    Military Housing: Better Reporting Needed on the Status of the
    Privatization Program and the Costs of Its Consultants
    (09-OCT-03, GAO-04-111).

    In 2000, Congress required the Department of Defense (DOD) to
    report quarterly on the services' expenditures for consultants in
    support of the military family housing privatization programs.
    GAO was asked to review the costs of the consultants DOD used to
    support privatizing housing for servicemembers and their
    families. This report discusses (1) the number of family housing
    units the services have privatized, particularly newly
    constructed or renovated units, and project to be privatized by
    fiscal year 2005; (2) the portion of privatization support costs
    used for consultants; (3) the services' consistency in the
    definition for privatization support and consultant costs; and
    (4) factors that limit an evaluation of how consultant fees for
    the military housing initiative compare among the services.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-04-111
        ACCNO:   A08681
      TITLE:     Military Housing: Better Reporting Needed on the Status
    of the Privatization Program and the Costs of Its Consultants
         DATE:   10/09/2003
      SUBJECT:   Budget outlays
    	     Consultants
    	     Contract costs
    	     Cost analysis
    	     Housing construction
    	     Housing programs
    	     Housing repairs
    	     Military dependents
    	     Military housing
    	     Military personnel
    	     Privatization
    	     Reporting requirements
    	     DOD Military Housing Privatization
    	     Initiative

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    GAO-04-111

    United States General Accounting Office

    GAO 	Report to the Subcommittee on Military Construction, Committee on
    Appropriations, House of Representatives

    October 2003

    MILITARY HOUSING

    Better Reporting Needed on the Status of the Privatization Program and the Costs
                                   of Its Consultants

    GAO-04-111

    Highlights of GAO-04-111, a report to the Subcommittee on Military
    Construction, Committee on Appropriations, House of Representatives

    In 2000, Congress required the Department of Defense (DOD) to report
    quarterly on the services' expenditures for consultants in support of the
    military family housing privatization programs. GAO was asked to review
    the costs of the consultants DOD used to support privatizing housing for
    servicemembers and their families. This report discusses (1) the number of
    family housing units the services have privatized, particularly newly
    constructed or renovated units, and project to be privatized by fiscal
    year 2005; (2) the portion of privatization support costs used for
    consultants; (3) the services' consistency in the definition for
    privatization support and consultant costs; and (4) factors that limit an
    evaluation of how consultant fees for the military housing initiative
    compare among the services.

    GAO is recommending that DOD track the number of privatized units
    renovated and newly constructed and report this data to Congress. GAO is
    also recommending that DOD define housing privatization program support
    and consultant costs.

    In written comments on a draft of this report, DOD agreed with the
    recommendations.

    www.gao.gov/cgi-bin/getrpt?GAO-04-111.

    To view the full product, including the scope and methodology, click on
    the link above. For more information, contact Barry W. Holman at (202)
    512-8412 or holmanb@gao.gov.

    October 2003

    MILITARY HOUSING

    Better Reporting Needed on the Status of the Privatization Program and the Costs
    of Its Consultants

    Although DOD reported to Congress that the services plan to privatize most
    of their family housing by fiscal year 2005, DOD's reports do not provide
    decision makers with the number of privatized units that have been
    renovated or newly constructed. As of March 2003, the services had
    contracts privatizing about 28,000 family housing units and planned to
    privatize 140,000 units by fiscal year 2005. As a result of this
    privatization, about 7,600 units had been constructed or renovated. It can
    take developers several years to renovate existing housing or construct
    new units after they are privatized. As the program progresses, it will
    become increasingly important to have complete data on which to determine
    how quickly the privatization program is creating adequate family housing.

    Costs for consultants are less than half of the services' privatization
    support costs. The services anticipate many privatization support and
    consultant costs to peak in fiscal year 2004 when the need for consultants
    diminishes once most privatization contracts are signed. Remaining support
    costs will then focus increasingly on managing the portfolio of the
    privatized housing.

    The services are not consistent in their definitions for privatization
    support and consultant costs. The differences in the services' definitions
    for privatization support costs result in inconsistent budgeting for these
    costs. Also, the differences in the services' definitions for consultant
    costs result in inconsistent reporting of consultant costs in the
    department's quarterly housing privatization report to Congress. Further,
    the Office of the Secretary of Defense does not report its own program
    consultant costs in the quarterly report.

    Several factors, such as differences in labor categories, hours, and
    skills mix that each consulting firm can use to accomplish work, limited
    our evaluation of how consultant fees for the military housing initiative
    compare among the services. Even though these factors hinder a comparative
    evaluation of consultant fees, service officials told us they believe that
    they have contracted with firms that provide the best value to the
    government based on their needs and that the consultants' fees are fair
    and reasonable.

    Construction of Privatized Housing for Servicemembers and Their Families
    at Fort Meade, Maryland

    Contents

    Letter

    Results in Brief
    Background
    DOD Plans to Privatize Most Family Housing by 2005, but Its

    Reported Data Do Not Fully Show Progress in Eliminating Inadequate Housing
    Consultant Costs Represent Less than Half of Total Privatization Support
    Costs Military Services Use Inconsistent Definitions of Privatization
    Support and Consultant Costs Several Factors Limit Evaluation and
    Comparison of Consultant

    Fees Conclusions Recommendations for Executive Action Agency Comments and
    Our Evaluation Scope and Methodology

                                           1

                                          2 4

                                           6

                                           8

    10

    13 14 15 16 16

    Appendix I Comments from the Department of Defense

    Tables
                  Table 1: Number of Newly Constructed or Renovated Privatized
                                 Units, as of March 31, 2003                    8
                           Table 2: Reported Expenditures for Military Housing
                                                                 Privatization
                              Consultants, as of March 31, 2003                12
    Figures
                 Figure 1: Actual and Projected Number of Family Housing Units
                        Privatized, Pre-Fiscal Year 2000 through 2008           7
                Figure 2: Actual and Projected Military Housing Privatization
                            Support and Consultant Costs, Pre-Fiscal Year 2000
                                        through 2008                            9

    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
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    its entirety without further permission from GAO. However, because this
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    separately.

    United States General Accounting Office Washington, DC 20548

    October 9, 2003

    The Honorable Joseph K. Knollenberg
    Chairman
    The Honorable Chet Edwards
    Ranking Minority Member
    Subcommittee on Military Construction
    Committee on Appropriations
    House of Representatives

    The Department of Defense (DOD) has estimated that about 60 percent, or
    over 180,000 units, of its family housing inventory in the United States
    is
    inadequate, lacking modern amenities, and in need of renovation or
    replacement in 1998. DOD has determined that fixing this problem using
    only traditional military construction would cost as much as $16 billion
    and take over 20 years. Recognizing this problem, Congress provided DOD
    with new authorities to improve military housing more economically and
    at a faster rate than could be achieved through traditional military
    construction funding. Known as the Military Housing Privatization
    Initiative,1 the basic premise behind this program is for DOD to use
    private
    sector investment capital and housing construction expertise to finance,
    own, operate, and maintain military housing. Under this program, the
    department can provide direct loans, loan guarantees, or co-investments of
    land or cash to encourage the private sector to use private investment
    funds to build or renovate housing for use by military servicemembers and
    their families. Under the privatization effort, for example, developers
    assume responsibility for existing military housing units included in the
    contracts and may demolish or renovate existing units and construct new
    units. For DOD, this program has represented a new way of doing business
    and has proven to be inherently complex to implement because of the
    extensive real estate, financial, and legal expertise required. As a
    result,
    DOD has relied on consultants to provide this expertise and help advance
    the program.

    Over time, Congress has expressed concern about the lack of progress
    with the military's housing privatization program and required the Office
    of the Secretary of Defense (OSD) to report quarterly to Congress on the

    1 The National Defense Authorization Act for Fiscal Year 1996 (P.L. No.
    104-106), Feb. 10, 1996.

    status of the services' housing privatization projects.2 In 2000, Congress
    added another requirement that DOD report quarterly information on the
    services' expenditures for consultants due to its concern about the cost
    of implementing the program.3 In turn, DOD has included this information
    in its Military Housing Privatization Initiative Housing Privatization
    Report to the Congress. The military services consider consultant costs as
    a type of privatization support costs-a category that includes other
    support costs for the program, such as civilian salaries, training, and
    travel.

    In March 2003, you requested that we review the costs of consultants used
    by DOD to support privatizing military housing. In July 2003, we provided
    your offices with briefing materials on our preliminary findings. This
    report summarizes our findings. Specifically, it discusses (1) the number
    of family housing units the services have privatized, particularly those
    units newly constructed or renovated, and projected to be privatized by
    fiscal year 2005; (2) the portion of privatization support costs that are
    used for consultants;4 (3) the services' consistency in the definition for
    privatization support and consultant costs; and (4) factors that limit an
    evaluation of how consultant fees for the military housing program compare
    among the services. In conducting our work, we interviewed Army, Navy,
    Marine Corps, and Air Force headquarters' officials to obtain information
    related to the status of the privatization program, the use and costs of
    consultants, and the variances in privatization support and consultant
    costs. We also interviewed and discussed these data and the results of our
    work with officials of OSD's Housing and Competitive Sourcing Office and
    the Office of the Under Secretary of Defense (Comptroller).

    Although DOD reported to Congress on its plans to privatize most of its
    family housing units by the end of fiscal year 2005, these reports do not
    provide decision makers with information on the number of units that have
    been renovated or newly constructed. As of March 2003, the military

    2 Conference Report (H.R. Conf. Rep. No. 105-647), July 24, 1998,
    accompanying H.R. 4059, Military Construction Appropriation Act, 1999
    (P.L. No. 105-237), Sept. 20, 1998.

    3 Conference Report (H.R. Conf. Rep. No. 106-710), June 29, 2000,
    accompanying H.R. 4425, Military Construction Appropriation Act, 2001(P.L.
    No. 106-246), July 13, 2000.

    4 When we use the term "costs" throughout this report, we are referring to
    the recorded amount of funds obligated in the military services' program
    records.

    Results in Brief

    services had signed contracts privatizing about 28,000 family housing
    units and planned to privatize a total of about 140,000 units by the end
    of fiscal year 2005. As a result of this privatization, about 7,600 units
    had been constructed or renovated as of March 2003.5 It can take
    developers several years to renovate existing housing units or construct
    new units after the military housing is privatized. However, this type of
    information is not routinely tracked at OSD nor is it reported to Congress
    although the data are available at the installation level. As a result,
    decision makers do not have complete data to fully assess the housing
    privatization program's progress in creating adequate family housing and
    improving the living conditions of the servicemembers and their families.

    Costs for consultants represent less than half of the services' total
    privatization support costs. Specifically, for fiscal year 2002,
    consultant costs were about $24 million, or 42 percent, of the services'
    total support costs of about $57 million. In addition to costs for
    consultants, the services incur other privatization support costs, such as
    costs for federal salaries, training, and travel activities. Some services
    also incur the cost of environmental assessments and land boundary surveys
    associated with the privatization of military housing activities. The
    services anticipate both privatization support and consultant costs to
    sharply decline after fiscal year 2004 when the need for consultants
    diminishes as the services privatize most of their planned family housing
    units.

    The military services are not consistent in their definitions for
    privatization support and consultant costs and OSD had not defined these
    costs when it gave the services operational responsibility for the program
    in 1998. While the services consider the costs for consultants, federal
    civilian salaries, and training and travel activities as privatization
    support costs, they differ on the extent to which their costs for
    environmental assessments; land boundary surveys; and supervision,
    inspection, and overhead construction activities are to be considered
    support costs under the program. This has resulted in inconsistencies in
    the services' budgeting of privatization support costs. Also, the services
    are not consistent in their definitions for consultant costs, which
    results in inconsistencies in the services' data about these costs that
    are provided to OSD for use in its quarterly housing privatization report
    to Congress. In addition, the quarterly housing privatization reports have
    not included all consultant

    5 OSD officials estimate that 25 percent of the existing military family
    housing units that are privatized require no renovation.

    costs for the housing privatization program, because OSD is not required
    to include its own consultant costs for the program in the report.

    Several factors, such as differences in labor categories6 and skills mix
    that each consulting firm can use to accomplish the needed work, limited
    our evaluation of how consultant fees for the military housing
    privatization program compare among the services. For example, the
    consultant with the lowest hourly fee does not always result in the lowest
    total cost because different consultant firms use a mix of staff with
    varying pay rates and charge different hours to complete the work.
    Officials from all of the services believe that they have contracted with
    firms that provide the best value to the government based on their needs
    and that the consultants' fees are fair and reasonable.

    To aid Congress in its oversight of the military housing privatization
    program, we are making several recommendations to improve the consistency
    and completeness of reported privatization support and consultant costs.
    In written comments on a draft of this report, the Director for Housing
    and Competitive Sourcing within the Office of the Under Secretary of
    Defense for Acquisition, Technology and Logistics agreed with our
    recommendations, stating the department is or plans to take steps to
    implement them.

    The 1996 Military Housing Privatization Initiative allows private-sector
    financing, ownership, operation, and maintenance of military family and
    unmarried junior servicemember (barrack) housing.7 Under the program, the
    department can provide direct loans, loan guarantees, and other
    arrangements to encourage private developers to renovate existing housing
    or construct and operate housing either on or off military installations.
    Servicemembers, in turn, may use their housing allowance to pay rent and
    utilities to live in the privatized housing. Because the program

    6 Labor categories are positions or titles within a firm such as director,
    program manager, project manager, and financial analysts.

    7 While the services have considered barracks privatization over the past
    several years, they have not yet developed pilot project proposals to
    determine the feasibility and cost-effectiveness of private sector
    financing, ownership, operation, and maintenance of military barracks.
    Thus, the consultant activities discussed in this report are focused on
    the privatization of military family housing. See U.S. General Accounting
    Office, Military Housing: Opportunities That Should Be Explored to Improve
    Housing and Reduce Costs for Unmarried Junior Servicemembers, GAO-03-602
    (Washington, D.C.: June 10, 2003).

    Background

    represents a new way of doing business for both the military and the
    private sector, DOD has relied on consultants for a variety of advisory
    and assistance services. In completing privatization agreements, many
    financial, budgetary and other issues need to be resolved to the
    satisfaction of the government, developers, and private lenders before a
    deal can be closed. Further, each privatization agreement is different and
    involves unique issues. According to DOD officials, consultants provide
    the necessary expertise and assistance to help resolve these issues.

    Initially, DOD established the Housing Revitalization Support Office in
    OSD to facilitate implementation of the military housing privatization
    program. This office established the financial and legal framework for the
    new initiative and provided assistance to the services as they began to
    consider housing privatization. Initial progress in implementing the
    program was slow and, in 1998, DOD shifted primary responsibility for
    implementing the program to the individual services. With this change, the
    Housing Revitalization Support Office was eliminated, and housing
    privatization oversight responsibility was assigned to a newly created
    office in OSD-now known as the Housing and Competitive Sourcing Office.
    This office establishes DOD policy for the program and monitors the
    services' implementation of the program.

    Concerned about the lack of progress with the military's housing
    privatization program, Congress in 1998 required OSD to begin reporting
    quarterly on the status of all privatization projects for which funds had
    been appropriated.8 In addition, in 2000, Congress required that DOD
    report information quarterly on expenditures for consultants used by the
    services to implement the program.9 DOD now includes this information in
    its Military Housing Privatization Initiative Housing Privatization Report
    to the Congress. The report lists each privatization project, identifies
    the number of units to be privatized, shows the project milestones, and
    includes the cumulative amount spent on consultants by project and
    service.

    Military construction appropriations fund the military housing
    privatization program, including privatization support and consultant
    expenditures. Privatization support includes costs for consultants,
    federal

    8 H.R. Conf. Rep. No. 105-647. 9 H.R. Conf. Rep. No. 106-710.

    civilian salaries, and training and travel activities. Some of the
    services also include costs for environmental assessments; land boundary
    surveys; and supervision, inspection, and overhead construction
    activities. Consultant costs generally include costs for advisory and
    assistance activities, such as individual project development,
    solicitation development and preparation, pre-award evaluations of project
    proposals, and financial and real estate analysis.

    DOD Plans to Privatize Most Family Housing by 2005, but Its Reported Data
    Do Not Fully Show Progress in Eliminating Inadequate Housing

    Although DOD reported to Congress that the services plan to privatize most
    of their family housing units by the end of fiscal year 2005, these
    reports do not include the number of privatized units that have been
    renovated or newly constructed. Such data would show the program's
    progress in creating adequate family housing and the status of
    improvements to the living conditions of the servicemembers and their
    families. These renovation and construction numbers should accelerate over
    time.

    As of March 2003, the military services had signed contracts privatizing
    about 28,000 family housing units and plan to privatize a total of about
    140,000 units by the end of fiscal year 2005. The services plan to
    privatize 72 percent of their total family housing inventory, representing
    about 183,000 units, as shown in figure 1, by fiscal year 2007 instead of
    by 2010 as originally scheduled.

    Figure 1: Actual and Projected Number of Family Housing Units Privatized,
    Pre-Fiscal Year 2000 through 2008

    As a result of these privatization contracts, as of March 2003 the
    services had constructed 4,396 new housing units and renovated 3,184
    existing units-total of 7,580 units (see table 1).10

    10 Some privatization contracts also require the demolition of
    deteriorated military family housing.

    Table 1: Number of Newly Constructed or Renovated Privatized Units, as of
    March 31, 2003

                                            Number of     Number of
                         Service  constructed units      renovated units    Total
                            Army                1,064       2,484           3,548
                 Navy and Marine                1,768        200            1,968
                           Corps
                       Air Force                1,564        500            2,064
                     Total units                4,396       3,184           7,580

    Source: Military services' housing officials.

    Note: Data on newly constructed or renovated units projected by fiscal
    year 2005 were not readily available.

    We recognize it can take developers several years to renovate existing
    housing units or construct new ones after the military housing is
    privatized. However, data regarding this process, although maintained at
    the installation level, are not collectively tracked and reported to
    Congress by OSD. Thus, decision makers do not have complete data to fully
    assess the housing privatization program's progress. Furthermore, as the
    privatization program progresses, it will become increasingly important to
    have complete data on the status of actual renovation and new construction
    of privatized housing units on which to determine how quickly the program
    is creating adequate family housing and improving the living conditions of
    the servicemembers and their families.

    According to the services' budget data, costs for consultants are less
    than half of the services' total privatization support costs, actual and
    projected. For example, for fiscal year 2002 consultant costs were about
    $24 million, or about 42 percent, of the services' total support costs of
    about $57 million for their housing privatization efforts. Furthermore,
    the services incur other privatization support costs besides the costs for
    consultants, such as federal salaries, training, and travel. In addition,
    some services include the cost of environmental assessments and land
    boundary surveys in their privatization support costs.

    As the services sign the contracts to privatize most of their family
    housing units, service officials said their privatization support costs
    would decline as the need for consultants diminishes. While these costs
    are expected to

    Consultant Costs Represent Less than Half of Total Privatization Support
    Costs

    decline, other assistance costs for portfolio management services11 for
    the privatization program are expected to become a key component of the
    remaining support costs as more projects are completed. As figure 2 shows,
    the services project sharp declines in privatization support and
    consultant costs after fiscal year 2004.

    Figure 2: Actual and Projected Military Housing Privatization Support and
    Consultant Costs, Pre-Fiscal Year 2000 through 2008

    11 Portfolio management services include monitoring and reporting
    activities on the financial, operational, and maintenance status of
    privatized housing units.

    Military Services Use Inconsistent Definitions of Privatization Support
    and Consultant Costs

    The military services are not consistent in their definitions for
    privatization support and consultant costs. The differences in the
    services' definitions for privatization support costs result in
    inconsistent budgeting for these costs. Also, the differences in the
    services' definitions for consultant costs result in inconsistent
    reporting of consultant costs in the department's quarterly housing
    privatization report to Congress. Furthermore, OSD does not report its own
    program consultant costs in the quarterly report.

    Differences in the Services' Definitions for Privatization Support Costs
    Result in Inconsistent Budgeting

    Since OSD had not defined privatization support costs when it gave the
    services operational responsibility for the program in 1998, the services
    individually defined them, resulting in inconsistencies in the types of
    costs included in the services' budgeting for privatization support. The
    Navy, for example, does not include the costs of environmental assessments
    and land boundary surveys as privatization support costs while the Army
    and the Air Force do. Similarly, the Army and the Navy do not include the
    costs for supervision, inspection, and overhead construction activities as
    privatization support costs while the Air Force does. Without a common
    definition, these differences in accounting lead to an increased variance
    in the services' reported costs and add difficulty for DOD and Congress to
    accurately determine total privatization support costs across the
    services.

    According to officials in the Office of the Under Secretary of Defense
    (Comptroller), DOD does not have written budget guidance defining what
    types of privatization support costs should be included in the services'
    budget estimates. Thus, the services account for housing privatization
    support costs differently. For example, according to Navy officials, the
    Navy's privatization support budget account does not include costs for
    activities that the other services do, such as environmental assessments
    and land boundary surveys. As such, the Navy's privatization support
    expenses may not be as low as they appear in its budget. Navy has combined
    the management of the family housing program with its real estate,
    acquisition, and construction contracting expertise in the Naval
    Facilities Engineering Command-the command responsible for military
    construction. Thus, the costs for environmental assessments, land boundary
    surveys, and supervision, inspection, and overhead construction activities
    are part of how the command conducts its mission and are not captured in
    the Navy's privatization support budget. According to Navy officials,
    these activities are conducted and funded within the command and a budget
    request distinction is not made as to whether the costs for these
    activities are for a privatization housing project or a traditional

    military construction project. For example, Navy's estimated $5 million
    costs for environmental assessments for its privatization housing efforts
    through 2008 will not be reflected in its privatization support account
    although this cost is in the other services' privatization support
    accounts. Similarly, the Army's expenses for construction supervision,
    inspection, and overhead activities are part of the developers' costs; and
    the Army does not reflect these costs in its privatization support budget,
    whereas the Air Force does.

    DOD officials said that the budget inconsistencies have created a problem
    for the services. According to DOD officials, Congress has reduced the
    Army and the Air Force privatization support budgets due to the perception
    that their budgets are unreasonably high when compared with the Navy's.

    Differences in the Services' Definitions for Consultant Costs Result in
    Inconsistent Reporting to Congress

    Because OSD had not defined the types of costs to be included in
    determining consultant costs, the services define them differently,
    resulting in inconsistent reporting of consulting expenditures in the
    department's quarterly housing privatization report to Congress.
    Specifically, the services are beginning to contract for assistance in
    managing the portfolio of housing privatization projects to better ensure
    long-term program success. The Air Force views portfolio management as a
    contractor cost and, as such, is not including this expense in its
    consultant cost data to OSD for the quarterly housing privatization
    report. In contrast, the Army, the Navy, and the Marine Corps view
    portfolio management as a consultant cost; and this expense is included in
    the report to Congress. As a result, OSD is providing inconsistent service
    data regarding consultant costs in the department's quarterly housing
    privatization report to Congress. Furthermore, as costs for portfolio
    management are expected to become a key component of remaining support
    costs as the services privatize more housing, the inconsistent cost
    reporting will become more pronounced in the future.

    Also, important in explaining inconsistencies and variances in consultant
    costs among the services is the organizational placement of the
    privatization program and the number of projects per service. For
    instance, the Navy's consulting costs are less than the other services
    because it has combined the management of its program with its real
    estate, acquisition, and construction contracting expertise in the Naval
    Facilities Engineering Command. According to Navy and OSD officials, that
    decreases the Navy's need for consultants. Then again, according to

    Air Force officials, the Air Force's consulting costs are higher than the
    other services, when its contractor's portfolio management costs are
    included, because it has more privatization projects needing consultant
    assistance and advice. Currently, the Air Force plans on 53 family housing
    privatization projects whereas the Army and the Navy are planning on 27
    and 37 projects, respectively.

    The services reported in the quarterly housing privatization report to
    Congress that they had spent about $73 million, in total, on consultants
    associated with its housing privatization efforts as of March 31, 2003
    (see table 2). The extent of their expenditures varied, with the Army
    expending $34 million, more than twice the amount expended by the Navy and
    the Marine Corps.

    Table 2: Reported Expenditures for Military Housing Privatization
    Consultants, as of March 31, 2003

                                  Dollars in millions

                                     Service Amount

                                       Army $34.0

    Navy and Marine Corps

    Air Force

                                      Total $72.6

    Source: OSD's Military Housing Privatization Initiative Housing
    Privatization Report to Congress, April 2003.

    OSD Does Not Report Its Own Consultant Costs in the Quarterly Housing
    Privatization Report

    OSD does not, and is not required to, include its own costs for
    consultants associated with its implementation of the military housing
    privatization program in the quarterly report to Congress. Officials
    within OSD's Housing and Competitive Sourcing Office stated that OSD has
    not reported about $10 million in consultant costs since the beginning of
    the program in 1996. These consultant costs were not in direct support of
    a particular installation and most occurred when OSD had centralized
    control over the program. With the transfer of operational responsibility
    for the program to the individual services in 1998, OSD's consultant costs
    have decreased significantly, currently averaging about $1 million a year.
    These consultant costs are mostly to assist OSD design program evaluation
    criteria and to help with budget scoring requirements.

    Several Factors Limit Evaluation and Comparison of Consultant Fees

    Although housing privatization fees paid to individual consultants vary
    among the services, several factors limit an evaluation and comparison of
    these fees. Such factors include the differences in labor categories,
    hours, and skills mix that each consulting firm can use to describe the
    work they need to do to accomplish the work specified by the services,
    such as the following:

    o  	Labor categories. Despite some commonalities (e.g., program manager
    and financial analyst), the services for the most part list different
    labor categories and staff positions in their consultant contracts. The
    Air Force, for example, identified 22 labor categories for each of its
    five consultants, while the Navy and Army listed 5 and 7 labor categories,
    respectively.

    o  	Labor and hour mixes. Each consulting firm generally emphasizes a
    different mix of staff and anticipated number of labor hours, depending on
    the needed work. As such, contracting with a consultant with lower hourly
    fees will not necessarily result in the lowest total cost because the
    different consultant firms use a mix of staff with varying hourly pay
    rates and charge different hours to complete the work. Air Force data, for
    example, showed that one firm, which charges higher average hourly fees,
    planned to dedicate fewer labor hours to a proposed task than another
    firm, which charges a lower average hourly fee. The particular mix of
    staff and labor hours proposed by both firms led to only a 3 percent cost
    variance for a proposed project of about $780,000. In addition, Air Force
    data showed that two firms proposed that its senior managers dedicate
    considerably fewer hours to the project although charging higher hourly
    fees, while another firm proposed that its senior managers dedicate
    considerably more hours to the project but charge significantly lower
    hourly fees. Thus, a comparison of consultant fees in isolation could
    create a misleading assessment.

    o  	Scope of work. Different scopes of work within the various housing
    privatization projects may generate different labor mixes or entirely new
    labor categories for a particular consultant, making comparison difficult.
    For example, the Air Force uses two different sets of labor categories for
    the same firm-one for the portfolio management work and another, which is
    slightly different, for the privatization support work.

    o  	Capacities. Consulting firms have different capacities-some are small
    businesses while others are global enterprises-and each firm has different
    capabilities and expertise. According to Air Force data, for example, the
    firms charging the lowest average hourly fee at the managerial level have
    only six Air Force family housing privatization

    projects between them. However, Air Force officials told us they believe
    these firms are small businesses operating at capacity and cannot take on
    another project, despite having lower fees than some of the other
    consulting firms.

    Even though these factors limit a comparative evaluation of consultant
    fees, service officials told us they believe that their particular
    consultant fees are fair and reasonable because they (1) awarded their
    consultant contracts competitively; (2) examined consulting rates
    published by the General Services Administration, particularly those in
    its Management, Organizational, and Business Improvement Services
    Schedule,12 to assist in determining if the rates were reasonable; and (3)
    selected consultants through "best value" determinations. In striving to
    obtain best value, service officials said that the services select firms
    offering the most advantageous deal to the government and that cost is
    only one of several evaluation considerations. Past performance and the
    capability to perform the proposed work, among other considerations, are
    evaluated alongside fee considerations in assessing contract awards. As a
    result, service officials said that they have contracted with firms that
    provide the best value to the government based on their needs.

    Conclusions 	The military housing privatization program was established
    for a faster creation of quality housing for military servicemembers and
    their families. As such, the Secretary of Defense has directed the
    military services to increase their use of privatization and eliminate
    their inadequate housing inventory, moving the completion date for the
    privatization up from 2010 to 2007. However, until the number of renovated
    or newly constructed housing units under privatization are routinely
    tracked and reported to Congress, it will be difficult to adequately
    assess the impact of the privatization program. Further, as the program
    progresses and additional privatized units are expected to be under
    contract, more complete and informative data on the number of privatized
    housing units that have been renovated or newly constructed will become
    increasingly important to decision makers. Such data are needed to
    determine how quickly the privatization program is creating adequate
    family housing and improving the living conditions of servicemembers and
    their families.

    12 The Management, Organizational, and Business Improvement Services
    Schedule is a list of commercial firms contracted by the General Services
    Administration to provide management and consulting services to federal
    agencies.

    Until OSD provides a common definition of the types of cost to be included
    in determining privatization support costs, including consultant costs,
    the military services will continue to budget inconsistently for
    privatization support costs and OSD will continue to use inconsistent data
    from the services to report consultant costs in its quarterly housing
    privatization report to Congress. Similarly, without an OSD determination
    of whether portfolio management costs are costs that should be included as
    consultant costs, the services will continue to provide OSD with
    inconsistent data on consultant costs for its quarterly report to
    Congress. Furthermore, until OSD includes its own program consultant costs
    in the department's quarterly housing privatization report, Congress will
    not have complete knowledge of the total housing privatization consultant
    costs. Without consistent and complete information, Congress and DOD
    cannot make the most informed decisions regarding the appropriateness of
    support and consultant costs requested and expended in support of the
    military housing privatization program.

    Recommendations for Executive Action

    To illustrate the number of inadequate housing units eliminated and of new
    or renovated units brought on line through the military housing
    privatization program, we recommend that the Secretary of Defense direct
    the Under Secretary of Defense for Acquisition, Technology and Logistics
    to track the supporting data and report the number of privatized units
    renovated and newly constructed to the Congress on a periodic basis.

    To provide for more consistent and complete data on military housing
    privatization support costs, we recommend that the Secretary of Defense
    direct the Under Secretary of Defense (Comptroller), in consultation with
    the Housing and Competitive Sourcing Office, to define privatization
    support costs for the military services. Specifically, this definition
    should address the differences in how the services consider the costs of
    environmental assessments; land boundary surveys; and supervision,
    inspection, and overhead construction activities associated with the
    housing privatization program.

    To provide for more consistent and complete data on privatization
    consultant costs, we recommend that the Secretary of Defense direct the
    Under Secretary of Defense for Acquisition, Technology, and Logistics, in
    consultation with the Under Secretary of Defense (Comptroller), to (1)
    define consultant costs, including a determination of the inclusion of
    portfolio management costs, for the military services; and (2) include
    OSD's own program consultant costs associated with its efforts to

    Agency Comments and Our Evaluation

    Scope and Methodology

    privatize military housing in the department's quarterly housing
    privatization report to Congress.

    In written comments on a draft of this report, the Director for Housing
    and Competitive Sourcing within the Office of the Under Secretary of
    Defense for Acquisition, Technology and Logistics agreed with our
    recommendations, stating the department is or will be taking steps to
    implement them. In reference to our recommendation to track supporting
    data and report on the number of privatized units renovated and newly
    constructed, DOD concurred with the recommendation, stating it is
    essential that project progress be monitored. However, DOD stated that its
    semi-annual Program Evaluation Plan report is a more appropriate vehicle
    to track this data than the quarterly reporting specified in our draft
    report and has initiated steps to do so. We believe the collection and
    periodic reporting of this data to the Congress, regardless of the
    reporting format, will benefit decision makers to better assess the
    housing privatization program's progress in creating adequate family
    housing and improving the living conditions of the servicemembers and
    their families. Accordingly, we modified our recommendation to recognize
    the potential for greater flexibility in reporting. DOD's comments are
    included in appendix I of this report.

    We performed our work at the headquarters offices responsible for
    implementing the privatization program for the Army, the Navy, the Marine
    Corps, and the Air Force. At each location, we interviewed officials
    cognizant of the program and reviewed applicable policies, procedures, and
    documents. We also interviewed officials at the Air Force Center for
    Environmental Excellence in San Antonio, Texas, which has responsibility
    for executing Air Force contracts for consultant assistance with the
    military housing privatization program. We also discussed our analyses
    with officials of OSD's Housing and Competitive Sourcing Office and the
    Office of the Under Secretary of Defense (Comptroller). For the military
    housing privatization program, our analyses mostly covered 1996-the
    beginning of the military housing privatization program-through 2008 when
    the services expect to have privatized all of their planned housing.

    To determine the number of projects and family housing units the services
    have privatized and project to privatize since program inception to fiscal
    year 2008, we interviewed service officials and obtained relevant data. We
    obtained data for the number of projects and units already privatized from

    OSD's Military Housing Privatization Initiative Housing Privatization
    Report to Congress. However, because project execution schedules for
    future projects change regularly and the services told us several future
    project dates are tentative, we requested the latest estimates of projects
    and units to be privatized from the services. Army and Air Force officials
    provided us with their privatization schedules while Navy officials told
    us to use their fiscal year 2004 budget request data. In addition, the
    services provided data on the number of units newly constructed or
    renovated as of March 31, 2003, but stated that estimated data was not
    readily available for fiscal years 2004 through 2008.

    To identify the portion of privatization support costs used for
    consultants, we obtained and analyzed budget data from the services for
    actual and projected amounts covering fiscal years 1996 through 2008. The
    services identified those activities that they considered to be a
    privatization support cost and consultant cost. We did not validate these
    recorded budget amounts.

    To analyze the services' consistency in defining privatization support and
    consultant costs, we compared budget data provided by the services and
    noted differences in what they considered privatization support and
    consultant costs. We met with service officials to discuss those
    differences and possible reasons for these differences. To report data on
    the services' cumulative expenditures as of March 31, 2003, for military
    housing privatization consultants, we used the department's latest
    quarterly housing privatization report dated April 2003. We interviewed
    OSD and service officials about the reporting requirements for the
    quarterly housing privatization report and corresponding budget guidance
    on privatization support and consultant costs. In addition, we met with
    officials from the Office of the Under Secretary of Defense (Comptroller)
    to obtain their views on our privatization support and consultant cost
    analyses.

    To assess how consultant fees for the military housing privatization
    program compare among the services, we reviewed and analyzed the services'
    consultant contracts and individual task orders, noting the hourly fees
    charged by each consultant. We obtained data from the appropriate General
    Services Administration federal supply schedule for Management,
    Organizational, and Business Improvement Services Schedule and made fee
    comparisons. We also interviewed service officials to discuss their
    assessment process for evaluating consultant fees and selecting
    consultants. Finally, we interviewed officials from the Air Force's Brooks
    City Base, San Antonio, Texas, and from the Army's Fort Sam Houston,

    San Antonio, Texas, to discuss DOD's use of consultants in similar
    privatization activities.

    In performing this review, we did not validate DOD's reported housing
    requirements or privatization information. We conducted our work from
    April 2003 through July 2003 in accordance with generally accepted
    government auditing standards.

    We are sending copies of this report to the Secretaries of Defense, the
    Army, the Navy, and the Air Force; the Commandant of the Marine Corps;
    and the Director, Office of Management and Budget. We will also make
    copies available to others upon request. In addition, the report is
    available
    at no charge on GAO's Web site at www.gao.gov.

    Please contact me on (202) 512-8412, or my Assistant Director, Mark
    Little,
    at (202) 512-4673 if you or your staff have any questions regarding this
    report. Major contributors to this report were Laura Talbott, Shawn
    Arbogast, Jason Aquino, Jane Hunt, and R.K. Wild.

    Barry W. Holman, Director
    Defense Capabilities and Management

    Report number now GAO-04-111 to reflect new fiscal year.

                          Page 19 GAO-04-111 Military Housing

    Appendix I: Comments from the Department of Defense

                                       See p. 15.

                                       See p. 15.

                                       See p. 15.

    (350426) Page 20 GAO-04-111 Military Housing

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