Defense Budget: Trends in Operation and Maintenance Costs and	 
Support Services Contracting (18-MAY-07, GAO-07-631).		 
                                                                 
The Department of Defense (DOD) spent about 40 percent of the	 
total defense budget to operate and maintain the nation's	 
military forces in fiscal year 2005. Operation and maintenance	 
(O&M) funding is considered one of the major components of	 
funding for readiness. O&M appropriations fund the training,	 
supply, and equipment maintenance of military units as well as	 
the infrastructure of military bases. Over the past several	 
years, DOD has increasingly used contractors, rather than	 
uniformed or DOD civilian personnel, to provide O&M services in  
areas such as logistics, base operations support, information	 
technology services, and administrative support. The House	 
Appropriations Committee directed GAO to examine growing O&M	 
costs and support services contracting. This GAO report (1)	 
identifies the trends in O&M costs and services contracts and the
reasons for the trends, (2) discusses whether increased services 
contracting has exacerbated the growth of O&M costs, and (3)	 
provides perspectives on the benefits and concerns associated	 
with increased contracting for support services. GAO analyzed	 
DOD's O&M appropriations, budgets, and services contract costs	 
over a 10-year period and developed case studies of outsourced	 
O&M-related work at three installations. GAO is not making any	 
recommendations. DOD made only technical comments on a draft of  
this report.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-631 					        
    ACCNO:   A69770						        
  TITLE:     Defense Budget: Trends in Operation and Maintenance Costs
and Support Services Contracting				 
     DATE:   05/18/2007 
  SUBJECT:   Contract costs					 
	     Contract performance				 
	     Contracts						 
	     Cost analysis					 
	     Defense budgets					 
	     Defense cost control				 
	     Defense procurement				 
	     Department of Defense contractors			 
	     Equipment maintenance				 
	     Maintenance costs					 
	     Military appropriations				 
	     Policy evaluation					 
	     Source selection					 
	     Operations and maintenance costs			 
	     Public-private competitions			 
	     DOD A-76 Program					 
	     Global War on Terrorism				 

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GAO-07-631

   

     * [1]Results in Brief
     * [2]Background
     * [3]O&M and Services Contract Costs Have Increased Significantly

          * [4]Most Growth in O&M Costs Occurred since Fiscal Year 2001
          * [5]Increased Military Operations Were the Primary Reason for O&
          * [6]DOD's Reliance on Contractors for Support Services Has Incre

     * [7]Data Are Insufficient to Determine Whether Increased Service

          * [8]Information Needed to Assess the Effect of Increased Service
          * [9]A-76 Public/Private Competition Data Indicate Outsourcing De
          * [10]Case Studies Generally Show That Decisions to Contract Out W
          * [11]DOD Report Noted That Contract Security Guards Cost More tha

     * [12]Different Perspectives Exist on the Benefits and Concerns As

          * [13]Benefits from Increased Use of Contractor Support
          * [14]Concerns from Increased Use of Contractor Support

               * [15]The Congress Recently Required DOD to Consider
                 Performing Mo
               * [16]Military Services Have Taken Steps to Control Support
                 Servic
               * [17]Installation Officials Noted Reduced Flexibility in Some
                 Ins
               * [18]GAO Has Noted Concerns with Services Acquisition

     * [19]Concluding Observations
     * [20]Agency Comments
     * [21]Appendix I: Scope and Methodology
     * [22]Appendix II: GAO Contact and Staff Acknowledgments

          * [23]GAO Contact
          * [24]Acknowledgments

               * [25]Order by Mail or Phone

Report to Congressional Committees

United States Government Accountability Office

GAO

May 2007

DEFENSE BUDGET

Trends in Operation and Maintenance Costs and Support Services Contracting

GAO-07-631

Contents

Letter 1

Results in Brief 2
Background 6
O&M and Services Contract Costs Have Increased Significantly 7
Data Are Insufficient to Determine Whether Increased Services Contracting
Has Exacerbated O&M Cost Growth 18
Different Perspectives Exist on the Benefits and Concerns Associated with
Increased Contracting for Support Services 29
Concluding Observations 32
Agency Comments 32
Appendix I Scope and Methodology 35
Appendix II GAO Contact and Staff Acknowledgments 37

Tables

Table 1: Changes in Service Contract Costs in Selected Categories 16
Table 2: A-76 Public/Private Competition Decisions for Fiscal Years 1995
through 2005 19

Figures

Figure 1: O&M Costs for Fiscal Years 1995 through 2005 8
Figure 2: Percent Change in DOD Costs by Major Budget Category from Fiscal
Year 1995 to 2000 9
Figure 3: Percent Change in DOD Costs by Major Budget Category from Fiscal
Year 2000 to 2005 10
Figure 4: Percent Change in the Services' O&M Costs 11
Figure 5: Supplemental O&M Appropriations for Fiscal Years 2000 through
2005 13
Figure 6: Services' O&M Costs with and without Supplemental Funding,
Transfers, and Reprogrammings 14
Figure 7: First Performance Period Results from Army A-76 Public/Private
Competition Decisions to Outsource Work between Fiscal Years 1995 and 2005
20
Figure 8: First Performance Period Results from Navy and Marine Corps A-76
Public/Private Competition Decisions to Outsource Work between Fiscal
Years 1995 and 2005 21
Figure 9: First Performance Period Results from Air Force A-76
Public/Private Competition Decisions to Outsource Work between Fiscal
Years 1995 and 2005 22

Abbreviations

DOD Department of Defense
GWOT global war on terrorism
O&M operation & maintenance

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United States Government Accountability Office
Washington, DC 20548

Committees Congressional Committees

The Department of Defense (DOD) spent about $210 billion, or 40 percent of
the total defense budget, to operate and maintain the nation's military
forces in fiscal year 2005.^11 As a major component of DOD's funding for
readiness, operation and maintenance (O&M) appropriations fund the
training, supply, and equipment maintenance of military units as well as
the administrative and facilities infrastructure of military bases. Over
the past several years, DOD has increasingly used private sector
contractors, rather than uniformed or DOD civilian personnel, to provide
O&M-related services in areas such as logistics, weapon systems, and base
operations support; information technology services; and administrative
support. The Department of Defense (DOD) spent about $210 billion, or 40
percent of the total defense budget, to operate and maintain the nation's
military forces in fiscal year 2005. As a major component of DOD's funding
for readiness, operation and maintenance (O&M) appropriations fund the
training, supply, and equipment maintenance of military units as well as
the administrative and facilities infrastructure of military bases. Over
the past several years, DOD has increasingly used private sector
contractors, rather than uniformed or DOD civilian personnel, to provide
O&M-related services in areas such as logistics, weapon systems, and base
operations support; information technology services; and administrative
support.

In its June 2006 report accompanying the DOD Appropriations Bill, 2007,
the House Appropriations Committee expressed concern about the increasing
costs of operating our military forces.^22 The committee further stated
that this trend may have been exacerbated by efforts to contract out a
substantial portion of the military services' logistic and support
activities. To gain better insight about the costs and consequences of
contracting out, as well as other factors generating an increase in
operation and maintenance costs, the committee directed us to prepare a
comprehensive analysis covering fiscal years 1995 through 2005.
Accordingly, this report (1) identifies the trends in O&M costs and
services contracts and the reasons for the trends, (2) discusses whether
increased services contracting has exacerbated the growth of O&M costs,
and (3) provides perspectives on the benefits and concerns associated with
increased contracting for support services. In its June 2006 report
accompanying the DOD Appropriations Bill, 2007, the House Appropriations
Committee expressed concern about the increasing costs of operating our
military forces. The committee further stated that this trend may have
been exacerbated by efforts to contract out a substantial portion of the
military services' logistic and support activities. To gain better insight
about the costs and consequences of contracting out, as well as other
factors generating an increase in operation and maintenance costs, the
committee directed us to prepare a comprehensive analysis covering fiscal
years 1995 through 2005. Accordingly, this report (1) identifies the
trends in O&M costs and services contracts and the reasons for the trends,
(2) discusses whether increased services contracting has exacerbated the
growth of O&M costs, and (3) provides perspectives on the benefits and
concerns associated with increased contracting for support services.

To address these objectives, we reviewed and analyzed DOD's O&M
appropriations, budget documentation, and services contract costs and
identified the related trends for fiscal years 1995 through 2005. To
consider inflation, we adjusted cost data to constant fiscal year 2007
dollars using To address these objectives, we reviewed and analyzed DOD's
O&M appropriations, budget documentation, and services contract costs and
identified the related trends for fiscal years 1995 through 2005. To
consider inflation, we adjusted cost data to constant fiscal year 2007
dollars using DOD's adjustment factors.^3 We discussed with DOD and
service headquarters officials the reasons for the trends and how greater
reliance on the private sector for O&M activities formerly performed
in-house has affected the overall O&M budget. We also assessed the
availability of information related to services contracts, reviewed and
analyzed information from DOD's competitive sourcing, or A-76, program,
and visited three installations to develop case study examples of
O&M-related work that was contracted out either as a result of A-76
public/private competitions or because the uniformed personnel who
formerly performed the work were needed to support other missions. For the
case study examples, we identified cost estimates for the work when
performed by government employees, the reasons that the work was
contracted out, the actual contract costs, and the reasons for any
contract cost growth. We did not review the actual contracts. In reviewing
contract costs, we relied on cost data provided by installation officials.
We also discussed with installation officials any consequences associated
with increased contracting out of O&M work. Additionally, we examined
DOD's response to recent legislation requiring DOD to consider performing
more work by government employees, reviewed steps recently taken by the
military services to control support services contract costs, and
summarized our recent reports concerning DOD's acquisition of services.

^1Unless otherwise stated, operation and maintenance (O&M) costs in this
report are total obligation authority and are expressed in constant fiscal
year 2007 dollars.

^2H.R. Rep. No. 109-504, at 46-47 (2006).

We conducted our review from August 2006 through March 2007 in accordance
with generally accepted government auditing standards. A more detailed
description of our scope and methodology is included in appendix I.

Results in Brief

Largely driven by increased military operations related to the global war
on terrorism (GWOT) and other military contingencies, DOD's O&M and
services contract costs increased substantially since fiscal year 2001.
DOD's O&M costs were almost constant from fiscal years 1995 to 2000,
increasing by about 2 percent in the Army and declining about 1 percent in
the Navy and Marine Corps and 2 percent in the Air Force. However, between
fiscal years 2000 and 2005, DOD's O&M costs, including supplemental O&M
funds, increased from $133.4 billion to $209.5 billion, an increase of
$76.1 billion, or 57 percent. Among the military services during this
period, O&M costs increased by 137 percent in the Army, 30 percent in the
Navy and Marine Corps, and 29 percent in the Air Force. Most of this
growth occurred since fiscal year 2001 and was primarily caused by
increased military operations associated with GWOT and other contingencies
such as hurricane relief. In addition, DOD and service officials stated
that other factors also contributed to the growth in O&M costs, such as
the aging of military infrastructure and equipment; increased costs for
installation security, antiterrorism force protection, communications,
information technology, transportation, fuel, and utilities; and certain
changes in acquisition approaches. While O&M costs have increased, so has
DOD's reliance on contractors to perform O&M-related work. For example,
between fiscal years 2000 and 2005, DOD's service contract costs in
O&M-related areas increased by 73 percent. According to DOD and service
officials, several factors have contributed to the increased use of
contractors for support services. First, the GWOT and other contingencies
have significantly increased O&M requirements and DOD has met these
requirements without an increase in active duty and civilian personnel. To
do this, DOD relied not only on reserve personnel activations, but also on
increased use of contractor support. Second, federal government policy is
to rely on the private sector for needed commercial services that are not
inherently governmental in nature, which includes many of the requirements
generated from the GWOT in areas such as logistics and base operations
support. Third, some initiatives, such as DOD's competitive sourcing and
utility privatization programs, have resulted in greater reliance on the
private sector.

^3Office of the Under Secretary of Defense (Comptroller), National Defense
Budget Estimates for Fiscal Year 2007, "Table 5-4, Department of Defense
Deflators--Total Obligation Authority" (Washington, D.C.: March 2006).

Sufficient data are not available to determine whether increased services
contracting has caused DOD's costs to be higher than they would have been
had the contracted activities been performed by uniformed or DOD civilian
personnel. Because existing policy generally does not require a
public/private competition for private sector performance of a new
requirement or segregable expansion of an existing commercial activity
performed by government personnel, DOD officials stated that in-house cost
estimates have not been prepared for most of the work awarded to
contractors as a result of increased O&M requirements from GWOT and other
contingencies. Without this information, an overall determination cannot
be made of the effect of increased services contracting on O&M cost
growth. DOD does maintain detailed data from its competitive sourcing
program, commonly referred to as the A-76 program. These data include
information on contracts for work formerly performed in-house that were
awarded to the private sector as a result of a public/private cost
competition.^4 Our analysis of the military services' reported information
on 538 decisions during fiscal years 1995 through 2005 to contract out
work formerly performed by uniformed and DOD civilian personnel showed
that the decisions generally resulted in reducing the government's costs
for the work. However, compared to all O&M-related contracts, the number
of A-76 public/private competition contracts is small and the results from
this program may not be representative of the results from all services
contracts for new or expanded O&M work. DOD officials further noted that
outsourcing work formerly performed by uniformed personnel may reduce the
cost of the work but also increase O&M costs because military personnel
appropriations are used to compensate uniformed personnel and O&M
appropriations are used to pay contractors for their services.

Differing perspectives exist on the benefits and concerns associated with
increased contracting for support services. DOD officials noted that under
certain circumstances increased use of contractors for support services
can be beneficial by allowing more uniformed personnel to be available for
combat missions and providing certain support capabilities that are in
short supply in the active and reserve components. On the other hand,
concerns over increased contracting for support services have been cited
by the Congress, the military services, and us. For example, the Congress
recently required DOD to prescribe guidelines giving consideration to
performing more work using government employees. Section 343 of the
National Defense Authorization Act for Fiscal Year 2006 required the
Secretary of Defense to prescribe guidelines and procedures for ensuring
that consideration is given to using government employees for work that is
currently performed or would otherwise be performed by contractors.^5 In
February 2007, DOD officials stated that they plan to issue the required
guidance in the near future and that the use of government employees
instead of contractors to meet O&M-related requirements in some
circumstances might result in savings. Further, citing the need to control
costs and achieve fiscal efficiencies, the Army and the Air Force recently
issued policy memorandums calling for a reduction in services contract
costs. The Secretary of the Army stated in a January 2007 memorandum that
he expected to see significant reductions in the number of Army contracted
services personnel during the remainder of fiscal year 2007 and the
Secretary of the Air Force set targets for realizing estimated savings in
Air Force support services contract costs.^6 Navy officials stated that
although they had not issued any new policy on contracted services, the
issue is a concern and the Navy had reduced its planned contractor support
budgets in both fiscal year 2007 and 2008. At the three installations we
visited, local officials also cited concerns over increased contracting
for support services--such as the loss of flexibility that is inherent
with the use of uniformed and DOD civilian personnel in some
circumstances, the difficulty in preparing accurate contract statements of
work to help avoid contract modifications, and the availability of
sufficient resources to ensure adequate contract oversight. Finally, in
November 2006, we reported that DOD's approach to services acquisition did
not always take the necessary steps to ensure that customer needs were
translated into well-defined contract requirements or that postcontract
award activities resulted in expected outcomes.^7 As a result, DOD was
potentially exposed to a variety of risks, including purchasing services
that did not fully meet customer needs or that should have been provided
in a different manner or with better results. DOD concurred with the
report's recommendations to address these concerns and stated that the
department was taking or planned to take actions to improve the
acquisition of services.

^4Under the A-76 program prior to 2003, commercial activities involving 10
or fewer full time employees could be directly converted to performance by
a private contractor without a cost comparison under certain
circumstances.

^5National Defense Authorization Act for Fiscal Year 2006, Pub. L. No.
109-163, S 343 (2006).

Although there may be some merit in DOD developing more information on the
cost-effectiveness of its O&M services contracts that were not awarded
through the A-76 public/private competitive process, at this time we are
not recommending that DOD do this because performing the analyses to
determine the estimated in-house costs to perform this work can be
expensive and time consuming; contracting with the private sector may be
the only alternative to meet certain requirements in the short term,
especially during times of increased operations; and, as long as DOD uses
competition in its contract solicitations for new and expanded
requirements and provides adequate contract oversight, cost efficiencies
could be achieved through normal market forces. DOD made no comments on a
draft of this report except for technical comments, which we incorporated
where appropriate.

^6Secretary of the Army, Memorandum for Distribution, Subject: Improved
Management and Justification of Service Contract Requirements (Washington,
D.C.: Jan. 29, 2007); and Secretary of the Air Force, Memorandum for All
Major Commands, Subject: Contractor Support Approval Authority Policy Memo
06A-002 (Washington, D.C.: Mar. 9, 2006).

^7GAO, Defense Acquisitions: Tailored Approach Needed to Improve Service
Acquisition Outcomes, [26]GAO-07-20 (Washington, D.C.: Nov. 9, 2006).

Background

O&M appropriations support the training, supply, and equipment maintenance
of military units as well as the administrative and facilities
infrastructure of military bases. Along with military personnel costs,
which are funded with separate military personnel appropriations, O&M
funding is considered one of the major components of DOD's funding for
readiness.

O&M funds provide for a diverse range of programs and activities that
include the salaries and benefits for most DOD civilian employees; depot
maintenance activities; fuel purchases; flying hours; base operations;
consumable supplies; health care for active duty service personnel and
other eligible beneficiaries; reserve component operations; and DOD-wide
support functions including several combat support agencies, four
intelligence agencies, and other agencies that provide common information
services, contract administration, contract audit, logistics, and
administrative support to the military departments.

The Congress provides O&M appropriations to 11 service-oriented O&M
accounts--the Army, Navy, Marine Corps, Air Force, Army Reserve, Navy
Reserve, Marine Corps Reserve, Air Force Reserve, Army National Guard, Air
National Guard, and defensewide--and to program accounts, such as the
defense health program. In addition to the regular annual O&M
appropriations, the Congress can make supplemental O&M appropriations to
finance the incremental costs above the peacetime budget that are
associated with contingencies, such as the GWOT.

Since late 1995, DOD has encouraged the services and the defense agencies
to conduct cost comparison studies as provided for in the Office of
Management and Budget's Circular A-76. Under the A-76 process, otherwise
known as competitive sourcing, the military services and other defense
components conduct a public/private competition for a commercial activity
currently performed by government personnel to determine whether it would
be cost-effective to contract with the private sector for that activity's
performance. On the other hand, a public/private competition is not
required for private sector performance of a new requirement, private
sector performance of a segregable expansion of an existing commercial
activity performed by government personnel, or continued private sector
performance of a commercial activity. However, before government personnel
may perform a new requirement, an expansion to an existing commercial
activity, or an activity performed by the private sector, a public/private
competition is required to determine whether government personnel should
perform the commercial activity.

The DOD Commercial Activities Management Information System is DOD's
database of record established to meet reporting requirements on the
conduct of A-76 competitions and the results from implementing A-76
decisions, whether the decisions are to continue using government
employees to perform the work or to outsource the work. For contracts
awarded to the private sector, the database includes the estimated cost to
perform the work using government employees, the contract award amount,
the actual contract cost for each contract performance period, and brief
reasons for any cost growth over the performance periods. A contract
performance period is normally for 12 months, although the first
performance period may cover a shorter transition period when the work is
initially conveyed to the contractor. Contract information is to be
maintained through the end of the last performance period included in the
competition. Installation officials are responsible for reporting
information on the A-76 program for input into the DOD database.

O&M and Services Contract Costs Have Increased Significantly

Driven primarily by increased operations associated with GWOT and other
contingencies, DOD's O&M costs increased substantially between fiscal
years 1995 and 2005, with the most growth occurring since fiscal year
2001. DOD's reliance on contractors for support services also increased
substantially during this period in order to meet increased military
requirements without an increase in active duty and civilian personnel and
because federal government policy is to rely on the private sector for
needed commercial services that are not inherently governmental in nature,
which includes many of the requirements generated from the GWOT in areas
such as logistics and base operations support.

Most Growth in O&M Costs Occurred since Fiscal Year 2001

Although DOD's O&M costs increased significantly between fiscal years 1995
and 2005, there was a distinct difference in the rate of growth between
the early and latter years of this 10-year period. Specifically, as shown
in figure 1, DOD's annual O&M costs were practically constant until 2001,
when the costs began to increase.

Figure 1: O&M Costs for Fiscal Years 1995 through 2005

Note: The costs shown in the figure are actual total obligation authority,
which includes regular O&M appropriations, any supplemental O&M
appropriations, and any funding from other appropriation accounts
transferred or reprogrammed into the O&M account during budget execution.

Figure 2 shows that during the first half of the 10-year period from
fiscal year 1995 to fiscal year 2000, DOD's O&M costs increased about 1
percent. In comparison, costs in DOD's other major budget categories
during this period changed as follows: military personnel costs declined
about 13 percent; procurement costs increased about 21 percent; research
and development costs increased about 4 percent; and other costs increased
about 1 percent. DOD total costs were almost constant between fiscal year
1995 and fiscal year 2000.

Figure 2: Percent Change in DOD Costs by Major Budget Category from Fiscal
Year 1995 to 2000

Figure 3 shows that a significant change in cost growth occurred during
the subsequent 5-year period from fiscal year 2000 to fiscal year 2005,
when DOD's O&M costs increased about 57 percent. In the other major budget
categories during this period, military personnel costs increased about 36
percent, procurement costs increased by about 62 percent, research and
development increased by about 62 percent, and other costs increased about
13 percent. DOD total costs increased about 51 percent between fiscal year
2000 and fiscal year 2005.

Figure 3: Percent Change in DOD Costs by Major Budget Category from Fiscal
Year 2000 to 2005

Trends in O&M costs at the military service level generally reflect the
overall DOD trend. As shown in figure 4, between fiscal years 1995 and
2000, little change occurred in each service's O&M costs. However,
considerable cost growth occurred between fiscal years 2000 and 2005.
Among the services, the Army had the largest percentage of growth in O&M
costs between fiscal years 2000 and 2005. During this period, the Army's
O&M costs increased by about 137 percent, while the Navy and Marine Corps'
and the Air Force's O&M costs increased by about 30 percent and 29
percent, respectively.

Figure 4: Percent Change in the Services' O&M Costs

Increased Military Operations Were the Primary Reason for O&M Cost Growth

According to DOD and service officials, the primary cause for increased
O&M costs since fiscal year 2001 is the increase in military operations
associated with GWOT and other contingencies, including hurricane relief.
However, the officials also stated that other factors have contributed to
the growth in O&M costs, such as the aging of military infrastructure and
equipment; increased costs for installation security, antiterrorism force
protection, communications, information technology, transportation, and
utilities; and certain changes in acquisition approaches.

The fight against terrorism has resulted in operations and deployments
around the globe that are in addition to the usual peacetime operations.
According to DOD, the related costs have included not only the personnel
costs associated with mobilizing National Guard and reserve forces but
also the costs of supporting these forces and the increased pace of
operations. O&M-funded costs include a wide range of activities and
services supporting operations including costs related to (1)
predeployment and forward-deployed training of units and personnel; (2)
personnel support costs including travel, subsistence, reserve component
personnel activation and deactivation costs, and unit-level morale,
welfare, and recreation; (3) establishment, maintenance, and operation of
housing and dining facilities and camps in the theaters of operation; (4)
petroleum, oils and lubricants, spare parts, consumable end items, and
other items necessary to support the deployment of air, ground, and naval
units; (5) establishment, maintenance, and operation of facilities
including funds for roads, water, supply, fire protection, hazardous waste
disposal, force protection bunkers and barricades; (6) command, control,
communications, computers and intelligence within the contingency areas of
operations; (7) organization-level maintenance including repairs to
equipment and vehicles; (8) intermediate- and depot-level maintenance of
weapons and weapon system platforms requiring service after the wear and
tear of combat operations; and (9) contracts for services for logistics
and infrastructure support to deployed forces.

The additional military costs associated with GWOT and other contingencies
have been primarily funded through supplemental appropriations. Figure 5
shows the annual amount of supplemental O&M funds appropriated each year
from fiscal year 2000 through fiscal year 2005. During this period,
supplemental O&M appropriations totaled about $210 billion and, according
to the services, additional amounts were transferred or reprogrammed from
other accounts to the O&M accounts of the military services.

Figure 5: Supplemental O&M Appropriations for Fiscal Years 2000 through
2005

Note: GAO analyzed the annual supplemental O&M appropriations for DOD.

Although costs associated with the GWOT and other contingencies have been
the primary reason for increased O&M costs between fiscal years 2000 and
2005, other factors also contributed to the O&M cost growth in the
military services. To illustrate, if the services' annual O&M total
obligation authority is adjusted by removing annual supplemental O&M
appropriations and net transfers and reprogrammings into the O&M account,
the result shows that O&M costs still grew during this time period, as
illustrated in figure 6. Specifically, between fiscal years 2000 and 2005,
O&M costs after the adjustment grew by about 44 percent in the Army, 17
percent in the Navy and Marine Corps, and 2 percent in the Air Force.

Figure 6: Services' O&M Costs with and without Supplemental Funding,
Transfers, and Reprogrammings

Note: GAO analyzed annual supplemental O&M appropriations and DOD data on
the military services excluding the services' reserve components.

According to service officials, baseline O&M costs have increased between
fiscal years 2000 and 2005 because of many factors, such as aging of
military infrastructure and equipment, and increased costs for
installation security, antiterrorism force protection, communications,
information technology, transportation, and utilities. Navy officials
particularly cited the implementation of DOD's utility privatization
program as a factor contributing to increased O&M costs. In a September
2006 report, we noted that DOD's utility costs could potentially increase
by another $954 million to pay costs associated with remaining utility
systems that might be privatized.^8 Increased O&M costs are also
attributable to certain changes in DOD's acquisition approaches. For
example, the Air Force historically bought space launch vehicles, such as
the Delta and Titan rockets, as products paid for with procurement
appropriations. Now, under the Evolved Expendable Launch Vehicle program,
the Air Force uses O&M appropriations to purchase launch services using
contractor-owned launch vehicles. The projected cost of this program is
$28 billion. Further, as we noted in our September 2006 report, the Army
and the Air Force turned to service contracts for simulator training
primarily because efforts to modernize existing simulator hardware and
software had lost out in the competition for procurement funds.^9 As a
result, the simulators were becoming increasingly obsolete. Buying
training as a service meant that O&M funds could be used instead of
procurement funds.

^8GAO, Defense Infrastructure: Actions Taken to Improve the Management of
Utility Privatization, but Some Concerns Remain, [27]GAO-06-914
(Washington, D.C.: Sept. 5, 2006).

DOD's Reliance on Contractors for Support Services Has Increased since Fiscal
Year 2000 for Several Reasons

To meet military requirements during a period of increased operations
without an increase in active duty and civilian personnel, DOD has relied
not only on reserve personnel activations but also on increased use of
contractor support in areas such as management and administrative
services, information technology services, medical services, and weapon
systems and base operations support. Between fiscal years 2000 and 2005,
DOD's service contract costs in O&M-related areas increased over $40
billion, or 73 percent. Table 1 highlights the growth in several service
contract categories.

^9GAO, Contract Management: Service Contract Approach to Aircraft
Simulator Training Has Room for Improvement, [28]GAO-06-830 (Washington,
D.C.: Sept. 22, 2006).

Table 1: Changes in Service Contract Costs in Selected Categories

Fiscal year  2007 dollars  in                                
billions                                                     
                                                      Change from fiscal year
                                   Contract costs          2000 to 2005
                                    Fiscal    Fiscal                          
Service category              year 2000 year 2005     Amount    Percentage 
Professional, administrative,     $14.6     $30.1      $15.5           107 
and management support                                                     
Maintenance  and  repair   of       7.7      12.3        4.6            60 
equipment                                                                  
Data      processing      and       6.3      11.0        4.7            74 
telecommunications                                                         
Medical                             2.8       8.4        5.6           199 
Maintenance  and  repair   of       6.6       8.0        1.5            22 
real property                                                              
Utilities and housekeeping          3.9       7.0        3.1            79 
Transportation and travel           3.4       6.6        3.3            97 
Conservation   and    natural       1.7       2.3        0.7            39 
resources                                                                  
Operation of government-owned       2.3       2.1      (0.2)            -9 
facilities                                                                 
Technical      representative       1.4       1.7        0.3            23 
services                                                                   
Special studies and analyses        1.2       1.5        0.2            19 
Modification of equipment           1.1       1.4        0.3            29 
Educational   and    training       1.1       1.4        0.3            23 
services                                                                   
Other^a                             1.3       2.0        0.7            58 
Total                             $55.4     $95.9      $40.6            73 

Source: GAO analysis of DOD data.

Notes: GAO analyzed DOD's DD350 database of all contracting actions
exceeding $25,000. Some numbers in the table may not calculate correctly
due to rounding.

a"Other" includes contracts for quality control, testing, and inspection;
equipment lease, rental, and installation; social services; photographic,
mapping, and printing services; and salvage services.

DOD officials noted several factors that have contributed to DOD's
increased use of contractor support. First, the GWOT and other
contingencies have significantly increased O&M requirements and DOD has
met these requirements without an increase in active duty and civilian
personnel. To do this, DOD relied not only on reserve personnel
activations, but also on increased use of contractor support.

Second, Office of Management and Budget Circular A-76 notes that the
long-standing policy of the federal government has been to rely on the
private sector for needed commercial services and that commercial
activities should be subject to the forces of competition to ensure that
the American people receive maximum value for their tax dollars.^10 The
circular notes that a public/private competition--which can involve a
lengthy and costly process--is not required for contractor performance of
a new requirement or private sector performance of a segregable expansion
of an existing commercial activity. On the other hand, the circular states
that before government personnel may perform a new requirement or an
expansion of an existing commercial activity a public/private competition
is required to determine whether government personnel should perform the
work.

Third, DOD initiatives that have required that consideration be given to
outsourcing certain work performed by uniformed and DOD civilian personnel
have resulted in outsourcing decisions. For example, between fiscal years
1995 and 2005, DOD's competitive sourcing, or A-76 public/private
competition, program resulted in 570 decisions to contract out work that
had been performed by over 39,000 uniformed and DOD civilian personnel.
Also, in 1997, DOD decided that privatization of military installation
utility systems was the preferred method for improving utility systems and
services because privatization would allow installations to benefit from
private sector financing and efficiencies. As of March 2006, DOD had
awarded contracts to privatize 117 systems and had an additional 904
systems in various phases of the privatization evaluation and solicitation
process.

Fourth, service officials noted that in some instances certain personnel
issues tend to favor the use of contractor support. For example, service
officials stated that because of limitations on headquarters personnel
authorizations, the use of contractor support is often the only readily
available option to accomplish new or expanded commercial work
requirements at service headquarters. Service officials also noted that it
is generally easier to terminate or not renew a contract than to lay off
government employees in the event of reduced work requirements. For this
reason, use of contractor support is often favored when there is
uncertainty over the length of time that support services will be needed,
which is the case for some work supporting GWOT and other contingencies.

^10Office of Management and Budget, Circular No. A-76 (Revised), Subject:
Performance of Commercial Activities (Washington, D.C.: May 29, 2003).

Data Are Insufficient to Determine Whether Increased Services Contracting Has
Exacerbated O&M Cost Growth

Sufficient data are not available to determine whether increased services
contracting has caused DOD's costs to be higher than they would have been
had the contracted activities been performed by uniformed or DOD civilian
personnel. Although overall quantitative information was not available,
our analysis of the military services' reported information from its
competitive sourcing program, commonly referred to as the A-76
public/private competition process, and case studies of O&M-related work
contracted out at three installations showed that outsourcing decisions
generally resulted in reducing the government's costs for the work.
However, compared to all O&M-related contracts, the number of A-76
public/private competition contracts is small, the results from this
program may not be representative of the results from all services
contracts for new or expanded O&M work, and certain limitations exist with
the use of the A-76 data. Further, a recent DOD study found that the
Army's use of contract security guards at domestic installations cost more
than the use of guards employed by the Army.^11

Information Needed to Assess the Effect of Increased Services Contracting Is
Unavailable

To determine whether increased services contracting has exacerbated the
growth of O&M costs, information is needed that allows for a comparison of
the contract costs with the costs of performing the same work in-house
with uniformed or DOD civilian personnel. However, in most cases DOD does
not know how much contracted services work would cost if the work were
performed by government employees. DOD officials noted that existing
policy generally does not require a public/private competition for private
sector performance of a new or expanded commercial requirement and, as a
result, in-house cost estimates have not been prepared for most of the
work awarded to contractors as a result of increased O&M requirements from
GWOT and other contingencies. In the absence of such quantitative data,
information is not available to determine whether the government's costs
are higher than they would have been had the contracted services work been
performed by uniformed or DOD civilian personnel.

^11Deputy Under Secretary of Defense (Installations and Environment),
Report to Congress: Contractor Performance of Security Guard Functions
(Washington, D.C.: January 2007).

A-76 Public/Private Competition Data Indicate Outsourcing Decisions Were
Cost-effective but Data Limitations Exist

While overall information was not available to determine whether increased
services contracting has exacerbated O&M cost growth, DOD does maintain
data on its competitive sourcing program, otherwise known as the A-76
public/private competition process, which allows a comparison of in-house
and contract costs for some O&M related work. Specifically, DOD's A-76
program data include in-house and contract cost information on contracts
for work formerly performed by uniformed or DOD civilian personnel that
were awarded to the private sector as a result of a public/private cost
competition or, under certain conditions prior to May 2003, direct
conversion to contractor performance. As shown in table 2, of the 1,112
total A-76 public/private competition decisions that were made between
fiscal years 1995 and 2005, the military services decided to outsource the
work in 570, or 51 percent, of the cases. These decisions resulted in
contracting out the work formerly performed by over 39,000 uniformed and
DOD civilian personnel. In the remaining cases, based on the
public/private cost comparison the military services decided to continue
performing the work in-house.

Table 2: A-76 Public/Private Competition Decisions for Fiscal Years 1995
through 2005

                                                 Positions covered by A-76
                       A-76 decisions                    decisions
Military                   To      Percent                 To      Percent 
service     Total   outsource   outsourced   Total  outsource   outsourced 
Army          222          98           44  31,481     13,395           43 
Navy          405          99           24  28,746      6,440           22 
Marine         35          15           43   4,072      1,214           30 
Corps                                                                      
Air Force     450         358           80  27,892     18,116           65 
Total       1,112         570           51  92,191     39,165           42 

Source: GAO analysis of DOD data.

At the time of our review, the Army, Navy, Marine Corps, and Air Force had
reported detailed contract cost data on 538 of the 570 A-76 decisions to
outsource work. Our analysis of these data showed that the public/private
competition decisions generally resulted in reducing the government's
costs for the work.^12 Specifically, according to data reported during the
first contract performance period, the Army estimated savings of about $33
million from 96 contracts, the Navy and Marine Corps estimated savings of
about $74 million from 88 contracts, and the Air Force estimated savings
of about $115 million from 354 contracts.^13 Figures 7, 8, and 9 show each
service's reported A-76 outsourcing information for contracts resulting
from both public/private competitions and direct conversion from
government to contractor performance between fiscal years 1995 and 2005.

^12Our analysis relied on the data reported by the services. We did not
review the actual contracts.

Figure 7: First Performance Period Results from Army A-76 Public/Private
Competition Decisions to Outsource Work between Fiscal Years 1995 and 2005

Note: Numbers in the figure may not total correctly due to rounding.

^13All amounts in this report related to A-76 contracts are in current
year dollars--not fiscal year 2007 dollars.

Figure 8: First Performance Period Results from Navy and Marine Corps A-76
Public/Private Competition Decisions to Outsource Work between Fiscal
Years 1995 and 2005

Figure 9: First Performance Period Results from Air Force A-76
Public/Private Competition Decisions to Outsource Work between Fiscal
Years 1995 and 2005

Note: Numbers in the figure may not total correctly due to rounding.

Although the services' A-76 data show that decisions to outsource work
were cost-effective, several limitations are associated with the use of
this information. First, DOD officials noted that when work performed by
uniformed personnel is outsourced, the personnel generally are assigned to
other duties. Thus, while the cost to perform the outsourced work may be
less than when it was performed in-house, the overall cost to the
government may actually increase because the uniformed personnel continue
to be paid to perform different work and a contractor is now paid to do
the work formerly performed by the uniformed personnel. Also, outsourcing
of work formerly performed by uniformed personnel may also increase O&M
costs because military personnel appropriations are used to compensate
uniformed personnel and O&M appropriations are used to pay contractors for
services work.

Second, compared to all O&M-related contracts, the number of A-76
public/private competition contracts is small and the results from this
program may not be representative of the results from all services
contracts for new or expanded O&M work. For example, for the 538 A-76
outsourcing decisions for fiscal years 1995 through 2005 with reported
cost data, the total contract value for the first performance period was
about $1.2 billion. Yet, in fiscal year 2005 alone, the value of DOD's
O&M-related services contracts exceeded $95 billion.

Third, the available A-76 public/private competition information compares
the contract costs with the cost estimates for work using government
employees during the first contract performance period. Our review of
contract costs in subsequent performance periods showed that contractor
costs frequently grew and in many cases exceeded the government employee
cost estimate in subsequent periods. However, according to DOD cost
information, the cost growth was usually attributed to requirements being
added to the contract and contract wage increases, which the government
employee cost estimate did not reflect. As a result, information is
normally not available to determine whether the outsourcing continued to
be cost-effective for those contracts that subsequently cost more than the
estimate using government employees.

Fourth, the reliability of the services' reported A-76 public/private
competition contract costs and savings appears questionable. The DOD
Inspector General reported in November 2005 that DOD had not effectively
implemented a system to track and assess costs of performance under the
A-76 program.^14 The report stated that because system users did not
always maintain supporting documentation for key data elements and entered
inaccurate and unsupported costs, and the military services used different
methodologies to calculate baseline costs, DOD's A-76 database included
inaccurate and unsupported costs, and as a result, reported costs and
estimated savings may be either overstated or understated. DOD officials
noted that, while the estimated savings may be either overstated or
understated, there were still savings and that DOD was in the process of
addressing the report's recommendations for improving the tracking system.

During our visits to Fort Hood, Naval Air Station Pensacola, and Langley
Air Force Base, we reviewed the accuracy of reported cost information on
contracts awarded as a result of A-76 public/private competitions.
According to information provided by Fort Hood officials, we found that
actual contract costs were greater than the costs reported in the DOD A-76
database for one contract. However, the difference was less than 1
percent. At Naval Air Station Pensacola, there were no differences in the
costs reported in the A-76 database and the actual costs for eight
contracts awarded as a result of A-76 competitions. At Langley Air Force
Base, we found some differences in the reported and actual costs for four
contracts awarded as a result of A-76 competitions. For the four contracts
over 4 years, the actual contract costs, according to installation
officials, were about $250,000, or 5 percent, more than reported in the
database. However, even with the increased actual costs, the contracts
still showed considerable savings over the estimated costs using
government employees.

^14See DOD Office of Inspector General, D-2006-028.

Case Studies Generally Show That Decisions to Contract Out Were Cost-effective

During our visits to Fort Hood, Naval Air Station Pensacola, and Langley
Air Force Base, we reviewed examples of O&M-related work that was
contracted out, or slated to be contracted out, either as a result of an
A-76 public/private competition or because the uniformed personnel who
formerly performed the work were needed to support other missions.
According to installation officials, the outsourcing of work formerly
performed in-house had not resulted in any unexpected funding or other
consequences. Officials at each installation stated that their outsourcing
efforts had resulted in reduced costs for performing the work and that
they were satisfied with contractor performance. The following examples
illustrate the outsourcing results from specific cases of work formerly
performed in-house at the three installations we visited and in general
show that the outsourcing efforts appeared to be cost-effective.

Fort Hood

           o In June 2000, as a result of an A-76 public/private competition,
           Fort Hood contracted the operation and maintenance of the
           installation's firing range. During the A-76 competition, the cost
           estimate to continue performing the work in-house was $37.1
           million over the 4-year and 7-month total performance period. The
           estimate was based on using 118 civilian and 11 military personnel
           to do the work. The work was awarded to a contractor who bid $30.8
           million to perform the work. Fort Hood officials stated that
           between the time of the contract solicitation and the time the
           contractor took over range operations, changes occurred in unit
           training events and range operating standards which caused the
           work requirement to increase far above the level included in the
           solicitation's statement of work. As a result, the officials
           stated that the contract was modified to provide for the increased
           workload and actual contract costs totaled $38.2 million through
           the end of the total performance period in December 2004. Although
           the contract costs exceeded the in-house estimate by $1.1 million,
           or 3 percent, Fort Hood officials stated that they were confident
           that the outsourcing was cost-effective because the in-house cost
           estimate would have exceeded the actual contract costs if the
           in-house estimate had included the cost of the workload
           subsequently added to the contract. The officials also stated that
           they were satisfied with the contractor's performance.

           o In January 2003, Fort Hood contracted the installation's
           ammunition supply work because the uniformed personnel who
           formerly performed the work at Fort Hood were needed to help
           support the GWOT. According to installation officials, the work,
           which included the receipt, storage, and issue of training
           ammunition, had historically been performed by approximately 180
           uniformed personnel, who were also responsible for completing
           collateral military duties. The officials stated that the work was
           converted to contractor performance by modifying an existing Fort
           Hood support services contract to add the ammunition supply work
           for about $1.8 million annually. According to the officials, the
           contractor used between 45 and 56 people to do the work, and
           performance metrics, such as inventory accuracy, improved after
           the contractor took over the work. Although an analysis was not
           performed to compare the contract cost with the cost to perform
           the work with uniformed personnel, Fort Hood officials stated that
           they believe that the outsourcing was cost-effective because the
           contractor was performing the work with far fewer people compared
           to the number of uniformed personnel who formerly did the work.
           The officials stated that a new contract for the work was awarded
           in June 2006 at an annual cost of about $2.3 million. The
           officials attributed the increase in contract costs to new
           requirements that were added to the scope of the work.

           Naval Air Station Pensacola

           o In January 2001, as a result of an A-76 public/private
           competition, Naval Air Station Pensacola contracted the
           installation's receipt, storage, and distribution of petroleum,
           oil, and lubrication products. The work had previously been
           performed by 14 civilian personnel at an estimated annual cost of
           about $700,000. During the A-76 competition, the cost estimate to
           continue performing the work using government employees was
           $355,000 annually based on reducing the number of employees needed
           to do the work to seven. Naval Air Station Pensacola officials
           stated that the work was awarded to a contractor who bid $250,000
           annually to do the work. This amount was about $450,000 less than
           the original cost of the work and about $105,000 less than the
           estimate to continue performing the work in-house. Primarily
           because of added work requirements, reported data showed that the
           actual contract costs increased to $315,000 by the fifth contract
           performance period. Nevertheless, Naval Air Station Pensacola
           officials noted that this outsourcing effort continued to cost
           less than the estimated cost to perform the work in-house. The
           officials also stated that they were satisfied with the
           contractor's performance.

           o In March 2002, as a result of another A-76 public/private
           competition, Naval Air Station Pensacola contracted the management
           of household goods shipments for military personnel arriving and
           departing the installation. The work had previously been performed
           by 21 civilian personnel at an estimated cost of about $6.1
           million over a 5-year period. During the A-76 competition, the
           cost estimate to continue performing the work in-house was $3.8
           million over the 5-year total contract performance period, based
           on streamlining the work and reducing the number of employees
           needed to do the work. Naval Air Station Pensacola officials
           stated that the work was awarded to a contractor who bid $2.8
           million to perform the work over the total performance period.
           This amount was about $1.1 million less than the in-house
           estimate. Through the first 3 years and 3 months of the contract,
           reported data showed that the actual contract costs were about 13
           percent higher than the contractor's bid amount but were still
           less than the estimated cost to perform the work in-house. Naval
           Air Station Pensacola officials stated that contract costs were
           higher because of wage rate increases. The officials also stated
           that they were satisfied with the contractor's performance.

           Langley Air Force Base

           o In June 2000, as a result of an A-76 public/private competition,
           Langley Air Force Base contracted transient aircraft services
           work. During the A-76 competition, the cost estimate to continue
           performing the work in-house was $1.1 million annually based on
           using 14 military and 7 civilian personnel to do the work.
           According to Langley Air Force Base officials, the work was
           awarded to a contractor who bid $365,000 to perform the work, and
           the actual contract cost to perform the work during the first
           performance period was about $374,000. This amount was about
           $726,000, or about 66 percent, less than the estimated cost to do
           the work in-house. Although reported data showed that contract
           costs increased by 8 percent by the third contract performance
           period primarily because of wage rate adjustments, the contract
           still cost less than the estimated in-house cost to perform the
           work. Langley Air Force Base officials stated that they were
           satisfied with the contractor's performance and that the contract
           was recompeted in 2003 and awarded at approximately the same cost.

           o In October 2001, as a result of another A-76 public/private
           competition, Langley Air Force Base contracted certain records
           management services. During the A-76 competition, the cost
           estimate to continue performing the work in-house was $643,000
           annually based on using 13 uniformed personnel to do the work.
           According to Langley Air Force Base officials, the work was
           awarded to a contractor who bid about $337,000 to perform the work
           during the first annual performance period. This amount was
           $306,000, or about 48 percent, less than the estimated cost to
           perform the work in-house. According to the available data and
           Langley Air Force Base officials, the actual contract cost during
           the first performance period was the same as the bid amount.
           Although reported data showed that contract costs increased to
           about $394,000 by the fifth contract performance period primarily
           because of wage rate adjustments, the officials noted that the
           cost was still less than the in-house estimate for the work. The
           officials also stated that they were satisfied with the
           contractor's performance.
		   
		   DOD Report Noted That Contract Security Guards Cost More than
           Government-Employed Guards

           A recent DOD report provides another comparison of costs for work
           performed by contractors and government personnel.^15 In this
           case, DOD found that contract security guards at domestic
           installations cost more than use of guards employed by the
           government. However, as with the reported results from A-76
           contracts, because the data used in DOD's report is from a
           relatively small number of contracts, the results may not be
           representative of the results of all O&M related services
           contracts.

           The John Warner National Defense Authorization Act for Fiscal Year
           2007 required the Secretary of Defense to submit a report
           including an explanation of the Army's progress in responding to
           our April 2006 report that assessed the Army's acquisition of
           security guards and an assessment of the cost-effectiveness and
           performance of contract security guards.^16 Our report noted that
           in the aftermath of the September 11, 2001, attacks, DOD sent
           numerous active-duty, U.S.-based personnel to Afghanistan, Iraq,
           and other destinations to support the GWOT.^17 These deployments
           depleted the pool of military security guards at a time when DOD
           was faced with increased security requirements at its U.S.
           installations. To ease this imbalance, the Congress authorized DOD
           to waive a prohibition against the use of contract security guards
           at domestic military installations. The Army, the first service to
           use the authority, had awarded contracts worth nearly $733 million
           for contract guards at 57 installations as of December 2005.

^15See Deputy Under Secretary of Defense (Installations and Environment),
Report to Congress: Contractor Performance of Security Guard Functions
(January 2007).

^16John Warner National Defense Authorization Act for Fiscal Year 2007,
Pub. L. No. 109-364, S 333 (2006).

           Our report also noted that the Army had relied heavily on
           sole-source contracts to acquire contract security guards, despite
           the Army's recognition early on that it was paying considerably
           more for its sole-source contracts than for those awarded
           competitively. Our report made recommendations to the Secretary of
           Defense to improve management and oversight of the contract
           security guard program.

           In early 2007, DOD issued its report, which stated that the Army
           concurred with our recommendations and was in the process of
           resoliciting security guard contracts to increase the use of
           competition. In regard to comparing the costs of
           government-employed and contract security guards, DOD reported
           that the contract security guards were more expensive than use of
           government guards. However, the amount of the cost difference
           varied widely depending on whether the contract was awarded
           competitively. In cases where the contracts were awarded
           competitively, the contracts cost about 5 percent more than use of
           government guards. However, in cases where the contracts were not
           awarded competitively; the contracts cost about 42 percent more
           than government guards. DOD's report also noted its view that the
           security guard contracts provided greater flexibility in this
           instance to adjust the workforce level up or down when the threat
           level changes and a performance test showed no difference in the
           effectiveness between government and contract security guards.

^17GAO, Contract Security Guards: Army's Guard Program Requires Greater
Oversight and Reassessment of Acquisition Approach, [38]GAO-06-284
(Washington, D.C.: Apr. 3, 2006).

           Different Perspectives Exist on the Benefits and Concerns Associated
		   with Increased Contracting for Support Services

           DOD officials cited several benefits associated with the increased
           use of contractors for support services in certain circumstances.
           On the other hand, concerns over increased contracting have also
           been cited by the Congress, the military services, and us.
		   
		   Benefits from Increased Use of Contractor Support

           DOD officials noted that when expanded military missions,
           deployments, and other contingencies increase operational
           requirements, additional personnel are needed to perform the extra
           work. For mission support work, additional personnel might be
           obtained from several alternatives, such as increasing the size of
           the active military force, mobilizing reserve forces, hiring
           government employees, or contracting for services with the private
           sector. In certain circumstances, the officials stated that
           increased use of contractor support to help meet expanded mission
           support work has certain benefits. For example, the officials
           noted that the use of contractors can provide a force multiplier
           effect when contractor personnel perform military support missions
           to allow more uniformed personnel to be available for combat
           missions. Moreover, contractors can provide support capabilities
           that are in short supply in the active and reserve components,
           thus reducing the frequency and duration of deployments for
           certain uniformed personnel. The officials also stated that
           obtaining contractor support in some instances can be faster than
           hiring government workers and, when there is uncertainty over the
           length of time that support services will be needed, the use of
           contractor support instead of government employees can be
           advantageous because it is generally easier to terminate or not
           renew a contract than to lay off government employees when the
           operations return to normal. Further, the officials stated that
           they believed that contracts for new and expanded requirements can
           be cost-effective when the contracts are subjected to the forces
           of competition in the private sector.
		   
		   Concerns from Increased Use of Contractor Support

           Recently cited concerns associated with increased use of
           contractor support have included (1) the need for DOD to consider
           performing more work using government employees, (2) controlling
           support services contract costs, (3) reduced operational
           flexibility resulting from some outsourcing contracts, (4) the
           difficulty in ensuring accurate contract statements of work and
           sufficient contract oversight, and (5) questions on the adequacy
           of DOD's services acquisition process.
		   
		     The Congress Recently Required DOD to Consider Performing More
			 Work In-house

           The National Defense Authorization Act for Fiscal Year 2006
           required DOD to prescribe guidelines and procedures for ensuring
           that consideration is given to performing more work using
           government employees.^18 Section 343 of the Act requires the
           Secretary of Defense to prescribe guidelines and procedures for
           ensuring that consideration is given to using government employees
           for work that is currently performed or would otherwise be
           performed by contractors. The guidance is to provide for special
           consideration to be given to contracts that (1) have been
           previously performed by federal government employees at any time
           on or after October 1, 1980; (2) are associated with the
           performance of inherently governmental functions; (3) were not
           awarded on a competitive basis; or (4) have been determined to be
           poorly performed due to excessive costs or inferior quality. In
           February 2007, DOD officials stated that they had been working on
           developing the required guidelines and that they planned to issue
           the new guidance in the near future. The officials also stated
           that the use of government employees instead of contractors to
           meet O&M-related requirements in some circumstances might result
           in savings.
		   
		     Military Services Have Taken Steps to Control Support Services
			 Contract Costs

           Each of the military services has expressed concerns over
           increasing contract costs for support services. Citing the need to
           control costs, the Secretaries of the Army and the Air Force have
           issued policy memorandums calling for review and reduction in
           services contracts. For example, the Secretary of the Army stated
           in a January 2007 memorandum that he expected to see significant
           reductions in the number of Army contracted services personnel
           during the remainder of fiscal year 2007. Also, in a March 2006
           memorandum, the Secretary of the Air Force set targets for
           realizing estimated savings in Air Force contract support services
           costs. Navy officials stated that although they have not issued
           any new policy statements on contracted services, the issue is a
           concern. The officials stated that the Navy proactively reduced
           its planned contractor support budgets in both fiscal year 2007
           and 2008.
		   
		     Installation Officials Noted Reduced Flexibility in Some
			 Instances and Other Concerns with Outsourcing

           During our installation visits, local officials noted some
           concerns with outsourcing of support services. For example, Fort
           Hood officials stated that outsourcing of work formerly performed
           in-house can result in reduced flexibility in being able to
           quickly respond to changing requirements. The officials noted that
           in some instances when a new or different work requirement
           develops, uniformed and DOD civilian personnel can be reassigned
           to perform the tasks on a temporary basis or as a collateral duty.
           However, before contractors perform new or different work
           requirements, contract changes normally have to be negotiated,
           which can result in delays before the new work is started.
           Installation officials also noted concern over the difficulty in
           preparing accurate contract statements of work in order to avoid
           contract changes. Naval Air Station Pensacola officials stated
           that in some cases numerous contract changes occurred when the
           original statement of work did not anticipate or accurately define
           certain work situations. Further, installation officials cited
           concerns over ensuring adequate contract oversight. Officials at
           Naval Air Station Pensacola noted that ensuring adequate oversight
           becomes increasingly difficult as the number of contracts
           increases.
		   
^18National Defense Authorization Act for Fiscal Year 2006, Pub. L. No.
109-163, S 343 (2006).

             GAO Has Noted Concerns with Services Acquisition

           In November 2006, we reported that DOD's approach to managing
           service acquisitions has tended to be reactive and has not fully
           addressed the key factors for success at either the strategic or
           transactional level.^19 As a result, the growth in service
           contracting over the past 10 years was, in large part, not a
           managed outcome. Further, DOD's approach did not always take the
           necessary steps to ensure customer needs were translated into
           well-defined contract requirements or that postcontract award
           activities resulted in expected outcomes. As a result, DOD was
           potentially exposed to a variety of risks, including purchasing
           services that did not fully meet customer needs or that should
           have been provided in a different manner or with better results.
           Also, in January 2007 testimony before the Subcommittee on
           Readiness and Management Support, Senate Committee on Armed
           Services, we noted that long-standing problems with contract
           management continue to adversely affect service acquisition
           outcomes even as DOD has become more reliant on contractors to
           provide services for DOD's operations.^20 For example, the lack of
           sound business practices--poorly defined requirements, inadequate
           competition, and inadequate monitoring of contractor
           performance--exposes DOD to unnecessary risk and wastes resources.
           We have found cases in which the absence of well-defined
           requirements and clearly understood objectives complicates efforts
           to hold DOD and contractors accountable for poor service
           acquisition outcomes. Likewise, obtaining reasonable prices
           depends on the benefits of a competitive environment, but we have
           reported on cases in which DOD sacrificed competition for the sake
           of expediency. Monitoring contractor performance to ensure DOD
           receives and pays for required services is another control we have
           found lacking. In the testimony, we noted DOD has taken some steps
           to improve its management of services acquisition, and it is
           developing an integrated assessment of how best to acquire
           services.
		   
^19See [39]GAO-07-20 .

^20GAO, Defense Acquisitions: DOD Needs to Exert Management and Oversight
to Better Control Acquisition of Services, [40]GAO-07-359T (Washington,
D.C.: Jan. 17, 2007).		

           Concluding Observations
   
           DOD's O&M costs and reliance on contractors to perform O&M-related
           work have increased substantially since fiscal year 2001. However,
           sufficient data are not available to determine whether increased
           services contracting has caused DOD's costs to be higher than they
           would have been had the contracted activities been performed by
           uniformed or DOD civilian personnel. While we believe that there
           may be some merit in DOD developing more information on the
           cost-effectiveness of its O&M services contracts that fall outside
           of the A-76 public/private competition process, at this time we
           are not recommending that DOD do this for several reasons. First,
           performing the analyses to determine the estimated in-house costs
           to perform work awarded to contractors can be expensive and time
           consuming. Second, according to DOD officials, contracting with
           the private sector may be the only alternative to meet certain
           requirements in the short term, such as when uniformed personnel
           must be diverted from performing peacetime work to supporting
           operational missions. Third, as long as DOD uses competition in
           its contract solicitations for new and expanded requirements and
           provides adequate contract oversight, cost efficiencies could be
           achieved through normal market forces.
		   
		   Agency Comments

           DOD made no comments on a draft of this report except for
           technical comments, which we incorporated where appropriate.

           We are sending copies of this report to the Secretaries of
           Defense, the Army, the Navy, and the Air Force; the Commandant of
           the Marine Corps; and the Director, Office of Management and
           Budget. We will 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 about this report, please
           contact me at (202) 512-4523 or by e-mail at [email protected] .
           Contact points for our Offices of Congressional Relations and
           Public Affairs may be found on the

           last page of this report. The GAO staff members who made key
           contributions to this report are listed in appendix II.

           Brian J. Lepore, Director
		   Defense Capabilities and Management

           List of Committees

           The Honorable Carl Levin
		   Chairman
		   The Honorable John McCain
           Ranking Member
		   Committee on Armed Services
		   United States Senate

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

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

           The Honorable John P. Murtha
		   Chairman
		   The Honorable C.W. Bill Young
		   Ranking Member
		   Subcommittee on Defense
		   Committee on Appropriations
		   House of Representatives
		   
		   Appendix I: Scope and Methodology

           To identify the trends in operations and maintenance (O&M) costs
           and services contracts and the reasons for the trends, we reviewed
           and analyzed the Department of Defense's (DOD) O&M appropriations,
           budget documentation, and services contract costs and identified
           the related trends for fiscal years 1995 through 2005. We used
           costs as reflected by total obligation authority, which includes
           regular O&M appropriations, any supplemental O&M appropriations,
           and any funding from other appropriation accounts transferred or
           reprogrammed into the O&M account during budget execution. To
           consider inflation, we adjusted cost data to constant fiscal year
           2007 dollars using DOD's adjustment factors. We discussed with DOD
           and service headquarters officials the reasons for the trends in
           O&M costs and how outsourcing of O&M activities formerly performed
           in-house has affected the overall O&M budget. We shared the
           results of our analyses with DOD and service officials and
           incorporated their comments as appropriate.

           To discuss whether increased services contracting has exacerbated
           the growth of O&M costs, we determined the availability of
           information related to services contracts including whether
           in-house cost estimates were available for all contracts for new
           or expanded work awarded as a result of the global war on
           terrorism (GWOT) and other contingencies. We also reviewed and
           analyzed information from DOD's competitive sourcing, or A-76,
           program. Further, we visited three installations--Fort Hood,
           Texas; Naval Air Station Pensacola, Florida; and Langley Air Force
           Base, Virginia--to develop case study examples of O&M-related work
           that was contracted out either as a result of A-76 public/private
           competitions or because the uniformed personnel who formerly
           performed the work were needed to support other missions. Fort
           Hood and Langley Air Force Base were selected based on discussions
           with our requesters, and Naval Air Station Pensacola was selected
           based on recommendations from Navy officials who stated that the
           installation had a cross section of contracts for O&M work that
           was formally performed in-house. At each installation, we reviewed
           O&M budget information and discussed with local officials any
           adverse consequences associated with contracting out O&M-related
           work. For the case studies highlighting examples of work that was
           outsourced to private contractors, we identified cost estimates
           for the work if performed by government employees, the reasons
           that the work was contracted out, the actual contract costs, and
           the reasons for any contract cost growth. We relied on cost data
           provided by the installation officials and did not review any
           actual contracts. However, we did review the accuracy of reported
           information on selected contracts awarded as a result of A-76
           public/private competitions.

           To provide perspectives on the benefits and concerns associated
           with increased contracting for support services, we discussed this
           issue with DOD officials. We also examined DOD's response to
           recent legislation requiring DOD to give consideration to
           performing more work using government employees. We also discussed
           with DOD and service headquarters officials the effect of
           increased contracting support for support services and reviewed
           steps recently taken by the military services to control service
           contract costs. We also discussed with installation officials
           concerns associated with outsourcing O&M-related work that was
           formally performed in-house. Additionally, we summarized recent
           GAO reports that identified concerns with DOD's acquisition of
           services.

           We conducted our review from August 2006 through March 2007 in
           accordance with generally accepted government auditing standards.
		   
		   Appendix II: GAO Contact and Staff Acknowledgments
		   
		   GAO Contact

           Brian J. Lepore, (202) 512-4523 or [email protected]
		   
		   Acknowledgments

           In addition to the contact named above, Mark A. Little, Assistant
           Director; Alissa Czyz; Kevin Keith; Harry Knobler; Gary Phillips;
           and Sharon Reid made key contributions to this report.
		   
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(350912)

www.gao.gov/cgi-bin/getrpt?GAO-07-631 .

To view the full product, including the scope

and methodology, click on the link above.

For more information, contact Brian Lepore at (202) 512-4523 or
[email protected].

Highlights of [42]GAO-07-631 , a report to congressional committees

May 2007

DEFENSE BUDGET

Trends in Operation and Maintenance Costs and Support Services Contracting

The Department of Defense (DOD) spent about 40 percent of the total
defense budget to operate and maintain the nation's military forces in
fiscal year 2005. Operation and maintenance (O&M) funding is considered
one of the major components of funding for readiness. O&M appropriations
fund the training, supply, and equipment maintenance of military units as
well as the infrastructure of military bases. Over the past several years,
DOD has increasingly used contractors, rather than uniformed or DOD
civilian personnel, to provide O&M services in areas such as logistics,
base operations support, information technology services, and
administrative support.

The House Appropriations Committee directed GAO to examine growing O&M
costs and support services contracting. This GAO report (1) identifies the
trends in O&M costs and services contracts and the reasons for the trends,
(2) discusses whether increased services contracting has exacerbated the
growth of O&M costs, and (3) provides perspectives on the benefits and
concerns associated with increased contracting for support services. GAO
analyzed DOD's O&M appropriations, budgets, and services contract costs
over a 10-year period and developed case studies of outsourced O&M-related
work at three installations. GAO is not making any recommendations. DOD
made only technical comments on a draft of this report.

DOD's O&M and services contract costs increased substantially between
fiscal years 1995 and 2005, with most growth occurring since fiscal year
2001. DOD's O&M costs were almost constant between fiscal years 1995 and
2000. However, between fiscal years 2000 and 2005, DOD's O&M costs
increased from $133.4 billion to $209.5 billion--an increase of $76.1
billion, or 57 percent, in constant fiscal year 2007 dollars. This growth
was primarily caused by increased military operations associated with the
global war on terrorism and other contingencies. In addition to increased
O&M costs, DOD has increasingly relied on contractors to perform
O&M-related work. Between fiscal years 2000 and 2005, DOD's services
contract costs in O&M-related areas increased by 73 percent. According to
DOD and service officials, several factors have contributed to the
increased use of contractors for support services: (1) increased O&M
requirements from the global war on terrorism and other contingencies,
which DOD has met without an increase in active duty and civilian
personnel, (2) federal government policy, which is to rely on the private
sector for needed commercial services that are not inherently governmental
in nature, and (3) DOD initiatives, such as its competitive sourcing and
utility privatization programs.

Sufficient data are not available to determine whether increased services
contracting has caused DOD's costs to be higher than they would have been
had the contracted activities been performed by uniformed or DOD civilian
personnel. Because existing policy generally does not require a
public/private competition for contractor performance of a new or expanded
commercial requirement, in-house cost estimates have not been prepared for
most of the work awarded to contractors as a result of increased O&M
requirements from expanded military operations. Without this information,
an overall determination cannot be made of the effect of increased
services contracting on O&M cost growth. DOD does maintain data from its
competitive sourcing, or A-76, program. GAO's analysis of the military
services' reported information on 538 A-76 decisions during fiscal years
1995 through 2005 to contract out work formerly performed by uniformed and
DOD civilian personnel showed that the decisions generally resulted in
reducing the government's costs for the work. However, the number of A-76
public/private competition contracts is relatively small and the results
from this program may not be representative of the results from all
services contracts for new or expanded O&M work.

Although DOD officials have cited certain benefits from increased use of
contractors for support services, such as allowing more uniformed
personnel to be available for combat missions, concerns have also been
cited. For example, Congress recently required DOD to prescribe guidelines
giving consideration to performing more work using government employees
and GAO has noted concerns over DOD's approach to services acquisition.

References

Visible links
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-07-20
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-06-914
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-06-830
  38. http://www.gao.gov/cgi-bin/getrpt?GAO-06-284
  39. http://www.gao.gov/cgi-bin/getrpt?GAO-07-20
  40. http://www.gao.gov/cgi-bin/getrpt?GAO-07-359T
  42. http://www.gao.gov/cgi-bin/getrpt?GAO-07-631
*** End of document. ***