Information Technology: Issues Affecting Cost Impact of Navy	 
Marine Corps Intranet Need to Be Resolved (31-OCT-02, GAO-03-33).
                                                                 
Under the Navy Marine Corps Intranet (NMCI) contract, the	 
Department of the Navy is obtaining information technology (IT)  
services that are to allow it to replace thousands of independent
networks, applications, hardware, and software with one secure	 
network. The National Defense Authorization Act of 2002 directed 
GAO to review the impact on IT costs of NMCI at Navy shipyards	 
and air depots, which are predominantly working capital funded	 
activities. Because this funding model requires these activities 
to recover all costs through charges to customers, GAO also	 
reviewed NMCI's impact on shipyard and depot rates.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-33						        
    ACCNO:   A05427						        
  TITLE:     Information Technology: Issues Affecting Cost Impact of  
Navy Marine Corps Intranet Need to Be Resolved			 
     DATE:   10/31/2002 
  SUBJECT:   Cost analysis					 
	     Information technology				 
	     Intranets						 
	     Military cost control				 

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GAO-03-33

                                       A

Report to Congressional Committees

October 2002 INFORMATION TECHNOLOGY Issues Affecting Cost Impact of Navy
Marine Corps Intranet Need to Be Resolved

GAO- 03- 33

Lett er

October 31, 2002 The Honorable Carl Levin Chairman The Honorable John
Warner Ranking Minority Member Committee on Armed Services United States
Senate

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

The National Defense Authorization Act for fiscal year 2002 (Public Law
107- 107) directed us to review the impact of the Navy Marine Corps
Intranet (NMCI) program on the information technology (IT) costs of Navy
working capital funded industrial facilities. As agreed with your offices,
our

work focused on naval shipyards and air depots that operate under the
Navy*s working capital fund. Because working capital funded facilities are
required to set rates to recover all costs through charges to customers,
our work also included NMCI*s impact on rates. NMCI is a multiyear program
to outsource the vast majority of Navy and

Marine Corps desktop, server, infrastructure, and communications asset and
service needs. Through the NMCI services contract, the Navy plans to
replace thousands of independent networks, applications, and other
hardware and software with one secure network for all Navy and Marine
Corps civilian and military personnel, including deployed forces. The Navy
expects that significant benefits will accrue from NMCI over the life of
the contract, including (1) an uninterrupted flow of information;

(2) improvements to interoperability, security, information assurance,
knowledge sharing, productivity, and operational performance; and (3)
reduced costs. The Navy awarded the NMCI contract in October 2000 to
Electronic Data Systems Corporation, for an estimated 412,000 to 416,000

workstations/ seats 1 and an estimated minimum value of $6. 9 billion over
8 years. On August 30 and September 6, 2002, we provided your offices a
briefing on the results of this review, including our scope and
methodology. This report transmits the briefing, which is reprinted as
appendix I.

In summary, NMCI has not to date measurably affected either IT costs at
shipyards and air depots or the rates they charge customers, because NMCI
implementation at these facilities has slipped from fiscal year 2002 to
the

latter part of fiscal year 2003. However, shipyard and depot officials
stated that NMCI transition activities during fiscal year 2002, such as
site readiness and preparation, have had a minor effect on costs. We could
not

quantify their impact on IT costs because these costs were not separately
identified. For fiscal year 2003, budget estimates show that NMCI will
make up about 2 percent of total shipyard and depot costs and about 38 and
31 percent of shipyard and depot IT costs, respectively. Shipyard and
depot officials told us that these NMCI cost estimates, which are a
component of overhead costs, will not affect the rates charged to
customers in fiscal year 2003 because they plan to reduce budgeted costs
in other overhead accounts, such as travel, training, and real property
maintenance, to offset budgeted NMCI costs. However, if activities are not
successful in implementing plans or in offsetting unexpected costs that
may arise during the year, they could operate at a loss and thus be
required to increase rates in subsequent fiscal years. The impact of NMCI
on IT costs and rates beyond fiscal year 2003 is

unclear because, as we reported in our briefing, several issues peculiar
to shipyards and depots were unresolved, such as how the costs of some
transition items would be funded and whether these costs would be included
in the rates. Moreover, NMCI implementation plans did not provide for
resolving them because responsibility for doing so had not been

clearly assigned and the Navy did not have an explicit issue
identification and resolution process. This exacerbates the uncertainty
surrounding NMCI*s future impact on shipyard and depot costs and rates,
and limits 1 Seat management generally refers to service provision
arrangements in which contractorowned

desktop and other computing hardware, software, and related services are
bundled and provided to a client (e. g., government agency) at a fixed
price per unit (or seat).

these activities* ability to plan and budget. DOD subsequently told us
these issues have been resolved, but did not provide supporting evidence
and did not specify its process for issue identification and resolution
and who is responsible for the process.

To ensure that existing and future issues are effectively and efficiently
resolved, and thereby allow the shipyards and depots to make more informed
planning and budgeting decisions, we recommend that the Secretary of
Defense have the Secretary of the Navy direct the NMCI program manager, in
collaboration with the Commanders of the Naval Sea Systems Command and the
Naval Air Systems Command, to develop and

execute an issue management process that resolves existing and future
issues and includes

 participation by Navy shipyard and air depot officials,  continuous
identification of relevant and material NMCI implementation issues,

 shipyard and air depot implementation plans that include strategies for
resolving these issues, and

 tracking of and reporting on issue resolution. In response to a draft of
this report, DOD provided what it termed *official oral comments* from the
Acting Deputy Assistant Secretary of Defense for Command, Control,
Communications, and Intelligence. In its comments DOD stated that it
agreed with the report. DOD also provided updated

information on the unresolved issues discussed in the briefing (app. I).
We have incorporated the information as appropriate. We are sending copies
of this report to the Chairmen and Ranking Minority Members of other
Senate and House committees and subcommittees that have jurisdiction and
oversight responsibilities for the Departments of Defense and the Navy. We
are also sending copies to the Secretary of Defense; the Secretary of the
Navy; the Commandant of the Marine Corps; the Assistant Secretary of
Defense for Command, Control, Communications, and Intelligence; and the
Director of the Office of Management and Budget. Copies will also be
available at no charge on our Web site at www. gao. gov.

Should you or your staff have any questions on matters discussed in this
report, please contact Randolph Hite at (202) 512- 3439 or Gregory Kutz at
(202) 512- 9095. They can also be reached by E- mail at hiter@ gao. gov
and kutzg@ gao. gov. Key contributors to this report were Barbara Collier,
William Hill, Greg Pugnetti, Ronnie Tobias, Carl Urie, and Robert
Williams, Jr.

Randolph C. Hite Director, Information Technology Architecture and Systems
Issues

Gregory D. Kutz Director, Financial Management and Assurance

Appendi Appendi xes x I

Briefing Presented to Subcommittees Impact of the Navy Marine Corps
Intranet ( NMCI) on Information Technology Costs at Naval Shipyards and
Air Depots

Briefing for Senate Armed Services Committee, Subcommittee on Readiness
and Management Support

and House Armed Services Committee, Subcommittee on Military Readiness

August 2002 1

Outline of Briefing

Introduction Objective Scope and Methodology Results in Brief Background
Results

Near- Term Impact on Costs Near- Term Impact on Rates Longer Term Impacts
on Costs and Rates Conclusions Recommendations

2

Introduction

The Navy- Marine Corps Intranet ( NMCI) is a departmentwide, multiyear
information technology ( IT) services contract to provide and manage the
vast majority of Navy and Marine Corps desktop, server, infrastructure,
and communications assets and services.

This type of contract is commonly referred to as seat management [ 1 ] ,
because it involves a number of distinct workstations or seats that will
be transitioned to a contractor ( or contractors) , who takes
responsibility for operating and maintaining the workstations, including
applications and supporting infrastructure, and for providing
administrative and operations support, such as help desk support.

[ 1 ] Seat management generally refers to service provision arrangements
in which contractor- - owned desktop and other computing hardware,
software, and related services are bundled and provided to a client ( e.
g. , government agency) at a fixed price per unit ( or seat) . See our
report, Desktop Outsourcing: Positive Results Reported, but Analyses Could
Be Strengthened, GAO- 02- 329 ( Mar. 23, 2002) , for additional
information on seat management contracts.

3

Introduction ( cont d)

NMCI is to replace thousands of independent networks, applications, and
other hardware and software with one secure network for all Navy and
Marine Corps civilian and military personnel, including deployed forces.
Expected benefits include ( 1) an uninterrupted flow of information; ( 2)
improvements to interoperability, security, information assurance,
knowledge sharing, productivity, and operational performance; and ( 3)
reduced costs.

The Navy awarded the NMCI contract in October 2000 to Electronic Data
Systems Corporation, for an estimated 412,000 to 416, 000 workstations/
seats and an estimated minimum value of $ 6.9 billion over 8 years.

4

Objective

In the National Defense Authorization Act for Fiscal Year 2002 ( Public
Law 107- 107) , the Congress directed us to review the impact that
participation in NMCI has on IT costs of Navy working capital funded
industrial facilities.

As agreed with the House and Senate Armed Services Committees, our work
focused on Navy shipyards and air depots that operate under the Navy s
working capital fund [ 1 ] . Because working capital funded facilities
must set rates to recover all costs through charges to customers, our work
also included NMCI s impact on rates.

[ 1 ] Three of the shipyards and all the air depots operate under the Navy
Working Capital Fund; ; the Pearl Harbor shipyard operates under an annual
appropriation. When we refer in this briefing to the shipyards, we do not
include Pearl Harbor.

5

Scope and Methodology

We obtained and analyzed information from the following sites: NMCI
Program Office, Arlington, Virginia [ 1 ] Navy Headquarters Budget Office,
Arlington, Virginia [ 1 ] Naval Sea Systems Command, Washington, D. C. [ 1
] Naval Air Systems Command, Patuxent, Maryland [ 1 ] Naval Air Depot,
Cherry Point, North Carolina [ 1 ] Naval Air Depot, Jacksonville, Florida
[ 1 ] Naval Air Depot, North Island, California Naval Shipyard,
Portsmouth, New Hampshire [ 1 ] Naval Shipyard, Norfolk, Virginia Naval
Shipyard, Puget Sound, Washington Office of the Assistant Secretary of
Defense for Command, Control,

Communications, and Intelligence, Arlington, Virginia [ 1 ] [ 1 ] Sites
visited.

. 6

Scope and Methodology ( cont' d)

We obtained and analyzed the following types of information: Budgeted
information on overhead costs, IT costs, and NMCI costs for

fiscal years 2000 through 2003. At the time of our review, Navy had not
prepared its fiscal year 2004 budget estimates.

Rates ( prices that the shipyards and air depots charge their customers)
and that portion of the rates that was budgeted to cover NMCI costs.

Information on NMCI- like services and unresolved NMCI implementation
issues and perspectives on these issues from officials at the shipyards
and air depots and the NMCI program office.

We did not independently verify the accuracy or completeness of certain
information provided by the Navy, such as budgeted costs and rates.

We performed our work from March through August 2002 in accordance with
generally accepted government auditing standards.

7

Results in Brief

To date, NMCI has not measurably affected either IT costs at shipyards and
air depots or the rates they charge customers, because NMCI has not been
implemented at these facilities and is not expected to be in place until
the latter part of fiscal year 2003. However, shipyard and depot officials
stated that NMCI transition activities during fiscal year 2002, such as
site readiness and preparation, have had an effect on costs that cannot be
quantified because these costs were not separately identified.

For fiscal year 2003, budget estimates show that NMCI will make up about 2
percent of total shipyard and depot costs and about 38 and 31 percent of
shipyard and depot IT costs, respectively. Shipyard and depot officials
told us that these NMCI cost estimates, which are a component of overhead
costs, will not affect the rates charged to customers in fiscal year 2003
because they plan to reduce budgeted costs in other overhead accounts,
such as travel, training, and real property maintenance, to offset
budgeted NMCI costs.

8

Results in Brief ( cont d)

The impact of NMCI on IT costs and rates beyond fiscal year 2003 is
unclear because several issues peculiar to shipyards and depots are
unresolved, such as how the costs of some transition items will be funded
and whether these costs will be included in the rates. Moreover, when they
will be resolved is uncertain, because NMCI implementation plans do not
specifically provide time frames or procedures for doing so. The absence
of an explicit issue management process exacerbates the uncertainty
surrounding NMCI s future impact on shipyard and depot costs and rates.

To reduce this uncertainty and allow the shipyards and depots to make more
informed planning and budgeting decisions, we are making recommendations
aimed at resolving these issues.

In its oral comments on a draft of this briefing, Defense officials agreed
with our findings, conclusions, and recommendations.

9

Background

NMCI is to replace thousands of independent networks, applications, and
other hardware and software with one secure network for all Navy and
Marine Corps civilian and military personnel, including deployed forces.
Expected benefits include

uninterrupted flow of information; improvements to interoperability,
security, information assurance,

knowledge sharing, productivity, and operational performance; and reduced
costs.

10

Background ( cont d) NMCI contract

NMCI is being accomplished through a multiyear IT services contract that
has a base period of 5 years plus a 3- year option period [ 1 ] . The
contract is a firm fixed- price, indefinite- delivery/ indefinite-
quantity contract with performance incentives. Awarded on October 6, 2000,
the contract covers

delivery and maintenance of workstations and desktop applications;
transmission of voice, video, and data; and infrastructure improvements.

[ 1 ] The contract was awarded to Electronic Data Systems ( ( EDS)
Corporation. 11

Background ( cont d) Roles and responsibilities

Several organizations share responsibility for managing NMCI.

Organization NMCI roles and responsibilities Office of the Assistant
Secretary Provides guidance, assesses compliance with the Clinger- of
Defense for Command,

Cohen Act, and oversees program management activities Control,
Communications and

related to major milestone approvals for NMCI; is the Intelligence ( OASD
C3I) milestone decision authority for the program. Navy Chief Information
Officer Coordinates NMCI policy, planning, and interoperability

issues. NMCI program office Manages the NMCI contract; creates and manages

implementation of a Navywide NMCI execution plan. Parent commands [ 1 ]
Manage implementation of NMCI at their facilities. Shipyards and air
depots Carry out NMCI implementation, receive respective contracted
services, and respond to customer satisfaction questionnaire

related to services provided. [ 1 ] The parent command for the Naval
shipyards is the Naval Sea Systems Command, , and the parent command for
Navy air depots is the Naval Air Systems Command.

12

Background ( cont d) Legislative requirements

Public Law 106- 398 ( 2001 National Defense Authorization Act) and Public
Law 107- 107 ( 2002 National Defense Authorization Act) mandated that NMCI
be implemented in phases and that NMCI program management controls comply
with the Clinger- Cohen Act and DOD acquisition regulations.

Key features of implementation phases

Phase I: Beginning with contract award in October 2000, phase I covered
about

15 percent or about 62,000 of the expected total of 412,000 to 416,000
seats.

This phase excluded shipyards and air depots. 13

Background ( cont d)

Phase II: In phase II, tests and evaluations were required to demonstrate
the

operational effectiveness of the network ( whether the equipment,
operating software, and applications software performed as intended) ;
this phase did not require evaluations to determine whether expected costs
and benefits were being realized.

On the basis of April 2002 test and evaluation results, which the OASD C3I
approved in May 2002, the Navy was allowed to order an additional 100,000
seats and proceed with the remainder of the program, subject to key
improvements to management controls and satisfaction of specific testing
requirements ( e. g. , an updated test and evaluation plan, a plan and
schedule for migrating legacy applications to NMCI, updates to the
business case, and DOD senior- level review of program results) .

Within phase II are 20,301 seats designated for shipyards and air depots
that operate under the Navy Working Capital Fund.

14

Background ( cont d) Shipyards and air depots

Navy shipyards and air depots overhaul and repair ships, planes, and
engines and provide engineering, technical, and professional services on
maintenance and logistic problems to the Navy, DOD, and other federal
government customers. The locations of the Navy s three shipyards and
three air depots are shown on the following slide.

The shipyards and depots that are under the Navy Working Capital Fund
operate similarly to commercial entities. That is, they do not receive an
annual appropriation, but receive their funding from customer orders, for
which they charge rates that must capture all costs of operations.

Rates charged customers in a given year are based on estimates of direct,
indirect ( e. g. , materials used for more than one project or purpose) ,
and overhead ( e. g. , IT support) costs for that year. If actual costs
exceed estimates, the shipyards and depots would operate at a loss for
that year and thus be required to increase rates in the subsequent year(
s) .

15

Background Shipyard and depot locations

Naval Shipyard, Puget Sound, Washington

Naval Shipyard, Portsmouth, New Hampshire

Naval Shipyard, Norfolk, Virginia

Naval Air Depot, Cherry Point, North Carolina

Naval Air Depot, North Island,

Naval Air Depot, California

Jacksonville, Florida 16

Background ( cont d) NMCI status/ plans

Navywide: As of July 31, 2002, the Navy reports that EDS had assumed
responsibility for

operating and maintaining 57,674 seats, and 19,536 of these seats had
reached cutover ( ( the point at which the NMCI operating environment is
to function in full support of contracted service level agreements [ 1 ] )
.

Shipyards and air depots: A total of 20,301 NMCI workstations are planned
for the three shipyards and

three air depots that operate using Navy working capital funds 12,336
workstations are planned for shipyards, and 7,965 workstations are planned
for depots, with cutover projected during June and July of 2003,
respectively [ 2 ] . ( See table on next slide for more detailed breakout.
) [ 1 ] Service level agreements define the agency s expectations ( e. g.
, requirements in terms of system performance objectives and customer
satisfaction, often defined as specific agency mission outcome goals) and
are used to track and measure a contractor s performance.

[ 2 ] According to shipyard and depot officials, , the number of
workstations actually implemented may be different from what the table on
the next slide indicates as they further review their workstation fiscal
year 2003 requirements.

17

Background ( cont d) NMCI status/ plans ( cont d) Shipyards Seats Start
cutover Portsmouth 2, 526 June 2003 Norfolk 4, 610 June 2003 Puget Sound
5, 200 June 2003

Subtotal 12, 336

Air depots Cherry Point 2, 630 July 2003 Jacksonville 2, 935 July 2003
North Island 2, 400 July 2003

Subtotal 7, 965 Total 20, 301 18

Results: Near- Term Impact on Costs No measurable impact to date

NMCI is not scheduled to be implemented at the shipyards and air depots
until the latter part of fiscal year 2003. Thus, through fiscal year 2002,
NMCI has had no quantifiable impact on IT costs or the rates that these
activities charged customers.

Unquantifiable impact may have occurred

According to shipyard and depot officials, delays in implementing NMCI
have resulted in shipyards and air depots performing activities multiple
times, resulting in increases in IT overhead costs in fiscal years 2001
and 2002.

19

Results: Near- Term Impact on Costs ( cont d)

Examples of activities that were performed multiple times include
temporarily extending existing IT services contracts that NMCI is to

eventually supplant, revising the numbers and types of NMCI workstations
to be ordered in

response to contractor updates of hardware and software available since
contract award,

identifying legacy hardware and software applications that NMCI cannot
currently support, and

inventorying existing IT assets in response to multiple program office
data calls, each governed by different rules and formats.

. 20

Results: Near- Term Impact on Costs ( cont d)

Our analysis of available documentation, such as the NMCI demand models
for the shipyards and depots, budget reports, NMCI- related planning
documents, and project team meetings, confirmed that these activities have
been performed. However, because the shipyards and depots have not
separately accounted for these costs, we could not quantify their impact
on IT costs. Shipyard and depot officials stated that these costs were
minimal.

21

Results: Near- Term Impact on Costs ( cont d) Estimated impact on 2003
costs

The following charts show budget estimates developed by the shipyards and
air depots for fiscal years 2000 through 2003, assuming NMCI
implementation in fiscal year 2002. These estimates can be viewed as
indicators of NMCI s quantifiable cost impact, with one key qualification:

Qualification: The shipyards and depots respective parent commands decided
that NMCI s implementation at shipyards and depots in fiscal year 2002 and
2003 should not impact the rates charged customers during this time. These
budget estimates do not reflect the adjustments that would have to be made
to other overhead accounts, such as other IT costs, indirect labor, real
property maintenance, travel, and training, to offset the costs associated
with NMCI and thereby not affect rates.

Based on the estimates and assuming that NMCI is implemented in fiscal
year 2003, NMCI does not represent a significant portion of estimated
total shipyard and depot costs ( 1.8 percent for shipyards and 1.6 percent
for depots) , but it does represent 38 percent and 31 percent of shipyard
and depot IT costs, respectively [ 1 ] .

[ 1 ] The costs and resultant percentages shown on all the charts in this
briefing are rounded amounts. .

22

Results: Near- Term Impact on Costs ( cont d)

Cost estimates for shipyards ( millions of dollars)

Fiscal

$ 1, 888 ( 100% )

Total

year

$ 747 ( 40% )

Overhead 2000

IT $ 68

( 4% ) $ 0

( 0% ) NMCI

$ 1, 996 ( 100% )

2001 $ 773

( 39% ) $ 69

( 3% ) $ 0

( 0% ) $ 2, 202

( 100% ) $ 823

( 37% ) 2002

$ 73 ( 3% )

$ 7 ( 0. 3% )

$ 2, 299 ( 100% )

$ 861 ( 37% )

2003 $ 106

( 5% ) $ 40

( 1. 8% )

Note: Fiscal year 2002 estimates were developed in fiscal year 2001,
assuming implementation in fiscal year 2002. Fiscal year 2003 estimates
were developed in fiscal year 2002, assuming implementation in fiscal year
2003.

Source: GAO analysis based on Navy data. 23

Results: Near- Term Impact on Costs ( cont d)

NMCI and IT cost estimates for shipyards ( millions of dollars)

$ 0 $ 20 $ 40 $ 60 $ 80 $ 100 $ 120

Fiscal year

$ 68 ( 100% )

2000 $ 0

( 0% ) $ 69

( 100% ) 2001

$ 0 ( 0% )

IT NMCI

$ 73 ( 100% )

2002 $ 7

( 9% ) $ 106

( 100% ) 2003

$ 40 ( 38% )

Note: Fiscal year 2002 estimates were developed in fiscal year 2001,
assuming implementation in fiscal year 2002. Fiscal year 2003 estimates
were developed in fiscal year 2002, assuming implementation in fiscal year
2003.

Source: GAO analysis based on Navy data. 24

Results: Near- Term Impact on Costs ( cont d)

Cost estimates for air depots ( millions of dollars)

Fiscal

$ 1, 607 ( 100% )

Total

year

( 36% ) 2000

$ 571 Overhead

$ 57 ( 4% )

IT $ 0

( 0% ) NMCI

$ 1, 691 ( 100% )

2001 $ 582

( 34% ) $ 77

( 5% ) $ 0

( 0% ) $ 1, 820

( 100% ) 2002

$ 620 ( 34% )

$ 94 ( 5% )

$ 28 ( 1. 6% )

$ 1, 911 ( 100% )

2003 $ 626

( 33% ) $ 102

( 5% ) $ 32

( 1. 6% )

Note: Fiscal year 2002 estimates were developed in fiscal year 2001,
assuming implementation in fiscal year 2002. Fiscal year 2003 estimates
were developed in fiscal year 2002, assuming implementation in fiscal year
2003.

Source: GAO analysis based on Navy data. 25

Results: Near- Term Impact on Costs ( cont d)

NMCI and IT cost estimates for air depots ( millions of dollars)

$ 0 $ 20 $ 40 $ 60 $ 80 $ 100 $ 120

Fiscal year

$ 57 ( 100% )

2000 $ 0

( 0% ) $ 77

( 100% ) 2001

$ 0 ( 0% )

IT NMCI $ 94

( 100% ) 2002

$ 28 ( 30% )

$ 102 ( 100% )

2003 $ 32

( 31% )

Note: Fiscal year 2002 estimates were developed in fiscal year 2001,
assuming implementation in fiscal year 2002. Fiscal year 2003 estimates
were developed in fiscal year 2002, assuming implementation in fiscal year
2003.

Source: GAO analysis based on Navy data. 26

Results: Near- Term Impact on Rates NCMI costs have not affected the total
rate charged customers, but they have affected the content of the overhead
portion of the rate.

Both shipyards and air depots included estimated NMCI costs in the rates
they charge customers in fiscal years 2002 and 2003. However, as
previously mentioned, their respective parent commands directed that any
increase in budgeted IT costs caused by NMCI be offset by reductions in
other budgeted overhead accounts.

The following two charts show the allocation of budgeted costs within the
hourly rate structure for fiscal years 2000 to 2003. The budgeted costs of
the overhead accounts for fiscal years 2002 and 2003 were adjusted for
NMCI cost impact ( i. e. , NMCI costs are shown with the planned offset
adjustments in other overhead accounts) . Note: Activities have plans for
reducing actual overhead costs during fiscal year 2003. If activities are
not successful in implementing plans or in offsetting unexpected costs
that may arise during the year, they could operate at a loss and thus be
required to increase rates in subsequent fiscal years.

27

Results: Near- Term Impact on Rates ( cont d)

Hourly rate data for shipyards

$ 0 $ 10 $ 20 $ 30 $ 40 $ 50 $ 60 $ 70 $ 80

Fiscal

( 100% )

year

$ 70. 22 2000

$ 36. 95 ( 53% )

$ 3. 36 ( 4. 8% )

$ 0. 00 ( 0% )

Total hourly rate $ 70. 92

Overhead portion 2001

$ 36. 68 ( 52% )

( 100% ) IT portion

$ 3. 40 ( 4. 8% )

NMCI portion $ 0. 00

( 0% ) $ 72. 01

( 100% ) 2002

$ 36. 27 ( 50% )

$ 3. 18 ( 4. 4% )

$ 0. 34 ( 0. 5% )

$ 74. 08 ( 100% )

2003 $ 36. 72

( 49% ) $ 4. 71

( 6. 4% ) $ 1. 84

( 2. 5% )

Note: Fiscal year 2002 estimates were developed in fiscal year 2001,
assuming implementation in fiscal year 2002. Fiscal year 2003 estimates
were developed in fiscal year 2002, assuming implementation in fiscal year
2003.

Source: GAO analysis based on Navy data. 28

Results: Near- Term Impact on Rates ( cont d)

Hourly rate data for air depots

$ 0 $ 20 $ 40 $ 60 $ 80 $ 100 $ 120 $ 140 $ 160 $ 180

Fiscal

$ 128. 49 ( 100% )

Total hourly rate year

$ 45. 64 ( 36% )

Overhead portion 2000

$ 4. 59 ( 3. 6% )

$ 0. 00 ( 0% )

IT portion NMCI portion

$ 146. 92 ( 100% )

2001 $ 50. 52

( 34% ) $ 6. 72

( 4. 6% ) $ 0. 00

( 0% ) $ 151. 61

( 100% ) 2002

$ 51. 63 ( 33% )

$ 7. 82 ( 5. 2% )

$ 2. 37 ( 1. 6% )

$ 164. 98 ( 100% )

2003 $ 54. 04

( 33% ) $ 8. 81

( 5. 3% ) $ 2. 72

( 1. 6% )

Note: Fiscal year 2002 estimates were developed in fiscal year 2001,
assuming implementation in fiscal year 2002. Fiscal year 2003 estimates
were developed in fiscal year 2002, assuming implementation in fiscal year
2003.

Source: GAO analysis based on Navy data. 29

Results: Longer Term Impacts on Costs and Rates Navy is not taking steps
to resolve uncertainties surrounding NMCI implementation at shipyards and
air depots.

Working capital fund management policy advocates taking adequate steps to
avoid disruptive cost fluctuations and unforeseen cost changes [ 1 ] .
This policy recognizes that such steps allow for more accurate planning
and budgeting and more effective use of resources. One way to implement
this policy is to have a process for identifying those issues that could
contribute to cost fluctuations and changes and systematically plan for
resolving them.

[ 1 ] DOD Financial Management Regulation 7000.14R, , Chapter 50, Defense
Working Capital Fund General Policies and Requirements, page 50- 2,
paragraph h.

30

Results: Longer Term Impacts on Costs and Rates

Beyond fiscal year 2003, shipyards and depots face potential cost
fluctuations and changes because important issues concerning NMCI s
implementation have not been resolved.

The NMCI program office has designated the time frame for implementing
NMCI at shipyards and air depots as targeted and proposed, and program
officials characterized the time frame as tentative. Further, shipyard and
depot officials told us that they expect further delays in NMCI s
implementation.

31

Results: Longer Term Impacts on Costs and Rates ( cont d)

The NMCI program office has not decided who will pay for unique
requirements of shipyard and depot operations that may require changes to
the NMCI contract. Such requirements include

arranging for workstations to accompany personnel as they change locations
( e. g. , as ships move from dry dock to pier) ;

securing unclassified naval nuclear propulsion information; and
establishing and maintaining connections between NMCI and

existing networks ( including classified networks) and certain legacy
applications and databases.

32

Results: Longer Term Impacts on Costs and Rates ( cont d)

The NMCI program office has not decided who will pay newly identified and
increased NMCI transition costs, such as the increased costs associated
with short- term contract actions to maintain existing services until NMCI
is implemented.

33

Results: Longer Term Impacts on Costs and Rates ( cont d)

According to the NMCI program officials, these issues have not been
resolved but are being addressed in coordination with the Navy commands as
they implement NMCI.

Additionally, program officials said they have undertaken other actions to
mitigate NMCI s impact such as

using appropriated funds to pay for certain NMCI contract costs, such as
fees awarded the contractor for meeting performance incentives, facility
support costs ( e. g. , equipment to facilitate transition to NMCI) , and
physical space costs;

waiving the requirement for shipyards and depots to expense prior
investments, such as recently purchased computer equipment and other
capital assets that will be transferred to the contractor when NMCI is
implemented [ 1 ] ;

working with the contractor to develop lower cost workstation ( i. e. ,
seat) alternatives; and

not distributing network connection and telecommunications costs to
activities like shipyards and air depots. [ 1 ] We did not determine if
the planned approach for accomplishing this was consistent with relevant
accounting principles.

34

Results: Longer Term Impacts on Costs and Rates ( cont d)

These plans do not provide shipyard- and depot- specific actions and time
frames for addressing each of the issues raised by shipyards and depots.
Moreover, issues facing shipyards and depots in implementing NMCI are not
governed by an explicit Navywide process that would identify, document,
and track resolution of these issues. According to shipyard and depot
officials, the lack of a process is due to uncertainty surrounding roles
and responsibilities for resolving these issues.

35

Conclusions

NMCI has yet to impact costs at shipyards and air depots or the rates they
charge customers in any quantifiable way. Looking toward fiscal year 2003,
NMCI costs will likely have a minor impact on the allocation of shipyard
and depot overhead costs and the rates each activity charges, but total
costs and hourly rates should not change as a result of NMCI, because
these activities parent commands have decided to offset NMCI costs with
reductions in other overhead costs [ 1 ] .

Looking beyond fiscal year 2003, NMCI s impact on costs and rates is less
clear, because important implementation issues have not been resolved, and
the Navy is not systematically providing for their resolution. Such
uncertainty surrounding NMCI, and thus the costs that shipyards and depots
will incur, hampers these activities ability to effectively and
efficiently plan, budget, and use resources. Thus, it is important that
the Navy systematically plan for and resolve these issues. [ 1 ]
Activities have plans for reducing actual overhead costs during the year
of execution fiscal year 2003. If they are not successful in implementing
these plans or in offsetting unexpected costs that may arise during the
year, they could operate at a loss and thus be required to increase rates
in subsequent fiscal years.

36

Recommendations for Executive Action

To assist Navy shipyards and air depots in preparing for NMCI s impact on
their respective costs and rates, we recommend that the Secretary of
Defense have the Secretary of the Navy direct the NMCI program manager, in
collaboration with the Commanders of the Naval Sea Systems Command and the
Naval Air Systems Command, to systematically and expeditiously resolve
NMCI implementation issues that affect the ability of shipyards and depots
to plan and budget. In particular, we recommend that the NMCI program
manager work with these commanders to develop and execute an issue
management process that resolves each of the issues discussed in this
briefing and includes

participation by Navy shipyard and air depot officials, continuous
identification of relevant and material NMCI

implementation issues, shipyard and air depot implementation plans that
include strategies for

resolving these issues, and tracking of and reporting on issue resolution.

37

Agency Comments and Our Evaluation

In the department s oral comments on a draft of this briefing, officials
from the OASD( C3I) , Office of the Navy Chief Information Officer, Naval
Air Systems Command, and Naval Sea Systems Command agreed with our
findings, conclusions, and recommendations. They also provided updated and
clarifying information, which we have incorporated as appropriate in the
briefing.

In addition to obtaining the department s oral comments on a draft of this
briefing, we shared the contents of the briefing with NMCI program
officials, including the deputy program manager, when we completed our
audit work. These officials also agreed with our findings and conclusions,
but stated that our recommendations should be directed to the shipyard and
depot parent commands, rather than the NMCI program office. According to
the officials, the parent commands, along with the Comptroller of the
Navy, have all the information and authority necessary to resolve the
issues discussed in this briefing.

38

Agency Comments and Our Evaluation

The difference of opinion within the department on who the recommendations
should be directed to points to the need for the various NMCI players to
work collaboratively to resolve key issues and for one entity to take the
lead in doing so, as noted in our recommendations. Given the program
office s defined role under the NMCI governance structure, as well as the
fact that resolving some of these issues requires interpretations of NMCI
contract provisions and interactions with the contractor ( which only the
program office is positioned to do) , our recommendations provide for the
program office, rather than the parent commands, to take this lead role.

39

(310247)

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GAO United States General Accounting Office

To date, NMCI has not measurably affected either IT costs at shipyards and
air depots or the rates they charge customers. This is because the
network, while originally planned to be in place at these activities in
fiscal year 2002, is now not to be implemented at them until the latter
part of fiscal year 2003.

For fiscal year 2003, budget estimates show that NMCI will represent about
2 percent of total costs at shipyards and air depots. As a percentage of
IT costs, NMCI costs will be more significant: about 38 percent at
shipyards and 31 percent at air depots. According to shipyard and depot
officials, estimated NMCI costs (which are a component of overhead costs)
will not affect the rates charged to customers in fiscal year 2003 because
they will be offset by cost reductions in other overhead areas, such as
travel, training, and real property maintenance.

Beyond fiscal year 2003, the impact of NMCI on IT costs and rates is
unclear, because several issues peculiar to shipyards and air depots are
unresolved, such as how the costs of some transition items will be funded
and whether these costs will be included in the rates. Also uncertain is
when these issues will be resolved, because no specific plans for doing so
exist, and no explicit issue management process has been established. As a
result, the shipyards* and depots* ability to effectively plan and budget
is being impaired.

Impact of NMCI on IT Costs at Shipyards and Air Depots No measurable

impact Estimated to

be between 31 and 38 percent of IT

costs Unclear 2002 2003 2004 2005 Source: GAO analysis based on data
provided by the Department of the Navy. INFORMATION TECHNOLOGY

Issues Affecting Cost Impact of Navy Marine Corps Intranet Need to Be
Resolved

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 33. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Randolph Hite, (202) 512- 3439 (hiter@ gao. gov), or
Gregory Kutz, (202) 512- 9095 (kutzg@ gao. gov). Highlights of GAO- 03-
33, a report to the

Committee on Armed Services, United States Senate, and the Committee on
Armed Services, House of Representatives

October 2002

Under the Navy Marine Corps Intranet (NMCI) contract, the Department of
the Navy is obtaining information technology (IT) services that are to
allow it to replace thousands of independent networks, applications,
hardware, and software with one secure network. The National Defense
Authorization Act of 2002 directed GAO to review the impact on IT costs of
NMCI at Navy shipyards and air depots, which are predominantly working
capital funded activities. Because this funding model requires these
activities to recover all costs through charges to customers, GAO also
reviewed NMCI*s impact on shipyard and depot rates.

GAO is recommending that the Navy establish a departmentwide means for
systematically capturing and resolving NMCI implementation issues that
affect the ability of shipyards and air depots to plan and budget.

The Department of Defense concurred with the report.

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