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 [email protected].

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

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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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