    Defense Management: Processes to Estimate and Track Equipment
    Reconstitution Costs Can Be Improved (05-MAY-05, GAO-05-293).

    The high pace of military operations in Iraq and elsewhere has
    generated a multibillion dollar equipment maintenance requirement
    that must be addressed after units return home. Upon returning
    from deployments, active, reserve, and National Guard units
    reconstitute, or restore, their equipment to a condition that
    enables them to conduct training and prepare for future
    deployments. The Department of Defense (DOD) uses a two-phased
    process to develop equipment reconstitution supplemental budget
    estimates. GAO reviewed this process for the fiscal year 2004
    supplemental budget to determine (1) the extent to which the
    process produced reliable estimates of reconstitution
    requirements in the fiscal year 2004 supplemental budget, and (2)
    whether DOD is accurately tracking and reporting reconstitution
    costs.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-05-293
        ACCNO:   A23459
      TITLE:     Defense Management: Processes to Estimate and Track
    Equipment Reconstitution Costs Can Be Improved
         DATE:   05/05/2005
      SUBJECT:   Cost analysis
    	     Cost control
    	     Equipment maintenance
    	     Maintenance costs
    	     Reporting requirements
    	     Spare parts
    	     Cost estimates

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    GAO-05-293

                     United States Government Accountability Office

                         GAO Report to Congressional Committees

    May 2005

    DEFENSE MANAGEMENT

     Processes to Estimate and Track Equipment Reconstitution Costs Can Be Improved

                                           a

    GAO-05-293

    [IMG]

    May 2005

    DEFENSE MANAGEMENT

    Processes to Estimate and Track Equipment Reconstitution Costs Can Be Improved

      What GAO Found

    DOD's two-phased process to develop its fiscal year 2004 equipment
    reconstitution cost estimates contained weaknesses that produced errors,
    which may result in misstatements of future-year reconstitution cost
    requirements. The model DOD used to estimate costs in the first phase of
    the process generated unreliable estimates due to two main reasons. First,
    the model can overstate aircraft and ship reconstitution costs because
    these costs are covered in two different sections of the model. As a
    result, the model's estimate for Air Force aircraft reconstitution was
    overstated by over $1 billion. Second, there is uncertainty over what
    maintenance requirements the model covered. The Office of the Secretary of
    Defense (OSD) and the services developed their requirements with the
    understanding that the model did not calculate all maintenance
    requirements. GAO learned that the model may duplicate some requirements
    that the services manually calculated and included in their cost
    estimates. Consequently, DOD cannot have confidence that its equipment
    reconstitution budget estimate is reliable. There are also reconstitution
    estimating and guidance problems associated with the second phase of the
    process, where the services may develop alternative estimates outside of
    the model. For instance, the Army failed to consider funding in its
    baseline budget that would be available for equipment reconstitution. In
    another instance, the services included requirements in their
    reconstitution estimates that appear to go beyond equipment reconstitution
    as established by OSD's guidance. Nonetheless, GAO found an accumulation
    of unfulfilled equipment reconstitution requirements, because OSD guidance
    excluded the services from requesting funds for projected battle and other
    expected losses. The effect of losses not recognized in OSD's supplemental
    budget requirements have not yet been quantified and may be significant.
    GAO believes these problems are creating a backlog of equipment
    reconstitution requirements that will eventually need to be addressed in
    future budgets.

    DOD has not accurately tracked and reported its equipment reconstitution
    cost because the services are unable to segregate equipment reconstitution
    from other maintenance requirements as required. As a result, DOD cannot
    accurately report the cost of equipment reconstitution and, consequently,
    the total cost of the global war on terror. The Air Force does not break
    out its equipment reconstitution obligations from other global
    war-on-terrorism obligations in a DOD monthly cost report because it does
    not have a mechanism that can track the amounts obligated on equipment
    reconstitution and delineate such obligations from routine maintenance.
    Further, Army-and Navy-reported equipment reconstitution obligations are
    likely overstated in the monthly report because they include other
    maintenance costs-such as those related to equipment used in training
    exercises-that do not fall within DOD's description of equipment
    reconstitution.

                     United States Government Accountability Office

    Contents

        Letter                                                                  1
                                      Results in Brief                          3
                                         Background                             6
                  DOD's Equipment Reconstitution Estimating Process Contained
                               Weaknesses that Produced Errors                 10
                  DOD Not Accurately Reporting Equipment Reconstitution Costs  19
                                         Conclusions                           23
                            Recommendations for Executive Action               24
                             Agency Comments and Our Evaluation                25

      Appendix

                           Appendix I: Scope and Methodology
                Table 1: Fiscal Year 2004
    Tables Reconstitution Requirements
                               Identified
               by Services and Requested   9
                    in Supplemental
                   Table 2: Comparison of
                         Army's Estimated
                   Reconstitution Cost to
              Actual Cost for 38 Selected 15
               Items for Fiscal Year 2004
                  Table 3: Reconstitution
                  Obligations Reported by
                         Services in DFAS
                Terrorist Cost Report, as                        Figure 1: Army
                  of the End of September 20 Figures    Prepositioned Equipment
                                     2004               Awaiting Maintenance at
                                                                   Camp Arifjan 8
              Figure 2: Bradley Fighting
                  Vehicle-Example of
                       Projected
                 Equipment Item Damage    18

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    A

    United States Government Accountability Office Washington, D.C. 20548

    May 5, 2005

    Congressional Committees

    The high pace of military operations in Iraq and elsewhere has generated a
    multibillion dollar equipment maintenance requirement that must be
    addressed after units return home. Upon returning from Iraq and other
    global war-on-terrorism deployments, units reconstitute-that is, restore-
    their equipment to a condition that enables them to conduct training
    exercises, achieve required readiness levels, and prepare for future
    deployments. While the Department of Defense (DOD) has not formally
    defined equipment reconstitution, its financial regulation describes
    reconstitution costs as including costs to clean, inspect, maintain,
    replace, and restore equipment to the required condition at the conclusion
    of the contingency operation or unit deployment. Furthermore, the
    department has issued additional specific guidance as to what costs should
    be included as reconstitution. Reconstitution is performed at each level
    of maintenance-organizational, intermediate, and depot-depending on the
    condition of returning equipment and the capacity available at each
    maintenance level.1 The department's equipment reconstitution maintenance
    requirement is based on the amount of repairs that need to be performed at
    all maintenance levels. As the global war on terrorism continues, the
    department will be generating additional equipment reconstitution
    requirements, which will have to be estimated for inclusion in future
    baseline or supplemental budgets.2

    The department has a two-phased process in place to estimate the
    incremental costs3 of supporting contingency operations, which includes
    the determination of equipment reconstitution requirements. During the

    1 Organizational maintenance normally consists of inspecting, servicing,
    lubricating, adjusting, and replacing parts. Intermediate maintenance
    includes calibration, and the repair or replacement of damaged and
    unserviceable parts. Depot maintenance is performed on equipment requiring
    major overhaul or a complete rebuild of parts.

    2 Fiscal years 2004 and 2005 global war-on-terrorism equipment
    reconstitution requirements are included in the supplemental budget
    requests.

    3 The term incremental costs means those directly attributable costs that
    would not have been incurred if it were not for the operation. Sections
    230406 and 230902 of Department of Defense Financial Management
    Regulations 7000.14R, volume 12, chapter 23, Contingency Operations
    (February 2001) provide additional information on incremental costs. We
    further note that DOD's financial systems only capture total obligations
    and the services use various management information systems to identify
    incremental obligations and to estimate costs.

    first phase, the Office of the Secretary of Defense (OSD) comptroller and
    the services use an OSD model, developed by the Institute for Defense
    Analyses (IDA), called the contingency operations support tool (COST),4
    which covers much of what is needed to conduct contingency operations, as
    well as some aspects of equipment reconstitution. Each service and OSD
    input information into the model regarding the period of deployment for
    units and equipment that will need reconstitution. The model generates an
    estimated funding requirement. During the second phase, the services may
    accept or reject the COST model's estimates and provide alternative
    estimates they developed outside the model. When the services propose an
    estimate other than that derived from the COST model, they meet with the
    OSD comptroller and provide support for their estimate and, in conjunction
    with the comptroller, determine the requirement to be submitted. The
    services also provide estimates for some requirements that are not covered
    by the model-such as depot-level maintenance and procurement for
    replacement equipment. OSD then reviews these estimates and, in
    conjunction with the services, determines a final estimate for inclusion
    in OSD's supplemental budget submission. However, when differences occur,
    the OSD comptroller has the final say in what equipment reconstitution
    requirement will be submitted in the supplemental budget.

    This report focuses on DOD's planning, budgeting, and tracking and
    reporting for equipment reconstitution for military units that have
    returned from Iraq and other global war-on-terrorism operations. The
    objectives of this report are to examine the extent to which (1) the
    process DOD used to develop its fiscal year 2004 supplemental budget
    equipment reconstitution requirements produced reliable estimates and (2)
    the department is accurately tracking and reporting equipment
    reconstitution obligations. We performed our work on the basis of the
    authority of the Comptroller General5 and are reporting the results to you
    because of your oversight roles.

    We examined OSD's and the services' processes for developing their fiscal
    year 2004 equipment reconstitution requirements and collected data related
    to OSD and service equipment reconstitution requirements. We held
    discussions at service headquarters and also visited Army and Marine

    4 IDA is a federally funded research and development center that OSD used
    to develop, maintain, and modify its COST model.

    5 31 U.S.C. 717.

    Corps units in the process of reconstituting equipment to review the
    equipment reconstitution planning process at these levels, observe
    implementation of these plans, and collect actual reconstitution costs. We
    reviewed reported reconstitution costs for Army equipment and determined
    that the reliability of these data was sufficient for our purposes. We
    performed our work from September 2003 through March 2005 in accordance
    with generally accepted government auditing standards. The scope and
    methodology section contains more detailed information about the work we
    performed.

    Results in Brief 	The two-phased process DOD used to develop its fiscal
    year 2004 equipment reconstitution cost estimates contained weaknesses
    that produced errors, which, if not corrected, may result in misstatements
    of future-year reconstitution cost requirements. Specifically, we observed
    problems in both phases of the process, as follows.

    o 	The COST model, which the department used during the first phase of the
    process, generated unreliable estimates due to two main reasons. First,
    the COST model contains an error that can result in a duplication of
    reconstitution cost estimates. OSD and IDA officials were unaware that the
    model's equipment reconstitution cost section duplicated reconstitution
    costs that were already covered by the operating cost section of the
    model. For example, the COST model estimate for Air Force aircraft
    reconstitution was overstated by $1.2 billion because the department did
    not take into account that these costs were already entered into the model
    as operating costs. Duplication of cost elements causes an overstatement
    of cost estimates and may result in DOD receiving more funds than are
    necessary to cover reconstitution costs. Second, there is uncertainty over
    what maintenance requirements the model covered. OSD and the services
    developed their equipment reconstitution requirements with the
    understanding that the COST model calculated organizational-and
    intermediate-level maintenance only, and thus calculated their depot-level
    maintenance requirements outside of the model during the second phase of
    the process. However, we later learned that, according to IDA officials,
    the model may include some depot-level maintenance, which could have
    resulted in the model duplicating the depot-level maintenance requirements
    calculated outside the model. This confusion occurred because the OSD
    comptroller's office apparently did not clearly identify what maintenance
    requirements are to be calculated by the model. Furthermore, neither OSD
    nor IDA was able to provide us with any

    written guidance regarding what maintenance requirements should be covered
    in the model's equipment reconstitution section. Without clearly
    identifying what maintenance requirements OSD expected the COST model to
    estimate and clearly communicating this information to IDA, IDA officials
    were not able to ensure that the COST model generates accurate and
    complete reconstitution maintenance cost estimates, and does not duplicate
    maintenance costs calculated outside of the model. Consequently, the
    department cannot have confidence in the equipment reconstitution budget
    estimate generated by the model.

    o 	We also found reconstitution estimating and guidance problems during
    the second phase of the process. These problems involve the services
    developing requirements not calculated by the COST model and modifying
    COST model estimates. In one instance, the Army did not consider baseline
    peacetime operation and maintenance funding when calculating its equipment
    reconstitution requirements outside of the COST model. This was because
    the Army does not have a step in its supplemental estimating process to
    offset estimates with the baseline budget, as required by the department.6
    Not recognizing and adjusting for normal operating budgets overstates the
    funding requirement and could, if not addressed, result in the Army
    overstating funding requirements for equipment reconstitution in the
    future. Moreover, the services included costs in their reconstitution
    estimates calculated outside the COST model that appear not to be
    equipment reconstitution as established by OSD's supplemental budget
    preparation guidance. For example, while OSD guidance specifically
    directed the services to request funds needed to restore forces to the
    same operational level as prior to deployment, and to limit requests to
    those costs already incurred as a direct result of operations in support
    of the global war on terrorism, the Navy and the Air Force included
    unfunded fiscal year 2004 depot maintenance requirements in their
    supplemental funding cost estimates that did not arise from Operation
    Iraqi Freedom and other global war-on-terrorism operations. This occurred
    due to a lack of clear guidance on how the services should calculate their
    reconstitution costs, and according to Navy and Air Force officials, they
    wanted all of their equipment in the best condition possible to fight the
    global war on

    6 OSD fiscal year 2004 supplemental budget preparation guidance instructed
    the services to offset costs from the baseline budget that will not be
    incurred (e.g., peacetime training-and maintenance-related activities that
    will not occur since units will be deployed in support of the global war
    on terrorism) when calculating their incremental costs.

    terrorism. Including these unfunded peacetime requirements may overstate
    the estimated cost of reconstituting equipment involved in operations in
    Iraq and Afghanistan. Nonetheless, we found an accumulation of unfulfilled
    equipment reconstitution requirements because OSD guidance limited the
    services to requesting funding for replacement of known battle losses
    only. In preparing the fiscal year 2004 supplemental budget, the services
    were not permitted to request funds for projected battle losses and other
    expected losses. The effect of losses not recognized in OSD's supplemental
    budget calculations has not yet been quantified and may be significant.

    DOD is unable to accurately track and report its equipment reconstitution
    cost because the services are unable to segregate equipment reconstitution
    from other maintenance requirements, as required. In an effort to meet
    congressional requests for information on global war-on-terrorism
    obligations7 and provide the OSD comptroller with a means to assess
    variance between obligations and the budget, Defense Finance and
    Accounting Service (DFAS) produces a monthly report to track these
    obligations. The DFAS report on funds obligated in support of the war
    includes a category for tracking equipment reconstitution obligations.
    However, the data in the report are not reliable for determining
    accurately how much money each service is obligating on equipment
    reconstitution. For example, the Air Force does not break out its
    equipment reconstitution obligations from other global war-on-terrorism
    obligations in the DFAS report in accordance with DOD guidance, because it
    does not have a mechanism in its accounting system that can track the
    amounts specifically obligated for equipment reconstitution. Thus, the Air
    Force is reporting zero dollars in the DFAS report's equipment
    reconstitution category. Additionally, Army and Navy equipment
    reconstitution obligations may also be inaccurate in the DFAS report,
    because the services' accounting codes for equipment reconstitution are
    capturing global war-on-terrorism and other obligations that were not
    incurred exclusively for equipment reconstitution. Consequently, Army- and
    Navy-reported equipment reconstitution obligations are likely overstated
    because they include other maintenance costs-such as those related to
    equipment used in training exercises-that are not consistent with DOD's
    guidance relating to

    7 Obligations are incurred through actions such as orders placed,
    contracts awarded, services received, or similar transactions made by
    federal agencies during a given period that will require payments during
    the same or a future period. See Department of Defense Financial
    Management Regulations, 7000.14-R, vol. 1, Definitions, page xvii.

    reporting reconstitution obligations for equipment used in support of the
    global war on terrorism. As a result, DOD cannot accurately report the
    cost of equipment reconstitution and, consequently, the total cost of the
    global war on terrorism.

    We are making recommendations that correct weaknesses we identified in
    DOD's process for estimating and tracking equipment reconstitution costs.
    In concurring or partially concurring on our recommendations DOD indicated
    that it was taking steps to eliminate the duplication of maintenance
    requirements in its COST model, would consider including a factor to
    reflect maintenance washout trends in future supplemental budget requests,
    and has revised its financial management regulation to improve the
    reporting of equipment reconstitution obligations. However, we believe
    that further improvements, such as providing instructions in the DOD
    financial management regulation regarding how to avoid duplication of
    maintenance requirements in DOD's COST model, are needed to meet the
    intent of our recommendations. In not concurring with our recommendation
    that the Army establish a step to offset its equipment reconstitution
    estimate with its baseline budget, department officials said that their
    process for developing the supplemental budget already includes a process
    for excluding costs for equipment maintenance funded in the baseline
    budget. However, we believe that the Army's, and the other services',
    supplemental budget-estimating processes also need to have such assurances
    built in. DOD's comments and our evaluation of them are discussed on page
    25.

    Background 	In preparation for the initiation of Operation Iraqi Freedom
    (OIF), the United States deployed four Army divisions and their supporting
    reserve component units, a Marine Expeditionary Force, and a significant
    portion of the Navy's and Air Force's combat power to southwest Asia. The
    Army's Third Infantry Division (mechanized) and its supporting reserve
    component units were primarily equipped with Army-prepositioned
    assets-consisting of over 17,000 pieces of rolling stock8 and almost 6,000
    standard 20-foot shipping containers of supplies-drawn from prepositioned
    equipment sites located in southwest Asia and offloaded from Army
    prepositioned ships. The 1st Marine Expeditionary Force was also primarily
    equipped with prepositioned assets offloaded from Marine

    8 Rolling stock includes items such as tanks, trucks, and trailers.

    Corps prepositioned ships. By the height of the combat portion of OIF, the
    United States had deployed a significant portion of its combat power to
    southwest Asia. For example, during fiscal year 2003, the Army deployed
    four divisions and numerous supporting active, reserve, and national guard
    units which participated in the combat phase of OIF. As a result, the Army
    estimated that these units, with assistance from other Army maintenance
    activities, would have to reconstitute over 53,000 pieces of rolling
    stock9 when the units redeployed to their home stations.

    In Iraq and Afghanistan, the U.S. military-especially the Army and Marine
    Corps-are operating at a pace well in excess of their normal peacetime
    level, which is driven by units' training requirements. This not only
    greatly increases the day-to-day operational maintenance requirements,
    including spare parts demands, of deployed Army and Marine Corps units,
    but also generates a large post-operational maintenance requirement that
    must be addressed when the units redeploy to their home station. Upon
    redeployment, the units need to bring their equipment at least back up to
    fully mission-capable status10 in order for the units to be able to train
    on their equipment and achieve their readiness levels and be prepared for
    future deployments. In addition, before leaving Iraq, redeploying units
    turned in a large amount of prepositioned equipment that must undergo
    maintenance and repair before the equipment can be reissued to units
    deploying to or already in southwest Asia in support of OIF, or returned
    to prepositioned equipment stock for future use. Figure 1 shows some
    prepositioned equipment stored in Kuwait awaiting repair.

    9 This figure includes prepositioned rolling stock that has remained in
    Iraq in support of ongoing operations.

    10 Fully mission capable means an item can "move, shoot and communicate",
    and has no outstanding safety issues.

    Figure 1: Army Prepositioned Equipment Awaiting Maintenance at Camp
    Arifjan

    Source: GAO.

    Army and Marine Corps units returning from deployments related to the
    global war on terrorism have equipment that has been heavily used and is
    in various degrees of disrepair. Upon returning to home station, the
    units' equipment is inspected to determine what maintenance is needed to
    bring the equipment back to the condition needed to allow the unit to
    conduct mission-essential training and be prepared for future deployments.
    The services use myriad repair and maintenance sources to assist units in
    reconstituting their equipment. At military installations, various
    maintenance personnel-including military personnel within units,
    installation personnel (including contractors) who support day-to-day
    maintenance operations, contractors who have been hired to augment the
    units' and installations' day-to-day workforces, and contractors who have
    been hired to increase an installation's maintenance capacity-are all
    working in concert to reconstitute the units' equipment in a timely manner
    so that the units will be ready to again deploy. In addition, military
    depots and contractors are using their vast maintenance and repair
    capabilities to help in the equipment reconstitution effort.

    To fund the global war on terrorism in fiscal year 2003, Congress provided
    DOD with $62 billion in the fiscal year supplemental appropriation,
    primarily funding operations in Iraq.11 While most of this funding was
    used to cover the costs of combat operations, the DFAS monthly terrorist
    report12 indicate that about $3.8 billion in funds were obligated for
    equipment reconstitution in fiscal year 2003.

    The fiscal year 2004 global war-on-terrorism supplemental budget included
    a significantly larger amount for equipment reconstitution than the
    previous supplemental budget. DOD requested $65.6 billion for executing
    the global war on terrorism in its fiscal year 2004 global war on
    terrorism supplemental budget request, which Congress funded at $64.3
    billion.13 In the budget-building process that was used for developing its
    fiscal year 2004 global war-on-terrorism supplemental budget request, the
    department included $5.9 billion for equipment reconstitution. (See table
    1.)

    Table 1: Fiscal Year 2004 Reconstitution Requirements Identified by
    Services and Requested in Supplemental

                                  Dollars in billions

                              Service requested          OSD supplemental request
                 Service Unit level Depot level Total      Unit level Depot level
                                                                            Total
                    Army            $3.64 $1.47 $5.11           $1.85 $1.22 $3.07
                    Navy             0.00 0.78a 0.78              0.00 0.78a 0.78
               Air Force              1.30 0.98 2.28               1.30 0.72 2.02
            Marine Corps              0.17 0.26 0.43               0.00 0.07 0.07
                   Total            $5.11 $3.49 $8.60           $3.15 $2.79 $5.94

    Source: Unaudited DOD data.

    aIncludes ship intermediate maintenance.

    11 Emergency Wartime Supplemental Appropriations Act for Fiscal Year 2003,
    Pub. L. 108-11 (Apr. 16, 2003).

    12 The DFAS monthly terrorist report tracks the amount of funds the
    services are obligating on the global war on terrorism by various
    categories, including equipment reconstitution.

    13 Emergency Supplement Appropriation Act for Defense and for the
    Reconstruction of Iraq and Afghanistan Fiscal Year 2004, Pub. L. 108-106
    (Nov. 6, 2003).

    For the fiscal year 2004 supplemental budget process, table 1 shows the
    requirements the services developed and what OSD ultimately included in
    its supplemental budget submission to Congress. The requirements are
    broken down between unit-level and depot-level requirements. Unit-level
    maintenance, which consists of organizational-and intermediate-level
    maintenance, includes maintenance performed by military units in motor
    pools and maintenance support units, and by DOD civilians and contractor
    personnel at installation maintenance organizations. Depot-level
    maintenance includes maintenance performed by DOD civilian employees and
    DOD contractors at military depots or private facilities. The fiscal year
    2004 supplemental defense appropriation does not delineate the amounts
    appropriated for unit- and depot-level equipment reconstitution.

      DOD's Equipment Reconstitution Estimating Process Contained Weaknesses That
      Produced Errors

    The two-phased process DOD used to develop its fiscal year 2004
    supplemental budget equipment reconstitution requirements contained
    weaknesses that produced errors that may result in misstatements of
    future-year budget estimates if not corrected. We observed two problems
    with the COST model associated with the first phase of DOD's process that
    have generated unreliable estimates. First, the COST model can overstate
    reconstitution costs related to aircraft and ship costs because these
    costs are covered in both the operations and reconstitution sections of
    the model. Second, there is uncertainty in DOD over the maintenance
    requirements covered by the model. We also noted problems with the second
    phase of DOD's process. In one instance, the Army did not consider funding
    in its baseline peacetime operation and maintenance budget that would be
    available for equipment reconstitution. The Army also significantly
    overestimated the organizational-and intermediate-level maintenance costs
    to reconstitute individual equipment items. In another instance, the
    services included requirements in their reconstitution estimates that
    appear to be inconsistent with equipment reconstitution activities
    established by OSD's supplemental budget preparation guidance. Also, OSD
    guidance only allowed the services to request funding to replace known
    battle losses-excluding projected battle losses and other expected
    losses-in preparing their fiscal year 2004 supplemental budget
    submissions.

    Duplication of Cost The model that OSD and the services used in the first
    phase of the process Requirements Overstates to calculate reconstitution
    requirements for fiscal year 2004 resulted in an Reconstitution Estimate
    overstatement of about $1.2 billion. This is because the COST model

    contains an error that can result in a duplication of reconstitution cost
    requirements. The equipment reconstitution section of the COST model
    provides funding for aircraft and ship reconstitution that is already
    funded through the operations section of the model.

    All services support their aircraft through a flying-hour program that
    covers costs associated with operating aircraft, such as petroleum, oil
    and lubricants, consumables (supplies), and spare parts. As a result, all
    organizational-and intermediate-level maintenance and repair requirements
    are met through the flying-hour program.14 Since the operations section of
    the COST model already includes flying-hour program funding, the inclusion
    of an equation for aircraft reconstitution in the equipment reconstitution
    section of the model is redundant. Air Force officials told us that due to
    their flying-hour program, additional funding specifically addressing
    organizational-and intermediate-level reconstitution of aircraft was not
    needed. However, the Air Force's fiscal year 2004 supplemental budget
    request included about $1.2 billion in the equipment reconstitution
    section for aircraft maintenance that was also covered by the operations
    section of the COST model. According to Air Force officials, they were
    unaware that the equipment reconstitution section duplicated the aircraft
    maintenance costs that are covered in the operations section of the COST
    model. In contrast, the Navy removed funding that the COST model's
    equipment reconstitution section provided for aircraft organizational-and
    intermediate-level maintenance.

    The equipment reconstitution section of the COST model also duplicates
    organizational-level ship reconstitution that is already covered in the
    operations section of the model. However, the Navy treated this potential
    duplication in the same manner as it treated the flying-hour program
    duplication. Recognizing that this maintenance was already covered in the
    COST model's operations section, the Navy only included intermediatelevel
    ship maintenance, and aircraft and ship depot-level maintenance in the
    equipment reconstitution section of its requirements calculation.

    The different ways that the Air Force and Navy treated aircraft
    reconstitution demonstrate how this potential redundancy is a weakness in
    the structure of OSD's COST model. In discussing these redundancies in the
    model with OSD comptroller officials, they told us that OSD and IDA

    14 Depot-level aircraft maintenance and repair requirements are funded
    through a process separate from the flying-hour program.

    officials were unaware of this potential duplication. This lack of
    awareness was demonstrated when OSD comptroller officials did not identify
    and correct the Air Force's duplication described previously. Air Force
    finance officials told us that they have taken steps when preparing their
    fiscal year 2005 supplemental budget to prevent this duplication from
    occurring again. We observed that the fiscal year 2005 supplemental budget
    did not repeat this duplication.

        DOD Had Uncertainty Over Which Maintenance Requirements Were Covered by Its
        COST Model

    There was uncertainty within the department regarding which maintenance
    requirements were covered in the COST model. OSD and the services
    developed their equipment reconstitution requirements with the
    understanding that the COST model calculated organizational-and
    intermediate-level maintenance only, and they thus calculated their
    depotlevel maintenance requirements outside of the model during the second
    phase of the process. However, we later learned that the model may have
    calculated some depot-level maintenance requirements, which could have
    resulted in the model duplicating the depot-level maintenance requirements
    calculated outside the model.

    We held a series of discussions with officials from OSD-the owners of the
    model-and IDA-the developers of the model-to determine what types of
    maintenance requirements are included in the equipment reconstitution
    section of the model. Both OSD and IDA officials provided us with
    different descriptions of what was included in the model. In addition,
    these officials were unable to produce any written guidance that OSD
    provided IDA regarding what maintenance requirements the model's equipment
    reconstitution section should cover. They stated that this was determined
    so long ago that the paper trail no longer exists and that in all
    probability the guidance was transmitted either verbally or via e-mail, or
    both.

    For example, in our initial meeting with OSD comptroller officials to
    determine how OSD and the services developed their equipment
    reconstitution estimates for the fiscal year 2004 supplemental budget, we
    were told that the equipment reconstitution section of the COST model
    included organizational-and intermediate-level maintenance requirements
    and excluded depot-level maintenance requirements. Officials from each of
    the services corroborated this viewpoint and stated that they understood
    the equipment reconstitution section of the COST model to include
    organizational-and intermediate-level maintenance requirements and exclude
    depot-level requirements. Army, Navy, Air Force, and Marine

    Corps finance officials also told us that they developed depot-level
    maintenance estimates separate from the COST model.

    Next, we met with IDA officials to better understand what levels of
    reconstitution maintenance were included in the equipment reconstitution
    section of the COST model. The IDA officials said that the model included
    organizational-and intermediate-levels of maintenance, and could include
    some depot-level maintenance. However, IDA could not provide us with the
    documentation to support this assertion and we were therefore unable to
    determine whether model calculations included or excluded depot-level
    maintenance.

    We shared IDA's comments about the levels of maintenance covered in the
    model with OSD comptroller officials in a follow-up meeting. At this
    point, they told us that its COST model was intended to provide
    organizationallevel maintenance costs only, which represents a small
    portion of the total equipment reconstitution requirement.15 However,
    based on our analysis of the COST model, we concluded that
    intermediate-level requirements are indeed included in the COST model
    equations. In the end, OSD comptroller officials stated that they are now
    taking steps to clear up confusion regarding the requirements for each
    type of maintenance and repair.

    As described previously, OSD comptroller officials did not clearly
    establish and communicate to IDA what levels of maintenance they expected
    the COST model to estimate. Without clearly identifying what levels of
    maintenance OSD expected in the COST model and subsequently clearly
    communicate this information to IDA, IDA officials are not able to ensure
    that the COST model generates accurate and complete organizational and
    intermediate maintenance cost estimates, and does not duplicate depot
    maintenance costs calculated outside of the model. Consequently, the
    department cannot have confidence in its equipment reconstitution budget
    estimate.

    15 OSD's supplemental request was split 53 percent for organizational-and
    intermediate-level maintenance and 47 percent for depot-level maintenance.
    OSD comptroller officials were not able to delineate organizational-and
    intermediate-level maintenance.

        Army's Equipment Reconstitution Estimate Did Not Consider Baseline Peacetime
        Budget

    The Army did not consider funding in its baseline peacetime operation and
    maintenance budget that would be available for equipment reconstitution
    when developing its own estimate outside of the COST model. As a result,
    the Army overestimated its equipment reconstitution requirements.

    The Army used the COST model as a starting point for determining its
    equipment reconstitution requirements for fiscal year 2004. However, Army
    officials concluded that the $1.9 billion calculated by the model was
    inadequate. As a result, the Army developed its own methodology for
    calculating equipment reconstitution requirements and estimated $3.0
    billion would be needed for organizational-and intermediate-level repair
    and maintenance, which was about $1 billion higher than the OSD COST model
    estimate.

    Our analysis of the Army's methodology for calculating equipment
    reconstitution requirements revealed a major weakness in the Army
    estimate. The Army's process for estimating its equipment reconstitution
    requirements did not include steps to offset total requirements with
    baseline funding.16 Consequently, we estimate that the Army's equipment
    reconstitution estimate may have been overstated by between $299 million
    to $497 million.

    OSD's guidance to the services for developing the supplemental budget
    specifies that the services were to offset funds already contained in
    their baseline budgets-peacetime maintenance costs that would not be
    incurred because the unit was deployed in support of the global war on
    terrorism-when estimating a contingency operation's cost. Not recognizing
    and adjusting for normal operating budgets overstates the funding
    requirement and could result in the Army overstating funding requirements
    for equipment reconstitution in the future if not addressed. According to
    Army officials, this oversight occurred because the Army did not establish
    a specific step in its supplemental estimating process to offset the
    Army's estimate with baseline budget funds.

    16 We have previously reported that contingency costs were being
    overstated because they were not adjusted to reflect baseline budget
    offsets. See GAO, Contingency Operations: DOD's Reported Costs Contain
    Significant Inaccuracies, NSIAD-96-115 (Washington, D.C.: May 17, 1996).

        Army Overestimated Organizational and Intermediate Maintenance Costs for
        Numerous Equipment Items

    In the process of reviewing the Army's methodology for calculating
    equipment reconstitution requirements, we also found that the Army
    overestimated organizational-and intermediate-level maintenance costs for
    numerous equipment items. A comparison of the actual fiscal year 2004
    equipment reconstitution obligations reported by the Army with the Army's
    equipment reconstitution cost estimate showed that organizational-and
    intermediate-level repair costs for individual equipment items were
    significantly overestimated. Specifically, we collected actual cost data
    on 38 types of equipment included in the Army's estimate and determined
    that the actual costs for reconstituting the items were lower than the
    Army's estimates for 34 of the 38 items. (See table 2.) The Army was
    unable to provide us with adequate support for its estimates because it
    did not retain supporting documentation. Consequently, we were not able to
    determine the reasons for differences between estimated costs and reported
    equipment reconstitution obligations.

    Table 2: Comparison of Army's Estimated Reconstitution Cost to Actual Cost
    for 38 Selected Items for Fiscal Year 2004

                                      Estimated                    Average actual
                                 reconstitution  reconstitution Actual as percent
                           Item   cost per item       cost per item a of estimate
                  M119 howitzer         $50,000                         $1,869 4%
                          M1101          12,931                         1,312 10%
                          M88A1         140,000                        14,587 10%
                           M969          30,000                         4,528 15%
                           M1A1         120,000                        18,213 15%
             M916 (10T tractor)          44,000                         8,560 19%
                   M1078 (FMTV)          33,000                         6,508 20%
                          M35A3          33,000                         6,780 21%
                     Compressor           9,000                         2,013 22%
                         M9 ACE          60,000                        14,136 24%
                   M113A3 (FOV)          46,000                        11,391 25%
                            MKT           9,000                         2,594 29%
                   M113A2 (FOV)          46,000                        13,738 30%
                           M871          17,000                         5,319 31%
              M978 2.5K tankers          38,000                        11,932 31%
                     M992 FAASV          50,000                        15,940 32%
                   M1083 (LMTV)          25,000                         8,830 35%
                        Page 15                     GAO-05-293 Defense Management

                             (Continued From Previous Page)

                                      Estimated Average actual
                                 reconstitution  reconstitution Actual as percent
                            Item  cost per item cost per item a       of estimate
                            AVLB         96,000          34,917               36%
                  Generator sets          5,565           2,024               36%
                              D7         25,000           9,527               38%
                          MICLIC          6,000           2,327               39%
               M915 (8T tractor)         25,000           9,914               40%
                       M2A2/M3A3         77,000          31,266               41%
                  M109A6 Paladin         55,000          24,064               44%
             M1076 (PLS trailer)         15,000           6,851               46%
                            M872         22,000          10,740               49%
                       PLS truck         39,000          19,477               50%
                  ATLAS forklift         15,000           7,552               50%
              M984 HEMTT wrecker         39,000          19,868               51%
            M977 10T cargo truck         38,000          23,880               63%
                            M149          3,777           2,435               64%
                         FLU-419         35,000          24,629               70%
                            M101          2,288           1,612               70%
                     4K forklift          9,000           8,363               93%

                                M105           2,288     2,654               116%
                           PLS racks           1,200     1,783               149%
                               M1061           1,200     1,973               164%
                      M200A1 trailer           1,200     2,390               199%

    Sources: U.S. Army and GAO analysis.

    aRepresents incremental cost comprised of direct labor and material costs
    and does not include any indirect cost allocation.

    Alternative Service The services included costs in their reconstitution
    estimates calculated Estimates Included outside the COST model that appear
    not to be equipment reconstitution as Equipment Maintenance established by
    OSD's guidance. In one case, the Navy and the Air Force

    included unfunded fiscal year 2004 depot-level maintenance
    requirementsThat May Exceed OSD's in their supplemental funding cost
    estimates that did not arise from OIF Reconstitution Guidance and other
    operations related to the global war on terrorism.

    The Navy and Air Force used unfunded peacetime depot maintenance
    requirements as the basis for the depot-level maintenance portion of their
    fiscal year 2004 supplemental equipment reconstitution requests. The Navy
    requested funding for unfunded ship overhauls, and according to Atlantic

    fleet officials, unfunded ship overhauls occur every year. These officials
    also stated that the Navy typically finds the funding needed to perform
    unfunded overhauls somewhere in its baseline budget or will delay the
    overhauls until the following year. In addition, the Air Force's fiscal
    year 2004 supplemental request for depot-level equipment reconstitution
    consisted of funding engine and airframe overhauls that were not funded in
    its fiscal year 2004 baseline budget.

    These requirements may not fall within the description of equipment
    reconstitution as established in OSD's guidance, which directed the
    services to request funds needed to restore forces to the same operational
    level as prior to deployment and to limit requests to those costs already
    incurred as a direct result of operations in support of the war on
    terrorism. However, the DOD guidance also instructed the services to
    prepare their supplemental budget estimates around the DOD Financial
    Management Regulation, Chapter 23 Contingency Cost Breakdown Structure,
    which provides a broader description of reconstitution costs. Taken as a
    whole, the DOD supplemental budget preparation guidance is unclear on what
    the services could and could not include in their budget submissions. In
    addition, Air Force and Navy officials said that funding for these
    requirements was needed to prepare their forces to be fully ready to fight
    the global war on terrorism. However, including these unfunded depot
    maintenance peacetime requirements may overstate the estimated cost of
    reconstituting equipment involved in operations in Iraq and Afghanistan.

        OSD Guidance Excluded Estimates of Potential Equipment Losses During the
        Budgeting Process

    In preparing the fiscal year 2004 global war-on-terrorism supplemental
    budget, OSD only allowed the services to request funding to replace known
    battle losses and excluded projected battle losses and other expected
    losses. Such expected losses include equipment that would be considered
    beyond economic repair, such as crash-damaged vehicles and maintenance
    washouts.17 However, the replacement of these excluded items ultimately
    will need to be funded in future budgets to ensure that the Army and
    Marine Corps have an adequate amount of equipment needed to meet future
    challenges.

    17 Maintenance washouts are equipment that has been deemed too expensive
    to repair when compared to the cost to replace the equipment item, and is
    removed from the active inventory.

    Figure 2: Bradley Fighting Vehicle-Example of Projected Equipment Item
    Damage

    Source: GAO.

    The equipment replacement needs being quantified by the services for
    inclusion in the fiscal year 2005 global war-on-terrorism supplemental
    budget will incorporate some of the expenses excluded by OSD guidance in
    the fiscal year 2004 supplemental budget request. However, as of December
    2004, the magnitude of this requirement is unknown.

    Using the Army's equipment reconstitution requirements analysis, we
    estimated that the fiscal year 2004 equipment replacement requirement due
    to maintenance washouts ranged from $259 million to $562 million.18
    Recognizing that not all OIF equipment losses were covered in the fiscal
    year 2004 supplemental, the Army has included some unknown battle losses,
    crash losses, and maintenance washouts in its Tactical Wheeled Vehicle
    Study. The Army engaged this study to identify shortfalls in its tactical
    wheeled vehicle fleets and also included transformation and underfunded
    requirements in past baseline budgets. This study will identify multiyear
    procurement requirements and, according to Army resource officials, it is
    hoped the Army will have these requirements funded

    18 This estimate is based on the Army's ability to locate excess carcasses
    that could be remanufactured at its intermediate-level maintenance
    facilities and depots. If carcasses are unavailable or maintenance
    capacity is unavailable due to operational and reconstitution
    requirements, the funding needed will be higher because the requirement
    will have to be met with procurement of new equipment.

    through future baseline and supplemental budgets. As of March 2005, the
    study has not been issued and the Army has been unable to provide us with
    an estimate of the procurement funding requirements, including the amount
    directly related to OIF equipment reconstitution requirements.

    Furthermore, the Army's and Marine Corp's reconstitution requirements for
    prepositioned equipment still being used in Iraq will also increase
    because the anticipated battle and crash losses and maintenance washouts
    will also continue to increase the longer the equipment remains in use.
    Until OSD allows the services to consider anticipated operational
    equipment losses and maintenance washouts in their supplemental budgeting
    process, equipment reconstitution requirements generated during the
    current fiscal year will inevitably be pushed out for funding in upcoming
    years. Not doing so could also have an impact on the ability of the
    services to quickly reconstitute equipment in the current fiscal year.

                                   DOD Not Accurately
                                  Reporting Equipment
                                  Reconstitution Costs

    DOD has not accurately tracked and reported its equipment reconstitution
    costs because the services are unable to segregate equipment
    reconstitution from other maintenance requirements, as required. In part
    to provide Congress with information on global war-on-terrorism costs and
    provide the OSD comptroller with a means to assess variance between
    obligations and the budget, DFAS compiles a monthly report to track these
    obligations. The DFAS report on funds obligated in support of the war
    includes a category for tracking equipment reconstitution obligations and
    the guidance associated with this report describes what reconstitution
    costs can include. Our analysis of the DFAS report showed that 1) the Air
    Force is not separately reporting equipment reconstitution obligations
    because it does not have a mechanism within its current accounting system
    to track them, 2) the Army is including unit reconstitution obligations
    that are above and beyond equipment reconstitution and other maintenance
    costs, and 3) the Navy is unable to segregate regular maintenance from
    reconstitution maintenance for ship overhauls. As a result, the equipment
    reconstitution obligations are being inconsistently reported by the
    services and the report data are not reliable for accurately determining
    how much the services are actually obligating for the reconstitution of
    equipment returning from deployments in support of the global war on
    terrorism. Table 3 lists the fiscal year 2004 obligations reported by the
    services in DFAS's report as of the end of September 2004 for
    reconstitution.

    Table 3: Reconstitution Obligations Reported by Services in DFAS Terrorist
    Cost Report, as of the End of September 2004

                                  Dollars in thousands

                              Service Obligations reported

                                    Army $3,704,622

                                      Navy 791,532

    Air Force

                                  Marine Corps 229,280

                               Special Operations 54,206

                                   Total $ 4,779,640

    Source: DOD.

    DOD reports the costs of the global war on terrorism largely in accordance
    with the cost breakdown structure found in its financial management
    regulation.19 This internal DOD guidance describes equipment
    reconstitution costs as including the cost to clean, inspect, maintain,
    replace, and restore equipment to the required condition at the conclusion
    of the contingency operation or unit deployment. This guidance, which
    includes a specific cost category for equipment reconstitution along with
    specific budget guidance issued by the OSD comptroller's office that
    addresses incremental costs of the global war on terrorism, calls for the
    services to report equipment reconstitution costs separately from other
    incremental costs.20 Despite this guidance, the Air Force is not
    separately reporting equipment reconstitution obligations to DFAS for
    inclusion in its monthly terrorism cost report owing to the way the Air
    Force accounting system was designed. Air Force officials told us that the
    Air Force's accounting system currently has no way to delineate equipment

    19 DOD Financial Management Regulation 7000.14-R, vol. 12, ch. 23, sec.
    230406, Contingency Operations (2001).

    20 Although not pointed out to us by the OSD comptroller office or Air
    Force officials, we noted during the course of our review two provisions
    of volume 12, chapter 23 of DOD's financial regulation that could be
    viewed as being inconsistent with this requirement. These provisions
    suggest that the services need not separately report reconstitution
    obligations if

    1) to do so would require them to establish a cost accounting system
    solely for the purpose of determining costs of contingency operations, or
    2) they could not separately identify the additive costs for equipment
    overall and maintenance attributable to the contingency. This apparent
    inconsistency could further confuse service budget and accounting
    officials as to the extent they should specifically report reconstitution
    costs apart from other incremental costs.

    reconstitution obligations from other global war-on-terrorism obligations
    for DFAS reporting purposes. Specifically, the Air Force does not have a
    mechanism nor has it established codes that can track the dollar amounts
    obligated on equipment reconstitution in fiscal years 2003 and 2004, which
    the guidance does not require. The Air Force's accounting system has two
    types of codes for classifying expenses: (1) element of expense investment
    codes, which are used for tracking obligations by commodities (such as
    supplies, travel, and civilian pay); and (2) emergency and special program
    codes, which are used to collect costs incurred during an emergency or a
    special program (such as the global war on terrorism). Neither of these
    codes, individually or in combination, equates to equipment
    reconstitution. Instead, equipment reconstitution obligations are spread
    throughout other categories in the DFAS terrorist cost report, as
    appropriate, for the type of obligations incurred. Thus equipment
    reconstitution obligations are reported in the operations category of
    DFAS's report, not the reconstitution category of the DFAS report, and are
    mixed with other global war-onterrorism obligations that are tracked by
    other cost categories in the DFAS report. According to OSD comptroller
    officials, having the ability to track actual global war-on-terrorism
    obligations is important in that it allows them insight into the accuracy
    of the supplemental budget that was generated, in part, from the COST
    model.

    Army and Navy equipment reconstitution obligations may also be inaccurate
    in the DFAS report. The Army and Navy track their equipment reconstitution
    obligations through the use of certain codes available in their account
    encoding structure and may overstate reported equipment reconstitution
    obligations, because these codes are accumulating global war-on-terrorism
    and other obligations that were not exclusively for equipment
    reconstitution.

    During our review, we found that the Army is including obligations not
    directly related to equipment reconstitution requirements arising from
    global war-on-terrorism deployments. For example, units reconstituting
    after returning from Iraq may be including maintenance obligations
    generated during training exercises. Army officials stated that these
    units are being ordered to rapidly prepare for subsequent deployments,
    which includes reconstituting equipment and engaging in training exercises
    among various other tasks. According to Army officials, training exercises
    can require the use of equipment that has not yet been fully reconstituted
    and the exercises generate additional maintenance requirements not related
    to global war-on-terrorism equipment reconstitution. However, these
    training-related maintenance requirements are not readily separable

    from the equipment reconstitution requirements, and are therefore being
    included as part of the Army's reported reconstitution obligations. In
    addition, some reconstitution obligations do not readily align with the
    cost categories in the DFAS report and are thus included in existing
    categories, such as equipment reconstitution. For example, Army budget
    officials told us that when units return home from a deployment they incur
    reconstitution expenses unrelated to their equipment. These expenses
    include training needed to reestablish a unit's ability to perform its
    mission and personnel expenses related to the movement of soldiers in and
    out of the unit that occur after an extensive deployment. The officials
    told us that these obligations are being included in the equipment
    reconstitution section because this was the best place to account for
    them. As a result, the Army's equipment reconstitution amounts are likely
    overstated.

    The Navy's reported reconstitution obligations include some maintenance
    costs that did not appear to completely result directly from global
    war-onterrorism deployments. Portions of the Navy's reported obligations
    for equipment reconstitution include major ship repairs and overhauls,
    called "availabilities", which are accomplished at specified time
    intervals independent of the ship's use during the global war on
    terrorism. The specific maintenance tasks performed during an availability
    depend on the type of ship, the type of repair or overhaul being
    conducted, and the ship's condition. According to Navy officials, they
    report all of the obligations incurred in conjunction with an availability
    funded by the fiscal year 2004 supplemental budget as equipment
    reconstitution regardless of whether the obligations are due to conditions
    that existed prior to a global war-onterrorism deployment or to peacetime
    maintenance conducted during all availabilities. The Navy reports all of
    these obligations as equipment reconstitution, because it does not have a
    process to capture what obligations for an availability are driven by the
    higher level of operations generated by global war-on-terrorism
    deployments versus baseline requirements generated by a ship during
    deployments not related to the global war on terrorism. While all of the
    maintenance tasks associated with availabilities that are funded by
    supplemental money are needed to effectively maintain the condition of
    Navy ships, not all of the maintenance performed during the availabilities
    resulted from the ships being deployed in support of the global war on
    terrorism. Thus, some of the Navy's reported obligations do not appear to
    fit DOD's criteria for equipment reconstitution costs that should be
    reported as an incremental cost of the global war on terrorism.

    Conclusions	As the services, especially the Army and Marine Corps,
    continue to conduct operations related to the global war on terrorism at
    the current high pace, they will continue to generate equipment
    reconstitution requirements. OSD and the services will continue to use the
    department's two-phased process to develop estimates of these maintenance
    requirements so they can be funded through supplemental and baseline
    budgets. However, DOD and the services cannot be assured that its global
    war-on-terrorism supplemental budget requirements are as reliable and
    complete as possible until the OSD comptroller:

    o 	revises its contingency model to ensure that costs covered by the
    model's operating tempo cost elements are not duplicated by costs in the
    model's reconstitution cost elements;

    o 	clearly establishes what equipment reconstitution maintenance
    requirements should be covered by the COST model and communicates this
    information to IDA to ensure that the model calculations reflect only
    these maintenance costs;

    o 	clarifies its guidance to the services on what types of maintenance
    requirements should and should not be included as equipment reconstitution
    when developing the supplemental budget; and

    o 	ensures that all anticipated equipment reconstitution requirements,
    such as operational losses and maintenance washouts, are considered when
    developing supplemental budget requests.

    Overestimating these requirements could result in a misapplication of
    funds, while underestimating them could require the services to draw funds
    from baseline programs or result in the inability of the services to fully
    reconstitute their equipment. Improving DOD's process for estimating
    equipment reconstitution maintenance and equipment replacement
    requirements will aid the services in reducing the risks they face in
    executing the equipment reconstitution program and help maintain a
    military that is able to meet the nation's needs.

    With global war-on-terrorism operations continuing at a high pace, the
    Army will be generating additional equipment reconstitution requirements
    that will be funded through future supplemental budgets. Although OSD did
    not use the Army's fiscal year 2004 equipment reconstitution estimate for
    the fiscal year 2004 supplemental request, that does not preclude OSD

    from using future Army estimates. Consequently, it is important that the
    Army appropriately offset its equipment reconstitution estimate with
    baseline peacetime funding, which it did not do for its fiscal year 2004
    estimate. Until the Army establishes a step in its supplemental estimating
    process to offset the estimate with the baseline budget, its calculation
    of equipment reconstitution requirements for future supplemental budgets
    will continue to be overstated. Further, if OSD uses the Army-calculated
    equipment reconstitution estimate and does not adjust the estimate for
    baseline funding, the Army's equipment reconstitution requirements could
    be overfunded, which could limit the funding available for other
    requirements, thus potentially increasing risks in other areas.

    Inconsistencies between how the services are reporting equipment
    reconstitution obligations in the DFAS global war-on-terrorism cost report
    mean that equipment reconstitution and other related cost categories are
    being inaccurately reported. Until DOD develops comprehensive and
    consistent methods for tracking and reporting equipment reconstitution
    obligations-including (1) developing a mechanism within the Air Force for
    identifying, accumulating, and reporting its equipment reconstitution
    obligations; and (2) refining the Navy and Army processes for identifying
    obligations that are incurred exclusively for equipment reconstitution-the
    usefulness of the DFAS report will remain limited. Improving the accuracy
    and completeness of the report will result in a DFAS cost report that will
    be more useful to OSD and Congress in their oversight of global
    war-onterrorism obligations.

      Recommendations for Executive Action

    To correct the weaknesses we identified in the equipment reconstitution
    cost estimating process the department used when developing its fiscal
    year 2004 supplemental budget request, we recommend that the Secretary of
    Defense take the following five actions:

    o 	Direct the OSD comptroller to revise its COST model to ensure that
    costs covered by the model's operating tempo cost elements are not
    duplicated by costs in the model's reconstitution cost elements;

    o 	Direct the OSD comptroller to clearly establish what equipment
    maintenance requirements should be covered by the COST model and
    communicate this information to IDA to ensure that the model calculations
    reflect only these maintenance costs;

    o 	Direct the Secretary of the Army to establish a step in its
    supplemental estimating process to offset the estimate with the baseline
    budget to improve future contingency funding estimates;

    o 	Direct the OSD comptroller to clarify its supplemental budget guidance
    to the services on what types of maintenance requirements should and
    should not be included as equipment reconstitution when developing the
    supplemental budget; and

    o 	Direct the OSD comptroller to ensure that all potential equipment
    reconstitution requirements are considered when developing supplemental
    budget requests by allowing the services to include anticipated equipment
    losses-both operational losses and maintenance washouts-in their
    supplemental budgeting process.

    To ensure that Congress has a clear insight into the cost of equipment
    reconstitution, we also recommend that the Secretary of Defense direct the
    services, in conjunction with DFAS, to develop comprehensive and
    consistent methods for tracking and reporting equipment reconstitution
    obligations. This includes (1) developing a mechanism within the Air Force
    for identifying, accumulating, and reporting its equipment reconstitution
    obligations; and (2) refining the Navy and Army processes for identifying
    obligations that are incurred for equipment reconstitution.

      Agency Comments and Our Evaluation

    The OSD Comptroller, Director for Operations and Personnel provided oral
    comments on a draft of this report for DOD and concurred with two of our
    six recommendations, partially concurred with three recommendations, and
    did not concur with the other recommendation.

    In concurring with our recommendation that OSD clarify its supplemental
    budget guidance to the services on what types of maintenance requirements
    should and should not be included as equipment reconstitution when
    developing the supplemental budget, the OSD director stated that
    improvements are made to each iteration of the guidance. We confirmed that
    the guidance provided to the services for the fiscal year 2005
    supplemental budget was much more detailed and comprehensive than the
    guidance provided for developing the fiscal years 2003 and 2004
    supplemental budgets.

    In concurring with our recommendation that the services, in conjunction
    with DFAS, develop comprehensive and consistent methods for tracking

    and reporting equipment reconstitution obligations, the OSD director
    stated that they have already revised their financial management
    regulation to improve reporting of equipment reconstitution. However,
    until additional actions are taken, such as improving the services'
    financial systems' ability to track obligations, our recommendation will
    not be fully implemented.

    In partially concurring with our recommendation regarding the duplication
    of maintenance costs in the COST model, the OSD director stated that they
    have made revisions to DOD's financial management regulations to ensure
    that the cost of equipment maintenance is not being duplicated in
    different COST model sections. However, as currently written, the revised
    section does not have any instructions on avoiding duplicating maintenance
    requirements calculated by the model's operations section; instead it
    simply divides reconstitution into four subcategories of maintenance.
    Until further changes are made, the intent of our recommendation will not
    have been met.

    In partially concurring with our recommendation that the OSD comptroller
    clearly establish what equipment reconstitution maintenance requirements
    should be covered by the COST model, the OSD director stated that IDA, the
    model's operator, periodically receives specific guidance from the
    comptroller's office on the criteria and elements of costs to be included
    in the model's calculations. However, as we reported, neither OSD
    comptroller nor IDA officials were able to provide us with examples of
    this guidance when requested. The OSD director also told us that they have
    taken action to ensure that the model calculates costs in accordance with
    the DOD Financial Management Regulation and that they issue guidance to
    the services on what costs will be covered by the model. Although Volume
    12, Chapter 23, Section 3.5 of the financial management regulation has
    been revised to delineate equipment reconstitution into four categories-
    organizational-, intermediate-, and depot-level maintenance; and
    contractor logistics support-the section does not state which of these
    categories are covered by the COST model. In addition, while OSD guidance
    to the services for developing the fiscal year 2005 supplemental budget
    stated that intermediate-and depot-level maintenance would be calculated
    outside the model, the guidance provided for developing the fiscal years
    2003 and 2004 supplemental budgets only specified that depot-level
    maintenance would be calculated outside the model. Until changes are made
    establishing what maintenance requirements are in the COST model and
    clearly communicating this to IDA, the intent of our recommendation will
    not have been met.

    The OSD director did not concur with our recommendation that the Secretary
    of the Army be directed to establish a step in its supplemental budget
    process for estimating equipment reconstitution requirements to offset the
    estimate with baseline funding. The OSD director said that the process for
    developing the supplemental budget already includes a process for
    excluding costs for equipment maintenance funded in the baseline budget.
    As stated in this report, we acknowledge that OSD's COST model equations
    for equipment reconstitution contain a factor for reducing the
    reconstitution requirements by taking baseline funding into account. We
    also acknowledge that OSD's process for building the supplemental budget
    has controls in place to help ensure that only incremental costs are
    included in the supplemental budget. However, we believe that the
    services' supplemental budget estimating processes also need to have such
    assurances built in. We made our recommendation to address the fiscal year
    2004 equipment reconstitution requirement that the Army developed separate
    from the COST model during what we have described in this report as the
    second phase of DOD's process for building the supplemental budget. When
    developing this requirement, the Army did not take into account available
    baseline funding, because it did not have a step in its supplemental
    budget estimating process to offset the estimate with baseline funding. If
    the OSD comptroller had used this Army-generated requirement in its fiscal
    year 2004 supplemental budget, the potential exists that OSD comptroller
    officials might miss the Army's failure to adjust this requirement for
    baseline funding. Importantly, the very safeguards that the OSD
    comptroller stated it has in place failed to offset the $1.2 billion
    duplication of aircraft maintenance requirements that the Air Force
    included in its fiscal year 2004 supplemental budget requirement. Taking
    action on our recommendation would provide the Army with the necessary
    safeguards to submit accurate budget estimates and avoid the potential
    that future supplemental budgets could provide more than incremental
    funding to the Army. Therefore, we continue to believe our recommendation
    has merit.

    In partially concurring with our recommendation that the services be
    allowed to include equipment losses in their supplemental budget
    requirements, the OSD director stated that they typically address these
    potential future costs through subsequent budget requests or through
    reprogramming efforts. The OSD director also told us that it is
    conceivable that some factor reflecting maintenance washout trends could
    be considered in future supplemental budget requests. If this action is
    taken, it should satisfy the intent of our recommendation. As we stated in
    our report, until OSD allows the services to consider anticipated
    operational

    equipment losses and maintenance washouts in their supplemental budgeting
    process, equipment reconstitution requirements generated during the
    current fiscal year will inevitably be pushed out for funding in upcoming
    years. Not doing so could also have an impact on the ability of the
    services to quickly reconstitute equipment in the current fiscal year.

    We are sending copies of this report to other appropriate congressional
    committees, the Secretary of Defense, the Secretary of the Army, the
    Secretary of the Navy, the Secretary of 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 will be available at no charge on GAO's Web site at
    http://www.gao.gov.

    If you or your staff have any questions on the matters discussed in this
    letter, please contact me at (202) 512-8412 or solisw@gao.gov or my
    assistant director, Julia Denman, at (202) 512-4290 or denmanj@gao.gov.
    Other major contributors to this letter were John Strong, Bob Malpass,
    Andy Marek, Robert Wild, Dave Mayfield, and Charles Perdue.

    William M. Solis Director, Defense Capabilities and Management

    Congressional Committees

    The Honorable John W. Warner, Chairman The Honorable Carl Levin Ranking
    Minority Member Committee on Armed Services United States Senate

    The Honorable Ted Stevens, Chairman The Honorable Daniel K. Inouye Ranking
    Minority Member Subcommittee on Defense Committee on Appropriations United
    States Senate

    The Honorable Duncan Hunter, Chairman The Honorable Ike Skelton Ranking
    Minority Member Committee on Armed Services House of Representative

    The Honorable Jerry Lewis, Chairman The Honorable John Murtha Ranking
    Minority Member Subcommittee on Defense Committee on Appropriations House
    of Representatives

    Appendix I

    Scope and Methodology

    To determine if the process DOD used to develop its fiscal year 2004
    supplemental budget equipment reconstitution requirements was accurate, we
    met with officials from the OSD Under Secretary of Defense (Comptroller);
    Assistant Secretary of the Army, Financial Management and Comptroller;
    Assistant Secretary of the Navy, Financial Management and Comptroller;
    Assistant Secretary of the Air Force, Financial Management and
    Comptroller; Headquarters U.S. Marine Corps Programs and Resources
    Department, and U.S. Marine Corps Deputy Commandant Installations and
    Logistics. We also collected and reviewed OSD and service equipment
    reconstitution guidance to develop an understanding of the processes the
    department used to develop its fiscal year 2004 equipment reconstitution
    requirements. As part of this effort we also met with officials from OSD
    Under Secretary of Defense (Comptroller); Headquarters U.S. Army Deputy
    Chief of Staff G-4; Headquarters U.S. Navy Deputy Chief of Naval
    Operations (Logistics); Headquarters U.S. Air Force Deputy Chief of Staff
    Installation and Logistics; and Headquarters U.S. Marine Corps Programs
    and Resources Department to identify the methodologies used by OSD and
    each of the services for determining equipment reconstitution requirements
    and collected related documentation. To gain further insight into the
    accuracy of the process the Army used to develop its equipment
    reconstitution requirement, we met with officials at and collected data
    from the Army Materiel Systems Analysis Activity; Forts Bragg, Campbell,
    Dix, Hood, Riley, and Stewart; and Camps Arifjan and Doha, Kuwait. We
    collected actual equipment reconstitution cost data from these activities
    and compared them to the data the Army used in developing its equipment
    reconstitution requirement. To determine the reliability of the actual
    reconstitution costs for Army equipment, we discussed and observed the
    equipment reconstitution data collection process at four of the Army bases
    we visited where we observed a consistent process for collecting and
    entering equipment reconstitution data into the Army's database. We also
    visited the AMSAA team that was managing and summarizing the Army's
    equipment reconstitution data collection effort to determine that the
    personnel collecting the data and managing the data collection effort were
    performing quality reviews to ensure completeness and accuracy.
    Additionally, the AMSAA management team had the Army commands review the
    data collected at their installations prior to passing the data to higher
    commands. Based on this assessment, we concluded that the data collection
    effort was sufficiently comprehensive and reliable to provide data for
    this engagement. We also collected and analyzed data the services use in
    developing their reconstitution requirements, which were submitted to OSD.
    Further, we collected and analyzed data OSD used to develop the
    department's overall equipment reconstitution requirement that was

    Appendix I Scope and Methodology

    included in the fiscal year 2004 global war-on-terrorism supplemental
    budget request. To gain further insight into how OSD developed the
    equipment reconstitution requirement, we met with IDA officials to develop
    an understanding of how OSD's COST model calculates this requirement. We
    limited our examination of the COST model to the section that calculates
    equipment reconstitution requirements, which consists of only 4 of the 188
    equations that comprise the COST model. To understand the extent to which
    equipment reconstitution requirements generated during fiscal year 2004
    will have to be funded in upcoming budgets we met with and obtained
    guidance issued by the OSD Under Secretary of Defense (Comptroller)
    regarding how the services' equipment reconstitution requirements were
    restricted. To quantify the effect of these limitations we collected Army
    data on potential equipment losses and estimated their possible impact on
    future budgets. To assess the equipment reconstitution requirement inputs
    provided to the services by their component commands and units we met with
    officials of and collected data at Army Forces Command, Naval Air Systems
    Command, U.S. Atlantic Fleet, Air Combat Command, and U.S. Marine Corps
    Logistics Command. Using the information and analysis described here we
    assessed the reasonableness and completeness of the department's equipment
    reconstitution requirements.

    To determine how accurately and completely the department is tracking and
    reporting equipment reconstitution costs we met with officials of and
    collected documentation from the Assistant Secretary of the Army,
    Financial Management and Comptroller; Assistant Secretary of the Navy,
    Financial Management and Comptroller; Assistant Secretary of the Air
    Force, Financial Management and Comptroller; and Headquarters U.S. Marine
    Corps Programs and Resources Department. We reviewed the structure of how
    the services are accumulating and reporting obligations associated with
    their equipment reconstitution efforts. We compared and contrasted what
    type of obligations each service considered as equipment reconstitution
    for inclusion in the Defense Financial Accounting Service's report that is
    tracking fiscal year 2004 global war-on-terrorism obligations. We
    discussed the inconsistencies between the services noted during our review
    with the service officials listed above to determine the reasons for the
    inconsistent manner in which equipment reconstitution obligations were
    reported.

    We performed our work from September 2003 through March 2005 in accordance
    with generally accepted government auditing standards.

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