Depot Maintenance: DOD's 50-50 Reporting Should Be Streamlined
(15-SEP-03, GAO-03-1023).
Under 10 U.S.C. 2466, not more than 50 percent of each military
department's annual depot maintenance funding can be used for
work done by private-sector contractors. The Department of
Defense (DOD) also must submit two reports to the Congress
annually on the division of depot maintenance funding between the
public and private sectors--one about the percentage of funds
spent in the previous 2 fiscal years (prior-years report) and one
about the current and 4 succeeding fiscal years (future-years
report). As required, GAO reviewed the two DOD reports submitted
in early 2003 and is, with this report, submitting its views to
the Congress on whether (1) the military services met the
so-called "50-50 requirement" for fiscal years 2001-2 and (2) the
projections for fiscal years 2003-7 are reasonable estimates. GAO
also identified opportunities to improve the reporting process.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-1023
ACCNO: A08465
TITLE: Depot Maintenance: DOD's 50-50 Reporting Should Be
Streamlined
DATE: 09/15/2003
SUBJECT: Data integrity
Department of Defense contractors
Equipment maintenance
Financial management
Financial management systems
Future budget projections
Maintenance costs
Maintenance services contracts
Military procurement
Reporting requirements
Private sector
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GAO-03-1023
Report to Congressional Committees
United States General Accounting Office
GAO
September 2003 DEPOT MAINTENANCE
DOD*s 50- 50 Reporting Should Be Streamlined
GAO- 03- 1023
Continuing weaknesses in DOD*s data gathering, reporting processes, and
financial systems prevented GAO from determining with precision if the
military services complied with the 50- 50 requirement in fiscal years
2001- 2. DOD data show all the services, except the Air Force in fiscal
year 2001, to be below the 50- percent funding limit on private sector
work. However, as before, GAO found errors in the data that, if corrected,
would overall increase funding of the private sector and move each service
closer to the contract limit. For example, for fiscal year 2002, the Navy
did not include about $401 million in private sector maintenance work on
aircraft carriers and surface ships. Correcting for these and other errors
would increase the Navy*s percentage of private sector depot maintenance
funds for that year from the 42.6 percent reported to 46.9 percent. Such
data weaknesses show that prior- years reports do not precisely measure
the division of maintenance funding. At best, over time these results
provide rough approximations and indicate trends that may be useful to
decision makers.
Because of data deficiencies and changing budget projections, the
futureyears report does not provide reasonable estimates of public and
private sector maintenance funding for fiscal years 2003- 7 and limits its
usefulness to decision makers. GAO reported this shortcoming in the past,
and problems continue. For example, the Army underreported maintenance
work at nondepot locations as it continues to consolidate the work and
better control it at such locations. Other Army work was not reported
because some commands did not receive guidance and others misapplied it.
These errors would add about $200 million annually to the Army*s future
estimate and increase the percent of projected funding in the private
sector.
Opportunities still exist for improvements, including for streamlining the
50- 50 reports, continued service audit agency support, and data
development. Streamlining the 50- 50 reports could help address problems
caused by, among other factors, inexact program estimates. Second,
although DOD is concerned that recent revisions to federal audit standards
could keep service auditors from further participation in the 50- 50
process, GAO believes that a way can be developed to enable auditors*
continued support yet ensure their independence. Third, data development
could be helped by better disseminating guidance and training
participating personnel.
DOD*s Reported Fiscal Year 2002 50- 50 Data and GAO*s Adjustments
Numbers in percent
Service Public work
reported Public work
adjusted Private work
reported Private work
adjusted
Army 51.5 49.2 46.5 49.0 Navy/ Marine Corps
54.5 50.3 42.6 46.9 Air Force 54.1 51.4 45.8 48.5 Source: GAO analysis of
DOD data.
Note: Totals reported and adjusted will not equal 100 percent due to
rounding and legislatively excluded public- private partnerships.
Under 10 U. S. C. 2466, not more than 50 percent of each military
department*s annual depot
maintenance funding can be used for work done by private- sector
contractors. The Department of Defense (DOD) also must submit two reports
to the Congress annually on the division of depot maintenance funding
between the public and private sectors* one about the percentage of funds
spent in the previous 2 fiscal years (prior- years report) and one about
the current and 4 succeeding fiscal years (future- years report). As
required, GAO reviewed the two DOD reports submitted in early 2003 and is,
with this report,
submitting its views to the Congress on whether (1) the military services
met the so- called *50- 50 requirement* for fiscal years 2001- 2 and (2)
the projections for fiscal years 2003- 7 are reasonable estimates. GAO
also identified
opportunities to improve the reporting process. GAO suggests that the
Congress
consider amending 10 U. S. C. 2466 to require only one annual 50- 50
report to cover the prior, current,
and budget years for which data are generally more reliable and potential
impacts more immediate.
GAO also recommends that DOD improve 50- 50 data collection and validation
by, among other actions, using service audit agencies for timely review
and validation of 50- 50 data. DOD concurs with the report
recommendations.
www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 1023. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Barry W. Holman at (202) 512- 5581 or holmanb@ gao.
gov. Highlights of GAO- 03- 1023, a report to
Congressional Committees
September 2003
DEPOT MAINTENANCE
DOD's 50- 50 Reporting Should Be Streamlined
Page i GAO- 03- 1023 Depot Maintenance Letter 1 Results in Brief 2
Background 4 Weaknesses in Data Preclude Determinations of Compliance in
Prior- Years Report 9 Future- Year Projections Are Not Reasonable and Not
Very Useful 12 Opportunities Exist to Improve DOD Reporting 13 Conclusions
16 Matter for Congressional Consideration 17 Recommendations for Executive
Action 17 Agency Comments and Our Evaluation 18 Appendix I GAO Adjustments
for Errors, Omissions, and
Inconsistencies in Military Departments 50- 50 Data for Fiscal Year 2002
19
Department of the Army 19 Department of the Navy 20 Department of the Air
Force 21 Appendix II Scope and Methodology 24
Appendix III Comments from the Department of Defense 27
Related GAO Products 34
Tables
Table 1: DOD Reported Depot Maintenance Funding Allocations 8 Table 2: GAO
Changes to Army*s FY 2002 50- 50 Data 19 Table 3: GAO Changes to Navy*s
and Marine Corps* FY 2002 50- 50 Data20 Table 4: GAO Changes to Air
Force*s FY 2002 50- 50 Data 22 Contents
Page ii GAO- 03- 1023 Depot Maintenance Abbreviations
DOD Department of Defense OSD Office of the Secretary of Defense
This is a work of the U. S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
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separately.
Page 1 GAO- 03- 1023 Depot Maintenance
September 15, 2003 The Honorable John Warner Chairman The Honorable Carl
Levin Ranking Minority Member Committee on Armed Services United States
Senate
The Honorable Duncan Hunter Chairman The Honorable Ike Skelton Ranking
Minority Member Committee on Armed Services House of Representatives
Under 10 U. S. C. 2466, not more than 50 percent of annual depot
maintenance funding provided to the military departments and defense
agencies can be used for work accomplished by private- sector contractors.
Section 2466 also directs the Department of Defense (DOD) to submit two
annual reports to the Congress on the distribution of depot maintenance
funding between the public and private sectors. The first report is to
identify the percentage of funds expended by each military department and
defense agency during the preceding 2 fiscal years for the performance of
depot maintenance workloads by the public and private
sectors (the *prior- years report*). The second report is to project the
same information for the current and 4 succeeding fiscal years (the
*future- years report*). For 2003, DOD issued the prior- years report on
February 11, 2003, and the future- years report on April 7, 2003. Section
2466 also requires us to submit our views to the Congress on
whether DOD complied with the so- called *50- 50 requirement* in the
prior- years report and whether the projections in the future- years
report are reasonable. Accordingly, this report discusses whether (1) the
military departments met the 50- 50 requirement for fiscal years 2001 and
2002 and (2) the projections for fiscal years 2003 through 2007 represent
reasonable estimates. As part of our work, we also identified
opportunities to improve the reporting process. To accomplish these
objectives, we analyzed the 50- 50 reported data and each service*s
procedures and internal
management controls for collecting, aggregating, and validating depot
maintenance information for purposes of responding to the section 2466
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 03- 1023 Depot Maintenance
requirements. We limited our analysis of future- years data because
initial audit efforts identified significant continuing problem areas,
similar to those found in prior audits, that are not likely to change.
Continuing weaknesses in DOD*s data gathering, reporting processes, and
financial systems prevented us from determining with precision whether the
services were in compliance with the 50- 50 requirement for fiscal years
2001 and 2002. DOD*s data as submitted to the Congress shows the military
departments to be below the 50- percent funding limitation on private
sector work, except for the Air Force, which for 2001 reported itself
above the limit 1 but below it in 2002. However, as in past years, we
found errors and omissions in the data that, if corrected, would overall
increase the percentages of funding going to the private sector and move
each department closer to the contract limit. For example, in its data for
fiscal year 2002, the Navy did not include about $401 million in private
sector maintenance work on aircraft carriers accomplished during the same
time as nuclear refueling and on surface ships being placed in an inactive
status. The Marine Corps, which compared to the other services has the
smallest workload but the largest proportion of errors, did not report
most depot maintenance workloads from the command responsible for system
acquisitions and upgrades, understating private- sector workloads by about
$32 million and public sector workloads by about $7 million. Correcting
for these and other errors we found would increase the Department of the
Navy*s percentage of depot funds for work accomplished in the private
sector during fiscal year 2002 from the 42.6 percent reported to 46.9
percent, a gain of over 4 percentage points. These weaknesses indicate the
data in the prior- years report cannot be relied on to provide a precise
measure of the balance of funding between the public and private sectors
for the military departments. At best, over time these reports provide
rough approximations of the public- private
funding allocations, with some indications of trends that may be useful
information to the Congress in exercising its oversight role and to DOD
officials in managing the depot maintenance program.
Because of supporting data deficiencies and the changing nature of budget
projections, the future- years report does not provide reasonable
estimates
1 The Secretary of the Air Force issued a national security waiver for
fiscal year 2001 as provided by 10 U. S. C. 2466( b) at that time. This
provision was subsequently amended (sec. 341, P. L. 107- 107, Dec. 28,
2001) to designate the Secretary of Defense as the waiver authority
instead of the secretaries of the military departments. Results in Brief
Page 3 GAO- 03- 1023 Depot Maintenance
of public and private sector depot maintenance funding allocations for
fiscal years 2003 through 2007, thereby limiting its usefulness to
congressional and DOD decision makers. We have reported this shortcoming
with the future- years report in the past, and the problems continue to
occur. For example, as in past years, the Army underreported public and
private sector depot- level maintenance work at field locations as it
continues unfinished efforts to consolidate maintenance activities and
better control the proliferation of depot- level tasks at nondepot
locations. Other Army work was not reported because some commands did not
receive 50- 50 guidance and others misapplied the guidance. While the
Army*s supporting documentation for the projected data was inadequate,
errors and omissions of similar magnitude to the prior years data would
add more than $200 million annually to the Army*s reported future work for
both public and private sectors. As with the prior years, the net effect
of the problems we found generally increases the percentage of workload
expected to be accomplished by the private sector. Besides reporting
errors, other internal and external factors can create large fluctuations
in reported data, which in turn can provide a distorted and misleading
view to outside observers about efforts to remain compliant with the 50-
50 requirement. For example, in the current future- years report, the Air
Force*s projected public sector work financed through the working capital
fund is $3.0 billion higher than the amount reported for the same 4- year
time period in the future- years report submitted in 2002. Although this
would appear to indicate a large influx of new work to the public depots,
in reality the amount of work, according to budget estimates and
management reports, is expected to remain fairly level during this
reporting period in terms of production hours and size of workforce. Most
of the dollar (and percentage) increase in public sector work is the
result of price hikes in the sales rate charged to its customers, a
condition primarily caused by increases in the cost of spare and repair
parts used in the maintenance process.
Recently DOD*s improvements in 50- 50 guidance and operating processes
have reached a plateau in terms of quality and direction. However,
opportunities still exist to improve 50- 50 data and management processes
and controls, including through a streamlined 50- 50 report, service audit
agency participation in that process, and an improved data development
process. Streamlining the 50- 50 report to focus on the data that are
likely to be more accurate and extending the time DOD officials have to
put the data together should improve the quality of the reported 50- 50
data. Furthermore, DOD officials indicated their concerns that the issue
of auditor independence, arising from a recent revision of government
auditing standards, could keep service auditors from further participation
Page 4 GAO- 03- 1023 Depot Maintenance
in 50- 50 reviews. However, the continued participation of the service
audit agencies* to verify data and identify errors to be corrected by 50-
50 managers before reports are submitted to the Congress* is critical to
improving data accuracy and completeness. We believe that, as such
participation by auditors has been done with regard to the base
realignment and closure process, a process can be developed to enable
service auditors* valuable participation to continue while the services
are compiling their data, with audit agencies still maintaining their
independence. Lastly, opportunities for improvement in the data
development process include better dissemination of guidance and enhanced
training for personnel who collect and report the data.
We are including a matter for congressional consideration regarding the
streamlining of the 50- 50 reports by reducing the number of years of
future data that are collected and combining the prior- year and future-
year reports into one report with a later reporting date. We are also
making recommendations to the Department of Defense for improving the 50-
50 data reported to the Congress (1) by assuring the timely participation
of the service audit agencies in reviewing the data before reports are
submitted to the Congress and (2) by increasing management*s attention to
the dissemination of guidance to all organizations and personnel
participating in the process and to the improvement of training for
personnel responsible for developing and aggregating data.
In written comments on a draft of this report, DOD concurred with the
report*s recommendations while disagreeing with limited portions of our
analyses. The department*s comments are included in appendix III.
In addition to the 50- 50 requirement in 10 U. S. C. 2466, two other title
10 provisions directly affect the reporting of workload allocations to the
public and private sectors.
Section 2460 defines depot maintenance to encompass material maintenance
or repair requiring the overhaul, upgrade, or rebuilding of parts,
assemblies, or subassemblies and the testing and reclamation of equipment,
regardless of the source of funds or the location at which maintenance or
repair is performed. Depot maintenance also Background
Governing Legislation and Previous Reports Concerning the 50- 50
Requirement
Page 5 GAO- 03- 1023 Depot Maintenance
encompasses software maintenance, interim contractor support, 2 and
contractor logistics support 3 to the extent that work performed in these
categories is depot maintenance. The statute excludes from depot
maintenance the nuclear refueling of an aircraft carrier, the procurement
of major modifications or upgrades of weapon systems, and the procurement
of parts for safety modifications, although the term does include the
installation of parts for safety modifications.
Section 2474 directs DOD to designate public depots as Centers of
Industrial and Technical Excellence and to improve their operations so as
to serve as recognized leaders in their core competencies. 4 Section 342
of the National Defense Authorization Act for Fiscal Year 2002 (P. L. 107-
107, Dec. 28, 2001) amended this statute to exclude qualifying
public- private partnerships 5 from the 50- percent funding limitation on
contracting in section 2466. Section 342 provides that the funds expended
for the performance of depot- level maintenance by nonfederal government
personnel located at the centers shall not be
counted when applying the 50- percent limitation if the personnel are
provided pursuant to a public- private partnership. This exclusion
initially applied to depot maintenance funding for fiscal years 2002
through 2005. Section 334 of the National Defense Authorization Act for
Fiscal Year 2003 (P. L. 107- 314, Dec. 2, 2002) extended this period to
include all contracts entered into through fiscal year 2006.
The Office of the Secretary of Defense (OSD) has issued guidance to the
military departments for reporting public- private workload allocations. 2
Interim contractor support is designed to be an interim support
arrangement in which a contractor provides depot maintenance (and
sometimes other logistics support) as part of the acquisition strategy for
new systems. 3 Contractor logistics support is designed to be a lifetime
support concept in which a contractor provides most or all elements of
logistics support, including depot maintenance. 4 Core competencies are
depot- level maintenance capabilities to be retained in public depots to
meet defense strategic and contingency plans and for which the military
departments believe that DOD should be a recognized leader in the national
technology and industrial base. 5 DOD guidance defines a public- private
partnership for depot maintenance as an
agreement between a public- sector depot maintenance activity and one or
more private industry or other entities to perform work or utilize
facilities and equipment. Such an arrangement includes use of public
facilities, equipment, and employees to perform work for the private
sector under certain defined circumstances; private- sector use of
publicsector equipment and facilities to perform work for the public
sector; and work- sharing agreements using both public- and private-
sector facilities and/ or employees.
Page 6 GAO- 03- 1023 Depot Maintenance
The guidance is consistent with the definition of depot- level maintenance
and repair in 10 U. S. C. 2460. 6 The military departments have also
issued internal instructions to manage the data collection and reporting
process, tailored to their individual organizations and operating
environments.
Based on the congressional mandate regarding the DOD 50- 50 requirement,
this is the sixth year that we have reported on the prior- year numbers
and the fourth year reporting on the future- year numbers. 7 In past
years, we have reported on continuing data errors and inconsistencies in
reporting by the military departments and problems in documenting and
independently validating 50- 50 data. We have recommended increasing
management attention to and emphasis on the 50- 50 reporting process,
improving guidance in specific maintenance categories, and implementing
better internal controls. We have also observed that the 50- 50 process is
complex, involving numerous reporting entities and commands, and requiring
the incorporation of evolving new concepts of logistics support, changing
locations and organizations for accomplishing depot maintenance, and
changes in statutory provisions. Service officials told us that the
reporting process is somewhat burdensome and time frames for
collecting data are constrictive. Further complications in reporting
result from relatively high turnover in staff responsible for collecting
and managing data and uneven management attention and priority accorded
the 50- 50 process.
Our work has historically been augmented by the efforts of the service
audit agencies, which have participated in the 50- 50 processes in varying
degrees. We have recommended the continued involvement of the auditors to
review and validate reporting processes and results and to correct
substantial errors and omissions before the 50- 50 data are submitted to
the Congress.
6 Because of the difficulty of segregating installation costs for safety
modifications from costs for installing other modifications (e. g., for
improved performance), OSD*s guidance specifies that all modification
installation costs be reported when an installation is considered to be a
depot- level service. 7 For the two most recent reports, see U. S. General
Accounting Office, Depot Maintenance: Change in Reporting Practices and
Requirements Could Enhance Congressional Oversight, GAO- 03- 16
(Washington, D. C.: Oct. 18, 2002) and Depot Maintenance:
Management Attention Required to Further Improve Workload Allocation Data,
GAO- 02- 95 (Washington, D. C.: Nov. 9, 2001). Other related GAO products
are listed at the end of this report.
Page 7 GAO- 03- 1023 Depot Maintenance
Our prior reports also recognized the limitations of DOD*s financial
systems, operations, and controls. Our audits of DOD*s financial
management operations have routinely identified pervasive weaknesses in
financial systems, operations, and internal controls that impede its
ability
to provide useful, reliable, and timely financial information for day- to-
day management and decision making. In the financial management systems
area, DOD continues to struggle in its efforts to implement systems to
support managerial decision- making. As we recently reported, 8 DOD can
ill afford to invest in systems that are not capable of providing DOD
management with more accurate, timely, and reliable information on the
results of the department*s business operations.
To date, none of the military services or major DOD components has passed
the test of an independent financial audit. A continuing inability to
capture and report the full cost of its programs represents one of the
most significant impediments facing DOD. Nonetheless, the data used to
develop the 50- 50 report are the only data available and are accepted and
used for DOD decision making and for congressional oversight.
Table 1 provides a consolidated summary of DOD*s 2003 prior- years and
future- years reports to the Congress on public and private sector
workload allocations for depot maintenance. The amounts shown are DOD*s
record of actual obligations incurred for depot maintenance work in fiscal
years 2001 and 2002 and projected obligations for fiscal years 2003- 2007
based on the defense budget and service funding baselines. 9 The
percentages show the relative allocations between the public and private
sectors and the exempted workloads. Adding the private and private-
exempted percentages together shows what the private- sector amount would
have been reported as, absent the recent legislation to exempt qualified
partnership workload.
8 See U. S. General Accounting Office, Department of Defense: Status of
Financial Management Weaknesses and Progress Toward Reform, GAO- 03- 931T
(Washington, D. C.: June 25, 2003).
9 Although 10 U. S. C. 2466 specifies reporting of funds expended in the
prior years and projected to be expended in the future years, DOD*s past
and current 50- 50 reports are based on obligation data. A DOD official
explained that obligation data are considered to be more appropriate
because of the statutory requirement to report funds made available in a
given fiscal year and because expenditure data may not be completely
recognized in the accounting records for a year or more following the
funds* obligation. Summary of Data in DOD*s
50- 50 Reports
Page 8 GAO- 03- 1023 Depot Maintenance
Table 1: DOD Reported Depot Maintenance Funding Allocations
Dollars in millions Prior fiscal years Future fiscal years 2001 2002 2003
2004 2005 2006 2007 Army Public $1,205 $1,373 $1,781 $1,790 $1,907 $2,017
$2,008
52.2% 51.5% 55.8% 52.8% 53.6% 52.6% 52.7%
Private $1,102 $1,239 $1,325 $1,517 $1,562 $1,729 $1,716
47.8% 46.5% 41.5% 44.7% 43.9% 45.1% 45.0%
Private exempt a - $51 $84 $86 $87 $87 $87
1.9% 2.6% 2.5% 2.4% 2.3% 2.3% Total $2,307 $2,663 $3,190 $3,393 $3,556
$3,833 $3,812
Navy/ Marine Corps Public $4,342 $5,258 $4,986 $4,594 $5,237 $5,172 $5,178
54.7% 54.5% 54.1% 54.2% 55.2% 55.0% 56.3%
Private $3,593 $4,110 $4,188 $3,836 $4,173 $4,144 $3,903
45.3% 42.6% 45.4% 45.2% 44.0% 44.0% 42.5%
Private exempt a - $273 $46 $51 $74 $94 $111
2.8% 0.5% 0.6% 0.8% 1.0% 1.2% Total $7,935 $9,642 $9,220 $8,481 $9,484
$9,411 $9,192
Air Force Public $3,322 $4,467 $4,456 $4,993 $5,404 $5,530 $5,629
47.7% 54.1% 51.9% 56.8% 57.9% 56.6% 53.7%
Private $3,643 $3,781 $4,120 $3,791 $3,922 $4,230 $4,848
52.3% 45.8% 48.0% 43.1% 42.0% 43.3% 46.2%
Private exempt a - $12 $9 $8 $7 $7 $8
0.1% 0.1% 0.1% 0.1% 0.1% 0.1% Total $6,965 $8,260 $8,585 $8,792 $9,333
$9,768 $10,484
Source: DOD*s *50- 50* Reports, dated Feb. 11 and Apr. 7, 2003. a The
provision in 10 U. S. C. 2474 to exempt qualified public- private
partnerships from the 50- percent funding limitation began with the 2002
reporting year and is now continued for all contracts entered into through
fiscal year 2006. DOD interpreted this to mean that exemptions should also
be reported for fiscal year 2007 for contracts initiated in 2002 through
2006.
Page 9 GAO- 03- 1023 Depot Maintenance
DOD*s prior- years report for fiscal years 2001 and 2002 as submitted to
the Congress shows the Departments of the Army and Navy to be below the
50- percent funding limitation on private sector workloads for both years.
The Air Force reported itself over the limitation in 2001 and below it in
2002. (See table 1.) The net effects of correcting for the errors and
omissions we identified would increase the percentages of workload going
to the private sector and move each department closer to the contract
limit. Appendix I shows the amounts and effects of our adjustments to the
reported data submitted by the military departments for fiscal year 2002
and provides a description of the major deficiencies we found. Overall,
however, recurring weaknesses in DOD*s data gathering, reporting
processes, and financial systems prevented us from determining with
precision whether the services were in compliance with the 50- 50
requirement for fiscal years 2001 and 2002.
The Army reported its private sector funding to be below the 50- percent
limit for both fiscal years 2001 and 2002. Army 50- 50 reporting involves
multiple commands with somewhat different processes for collecting,
summarizing, and validating data. Although the Army utilized a new, more
centralized financial system to collect 50- 50 data that corrected some of
the transcription errors we found last year, 10 we continued to find
errors, omissions, and inconsistencies in its data.
For example, as in past years, the Army underreported public and private
sector depot- level maintenance work at field locations as it continues
unfinished efforts to consolidate maintenance activities and better
control the proliferation of depot- level tasks at nondepot locations.
Other Army work was not reported because some commands did not receive 50-
50 instructions and others misapplied the guidance. Unfamiliarity with the
guidance was caused in some instances by the large turnover from last year
in the staff responsible for collecting and summarizing data. Staff
turnover was cited by each of the military services as contributing to
increased errors and training needs. To the extent we identified them,
these specific errors would add about $228 million in total to the Army*s
public and private sector workloads in 2002; the net effect of correcting
for these errors would add 2.5 percent to the private sector percentage
allocation in 2002. (See table 2 in app. I.)
10 GAO- 03- 16. Weaknesses in Data
Preclude Determinations of Compliance in PriorYears Report Department of
the Army
Page 10 GAO- 03- 1023 Depot Maintenance
The Navy reported its private sector funding to be below the 50- percent
limit for both fiscal years. Similar to the Army, the Navy*s 50- 50
process also involves multiple naval commands as well as the Marine Corps.
As in prior years, we believe this increases the complexity in managing
the process and in ensuring consistency in application of the guidance. It
also exacerbates the less than adequate data validation efforts.
We identified several problems that carried over from last year*s 50- 50
efforts. The Navy did not report any depot maintenance work accomplished
along with the nuclear refueling of its aircraft carriers, citing the
exclusion of nuclear refueling from the 10 U. S. C. 2460 definition of
depot maintenance. We continue to believe that depot repairs not directly
associated with refueling tasks should be reported because these kinds of
repair actions are reported by other organizations and funding for these
tasks are identifiable in contracts and financial systems. The Navy also
continues to inconsistently report inactivation activities that involve
the servicing and preservation of systems and equipment before it is
placed in storage or in an inactive status. Officials report public sector
workloads
for inactivation activities on nuclear ships but do not report such work
on nonnuclear ships, saying that the former workload is complex while the
latter is not. We think all such depot- level work should be counted since
the statute and implementing guidance does not make a distinction of
complexity. These two examples would add about $401 million to the private
sector workloads in fiscal year 2002.
We also determined that about $41 million of partnership workloads were
incorrectly exempted from reporting because the work was not accomplished
at a designated depot or was not performed by contract employees.
The Marine Corps data are included as part of the Department of the Navy
50- 50 report for compliance purposes, but the Corps exercises a separate
process for collecting data. Compared to the other services, the Marine
Corps has a small depot program but makes more relative errors and has
substantial shortcomings in its management oversight and control actions.
For example, most of the program offices in the command that is
responsible for acquiring and upgrading weapon systems did not report at
all. Our review found that this understated the private sector total for
fiscal year 2002 by about $32 million and the public sector total by
almost $7 million. We also identified other errors including a nearly $19
million overstatement of the public sector when an official incorrectly
included obligations from fiscal year 2001 in the total for 2002.
Department of the Navy,
including the Marine Corps
Page 11 GAO- 03- 1023 Depot Maintenance
On balance, for the Department of the Navy as a whole we found the total
dollar amount of errors affected the private sector data more than the
public sector. Correcting for the errors we found substantially increases
the private sector percentage share in fiscal year 2002 from 42.6 percent
to 46.9 percent, a gain of over 4 percent. (See table 3 in app. I.)
The Air Force reported that it exceeded the 50- percent funding limitation
for the private sector in 2001. As provided by law at the time, the
Secretary of the Air Force issued a waiver. 11 The Air Force reported
itself back below the limitation for fiscal year 2002.
Most of the errors we found were the same or similar from past reviews.
For example, the Air Force continues to make a significant adjustment in
its reporting for contract administration and oversight costs. The
adjustment increases the reported public sector funding and decreases the
private sector. The total adjustment was $125 million (in absolute terms)
for fiscal year 2002. Consistent with the 50- 50 guidance, which states
that costs should be associated with the end product (i. e., the repaired
item), we think these costs should instead be treated as contracting
expenses. Accordingly, we reversed this adjustment in our analysis. The
Air Force also continues to count some component repair costs twice, once
when the component is repaired and again when it is installed in an
equipment item or assembly during a periodic overhaul. Officials said
these are both reportable events, while we think this overstates the
amount of actual
repair work done. Eliminating the double count would affect about $666
million in 2002* a $485 million decrease in the public sector amount and a
$181 million decrease in the private sector.
As in past years, we also identified many errors in the amounts reported
for programs supported by interim and contractor logistics support
contracts. We determined that several programs used incorrect factors and
assumptions to calculate the depot portion of total contract costs. We
found other programs that could not adequately explain or justify their
estimating methods* some had been developed years ago by officials no
longer in the program and simply applied by new staff without checking
their validity nor maintaining adequate supporting documentation to
explain and rationalize the results. Relatively high turnover of staff
11 The Air Force also reported itself as exceeding the 50- percent limit
in fiscal year 2000, and a notice of the waiver was duly issued to the
Congress. Department of the Air
Force
Page 12 GAO- 03- 1023 Depot Maintenance
responsible for collecting and managing 50- 50 data tends to increase the
number and persistence of errors and omissions. In total, the net effect
of the errors we found would increase the private sector allocation in
2002 by about 2.7 percent. (See table 4 in app. I.)
Because of the changing nature of budget projections and supporting data
deficiencies, the future- years report does not provide reasonable
estimates of public and private sector depot maintenance funding
allocations for fiscal years 2003 through 2007. Furthermore, the services
tend to place less emphasis and priority on collecting and validating
future- years data. The reported projections are based, in part, on
incorrect data, questionable assumptions and estimating factors, and some
inconsistencies with existing budgets and management plans. As with the
prior years, the net effect of the problems we found generally increases
the percentage of funding for projected private sector work. The
uncertainty and instability of budget estimates combined with the errors
and omissions we found result in a future- years report that is not very
useful to congressional and DOD decision makers.
We found many of the same problems identified in the prior- years data
were continued in the future- years projections. The Army continued to
underreport maintenance work at field locations and made other errors
similar to its prior- years presentation. While supporting documentation
for the Army*s projected data was inadequate, errors and omissions of the
same magnitude as fiscal year 2002 would add more than $200 million
annually to the totals projected for the public and private sectors in the
Army*s future- years report. Similarly, in its respective projections, the
Navy continued to not report depot maintenance accomplished with, but not
directly related to nuclear refueling; the Marine Corps underreported work
from the acquisition command; and the Air Force contract estimates again
involved some questionable estimating factors and assumptions. Overall, we
found this year as in the past that the services tend to place less
emphasis and priority on collecting and validating the future- years data
compared to efforts on the prior- years data.
Besides errors in reporting, other internal and external factors can
create large fluctuations in reported data, which in turn can provide a
distorted and misleading view to outside observers about efforts to remain
compliant with the 50- 50 requirement. For example, in the current
futureyears report, the Air Force*s projected public- sector work financed
through the working capital fund is about $3.0 billion higher than the
total amount reported for the same 4- year time period in the future-
years report Future- Year
Projections Are Not Reasonable and Not Very Useful
Page 13 GAO- 03- 1023 Depot Maintenance
submitted in 2002. Although this would appear to indicate a large influx
of new work to the public depots, in reality the amount of work, according
to budget estimates and management reports, is expected to remain fairly
level during this reporting period in terms of production hours and size
of workforce. Most of the dollar (and percentage) increase in public-
sector work is the result of price hikes in the sales rate charged to its
customers. Price hikes were caused primarily by increases in the cost of
spare and
repair parts that were used in the repair process. The future- year
estimates are not reasonable because they represent budget and planning
data that change over time, incorporate the same errors found in prior-
year data, and also have other problems. The budget
and planning data used to project the share of depot maintenance work to
be performed in the public and private sectors in the future are
estimates. At best, they provide only rough estimates of future funding
allocations; and these estimates change over time. As an illustration, our
comparison of the consistency of the 2003 reported data with that in DOD*s
50- 50 reports submitted in 2002 showed that congressional and DOD
decision makers were given quite a different view this year of the public-
private sector workload mix than that presented just last year. With so
many errors and frequent changes, the future- years data may be misleading
and not very useful to congressional and DOD decision makers, particularly
the further estimates are in the future. While we have identified these
shortcomings in the past, the problems continue and show no signs of
getting better.
DOD officials agreed that the planning and budget data available for
making future projections beyond the budget year are not very useful as
predictors of the balance of future workloads between the public and
private sectors. They also noted that when the services are within a few
percentage points of the 50- 50 ceiling, as they are now, the accuracy of
the conclusions drawn from the unreliable future projections does not
provide a very good basis for forecasting the future.
Despite prior improvements, opportunities continue to exist to make 50- 50
data a more complete and accurate representation of the balance of funding
for depot maintenance work assigned to the public and private sectors.
First, streamlining the 50- 50 report would offer an opportunity to focus
improvement efforts on the data where improvements are most likely to be
realized. Second, continued participation of the service audit agencies
should improve the quality of the 50- 50 data, particularly if the
audit support is timely to allow for corrections to be made before the 50-
50 Opportunities Exist to
Improve DOD Reporting
Page 14 GAO- 03- 1023 Depot Maintenance
report goes to the Congress. Finally, there are opportunities to improve
the data development process.
As previously discussed, the future- years data particularly that
estimated for the years beyond the current year and budget year do not
provide a reasonable estimate of the future balance of funding for depot
maintenance between the public and private sectors. Further, the data may
be so bad as to be misleading. Streamlining the data collected to provide
data for a shorter period of time could allow responsible officials to
focus more closely on the data that are more accurate. Additionally, if
the report date to the Congress were extended, the report could be based
on more actual costs and require fewer projections, improving the quality
of the reported data.
While we continue to believe that the service audit agencies could help
the military departments improve 50- 50 reporting, their future
involvement is uncertain. As we have reported in the past, auditor
involvement typically identified and corrected substantial errors in the
data before the 50- 50
reports went to the Congress. However, this year the Air Force Audit
Agency did not participate; while the Army did participate, some of the
errors they identified were not corrected in the reports to the Congress;
and the Navy audit was not done in time to result in changes to the 50- 50
data submitted to the Congress. A more meaningful review would be one that
was carried on when the data are being aggregated, with input to the
process in time to influence the reported data. DOD officials told us that
the audit services were not expecting to work on future 50- 50 efforts.
Audit services are reconsidering their roles because of recent changes to
government auditing standards regarding auditor independence when
performing both audit and nonaudit management assistance services to the
same client. 12 Air Force auditors have had a positive role in the 50- 50
process in past
years. Serving in an advisory capacity, they identified errors and
cognizant program officials made corrections before the Air Force input
was finalized and forwarded to the Office of the Secretary of Defense.
This year, however, Air Force auditors decided not to participate.
Officials said
12 See revised standards in U. S. General Accounting Office, Government
Auditing Standards: 2003 Revision, GAO- 03- 673G (Washington, D. C.: June
1, 2003). Streamlining the 50- 50 Report
Participation of Service Audit Agencies
Page 15 GAO- 03- 1023 Depot Maintenance
they were concerned about conflict of interest because auditors
participating in the management services review could also be involved in
audit service reviews of depot maintenance programs, processes, and funds.
While Army auditors participated in the process during this year*s cycle
and some of their work influenced changes in this year*s reported data,
some errors were not corrected because of time constraints imposed by the
50- 50 reporting schedule. Army officials said the Army Audit Agency would
not likely be involved in next year*s 50- 50 process primarily because of
concerns about independence. Navy auditors became involved in the process
this year after we recommended their participation in prior reports.
However, the Navy Audit Service work was not done in time to influence the
Navy*s 50- 50 report. According to audit service officials, their decision
to do an audit of the data after it was submitted rather than providing
advisory services to cognizant officials developing the Navy*s 5050 report
was influenced by the before- mentioned change in audit standards. Navy
program officials said that because a post- process audit did not improve
the 50- 50 data, the audit service would not be used next year.
We recognize that recent changes in government auditing standards have
been made to better address and specify independence issues arising when
an audit organization undertakes both audit and nonaudit services for the
same client. Nonetheless, the new auditing standards do not preclude
auditors from verifying the accuracy of data; providing other technical
assistance to the 50- 50 process; and accomplishing other audits of the
depot maintenance process, programs, and activities. Improved
planning, management involvement, and documentation of roles and
responsibilities may be required; but a process can be developed to ensure
independence will not be compromised. This has already been done so that
the service audit agencies can perform similar functions* evaluating
validity and consistency of data as it is being developed for subsequent
decision making* in support of the base realignment and closure process.
Incremental improvements in data development were noticeable in the first
several years of 50- 50 reporting as guidance was clarified and expanded.
However, as we reported last year, the quality of the 50- 50 data is not
continuing to improve as it did in earlier years of the reporting
requirement. 13 Overall quality and direction of DOD*s reporting seems to
13 GAO- 03- 16. Improving the Data Development Process
Page 16 GAO- 03- 1023 Depot Maintenance
have reached a plateau where further major improvements have been limited.
As we have previously discussed, one of the reasons this has occurred is
that 50- 50 guidance was not always distributed to the people who needed
it. Further, significant turnover of personnel responsible for
developing the data without providing sufficient time and training to
familiarize them regarding the 50- 50 requirement and process adversely
affected the quality of the 50- 50 data. In short, the priority afforded
this process by management at all levels in the department is not
sufficient to ensure that the data are as accurate as possible.
Continuing errors and omissions in the data for both the prior- and
futureyears reports indicate that each of the service components is closer
to exceeding the limitation on percentage of work permitted to be
performed by the private sector than DOD*s reporting would indicate. At
best, DOD*s data over time should be treated as providing a rough
approximation of the allocation of depot maintenance workloads between the
public and private sectors with some indication of trends. As such, the
information on actual prior- years allocations can be useful to the
Congress in its oversight role and to DOD officials in deciding support
strategies for new systems and in evaluating depot policies and practices.
On the other hand, because it provides an increasingly less reliable
estimate of projected allocations the further it gets from the current
year, the future- years report is not a very useful tool for informing the
Congress or DOD officials about likely future compliance. This occurs
because of the changing nature of projections, a combination of errors and
omissions, less emphasis by the services on the collection and validation
of future- years data, and the use of ever- changing budgetary estimates
to construct projections. These
budgetary estimates* and built- in assumptions* become more inexact and
more problematic the further into the future the projections are made due
to their very speculative and volatile natures. Indeed, tracking the 50-
50 projected data from year to year reveals wide swings in the total
amounts reported and in the relative allocations to the public and private
sectors. As a result, congressional and DOD decision makers were given
quite a different view this year of the public- private sector workload
mix than that presented just last year. We believe that these problems are
likely to continue and we question the cost- effectiveness of collecting
and aggregating data for 3 years past the current and budget years given
the problems identified with the estimates.
Furthermore, after the first several years of 50- 50 reporting, the
overall quality of DOD reporting in terms of accuracy and completeness has
not improved significantly. Indeed, the overall quality and direction seem
to Conclusions
Page 17 GAO- 03- 1023 Depot Maintenance
have reached a plateau where further major improvements to reporting may
be unachievable and where the environmental factors that complicate
reporting are not expected to change much. These complicating factors*
including a burdensome collection process, tight timeframes for collecting
data, high staff turnover, uneven management attention, changing
concepts about maintenance organization and delivery* present continued
challenges to the services in their ability to make significant
improvements to their collection, documentation, and reporting processes.
Notwithstanding these constraints, opportunities still exist to improve
the reporting, including continued use of the audit services and renewed
efforts to ensure guidance is appropriately disseminated and staff trained
in its use.
Given that we continue to see the same problems and complicating factors
in our current and past assessments of 50- 50 reports and considering that
the volatile nature of budget estimates is not likely to change, the
Congress should consider amending 10 U. S. C. 2466 to require only one
annual 50- 50 report. The single report would cover a 3- year period
(prior year, current year, and budget year) for which the data are
generally more reliable and the potential impacts more immediate. The
Congress should also consider extending the due date for the single report
from February 1 of each year to April 1; this would provide more time for
the military departments to collect and validate data and allow for the
incorporation of more actual cost data for the current year estimate.
To enhance data verification and validation, we recommend that the
Secretary of Defense require the secretaries of the military departments
to direct the use of service audit agencies, or an agreed- upon alternate
method, for third- party review and validation of 50- 50 data and to
ensure that auditor- identified errors in the data are rectified before
reports are submitted to the Congress.
To ensure consistent and complete reporting, we recommend that the
Secretary of Defense direct the secretaries of the military departments to
ensure that 50- 50 reporting guidance is appropriately disseminated to
reporting organizations and individuals and that staff are properly and
timely trained in the application of the guidance. Matter for
Congressional Consideration
Recommendations for Executive Action
Page 18 GAO- 03- 1023 Depot Maintenance
In written comments on a draft of this report from the Deputy Under
Secretary of Defense for Logistics and Materiel Readiness, DOD concurred
with the report*s recommendations. However, the department did not agree
with limited portions of our analyses regarding some selected workloads
and the resulting impacts on the percentage allocation of funds
between the public and private sectors. These workloads involve the Navy*s
nuclear carrier refueling and surface ship inactivation and the Air
Force*s adjustment for general and administrative expenses and double
counting of some reparable workloads. DOD*s written comments, and our
evaluation of these items in question, are reprinted in appendix III.
We are sending copies of this report to congressional committees; the
Secretary of Defense; the Secretaries of the Army, the Navy, and the Air
Force; and the Director, Office of Management and Budget. We will make
copies available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http:// www. gao. gov.
If you or your staff has questions regarding this report, please contact
me at (202) 512- 8412 or holman@ gao. gov or Julia Denman, Assistant
Director, at (202) 512- 4290 or denmanj@ gao. gov. Other major
contributors to this report were David Epstein, Bruce Fairbairn, Jane
Hunt, Larry Junek, Robert Malpass, Andy Marek, Marjorie Pratt, John
Strong, and Bobby Worrell.
Barry W. Holman Director, Defense Capabilities and Management Agency
Comments
and Our Evaluation
Appendix I: GAO Adjustments for Errors, Omissions, and Inconsistencies in
Military Departments 50- 50 Data for Fiscal Year 2002
Page 19 GAO- 03- 1023 Depot Maintenance
Our review of the data supporting the Department of Defense*s (DOD) prior-
years report identified errors, omissions, and inconsistencies that, if
corrected, would revise the total workloads and increase the privatesector
allocations for each of the military departments. Brief descriptions of
the larger and more extensive problems found follow the adjusted figures.
Our review of fiscal year 2002 data reported by the Army and of supporting
documentation for selected activities identified errors, omissions, and
inconsistencies that, if corrected, would result in significant
adjustments in the public and private sector percentages reported to the
Congress, as shown in table 2.
Table 2: GAO Changes to Army*s FY 2002 50- 50 Data
Dollars in millions Public work reported $1,372.6 51.5% Net adjustments
50.9 Public work adjusted $1,423.5 49.2%
Private work reported $1,238.7 46.5% Net adjustments 177.0 Private work
adjusted $1,415.7 49.0%
Private work exempted $51.4 1.9% Net adjustments 0 Exempted adjusted $51.4
1.8%
Source: GAO analysis of DOD data.
Errors we found included the following examples: Unreported depot- level
work associated with the Army*s ongoing
efforts to consolidate maintenance activities and craft a national
maintenance program. Our prior 50- 50 reports have documented continuing
problems and shortcomings in accurately and consistently reporting depot
maintenance accomplished by both public and private sector sources at
nondepot locations. Appendix I: GAO Adjustments for Errors, Omissions, and
Inconsistencies in Military
Departments 50- 50 Data for Fiscal Year 2002 Department of the Army
Appendix I: GAO Adjustments for Errors, Omissions, and Inconsistencies in
Military Departments 50- 50 Data for Fiscal Year 2002
Page 20 GAO- 03- 1023 Depot Maintenance
Unreported one- time repair actions. These are depot repairs that are
accomplished at non- depot locations following an organization*s request
and approval to do this work on a limited basis.
Unreported work by commands that did not receive Army reporting guidance
and other misreported and understated work by some commands that received
but misapplied the guidance.
Other adjustments included (1) errors identified by the Army Audit
Agency but not corrected in the data sent to the Office of the Secretary
of Defense (OSD) for inclusion in the prior- years 50- 50 report to the
Congress; and (2) depot support work identified in a contractor*s study of
the proliferation of depot work at non- depot locations.
Our review of fiscal year 2002 data reported by the Navy and Marine Corps
and of supporting documentation for selected activities identified errors,
omissions, and inconsistencies that, if corrected, would result in
significant adjustments in the public and private sector percentages
reported to the Congress, as shown table 3.
Table 3: GAO Changes to Navy*s and Marine Corps* FY 2002 50- 50 Data
Dollars in millions Public work reported $5,258.1 54.5% Net adjustments
(115.5) Public work adjusted $5,142.6 50.8%
Private work reported $4,110.4 42.6% Net adjustments 640.9 Private work
adjusted $4,751.3 46.9%
Private work exempted $273.1 2.8% Net adjustments (40.7) Exempted adjusted
$232.4 2.3%
Source: GAO analysis of DOD data. Note: Numbers in parentheses are
negative.
Department of the Navy
Appendix I: GAO Adjustments for Errors, Omissions, and Inconsistencies in
Military Departments 50- 50 Data for Fiscal Year 2002
Page 21 GAO- 03- 1023 Depot Maintenance
Errors we found included the following examples: Unreported depot work
on nuclear aircraft carriers. As reported last
year, Navy officials cite the definition in 10 U. S. C. 2460, which
excludes from depot maintenance the nuclear refueling of aircraft
carriers, in justifying why they do not report any of the depot work
accomplished at the same time as refueling. We believe that depot work
that is reportable elsewhere and separate from the refueling tasks should
be reported.
Inconsistent reporting of ship inactivations, which include depot tasks
for servicing and preserving equipment before they are placed in storage
or in an inactive status. Navy officials report for 50- 50 purposes the
nuclear ship inactivation work performed in the public sector but do not
report surface ship inactivation work performed by the private sector.
Underreporting of maintenance work by the command responsible for
acquiring and upgrading Marine Corps weapon systems. Failure to report has
several causes, including misunderstanding of what should be reported,
limited dissemination of the 50- 50 guidance, and inadequate management
and oversight of the collection process to identify and resolve reporting
deficiencies.
Incorrectly exempting some private- sector activities from reporting.
The Navy exempted more work than did the other departments; but we found
some in error, including partnering work accomplished at a contractor
facility and some work actually performed by government employees.
Partnership work qualifying for the exemption must be accomplished at
designated public depots by contractor employees.
Other errors included (1) work subcontracted by the public shipyards to
the private sector reported as public sector work and (2) misreporting by
the Marine Corps of work obligated in fiscal year 2001 rather than 2002.
Our review of fiscal year 2002 data reported by the Air Force and of
supporting documentation for selected activities identified errors,
omissions, and inconsistencies that, if corrected, would result in
significant adjustments in the public and private sector percentages
reported to the Congress, as shown in table 4. Department of the Air
Force
Appendix I: GAO Adjustments for Errors, Omissions, and Inconsistencies in
Military Departments 50- 50 Data for Fiscal Year 2002
Page 22 GAO- 03- 1023 Depot Maintenance
Table 4: GAO Changes to Air Force*s FY 2002 50- 50 Data Dollars in
millions Public work reported $4,467.0 54.1% Net adjustments (547.9)
Public work adjusted $3,919.1 51.4%
Private work reported $3,781.4 45.8% Net adjustments (82.5) Private work
adjusted $3,698.9 48.5%
Private work exempted $11.9 0.1%
Net adjustments 0 Exempted adjusted $11.9 0.2%
Source: GAO analysis of DOD data. Note: Numbers in parentheses are
negative.
Errors we found included the following examples: As in past years, Air
Force officials continue to adjust the 50- 50 data for
the salaries and overhead expenses of government employees administering
depot maintenance contracts funded through the working capital fund.
Officials subtract these amounts from the reported private sector amount*
where they are accounted for within the working capital fund* and add them
to the public sector funding for 50- 50 reporting. Consistent with the 50-
50 guidance that states that costs should be associated with the end
product, we think these costs should be treated as contracting expenses.
Our review of Air Force workloads determined that funding for some
component repairs was counted twice in 50- 50 data, once when the item was
repaired and the second time when it was installed into a weapon system or
major subsystem during its overhaul. This resulted in overstating both
public sector work and, by a lesser amount, private sector work.
Errors occurred in reporting depot costs on interim contractor support
and contractor logistics support contracts. Our review of selected
programs identified numerous errors resulting in net underreporting of
depot maintenance work performed by contractors. Many problems resulted
from questionable factors and assumptions used in developing
Appendix I: GAO Adjustments for Errors, Omissions, and Inconsistencies in
Military Departments 50- 50 Data for Fiscal Year 2002
Page 23 GAO- 03- 1023 Depot Maintenance
estimating methodologies. Because interim contractor support and
contractor logistics support contracts often cover more than just depot
maintenance (including lower levels of maintenance, supply operations, and
logistics program management), the OSD guidance allows for the use of
estimating methods. This can cause complications and introduce
subjectivity into the data collection process. Newer contract approaches
under acquisition reform efforts pose particularly challenging problems in
identifying the depot portion.
Examples of errors and questionable practices we found included not
updating a methodology when contract provisions and
circumstances change, resulting in not reporting additional maintenance
work from increased operational contingencies and new orders of materials;
assuming a straight percentage of total cost as depot work where data
exists to make a more exact accounting; not reporting maintenance on a
newly acquired modification; and not reporting software depot
maintenance.
Appendix II: Scope and Methodology Page 24 GAO- 03- 1023 Depot Maintenance
To determine whether the military departments met the 50- 50 requirement
in the prior- years report, we analyzed each service*s procedures and
internal management controls for collecting and reporting depot
maintenance information for purposes of responding to the section 2466
requirement. We reviewed supporting details (summary records, accounting
reports, budget submissions, and contract documents) at departmental
headquarters, major commands, and selected maintenance activities. We
compared processes to determine consistency and compliance with
legislative provisions, OSD guidance, and military service instructions.
We selected certain programs and maintenance activities for a more
detailed review. 1 We particularly examined reporting categories that DOD
personnel and we had identified as problem areas in current and past
reviews. These areas included interserviced workloads, 2 contractor
logistics support, warranties, software maintenance, and depot maintenance
at nondepot locations. We evaluated processes for collecting and
aggregating data to ensure accurate and complete reporting and to identify
errors, omissions, and inconsistencies. We coordinated our work, shared
information, and obtained results of the Army and Air Force service audit
agencies* data validation efforts.
To determine whether the future- year projections were based on accurate
data, valid assumptions, and existing plans and represented reasonable
estimates, we followed the same general approach and methodology used to
review the prior- years report. Although the future- years report is a
budget- based projection of obligations, the definitions, guidance,
organization, and processes used to report future data are much the same
as for the prior- years report of actual obligations. We discussed with
DOD officials the main differences between the two processes and the
manner in which the data were derived from budgets and planning
requirements and key assumptions made in the outyear data. For reviews of
both 50- 50 reports, we performed certain checks and tests,
including variance analyses, to judge the consistency of this information
with data from prior years and with the future- years budgeting and
1 We selected the programs reviewed based on size and importance, leads
obtained from internal auditors, and any previously identified areas of
concern. Given the nature of our sample, the results are not projectible
to the universe of depot maintenance activities. We also did not audit the
integrity of DOD*s financial systems and accounting data used to prepare
the 50- 50 reports.
2 Interserviced workload is maintenance that one military service performs
on equipment owned and funded by another service. Appendix II: Scope and
Methodology
Appendix II: Scope and Methodology Page 25 GAO- 03- 1023 Depot Maintenance
programming data used in DOD*s budget submissions and reports to the
Congress. For example, we compared each service*s 50- 50 data reported in
February and April 2003 for the period 2001 through 2006 with data
reported for these same years in the 50- 50 reports submitted in 2002. We
found repeated and significant changes, even though the estimates were
prepared only about 1 year apart. We used this analysis to further discuss
with officials and analyze reasons for changes in reported data and
percentage allocations between the 2002 and 2003 reports submitted to the
Congress. Variance analysis showed that congressional and DOD decision
makers were given quite a different view of the public- private sector
workload mix than that presented just last year.
Several factors concerning data validity and completeness were considered
in our methodology and approach to reviewing the prior- and future- years
reports. One key factor is the continuing deficiencies we have noted in
DOD*s financial systems and reports that preclude a clean opinion on its
financial statements and that result in limited accuracy of budget and
cost information. Another factor is that documenting depot maintenance
workload allocations between the public and private sectors is becoming
more complicated by the consolidation of maintenance activities and the
performance of depot- level maintenance at field locations. These
complicating factors (1) make it more difficult to identify work that
meets the statutory definition of depot maintenance,
(2) complicate workload reporting, and (3) result in underreporting of
depot maintenance for both the public and private sectors. In addition,
changes in business philosophy and approach can make analysis more
difficult. For example, many new contracts are performance- based and may
not discretely identify maintenance activities or account separately for
their costs. This can result in under- and overreporting of depot
maintenance work performed in the private sector. It also forces more
reliance on the contractor for providing information needed in 50- 50
reporting and may result in DOD officials having to use more assumptions
and estimating methodologies in lieu of contract data.
As part of our efforts to identify areas for improvement, we reviewed
DOD*s efforts to improve the accuracy and completeness of reports. We
discussed with officials managing and coordinating the reporting process
their efforts to address known problem areas and respond to
recommendations by the audit agencies and us. We compared this year*s sets
of instructions with last year*s to identify changes and additions. We
reviewed efforts to identify reporting sources and to distribute guidance
and taskings. We asked primary data collectors to provide their opinions
on how well efforts were managed and data verified and to identify *pain
Appendix II: Scope and Methodology Page 26 GAO- 03- 1023 Depot Maintenance
points* and ideas they had to improve reporting. We reviewed prior
recommendations and service audit agency findings to determine whether
known problem areas were being addressed and resolved. We applied this
knowledge to identify additional areas for improving the reporting process
and management controls. We interviewed officials, examined documents, and
obtained data at OSD, Army, Navy, Marine Corps, and Air Force headquarters
in the Washington, D. C., area; Army Materiel Command in Alexandria,
Virginia; Naval Sea
Systems Command in Washington, D. C.; Naval Air Systems Command in
Patuxent River, Maryland; Marine Corps Materiel Command in Albany,
Georgia; Air Force Materiel Command in Dayton, Ohio; Army Audit Agency in
Washington, D. C.; Naval Audit Service in Crystal City, Virginia; several
public depots managed by the military departments* materiel
commands; and selected operating bases. We conducted our review from
February to July 2003 in accordance with generally accepted government
auditing standards.
Appendix III: Comments from the Department of Defense
Page 27 GAO- 03- 1023 Depot Maintenance
Appendix III: Comments from the Department of Defense
Note: GAO*s comments supplementing those in the report text appear at the
end of this appendix.
Appendix III: Comments from the Department of Defense
Page 28 GAO- 03- 1023 Depot Maintenance
Report language is now on p. 18.
Report language is now on p. 18.
Appendix III: Comments from the Department of Defense
Page 29 GAO- 03- 1023 Depot Maintenance
See comment 2. Report language is
now on p. 21. See also p. 10.
Report language is now on p. 17.
See comment 1.
Appendix III: Comments from the Department of Defense
Page 30 GAO- 03- 1023 Depot Maintenance
Report language is now on p. 23. See also p. 11. Report language is now
on p. 23. See also p. 11. See comment 3.
See comment 4.
Appendix III: Comments from the Department of Defense
Page 31 GAO- 03- 1023 Depot Maintenance
The following are GAO*s comments on the Department of Defense*s letter
dated August 26, 2003.
1. The department did not agree with our adjustment for nuclear aircraft
carriers. The Navy interprets the 10 U. S. C. 2460 exclusion of nuclear
refueling of aircraft carriers from the definition of depot maintenance to
mean that no work associated with the refueling complex overhaul of
nuclear carriers is reportable for 50- 50 purposes. Navy officials also
said that non- nuclear depot repairs on carriers are not severable tasks
to be split out from contracts. We continue to believe that the costs of
depot repairs and tasks not directly associated with nuclear refueling
tasks during carrier overhauls should be reported. Many maintenance tasks
performed at the same time as the nuclear refueling are not related to the
refueling; and when these and similar tasks are performed during other
maintenance activities, the Navy does report them as depot maintenance. We
found that the funding for these tasks is clearly identifiable in the
contract financial records and could be counted just like other 50- 50
work. In our view, without some nexus between that work and refueling
work, it would be inconsistent with the plain language of section 2460 to
exempt that work simply because it was performed during a refueling
complex overhaul of nuclear carriers. We deleted the reference to
severable tasks in the body of the report, as our intent was not to
suggest that the Navy break out nonnuclear work from nuclear work onto
separate contracts or work orders, but rather that the funding for non-
nuclear refueling work accomplished on existing contracts be identified
and reported.
2. The department did not agree with our adjustment for surface ship
inactivations. DOD considers nuclear ship inactivation work to be a
relatively complex process that is equivalent to depot level maintenance,
but that conventional ship inactivation work performed by the private
sector is not as complex and is not equivalent to depotlevel maintenance.
In addition, the department*s written response indicated that surface ship
inactivation work accomplished by the public sector is also not reported
in the 50- 50 data. We believe that inactivation work should be reported
because the relevant title 10 statutes and OSD*s 50- 50 guidance do not
make this distinction of relative complexity and requires reporting of all
depot maintenance, regardless of location and source of funding. Further,
DOD*s Financial Management Regulation 7000. 14- R, vol. 6A, ch. 14 (which
prescribes depot maintenance reporting requirements) includes inactivation
as a depot maintenance activity. Although we did not review inactivation
GAO Comments
Appendix III: Comments from the Department of Defense
Page 32 GAO- 03- 1023 Depot Maintenance
work accomplished by public sector workers, it should also be reported if
it meets the definition of depot maintenance. 3. The Air Force did not
agree with our reversal of the 50- 50 reporting
adjustment it makes for the salaries and overhead expenses of government
employees administering depot maintenance contracts. The Air Force
believes that the costs for government personnel managing depot
maintenance contracts represent public sector costs; therefore, to report
them as contract would misrepresent the publicprivate sector percentage
allocations. However, OSD*s 50- 50 guidance requires that all the costs
associated with accomplishing a specific
depot workload* labor, material, parts, indirect, and overhead* should be
counted for 50- 50 purposes in the sector accomplishing the actual
maintenance. The guidance cites examples, such as counting the contract
maintenance on depot plant equipment as public sector costs
because the plant equipment is part of the costs incurred to perform
maintenance at the depot. Similarly, we think that contract administrative
costs should be counted as part of the costs incurred to accomplish the
work in the private sector. We note that the Air Force will stop making
this adjustment after this year when financing for the depot contracts is
moved from the working capital fund to direct appropriations. It remains
to be seen, however, how the Air Force will account for contract
administrative expenses in the future.
4. The department did not agree that counting the repair costs twice for
some components installed in higher level assemblies is inconsistent with
the statutory requirements of 10 U. S. C. 2466( e) and 10 U. S. C. 2460.
The Air Force believes that the original repair cost for a component and
its subsequent cost as material used in system or
subsystem overhaul are two distinct and separate transactions and that
both costs should be reported for 50- 50 purposes. We continue to believe
that counting some component repair costs twice when the components are
incorporated in a higher- level assembly distorts the 50- 50 reports and
the actual amount of work accomplished by both the public and private
sectors. In our view, there is no reason to conclude that the intent of
title 10 requires double counting component repairs and that a more
reasonable reading is that DOD can implement those provisions so as to
allow for adjustments in reporting to more accurately reflect the cost of
depot work. DOD adopted a similar approach in response to a recommendation
in our 2001 report. 1 In that
1 GAO- 02- 95.
Appendix III: Comments from the Department of Defense
Page 33 GAO- 03- 1023 Depot Maintenance
report, we found that unrealistic and outdated budget data were being
reported when there were other, more accurate information sources.
Accordingly, OSD revised its 50- 50 guidance to allow for revising
budgetary estimates to better reflect known and anticipated changes in
workloads, workforce, priorities, and performance execution rates.
This resulted in the Air Force reporting additional hundreds of millions
of dollars in projected depot work based on current workload estimates. A
similar approach could be used to eliminate the effects of double counting
reparables later used in higher- level assemblies.
Related GAO Products Page 34 GAO- 03- 1023 Depot Maintenance
Depot Maintenance: Key Unresolved Issues Affect the Army Depot System*s
Viability. GAO- 03- 682. Washington, D. C.: July 7, 2003.
Department of Defense: Status of Financial Management Weaknesses and
Progress Toward Reform. GAO- 03- 931T. Washington, D. C.: June 25, 2003.
Depot Maintenance: Change in Reporting Practices and Requirements Could
Enhance Congressional Oversight. GAO- 03- 16. Washington D. C.: October
18, 2002.
Depot Maintenance: Management Attention Needed to Further Improve Workload
Allocation Data. GAO- 02- 95. Washington, D. C.: November 9, 2001.
Defense Logistics: Actions Needed to Overcome Capability Gaps in the
Public Depot System. GAO- 02- 105. Washington, D. C.: October 12, 2001.
Defense Maintenance: Sustaining Readiness Support Capabilities Requires a
Comprehensive Plan. GAO- 01- 533T. Washington, D. C.: March 23, 2001.
Depot Maintenance: Key Financial Issues for Consolidations at Pearl Harbor
and Elsewhere Are Still Unresolved. GAO- 01- 19. Washington, D. C.:
January 22, 2001.
Depot Maintenance: Action Needed to Avoid Exceeding Ceiling on Contract
Workloads. GAO/ NSIAD- 00- 193. Washington, D. C.: August 24, 2000.
Depot Maintenance: Air Force Waiver to 10 U. S. C. 2466. GAO/ NSIAD- 00-
152R. Washington, D. C.: May 22, 2000.
Depot Maintenance: Air Force Faces Challenges in Managing to 50- 50
Ceiling. GAO/ T- NSIAD- 00- 112. Washington, D. C.: March 3, 2000.
Depot Maintenance: Future Year Estimates of Public and Private Workloads
Are Likely to Change. GAO/ NSIAD- 00- 69. Washington, D. C.: March 1,
2000.
Depot Maintenance: Army Report Provides Incomplete Assessment of Depot-
type Capabilities. GAO/ NSIAD- 00- 20. Washington, D. C.: October 15,
1999. Related GAO Products
Related GAO Products Page 35 GAO- 03- 1023 Depot Maintenance
Depot Maintenance: Status of the Navy*s Pearl Harbor Project. GAO/ NSIAD-
99- 199. Washington, D. C.: September 10, 1999.
Depot Maintenance: Workload Allocation Reporting Improved, but Lingering
Problems Remain. GAO/ NSIAD- 99- 154. Washington, D. C.: July 13, 1999.
Navy Ship Maintenance: Allocation of Ship Maintenance Work in the
Norfolk, Virginia, Area. GAO/ NSIAD- 99- 54. Washington, D. C.: February
24, 1999.
Defense Depot Maintenance: Public and Private Sector Workload Distribution
Reporting Can Be Further Improved. GAO/ NSIAD- 98- 175. Washington, D. C.:
July 23, 1998.
Defense Depot Maintenance: DOD Shifting More Workload for New Weapon
Systems to the Private Sector. GAO/ NSIAD- 98- 8. Washington, D. C.: March
31, 1998.
Defense Depot Maintenance: Information on Public and Private Sector
Workload Allocations. GAO/ NSIAD- 98- 41. Washington, D. C.: January 20,
1998.
Defense Depot Maintenance: Uncertainties and Challenges DOD Faces in
Restructuring Its Depot Maintenance Program. GAO/ T- NSIAD- 97- 112.
Washington, D. C.: May 1, 1997. Also GAO/ T- NSIAD- 97- 111. Washington,
D. C.: March 18, 1997.
Defense Depot Maintenance: DOD*s Policy Report Leaves Future Role of Depot
System Uncertain. GAO/ NSIAD- 96- 165. Washington, D. C.: May 21, 1996.
Defense Depot Maintenance: More Comprehensive and Consistent Workload Data
Needed for Decisionmakers. GAO/ NSIAD- 96- 166. Washington, D. C.: May 21,
1996.
Defense Depot Maintenance: Privatization and the Debate Over the Public-
Private Mix. GAO/ T- NSIAD- 96- 148. Washington, D. C.: April 17, 1996.
Also GAO/ T- NSIAD- 96- 146. Washington, D. C.: April 16, 1996.
Depot Maintenance: Issues in Allocating Workload Between the Public and
Private Sectors. GAO/ T- NSIAD- 94- 161. Washington, D. C.: April 12,
1994.
(350315)
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