfilled orders.
Unfilled orders equals the dollar value of customer orders received
less revenue earned. Revenue is earned as repairs on undelivered items
are completed. Work-in-process is the cost of the materials, labor,
and indirect costs used in producing an end item or service on an
order that is not yet complete.

[3] Estimate made as a 95 percent confidence level with a confidence
interval of +/- $81 million.

[4] Estimate made at a 95 percent confidence level with a confidence
interval of +/- $58 million.

[5] Estimate made at a 95 percent confidence level with a confidence
interval of +/- $87 million.

[6] U.S. General Accounting Office, Defense Working Capital Fund:
Improvements Needed for Managing the Backlog of Funded Work,
[hyperlink, http://www.gao.gov/products/GAO-01-559] (Washington, D.C.:
May 30, 2001).

[7] Estimate made at a 95 percent confidence level with a confidence
interval of +/- $65 million.

[8] Estimate made at a 95 percent confidence level with a confidence
interval of +/- $81 million.

[9] Estimate made at a 95 percent confidence level with a confidence
interval of +/- $58 million.

[10] Estimate made at a 95 percent confidence level with a confidence
interval of +/- $58 million.

[11] Estimate made at a 95 percent confidence level with a confidence
interval of +/- $62 million.

[12] The leading edge is a part located in front of the engine on a C-
5 aircraft that helps direct air into the engine.

[13] This problem is discussed in our report entitled, U.S. General
Accounting Office, Air Force Supply: Management Actions Create Spare
Parts Shortages and Operational Problems, [hyperlink,
http://www.gao.gov/products/GAO/NSIAD/AIMD-99-77] (Washington, D.C.:
April 29, 1999).

[14] Estimate made at a 95 percent confidence level with a confidence
interval of +/- $53 million.

[15] Estimate made at a 95 percent confidence level with a confidence
interval of +/- $58 million.

[16] Although this problem applied primarily to software workloads, we
found similar problems with other workloads that have an output
expressed as a level of effort, such as months or hours of work,
rather than items repaired.

[17] In fiscal year 2001, the Air Force completed the closure of the
Sacramento and San Antonio Air Logistics Centers, as directed by the
1995 Base Realignment and Closure Commission.

[18] We did not find this to be a significant problem at one of the
remaining air logistics centers primarily because an entire product
directorate, including key personnel from the contract depot
maintenance function, transferred with the workload from one of the
closing air logistics centers. Personnel from the contract function
brought the contract information (e.g., contract files) with them in
order to avoid any problems with missing data According to officials
at the remaining center, the work that the transferred product
directorate performs accounts for about 65 percent of the remaining
center's total workload.

[19] Hush houses are structures that contain noise suppression
systems. They are used to reduce the noise associated with engine
tests.

[20] Estimate made at a 95 percent confidence level with a confidence
interval of +/- $10 million.

[End of section]

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