Army Logistics: Status of Proposed Support Plan for Apache Helicopter
(Letter Report, 07/01/1999, GAO/NSIAD-99-140).
The Pentagon has embarked on a strategy to reengineer its logistics
support for weapon systems by relying more on the private sector. The
military has selected the Apache AH-64 helicopter as a pilot for
implementing this new strategy. At the same time, the Army has been
considering a logistics support concept called prime vendor support for
the Apache. Prime vendor support is a contractor's proposal to use
commercial practices to reengineer logistics support, improve readiness,
reduce life-cycle costs, and provide savings that can be used to
modernize the helicopter. The program will rely on private-sector
capital to upgrade Apache components and to manage the parts pipeline.
DOD is prohibited from entering into a prime vendor contract for depot
maintenance and repair of a weapons system until 30 days after the
military submits a report to Congress describing the competitive
procedures used to select the awardee and provides a cost analysis that
shows the savings to the government over the life of the contract. This
report determines the status of the Apache prime vendor support
proposals. GAO discusses the evolution of the prime vendor support
concept and the financial and operational issues that have been raised
over whether the Army should implement the concept.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-99-140
TITLE: Army Logistics: Status of Proposed Support Plan for Apache
Helicopter
DATE: 07/01/1999
SUBJECT: Weapons systems
Army procurement
Department of Defense contractors
Private sector practices
Military aircraft
Helicopters
Military cost control
Logistics
Reengineering (management)
Cost effectiveness analysis
IDENTIFIER: DOD Quadrennial Defense Review
Apache Helicopter
Army Working Capital Fund
Army Second Generation Forward Looking Infrared Program
Target Acquisition Designation Sight and Pilot Night
Vision Sensor
Army Apache Helicopter Reliability Improvement Program
DOD Prime Vendor Program
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United States General Accounting Office GAO Report
to Congressional Requesters July 1999 ARMY LOGISTICS
Status of Proposed Support Plan for Apache Helicopter GAO/NSIAD-
99-140 United States General Accounting Office
National Security and Washington, D.C. 20548
International Affairs Division B-282580
Letter July 1, 1999 The Honorable Herbert H. Bateman Chairman The
Honorable Solomon P. Ortiz Ranking Minority Member Subcommittee on
Military Readiness Committee on Armed Services House of
Representatives Consistent with the results of the 1997
Quadrennial Defense Review, the Department of Defense (DOD) has
embarked on a strategy to reengineer its logistics support for
weapon systems, placing greater reliance on the private sector for
this support. The Apache AH-64 helicopter has been designated by
DOD as a pilot effort for implementing this new strategy.1 At the
same time, the Army has been considering a logistics support
concept called Prime Vendor Support2 (PVS) for the Apache
helicopter. Apache PVS is a contractor's proposal to use
commercial practices to reengineer logistics support, improve
readiness, reduce life-cycle costs and provide savings that can be
used to modernize the Apache aircraft.3 The program is also
intended to rely on private-sector capital to upgrade Apache
components and to manage the parts pipeline. The program also
corresponds with an Army General Officer Steering Committee's
desire to seek ways to reengineer logistics support for the Apache
helicopter, lower costs, and provide savings for modernization.
1The Apache helicopter is the Army's premier aviation weapon
system. Its mission as an attack helicopter is to perform rear,
close, and deep operations and deep precision strikes and to
provide armed reconnaissance and security. The terms rear, close,
and deep refer to where in the battlefield military operations
take place. These vary according to the depth of the
battlefield. Depth is the extension of operations in time, space,
resources, and purpose. 2Prime vendors typically are third-party
contractors that buy inventory from a variety of suppliers, store
it in commercial warehouses, and ship it to customers when
ordered. In the case of the Apache helicopter, the prime vendor
concept is much different in that the major equipment
manufacturers are teaming together to provide the full range of
logistics support along with continuous product improvement and
modernization. 3The proposed contract amount of the PVS offer and
the value of the government's estimate of its in-house best-case
approach are considered proprietary and competition sensitive,
respectively; therefore, this data is not included in this report.
Letter Page 1
GAO/NSIAD-99-140 Army Logistics B-282580 Section 346 of the Strom
Thurmond National Defense Authorization Act for Fiscal Year 1999
(P.L. 105-261) prohibits the Secretary of Defense from entering
into a prime vendor contract for depot maintenance and repair of a
weapon system until 30 days after the Secretary submits a report
to the Congress that describes the competitive procedures used to
select the awardee and provides a cost analysis that shows savings
to the government over the life of the contract. As you requested,
we determined the status of the Apache PVS proposal. This report
addresses the evolution of the PVS concept and the financial and
operational issues that have been raised over whether the Army
should implement the concept. Results in Brief The Apache
PVS concept began as an unsolicited contractor proposal whose
scope has evolved over time. As would be expected when a new
concept of this magnitude is introduced, there are significantly
different views about various aspects of the proposal. Although
the Apache PVS proposal is viewed by various Office of the
Secretary of Defense (OSD) and Army officials as a key effort to
test improved weapon system logistics support, the proposal
remains under study within the Army to address unresolved issues.
The Army does not know when a decision will be made on whether or
not the program will go forward. Key questions remain regarding
how certain cost factors should be considered in evaluating the
PVS proposal. Estimates of the cost differences between PVS and
the government's best-case cost study of the in-house approach
vary significantly, and each is considered the most cost-effective
depending on which assumptions, including program requirements,
are used. Also, a number of questions have been raised about the
potential operational impact of PVS on meeting warfighters'
logistics support needs. Because of uncertainties and differing
views and issues that have emerged, the Under Secretary of the
Army directed in January and March 1999 that more rigorous and
comprehensive analyses be conducted of cost, operational, and
requirement issues. Those efforts are still underway. Because the
PVS studies directed by the Under Secretary are not yet complete,
we are not making any recommendations in this report. Background
In recent years, DOD has concluded that its logistics support
system needs to be more efficient and effective in meeting war-
fighters' needs. DOD has recently designated the AH-64 Apache
helicopter as one of several pilot Letter Page 2
GAO/NSIAD-99-140 Army Logistics B-282580 programs to test
improvements in program management responsibility for life-cycle
logistical support of specific weapon systems. Traditional
Logistics The Army currently manages its logistics system
through a network of Management System federal workers
who acquire spare parts, manage the configuration and the
upgrades, and oversee all logistics functions.4 This extensive
and interrelated logistics support system is executed by dedicated
program and commodity management personnel that work for the Army
as well as contractor personnel and employees of the Defense
Logistics Agency (DLA). The Army's Aviation and Missile Command-a
major subordinate command under the Army Materiel Command-manages
support of the Apache system through a broad range of activities
and functions, including determining the need for and acquiring
spare parts and depot level maintenance, managing inventory, and
managing configuration and engineering upgrades. The Apache
program manager is responsible for the development, acquisition,
and fielding of the system. The manager reports to the Aviation
Program Executive Officer (PEO) under the Assistant Secretary of
the Army for Acquisition, Logistics, and Technology. The PEO is
responsible for providing executive-level management of assigned
weapon system programs such as the Apache helicopter. At the unit
level, a combination of federal civilian, military, and contractor
maintenance and supply activities provide support to the Apache
system. Working Capital Funds The Army and DLA use working
capital funds to finance logistics support Finance Logistics
Support for the Apache system.5 Customers that buy supplies
through working capital funds pay the latest acquisition or repair
price plus a surcharge for additional costs such as
transportation, inventory management, and depreciation. Sales
related to the Apache system represent a sizable 4The Army has a
two-tiered, wholesale and retail logistics support system. The
wholesale system is comprised of the four major commands
subordinate to the Army Materiel Command; these subordinate
commands procure supplies directly from vendors and hold
inventories of stocks to meet the demands of retail customers.
Retail customers are field-operating commands, which receive
support from the wholesale level. 5DOD has used revolving or
working capital funds for years. However, in December 1996, the
Under Secretary of Defense (Comptroller) reorganized the Defense
Business Operations Fund and created four working capital funds-
Army, Navy, Air Force, and Defense-wide. Under the working
capital fund concept, Defense components are expected to break
even over time by charging customers the full cost of goods and
services provided to them. Customers use appropriated funds,
primarily Operations and Maintenance appropriations, to finance
purchases. Page 3
GAO/NSIAD-99-140 Army Logistics B-282580 portion of the Army
Working Capital Fund's business activity. For fiscal year 1999,
the Army estimated that total sales for the fund would be about
$2.94 billion and that sales involving the Apache system would be
about $543 million. Surcharges represent about 25 percent of the
fund's total sales value. For fiscal year 1998, sales in DLA's
Working Capital Fund totaled $7.39 billion, including about $52.6
million for the Apache system. DLA estimated that its surcharge
rate was about 24 percent of total sales. Policy and Legislative
Although OSD has designated the Apache PVS proposal a pilot
effort, this Guidance Applicable to designation did not
provide an exemption from policy and legal Outsourcing Decisions
requirements that might otherwise affect outsourcing decisions.
Since 1955, federal agencies have been encouraged to obtain
commercially available goods and services from the private sector
if doing so is cost-effective. In 1966, the Office of Management
and Budget (OMB) issued Circular A-76, which established federal
policy for the government's performance of commercial activities
and set forth the procedures for studying them for potential
contracting. The circular and its Supplemental Handbook provide
guidance to federal agencies on procedures to follow in
determining whether commercial activities should be performed in-
house, by another federal agency through interservice support
agreements, or by the private sector. This guidance generally
applies to commercial functions except those involving depot
maintenance workloads performed in-house and valued at more than
$3 million-those are subject to the competitive requirements of 10
U.S.C. 2469. Under the Apache PVS proposal, the current plan is
for in-house depot maintenance work to remain in Army depots;
under these circumstances, section 2469 and its requirements for
competing depot workloads would not apply. Generally, the A-76
process requires (1) developing a performance work statement and
quality assurance surveillance plan; (2) conducting a management
study to determine the government's most efficient organization
(MEO); (3) developing an in-house government cost estimate for the
MEO; (4) issuing a request for proposal or invitation for bid; (5)
evaluating the proposals or bids and comparing the in-house
estimate with a private-sector offer or interservice support
agreement and selecting the winner of the cost comparison; and (6)
considering any appeals submitted under the administrative appeals
process, which is designed to ensure that all costs are fair,
accurate, and calculated in the manner prescribed by the A-76
handbook. Page 4
GAO/NSIAD-99-140 Army Logistics B-282580 The A-76 Supplemental
Handbook provides that under certain circumstances agencies may
waive cost comparisons and direct conversion to or from in-house,
contract, or interservice support agreements. A waiver may be
granted where the appropriate official determines that * the
conversion will result in a significant financial or service
quality improvement and will not serve to significantly reduce the
level or quality of competition in the future award or performance
of work or * the waiver will establish why in-house or contract
offers have no reasonable expectation of winning a competition
conducted under the cost comparison procedures of the handbook. In
addition to A-76, DOD must consider the effect of 10 U.S.C. 2461
when it plans changes to an industrial- or commercial-type
function performed by its civilian employees. Section 2461, as
amended by the Strom Thurmond National Defense Authorization Act
for Fiscal Year 1999, requires an analysis of the activity,
including a comparison of the cost of performance by DOD civilian
employees and by a contractor, to determine whether contractor
performance could result in savings to the government. It also
requires DOD to notify the Congress and to provide other
information prior to instituting a change in performance.6 In
October 1997, the Army provided an initial notification to the
Congress regarding its intent to study Apache logistics functions
for possible performance by a contractor. This notification
included the Army's intent to make appropriate cost comparisons
between current government operations and proposed contractor
operations.7 Evolution and Status of The Apache PVS concept began
as an unsolicited contractor proposal, PVS Support Proposal whose
scope has evolved over time. However, because of questions and
uncertainties regarding PVS requirements, cost-effectiveness, and
operational impact, the proposal was the subject of various
studies and reviews that provided differing results. In January
and March 1999, the Under Secretary of the Army directed a
comprehensive review of various 6Further, section 8014 of the
Department of Defense Appropriations Act for Fiscal Year 1999
(P.L. 105-262) requires that DOD certify its in-house estimate to
congressional committees before outsourcing any activity performed
by more than 10 DOD civilian employees. 7The Army's notification
was submitted under 10 U.S.C. 2461 prior to the 1999 Defense
Authorization Act amendments. The earlier version of section 2461
contains similar, but less detailed, analysis and notification
requirements. Page 5
GAO/NSIAD-99-140 Army Logistics B-282580 issues surrounding the
PVS proposal. Those reviews are still underway, but no milestone
has been established for their completion. Program Evolution In
April 1997, the Army received an unsolicited proposal from
McDonnell Douglas (now Boeing) and Lockheed Martin to provide full
wholesale logistics support for the Apache helicopter. The Apache
PVS proposal would outsource almost all of the Army's traditional
logistics support functions8 to a contractor, Team Apache Systems
(TAS).9 The proposal would significantly reengineer logistics
support for the Apache helicopter while meeting a 120,000 flying-
hour requirement each year. The program would be expected to
lower total ownership costs, improve parts availability, and
leverage private-sector resources for modernization. In assessing
the value of the PVS proposal, the Aviation PEO stated that the
government's traditional logistics management system was a problem
because of split management responsibility and shared control
between the government and contractors. In his view, under the
current approach, no single entity is responsible for identifying
and implementing cost-saving changes to improve Apache logistics
support. The Aviation PEO also described the current system as
having parts shortages, requiring extensive use of local special
repair activities to meet needs, needing controlled substitution
of spare parts to meet maintenance requirements, and having
declining financial resources to support the wholesale system due
to the use of local options and high flying-hour costs. In his
view, decapitalizing10 the Apache system from the Army Working
Capital Fund and converting it to PVS as a pilot program would
test whether the Army can develop a better way to manage its
logistics business operations. 8Current plans for the Apache PVS
proposal provide that the Corpus Christ Army Depot, the Army's in-
house helicopter depot, would accomplish about 85,000 direct labor
hours of Apache depot maintenance work. The components repaired
by Corpus Christi would be provided as government furnished
materiel to the PVS contractor. Although a limited amount of
direct labor hours of Apache work is currently being performed by
the Anniston and Tobyhanna Army depots, the Army has not yet
determined how or to what extent this work would continue to be
done at Army depots under the proposed PVS program. 9Team Apache
Systems is a limited liability company formed by Boeing, Lockheed
Martin, and General Electric. 10Decapitalization is the transfer
of fund inventories to other appropriations or funds without
reimbursement. Decapitalizing a weapon system leaves the fund
with essentially the same costs, at least in the short term, but
reduces the number of contributors that will continue to pay their
share of the costs. Page 6
GAO/NSIAD-99-140 Army Logistics B-282580 The Aviation PEO office
expects the PVS contractor to * use commercial best practices to
develop and implement design and logistics support changes to
improve performance and reduce life-cycle support costs; * improve
stock availability and maximize rapid distribution without
impacting safety, readiness, supportability, or performance; and *
reduce failures and removals and repairs and improve
supportability through component reliability improvements. After
receiving the PVS proposal, the Army initiated several actions to
establish a framework for analyzing Apache PVS for a 5-year
period, from fiscal year 1999 through 2003: * In May 1997, the
Army's commercialization General Officer Steering Committee
concluded that the Army had to reengineer the Apache logistics
support functions to lower costs and provide savings for
modernization. Thus, the committee designated Apache PVS as a
pilot program and directed the Army Aviation PEO to study the
acceptability of the proposal. * In October 1997, the Acting
Assistant Secretary of the Army for Research, Development, and
Acquisition, authorized the Army Aviation and Missile Command to
pursue a PVS contract through other than full and open competition
because the original equipment manufacturers were considered the
only entities technically capable of providing complete logistics
support for the Apache system.11 * In October 1997, the Aviation
PEO and Army Aviation and Missile Command began negotiations with
the PVS contractor to jointly develop a proposal acceptable to
both parties. Under an approach referred to as alpha contracting,
the Army's team and TAS jointly developed requirements and a PVS
performance work statement that defined the performance-based
products and services to be provided by the firm. * In November
1997, consistently with A-76 requirements, representatives from
the Army Materiel Command began an internal evaluation to develop
the government's best case cost estimate for its in-house approach
under a streamlined concept to provide Apache logistics support.
11The approval to negotiate a PVS contract on the basis of other
than a full and open competition conditioned the award of the
contract on approval of an OMB Circular A-76 waiver to the
requirement for a cost study that compares the negotiated price of
the contract with the cost of government performance. Page 7
GAO/NSIAD-99-140 Army Logistics B-282580 * In December 1997,
representatives from the Aviation PEO's Office and the Army's Cost
and Economic Analysis Center developed a cost baseline for the
Apache system. This baseline represented the estimated
operational costs for the 5-year period. * In March 1998, the Army
Materiel Command provided its best-case government estimate for
accomplishing the Army's in-house effort to improve the efficiency
of in-house logistics support for the 5-year period. * In June
1998, contract negotiations resulted in an offer from TAS for
Apache PVS for the 5-year period. To facilitate developing the
government's best estimate of its in-house approach, in September
1997 the Aviation PEO provided the Army Materiel Command a number
of proposed metrics and requirements that had been developed for
Apache PVS. In developing its in-house estimate, Army Materiel
Command expected to improve the current logistical support system
through a number of efficiencies related to actions such as *
reducing overhead costs, * reducing the number of civilian
personnel devoted to material management and contract oversight, *
reducing the cost of Apache components, and * establishing
logistics centers of excellence and consolidating repair functions
to provide support for the Apache system. Where Things Stand Today
Because of uncertainties and differing views and issues that have
emerged from the Army's acquisition, logistics, and operational
communities regarding requirements of the proposed Apache PVS
program, cost-effectiveness, and operational impact, the Under
Secretary of the Army directed in January 1999 that a more
rigorous and comprehensive analysis be conducted. More
specifically, he directed Army components to expand the PVS
analysis to include * a review of the Aviation PEO's A-76 waiver
package for proper accounting; * a 20-year cash flow analysis to
determine the net present value of positive and negative cash flow
if PVS were implemented; * identification of PVS implementation
costs and of the financial impact of the Army's transition to PVS,
to include a validation of inventory and pipeline values and
determination of the impact on the Army Working Capital Fund and
customer funding; Page 8
GAO/NSIAD-99-140 Army Logistics B-282580 * an update of the
government's best-case proposal cost estimate, extending it beyond
the original 5-year period to be as compatible as possible with
the current PVS proposal; * a determination of how much the PVS
and management information systems will be transparent to the
soldiers; * an evaluation of how PVS would work in a transition to
war; and * an assessment of the impact of an increase in the
Apache flying-hour requirement on expected PVS operations and
costs. Also, in March 1999 the Under Secretary of the Army tasked
the Deputy Chief of Staff for Operations and Plans to identify the
Army's requirements to satisfy the Apache flying-hour program.
This would include determining whether additional services offered
by the PVS contractor would be needed. If they are, the Army does
not know at this time whether or not further analysis might be
required to ensure a more level playing field between the
government and the private sector to determine which could provide
the most cost-effective option. Various Army components have
proposed milestones for completing the Apache PVS study and
transitioning to PVS operations. However, the Under Secretary of
the Army's expansion of the study process has resulted in a
stretching out of the time frames for completing the study effort.
As of May 1999, the Army had not established a firm milestone for
completing its study efforts. Significant Financial There are
significant differences of opinions within the Army over the
Issues Led the Under cost-effectiveness of the Apache PVS
proposal. On one hand, there are those within the PEO community
who believe the proposal is more Secretary to Request cost-
effective than the government's in-house approach; on the other
hand, More Detailed there are others who believe the
government's approach is the most Analyses cost-
effective. Army analysts tasked with studying the matter have
reached varying conclusions ranging from increased costs to
significant savings about the financial effects of Apache PVS. The
Aviation PEO, based on analysis and adjustments to PVS contractor
and government cost estimates made by his office, concluded that
the PVS proposal was the more cost-effective solution to meeting
the Apache program's needs. The PEO office also concluded that
waiver provisions of OMB Circular A-76 applied in this instance
and submitted a formal request for the waiver to the Assistant
Secretary of the Army for Installations, Logistics, and
Environment. Continuing debate within the Army over cost
adjustments Page 9
GAO/NSIAD-99-140 Army Logistics B-282580 introduced by the PEO
office and other issues led, as indicated earlier, to the Under
Secretary's request for additional analyses. The primary
controversy over the different conclusions reached by various Army
organizations involves how key features introduced by the Aviation
PEO should be considered when comparing the costs of the PVS offer
and the government's best-case estimate. These features include
the contractor's offer of (1) increased field technical assistance
and engineering support and reliability improvements and (2) a
reliability improvement program. Another issue is the impact that
removing Apache inventory support from that system would have on
the Army's Working Capital Fund. The Army is considering these
factors in its evaluation. Aviation PEO's Conclusions An Army
cost team completed an initial cost comparison of the Apache
Differed From Results of PVS offer and the government's
best-case estimate in August 1998. The Initial Cost Comparison
team concluded that the Apache PVS offer did not represent a
significant financial advantage to the Army and that the
government's best-case estimate could be competitive. After
reviewing the results of the cost team's comparison, the Aviation
PEO office adjusted the cost estimates and drew different
conclusions. These adjustments became the focus of subsequent
efforts to determine whether the Apache PVS proposal would be
financially advantageous to the Army. After completing an
evaluation of the PVS and the government's best-case estimate, an
Army cost team, with representatives from the Army's Aviation and
Missile Command, Materiel Command, Apache Program Office, and the
Army's Cost and Economic Analysis Center (CEAC), concluded that
available data would not support an A-76 waiver and, that if
implemented, PVS would become a significant affordability issue.
During its analysis, the Army team adjusted the Apache PVS
proposal and the government's best-case estimate to reflect common
costs and savings. For example, the team added $542.3 million in
costs to the PVS offer, including $437.2 million for the estimated
impact on the working capital fund.12 Also included in the added
costs to the PVS offer were $105.1 million for factors such as
transition, contract maintenance services purchased at the local
level to support the Apache system, and the value of government-
furnished depot 12This $437.2 million would represent the
estimated loss of revenue from the sale of Apache parts-the
surcharge loss and nonsystem specific fixed costs-and the value of
inventory on order but not yet delivered. Page 10
GAO/NSIAD-99-140 Army Logistics B-282580 maintenance work. The
team added $44.9 million to the government's best-case estimate
for local contract maintenance services and contractor field
service representatives that would remain in place under the
government's approach. The study did not address the issue of
transitioning to the contractor Apache parts already in the Army's
inventory. The Army cost team's August 1998 analysis concluded
that, overall, the government's best-case estimate would cost $431
million less than the PVS proposal. PEO Adjustments to Initial
Cost After reviewing the results of the cost team's analysis,
the Aviation PEO's Comparison office made
sufficient adjustments to the government's cost estimate to reach
the conclusion that the PVS proposal would cost $362.5 million
less than the government's approach. These adjustments were based
primarily on features of the contractor's offer that the PEO
office considered superior to the government's approach-increased
technical and engineering services and a reliability improvement
program for Apache components. The office also reduced the
estimated impact of PVS on the Army's Working Capital Fund by
limiting the impact from 5 years to 1 year and by using a more
current estimate of due-in inventory (parts that have been ordered
but not yet received). The costs that the Aviation PEO added to
the government's estimate were primarily to reflect the value of
the contractor's proposed field technical assistance and
engineering support and for reliability improvements and
obsolescence engineering. These improvements related primarily to
improving the reliability of the Target Designation Sight/Pilot
Night Vision Sensor (TADS/PNVS).13 After the PEO concluded that
the PVS' and not the government's approach was the most cost-
effective option, he formally requested a waiver of A-76 cost
comparison requirements. He justified this decision in his waiver
request in part on the basis of his belief that neither the
government nor another contractor would have a reasonable
expectation of winning a competition under the A-76 process. 13The
TADS/PNVS provides pitch/roll/yaw rate stabilization data for
proper flight operation of the aircraft and provides the
capability to fly at night and in poor weather conditions. The
aircraft uses TADS/PNVS to control all weapons targeting
functions. Page 11
GAO/NSIAD-99-140 Army Logistics B-282580 PEO Offered Further
In addition, to further support his position that PVS was more
cost-effective Adjustments to Include the than the
government's approach, the Aviation PEO included in his waiver
Introduction of Second request an assessment of the
contractor's proposal to upgrade the Second Generation Forward
Looking Generation Forward Looking Infrared Program (2nd Gen
FLIR), a program Infrared Program that was not part
of the original Apache PVS proposal and was not addressed by the
Army's cost analysis.14 The Army has a requirement to introduce
the 2nd Gen FLIR program into the Apache system. However, the
Army's current funding stream is not adequate to fully fund the
program. The Army's total estimated costs for a stand-alone
program to introduce the 2nd Gen FLIR are $961 million-$575
million for the PVS reliability improvement program and $386
million for the 2nd Gen FLIR. At the time of the Aviation PEO's
waiver request, the Army had a funding commitment of only $317
million for the 2nd Gen FLIR. Outside of inclusion under the
Apache PVS, it is not clear how 2nd Gen FLIR requirements-either
funded or unfunded-would be evaluated against other Army
requirements in a constrained budget environment. Although the 2nd
Gen FLIR was not part of the Apache PVS statement of work, the PVS
contractor offered to introduce the program along with the
upgrade of the TADS/PNVS components so that improved reliability
components in the TADS/PNVS would be compatible with the 2nd Gen
FLIR. Additionally, although completion of the 2nd Gen FLIR
program would take longer than the 5 years covered in the Army's
cost comparison, the Aviation PEO extrapolated the 5-year costs
through fiscal year 2010 to support his A-76 waiver request. This
extrapolation allowed the PEO to increase the cost difference
between the PVS' and the government's best case estimate to the
point that the PVS proposal would cost $420 million less than the
government's estimate. PEO's Proposal to Consign The Army's
original cost comparison did not address how Apache parts Apache
Inventory to PVS already in the Army's inventory would be
incorporated into the proposed Contractor
Apache PVS. The Aviation PEO, as part of his waiver request, also
proposed that the Army retain ownership of all existing inventory
and consign it to the PVS contractor as government-furnished
materiel. As of September 1998, the existing inventory was
reportedly valued at $745.5 million for both serviceable and
unserviceable items. The Aviation PEO believes that consignment
would be the most cost-effective option because 14The purpose of
the 2nd Gen FLIR is to improve the performance of the TADS/PNVS
system in target acquisition. As part of the PVS proposal, the
contractor proposed to replace the obsolete 1st Gen FLIR with the
2nd Gen FLIR within the program budget. Page 12
GAO/NSIAD-99-140 Army Logistics B-282580 the contractor would not
incur and pass to the government the costs of insurance and taxes
on the inventory, both of which would be likely if the contractor
owned the inventory. Army Analysts Raised Subsequent
analyses by Army analysts questioned the Aviation PEO's Questions
About the adjustments, concluding that, for the most
part, the adjustments were not Aviation PEO's Adjustments
necessary to meet the proposed flying-hour requirements for the
Apache helicopter and that some of the claimed savings in the cost
comparison were inappropriate. Analyses of the A-76 waiver
request by CEAC and the Army Audit Agency questioned the Aviation
PEO's adjustments. CEAC and the Army Audit Agency did not support
the Aviation PEO's conclusion that the Apache PVS was less costly
than the best-case government estimate and that the government had
no chance of winning an A-76 competition. Also, the Army
Comptroller opposed the consignment of inventory to the PVS
contractor without reimbursement. CEAC Analysis
In addition to participating in the original cost comparison,
CEAC, at the request of the Army Comptroller, made a subsequent
analysis of the cost adjustments made by the Aviation PEO's
office. Its February 18, 1999, report on these adjustments
concluded that the government's estimate was cheaper than the PVS
proposal by about $154.3 million. CEAC's conclusions were: * The
value of the contractor's proposed field technical assistance and
engineering support should not be added to the government's
estimate because, among other things, it includes an excessively
high labor rate, and the government's proposal is sufficient to
meet the 120,000 flying-hour requirement included in the statement
of work. * The PEO's adjustment for the reliability improvement
program related to the TADS/PNVS should be reduced to reflect the
funding amount already in the government's estimate. Although
CEAC pointed out that the program may not result in savings to the
government, the Center believed that adding an amount for the
program to the government's estimate would help make the analysis
more equitable. * The impact of Apache PVS on the Army's Working
Capital Fund was correctly computed by the initial cost team. For
comparison purposes, CEAC noted that the value of the due-in
inventory should be consistent with other cost elements in the
analysis and that the government's estimate should not be charged
for inventory that would be issued free to the PVS contractor.
Also, CEAC determined that a 5-year surcharge loss was more
appropriate than a 1-year loss for the cost comparison Page 13
GAO/NSIAD-99-140 Army Logistics B-282580 because nonweapon system
specific or common costs, such as the surcharge, were already
embedded in the government's best-case estimate. Regarding the 2nd
Gen FLIR program, CEAC recommended that the cost comparisons for
the A-76 waiver analysis should not extend beyond the 5-year
period, in part because the proposed PVS contract does not extend
beyond 2003. CEAC's report also noted that PVS costs could be
impacted by the findings of the ongoing study of the Army Working
Capital Fund. Army Audit Agency Analysis In addition, the Under
Secretary of the Army asked the Army Audit Agency to examine the
adjustments made by the Aviation PEO's office and reflected in the
A-76 waiver justification. On February 22, 1999, the Army Audit
Agency released the results of its review of the A-76 waiver
justification. It stated that * Army leaders above the Aviation
PEO should determine the adjustments needed to satisfy Army
requirements and * the cost comparisons could be impacted by the
results of an ongoing study of the Working Capital Fund. Like CEAC
report, the Army Audit Agency considered the Aviation PEO's
adjustment to the government's in-house approach for field
technical assistance and engineering support unnecessary because
it represented a different approach to achieving the same
requirement. The Army Audit Agency concluded that the
government's best-case cost estimate should not necessarily be
adjusted for the engineering program as related to the TADS/PNVS,
as the program may not be needed to satisfy the Army's 120,000
flying-hour requirement. The Army Audit Agency did not comment on
the Army Working Capital Fund impact adjustment, noting that the
issue was still under review. At the time we completed our work,
the Army Working Capital Fund study team had not yet completed its
study of the impact of Apache PVS on the fund. Army Comptroller
Concern When the PEO office proposed a waiver to the A-76
study requirements, it also expressed the desire to consign
existing Army Apache parts inventory at no cost to the contractor,
should the contractor's proposal be accepted. The Army Comptroller
opposed consigning the inventory without reimbursement to the
Fund. The Comptroller's primary concern was that consignment
without reimbursement would cause the Army Working Capital Fund to
absorb a large operating loss, increasing future sale prices for
other items in the fund. The Army is studying the issue of
inventory Page 14
GAO/NSIAD-99-140 Army Logistics B-282580 consignment without
reimbursement. Officials in the Office of the Assistant Secretary
of the Army for Financial Management and Comptroller told us that
the Army may have to seek a waiver from the Under Secretary of
Defense, Comptroller, to consign the inventory without
reimbursement. However, at the time of our review, the Army had
not requested a waiver. Army Analysts' Concern About Army
analysts identified additional short-term investment cost issues
that Potential for Funding Shortfall could affect
implementation of either the contractor's or the government's
Under Either Proposal approaches; however, the
initial investment costs appeared much greater under the PVS
proposal. Preliminary results from the Army's follow-on analysis
indicated that both the government's estimate and the PVS proposal
would cause a funding shortfall in the first year of
implementation because insufficient funding was included in the
Army's proposed budget to cover costs. The results showed that
the government's approach would create a $34-million shortfall in
the first year of implementation, compared with a $209-million
shortfall estimated for the Apache PVS.15 In its continuing
analysis of Apache PVS, the Army Audit Agency said on March 16,
1999, that, for the most part, the government's estimate would
support the Apache flying-hour requirements and that
implementation costs were generally reasonable. The Agency did not
project shortfalls in funding for future years. In its continuing
analysis of Apache PVS, on March 9, 1999, the Army Budget Office
estimated that the costs to implement PVS in the first year would
exceed available funding by about $209 million and that future
years could also have funding shortfalls. Logistical and Other
Army logistics managers and operational commanders have concerns
Operational Issues about the impact Apache PVS
would have on the Army's support infrastructure for the Apache
system. They question whether Apache PVS Being Addressed by the
operations could (1) pair well with the Army's current logistics
support Army structure, (2)
adversely impact transitioning to war, or (3) limit commanders'
flexibility to meet changing funding needs. The Army is
considering these concerns in its continuing analysis of Apache
PVS, mostly as a result of the Under Secretary's January 1999
directive. 15The government's best-case estimate proposed
improvements to the government's current support system that would
require some upfront investment costs. For instance, the proposal
to implement centers of excellence for the Apache system would
require additional funds to establish the centers and consolidate
existing support sites. Page 15
GAO/NSIAD-99-140 Army Logistics B-282580 PVS Compatibility With
Existing U.S. Army Forces Command (FORSCOM) officials at several
subordinate Army Logistics Support locations have
emphasized that the PVS support system should appear the Structure
same as other support systems so as to be easy for soldiers to
use. But there are questions about how the proposed PVS would
interface with standard Army systems. The Aviation PEO has stated
that Apache users in the field would be unaware of the difference
between the Apache's and other support systems. However, FORSCOM
officials have emphasized that they desire a clearer definition of
the proposed integration of PVS supply and financial systems with
standard Army systems. For example, the Standard Army Retail
Supply System does not automatically provide a free exchange of
broken parts for new parts, as the PVS proposal would offer.
FORSCOM officials have requested that a functional test be made of
the proposed PVS supply system to determine how it would work,
whether Apache PVS will require a separate management information
system, and whether intermediate level operations would require
two independent supply and support systems. They said that a
demonstration is also needed to show how a supply requisition
would be processed at the intermediate- level to the contractor
without any functional problems or additional soldier
requirements. Further, they want more input into deciding the
criteria used to measure the effectiveness of the contractor's
support. FORSCOM's views were similar to those expressed in August
1998, when a team from the Army Materiel Command, the U.S. Army
Aviation and Missile Command, and the Aviation PEO made a
technical evaluation of the Apache PVS' and the government's
approach. The team's report noted that the PVS system should
provide the same level of data and management visibility for the
Apache system as that provided by DOD systems. This would require
the PVS contractor to modify its current systems. The PVS system
would also have to be expanded to include all members of the PVS
contractor consortium. Furthermore, the government would have to
modify its automated requisition system so that data could flow to
the PVS contractor. The Apache program manager and the contractor
have agreed to conduct a demonstration of the proposed PVS support
system prior to any formal conversion to the proposed PVS support
system. Concerns Over How PVS Would Amidst concerns by Army
officials at various levels about the operational Affect
Transitioning to War flexibility of PVS, the Army is
studying how Apache PVS operations would function in peacetime as
well as how it would respond to contingency operations. Page 16
GAO/NSIAD-99-140 Army Logistics B-282580 The PVS proposal covers
support for all wartime and contingency operations, and contractor
personnel would be expected to deploy with military units. The
concept calls for PVS assistance to include on-site field
technical support and operational and supply support to Apache
units for contingency operations. However, officials at the Army
Aviation and Missile Command have expressed concern that the PVS
proposal that would relieve the contractor of responsibility for
delivering supplies into theaters of operation and allow the
contractor to turn in-transit materiel over to government
distribution/transportation channels. Under this approach, the
government would become responsible for transportation of parts
and contractor equipment, along with combat units, into and within
theaters of operations. Thus, the government might have to take
over the PVS distribution and transportation system during
contingency operations. The officials also pointed out that the
proposed contract would authorize additional costs for other than
normal peacetime operations. According to the Command, these types
of costs have increased significantly during prior contingency
operations. In wartime contingencies, DOD-owned depots play a role
in supporting readiness and sustainability requirements of
warfighters and, by design, can quickly increase their output to
high levels in a short period of time to accomplish required
contingency workloads. Under the proposed PVS structure, the Army
would retain surge capability at its depots by having the depots
perform Apache maintenance work. The proposed PVS contract would
include an option for up to an additional 25,000 flying hours to
respond to surge requirements. The Army is currently studying the
cost impact of increased flying hour requirements on the proposed
PVS contract. Loss of Flexibility to FORSCOM officials were
concerned about the impact of PVS operations on Balance Funding
Priorities commanders in the field. Their concerns focused on
funding and unit-level repair issues. Currently, field commanders
receive annual funding for expenses related to readiness,
infrastructure, and soldiers' quality of life. Various Army
officials expressed concerns that adoption of the PVS approach
would result in their receiving less direct funding for support
and give them less flexibility to shift funds between support
areas to adjust to changing priorities. According to FORSCOM
representatives, PVS would place the funding for wartime and
contingency wholesale support under the Aviation PEO contracting
officer. FORSCOM officials said that the PVS proposal Page 17
GAO/NSIAD-99-140 Army Logistics B-282580 would require Apache
units to become dependent on the wholesale system because they
would not have the funding to pursue alternatives for Apache parts
repair, as they do now. Under the government's approach, funding
for the Apache helicopter too would no longer go directly to the
field commanders. In a memorandum to the Army Chief of Staff (Aug.
20, 1998), the FORSCOM Commander provided his fiscal year 1999
funding assessment. He noted that FORSCOM commanders could no
longer train and sustain the force, stop infrastructure
degradation, and provide soldiers the quality of life programs
critical to long-term readiness. In discussing the areas impacted
by insufficient funding levels, the Commander noted that
flexibility in meeting all programs would be further hampered by
funding designated for and restricted to use by specific programs
that are becoming an increasingly larger percentage of FORSCOM's
budget. Conclusions As would be expected when
a new concept is being considered, there are significantly
differing views within the Army regarding various aspects of the
Apache PVS proposal. The key questions and uncertainties that
remain unresolved regarding the Apache PVS proposal are related to
cost and operational issues. From a cost standpoint, there are
uncertainties concerning whether the additional services and the
reliability improvement program offered by the PVS contractor are
appropriate for use in the public-private cost comparison and what
level of costs should be recognized-and for how long-if the Apache
system were to be removed from the Army Working Capital Fund. A
number of operational questions have also been raised about the
potential impact of PVS on meeting warfighters' logistical support
needs. Consequently, at the end of our review the Army was
continuing to study these issues and had not established a firm
milestone for a decision on whether or when the program would go
forward. Agency Comments and DOD's comments to our draft report
are reprinted in appendix I. In its Our Evalutation
comments, DOD concurred with our findings but suggested several
technical changes. DOD suggested that we include a planned
implementation date for PVS of October 1, 1999; recognize that the
PVS proposal is for wholesale-level logistics while retail-level
logistics performed by soldiers would be left unchanged; and
recognize that the Department plans to review expected savings and
readiness from Apache Page 18
GAO/NSIAD-99-140 Army Logistics B-282580 PVS in 2 years. DOD also
noted that the Army is currently defining the Apache's capability
and reliability requirements which will be used as the basis for
comparing PVS and the government's in-house cost estimate. We
incorporated DOD's technical comments in the report as
appropriate. Scope and In conducting our work, we obtained
documents from and interviewed Methodology officials from the
Army headquarters, including the Office of the Assistant Secretary
of the Army (Acquisition, Logistics, and Technology) and its
Office of the Aviation PEO; Army Materiel Command; Army Aviation
and Missile Command; U.S. Army Forces Command; Army Audit Agency;
Army Cost and Economic Analysis Center; and Defense Logistics
Agency, regarding the Army's study of Apache PVS. At these
locations, we made extensive use of the work that was ongoing to
identify and evaluate issues concerning the outsourcing of
government activities and programs. To determine the status of the
Army's Apache PVS study, we discussed and reviewed the study
process, extent of work completed, and the specific taskings that
remained to be completed for all levels within the Army logistics
and financial community. To evaluate the Army's study process and
its preliminary results, we examined the methodology, assumptions,
and procedures that were being used to develop the government's
estimated costs and to negotiate the PVS offer. In testing the
reasonableness of the preliminary results, we examined the cost
comparisons and the cost elements that were used, including the
adjustments made for comparison purposes. Specifically, due to
the significance of the cost impact and the internal disagreement
about the applicability of the adjustments to the cost
comparisons, we focused on the normalization adjustments made by
the Aviation PEO. Further, we reviewed pertinent documentation
regarding the PVS study, including the Army's Justification and
Approval for Other than Full and Open Competition, the Aviation
PEO's A-76 cost comparison waiver package, the technical
evaluation of the government's estimate and the contractor's
offer, and the PVS transition plan. Finally, we reviewed the cost
comparison requirements of OMB Circular A-76 and Supplemental
Handbook and the applicable DOD financial regulations regarding
the operations of the Army Working Capital Fund. To identify the
potential impact that Apache PVS would have on other Army
activities and programs, we examined documentation and discussed
operational issues with Army logistics managers and field
commands. We obtained data from DLA regarding its support for the
Apache system and Page 19
GAO/NSIAD-99-140 Army Logistics B-282580 how Apache PVS would
impact that supporting role. Finally, we examined applicable
statutory requirements affecting the Army's outsourcing decisions
and the Army's legal analysis of how Apache PVS would meet these
requirements. We conducted our review from October 1998 to April
1999 in accordance with generally accepted government auditing
standards. We are sending copies of this report to the Honorable
William S. Cohen, the Secretary of Defense; the Honorable Louis
Caldera, the Secretary of the Army; and the Honorable Jacob J.
Lew, Director, Office of Management and Budget. We will also make
copies available to others upon request. If you have any questions
regarding this report, please contact me on (202) 512-8412. Key
contributors to this assignment were Barry Holman, Julia Denman,
and Bobby Worrell. David R. Warren, Director Defense Management
Issues Page 20 GAO/NSIAD-
99-140 Army Logistics Page 21 GAO/NSIAD-99-140 Army Logistics
Appendix I Comments From the Department of Defense Appendix I
(709374) Letter Page 22 GAO/NSIAD-99-140 Army
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