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. ***