Air Force Privatization-In-Place

This report reviews the Air Force's interim cost comparison of running its former Aerospace Guidance and Metrology Center in Newark, Ohio, before it was closed with the current privatization-in-place cost as the Boeing Guidance Repair Center. GAO previously discussed these cost comparison issues in congressional testimony during March and April 1997. (See GAO/T-NSIAD-97-111 and GAO/T-NSIAD-97-112.) This report assesses the interim comparison, including the major reasons for cost differences between the two activities.

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.