Depot Maintenance: Action Needed to Avoid Exceeding Ceiling on Contract
Workloads (Letter Report, 08/24/2000, GAO/NSIAD-00-193).

Pursuant to a legislative requirement, GAO reviewed the Department of
Defense's (DOD) congressional reports on depot maintenances workloads,
focusing on: (1) DOD's compliance with the 50-50 requirement in 10
U.S.C. 2466 for fiscal years 1998 and 1999; (2) GAO's views on DOD's
progress in improving the quality of the workload data for the previous
fiscal years; and (3) the reasonableness of DOD's estimates of
expenditures for fiscal years 2000 through 2004.

GAO noted that: (1) DOD's report covering fiscal year (FY) 1998 and 1999
workloads shows that the Air Force, the Army, and the Navy were in
compliance with the 50-percent ceiling set by section 2466, because of
continuing errors and weaknesses in the Department's data, GAO could not
determine whether the military services were in compliance with the
50-percent ceiling for the percentage of depot maintenance performed by
the private sector in FY 1999; (2) the quality of the data reported for
FY 1999 was substantially improved from prior years; (3) improvements
made in the data and reporting process reduced the amount of errors
found or led to corrections of errors before data were reported to
Congress; (4) GAO attributes these improvements largely to better
guidance provided by the Office of the Secretary of Defense, the
reporting of more comprehensive data, improved audit coverage by the
military services, and the correction of errors by the services before
the data were reported to Congress; (5) however, GAO continues to find
errors and inconsistencies in the reporting of depot-level workload and
limitations in how well the services documented their analyses
supporting their workload reports; (6) GAO does not believe that DOD's
projections of depot maintenance workloads for fiscal years 2000 through
2004 are a reasonably accurate projection of future depot maintenance
expenditures; (7) future year expenditure projections, at best, provide
a rough estimate of future workload funding split between the public and
private sectors since the projections are constructed using budgetary
estimates that by their nature, will change over time; (8) DOD's future
year projections do not show the reporting services exceeding the
50-percent ceiling on contract work in FY 2000 and beyond; (9) however,
the reasonableness of the estimates is doubtful because of uncertainties
that exist regarding the extent to which the services have fully
identified private sector depot maintenance workloads; (10) further,
GAO's analysis of available data indicates that the Air Force: (a) may
exceed the ceiling by about $200 million this fiscal year; and (b) faces
significant management challenges to remain under the ceiling in future
years; and (11) while the Army does not face as severe a problem as the
Air Force, available data suggest it too could be confronted with
management challenges if it is to stay within the 50-percent ceiling in
future years.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-193
     TITLE:  Depot Maintenance: Action Needed to Avoid Exceeding
	     Ceiling on Contract Workloads
      DATE:  08/24/2000
   SUBJECT:  Privatization
	     Defense procurement
	     Future budget projections
	     Reporting requirements
	     Maintenance services contracts
	     Equipment maintenance

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GAO/NSIAD-00-193

Appendix I: Problem Areas in Workload Reports

28

Appendix II: GAO Contacts and Staff Acknowledgements

37

38

Table 1: Reported Depot Maintenance Workload Allocations 5

Table 2: Amount of Workload That Could Have Been Shifted
From Public to Private Sector in Fiscal Year 1999 Without Exceeding
50-percent Ceiling 9

Figure 1: Percentage of Depot Maintenance Work Performed
by the Private Sector 8

DOD Department of Defense

OSD Office of the Secretary of Defense

National Security and
International Affairs Division

B-285518

August 24, 2000

Congressional Committees

Section 2466 of title 10, United States Code, stipulates that not more than
50 percent of the funds made available in a fiscal year to a military
department or defense agency for depot-level maintenance and repair may be
used for work performed by private sector contractors. As amended by the
National Defense Authorization Act for Fiscal Year 2000, the statute
requires the Department of Defense to submit two reports to the Congress
annually on public and private sector depot maintenance and repair
workloads. The first is to report on the percentage of funds associated with
such workloads during the preceding 2 fiscal years. The second is to report
projected expenditures for the current and for 4 succeeding fiscal years.

As required by 10 U.S.C. 2466 (e)(3), we reviewed the Department's reports,
which were submitted in February and April 2000, respectively, on the
percentage of depot maintenance funding. Accordingly, this report
(1) provides information on the Department's compliance with the 50-50
requirement for fiscal years 1998 and 1999, (2) sets forth our views on the
Department's progress in improving the quality of the workload data for the
previous fiscal years, and (3) assesses the reasonableness of the
Department's estimates of expenditures for fiscal years 2000 through 2004.

Although the Defense Department's report covering fiscal year 1998 and 1999
workloads shows that the Air Force, the Army, and the Navy1 were in
compliance with the 50-percent ceiling set by section 2466, because of
continuing errors and weaknesses in the Department's data, we could not
determine whether the military services were in compliance with the
50-percent ceiling for the percentage of depot maintenance performed by the
private sector in fiscal year 1999.

The quality of the data reported for fiscal year 1999 was substantially
improved from prior years. Improvements made in the data and reporting
process reduced the amount of errors found or led to corrections of errors
before data were reported to the Congress. We attribute these improvements
largely to better guidance provided by the Office of the Secretary of
Defense, the reporting of more comprehensive data, improved audit coverage
by the military services, and the correction of errors by the services
before the data were reported to the Congress. However, we continue to find
errors and inconsistencies in the reporting of depot-level workload and
limitations in how well the services documented their analyses supporting
their workload reports.

We do not believe that the Department's projections of depot maintenance
workloads for fiscal years 2000 through 2004 are a reasonably accurate
projection of future depot maintenance expenditures. Future year expenditure
projections, at best, provide a rough estimate of future workload funding
split between the public and private sectors since the projections are
constructed using budgetary estimates that by their nature, will change over
time. The Department's future year projections do not show the reporting
services exceeding the 50-percent ceiling on contract work in fiscal year
2000 and beyond. However, the reasonableness of the estimates is doubtful
because of uncertainties that exist regarding the extent to which the
services have fully identified private sector depot maintenance workloads.
Further, our analysis of available data indicates that the Air Force (1) may
exceed the ceiling by about $200 million this fiscal year and (2) faces
significant management challenges to remain under the ceiling in future
years. While the Army does not face as severe a problem as the Air Force,
available data suggest it too could be confronted with management challenges
if it is to stay within the 50-percent ceiling in future years.

This report contains recommendations to the Secretary of Defense to direct
actions to improve the accuracy and completeness of departmental reporting
and management actions to help meet the requirements of section 2466 that
limit the amount of depot maintenance work that can be performed by the
private sector to not more than 50 percent of the depot maintenance program.
DOD officials agreed with our findings and recommendations, and offered
additional comments about the actions undertaken or planned to address the
issues discussed.

Section 2466 of title 10 of the United States Code governs the allocation of
depot maintenance work between the public and private sectors. It prohibits
each military department and defense agency from using more than 50 percent
of the total funds that are provided annually for depot-level maintenance
and repair on work done by contractors. This is referred to as the 50-50
requirement.

The National Defense Authorization Act for Fiscal Year 2000 amended section
2466 to require the Department of Defense (DOD) to annually submit two
reports to the Congress, one on expenditures in the preceding years and the
other on estimated allocations in future years.2 Before this amendment, DOD
was only required to report each year the depot maintenance funding
allocations for the preceding fiscal year. Section 2466 currently requires
us to submit to the Congress our views on whether
(1) DOD has complied with the 50-50 requirement in the preceding years'
report and (2) the expenditure projections in the future years' report are
reasonable. The report on fiscal year 1998 and 1999 workloads, dated
February 4, 2000, and the report on fiscal year 2000 through 2004 estimates,
submitted April 7, 2000, were the initial reports submitted under the
amended statute. Table 1 provides a consolidated summary of DOD's reported
depot maintenance public and private sector workload allocations.

                     Dollars in millions by fiscal year
                 1998    1999     2000     2001     2002    2003     2004
 Army
       Public  $1,011.1 $1,010.3 $1,084.3$1,033.7 $1,098.2 $1,126.8 $1,189.2
               58.3%    54.3%    56.6%   57.2%    54.0%    53.9%    54.5%
       Private $722.8   $849.5   $832.7  $772.5   $935.5   $963.2   $992.1
               41.7%    45.7%    43.4%   42.8%    46.0%    46.1%    45.5%
       Total   $1,733.9 $1,859.8 $1,917.0$1,806.2 $2,033.7 $2,090.0 $2,181.3

 Navy
       Public  $4,040.1 $3,898.7 $4,290.4$3,884.1 $4,358.5 $4,997.3 $4,584.8
               63.6%    57.0%    59.6%   58.4%    61.5%    65.1%    61.7%
       Private $2,310.2 $2,938.4 $2,908.4$2,768.1 $2,733.8 $2,682.1 $2,851.8
               36.4%    43.0%    40.4%   41.6%    38.5%    34.9%    38.3%
       Total   $6,350.3 $6,837.1 $7,198.8$6,652.2 $7,092.3 $7,679.4 $7,436.6

 Air
 Force
       Public  $3,335.1 $3,281.9 $3,130.3$3,292.3 $3,573.2 $3,601.9 $3,681.7
               58.2%    53.1%    50.5%   52.0%    52.7%    52.1%    52.0%
       Private $2,397.6 $2,902.7 $3,066.6$3,041.6 $3,206.7 $3,310.2 $3,396.4
               41.8%    46.9%    49.5%   48.0%    47.3%    47.9%    48.0%
       Total   $5,732.7 $6,184.6 $6,196.9$6,333.9 $6,779.9 $6,912.1 $7,078.1

Source: DOD data reported to the Congress.

Section 2460 of title 10 defines depot-level maintenance and repair
workloads. The Office of the Secretary of Defense (OSD) has issued guidance
implementing section 2460. The guidance provides a comprehensive definition
of depot maintenance to ensure that the reporting includes all work
associated with the overhaul, upgrade, or rebuild of parts, assemblies, and
subassemblies, and the testing and reclamation of equipment as necessary,
regardless of the source of funds or the location at which maintenance is
performed. The definition provides that software maintenance and interim
contractor support and contractor logistics support, to the extent work
performed in these two categories is depot maintenance, should be reported.
Prior to the enactment of this section,3 depot maintenance was often viewed
as limited to that maintenance work performed at traditional military depots
or contractor facilities and funded using operation and maintenance dollars.

The military services' data in the February 2000 report were more complete
than in prior years' reports. However, because of errors and weaknesses in
components' data and reporting processes,4 combined with the increasing
closeness of two of the services to the 50-percent ceiling, we were unable
to determine whether the services had complied with section 2466. DOD's
report, as presented, indicates that each of the reporting military services
was in compliance with the 50-50 requirement for fiscal years 1998 and 1999,
even as the Air Force and the Army showed a general trend of increased
reliance on the private sector.

Because of weaknesses in reporting, we cannot be sure of the precise amounts
of depot workload being performed by government and private sector
employees. However, DOD reports an increasing trend among its services in
relying on the private sector for this work. Figure 1 shows the percentage
of the total reported depot maintenance workloads identified by the military
services as being performed by the private sector from fiscal years 1994
through 1999.

Note: The reporting baseline changed with the addition of contractor
logistics support and interim contractor support costs in 1998. While the
annual data points are not directly comparable as a result, this figure
still illustrates DOD's overall movement closer to the 50-percent ceiling.

Sources: DOD depot workload reports for March 1996, February 1998, February
1999, and February 2000.

As the services get closer to the 50-percent ceiling, there is less room for
error in the reported data. According to DOD's reported fiscal year 1999
depot maintenance workload allocation data, the amount of additional
contract maintenance work that could have been shifted from the public to
the private sector without exceeding the 50-percent limit was about
$80 million in the Army,5 about $190 million in the Air Force, and about
$480 million in the Navy. However, our review of DOD's data identified
various errors and omissions, some of which we were able to quantify. (These
errors and omissions are discussed more fully in a subsequent section and
app. I.) After considering those errors, we found that each of the military
services was brought closer to the ceiling.6 The revised amount and the
percentage of maintenance workload that could have been shifted from the
public to the private sector for each military department before exceeding
the 1999 ceiling is shown in table 2.

 Dollars in millions
           Revised total workload  Available dollars  Percent
 Army      $1,898.3                $63.9              3.4
 Navy      6,875.0                 442.9              6.4
 Air Force 6,218.8                 129.5              2.1

Source: Our analysis and adjustment of service data to correct for errors
and omissions that could be quantified.

Given the closeness of the Army and the Air Force to the 50-percent ceiling
and, as discussed later, questions about the accuracy and completeness of
components' reporting that cannot be readily quantified, we cannot be
certain of the potential impact on the 50-percent ceiling for contracted
work. While the Navy is not nearly as close to the ceiling, we have some
concerns about the accuracy and completeness of its data.

The quality and comprehensiveness of the data in DOD's February 4, 2000,
report on depot maintenance workloads are significantly better than the data
in prior reports. Nonetheless, material reporting weaknesses still exist.
Our analysis of the most recent prior year data for the fiscal year 1999
depot maintenance program identified fewer errors than in the past. However,
some areas still require increased focus, particularly the isolation of
reportable data in areas not traditionally considered to be included in
depot maintenance reporting. These areas include identifying
government-furnished material that should be reported as a contract
maintenance cost and correctly identifying maintenance work that (1) has
sometimes not been identified as depot maintenance because it is not funded
with operation and maintenance dollars, (2) is not performed in traditional
depot activities, or (3) is managed by activities such as system program
offices that historically did not deal with traditional depot activities.
Additionally, problems in documentation and financial management reporting
continue to affect the quality of the data.

DOD has made significant progress in its workload reporting over the past 3
years. By issuing improved guidance, increasing the awareness of the
reporting requirements to activities not previously involved, and more
effectively using internal audit groups, it improved the February 2000
report over last year's report and detected and corrected many errors in the
services' data before the consolidated report was submitted to the Congress.

Expanded Guidance and Corrections of Prior Problems

In response to our prior audit reports,7 OSD expanded its guidance to
address several areas of concern we noted in last year's report, and the
revised guidance is generally comprehensive. These areas included
depot-level maintenance provided in remanufacturing8 programs,
interserviced9 workloads, repair of reparable parts, warranties for depot
repair, and suggested use of audit agencies to verify data. Better, more
expansive guidance resulted in improved and more complete reporting. For
example, the Navy reported $12.0 million in fiscal year 1998 and
$10.7 million in fiscal year 1999 for disassembly and refurbishment costs
for the AV-8B Harrier remanufacture program, whereas it did not report the
cost of these workloads in last year's 50-50 report on fiscal year 1998.
Also, the distribution of instructions was improved throughout the
Department, a key factor in increasing the scope and number of reporting
commands.

The military services also increased the amount and scope of reporting by
correcting errors and expanding the number of reporting activities from last
year. The Navy and the Army made significant corrections in the amounts
included in this year's report relative to last year's report.10 The
military departments also more fully reported maintenance in several problem
areas we noted last year. For example, the Naval Sea Systems Command
reported about $350 million in fiscal year 1999 for installation
modifications compared to only $62 million last year, when an official
incorrectly decided that such work was not depot maintenance. Additionally,
more Army organizations reported depot maintenance than in past years (14
commands compared to 11 last year and only 4 the year before) and additional
program offices in the Navy and the Air Force reported for the first time.

Audit agencies' reviews

The quality and consistency of the data reported were significantly improved
by the services' audit agencies reviewing collection procedures and
preliminary data. In response to our recommendation that the services make
greater use of audit agencies, the Army expanded its use of its auditors,
the Navy used its audit agency for the first time, and the Air Force
continued to use its audit agency as in the past two report cycles. The
audit agencies identified many errors, and the reports of each military
service were corrected before being forwarded to OSD for consolidation and
submission to the Congress. Notwithstanding those corrective actions, as
noted later, reviews by two audit agencies raised unresolved issues
concerning the accuracy and completeness of the services' data.

Although the extent of errors and omissions we identified in our review of
the fiscal year 1998 and 1999 depot maintenance workload data submitted to
the Congress was significantly less than in prior reports, we continued to
find reporting errors and weaknesses. Most were not as systemic in nature as
they were in the past and, in some instances, they were exacerbated by
shortcomings in component specific guidance, documentation, or quality of
financial data. Moreover, issues identified in Army and Navy audit service
reports on data developed by the individual services raise unresolved issues
about the magnitude of reporting problems and their effect.

Types of Problems Identified

We identified a range of reporting problems, resulting in both over and
underreporting of depot workloads being performed in public facilities and
by the private sector. Several examples follow.

OSD guidance requires the cost of government-furnished material provided to
contractors to be reported as private sector costs in the workload report.
This requirement is to ensure comparability in reporting, since public
sector costs include material costs and other factors of production. The
Army and the Navy did not fully report the costs of government-furnished
material to contractors. Through a review of workload data and discussions
with reporting officials, we found that an Army command did not report up to
$30 million in fiscal year 1999 material costs recorded for contract repairs
of components funded by the Army's working capital fund and a Navy command
did not report a total of about $125 million for the recorded cost of
government-furnished material to contractors for fiscal years 1998 and 1999.

As we reported last year, consolidating the levels of maintenance and
performing depot-level maintenance at field locations complicate workload
reporting and result in an underreporting of depot maintenance for both the
public and private sectors. Our report11 on the Army's review of the
proliferation of depot workloads at consolidated and non depot locations
states that the Army is not sufficiently identifying the amount of depot
maintenance work accomplished at nondepot facilities. While the Army
identified some maintenance in nondepot facilities, the actual amount could
be much greater than the Army reported, but Army officials told us it would
be several years before they will have a realistic accounting of this
workload. This accounting is expected to increase the total amounts reported
for both the public and private sectors.

The identification of depot maintenance work in activities not previously
identified as depots is also problematic in the Navy and the Air Force. The
Navy's Pacific Fleet report of fiscal year 1999 workloads was based on a
rough estimate rather than actual obligation data to represent the depot
maintenance work accomplished at the Pearl Harbor Naval Shipyard and
Intermediate Repair Facility because they did not maintain the obligation
data for the newly consolidated activity. This problem will become even more
challenging as the Navy continues with its consolidation of intermediate and
depot maintenance activities.

In all three military services, we identified problems in reporting the
costs of interim and contractor logistic support contracts. These types of
contracts require some judgment and the use of estimating techniques in
determining the portion of total recorded contract costs meeting the
definition of depot maintenance. For example, through a review of contract
files and discussions with officials, we determined that an Air Force
program office did not report about $33 million in recorded software
maintenance and related management support costs. As we reported in the
past, officials said that there is still some uncertainty and disagreement
within the acquisition offices regarding what constitutes reportable depot
maintenance. Another problem was that it is often difficult to identify
depot maintenance costs when there is no specific contract line item for
this specific support category.

Warranty provisions specifying the performance of depot maintenance services
was another area identified where the services did not fully report some
contractor costs. The DOD reporting guidance states that warranty support
that occurs prior to the initial operational capability of a system should
not be reported. This guidance leaves open the question how to report
warranty costs that are obligated prior to initial operational capability
but which will provide support for the system after initial operational
capability. While we cannot quantify the amount of warranty work that should
be reported as depot maintenance, this is an area that needs further
examination in future years.

In those cases when either the public or private sector contracts with the
other sector for labor or for repair of a component or system that is a
subset of a larger maintenance package, the work should be reported for the
sector performing the work. Through a review of accounting data, we
identified four at the Oklahoma City Air Force depot where specific tasks or
the repair of specific items was reported as public sector maintenance when
it was actually performed by contractors and should have been reported as
contract maintenance. This work represented about
$1.15 million in fiscal year 1999. We do not know how often this is
happening, but it is likely to grow as DOD increases its use of
public-private partnering arrangements.

Limitations in Guidance May Have Contributed to Some Problems

Despite improved guidance issued by OSD, and to a lesser extent the Army and
the Air Force, there are still some opportunities to improve policy
guidance--in particular that of the reporting components, where limitations
in, or an absence of, service specific guidance may have contributed to
reporting problems. Continued problems with the reporting of maintenance
costs associated with warranties and with depot maintenance performed in
activities not traditionally considered as depots or funded with procurement
or research and development dollars, rather than operation and maintenance
dollars, suggest that additional refinement of guidance could help officials
less experienced in such matters better understand the reporting
requirements. This issue was more prominent in the Navy, which had not
provided component-specific guidance to its reporting activities, resulting
in some differences in interpretation and application of DOD's guidance and
the absence of a standardized process among different Navy commands. Navy
officials said that they issued some guidance in October 1999 based in large
part on our findings in last year's

report12 and that they are developing a standardized process handbook for
use by the different commands.

Although the Army revised its internal instructions to expand upon the OSD
guidance, further refinements could reduce ambiguities, particularly with
respect to reporting contractor costs, and could emphasize the need for all
project managers to report. In its review of preliminary data for fiscal
year 1999, the Army Audit Agency added almost $114 million in contractor
maintenance costs to the total reported. Among other errors, auditors
determined that the program manager for the Apache helicopter did not report
about $38 million in contractor costs shown in Army records, the program
manager for the Kiowa helicopter did not report about
$31 million in contractor costs, seven program managers initially reported
program estimates rather than the actual amount of recorded obligations, and
one command did not report about $20 million in recorded contractor costs
for software maintenance. The Army Audit Agency also pointed out that the
Army needs to develop a reasonable method of determining reportable contract
obligations when other logistics support functions are included on contract
line items that include depot maintenance.

The Air Force's supplemental guidance was not changed significantly for this
year's report, but additional supplemental guidance may still be needed to
clarify several areas. For example, we continued to identify problems
associated with the reporting of warranties, some contract work performed in
support of Air Force depot maintenance programs, and contract work where
maintenance was not a specific contract line item.

Inadequate Documentation of Services' Analyses Creates Some Uncertainties
Regarding Data

Our review this year, as in the past, determined that each of the
departments could better maintain auditable records for documenting data
collection methodology, estimating techniques, and results. While some
central records are maintained, information and reporting rationales at
program offices and maintenance activities are sometimes lacking, and it is
difficult for a third party to understand and reconstruct the methodology
and verify results.

The federal government's internal control standard for appropriate
documentation of transactions and internal control states that internal
control and all transactions and other significant events need to be clearly
documented and readily available for examination. It further states that all
documentation and records should be properly managed and maintained.13 Good
records, documentation of processes followed, and identification of data
sources used are important not only for audit and management oversight but
also for use as a historical record that can be followed by newly assigned
staff to assist in data collection and by programs reporting for the first
time. Air Force officials said the relatively high turnover of personnel
assigned each year to compute workload data increased training time and
errors. The documentation and process problems appeared to be more severe in
the Navy than in the other military departments.

While the quality and consistency of data reported by the services were
significantly improved by the participation of the service audit agencies,
reviews by two of these agencies highlighted uncertainties about the
components' data.

The Army Audit Agency reviewed about $1 billion of the Army's fiscal year
1999 reported obligations (about 58 percent of the total) and recommended
adjustments totaling $149 million. This represented an error rate of
14.9 percent. These adjustments increased the private sector share by
3.6 percent above that represented by the Army's unaudited data. If similar
problems were prevalent in remaining data the Audit Agency did not review,
and corresponding adjustments made, the private sector share would increase
even more. These additional adjustments, and those errors we identified (to
the extent values could be quantified), would place the Army very close to
the ceiling.

Army auditors identified unreported costs for remanufacturing programs and
modifications and some programs that used estimates rather than actual
recorded obligations. They also identified problems similar to those they
reported on in 1998 involving software maintenance, contractor logistics
support, government-furnished material to contractors, and modifications and
upgrades. They found that not all project managers were included in the
requests for data and had not reported depot maintenance data until the Army
audit pointed out the omission.

In completing their review of the Navy's workload data, the Naval Audit
Service personnel identified reporting errors and omitted data that
increased the total amount of workload reported for fiscal year 1999 by $106
million (an increase of 1.5 percent) but caused little change in the
public-private workload percentages. Much of the increase resulted from
correcting the Naval Sea Systems Command's omission of about
$85 million for installation of nuclear modifications. At the same time,
Naval Audit Service personnel expressed concerns over the absence of a
standard reporting process and the inadequate documentation of the basis for
some of the data and generally questioned the quality of the data they
reviewed.

Because of data limitations and other weaknesses, we do not believe the
Department's report provides a reasonably accurate projection of public and
private sector workload expenditures for fiscal years 2000 through 2004.
Future year projections, at best, provide a rough estimate of future
workload funding split between the public and private sectors, particularly
since the projections are constructed using budgetary estimates that, by
their nature, will change over time. The reasonableness of the estimates
becomes less certain where, as indicated earlier, uncertainties exist
regarding the extent to which the Air Force, the Army, and the Navy have
fully identified depot maintenance workloads in preparing their reports on
prior fiscal year expenditures. While DOD's future year projections do not
show its components exceeding the 50-percent ceiling on contract work in
fiscal year 2000 and beyond, our analysis indicates that the Air Force may
exceed the ceiling this fiscal year and faces significant challenges to
remain under the ceiling in future years. While the Army does not face as
severe a problem as the Air Force, available data suggest it too will be
confronted with difficulties in staying within the 50-percent ceiling in
future years, as more maintenance work is expected to go to the private
sector.

We have previously reported that future year projections of depot
maintenance workloads should be considered as only a rough estimate of the
workload funding split between the public and private sectors.14 The
services' projected depot maintenance expenditures for fiscal years 2000
through 2004 are based on the current funded workloads from the fiscal year
2001 budget submission and future years programming data. However, as
previously noted, budget plans frequently change, and the actual workload
mix may be significantly different than planned. Further, budget and
programming estimates do not include new requirements that have not yet been
officially approved.

Despite these factors, some of the input data may represent the best data
available, assuming it represents all categories and quantities of work that
is supposed to be accounted for, that the relative mix between the public
and the private sector represents actual plans, and that all contractor
costs, which are generally the most difficult to obtain, are accurately
shown.

the Ceiling Will Likely Be Exceeded

As permitted by 10 U.S.C. 2466, the Secretary of the Air Force waived the
50-percent limitation on private sector work for fiscal year 2000 and
notified the Congress that a waiver could also be required for 2001.
Nevertheless, the Air Force's projection data for fiscal years 2000 through
2004 show it nearing, but not exceeding, the 50-percent ceiling. Other data
indicate the Air Force will likely exceed the ceiling this year and will
face considerable challenges remaining under the ceiling in future years.

Our recent testimony and congressional report discussed the Air Force's
determination to waive the section 2466 limitation on private sector
workloads for fiscal year 2000 (and perhaps in 2001).15 We pointed out that
recent and continuing Air Force plans and initiatives to move more work to
the private sector were key factors leading to the need for the waiver and
that these actions had increased the private sector share of Air Force depot
maintenance work from 36 percent in 1991 to near the 50-percent ceiling in
2000.

Air Force contract maintenance is increasing more than previously estimated.
For example, the value of long-term depot contracts is expected to increase
from $1.1 billion in fiscal year 2000 to $1.5 billion in fiscal year 2004,
yet this amount does not include some workload information for new

or upgraded systems that do not have final support plans. Nonetheless, as we
recently reported,16 the Air Force is using or planning to use
multifunction, long-term contractor support for 75 new or upgraded systems
and subsystems. Furthermore, we reviewed 13 programs that had entered the
source-of-repair process between September 1999 and February 2000 and
determined that 11 had been recommended for private sector contract repair.
Thus, the trend toward increased contractor repair continues. According to
Air Force officials, these are the current recommendations of the program
managers and not the final approved recommendations by the Air Force. They
said 50-50 compliance will be fully considered before making the final
source-of-repair decisions. Finally, some of the data used in projecting the
future Air Force 50-50 allocations understate contract repair workloads.

An April 17, 2000, memorandum from the Commander of the Air Force Materiel
Command to command organizations directed that they identify current and new
workloads that could be moved to public depots to help the Air Force stay
under the 50-percent ceiling on contract work for fiscal years 2000 and
2001, as well as in the longer term. While a plan was to have been developed
by May 31, 2000, according to Air Force officials, this process has thus far
failed to achieve its goals and no workload has yet been approved for
movement to the public sector.

The Air Force's fiscal year 2000-2004 depot allocation data include several
significant adjustments that result in understating the Air Force's
contracted maintenance, keeping it below the 50-percent ceiling. Our
assessment of the current status of the workload mix for fiscal year 2000
and the projections for 2001 indicates the Air Force could exceed the
ceiling by over $200 million in fiscal year 2000 and will be significantly
challenged to make planned source of repair changes in time to correct the
imbalance for 2001. Since the report on future years was sent to the
Congress, more private sector workloads for bridge and emergency contracts
have been identified than were previously estimated and some new contract
workloads resulting from source-of-repair decisions have been recognized.17

Air Force officials said that as of May 2000, the Air Force had determined
that it could be $115 million over the ceiling in fiscal year 2000. They
noted, and we agree, that the depot maintenance execution data fluctuate and
that the data will continue to fluctuate through the end of 2000. Our
$200-million estimate represented a mid-June 2000 Air Force Materiel Command
assessment of the fiscal year 2000 depot maintenance execution information.
Moreover, available information indicates that the Air Force plans to
increase its fiscal year 2000 contract workload by moving program depot
maintenance work for the KC-135 aircraft from the Oklahoma City depot to a
contractor. Thus, unless the Air Force is able to perform more workload in
its military depots than is currently programmed, the fiscal year 2000
contract imbalance could grow even larger.

Air Force officials told us that fiscal year 2001 will pose an equally big
challenge. However, they outlined an ongoing three-pronged effort to conform
workload assignments to legislative guidelines: first, identify candidate
workloads that could be shifted from private to public sources in 2001;
second, identify longer term candidates; and third, focus on new weapon
system support planning. However, to date there have been few concrete
results that mitigate the potential contractor imbalance for 2000 or 2001.

In developing its projected depot maintenance workloads for fiscal years
2000 through 2004, the Air Force assumed that it would be able to shift work
currently being performed by the private sector to public depots and
adjusted its funding to reflect this shift. While these adjustments
represent the amount of workload that the Air Force is hopeful of moving to
public depots during the fiscal years 2000 to 2004 time period, a lack of
success thus far in accomplishing such changes in fiscal year 2000 makes it
uncertain to what extent such transfers will be made between 2001 and 2004.

Air Force officials at Air Force Materiel Command headquarters and at the
three logistics centers remaining open after base closure decisions are
implemented said that there are no quick fixes to the problem and that
without a commitment to designate new and upgraded systems for repair in the
military depots, the Air Force is not likely to be successful in resolving
its ceiling problem. These officials said that the problem is not getting
better; rather it is getting worse. The fact that no program offices have
identified future repair source changes that would improve the workload
allocation imbalance indicates the difficulty the Air Force faces in the
future. Air Force officials point to a May 31, 2000, Air Force decision to
delay source-of-repair decisions on the F-22 aircraft until 2008 as a
further example of the 50-50 imbalance problem. They also note that
preliminary planning for the Joint Strike Fighter program, an aircraft that
may comprise 75 percent of the U.S. fighter aircraft in the future, is
moving toward a decision for total contractor support. Officials said that
before the Air Force can make meaningful progress in resolving its 50-50
imbalance, these trends must change and the Air Force must adopt a different
support strategy than the one it has pursued for the past 4 or 5 years.
However, no overall management plan exists to specifically meet the
requirements of section 2466.

Long-term Challenge to Stay Within the Contract Ceiling

While the reported 50-50 outyear data show that the Army is also moving
close to the 50-percent ceiling on contract work, Army officials do not
believe the Army will exceed the 50-percent ceiling between fiscal year 2000
and 2004. Army leadership holds quarterly discussions to consider whether
execution changes from the current year's plan could adversely affect
compliance with the ceiling requirement. Army officials said they would
adjust the plan if required to stay below the ceiling. Given that the errors
Army Audit Agency and we identified in the data put the Army right at the
50-percent ceiling for fiscal year 1999, if similar errors and omissions
apply to the future data, the Army is also facing a 50-50 imbalance in the
future, unless it revises its plans for support of new and upgraded systems
coming into the inventory.

Army officials said that with regards to the future challenge, depot
maintenance source-of-repair decisions will be documented and the impact of
these decisions on the ceiling will be discussed at the milestone review
point authorizing the start of the engineering and manufacturing development
phase for new weapon systems. At this point, only one new system, the
Commanche, has gone through this milestone review since the new procedures
were instituted in November 1999, and it was granted a temporary waiver of
the requirement to complete a source-of repair and core analysis. While
early planning calls for the Commanche to be a contractor-supported system,
it is unclear whether the new process will affect the final decision.

Although the military services have significantly improved the quality and
completeness of their depot maintenance reporting data, material reporting
weaknesses remain. As a consequence, we were unable to determine with
precision whether DOD complied with the 50-percent limitation on private
sector performance under section 2466, even though the services reported
that they did not exceed the 50-50 ceiling for fiscal years 1998 and 1999.
Policy and execution issues must be addressed to improve the accuracy and
completeness of the prior year data. While OSD and the Army and Air Force
supplementary policy guidance have improved each year, some areas still
require further attention and may require more specific implementation
guidance at the service level as well as closer scrutiny by the services to
ensure consistent implementation throughout their organizations. Of
particular concern is the reporting of depot maintenance associated with new
and upgraded weapon systems, software, warranties, workloads performed in
nontraditional depot maintenance activities, and workloads that are
performed by one sector but which are part of a maintenance package that is
allocated to a different sector. These and other areas continue to be
problematic and will require greater emphasis in the future.

As the military services approach the 50-percent ceiling, it is increasingly
important to gain a more realistic perspective of the expected future
balance of the public and private sector mix of depot maintenance work so
that DOD can better define a workable strategy for meeting support needs
while complying with the 10 U.S.C. 2466 requirement establishing the
ceiling. While the Air Force and the Army have initiated some actions they
believe will address the problem, it is too early to tell if they have a
long-term strategy in place that will assure their ability to deal
effectively with the contract maintenance management challenge in the
future.

To improve the reporting of depot maintenance workload data to accurately
reflect the allocation of work between the public and private sectors and
comply with the requirement that not more than 50 percent of the depot
maintenance work be performed by the private sector, we recommend that the
Secretary of Defense

ï¿½ require that the military services, in preparing the future year estimates
of depot maintenance workloads that will be submitted each April, accurately
reflect, to the extent practical, the projected maintenance costs and
public-private sector allocations for new and upgraded systems;

ï¿½ require the Secretary of the Air Force to implement a long-term strategy
to manage its weapon system support programs to comply with the funding
requirement that not more than 50 percent of the depot maintenance program
be used for work performed by the private sector;

ï¿½ require the Secretary of the Navy to issue comprehensive supplementary
instructions tailoring OSD's guidance to the Navy's operating environment to
improve workload reporting and to implement adequate management controls and
documentation requirements; and.

ï¿½ direct that reporting services provide improved guidance and increased
management attention to improve workload reporting in the areas of
government-furnished material, warranties and software maintenance, as well
as in identifying depot maintenance work accomplished in
non-traditional activities and identifying reportable obligations for depot
maintenance on contracts where such amounts are not readily identifiable.

Representatives from the OSD (Maintenance Policy, Programs, and Resources)
and similar offices in the Air Force, the Army, and the Navy provided oral
comments on a draft of this report. The officials agreed with the
recommendations and provided technical comments, which we incorporated in
the report as appropriate.

To review DOD's reported amount of depot maintenance performed and the
percentage of the workload allocated to the public and private sectors for
fiscal years 1998 and 1999, we analyzed each service's procedures and
internal management controls for collecting and reporting depot maintenance
information for purposes of responding to the section 2466 requirement. We
reviewed supporting details (summary records, accounting reports, budget
submissions, and contract documents) at departmental headquarters, major
commands, and selected maintenance activities. We compared processes to the
legislative provisions, OSD guidance, and military service instructions. We
judgmentally selected certain programs and maintenance activities for a more
detailed review.18 We particularly examined reporting categories that we and
DOD personnel had identified as problem areas, including interserviced
workloads, contractor logistics support, maintenance funded with procurement
or research and development dollars, software maintenance, and maintenance
for such programs as the C-17 aircraft and the Apache helicopter. We
evaluated processes for collecting and aggregating data to ensure accurate
and complete reporting and to identify errors, omissions, and
inconsistencies. We coordinated our work and mutually shared information
with service audit agencies, which had a more extensive role this reporting
period in reviewing individual service's data collection efforts.

We used much the same approach and methodology in reviewing the future
years' estimates for fiscal years 2000-2004. Although this is a budget-based
projection of expenditures, the definitions, guidance, organization, and
processes used to report future data are much the same as for the report on
actual obligations of the two preceding years. We discussed with DOD
officials the main differences between the two processes and the way the
data are derived from budgets and planning requirements. We performed
certain checks and tests, such as deviance analyses, for consistency of this
information with prior years and with the outyear budgeting and programming
data used in DOD's budget submissions and reports to the Congress. We used
to a great extent our prior and ongoing audits in such areas as sustainment
planning, depot policies, financial systems and controls, and DOD pilots and
initiatives for increasing contractor involvement in maintenance.

We conducted our review from February to June 2000, in accordance with
generally accepted government auditing standards.

We are sending copies of this report to the Honorable William S. Cohen,
Secretary of Defense; the Honorable F. W. Peters, Secretary of the Air
Force; the Honorable Louis Caldera, Secretary of the Army; the Honorable
Richard Danzig, Secretary of the Navy; the Honorable Jacob J. Lew, Director,
Office of Management and Budget; and interested congressional committees. We
will also make copies available to others upon request.

GAO's contacts and key contributors to this report are listed in
appendix II.

David R. Warren, Director
Defense Management Issues

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 Inouye
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
United States Senate

The Honorable Floyd Spence
Chairman
The Honorable Ike Skelton
Ranking Minority Member
Committee on Armed Services
House of Representatives

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

Problem Areas in Workload Reports

Our review of the Department of Defense's (DOD) two reports on depot
maintenance workloads, collectively encompassing fiscal years 1998 through
2004, identified errors, omissions, and inconsistencies in the military
departments' data.

Office of the Secretary of Defense (OSD) guidance requires that the cost of
government-furnished material provided to contractors should be reported as
funding that has been obligated to the private sector. This requirement is
to ensure comparability in reporting since public sector obligations include
the costs of material and other factors of production. For purposes of
reporting funding obligations, all factors of production are to be counted
as a part of the reporting data for both the public and private sectors
according to which sector accomplishes the maintenance. Examples of problems
that we noted in this reporting area follow.

Two Army commands did not fully report the costs of material provided to
contractors. The Aviation and Missile Command did not report any costs for
government-furnished material for its reparable components contract
workloads funded by the Army's working capital fund. After submitting its
fiscal year 1999 data to the Army, officials identified about $30 million of
material furnished to aviation and missile secondary item contracts, but
others decided not to adjust the reported data. Command officials told us
that government-furnished material for reparable components is not tracked
and would require an accounting adjustment. Material is tracked for major
aviation and missile equipment items, and officials reported
$3.9 million in fiscal year 1999 for government-furnished material to
contractors. The Army's Communications Electronics Command also did not
report any costs for government-furnished material to its contractors.
Command officials advised the Army Audit Agency that they do not have a
system to track material provided to their contractors and that they could
not provide an estimate on the total amount requisitioned by contractors
during fiscal year 1999.

The Navy's Inventory Control Point at Philadelphia, Pennsylvania, which
manages aircraft parts, did not report about $125 million for the cost of
government-furnished material to contractors for fiscal years 1998 and 1999.
This material was used by contractors in repairing components managed by the
Navy and was accounted for as an expense item. The Inventory Control Point
does report government-furnished material for contractor repair of
components that are not directly managed by the Navy because those are
considered sales. This office also did not report government-furnished
material projected to be about $300 million for the fiscal years 2000-2004
period.

The statutory definition of depot maintenance includes depot maintenance and
repairs accomplished under interim contractor support, contractor logistics
support, and similar types of contracts.19 If it is not practical to
determine the amount of depot maintenance based on specific contract line
items, OSD and service supplemental guidance provides for the use of
estimating techniques. The reporting service is required to maintain records
on the amounts reported and descriptions of estimating techniques used. As
in past reviews, we found a number of errors and other problems in reporting
contract maintenance. Individuals charged with reporting must exercise
judgment that may result in errors or inconsistencies with other programs.
The errors and problems we noted follow.

Several Army program offices misreported contractor support costs. Some
amounts were overstated by including nondepot maintenance related costs and
others were understated when officials reported budgeted rather than actual
costs. For example, officials at the Intelligence and Security Command
overstated contract depot maintenance for a program by about $830,000 by
including nondepot maintenance related obligations for training and office
administration. Another command misreported costs because it reported on a
calendar year basis, rather than a fiscal year basis.

Three Navy program offices overreported contract costs by about
$39 million. Officials reported activities such as contractor support to
headquarters and support for a database on aircraft discrepancy reports and
mishaps. These kinds of activities do not meet the definition of depot
maintenance.

The Air Force's C-17 program office did not report logistics program
management costs and technical data associated with the provision of depot
maintenance services. Air Force guidance provides that a pro rata share of
contractor management support and data costs should be included in the depot
maintenance reported for 50-50 purposes. The C-17 office could have used an
estimating technique to derive the percentage of these costs that are
attributable to the depot maintenance responsibilities and therefore
reportable in the 50-50 report. Applying a 10-percent estimating factor to
the substantial flexible sustainment contract would add about $18.6 million
to the private sector total in fiscal year 1999.

Air Force officials agreed that they had not reported about $3 million in
technical data costs, but they stated that they had included some management
costs in the 50-50 report. However, they were unable to reconcile the data
reported in the 50-50 report with supporting accounting data, indicating an
underreporting of total depot costs consistent with our findings. Air Force
officials said they would thoroughly review the C-17 reporting methodology
to improve accuracy and support for next year's
50-50 report.

Officials at the Aeronautical Systems Center did not report about
$2.1 million obligated for depot maintenance on nine training systems during
fiscal year 1999. According to Air Force officials who are charged with
coordinating the Center's call for data, there is still some uncertainty and
disagreement within the acquisition offices regarding what constitutes
reportable depot maintenance. In this service, as in the others, depot
maintenance is still sometimes associated only with the operation and
maintenance appropriation account. However, the statutory definition of
depot maintenance includes all depot work regardless of funding source and
location. The Air Force did report these items in the future years' report.

OSD guidance implementing the statutory definition and reporting
requirements calls for reporting all aspects of depot maintenance on
software, which consists of changes to operational software in weapon
systems, components, and associated automated test equipment. Activities to
be reported after initial operating capability of the weapon system is
achieved include correcting errors in the software, adding incremental
capability improvements (or deleting unneeded features) through software
changes, and adapting software to retain compatibility with hardware or with
other systems with which the software interfaces. Examples of problems that
we noted in these areas follow.

The C-17 program officials did not report any depot-level software
maintenance. The program office obligated about $28 million per year in
fiscal years 1998 and 1999 for software workloads accomplished by contract.
Program officials said that the work involved both depot-level maintenance
and other tasks considered to be developmental in nature, which are not
reportable. Contractor personnel performed block changes in code and
upgraded software to ensure compatibility with the newest configuration. Air
Force officials said they generally perform depot maintenance concurrent
with production block upgrades, which they consider the primary factor
driving software maintenance work. Officials did not determine how much of
the $28 million should be classified as depot-level maintenance. Officials
also did not include software maintenance in their future years'
projections.

B-1B program officials overreported contractor software maintenance
workloads by including developmental activities. Estimated overstatements
were $7.5 million combined for fiscal years 1998 and 1999 and an estimated
$111.8 million over the fiscal years 2000-2004 reporting period.

The B-2 program office estimates for contractor software included about
$14.3 million in software maintenance expected to be accomplished by the
public depot.

Depot-level maintenance is to be reported regardless of where it is
accomplished. All repairs designated or coded as depot-level that are
performed at locations other than a depot are to be included. Added to
guidance this year was the direction that the military services issue
guidance, as necessary, concerning consolidation of depot and nondepot work
at individual locations.

The distinction between depot-level maintenance and other levels of
maintenance and manufacturing work has become increasingly vague as the
services move depot workloads to operating locations, redefine required
levels of maintenance, and consolidate maintenance organizations. While
depot-level maintenance workloads continue to be performed at traditional
depot activities, they are also performed by civilian and active-duty
military personnel in military units and by contractors at various field
locations and local repair activities.

We identified about $6.6 million in depot-level repairs accomplished by
contractor personnel in Europe and $2.7 million accomplished by Army
personnel in Korea that was not reported in fiscal year 1999. Potentially,
there is much more depot-level work at consolidated maintenance locations
and at Army bases not being reported. As we reported last year, the Army's
move to consolidate maintenance activities and to perform maintenance at
field locations continues to pose reporting challenges and may have resulted
in an underreporting of depot maintenance for both the public and private
sectors. Our report20 on the Army's review of the proliferation of depot
workloads at consolidated and nondepot locations states that the Army is not
sufficiently identifying the amount of depot maintenance work accomplished
at nondepot facilities. Additional amounts of depot maintenance-type work
and repair capabilities exist at various nondepot facilities and could be
much greater than the Army reported.

For example, the Army overhauls and rebuilds numerous components, including
engines, transmissions, circuit cards, and generators, at more than 100
local maintenance facilities that are managed under the integrated
sustainment maintenance program. In fiscal year 1998, the cost of this
program's secondary item repair work exceeded $260 million. While much of
this work appears to meet the definition of depot maintenance as specified
in 10 U.S.C. 2460, current Army policies and procedures allow it to be done
at nondepot locations, and the workload was not included in the Department's
50-50 report.

We concluded in our October 1999 report that the Army was unable to develop
accurate and consistent estimates of depot maintenance-type work because its
reporting criteria are not consistent with 10 U.S.C. 2460 guidance and that
its management information systems and procedures are not equipped to assess
the magnitude and cost-effectiveness of all maintenance and supply
functions. The Army is transiting to the national maintenance strategy, and
it plans to revise its maintenance manuals and policy statements to redefine
levels of maintenance. The current depot and general support levels will be
combined and relabeled as sustainment maintenance workload tasks that
involve overhauling and rebuilding items.

In March 1999, Army officials advised that all national maintenance
workloads would be reported as depot maintenance for the 50-50 public and
private sector workload allocations, without regard to the location where
work is performed. This policy change should eliminate much of the current
confusion regarding the identification of depot type workloads and enable
the Army to develop more accurate and consistent 50-50 reports. The
officials said that this change likely will not take place until October
2000. This change could materially increase the total amount of depot
workload reported and alter the relative public-private mix compared to the
Army's current projections for 2000-2004.

Changes in reporting definitions and work locations also contribute to
inconsistency in reporting. For the fiscal year 1999 workload report, the
Army National Guard and Reserves reported about $34.7 million in repairs of
trucks and vehicles. The Eighth Army in Korea reported (1) about
$11.7 million for work performed by government employees for their general
support repair program that extends the life of equipment like combat and
wheeled vehicles and (2) about $4.9 million for repair of major assemblies
and components that were repaired up to the general support level. Forces
Command, on the other hand, did not report wheeled vehicle repair at
contractor operated facilities at Forts Polk and Riley because the work was
classified as general support, which is considered to be below depot
maintenance.

The Navy had a similar problem as the Army in identifying and reporting
depot-level workloads at consolidated and field-level activities. The
Pacific Fleet's reporting of fiscal year 1999 through 2004 workloads
included a rough estimate of depot maintenance accomplished at the newly
consolidated Pearl Harbor Naval Shipyard and Intermediate Repair Facility.
Fiscal year 1999 was the first year that the consolidated facility operated,
used a single financial system, and received mission funding rather than the
Navy Working Capital Funds. The amount reported for depot work was
estimated, rather than actual obligations, because a system to identify and
account for depot-level work had not been established. Officials derived the
estimate by subtracting material costs associated with the military
workforce at the activity from the total mission funding received. Last
year, we were told that this consolidated activity could have difficulty
determining the depot-level work for purposes of the depot workload report.
Pacific Fleet has not yet developed a system to track and account for work
meeting the definition of depot workload used for the workload reporting
requirement.

The Navy did not report about $10 million spent annually for submarine
component repairs. An official said that government workers accomplish about
80 to 90 percent of the workload and contractors do the rest.
Intermediate-level monies fund the work. In previous reports, we questioned
the Navy's position that no depot-level work was performed at the two
Trident Refit Facilities because they were classified as intermediate level
activities and funded with intermediate level dollars. We determined that
the Navy's reported data for fiscal year 1999 included about $18 million for
depot-level work done at one facility. Our review of maintenance plans for
Trident submarines, however, showed that a considerable number of tasks were
coded as depot-level, indicating that depot is the recommended level that
should do the work. This work was done at private and government facilities,
including the two Trident facilities, and was not reported in the 50-50
data. In addition, Atlantic Fleet data indicates that at least a small
amount--about $300,000--for repair of various submarine components at the
Kings Bay facility should have been reported. We do not know how much should
be reported as depot maintenance out of the total obligated of about $160
million annually.

A provision for reporting contract warranties for depot maintenance and
repair was added to the OSD guidance this year. Warranty support occurring
after the initial operating capability date should be reported to the extent
that the terms and conditions specify performance of depot maintenance
services. The use of maintenance warranties appears to be increasing as a
result of acquisition reforms and adoption of commercial sector practices.
The errors we noted in this area follow.

We identified two Navy programs and about $1.5 million for fiscal year 1999
where warranties appeared to meet the reporting definitions in OSD guidance.
However, no costs of extended warranties for depot-level support were
reported. Because several officials we talked to were not aware of the OSD
requirement to report extended maintenance warranties and because the
limited Navy instructions did not mention it, there could be additional
programs with reportable warranties that should have been included in the
50-50 report.

Although the Air Force reported more warranties this year than last, we
identified one program that was not reported, with applicable depot costs of
about $371,000 in fiscal year 1999.

Interserviced workload is depot maintenance work performed by one military
department on equipment owned and funded by another military service. OSD
guidance directs that the service owning the equipment and managing the
funds should report the depot maintenance. The reporting service must also
determine whether the workload was done by government workers or by
contractor personnel. The Marine Corps incorrectly reported about $8.2
million in organic interserviced workload as contract in its report on
fiscal year 1998.

OSD guidance states that contracts for depot maintenance and repair
accomplished by contractor personnel assigned to work on government owned
and operated installations should be counted as private sector workload.
This workload includes direct labor augmentation of public depot maintenance
by contractor personnel. The Air Force increased the use of augmentees to
assist on repairs during the transition of workloads from closing to
receiving depots, and, except for the following instances, appeared to have
properly accounted for the work as private sector.

ï¿½ We identified four instances at the Oklahoma City Air Logistics Center
where some specific tasks on items reported as public sector maintenance
were actually accomplished by contractors, either because it involved a
proprietary process or because of temporary constrained capacity in the
depot. These tasks cost about $1.15 million in fiscal year 1999 and $0.5
million in fiscal year 1998. We could not determine the extent of such
activities occurring in other workloads at other Air Force depots.

ï¿½ We identified another instance that resulted in misreporting $1.2 million
in fiscal year 2000 as public sector workload. One office had to contract
out more of its public sector workload than initially projected and reported
in the 50-50 report. These kinds of errors double the impact because the
dollars must be subtracted from one sector and added to the other.

According to OSD and Air Force guidance, the costs or projected expenditures
for all factors of production--labor, material, parts, indirect, and
overhead--associated with a particular workload should be aggregated and
reported as either public or private workload depending on who does the
actual maintenance. In other words, for 50-50 reporting, costs should be
allocated depending on which sector is performing the maintenance on the end
item. For example, contract maintenance required for depot maintenance plant
equipment that government workers use to repair items should be counted as
public sector costs because it is part of the overall cost incurred by the
government in producing the repair.

Air Force officials, however, continue to make an adjustment for general and
administrative expenses associated with contracts. They added
$24.0 million and $41.9 million in fiscal years 1998 and 1999, respectively,
to the reported public sector total and subtracted like amounts from the
private sector side. These amounts were for the overhead and salary costs
incurred by government personnel in administering depot maintenance
contracts funded through the working capital funds. Air Force officials
believe these costs should be reported as part of the public sector since
they involve public sector employees. This area is not clearly dealt with in
existing guidance.

Air Force officials said that to count this cost as contract would
misrepresent the percentages of funds expended for work by DOD versus
nongovernment employees. OSD 50-50 reporting guidance requires that overhead
and indirect costs be counted in the sector that accomplished the
maintenance. Thus, we believe that it would be appropriate for costs
associated with administering the contract to be counted as private sector
costs of doing business.

OSD guidance on the future years' report was to express projected
obligations in then-year (inflated) dollars. We determined that several Air
Force offices did not inflate their future projections, resulting in an
understatement of future workloads for both public and private sectors.

GAO Contacts and Staff Acknowledgements

Barry W. Holman (202) 512-5581
Julia C. Denman (202) 512-4290

In addition to the above contacts, Bruce Fairbairn, Raymond Cooksey, Andrew
Marek, Fred Naas, Steven Hunter, and Robert Preston made contributions to
this report.

Related GAO Products

Depot Maintenance: Air Force Waiver to 10 U.S.C. 2466
(GAO/NSIAD-00-152R, May 22, 2000).

Defense Logistics: Air Force Report on Contractor Support Is Narrowly
Focused (GAO/NSIAD-00-115 , Apr. 20, 2000).

Depot Maintenance: Air Force Faces Challenges in Managing to 50-50 Ceiling
(GAO/T-NSIAD-00-112 , Mar. 3, 2000).

Depot Maintenance: Future Year Estimates of Public and Private Workloads Are
Likely to Change (GAO/NSIAD-00-69 , Mar. 1, 2000).

Depot Maintenance: Workload Allocation Reporting Improved, but Lingering
Problems Remain (GAO/NSIAD-99-154, July 13, 1999).

Navy Ship Maintenance: Allocation of Ship Maintenance Work in the Norfolk,
Virginia Area (GAO/NSIAD-99-54 , Feb. 24, 1999).

Defense Depot Maintenance: Public and Private Sector Workload Distribution
Reporting Can Be Further Improved (GAO/NSIAD-98-175, July 23, 1998).

Defense Depot Maintenance: DOD Shifting More Workload for New Weapon Systems
to the Private Sector (GAO/NSIAD-98-8, Mar. 31, 1998).

DOD Depot Maintenance: Information on Public and Private Sector Workload
Allocations (GAO/NSIAD-98-41, Jan. 20, 1998).

Defense Depot Maintenance: Uncertainties and Challenges DOD Faces in
Restructuring Its Depot Maintenance Program (GAO/T-NSIAD-97-111,
Mar. 18, 1997, and GAO/T-NSIAD-97-112, Apr. 10, 1997).

Defense Depot Maintenance: DOD's Policy Report Leaves Future Role of Depot
System Uncertain (GAO/NSIAD-96-165, May 21, 1996).

Defense Depot Maintenance: More Comprehensive and Consistent Workload Data
Needed for Decisionmakers (GAO/NSIAD-96-166, May 21, 1996).

Defense Depot Maintenance: Privatization and the Debate Over the
Public-Private Mix (GAO/T-NSIAD-96-146, Apr. 16, 1996, and
GAO/T-NSIAD-96-148, Apr. 17, 1996).

Depot Maintenance: Issues in Allocating Workload Between the Public and
Private Sectors (GAO/T-NSIAD-94-161, Apr. 12, 1994).

(709461, 709468)

Table 1: Reported Depot Maintenance Workload Allocations 5

Table 2: Amount of Workload That Could Have Been Shifted
From Public to Private Sector in Fiscal Year 1999 Without Exceeding
50-percent Ceiling 9

Figure 1: Percentage of Depot Maintenance Work Performed
by the Private Sector 8
  

1. Since data is reported by individual military department, the Marine
Corps data is included with that of the Navy.

2. P.L. 106-65, section 333.

3. This provision was contained in the National Defense Authorization Act of
Fiscal Year 1998 (P.L. 105-85, Nov. 18, 1997).

4. In addition to the data reliability weaknesses identified in this review,
our audits of DOD's financial management operations routinely identify
pervasive weaknesses in financial systems and fund controls that adversely
affect the Department's ability to accumulate costs and reliably determine
expenditures obligations, and funding availability. (See Department of
Defense: Progress in Financial Management Reform (GAO/T-AIMD/NSIAD-00-163 ,
May 7, 2000.)

5. According to an Army official, while this figure is technically accurate,
it is premised on taking that amount of work from public depots and
transferring it to the private sector. The official said a more useful
measure to Army management is $161 million--the total difference between the
reported public and private sector amounts for fiscal year 1999, as shown in
table 1. We believe both figures provide important perspectives on the
closeness of the Army's workload to the 50-50 ceiling.

6. This does not include the impact of the uncertainties regarding the
completeness of reporting that we were unable to quantify.

7. Depot Maintenance: Workload Allocation Reporting Improved, but Lingering
Problems Remain (GAO/NSIAD-99-154 , July 13, 1999) and companion reports
noted in the related documents section of this report.

8. A remanufacture program is an upgrade effort that typically results in a
new model number and serial number of the modified system. An upgrade is the
alteration, conversion, or modernization of an end item of investment
equipment that changes or improves its original purpose or operational
capacity in relation to the effectiveness, efficiency, reliability, or
safety of the item.

9. Interserviced workload is depot maintenance work that one service
performs for equipment owned and funded by another military service. DOD
depot reporting guidance specifies that the owning service reports the work
for purposes of depot maintenance workload reporting.

10. The Army's and the Navy's corrections in fiscal year 1998 reporting
resulted in increased percentages for the public sector. The Navy, for
example, corrected data that had been reversed in developing the initial
report on 1998 last year and corrected another significant error in which a
$267,000 expenditure had been reported as $267 million.

11. Depot Maintenance: Army Report Provides Incomplete Assessment of
Depot-Type Capabilities (GAO/NSIAD-00-20 , Oct. 15, 1999).

12. Depot Maintenance: Workload Allocation Reporting Improved, but Lingering
Problems Remain (GAO/NSIAD-99-154, July 13, 1999).

13. Standards for Internal Control in the Federal Government
(GAO/AIMD-00-21.3.1 , Nov. 1999).

14. Depot Maintenance: Future Year Estimates of Public and Private Workloads
Are Likely to Change (GAO/NSIAD-00-69 , Mar. 1, 2000).

15. Depot Maintenance: Air Force Faces Challenges in Managing to 50-50
Ceiling
(GAO/T-NSIAD-00-112 , Mar. 3, 2000) and Depot Maintenance: Air Force Waiver
to 10 U.S.C. 2466 (GAO/NSIAD-00-152R , May 22, 2000).

16. Defense Logistics: Air Force Report on Contractor Support Is Narrowly
Focused (GAO/NSIAD-00-115 , Apr. 20, 2000).

17. Bridge contracts are for short-term workloads performed by a contractor
to support requirements during workload transitions from closing depots to
other military depots.

18. Given the nature of our sample, the results are not projectible to the
universe of depot maintenance activities.

19. 10 U.S.C. 2460.

20. Depot Maintenance: Army Report Provides Incomplete Assessment of
Depot-Type Capabilities (GAO/NSIAD-00-20, Oct. 15, 1999).
*** End of document. ***