    Air Force Privatization-In-Place: Analysis of Aircraft and Missile
    Guidance System Depot Repair Costs (Letter Report, 12/22/97,
    GAO/NSIAD-98-35).

    GAO reviewed the Air Force's interim cost comparison of operating its
    former Aerospace Guidance and Metrology Center (AGMC) prior to its
    closure with the current privatized-in-place cost as the Boeing Guidance
    Repair Center (BGRC).

    GAO noted that: (1) the Air Force's interim comparison estimates that
    BGRC's first-year privatization-in-place costs will be higher than
    AGMC's historical costs for similar work; (2) the methodology used in
    the comparison is analytically sound and appears reasonable given the
    status of the program; however, until actual cost data is available, it
    is premature to reach a final conclusion on the cost issue; (3) three
    factors significantly influenced the increased cost at the
    facility--estimated increased material cost, contract oversight, and
    contractor award fee; (4) as with any successful privatization, improved
    contractor process efficiencies and operating cost reductions are needed
    to offset such cost factors; (5) the contractor disagrees with the Air
    Force study and is working with the Air Force to resolve their
    differences; (6) the Air Force will continue to monitor these contracts
    as actual cost data becomes available; (7) the Air Force performed an
    interim analysis comparing both actual and estimated aircraft and
    missile inertial navigation system repair and metrology costs at BGRC to
    actual historic costs for comparable workloads prior to
    privatization-in-place and estimated that the first full year of
    operations at the privatized-in-place BGRC will likely cost $14.1
    million more than it would have if the facility had continued to operate
    as a public activity; a 16-percent cost increase; (8) Boeing questioned
    the assessment, saying that its own estimate indicates that costs are
    about $6.8 million lower than before privatization-in-place; (9) Boeing
    also noted that it is exceeding contract quality requirements and
    minimum delivery schedules; (10) Air Force officials stated that
    Boeing's cost analysis is not complete and comprehensive; (11) the Air
    Force cost study methodology is analytically sound and used the best
    available data; (12) based on the available data, the methodology
    provides a reasonable interim estimate of costs for similar workloads
    performed by the Air Force depot and during the first year of
    privatization-in-place; (13) the Air Force's interim study does not
    include a variable-by-variable comparison between historical and current
    costs of operations, but it does identify three cost factors
    contributing to the increased costs at the facility: (a) estimated
    increased material cost of $3.4 million; (b) contract administration and
    oversight costs of $5.5 million; and (c) estimated contractor award fees
    of $5.2 million.

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

     REPORTNUM:  NSIAD-98-35
         TITLE:  Air Force Privatization-In-Place: Analysis of Aircraft and
                 Missile Guidance System Depot Repair Costs
          DATE:  12/22/97
       SUBJECT:  Military downsizing
                 Privatization
                 Base closures
                 Military cost control
                 Comparative analysis
                 Cost effectiveness analysis
                 Defense economic analysis

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    Cover
    ================================================================ COVER

    Report to Congressional Requesters

    December 1997

    AIR FORCE PRIVATIZATION-IN-PLACE -
    ANALYSIS OF AIRCRAFT AND MISSILE
    GUIDANCE SYSTEM DEPOT REPAIR COSTS

    GAO/NSIAD-98-35

    Air Force Privatization-in-Place

    (709265, 709240)

    Abbreviations
    =============================================================== ABBREV

      AFMC - Air Force Materiel Command
      AGMC - Aerospace Guidance and Metrology Center
      BGRC - Boeing Guidance Repair Center
      BRAC - Base Realignment and Closure
      DCAA - Defense Contract Audit Agency
      DCMC - Defense Contract Management Command
      DOD - Department of Defense

    Letter
    =============================================================== LETTER

    B-277787

    December 22, 1997

    Congressional Requesters

    As requested, we reviewed the Air Force's interim cost comparison of
    operating its former Aerospace Guidance and Metrology Center (AGMC)
    in Newark, Ohio, prior to its closure with the current
    privatized-in-place cost as the Boeing Guidance Repair Center
    (BGRC).\1 We previously discussed the AGMC/BGRC cost comparison
    issues in testimonies during March and April 1997.\2 This report
    provides our assessment of the interim comparison, including the
    major reasons for cost differences between the two activities.  This
    report contains no recommendations.

    --------------------
    \1 The term Boeing Guidance Repair Center refers to the facility
    housing the two privatization-in-place contractors---the Boeing
    Company and Wyle Laboratories.

    \2 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).

       BACKGROUND
    ------------------------------------------------------------ Letter :1

    AGMC was closed as a result of a 1993 decision of the Base
    Realignment and Closure (BRAC) Commission.  In recommending the
    closure of the Newark Air Force Base/AGMC, the Commission noted that
    the workload could be privatized or moved to other depot maintenance
    activities.  The BRAC recommendation states

         "The Aerospace Guidance and Metrology Center (AGMC) depot will
         be closed; some workload will move to other depot maintenance
         activities including the private sector."

    After the BRAC recommendation to close AGMC was finalized, (1) the
    Air Force moved a small portion of AGMC's Air Force workload to other
    Air Force depots, (2) the Navy moved most of its AGMC workload to
    other sites, and (3) the Army moved all of its AGMC workload to other
    sites.  The Air Force decided to privatize-in-place the remaining
    AGMC workloads.  At the time it made this decision, the Air Force
    relied on an analysis that estimated privatizing would save about $5
    million in 1997.  However, the preaward analysis was not documented
    and Air Force officials do not know the basis for the costs included.
    Consequently, the Air Force was not able to reconcile its current
    interim study to its precontract award analysis.

    Since October 1996, the Newark, Ohio facility has been operated as
    the Boeing Guidance Repair Center by two contractors--Boeing North
    American, Inc., (Autonetics Electronics Systems Division) and Wyle
    Laboratories, Inc.  The BGRC repair contract is managed by the Air
    Force's Ogden, Utah, Air Logistics Center program office.  Weapon
    system and item management functions for missile inertial guidance
    systems are performed at Ogden and the same functions for aircraft
    inertial guidance systems are managed at the Air Force's Oklahoma
    City Air Logistics Center.  The Air Force is retaining ownership of
    depot plant equipment with an estimated value of $326 million.  The
    Newark-Heath-Licking County Port Authority is in the process of
    purchasing the Newark Air Force Base real property.\3 The Port
    Authority currently leases the facility to Boeing, which then
    subleases a portion of the facility to Wyle Laboratories.  Additional
    details regarding the AGMC's mission and the depot's closure and
    privatization-in-place are found in appendix I.

    --------------------
    \3 The Heath-Newark-Licking County Port Authority is the Ohio
    chartered local reuse authority responsible for redeveloping and
    managing the closed Newark Air Force Base facilities.

          PRIVATIZATION-IN-PLACE
          EXPERIENCE
    ---------------------------------------------------------- Letter :1.1

    The Air Force's AGMC and two Navy facilities are the only
    privatizations-in-place resulting from BRAC decisions and have,
    consequently, created much interest in the cost and benefits of this
    concept.\4 The question of whether closing and privatizing-in-place
    AGMC's workload would result in savings arose soon after the 1993
    BRAC closure decision.  After the decision, Air Force organizations
    conducted several studies comparing the projected cost of
    privatizing-in-place the AGMC depot maintenance workload against the
    historical costs of the Air Force depot.  These studies concluded
    that costs of a privatized-in-place operation would exceed the
    historic costs by $6.2 million to $20 million, on a projected
    workload of about $82 million to $90 million.  However, in late 1995,
    at the time of the decision to award the contract, an Air Force
    Materiel Command (AFMC) analysis concluded that
    privatization-in-place would save about $5 million in 1997 and a
    total of $20 million over the 5-year contract period.

    --------------------
    \4 The AGMC privatization-in-place is different from current Air
    Force outsourcing efforts at San Antonio and Sacramento Air Logistics
    Centers.  The Air Force is now conducting public-private competitions
    at these centers following DOD's December 1996 reinstitution of these
    competitions.

          PRELIMINARY ANALYSIS OF
          CONTRACT COSTS
    ---------------------------------------------------------- Letter :1.2

    In April 1996, we testified that preliminary data showed (1) unit
    costs were higher after privatization-in-place for 201, or about 79
    percent of the items we reviewed; and (2) overall, repair costs
    increased by about $6 million for the 254 items reviewed.\5 We also
    noted that AFMC's projected 5-year savings of $20 million did not
    include all relevant costs.  For example, estimated contract costs
    excluded $15 million in material costs for eight contract items.

    Following a 9-month transition period, the first full year of the
    BGRC contract operations began in October 1996.  After the first
    quarter, Ogden and Oklahoma City logistics center personnel noted
    that funds were being expended faster than anticipated for the BGRC
    contract.  The most significant factor appeared to be the increased
    amount of material being ordered.  After reviewing Ogden and Oklahoma
    City information, we requested that the aircraft guidance program
    office at the Oklahoma City Air Logistics Center and the missile
    guidance program office at Ogden Air Logistics Center compare
    contractor versus Air Force depot costs for the fiscal year 1997
    workload.  Headquarters, AFMC, managed this evaluation.

    --------------------
    \5 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).

       RESULTS IN BRIEF
    ------------------------------------------------------------ Letter :2

    The Air Force's interim comparison estimates that BGRC's first year
    privatization-in-place costs will be higher than AGMC's historical
    costs for similar work.  The methodology used in the comparison is
    analytically sound and appears reasonable given the status of the
    program; however, until actual cost data is available, it is
    premature to reach a final conclusion on the cost issue.  Three
    factors significantly influenced the increased cost at the
    facility--estimated increased material cost, contract oversight, and
    contractor award fee.  As with any successful privatization, improved
    contractor process efficiencies and operating cost reductions are
    needed to offset such cost factors.  The contractor disagrees with
    the Air Force study and is working with AFMC to resolve their
    differences.  The Air Force will continue to monitor these contracts
    as actual cost data becomes available.  Specifically our work shows:

      -- The Air Force performed an interim analysis comparing both
         actual and estimated aircraft and missile inertial navigation
         system repair and metrology costs at the Boeing Guidance Repair
         Center to actual historic costs for comparable workloads prior
         to privatization-in-place.  The analysis estimated that the
         first full year of operations at the privatized-in-place Center
         will likely cost $14.1 million more than it would have if the
         facility had continued to operate as a public activity.  This is
         a 16-percent cost increase.

      -- Boeing questioned the Air Force Materiel Command's assessment,
         saying that its own estimate indicates that costs are about $6.8
         million lower than before privatization-in-place.  Boeing also
         noted that it is exceeding contract quality requirements and
         minimum delivery schedules.  Air Force officials stated that
         Boeing's cost analysis is not complete and comprehensive.  For
         example, they noted that Boeing's estimate did not include
         contract administration and oversight costs of about $3.4
         million, and overstated historic operations and maintenance
         costs by about $5 million.

      -- The Air Force cost study methodology is analytically sound and
         used the best available data.  Based on the available data, the
         methodology provides a reasonable interim estimate of costs for
         similar workloads performed by the Air Force depot and during
         the first year of privatization-in-place.  The Air Force's
         methodology is consistent with Department of Defense (DOD)
         guidance on public-private depot competitions in the Defense
         Depot Maintenance Council Cost Comparability Handbook and in
         supplemental procedures provided by the Air Force for conducting
         public-private competitions.

      -- The Air Force's interim study does not include a
         variable-by-variable comparison between historical and current
         costs of operations, but it does identify three cost factors
         contributing to the increased costs at the facility.  They are:
         (1) estimated increased material cost of $3.4 million, (2)
         contract administration and oversight costs of $5.5 million, and
         (3) estimated contractor award fees of $5.2 million.

       AIR FORCE INTERIM STUDY
       INDICATES THAT CONTRACT COSTS
       EXCEED COSTS OF AGMC OPERATIONS
    ------------------------------------------------------------ Letter :3

    The Air Force's July 1997 interim study projected that the
    privatization-in-place of guidance repair and metrology workloads at
    BGRC will result in fiscal year 1997 costs being from $3 million to
    $32 million more than the costs of performing the same work when the
    facility was operated as an Air Force depot.  Actual data was used to
    determine AGMC's pre-closure costs and actual cost data available to
    date and estimates were used to project BGRC's costs for 1997.  The
    Air Force plans to update BGRC's costs using complete actual data
    after the 1997 workload is closed out.  The contractor disagreed with
    the AFMC interim study and provided its own analysis.  Air Force
    officials said the Boeing analysis was not comprehensive because it
    (1) did not include contract administration and oversight costs and
    (2) overstated AGMC costs prior to privatization-in-place.

       RESULTS OF AIR FORCE'S JULY
       1997 INTERIM STUDY
    ------------------------------------------------------------ Letter :4

    In April 1997, AFMC estimated that privatized-in-place repair
    operations for the year would cost from $7.7 million to $31.2 million
    more than historical costs of AGMC operations--a 10.2- to
    44.8-percent increase--with a most likely increase of $16.1 million.
    In July 1997, AFMC expanded its interim cost analysis to include the
    metrology costs\6 and revised its prior estimates based on a
    reevaluation of overhead and base operation and support costs.  Using
    actual cost data, this reevaluation increased the costs of each
    workload repaired prior to privatization by allocating all base
    operation and support costs from the Newark Air Force Base, including
    those not directly affecting the depot maintenance business area, to
    the maintenance and metrology workloads.  The later projection
    indicated that the privatized-in-place repair and metrology
    operations during the first year of the contract would cost from $3.4
    to $32 million more than the historical AGMC cost--a 3.8- to
    39-percent increase--with a most likely increase of $14.1 million, or
    about 16 percent.  Because these comparisons are subject to change,
    AFMC officials noted that they would be revisited when the fiscal
    year 1997 contract period is over.  Appendix II summarizes the
    results of these analyses.

    --------------------
    \6 AGMC performed overall technical direction and management of the
    Air Force Metrology and Calibration Program and operated the Air
    Force Measurement Standards Laboratory.

             EARLIER STUDY RESULTS
             CANNOT BE RECONCILED
    -------------------------------------------------------- Letter :4.0.1

    The AFMC 1995 precontract award analysis indicated potential savings
    of $5 million in fiscal year 1997 through privatization-in-place.
    However, the more recent, interim study suggests that
    privatization-in-place may cost $14.1 million more, which would
    indicate a 16-percent cost increase.  The interim analysis estimated
    the cost of operating the privatized facility to be 3.7 percent
    higher than the preaward study, and the preclosure cost of operations
    to be about 15.6 percent less than the preaward study.  Table 1
    provides a comparison of total costs from AFMC's preaward and interim
    post-award analyses.  We asked AFMC Headquarters officials for the
    rationale for the difference between these estimates--particularly
    the substantial decrease in AGMC's preclosure cost.  They stated that
    they do not have the documentation supporting the $5 million savings,
    and, therefore, they are not able to reconcile differences between
    the 1995 and current analyses.  They noted that the estimated inhouse
    costs from the interim study were based on the fiscal year 1995 data
    obtained from the end-item cost report dated September 30, 1995,
    adjusted for quantity differences.  Comparability adjustments were
    made to cost elements as specified in the cost comparability handbook
    for public-private competitions.  Air Force officials said no data
    was available to support the estimated inhouse costs included in the
    preaward study and the estimates do not provide a valid comparative
    baseline of historical costs.  On the other hand, the interim study
    provides an accurate baseline of AGMC's costs for comparison with the
    current and future costs of the privatized activity.  Our review of
    historical data and study documentation supports this conclusion.

                                    Table 1

                       Results of AFMC Studies Comparing
                     Estimated Fiscal Year 1997 Organic to
                       Privatized-in-Place Costs for Same
                                    Workload

                             (Dollars in millions)

                                                              AFMC Cost
                                                               Analyses
                                                            --------------
                                                            Preawa  Interi
                                                                rd       m
    Operations                                               study   study
    ------------------------------------------------------  ------  ------
    AGMC (Air Force depot)                                   $99.8   $84.2
    BGRC (privatized depot)                                   94.8    98.3
    ======================================================================
    Difference                                               $ 5.0       -
                                                                     $14.1
    ----------------------------------------------------------------------
    Source:  AFMC November 1995, April 1997, and July 1997 AGMC cost
    studies.

          BOEING DISAGREES WITH AIR
          FORCE INTERIM STUDY
    ---------------------------------------------------------- Letter :4.1

    Boeing officials disagreed with the results of AFMC's most recent
    interim study.  They believe it overstates the contractor's material
    consumption and neglected to adjust for historic military
    construction expenditures.  As a result, they are concerned that AFMC
    miscalculated the cost of privatization-in-place.  In response,
    Boeing did its own analysis estimating that privatization-in-place
    would cost $67.2 million compared to its estimate of $74.0 million
    for government operations--a $6.8 million savings over government
    operations in fiscal year 1997.  Boeing officials met with AFMC
    officials on August 5, 1997, to present their analysis and to gain an
    understanding of the AFMC methodology.  According to Boeing and AFMC
    officials, the Boeing estimate did not include a detailed analysis of
    specific workloads and costs.  AFMC officials added that the Boeing
    analysis was not comprehensive.  For example, they pointed out that
    Boeing's estimate did not include contract administration and
    oversight costs of about $3.4 million, and it overstated historic
    AGMC operations and maintenance costs by about $5 million.

    However, AFMC did acknowledge the need to address Boeing's concern
    about historic military construction expenditures and to meet with
    Boeing to discuss the need for some adjustments to its cost
    comparison.  AFMC stated that the issue of material consumption would
    be resolved through an Air Force Audit Agency review that is
    scheduled to be completed in December 1997.

    Boeing officials also pointed out that they are meeting or exceeding
    contract requirements for cost, schedule, and performance.  For
    example, Boeing officials, noted that they are:

      -- underrunning target costs by 5 percent and 15 percent for
         Intercontinental Ballistic Missile and aircraft guidance system
         repair;

      -- exceeding minimum delivery schedules and delivering more
         end-items per month than AGMC had been tasked to deliver in
         fiscal year 1995; and

      -- exceeding quality requirements by achieving less than a
         3-percent quality deficiency report rate versus the contract
         goal of 10 percent or less.

    We agree with Boeing that preliminary indications show that it is
    meeting contract goals.  It will not be until all the costs are
    available for 1997, the first full year of privatized operations,
    that we will be able to determine how the cost of the privatized
    maintenance operations compares with cost of comparable maintenance
    operations by the Air Force depot.

       AFMC INTERIM STUDY METHODOLOGY
       IS REASONABLE AND PROVIDES
       INDICATIONS OF REASON FOR COST
       INCREASES
    ------------------------------------------------------------ Letter :5

    Our work indicates that, in general, AFMC's methodology for
    estimating the cost of work performed at the privatized-in-place BGRC
    facility and the cost for the same work based on AGMC cost data was
    reasonable.  The methodology was analytically sound and used the best
    available data.  In selecting its methodology and identifying the
    appropriate data, AFMC gathered input and addressed criticisms from
    various Air Force, Defense Contract Management Command, and
    contractor officials.  AFMC's methodology is consistent with DOD
    guidance on public-private depot competitions found in the Defense
    Depot Maintenance Council Cost Comparability Handbook and in
    supplemental Air Force procedures for conducting public-private
    competitions.  Defense contractors participated in the development of
    the handbook and in subsequent revisions.  We previously reviewed the
    handbook as a part of our assessment of depot maintenance
    public-private competitions and found that it generally covers the
    factors that should be considered in such competitions.  In
    performing its analysis, the Air Force Materiel Command used actual
    data where it was known and estimated costs when actual costs were
    not available.  Estimated costs were expressed as ranges, using most
    likely, low, and high estimates.  A summary of the methodology used
    for the analysis is provided in appendix III.

          REASONS FOR INCREASED
          CONTRACTOR COST
    ---------------------------------------------------------- Letter :5.1

    AFMC's interim study does not include a variable-by-variable
    comparison between historical and current costs of operations.
    However, the study provides sufficient data to identify three factors
    that increased costs at the facility:  (1) material cost, (2)
    contract administration and oversight, and (3) contractor award fee.

             MATERIALS
    -------------------------------------------------------- Letter :5.1.1

    Material orders have significantly increased since privatization.
    However, the Air Force has not determined the extent to which
    material consumption has increased.  Therefore, the interim AFMC
    study results covered the range of possible contractor material
    consumption from no increase at the low end to a 100-percent
    increase, or about $15.7 million at the high end, with the most
    likely increase being 35 percent, or about $5.5 million.

    AFMC asked the Air Force Audit Agency to determine the contractor's
    actual material consumption.  While the Audit Agency does not
    anticipate completing the audit until December 1997, auditors have
    visited BGRC to review material ordering and consumption with the
    contractor and program offices.  Based on work performed thus far,
    the auditors made the following observations:

      -- Contractor inventory records are not sufficiently complete to
         allow them to determine the value of total inventory on hand.

      -- Contractor inventory records do not provide an accurate basis
         for determining the value of inventory usage.

      -- The contractor appears to have a greater amount of
         government-furnished material than necessary for existing needs.

      -- Items to be repaired have been misclassified as
         government-furnished material.

    According to Audit Agency officials, two factors will inhibit AFMC's
    ability to reconcile physical inventory with the inventory records
    and establish material consumption rates.  First, with Air Force and
    contractor concurrence, the contractor accepted a transfer of initial
    material inventory from the Air Force without the Air Force
    performing a physical inventory.  According to the Audit Agency, the
    contractor disputes the accuracy of the Air Force's inventory
    transfer documents and, therefore, it may be impossible to determine
    how much material the contractor has consumed.  In addition, the
    contractor assumed control over stock already issued to the shop
    floor that was not on Air Force inventory records.  Therefore, the
    Air Force has no accurate way to measure consumption of those items
    typically held in stock at repair work benches.

    According to the Air Force Audit Agency, because the contract award
    fee structure does not emphasize minimizing the use of
    government-furnished material, the contractor may have used a greater
    amount of such material than necessary in order to reduce repair turn
    around time on items.  Nonetheless, BGRC personnel maintain that
    BGRC's consumption of material does not vary significantly from prior
    AGMC consumption levels because it is repairing items using the same
    people, the same facilities, and the same repair procedures.

    While the increased ordering of material clearly represents an
    increased cost to the program during the period evaluated, it is
    uncertain how material consumption will compare over a longer period.
    Considering the significant increase in material orders and the
    absence of actual consumption data, we believe it is reasonable for
    AFMC to reflect this increase in its treatment of material
    consumption at this time.

             CONTRACT OVERSIGHT AND
             ADMINISTRATION
    -------------------------------------------------------- Letter :5.1.2

    Consistent with the Defense Depot Maintenance Council's Cost
    Comparability Handbook, the interim study includes contract oversight
    and administration as an additional cost to privatization.  AFMC
    estimated this cost for the two BGRC contracts to be $3.4 million for
    1997.  The contracts require oversight from three entities:  the
    Defense Contract Management Command (DCMC), the Ogden Air Logistics
    Center's program office, and the Defense Contract Audit Agency
    (DCAA).  The payroll costs for these organizations as well as the
    cost of supplies and travel expenses added by AFMC seem appropriate
    for the cost comparison.

             CONTRACTOR AWARD FEE
    -------------------------------------------------------- Letter :5.1.3

    AFMC's interim study recognizes that the award fee earned by the
    contractor accounts for a portion of the cost of
    privatization-in-place.  While the fee can range from zero to 10
    percent of the estimated contract cost, the average Air Force fee for
    performance reviews to date has been 9.4 percent.  In its cost study,
    AFMC provided for varying projections of contractor award fees, based
    on historical data and contractor performance during the first half
    of 1997.  The estimated fee ranged from
    5 percent to 10 percent, with 9 percent being suggested as the most
    likely award fee rate, equating to a most likely contractor fee of
    about $5.2 million for 1997.

    Including this cost element is consistent with a December 1996 joint
    memorandum from the Principal Deputy Assistant Secretaries of the Air
    Force for Acquisitions and for Financial Management, which called for
    recognizing award fees in evaluating public-private depot
    competitions.  According to AFMC officials, the award fee adjustment
    was added to the standard adjustments provided for in the Cost
    Comparability Handbook to enhance the Air Force's ability to arrive
    at decisions that provide the best overall value to the government.
    The methodology followed in estimating this cost element appears
    reasonable.

       CONCLUSIONS
    ------------------------------------------------------------ Letter :6

    The Air Force's interim comparison estimates that BGRC's first year
    privatization-in-place costs will be higher than AGMC's historical
    costs for similar work.  The methodology used in the comparison is
    analytically sound and appears reasonable given the status of the
    program; however, until actual cost data is available, it is
    premature to reach a final conclusion on the cost issue.  Three
    factors significantly influenced the increased cost at the
    facility--estimated increased material cost, contract oversight, and
    contractor award fee.  As with any successful privatization, improved
    contractor process efficiencies and operating cost reductions are
    needed to offset such cost factors.  The contractor disagrees with
    the Air Force study and is working with AFMC to resolve their
    differences.  Further, the Air Force will continue to monitor these
    contracts as actual cost data becomes available.

       AGENCY AND CONTRACTOR COMMENTS
       AND OUR EVALUATION
    ------------------------------------------------------------ Letter :7

    DOD officials provided oral comments on a draft of this report
    addressing two points.  The first pertained to our reference to the
    Air Force's interim analysis as using 0 percent, 35 percent and 100
    percent to simulate the minimum, most likely, and maximum cost.  Air
    Force officials stated that its interim analysis actually assigned
    100 percent to both the minimum and most likely material consumption
    cost computations and 200 percent to the maximum material costs.  The
    100 percent referred to by the Air Force is the same as the historic
    material consumptions costs and represents the 0-percent increase we
    use in our explanation for the minimum condition.  In stating that
    there was no increase in material assigned to the most likely
    scenario, the Air Force was referring to the material consumption
    variable input to the model.  Our discussion of this factor refers to
    the material consumption cost estimates that resulted from the
    processing of the model.  The second comment dealt with our
    discussion of the employee benefits proposal submitted by Boeing.
    Since the benefit proposal has since been rejected, we have removed
    from the draft of this report our discussion of the proposal and its
    potential cost.

    Officials from the Autonetics and Missile Systems Division of Boeing
    North American, Inc., also commented, raising concerns about comments
    made by the Air Force Audit Agency and about the material usage
    assumptions in the AFMC interim study.  Boeing officials said they
    thought the Audit Agency's comments about material consumption were
    misleading because the level of inventory was not properly recorded
    at the time of transition.  Moreover, they said that the Audit
    Agency's approach greatly overstated material usage.  As previously
    discussed, lacking precise data on material consumption, the Air
    Force study used a range from no increase on the low end to a high of
    a 100-percent increase, with a 35-percent increase used to represent
    the most likely usage.  In the absence of actual consumption data,
    Air Force officials stated that they based their treatment of
    consumption on material orders, which should provide a good indicator
    of consumption.  Given the high material usage indicators but the
    lack of definitive data, the Air Force also took several independent
    actions.  It initiated a material consumption review by the Air Force
    Audit Agency and made plans for a follow-on analysis when actual
    consumption data is available.  We believe the Air Force study
    approach and follow-on actions provide a reasonable approach.

       SCOPE AND METHODOLOGY
    ------------------------------------------------------------ Letter :8

    To obtain information for this report, we reviewed documents and
    interviewed officials from the Office of the Secretary of Defense and
    the Headquarters, Air Force, Washington, D.C.; Headquarters, Air
    Force Materiel Command, Wright-Patterson Air Force Base, Ohio; and
    two subordinate activities--the Ogden Air Logistics Center, Hill Air
    Force Base, Utah, and the Oklahoma Air Logistics Center, Tinker Air
    Force Base, Oklahoma.  Since some of the actual data needed to make
    such an assessment is not yet available, we reviewed preliminary cost
    estimates.  We also discussed and gathered documentation on the
    program and the benefits and costs of privatization-in-place with
    representatives from the BGRC, Heath, Ohio; the Newark-Heath-Licking
    County Port Authority; and Defense Contract Management Command at
    BGRC.

    We discussed and reviewed the supporting data for the AFMC's cost
    analysis with representatives from the Ogden and Oklahoma Air
    Logistics Centers, as well as with Boeing representatives and the
    AFMC cost-analysis team.  We reviewed DOD's guide for making cost
    comparisons between public depots and private contractors (the
    Defense Depot Maintenance Council's Cost Comparability Handbook) to
    ensure that the AFMC study included all applicable cost elements and
    included any necessary adjustments.  We also reviewed Air Force
    procedures for conducting public-private depot competitions.  To test
    the reasonableness of the AFMC methodology used to allocate the
    Newark Air Force Base operating support costs to AGMC aircraft,
    missile, and metrology workloads, we consulted responsible officials
    in the DOD comptroller and Air Force financial management
    organizations, and reviewed applicable DOD instructions on
    reimbursable base support costs.  We reviewed the type of source used
    for each cost element to ensure that actual data was used when
    available instead of estimates.  We reviewed contractor cost reports
    to assess for shifts in cost trends that may impact the cost
    analysis.  Further, during the development of the cost study, we held
    extensive discussions with the cost-analysis team to review
    adjustments, both additions and deletions, for reasonableness.

    We conducted our review from March through August 1997 in accordance
    with generally accepted government auditing standards.

    ---------------------------------------------------------- Letter :8.1

    We are sending copies of this report to the Director, Office of
    Management and Budget; the Secretaries of Defense and the Air Force;
    and other interested parties.  We will make copies available to
    others upon request.

    Please contact me at (202) 512-4812 if you or your staff have any
    questions concerning this report.  Major contributors to this report
    were Jim Wiggins, Julia Denman, Larry Junek, and John Strong.

    David R.  Warren, Director
    Defense Management Issues

    List of Requesters

    The Honorable James M.  Inhofe
    Chairman
    The Honorable Charles S.  Robb
    Ranking Minority Member
    Subcommittee on Readiness
    Committee on Armed Services
    United States Senate

    The Honorable Neil Abercrombie
    The Honorable Saxby Chambliss
    The Honorable Tillie K.  Fowler
    The Honorable James V.  Hansen
    The Honorable John N.  Hostettler
    The Honorable Ernest J.  Istook
    The Honorable Walter B.  Jones, Jr.
    The Honorable Solomon P.  Ortiz
    The Honorable Norman Sisisky
    The Honorable J.C.  Watts, Jr.
    House of Representatives

    AGMC MISSION AND CLOSURE HISTORY
    =========================================================== Appendix I

    Prior to its closure in 1996, Newark Air Force Base supported the
    industrial complex comprising the Aerospace Guidance and Metrology
    Center (AGMC), supporting two Air Force missions--depot maintenance
    and metrology and calibration.  AGMC provided the Air Force with
    depot-level repair for inertial guidance and inertial navigation
    systems and displacement gyroscopes for the Minuteman and Peacekeeper
    intercontinental ballistic missiles and most of the Air Force's
    aircraft.  In fiscal year 1994, AGMC's depot maintenance workload
    consisted of about 900,000 hours; almost 10,500 items were produced
    to support repair requirements for 66 Air Force, Navy, and Army
    systems and components.  This work was accomplished by about 500
    maintenance and engineering personnel and 325 management and support
    personnel.  Figure I.1 shows an aerial view of the Newark facility.

       Figure I.1:  Photographs of
       Boeing Guidance and Repair
       Center

       (See figure in printed
       edition.)

    AGMC was different from the Air Force air logistics centers because
    it did not have weapon system and item management responsibility
    collocated at the same base.  For Air Force systems repaired at AGMC,
    weapon system and item management functions are performed primarily
    at the Ogden, Utah, or Oklahoma City, Oklahoma, Air Logistics
    Centers.

       Figure I.2:  Examples of
       Various Test and Repair
       Stations at Boeing Guidance and
       Repair Center, Heath, Ohio

       (See figure in printed
       edition.)

    For its second Air Force mission--metrology and calibration--AGMC
    performed overall technical direction and management of the Air Force
    Metrology and Calibration Program and operated the Air Force
    Measurement Standards Laboratory.  About 200 personnel were involved
    in the metrology and calibration mission--109 in generating technical
    orders, certification of calibration equipment, and management
    operations and 89 in the standards laboratory.

    The Department of Defense (DOD) considered AGMC's work conducive to
    conversion to the private sector and recommended closing Newark Air
    Force Base/AGMC through privatization and/or transferring the
    workload to other depots.  DOD justified the closure by (1)
    identifying at least 8.7 million hours of excess Air Force depot
    maintenance capacity, with the closure of AGMC expected to reduce the
    excess by 1.7 million hours and (2) applying the eight base closure
    criteria to Air Force bases having depots and ranking Newark Air
    Force Base low relative to the others.

    DOD estimated that implementing its recommendation on Newark Air
    Force Base/AGMC would cost $31 million, result in an annual savings
    of $3.8 million, and have an 8-year payback period for closure and
    relocation expenses.  In our report on the base closure and
    realignment recommendations and selection process, we estimated that
    the Newark Air Force Base/AGMC closure costs would be $38.29 million,
    with a 13-year payback.  The Base Closure and Realignment Commission
    determined that the AGMC workload could either be contracted out or
    privatized-in-place at the same location, although the BRAC noted
    that industry interest in privatization-in-place was limited.  The
    BRAC recommended closing Newark Air Force Base/AGMC--noting that
    workload could be moved to other depot maintenance activities,
    including the private sector.

    Our December 1994 report questioned the impending closure of AGMC and
    recommended reassessment of the Air Force closure and
    privatization-in-place plans.\1 DOD reevaluated its decision and
    reaffirmed its closure and privatization-in-place plans.  In December
    1995, the Air Force awarded two 5-year contracts for repair and
    metrology services at Newark:  an estimated $264 million cost plus
    award fee contract to Rockwell International for AGMC's repair
    mission\2 and a $19 million cost plus award fee contract to Wyle
    Laboratories for operation of the Air Force's standard metrology
    laboratory.  In October 1996, Boeing acquired the AGMC repair
    operations through its acquisition of Rockwell International.

    In addition to these contract operations, the Air Force retained
    about
    130 government employees at Newark--about 69 percent of the
    preclosure metrology staff.  They perform such functions as (1)
    periodically reviewing and certifying the operations of the Air
    Force's 130 metrology laboratories and (2) helping the Defense
    Contract Management Command monitor Wyle Laboratories' metrology
    contract.  In addition, 24 government civilian employees of the
    Defense Contract Management Command provide on-site contract
    oversight.

    The Newark-Heath-Licking County Port Authority is in the process of
    purchasing the Newark Air Force Base real property.\3 The Port
    Authority currently leases the facility to Boeing, which then
    subleases a portion of the facility to Wyle Laboratories.  Figure I.3
    depicts the relationship between the Air Force, the contractors, and
    the local reuse authority.

       Figure I.3:  Air Force,
       Contractor, and Local Reuse
       Authority Relationship

       (See figure in printed
       edition.)

    --------------------
    \1 Aerospace Guidance and Metrology Center:  Cost Growth and Other
    Factors Affect Closure and Privatization (GAO/NSIAD-95-60, Dec.  9,
    1994).

    \2 Following the decision to close AGMC, the Army and the Navy
    transferred about 95,000 direct labor hours of work to other sources
    of repair.

    \3 The Newark-Heath-Licking County Port Authority is the Ohio
    chartered reuse authority responsible for redeveloping and managing
    the closed Newark Air Force Base facilities.

    AFMC INTERIM COST ANALYSIS
    SUMMARIES
    ========================================================== Appendix II

                                   Table II.1

                     AFMC Estimated Fiscal Year 1997 Costs
                    for Missile and Aircraft Workload Before
                    and After Privatization-in-Place (Mar./
                              Apr. 1997 analyses)

                                                          Most  Pessimisti
                                        Optimistic      likely           c
    ----------------------------------  ----------  ----------  ----------
    Missiles AGMC                       $39,654,84  $38,143,56  $37,625,06
                                                 5           1           7
    Missiles BGRC                       43,010,320  44,933,117  50,858,073
    Difference                          $3,355,475  $6,789,556  $13,233,00
                                                                         6

    Aircraft AGMC                       $35,540,99  $33,092,11  $32,002,95
                                                 0           1           8
    Aircraft BGRC                       39,923,218  42,416,090  49,954,755
    Difference                          $4,382,228  $9,323,979  $17,951,79
                                                                         7

    ======================================================================
    Total AGMC                          $75,195,83  $71,235,67  $69,628,02
                                                 5           2           5
    ======================================================================
    Total BGRC                          82,933,538  87,349,207  100,812,82
                                                                         8
    ======================================================================
    Total difference                    $7,737,703  $16,113,53  $31,184,80
                                                             5           3
    ----------------------------------------------------------------------
    Source:  AFMC March/April 1997 AGMC cost analyses.

                                   Table II.2

                     AFMC Estimated Fiscal Year 1997 Costs
                      for Missile, Aircraft, and Metrology
                           Workloads Before and After
                     Privatization-in-Place (June/July 1997
                                   analyses)

                                                          Most  Pessimisti
                                        Optimistic      likely           c
    ----------------------------------  ----------  ----------  ----------
    Missiles AGMC                       $42,993,85  $41,154,58  $40,512,94
                                                 5           7           3
    Missiles BGRC                       43,527,092  45,509,268  51,321,727
    Difference                            $533,237  $4,354,681  $10,808,78
                                                                         4

    Aircraft AGMC                       $37,147,03  $34,386,42  $33,271,37
                                                 9           2           1
    Aircraft BGRC                       39,920,618  42,380,471  50,710,634
    Difference                          $2,773,579  $7,994,049  $17,439,26
                                                                         3

    Metrology AGMC                      $9,529,315  $8,671,675  $8,196,359
    Metrology BGRC                       9,654,497  10,453,622  11,982,424
    Difference                            $125,182  $1,781,947  $3,786,065

    ======================================================================
    Total AGMC                          $89,670,20  $84,212,68  $81,980,67
                                                 9           4           3
    ======================================================================
    Total BGRC                          93,102,207  98,343,361  114,014,78
                                                                         5
    ======================================================================
    Total difference                    $3,431,998  $14,130,67  $32,034,11
                                                             7           2
    ----------------------------------------------------------------------
    Source:  AFMC June/July 1997 AGMC cost analyses.

    AFMC COST ANALYSIS METHODOLOGY
    ========================================================= Appendix III

    In performing its cost analysis, the Air Force Materiel Command
    (AFMC) used actual cost data when it was known.  Estimated cost data
    were expressed as ranges, using most likely, low, and high estimates.
    The cost analysis was constructed using triangular probability
    distributions for each estimated cost element.  The cost elements
    were then summed statistically using a probability simulation model,
    with all estimated costs stated in fiscal year 1997 dollars.  To
    provide a valid basis for comparison, AFMC determined that it was
    necessary to derive AGMC and contract cost estimates using two
    distinct methodologies.

    The AGMC estimate is based largely on fiscal year 1995 data obtained
    from the end-item cost report dated September 30, 1995, adjusted for
    quantity differences.  The cost categories in that report consist of
    (1) depot product direct hours, (2) direct labor, (3) direct
    material, (4) shop overhead, (5) support overhead, and (6) general
    and administrative costs.  The organic estimate also included cost
    categories for unprogrammed work and cost comparability adjustments.
    Comparability adjustments were additions to the Defense Maintenance
    Business Area for expenditures funded by other sources.  These
    adjustments were made in accordance with the Defense Depot
    Maintenance Council Cost Comparability Committee Handbook dated
    August 10, 1993.  Cost comparability adjustments consisted of the
    following cost elements:  state unemployment tax, unfunded civilian
    retirement, casualty insurance, impact aid, retiree health benefits,
    other operation and maintenance costs, and costs associated with the
    guidance replacement program (new cost on the contract).

    For the contract estimate, AFMC based many of the most likely input
    variables on costs as stated in the current contract.  Latest revised
    estimates for the contract cost categories were obtained from the
    Contractor/Schedule Status Report dated end-of-month December 1996
    and February 1997.  Additional cost categories for the contract
    estimate included security, lease, depot maintenance business area
    contract fees, equipment depreciation, capital expenditures, and
    privatization-in-place costs.

    RELATED GAO PRODUCTS
    ========================================================= Appendix III

    Outsourcing DOD Logistics:  Savings Achievable but Defense Science
    Board's Projections Are Overstated (GAO/NSIAD-98-48, Dec.  8, 1997).

    Air Force Depot Maintenance:  Information on the Cost Effectiveness
    of B-1B and B-52 Support Options (GAO/NSIAD-97-210BR, Sept.  12,
    1997).

    Navy Depot Maintenance:  Privatizing the Louisville Operations in
    Place Is Not Cost Effective (GAO/NSIAD-97-52, July 31, 1997).

    Defense Depot Maintenance:  Challenges Facing DOD in Managing Working
    Capital Funds (GAO/T-NSIAD/AIMD-97-152, May 7, 1997).

    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-112, Apr.  10, 1997).

    Defense Outsourcing:  Challenges Facing DOD as It Attempts to Save
    Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar.  12,
    1997).

    Navy Ordnance:  Analysis of Business Area Price Increases and
    Financial Losses (GAO/AIMD/NSIAD-97-74, Mar.  14, 1997).

    High-Risk Series:  Defense Infrastructure (GAO/HR-97-7, Feb.  1997).

    Air Force Depot Maintenance:  Privatization-in-Place Plans Are Costly
    While Excess Capacity Exists (GAO/NSIAD-97-13, Dec.  31, 1996).

    Army Depot Maintenance:  Privatization Without Further Downsizing
    Increases Costly Excess Capacity (GAO/NSIAD-96-201, Sept.  18, 1996).

    Navy Depot Maintenance:  Cost and Savings Issues Related to
    Privatizing-in-Place the Louisville, Kentucky, Depot
    (GAO/NSIAD-96-202,
    Sept.  18, 1996).

    Defense Depot Maintenance:  Commission on Roles and Mission's
    Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July
    15, 1996).

    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).

    Military Bases:  Closure and Realignment Savings Are Significant, but
    Not Easily Quantified (GAO/NSIAD-96-67, Apr.  8, 1996).

    Depot Maintenance:  Opportunities to Privatize Repair of Military
    Engines (GAO/NSIAD-96-33, Mar.  5, 1996).

    Closing Maintenance Depots:  Savings, Personnel, and Workload
    Redistribution Issues (GAO/NSIAD-96-29, Mar.  4, 1996).

    Navy Maintenance:  Assessment of the Public-Private Competition
    Program for Aviation Maintenance (GAO/NSIAD-96-30, Jan.  22, 1996).

    Depot Maintenance:  The Navy's Decision to Stop F/A-18 Repairs at
    Ogden Air Logistics Center (GAO/NSIAD-96-31, Dec.  15, 1995).

    Military Bases:  Case Studies on Selected Bases Closed in 1988 and
    1991 (GAO/NSIAD-95-139, Aug.  15, 1995).

    Military Base Closure:  Analysis of DOD's Process and Recommendations
    for 1995 (GAO/T-NSIAD-95-132, Apr.  17, 1995).

    Military Bases:  Analysis of DOD's 1995 Process and Recommendations
    for Closure and Realignment (GAO/NSIAD-95-133, Apr.  14, 1995).

    Aerospace Guidance and Metrology Center:  Cost Growth and Other
    Factors Affect Closure and Privatization (GAO/NSIAD-95-60, Dec.  9,
    1994).

    Navy Maintenance:  Assessment of the Public and Private Shipyard
    Competition Program (GAO/NSIAD-94-184, May 25, 1994).

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

    Depot Maintenance (GAO/NSIAD-93-292R, Sept.  30, 1993).

    Depot Maintenance:  Issues in Management and Restructuring to Support
    a Downsized Military (GAO/T-NSIAD-93-13, May 6, 1993).

    Air Logistics Center Indicators (GAO/NSIAD-93-146R, Feb.  25, 1993).

    Defense Force Management:  Challenges Facing DOD as It Continues to
    Downsize Its Civilian Workforce (GAO/NSIAD-93-123, Feb.  12, 1993).

    Navy Maintenance:  Public-Private Competition for F-14 Aircraft
    Maintenance (GAO/NSIAD-92-143, May 20, 1992).

    *** End of document. ***