Depot Maintenance: Air Force Faces Challenges in Managing to 50-50
Ceiling (Testimony, 03/03/2000, GAO/T-NSIAD-00-112).

Pursuant to a congressional request, GAO discussed the Air Force's
50-percent ceiling waiver, focusing on the basis for the waiver and the
likelihood that the Air Force will need additional waivers in the
future.

GAO noted that: (1) the Secretary of the Air Force acted within his
legal authority to waive the 10 U.S.C. 2466 requirement that not more
than 50 percent of the funds made available for depot maintenance work
be performed by private sector contractors; (2) although the Air Force
explanation for the waiver was based primarily on the need to use
temporary repair contracts and temporary contract personnel to support
workloads at closing depots, these temporary contracts represent only a
minor share of the Air Force contract workload and did not in and of
themselves create the need for a waiver; (3) a significant factor
leading to the waiver were previous Air Force actions that increased the
private sector share of depot maintenance work form 36 percent in 1991
to the 50-percent ceiling in 2000--leaving little room to respond to
emergencies; (4) preliminary Air Force data indicates the Air Force will
be close to the 50-percent ceiling through fiscal year (FY) 2004; (5)
yet repair costs for work already on contract are increasing more than
previously estimated; (6) long-term depot maintenance contracts are
expected to grow from $1.1 billion in FY 2000 to $1.5 billion in FY
2004; (7) in addition, the Air Force is implementing initiatives to
outsource total systems support responsibility to the private
sector--including depot maintenance--for 64 new or modified systems,
including the Joint Direct Attack Munition, AC-130U Gunship, Sensor
Fuzed Weapon, and Joint Air to Surface Standoff Attack Missiles; and (8)
while the Air Force indicated a waiver should not be needed beyond 2001,
the increasing amount of the Air Force's contract depot maintenance work
and future outsourcing plans create a significant challenge to the Air
Force in managing its depot maintenance work within the 50-percent
ceiling.

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

 REPORTNUM:  T-NSIAD-00-112
     TITLE:  Depot Maintenance: Air Force Faces Challenges in Managing
	     to 50-50 Ceiling
      DATE:  03/03/2000
   SUBJECT:  Base closures
	     Base realignments
	     Air Force bases
	     Military materiel
	     Maintenance services contracts
	     Repair costs
	     Waivers
	     Private sector
	     Weapons systems
	     Internal controls
IDENTIFIER:  DOD Depot Maintenance Program
	     Joint Direct Attack Munition
	     AC-130U Gunship
	     Sensor Fuzed Weapon
	     Joint Air-to-Surface Standoff Attack Missile
	     C-5 Aircraft
	     KC-135 Aircraft
	     F-117 Aircraft
	     U-2 Aircraft
	     KC-10 Aircraft
	     C-17 Aircraft
	     C/KC-135 Aircraft
	     F-22 Aircraft
	     F100-229 Engine
	     F119 Engine

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Before the Subcommittee on Readiness, Committee on Armed Services, U.S.
Senate

For Release on Delivery

9:30 a.m., EDT

Friday,

March 3, 2000

DEPOT MAINTENANCE

Air Force Faces Challenges in Managing to 50-50 Ceiling

Statement of David R. Warren, Director, Defense Management Issues, National
Security and International Affairs Division

GAO/T-NSIAD-00-112

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss the Air Force's recent waiver of
the

10 U.S.C. 2466 provision that places a 50-percent ceiling on the amount of
depot maintenance funds that can be used for work performed by the private
sector. The statute allows the Secretary of a military department to waive
the 50-percent requirement for purposes of national security. In notifying
the Congress of the waiver, the Secretary of the Air Force explained the
need for the waiver primarily because the private sector was needed to
temporarily support maintenance that is being moved from the closing
Sacramento, California, and San Antonio, Texas, depots to other military
depots or private sector sources. As you requested, my testimony today
focuses on the basis for the waiver and the likelihood that the Air Force
will need additional waivers in the future.

RESULTS IN BRIEF

The Secretary of the Air Force acted within his legal authority to waive the

10 U.S.C. 2466 requirement that not more than 50 percent of the funds made
available for depot maintenance work be performed by private sector
contractors. Although the Air Force explanation for the waiver was based
primarily on the need to use temporary repair contracts and temporary
contract personnel to

support workloads at closing depots, these temporary contracts represent
only a minor share of the Air Force contract workload and did not in and of
themselves create the need for a waiver. A significant factor leading to the
waiver were previous Air Force actions that increased the private sector
share of depot maintenance work from 36 percent in 1991 to the 50-percent
ceiling in 2000--leaving little room to respond to emergencies.

Preliminary Air Force data indicates the Air Force will be close to the
50-percent ceiling through fiscal year 2004. Yet repair costs for work
already on contract are increasing more than previously estimated. For
example, long-term depot maintenance contracts are expected to grow from
$1.1 billion in fiscal year 2000 to $1.5 billion in fiscal year 2004. In
addition, the Air Force is implementing initiatives to outsource total
systems support responsibility to the private sector--including depot
maintenance--for 64 new or modified systems, including the Joint Direct
Attack Munition, AC-130U Gunship, Sensor Fuzed Weapon, and Joint Air to
Surface Standoff Attack Missile. While the Air Force indicated a waiver
should not be needed beyond 2001, the increasing amount of the Air Force's
contract depot maintenance work and future outsourcing plans create a
significant challenge to the Air Force in managing its depot maintenance
work within the 50-percent ceiling.

BACKGROUND

Depot maintenance involves the repair, overhaul, and upgrade of military
systems and equipment as well as the subsystems and reparable components
that make up these systems. It is performed in either military depots or
contractor facilities but is sometimes performed at military bases by
government civilians or contractor personnel. The amount of depot
maintenance work done by the public and private sectors is governed by 10
U.S.C. 2466. The statute states that not more than 50 percent of the funds
made available in a fiscal year to a military department or a defense agency
for depot-level maintenance and repair can be used by the private sector.
This percentage applies to each military department. The statute also
requires the Department of Defense to annually report to Congress regarding
the depot maintenance funds used by the public and private sectors in the
previous year and to estimate the split in the future years. It also
requires GAO to review and report on the data submitted by the Department.

The law permits the Secretary of a military department to waive the
50-percent ceiling for a fiscal year if the Secretary determines it is
necessary for national

security reasons and notifies Congress of the reasons for the waiver.
Another provision, 10 U.S.C. 2460, defines what work is considered to be
depot-level-maintenance. The definition of depot maintenance that was
established by this provision has resulted in increased reporting of depot
maintenance costs by the military departments in recent years.

On January 11, 2000, the Air Force notified the Congress that the Secretary
of the Air Force had approved a waiver of the 50 percent requirement for the
Air Force's depot activities for fiscal year 2000. Specifically, the
Secretary's notification stated that contracts were required to support
workloads of the closing Sacramento and San Antonio Air Logistics Centers
that had either been moved to other Air Force centers or redistributed
between the private sector and the other Air Force centers as a result of
public-private competitions within the last 3 fiscal years. According to the
Secretary, during the same time period, the Air Force had experienced
abnormally high demands and unusually low mission capable rates for key
warfighting assets. As a result, the Air Force reported that it had to enter
into temporary contracts to compensate for shortfalls in maintenance and
repair capabilities. The Secretary noted that private sector contractor
workloads would closely approach 50 percent in fiscal year 2000 and the
addition of the temporary contracts could result in private sector
contractors exceeding the 50 percent ceiling.

NEED FOR TEMPORARY PRIVATE SECTOR CONTRACTS

NOT THE MAJOR REASON FOR THE WAIVER

Given the broad language of the waiver provision and the discretion agencies
have in interpreting and implementing their own statutes, we do not question
the legal propriety of the waiver. However, the explanation for the waiver
understates key factors that led to the need for the waiver. While the
waiver principally cites the need to use temporary repair contracts and
temporary contract personnel to meet workloads created by closing depots,
these temporary contracts represent only a small share of the Air Force
contract workload and did not in and of themselves create the need for a
waiver. A more significant factor was the increase in the amount of other
contract depot maintenance work in recent years that brought the Air Force
up to the 50-percent ceiling.

Use of Temporary Repair Contracts and

Temporary Contract Personnel Is Limited

Collectively, the temporary repair contracts and temporary contract
personnel are estimated to cost $135 million in fiscal year 2000. This
represents about 4.4 percent of the $3 billion in depot maintenance work the
Air Force expects to contract with the private sector for fiscal year 2000.

To carry out the transition of workloads from two closing depots, the Air
Force awarded temporary contracts with private companies to provide interim
depot maintenance support until new sources of repair work are operational.
Some of these contracts were awarded as early as 1998. As shown in table 1,
the Air Force estimates that it could spend $104 million on these contracts
during fiscal year 2000.

Table 1: Estimated Temporary Contracts for Fiscal Year 2000

Dollars in millions
 Center                    Amount
 San Antonio               $87.5
 Sacramento                8.0
 Warner Robins             6.0
 Oklahoma City             1.6
 Ogden                     1.3
 Total                     $104.4

Source: Air Force data.

Air Force officials at the Oklahoma, Ogden, and Warner Robins Air Logistics
Centers told us they do not anticipate needing these contracts beyond fiscal
year 2000. San Antonio officials told us some of their center's temporary
contracts might be needed through fiscal year 2001.

Although the Secretary of the Air Force also justified the need for a waiver
based on the increased use of temporary contract personnel, the cost for
them is not significant in fiscal year 2000. Temporary contract personnel
were seldom used in Air Force depots prior to the need to support workloads
transitioning from closing depots to other sources of repair. As shown in
table 2, increased use of temporary contract personnel peaked in fiscal year
1999. Its use is projected to decrease by about $92 million during fiscal
years 1999-2000.

Table 2: Temporary Contract Personnel Costs

Dollars in millions
 Fiscal year
             Fiscal year Fiscal year Fiscal year Fiscal
 1997        1998        1999        2000        year 2001
 $31.9       $61.7       $122.3      $30.5       $2.6

Source: Air Force data.

About $27 million of fiscal year 2000's temporary contract personnel cost is
to support workloads moving from closing centers: $14.4 million at the
Warner Robins depot to support the C-5 aircraft, $7.2 million at the
Sacramento depot to support work on remaining KC-135 aircraft, and $5.4
million at the Oklahoma City depot that is associated with engine workload.

Air Force Has Significantly Increased Use

of Contract Depot Maintenance

As shown in figure 1, the Air Force--consistent with its plans and
policies--has increased the private sector share of its depot maintenance
work from 36 percent in fiscal year 1991 to about 50 percent in fiscal year
2000.

Note: Data for fiscal years 1991-1995 came from a March 1996 DOD report to
the Congress, Depot Level Maintenance and Repair Workload. Data for fiscal
year 1996 comes from our report, Defense Depot Maintenance: Information on
Public and Private Sector Workload Allocations (GAO/NSIAD-98-41, Jan. 20,
1998). Data for fiscal years 1997-1999 came from DOD reports to the Congress
on depot maintenance workloads. Data for fiscal year 2000 came from the Air
Force Materiel Command. The fiscal year 2000 estimate includes $104 million
for temporary repair contracts.

Source: Air Force data.

While increasing the private sector share of the Air Force's depot
maintenance workload is consistent with DOD's policy to increase outsourcing
of all types of logistics support activities, including depot maintenance,
the Department has consistently said that it would manage its depot
maintenance program within the 50-percent ceiling. However, because of
various management decisions in recent years, the Air Force now has little
flexibility to respond to emergency contract requirements and stay within
the ceiling for private sector work.

The following show some decisions that have brought the Air Force to this
point.

   * The Air Force increased the use of long-term depot maintenance
     contracts to support new systems. The cost of these contracts has
     increased from $600 million in fiscal year 1996 to $1.1 billion in
     fiscal year 2000, an increase of 83 percent. This contract maintenance
     category includes support for such systems as the F-117, U-2, KC-10,
     C-17 aircraft, and various classified programs.

   * The closure of the San Antonio, Texas, depot resulted in the transfer
     of about 66 percent of the engine workloads performed at that
     facility--which is estimated to be valued at about $545 million
     annually--to the private sector.

   * The closure of the Sacramento, California, depot resulted in the
     transfer of aircraft repair work valued at about $57 million annually
     to the private sector.

   * The closure and privatization-in-place of the Newark, Ohio, depot
     resulted in the transfer of aircraft and missile guidance repair work
     valued at about $94 million annually to the private sector.

These actions, along with the need for temporary contracts to support the
work being transferred from Sacramento and San Antonio, caused the Secretary
of the Air Force to waive the 50-percent limitation.

AIR FORCE FACES MAJOR FUTURE CHALLENGE

IN MANAGING TO THE 50-PERCENT CEILING

The Air Force stated that the need for a waiver of the 50-percent
requirement is temporary and should not be required beyond 2001. However,
preliminary data shows that the Air Force will be close to the 50-percent
ceiling during fiscal years 2000 through 2005. Further, maintenance work for
systems already on contract is growing more than previously expected, and
the Air Force is planning further outsourcing of maintenance work for new
and modified systems in the future.

While the Air Force has embarked on several courses of action to help manage
its workload under the 50-percent ceiling, the Air Force faces major
challenges if it is to stay under the ceiling.

The Air Force Secretary said that a waiver could be required in fiscal year
2001 because of the continuing need for temporary maintenance contracts to
support the workloads transitioning from closing depots. We found that the
San Antonio depot is planning to continue to use that temporary support for
2001 at an estimated cost of about $38 million. Nonetheless, other contract
maintenance work is increasing that will likely make it necessary for the
Air Force to seek future waivers unless workloads currently performed or
planned for the private sector are brought into the military depot system.

We have not yet been able to review the latest Air Force estimates for depot
maintenance work to be performed in the public and private sectors during
fiscal years 2000-2004. Air Force officials told us these estimates are
still under review and will be submitted to the Office of the Secretary of
Defense in time to support the required April 1, 2000, report of future
years estimates to the Congress. Nonetheless, our March 1, 2000, report on
last year's 50-50 estimates stated that

preliminary data from the Air Force showed that expenditures for depot
maintenance workloads on contract could exceed the 50-percent ceiling in the
coming years. We adjusted the Air Force data for fiscal year 2000 to account
for temporary repair contracts and it indicates that the Air Force would
exceed the 50 percent ceiling by $35.5 million, as seen in table 3.

Table 3. Available Funding Flexibility to Stay Within 50 Percent Ceiling

Dollars in millions
 Fiscal
 year     Fiscal    Fiscal    Fiscal   Fiscal
          year 2001 year      year     year 2004
 2000               2002      2003
 ($35.5 ) $11.4     $147.7    $130.3   $136.8

Source: Air Force Materiel Command 1999 Data, adjusted by GAO for estimated
temporary repair contracts in fiscal year 2000.

The data also shows the flexibility the Air Force will have for growth in
contract maintenance in future years, given projected workload allocations
at that time.

Several categories of contract depot maintenance work are growing more than
what had been previously estimated for years 2000 and beyond. For example, a
February 2000 Air Force Materiel Command memorandum stated that two
categories of long-term contract maintenance--contractor logistics support
and interim contractor support--were projected to grow $48 million more than
had previously been projected for fiscal year 2000. Contract costs for these
categories were said to be expected to grow from $1.1 billion in fiscal year
2000 to $1.5 billion in 2004. Depot maintenance for newer weapon systems
such as the C-17 and F-117, that use contractor logistics support, are
increasing at a faster pace than originally anticipated. As these weapons
systems age and additional aircraft enter the inventory, these trends will
likely continue.

The Air Force is also planning to contract out total system program
responsibility--including depot maintenance--for 64 new and modified
systems. Additionally, we reviewed 13 programs that had entered the source
of repair process --a DOD procedure for determining whether new maintenance
workloads will be performed in the public or private sector-between
September 1999 and February 2000. Eleven of the 13 programs, with an
estimated repair cost of $85.2 million during fiscal years 2000- 2006 are
currently recommended for private sector contract repair. We found that some
new maintenance workloads were being contracted out without completing the
source-of-repair process. For example, in October 1999, a contract was
signed for installation of modification kits for

C/KC-135 aircraft, even though a source of repair analysis had not been
completed. This contract involves installation costs of about $157 million
over a 5-year period. At the same time, the maintenance contract workload is
increasing faster than earlier anticipated, as older systems are phased out
of the inventory. As a result, the public sector share of the workload will
decrease, aggravating the Air Force's problem of maintaining the 50-50
share.

Air Force officials indicate that they have embarked on several courses of
action to improve its management of depot maintenance workloads with respect
to the 50-percent ceiling, including

   * exerting more control over and management attention to the assignment
     of work to the public and private sectors for repairs to new and
     modified systems and components,

   * reviewing work that is currently on contract for possible performance
     in a public depot,

   * increasing attention to the impact of future depot workloads in the
     acquisition process when depot support strategies are discussed, and

   * continuing mid-year assessments and actively monitoring programs for
     workload shifts and changes in scope.

We have not yet seen that these actions have significantly affected the Air
Force's workload allocation problem.

Despite the increasing trend toward outsourcing, Air Force Materiel Command
officials stated that some opportunities exist to bring additional older
workloads from private sector contract repair into the military depot
system. For example, landing gear for various aircraft previously repaired
on contract is being transitioned into the Ogden depot. This workload
represents an estimated annual value of $9.7 million. Officials at all three
remaining Air Force depots noted that some opportunities exist to move other
work to government depots, for example, work that both military depots and
contractors are splitting. However, they said that these opportunities are
limited to work on older systems. They noted that the workloads the depots
need are those that would infuse the military depot system with new
technologies, including component and aircraft repair work for newer systems
such as the C-17 and F-22 aircraft and the F100-229 and F119 engines. This
idea was supported by a recent memorandum from the Ogden Air Logistics
Center to the Headquarters, Air Force Materiel Command, which noted that
maintaining core capability--the capability that is to support requirements
in a contingency situation--requires the depots to establish repair
capability for new and modified systems. Nonetheless, should new initiatives
be adopted to bring new work into the depots, they would require funding and
time would be needed to establish a repair capability.

In conclusion, given the outsourcing trends discussed above as well as the
down-turn that is expected in the public sector share as older systems are
phased out of the inventory, the Air Force faces major challenges remaining
under the 50-percent ceiling in the future.

Mr. Chairman, this concludes my statement. I am prepared to respond to your
questions at this time.

-- -- -- --

Contacts and Acknowledgments

For future questions regarding this testimony, please contact me or my
Assistant Director, Julia Denman at (202) 512-4290. Other individuals making
key contributions to this testimony included Mike Kennedy, Bruce Fairbairn,
John Brosnan, and Pam Valentine, Larry Junek, and John Strong.

(709479)

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