Depot Maintenance: Improvements Needed to Achieve Benefits from  
Consolidations and Funding Changes at Naval Shipyards (14-SEP-06,
GAO-06-989).							 
                                                                 
To improve fleet support activities, the Navy is consolidating	 
maintenance facilities and converting its shipyards from	 
financing under the Navy Working Capital Fund to funding through 
direct appropriations (direct funding). Puget Sound Naval	 
Shipyard was converted to direct funding in 2003. The National	 
Defense Authorization Act for Fiscal Year 2006 directed the Navy 
to assess the impact of converting Puget Sound to direct funding 
and directed that GAO review the Navy's report. The Navy	 
submitted its report to Congress in March 2006, confirming its	 
position that direct funding was more advantageous than working  
capital funding and can best satisfy fleet maintenance		 
priorities. GAO's objectives were to evaluate the extent to which
the Navy's report (1) provided data and other supporting evidence
for its overall assessment of the impact of converting Puget	 
Sound to direct funding, (2) addressed unresolved issues that had
been identified in prior studies, and (3) disclosed any other	 
issues that have affected the implementation of direct funding.  
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-989 					        
    ACCNO:   A60905						        
  TITLE:     Depot Maintenance: Improvements Needed to Achieve	      
Benefits from Consolidations and Funding Changes at Naval	 
Shipyards							 
     DATE:   09/14/2006 
  SUBJECT:   Cost analysis					 
	     Data integrity					 
	     Defense conversion 				 
	     Defense economic analysis				 
	     Information systems				 
	     Maintenance (upkeep)				 
	     Naval facilities					 
	     Performance measures				 
	     Policy evaluation					 
	     Reporting requirements				 
	     Shipyards						 
	     Navy Working Capital Fund				 
	     Puget Sound (WA)					 

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GAO-06-989

     

     * Results in Brief
     * Background
     * Navy Did Not Provide Data and Other Supporting Evidence for
     * Navy Did Not Address Unresolved Issues Identified in Prior S
          * Navy Did Not Identify Methodologies for Total Cost Visibilit
          * Navy Did Not Identify Performance Metrics Demonstrating Impr
     * Navy Report Did Not Identify Problems with Information Syste
     * Conclusions
     * Recommendations for Executive Action
     * Matter for Congressional Consideration
     * Agency Comments and Our Evaluation
     * Scope and Methodology
     * Appendix I: Matters in Section 322(b)(2) of the National Def
          * Matters Identified in Section 322(b)(2)
     * Appendix II: Comments from the Department of Defense
     * Appendix III: GAO Contact and Staff Acknowledgments
          * GAO Contact
          * Acknowledgments
               * Order by Mail or Phone

Report to Congressional Committees

United States Government Accountability Office

GAO

September 2006

DEPOT MAINTENANCE

Improvements Needed to Achieve Benefits from Consolidations and Funding
Changes at Naval Shipyards

GAO-06-989

Contents

Letter 1

Results in Brief 3
Background 6
Navy Did Not Provide Data and Other Supporting Evidence for Its Overall
Assessment 7
Navy Did Not Address Unresolved Issues Identified in Prior Studies 9
Navy Report Did Not Identify Problems with Information Systems Not
Designed for Direct Funding 13
Conclusions 15
Recommendations for Executive Action 16
Matter for Congressional Consideration 16
Agency Comments and Our Evaluation 16
Scope and Methodology 17
Appendix I Matters in Section 322(b)(2) of the National Defense
Authorization Act for Fiscal Year 2006 21
Appendix II Comments from the Department of Defense 23
Appendix III GAO Contact and Staff Acknowledgments 25

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separately.

United States Government Accountability Office

Washington, DC 20548

September 14, 2006

Congressional Committees

Since the 1990s, the Navy has implemented changes aimed at making its
fleet support activities more efficient and effective. These changes have
included consolidation of the management, operations, and funding of
facilities performing ship maintenance. The first facilities to be
consolidated, in 1998, were the Pearl Harbor Naval Shipyard and the Naval
Intermediate Maintenance Facility in Hawaii.1 In 2003, Puget Sound Naval
Shipyard in Washington State was consolidated with the Naval Intermediate
Maintenance Facility, which includes the Trident Refit Facility Bangor and
Everett Intermediate Maintenance Facility. Prior to these consolidations
the shipyards were financed through the Navy working capital fund, while
the intermediate maintenance facilities were funded through direct
appropriations that authorized the Department of Defense (DOD) to incur
obligations for designated purposes (such as ship maintenance or
modifications), sometimes referred to as direct funding or mission
funding.2 A working capital fund is a type of intragovernmental revolving
fund that operates as a self-supporting entity that conducts a regular
cycle of businesslike activities. Working capital funds function from the
fees charged for the services they provide consistent with their statutory
authority. With the consolidations of maintenance facilities at Pearl
Harbor and Puget Sound, the shipyards have been converted to direct
funding so that the consolidated facilities operate under a single
financial structure. The Navy set up a single financial structure for the
consolidated facilities using direct funding in the belief that direct
funding was more flexible than working capital funding and would help
enable the consolidated facilities to better achieve Navy fleet readiness
goals. The Navy plans to convert its two remaining shipyards on the East
Coast-Norfolk and Portsmouth-to direct funding starting October 1, 2006.

1 The Navy maintains its surface ships and submarines at three levels:
organizational, intermediate, and depot. Organizational maintenance
involves routine tasks, such as inspection, lubrication, and assembly of
minor parts that are typically performed by a ship's crew. Maintenance
beyond the capability or capacity of a ship's crew is performed at Navy
intermediate maintenance facilities and consists of short-term,
time-critical projects. Depot-level maintenance, traditionally done in
shipyards, requires high levels of skills and equipment beyond the
capability or capacity of ships' crews and intermediate personnel and
facilities.

2 A direct-funded activity receives an operating budget that provides the
total appropriated funding for the fiscal year without identification of
the specific work to be accomplished. Direct-funded shipyards use
appropriated funds for a specific fiscal year to perform depot-level
maintenance.

In our prior reviews of the consolidation of maintenance facilities at
Pearl Harbor, we identified unresolved issues in financial management
related to the conversion of the shipyard to direct funding. A more recent
review of the conversion of Puget Sound Naval Shipyard to direct funding
by the DOD Office of the Inspector General (DOD-IG) identified weaknesses
in cost visibility and financial management at that facility. Also, the
Congressional Budget Office (CBO) has recently identified issues related
to reduced cost visibility and financial management in converting
shipyards from working capital funding to direct funding. Section 322(a)
of the National Defense Authorization Act for Fiscal Year 2006 prohibited
the Navy from converting its two East Coast shipyards to direct funding
prior to October 1, 2006, and Section 322(b) of the act required the
Secretary of the Navy to submit a report to the congressional defense
committees by March 1, 2006, that assessed the effects of converting Puget
Sound from the working capital fund to direct funding.3 The Navy report
was to include an assessment of 11 matters, including cost visibility,
operational and financial flexibility, capital improvements, buyout costs4
associated with the transfer of the Navy's two East Coast shipyards from
the Navy working capital fund to direct funding, and compliance with
legislative provisions. (The 11 specific matters in Section 322(b)(2) are
listed in app. I.) The Navy submitted its report to Congress on March 1,
2006. The report's overall assessment was that direct funding provides for
a more agile workforce that can best satisfy fleet maintenance priorities
without sacrificing cost visibility, performance accountability, or
quality of work. According to the Navy, direct funding, in concert with
regional consolidation, enabled maintenance activities to quickly respond
to emergent fleet operational requirements.

3 The Navy was also required by Section 322(c) of the National Defense
Authorization Act for Fiscal Year 2006 to submit a report to congressional
defense committees that proposed congressional budget exhibits for use in
connection with the funding of Navy shipyards on a direct basis. Congress
also requested that CBO submit a review of the Navy's report on the
proposed budget exhibits. The Navy provided preliminary information in the
March 1, 2006, report, and a more complete response March 20, 2006. In
April 2006, CBO reported that, in general, the Navy's proposed budget
exhibits for direct-funded shipyards addressed the matters specified in
the congressional request and were consistent with CBO's template for
reporting.

4 Buyout costs are the costs associated with making the working capital
fund financially whole when transferring working fund activities to direct
funding. These costs include undepreciated capital assets, accrued
employee leave, liabilities, and accumulated operating results.

Section 322(b)(3) also directed our office to review the Navy's report,
which was to include our assessment of whether the report adequately
addresses the 11 matters identified in Section 322(b)(2) of the act. Our
objectives were to evaluate the extent to which the Navy's report (1)
provided data and other supporting evidence for its overall assessment of
the impact of converting Puget Sound to direct funding, (2) addressed
unresolved issues that had been identified in prior studies, and (3)
disclosed any other issues that have affected the implementation of direct
funding at Puget Sound Naval Shipyard. On May 18 and 19, 2006, we briefed
congressional staff on our preliminary observations. This report expands
on the information delivered in those briefings and includes
recommendations to the Secretary of Defense.

To conduct our evaluation we reviewed the information and data presented
in the Navy's report to support its assessment of the matters specified in
Section 322(b)(2). We obtained prior reports on the conversion of Pearl
Harbor and Puget Sound naval shipyards to direct funding and identified
issues that were determined to be unresolved at the time these studies
were conducted. We discussed the Navy's March 2006 report with officials
responsible for its development and visited the consolidated facility at
Puget Sound to obtain information on the implementation of direct funding.
We also obtained and analyzed additional supporting documentation from
Navy officials regarding the matters covered in the report. As a part of
our assessment of cost visibility, performance metrics, and information
systems, we discussed with Navy officials the quality and reliability of
financial and operations data generated for the consolidated facility. We
conducted our work between March and May 2006 in accordance with generally
accepted government auditing standards. Our scope and methodology are
discussed in more detail at the end of this letter.

                                Results in Brief

Our review of the Navy's March 2006 report to Congress showed that the
report did not provide data and other supporting evidence for its overall
assessment of the impact of converting Puget Sound Naval Shipyard to
direct funding. While the Navy reported on each of the matters specified
in Section 322(b)(2), it did not provide data and other information needed
to support the Navy's position that direct funding was more advantageous
than working capital funding and can best satisfy fleet maintenance
priorities. More specifically, the report did not provide evidence that
direct funding had provided for a more agile workforce-the ability to more
easily move workers among maintenance projects in response to fleet
priorities-which was a key benefit the Navy claimed was achieved by
converting to direct funding. The Navy's report also did not provide
complete information on some specific matters. For example, complete
information was not provided in the report on the shipyard's capital
improvement program because the report did not show the extent to which
approved funding met program requirements. In addition, buyout costs for
the two East Coast shipyards are still pending because the final amounts
have not been negotiated. Thus, while the report addressed each matter and
argued for direct funding, it did not present data and other supporting
evidence for its overall conclusion that direct funding can best satisfy
fleet maintenance priorities without sacrificing cost visibility,
performance accountability, or quality of work.

The Navy's March 2006 report did not show data that adequately addressed
two key issues-cost visibility and performance metrics-which had been
identified as unresolved in prior studies. First, the report did not
present the Navy's approach and methodology for achieving total cost
visibility for specific work performed. Prior reports by our office and
the DOD-IG identified weaknesses in total cost visibility as an unresolved
issue, and contained recommendations to develop guidance and appropriate
costing methodologies or techniques that improve total cost visibility.
Reporting the full cost of ship maintenance operations is recommended by
federal accounting standards and is a key metric for evaluating a
consolidated facility's productivity and performance. Although the Navy
was attempting to gather cost data to show the full costs of operations at
its shipyards, we found that the Navy has not developed policies and
procedures to routinely and systematically accumulate these total cost
data. Consequently, Office of the Secretary of Defense (OSD) and Navy
officials do not yet have complete and reliable cost data needed for
making fully informed decisions related to ship maintenance activities.
Second, with respect to performance metrics, the Navy's report did not
provide data that demonstrated improved results, such as increased
productivity, of consolidating ship maintenance facilities at Puget Sound
and converting the shipyard to direct funding. Prior reports by our office
and the DOD-IG identified a lack of performance metrics as an unresolved
issue, and both reports contained recommendations that the Navy establish
appropriate metrics. DOD concurred, but did not identify proposed actions
or completion dates. Without performance metrics to measure progress
toward meeting goals and objectives, the Navy lacks data needed for
evaluating the changes it has made and making fully informed decisions
related to the management of consolidated ship maintenance activities.

The Navy's March 2006 report did not disclose shortcomings in its
information systems at Puget Sound Naval Shipyard that have hindered its
ability to efficiently and reliably meet its financial and business
operations reporting requirements. The information systems at the
consolidated facility were not designed to provide the types of cost and
operational data being requested under direct funding. As a result, the
systems have required extensive changes and manual administrative efforts
by shipyard personnel to support the consolidated facility's financial and
business operations reports being requested under direct funding. For
example, considerable manual effort is required to assemble information
for reports and data calls for the consolidated activity. Also, data
reliability is a concern because of problems encountered when the shipyard
and the intermediate maintenance facility personnel, cost, material, and
industrial data systems and databases were linked together for the
consolidation and conversion to direct funding. The Navy recognizes it
needs improved information systems to support the consolidated facility at
Puget Sound under direct funding, and the DOD-IG found improvements are
crucial to avoiding costly fixes and workarounds. However, the Navy has
not identified a solution-including requirements, corrective actions, time
frames, and resources-to address shortcomings in the information systems
supporting Puget Sound. Furthermore, this issue is not unique to Puget
Sound Naval Shipyard, but impacts all shipyards converting to direct
funding. In the long term, the Navy plans to install an enterprisewide
system as part of DOD's business systems modernization program. However,
this new enterprisewide system will not be available for years under
current Navy plans. Addressing the need for improvement in the information
systems could contribute to the Navy's long-term plans to install an
enterprisewide system.

This report recommends that the Navy, as it moves ahead to improve fleet
support activities by consolidating regional maintenance activities and
converting its remaining two shipyards to direct funding, take actions to
improve management of these changes and achieve expected benefits. More
specifically, the Navy should improve its ability to routinely and
systematically provide for total cost visibility, develop performance
metrics aimed at demonstrating expected benefits such as increased
productivity, and develop specific plans for information systems designed
to efficiently support financial and business operations at its shipyards.
DOD provided written comments on a draft of this report. In commenting on
a draft of this report, DOD concurred with our recommendations. On the
basis of our evaluation of DOD's comments, we have revised our
recommendation regarding performance metrics to be more specific. We have
also added a matter for congressional consideration to provide increased
oversight of the Navy's plans for improving its information systems. DOD's
comments are reprinted in appendix II.

                                   Background

In 1999, we reported that the preliminary results of the Pearl Harbor
pilot were mixed and recommended that DOD and the Navy address unresolved
issues related to the financial management of the consolidation as the
Navy proceeded with similar consolidations in other locations.5 In 2001,
we updated this assessment and concluded that while the consolidation of
shipyard and intermediate maintenance activities offered benefits for
using resources more efficiently, financial management issues existed that
needed to be resolved.6 We highlighted problems concerned with inadequate
cost visibility and accountability, and with data used to show compliance
with applicable statutes. In December 2005, CBO issued an interim report
comparing working capital funding and direct funding for Naval shipyards.7
Its preliminary findings indicated that working capital funding and direct
funding each has strengths and weaknesses as shipyard funding systems, but
did not conclude whether one system was best. CBO's report noted concerns
that direct funding makes shipyards' costs and operations less visible.
Also in December 2005, the DOD-IG issued a report that raised concerns
about the conversion of other shipyards to direct funding.8 The report's
main findings were that Puget Sound did not routinely accumulate financial
information as they had done when financed as a working capital fund
activity, metrics and goals used to track results of the transition were
unreliable and did not address the impacts of direct funding, and the
information systems did not fully support operations. As a result, DOD-IG
was unable to determine the effectiveness of the transition of Puget Sound
to direct funding.

5 GAO, Depot Maintenance: Status of the Navy's Pearl Harbor Pilot Project,
GAO/NSIAD-99-199 (Washington, D.C.: Sept. 10, 1999).

6 GAO, Depot Maintenance: Key Financial Issues for Consolidations at Pearl
Harbor and Elsewhere Are Still Unresolved, GAO-01-19 (Washington, D.C.:
Jan. 22, 2001).

7 CBO, Comparing Working-Capital Funding and Mission Funding for Naval
Shipyards: An Interim Report (Dec. 1, 2005).

8 DOD-IG, Financial Management: Puget Sound Naval Shipyard Mission-funded
Prototype, D-2006-037 (Dec. 9, 2005).

    Navy Did Not Provide Data and Other Supporting Evidence for Its Overall
                                   Assessment

The Navy's March 2006 report to Congress included sections corresponding
to each of the matters specified in Section 322(b)(2) of the National
Defense Authorization Act for Fiscal Year 2006. However, although the
report addressed the Navy's assessment of the conversion of Puget Sound to
direct funding, it did not provide data and other supporting evidence for
the Navy's overall assessment that direct funding was more advantageous
than working capital funding and can best satisfy fleet maintenance
priorities.

More specifically, the report did not provide evidence that direct funding
had provided for a more agile workforce-the ability to more easily move
workers among maintenance projects in response to fleet priorities-which
was a key benefit the Navy claimed was achieved by converting to direct
funding. It did not provide data to support the Navy's position that
direct funding enabled the maintenance activities to quickly respond to
emergent operational requirements by reprioritizing work, minimizing the
financial impact of unplanned maintenance, and optimizing the use of all
resources available in a region. While it said that some sharing of
production personnel had occurred prior to consolidation, this required
special actions and burdensome administrative processes, all causing delay
in accomplishing needed work, but provided no data showing differences
before and after the conversion. Regarding operational and financial
flexibility, the Navy said that while the working capital fund allows for
continued operations on a limited basis, it considered this limited
flexibility minor compared to the overall benefits of direct funding,
particularly its ability to move workers among projects as workload
priorities change, increasing the agility of the workforce and minimizing
the administrative burden. Again, no data were provided on increased
workforce agility or reduced administrative burden. Moreover, it did not
provide data to support the overall conclusion that direct funding can
best satisfy fleet maintenance priorities without sacrificing cost
visibility, performance accountability, or quality of work.

More broadly, the use of direct funding rather than working capital
funding as a financing mechanism for shipyard maintenance reflects
fundamental choices about how DOD goods and services are provided.9 Naval
shipyards have operated under some type of revolving fund financing
system, which includes working capital funds, for decades. Working capital
funding requires shipyards to track and report their total costs in order
to determine operating results (profits and losses) and future billing
rates. In doing so, the working capital fund focuses attention on the
total costs of providing a good or service. The fees that a working
capital-funded shipyard charges for the services provided are based on
total projected costs and projected workload for the year. Total costs
include fixed costs and sunk costs that are independent of the amount of
work performed as well as costs that vary according to workload.
Consequently, the price that shipyards charge may be viewed by the
customers as too high. If customers view shipyard rates as too high, they
may defer maintenance, reduce the scope, or shift to a new maintenance
provider, such as an intermediate maintenance facility that is direct
funded or does not include fixed costs in its prices. Under direct
funding, direct appropriations authorize DOD to incur obligations for
designated purposes, such as ship maintenance or modifications.
Direct-funded shipyards provide maintenance services to the fleets for
free, but they are still reimbursed for modifications and conversions.
Both capital expenditures and military construction at direct-funded
shipyards are funded through separate direct appropriations. Thus, direct
funding may reduce the availability of data on shipyards' total costs
unless the data are specifically requested or developed.

9 For a broader discussion of performance budgeting within the federal
government, see GAO, Performance Budgeting: Efforts to Restructure Budgets
to Better Align Resources with Performance, GAO-05-117SP (Washington,
D.C.: February 2005).

The Navy's report also did not provide complete information on some
specific matters. For example, the Navy's report did not provide complete
information on the capital improvement program. The Navy report noted
differences in funding of the shipyard's capital improvement program since
the conversion to direct funding. Under working capital funding, funds
function from the fees charged for the services they provide consistent
with their statutory authority. Under direct funding, appropriations
authorize DOD to incur obligations for designated purposes. However, more
information would have helped in understanding whether, after the
conversion to direct funding, the approved funding met total shipyard
capital improvement program requirements as well as requirements for the
shipyard's sustainment, restoration, and modernization program, which
provides funds to keep the facilities in good working order, restores
facilities, and makes alterations to meet higher standards or accommodate
new functions or missions. As we pointed out in our 2001 report, Pearl
Harbor was budgeted for less than 5 percent of the identified capital
improvement program requirements for the consolidated facility over 3
fiscal years.

In addition, buyout costs for the two East Coast shipyards are still
pending because the final amounts have not been negotiated. The Navy
report stated that it had not fully resolved buyout costs for converting
the two East Coast shipyards. These costs are to be negotiated by the
Navy, OSD, and the Defense Finance and Accounting Service after the end of
fiscal year 2006. Based on end-of-fiscal-year projections, buyout costs
will total $231.5 million for these shipyards. The Navy included $140.1
million in the President's fiscal year 2007 budget for projected working
capital fund buyout costs for the two East Coast shipyards, leaving a
projected balance of $91.4 million. The report also did not note that
Puget Sound will incur additional buyout costs of more than $53 million
due to operating losses for working capital fund projects carried over
during the transition to direct funding.

       Navy Did Not Address Unresolved Issues Identified in Prior Studies

The Navy's March 2006 report did not show data that adequately addressed
issues identified as unresolved in prior studies. Specifically, the Navy
did not identify (1) methodologies for achieving total cost visibility and
(2) performance metrics to measure improved results, such as increased
productivity, achieved by the consolidation of maintenance facilities and
the conversion to direct funding.

Navy Did Not Identify Methodologies for Total Cost Visibility

The Navy's report did not discuss the Navy's approach and methodology for
achieving total cost visibility at the consolidated facility. Section
322(b)(2) called for the Navy to address, among other things, the effect
of direct funding on (1) the cost visibility of specific work performed
and (2) the total cost of consolidated ship maintenance operations on an
ongoing basis. The Navy stated that the conversion to direct funding had
been made without sacrificing cost visibility because the same information
systems used to accumulate costs under the working capital fund have
remained in place. The Navy report identified broad cost categories,
provided total budget and expenditures figures for the consolidated
facility for fiscal years 2004 and 2005, and compared the total percentage
of actual to budgeted expenditures. However, the report did not discuss
how the conversion to direct funding had changed the way the Navy has to
accumulate cost data and achieve total cost visibility for specific work
performed.

Prior reviews have raised issues about the Navy's ability to provide data
showing total cost visibility. We reported in 2001 that the management and
financial systems at Pearl Harbor did not have reliable data on an ongoing
basis to determine the cost of delivering a direct labor hour of ship
maintenance work, a key metric for evaluating the consolidated facility's
productivity and performance. Determining the total cost of delivering
specific ship maintenance is important for other reasons as well. The
Statement of Federal Financial Accounting Standard No. 4 states that
reporting entities should accumulate and report the costs of their
activities on a regular basis for management information purposes and that
costs may be accumulated through cost accounting systems or "cost finding"
techniques. The full cost of an output is the sums of (1) the cost of
resources consumed that directly or indirectly contribute to the output
and (2) the cost of identifiable supporting services provided by other
entities. Also, we reported that the Navy had not implemented a method to
routinely and systematically accumulate and account for the full cost of
operations, such as tracking indirect overhead costs as closely under
direct funding. We recommended in our 2001 report that the Navy implement
a method to account for the total cost of consolidated ship maintenance
operations on an ongoing basis. DOD concurred with our recommendation, and
our current work supports the validity of this recommendation.

The DOD-IG reported in December 2005 that cost information was not
collected to determine the total cost (including all associated overhead
costs) required to establish an overhead rate to charge non-DOD customers
for maintenance performed. The DOD-IG found that, according to Puget Sound
officials, under direct funding the consolidated activity no longer
routinely accumulated costs necessary to compute an overhead rate to
charge its customers. They did not track these costs because Commander,
Pacific Fleet, is responsible for funding all overhead costs under mission
funding. The DOD-IG's report recommended that the Navy develop an
instruction addressing the processes and business practices to be used at
direct-funded shipyards, issue guidance to address financial reporting and
cost information accumulation requirements, and update existing reporting
and cost guidance to reflect changes since consolidating and transitioning
to direct funding. The Navy did not concur with these recommendations, but
indicated they supported improving top-down guidance, operating
procedures, and consistency of financial information, and ensuring
compliance with fiscal policy.

Our current review confirmed the Navy has not yet developed policies,
procedures, and information systems to routinely and systematically
accumulate and account for the total cost of specific work performed or
total costs of consolidated shipyard operations on an ongoing basis. Under
direct funding, the shipyard does not track and provide cost accounting
for all costs associated with specific projects. While the shipyard can
generate data on direct labor and material costs associated with
individual projects, other Navy commands must provide the remaining cost
data needed to determine the total costs for the consolidated facility.

The Navy's report did not discuss the added complexities in systematically
producing the total cost data for auditable financial statements under
direct funding. Developing a methodology to collect total cost data under
direct funding would help produce auditable financial statements, and it
would better inform congressional defense committees' authorization and
appropriation decisions. Navy officials said they still needed to develop
procedures for efficiently generating the data in new budget exhibits
being developed for Navy direct-funded shipyards. They also said
developing a methodology on the total cost of shipyard work would help
them abide by the definition and comply with annual reporting required,
respectively, by Sections 2460 and 2466 of Title 10, United States Code.
These sections define depot maintenance and limit the percentage
allocation of funds that may be expended for contractor performance of
depot-level maintenance and repair work. More specifically, the military
departments and defense agencies cannot expend more than 50 percent of
annual depot maintenance funding to contract for depot-level maintenance
and repair by nonfederal contractor personnel. The Secretary of Defense is
required to submit a report annually identifying, for each of the armed
forces and each defense agency, the percentage of workload funding
expended between the public and private sectors for the preceding fiscal
year, and projected expenditures for the current and ensuing fiscal year.
The Navy has developed data needed to respond to these reporting
requirements for Puget Sound Naval Shipyard each year, but its methods
have not provided the total cost visibility needed. Naval Audit Service
officials said they are reviewing the Navy's processes for complying with
this annual reporting requirement. Consequently, OSD and Navy officials do
not yet have complete and reliable cost and related data needed for making
fully informed decisions related to ship maintenance activities.

Navy Did Not Identify Performance Metrics Demonstrating Improved Results
Achieved by Consolidating Maintenance Facilities and Converting to Direct
Funding

The Navy's report did not provide performance metrics demonstrating
improved results associated with consolidating ship maintenance facilities
at Puget Sound and converting the shipyard to direct funding. For example,
the Navy's report asserts that benefits of direct funding are increased
agility of the workforce and minimized administrative burden associated
with reassignment of workers to high-priority projects. However, the
report provided no performance metric data demonstrating these or other
benefits, such as increased productivity and quality of work, that might
be expected from the consolidation of maintenance facilities and adoption
of a single financing structure. Outcome-oriented performance metrics
provide a means for agencies to assess their progress toward meeting goals
and objectives under an analytical framework.

Prior reviews have raised concerns about the Navy's lack of performance
metrics regarding the consolidation of ship maintenance facilities. Our
2001 review at Pearl Harbor found that although the consolidation had made
more effective use of workers and facilities in Hawaii, the performance
metrics tested by the Navy had not provided a conclusive assessment of the
consolidated facility's accomplishments in achieving greater efficiencies
and lowering costs. We recommended that the Navy develop additional
metrics to measure the efficiency and effectiveness of consolidated ship
maintenance activities, drawing on lessons learned from the consolidation
at Pearl Harbor. DOD concurred with our recommendation.

The DOD-IG report also found that the Navy lacked adequate performance
metrics for the consolidated Puget Sound facility. The DOD-IG found that
the Navy did not have metrics and goals for Puget Sound that would help
show the impact of direct funding on operations at the consolidated
shipyard. The report recommended that OSD and the Navy jointly establish
metrics and goals and baseline these metrics to evaluate Puget Sound's
transition to direct funding. It also recommended that the Navy establish
policies and procedures for direct-funded metrics and goals to ensure
information is consistently collected and reported and supporting
documentation is maintained to fully support reported results. The Navy
concurred, but did not identify the proposed actions and completion dates.
The Navy further stated that the primary advantage of converting the
shipyards to direct funding is that it allows fleet commanders as opposed
to fleet support activities to control priorities and, further, that this
benefit does not fit neatly into a metric that can be compared in "before
and after" snapshots. Without performance metrics to measure progress
toward meeting goals and objectives, the Navy lacks data needed for
evaluating the changes it has made and making fully informed decisions
related to the management of consolidated ship maintenance activities. The
CBO reported that having appropriately structured annual summary reports
for each shipyard could enable Congress to monitor shipyards' finances and
performance regardless of the type of funding used to pay for their
operations. While the CBO is currently evaluating proposed metrics that
are intended to demonstrate naval shipyards' performance, the metrics
being proposed do not address assessing the progress being made to
consolidate facilities and convert to direct funding.

We determined that after the initial consolidation of facilities at Puget
Sound, Navy officials identified a need for metrics that would be used to
provide an ongoing assessment of the consolidation process of the shipyard
and intermediate maintenance facility. More specifically, the region
placed high importance on the establishment of metrics designed to fully
measure the progress and assess the effects of consolidation, including
quality, cost, schedule, and workforce development. These metrics were to
provide a factual basis for management actions as the consolidation
continued into maturity. However, efforts to collect these metric data
were halted in July 2005, and although the shipyard had a variety of
metrics at the time of our review, it did not have metrics in place
related specifically to the consolidation or direct funding. As a result,
it was not quantifying or measuring the level of productivity achieved
since the consolidation and conversion to direct funding.

Navy Report Did Not Identify Problems with Information Systems Not Designed for
                                 Direct Funding

The Navy's report did not disclose shortcomings in its information systems
at Puget Sound Naval Shipyard that have hindered its ability to
efficiently and reliably meet its financial and business operations
reporting requirements. The consolidated shipyard's information systems
were not designed for reporting direct-funding operations. The Navy's
report said the shipyard utilized its existing information system,
enabling it to maintain the same cost data as a shipyard financed by the
working capital fund. It stated only that Puget Sound experienced some
data collection and reporting anomalies that were corrected by the end of
fiscal year 2004.

The DOD-IG reported in December 2005 that the information systems
available at Puget Sound Naval Shipyard did not fully support the
consolidated activity's operations. It found that after the consolidation
and conversion to direct funding, Puget Sound decided to maintain two
information systems and their subsystems to manage operations and
activities. For example, multiple subsystems and databases from the Puget
Sound shipyard information system and the Trident Refit Facility were
maintained and manual interfaces established to reflect the consolidated
facility's projects. Those systems and databases required considerable
manual effort to assemble information and reports for the consolidated
activity. For projects that spanned multiple fiscal years, Puget Sound
personnel had to extract data from multiple databases and add them
together to determine the total cost of a specific project. Furthermore,
the shipyard had to implement new procedures to enable the appropriated
funds to be deobligated at the end of the year, and new obligations set up
for the next year. The report recommended that the Navy identify
information system requirements for supporting the operations of all
consolidated activities affected by the shipyard transition to direct
funding in order to avoid costly manual workarounds and manage
communications between systems. The DOD-IG considered the need to properly
plan and identify information system requirements crucial to avoiding
costly fixes and workarounds, and requested the Navy provide a plan of
action with milestones. The Navy concurred with the recommendation;
however, it did not identify any proposed actions or completion dates.

Our review verified that the information systems at Puget Sound Naval
Shipyard consolidated facility were not designed to provide the types of
cost and operational data being requested under direct funding. As a
result, the systems have required extensive changes and manual
administrative efforts by shipyard personnel to support the consolidated
facility's financial and business operations reports being requested under
direct funding. As a test, we requested data on the total cost of specific
work performed on a multiyear direct-funded ship maintenance project. The
data the shipyard could provide were limited to direct costs, mainly labor
and material. According to shipyard officials, determining total costs for
a ship maintenance project was simpler under the working capital fund
because the projects were funded on a multiyear basis, and the system was
set up to track costs that spanned more than a single fiscal year.
However, to identify the total amount spent over several years on a ship
maintenance project under direct funding, they have to identify the total
amount spent each year, and manually enter it into another spreadsheet to
add the data together.

Also, data reliability is of concern. For example, shipyard and
intermediate maintenance facility personnel we talked with said numerous
problems were encountered and manually addressed when the shipyard and the
intermediate maintenance facility personnel, cost, material, and
industrial data systems and databases were linked together for the
consolidation and conversion to direct funding. For example, senior staff
spent considerable time checking output data for errors with the shipyard,
intermediate maintenance facility, and Defense Finance and Accounting
Service information systems. When causes of problems were identified,
systems files were set up to catch problems so the data could be
corrected. Although the Navy was able to collect cost and performance data
to populate its proposed shipyard budget exhibits in the March 2006
report, Navy officials said its processes need to become more efficient
and visible, and show how the data are collected.

Navy officials in headquarters and Puget Sound recognized the need for
improved information systems to support the Puget Sound Naval Shipyard
consolidated facility and other East Coast shipyards converting from
working capital funding to direct funding. However, the Navy has not
identified a solution-including requirements, corrective actions, time
frames, and resources-to address shortcomings in the information systems
supporting Puget Sound. Furthermore, this issue is not unique to Puget
Sound Naval Shipyard, but impacts all shipyards converting to direct
funding. Addressing the need for improvement in the information systems
could also contribute to the Navy's long-term plan to install an
enterprisewide system as part of DOD's business systems modernization
program. However, they said this new enterprisewide system will not be
available for years under current Navy plans, and in the meantime they are
limited each year to a relatively small amount of funds that can be
requested for data system improvements. Consequently, the Navy is
requesting additional funds annually for critical short-term information
system changes needed as Norfolk and Portsmouth Naval Shipyards convert to
direct funding, in lieu of redesigning efficient and reliable information
systems that meet the needs of these shipyards.

                                  Conclusions

The Navy has expected to achieve benefits from consolidating maintenance
activities at Pearl Harbor and Puget Sound and converting the shipyards to
direct funding. These changes are intended to make these fleet support
activities more efficient and effective. The Navy has asserted that using
a single financing system (direct funding) at the consolidated facilities
enables it to move workers more freely among projects in response to fleet
priorities. DOD intends to convert the remaining two East Coast shipyards
to direct funding in fiscal year 2007, expecting even greater benefits.
However, the Navy has not developed a methodology for determining total
cost visibility or performance metrics for measuring outcome-oriented
results associated with consolidating the facilities and converting the
shipyards to direct funding. In addition, the Navy does not have
information systems in place that systematically produce reliable
information needed for both total cost visibility and performance metrics.
Thus, the Navy will not have the data needed to evaluate the changes it
has made at its consolidated facilities. Furthermore, although prior
reviews have reported on these issues, they continue to persist because
specific actions and time frames have not been established and monitored.
As the Navy moves ahead to improve fleet support activities by
consolidating regional maintenance activities and converting its remaining
two shipyards to direct funding, opportunities exist to improve the
management of these changes and achieve expected benefits.

                      Recommendations for Executive Action

To improve the Navy's management of consolidated maintenance facilities
and the conversion of shipyards to direct funding, we recommend that the
Secretary of Defense direct the Secretary of the Navy to take the
following three actions:

           o  Implement a method to routinely and systematically provide for
           total cost visibility of ship maintenance work performed.
           o  Develop metrics to ensure that the planned changes to
           consolidate the management, operations, and funding of facilities
           performing ship maintenance are being implemented; that specific
           productivity improvements and other benefits are being achieved;
           and that areas where performance is lacking or problems exist are
           identified.
           o  Develop specific plans for information systems designed to
           efficiently support the financial and business operations at its
           shipyards, including identification of requirements, corrective
           actions, time frames, and resources needed.

           Matter for Congressional Consideration
			  
			  The Congress should require the Navy to periodically report on its
           specific improvement plans and progress, as well as any
           impediments requiring congressional action, to ensure that
           shortcomings in the information systems supporting the Navy's
           consolidation of regional maintenance facilities and conversion to
           direct funding are addressed in a timely manner.

           Agency Comments and Our Evaluation
			  
			  In comments on a draft of this report, DOD concurred with our
           recommendations and cited actions it would take to implement them.
           Concerning our recommendation that DOD implement a method to
           routinely and systematically provide for total cost visibility of
           ship maintenance work performed, DOD reported that the Navy will
           implement revised policy and initiatives to systematically provide
           the desired total cost visibility of ship maintenance work
           performed at the four Naval shipyards, and that proposed guidance
           is being coordinated for implementation by September 30, 2006,
           pending final congressional approval of the fiscal year 2007
           President's Budget.

           On the recommendation to develop metrics, DOD said it will
           continue to refine the Naval shipyard exhibit to ensure Committee
           concerns related to shipyard performance are fully addressed and
           that alternative metrics, including a metric addressing increased
           productivity, will be developed. While DOD's response is
           encouraging, it is not clear whether DOD intends to develop
           specific metrics that measure and assess the effects of
           consolidation and funding changes, as discussed in our report.
           Such metrics would identify the scope of the consolidation and
           workforce affected, and ensure that the planned changes to
           consolidate the management, operations, and funding of facilities
           performing ship maintenance are being implemented; specific
           productivity improvements and other benefits are being achieved;
           and areas where performance is lacking or problems exist are
           identified. As a result, we have revised this recommendation to be
           more specific.

           Regarding our recommendation on information systems designed to
           efficiently support financial and business operations at its
           shipyards, DOD commented that the existing information technology
           workarounds at Puget Sound Naval Shipyard reflected a temporary
           situation associated with a pilot program. DOD said the Navy will
           resolve the longer term information technology needs to eliminate
           manual workarounds and provide the necessary tools to support the
           Regional Maintenance Plan. As noted in the report, Navy officials
           have previously told us that they are limited each year to a
           relatively small amount of funds that can be requested for data
           system improvements. Consequently, they have requested funding
           only for critical short-term information system changes needed as
           shipyards convert to direct funding, in lieu of redesigning
           efficient and reliable information systems that meet the needs of
           these shipyards. Because of the funding issues involved and the
           critical need for information system improvements supporting the
           Navy's direct-funded shipyards, we believe that additional
           congressional oversight could assist the Navy in its efforts to
           implement planned changes in a timely manner. Therefore, we have
           added a matter for congressional consideration.

           Scope and Methodology
			  
			  To assess the Navy's March 2006 report to Congress, we reviewed
           the Navy's reporting requirements established in Section 322(b)(2)
           of the National Defense Authorization Act for Fiscal Year 2006. We
           evaluated the information and data presented in the Navy's report
           to support its assessment of the matters specified in Section
           322(b)(2) as well as the report's overall conclusions. We
           discussed the Navy's report with officials responsible for its
           development and visited the consolidated facility at Puget Sound
           to obtain information on the implementation of direct funding. We
           also obtained and analyzed additional supporting documentation
           from Navy officials regarding the matters covered in the report.
           We discussed this work with officials in the Office of the Under
           Secretary of Defense for Acquisition, Technology, and Logistics;
           the OSD Comptroller; the Assistant Secretary of the Navy for
           Financial Management and Comptroller; the Chief of Naval
           Operations; the Naval Sea Systems Command; and the Puget Sound
           Naval Shipyard and Trident Refit Facility in the state of
           Washington. We reviewed prior GAO, CBO, DOD-IG, and Naval Audit
           Service reports on the conversion of Pearl Harbor and Puget Sound
           naval shipyards to direct funding. We discussed the issues of cost
           visibility and performance metrics with those who conducted these
           reviews and with Navy headquarters and Puget Sound officials. We
           reviewed performance metrics the Puget Sound Naval Shipyard uses
           in managing the shipyard and intermediate maintenance facilities.
           We also obtained an understanding of issues related to the
           information systems supporting Puget Sound. We met with officials
           responsible for data system management and discussed challenges
           and changes that have been needed to support Puget Sound's
           operations and how these issues may affect other shipyards
           converting to direct funding. We asked for data on the total cost
           of operations for a full fiscal year and the cost of work for
           specific ship maintenance projects. We also discussed information
           system and performance metrics issues related to consolidation and
           direct funding with officials at the Trident Refit Facility. As a
           part of our assessment of cost visibility, performance metrics,
           and information systems, we discussed with Navy officials quality
           and reliability of the financial and operations data generated for
           the consolidated facility. We conducted our work between March and
           May 2006 in accordance with generally accepted government auditing
           standards.

           We are sending copies of this report to the appropriate
           congressional committees, the Secretary of Defense, the Secretary
           of the Navy, 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 the GAO Web
           site at http://www.gao.gov . If you or your staffs have any
           questions on the matters discussed in this report, please contact
           me at (202) 512-5140. Contact points for our Offices of
           Congressional

           Relations and Public Affairs may be found on the last page of this
           report. Key contributors to this report are listed in appendix
           III.

           William M. Solis, Director Defense Capabilities and Management

           List of Congressional Committees

           The Honorable John 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 L. Hunter Chairman The Honorable Ike Skelton
           Ranking Minority Member Committee on Armed Services House of
           Representatives

           The Honorable C.W. Bill Young Chairman The Honorable John P.
           Murtha Ranking Minority Member Subcommittee on Defense Committee
           on Appropriations House of Representatives

           Appendix I: Matters in Section 322(b)(2) of the National Defense
			  Authorization Act for Fiscal Year 2006
			  
			  The National Defense Authorization Act for Fiscal Year 2006
           required the Secretary of the Navy to submit a report to the
           congressional defense committees by March 1, 2006, containing the
           Secretary's assessment on the effects of converting Puget Sound
           from the working capital fund to direct funding on 11 matters. The
           matters are listed below.

           Matters Identified in Section 322(b)(2)
			  
			  A. The cost visibility of specific work performed.

           B. The total cost of consolidated ship maintenance operations on
           an ongoing basis.

           C. The ability to distinguish between depot and intermediate work
           of consolidated ship maintenance activities.

           D. The costs associated with buyout expenses for the transfer of
           the shipyards of the Navy on the east coast of the United States
           from funding through the working capital fund of the Navy to
           funding on a direct basis.

           E. The flexibility of the shipyard to continue routine ship
           maintenance operations during a potential funding gap at the
           beginning of a fiscal year or when expected maintenance costs
           exceed annual appropriations.

           F. Operational and financial flexibility and responsiveness of
           funding on a direct basis compared to funding through the working
           capital fund of the Navy.

           G. Long-term funding for the capital improvement programs of the
           shipyard.

           H. Compliance with Section 2460 of Title 10, United States Code,
           which defines the work that is considered to be depot-level
           maintenance and repair versus work that is considered to be a
           major modification of a weapons system.

           I. Compliance with Section 2466 of Title 10, United States Code,
           which limits the amount of depot-level maintenance and repair
           workload of the Department of Navy that is performed by nonfederal
           government personnel in any fiscal year to not more than 50
           percent of the total depot workload reported to the department in
           that fiscal year.

           J. Compliance with Sections 1115 and 1116 of Title 31, United
           Stated Code, which require agencies to set annual performance
           goals, measure performance toward the achievement of those goals,
           and publicly report on progress.

           K. Compliance with Chapter 35 of Title 31, United States Code,
           which requires audited financial statements to include the ability
           to properly charge and account for reimbursable workload.

           Appendix II: Comments from the Department of Defense
			  
			  Now on p. 16.

           Now on p. 16.

           Now on p. 16.

			  
			  Appendix III: GAO Contact and Staff Acknowledgments
			  
			  GAO Contact
			  
			  William Solis (202) 512-5140 or [email protected]

           Acknowledgments
			  
			  In addition to the contact named above, Thomas Gosling, Assistant
           Director; Grace Coleman; Lee Cooper; and Amy Sheller were major
           contributors to this report.

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