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 [email protected] or my
assistant director, Julia Denman, at (202) 512-4290 or [email protected].
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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