Depot Maintenance
DOD's 50-50 Reporting Should Be Streamlined Gao ID: GAO-03-1023 September 15, 2003Under 10 U.S.C. 2466, not more than 50 percent of each military department's annual depot maintenance funding can be used for work done by private-sector contractors. The Department of Defense (DOD) also must submit two reports to the Congress annually on the division of depot maintenance funding between the public and private sectors--one about the percentage of funds spent in the previous 2 fiscal years (prior-years report) and one about the current and 4 succeeding fiscal years (future-years report). As required, GAO reviewed the two DOD reports submitted in early 2003 and is, with this report, submitting its views to the Congress on whether (1) the military services met the so-called "50-50 requirement" for fiscal years 2001-2 and (2) the projections for fiscal years 2003-7 are reasonable estimates. GAO also identified opportunities to improve the reporting process.
Continuing weaknesses in DOD's data gathering, reporting processes, and financial systems prevented GAO from determining with precision if the military services complied with the 50-50 requirement in fiscal years 2001-2. DOD data show all the services, except the Air Force in fiscal year 2001, to be below the 50-percent funding limit on private sector work. However, as before, GAO found errors in the data that, if corrected, would overall increase funding of the private sector and move each service closer to the contract limit. For example, for fiscal year 2002, the Navy did not include about $401 million in private sector maintenance work on aircraft carriers and surface ships. Correcting for these and other errors would increase the Navy's percentage of private sector depot maintenance funds for that year from the 42.6 percent reported to 46.9 percent. Such data weaknesses show that prior-years reports do not precisely measure the division of maintenance funding. At best, over time these results provide rough approximations and indicate trends that may be useful to decision makers. Because of data deficiencies and changing budget projections, the futureyears report does not provide reasonable estimates of public and private sector maintenance funding for fiscal years 2003-7 and limits its usefulness to decision makers. GAO reported this shortcoming in the past, and problems continue. For example, the Army underreported maintenance work at nondepot locations as it continues to consolidate the work and better control it at such locations. Other Army work was not reported because some commands did not receive guidance and others misapplied it. These errors would add about $200 million annually to the Army's future estimate and increase the percent of projected funding in the private sector. Opportunities still exist for improvements, including for streamlining the 50- 50 reports, continued service audit agency support, and data development. Streamlining the 50-50 reports could help address problems caused by, among other factors, inexact program estimates. Second, although DOD is concerned that recent revisions to federal audit standards could keep service auditors from further participation in the 50-50 process, GAO believes that a way can be developed to enable auditors' continued support yet ensure their independence. Third, data development could be helped by better disseminating guidance and training participating personnel.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-03-1023, Depot Maintenance: DOD's 50-50 Reporting Should Be Streamlined
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Report to Congressional Committees:
United States General Accounting Office:
GAO:
September 2003:
DEPOT MAINTENANCE:
DOD's 50-50 Reporting Should Be Streamlined:
Depot Maintenance:
GAO-03-1023:
GAO Highlights:
Highlights of GAO-03-1023, a report to Congressional Committees
Why GAO Did This Study:
Under 10 U.S.C. 2466, not more than 50 percent of each military
department‘s annual depot maintenance funding can be used for work
done by private-sector contractors. The Department of Defense (DOD)
also must submit two reports to the Congress annually on the division
of depot maintenance funding between the public and private sectors”
one about the percentage of funds spent in the previous 2 fiscal years
(prior-years report) and one about the current and 4 succeeding fiscal
years (future-years report). As required, GAO reviewed the two DOD
reports submitted in early 2003 and is, with this report, submitting
its views to the Congress on whether (1) the military services met the
so-called ’50-50 requirement“ for fiscal years 2001-2 and (2) the
projections for fiscal years 2003-7 are reasonable estimates. GAO also
identified opportunities to improve the reporting process.
What GAO Found:
Continuing weaknesses in DOD‘s data gathering, reporting processes,
and financial systems prevented GAO from determining with precision if
the military services complied with the 50-50 requirement in fiscal
years 2001-2. DOD data show all the services, except the Air Force in
fiscal year 2001, to be below the 50-percent funding limit on private
sector work. However, as before, GAO found errors in the data that, if
corrected, would overall increase funding of the private sector and
move each service closer to the contract limit. For example, for
fiscal year 2002, the Navy did not include about $401 million in
private sector maintenance work on aircraft carriers and surface
ships. Correcting for these and other errors would increase the Navy‘s
percentage of private sector depot maintenance funds for that year
from the 42.6 percent reported to 46.9 percent. Such data weaknesses
show that prior-years reports do not precisely measure the division of
maintenance funding. At best, over time these results provide rough
approximations and indicate trends that may be useful to decision
makers.
Because of data deficiencies and changing budget projections, the
future-years report does not provide reasonable estimates of public
and private sector maintenance funding for fiscal years 2003-7 and
limits its usefulness to decision makers. GAO reported this
shortcoming in the past, and problems continue. For example, the Army
underreported maintenance work at nondepot locations as it continues
to consolidate the work and better control it at such locations. Other
Army work was not reported because some commands did not receive
guidance and others misapplied it. These errors would add about $200
million annually to the Army‘s future estimate and increase the
percent of projected funding in the private sector.
Opportunities still exist for improvements, including for streamlining
the 50-50 reports, continued service audit agency support, and data
development. Streamlining the 50-50 reports could help address
problems caused by, among other factors, inexact program estimates.
Second, although DOD is concerned that recent revisions to federal
audit standards could keep service auditors from further participation
in the 50-50 process, GAO believes that a way can be developed to
enable auditors‘ continued support yet ensure their independence.
Third, data development could be helped by better disseminating
guidance and training participating personnel.
What GAO Recommends:
GAO suggests that the Congress consider amending 10 U.S.C. 2466 to
require only one annual 50-50 report to cover the prior, current, and
budget years for which data are generally more reliable and potential
impacts more immediate. GAO also recommends that DOD improve 50-50
data collection and validation by, among other actions, using service
audit agencies for timely review and validation of 50-50 data. DOD
concurs with the report recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-03-1023.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact Barry W. Holman at
(202) 512-5581 or holmanb@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Weaknesses in Data Preclude Determinations of Compliance in Prior-Years
Report:
Future-Year Projections Are Not Reasonable and Not Very Useful:
Opportunities Exist to Improve DOD Reporting:
Conclusions:
Matter for Congressional Consideration:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: GAO Adjustments for Errors, Omissions, and Inconsistencies
in Military Departments 50-50 Data for Fiscal Year 2002:
Department of the Army:
Department of the Navy:
Department of the Air Force:
Appendix II: Scope and Methodology:
Appendix III: Comments from the Department of Defense:
Related GAO Products:
Tables:
Table 1: DOD Reported Depot Maintenance Funding Allocations:
Table 2: GAO Changes to Army's FY 2002 50-50 Data:
Table 3: GAO Changes to Navy's and Marine Corps' FY 2002 50-50 Data:
Table 4: GAO Changes to Air Force's FY 2002 50-50 Data:
Abbreviations:
DOD: Department of Defense:
OSD: Office of the Secretary of Defense:
United States General Accounting Office:
Washington, DC 20548:
September 15, 2003:
The Honorable John Warner
Chairman
The Honorable Carl Levin
Ranking Minority Member
Committee on Armed Services
United States Senate:
The Honorable Duncan Hunter
Chairman
The Honorable Ike Skelton
Ranking Minority Member
Committee on Armed Services
House of Representatives:
Under 10 U.S.C. 2466, not more than 50 percent of annual depot
maintenance funding provided to the military departments and
defense agencies can be used for work accomplished by private-sector
contractors. Section 2466 also directs the Department of Defense (DOD)
to submit two annual reports to the Congress on the distribution of
depot maintenance funding between the public and private sectors. The
first report is to identify the percentage of funds expended by each
military department and defense agency during the preceding 2 fiscal
years for the performance of depot maintenance workloads by the public
and private sectors (the "prior-years report"). The second report is to
project the same information for the current and 4 succeeding fiscal
years (the "future-years report"). For 2003, DOD issued the prior-years
report on February 11, 2003, and the future-years report on April 7,
2003.
Section 2466 also requires us to submit our views to the Congress on
whether DOD complied with the so-called "50-50 requirement" in the
prior-years report and whether the projections in the future-years
report are reasonable. Accordingly, this report discusses whether (1)
the military departments met the 50-50 requirement for fiscal years
2001 and 2002 and (2) the projections for fiscal years 2003 through
2007 represent reasonable estimates. As part of our work, we also
identified opportunities to improve the reporting process. To
accomplish these objectives, we analyzed the 50-50 reported data and
each service's procedures and internal management controls for
collecting, aggregating, and validating depot maintenance information
for purposes of responding to the section 2466 requirements. We limited
our analysis of future-years data because initial audit efforts
identified significant continuing problem areas, similar to those found
in prior audits, that are not likely to change.
Results in Brief:
Continuing weaknesses in DOD's data gathering, reporting processes, and
financial systems prevented us from determining with precision whether
the services were in compliance with the 50-50 requirement for fiscal
years 2001 and 2002. DOD's data as submitted to the Congress shows the
military departments to be below the 50-percent funding limitation on
private sector work, except for the Air Force, which for 2001 reported
itself above the limit[Footnote 1] but below it in 2002. However, as in
past years, we found errors and omissions in the data that, if
corrected, would overall increase the percentages of funding going to
the private sector and move each department closer to the contract
limit. For example, in its data for fiscal year 2002, the Navy did not
include about $401 million in private sector maintenance work on
aircraft carriers accomplished during the same time as nuclear
refueling and on surface ships being placed in an inactive status. The
Marine Corps, which compared to the other services has the smallest
workload but the largest proportion of errors, did not report most
depot maintenance workloads from the command responsible for system
acquisitions and upgrades, understating private-sector workloads by
about $32 million and public sector workloads by about $7 million.
Correcting for these and other errors we found would increase the
Department of the Navy's percentage of depot funds for work
accomplished in the private sector during fiscal year 2002 from the
42.6 percent reported to 46.9 percent, a gain of over 4 percentage
points. These weaknesses indicate the data in the prior-years report
cannot be relied on to provide a precise measure of the balance of
funding between the public and private sectors for the military
departments. At best, over time these reports provide rough
approximations of the public-private funding allocations, with some
indications of trends that may be useful information to the Congress in
exercising its oversight role and to DOD officials in managing the
depot maintenance program.
Because of supporting data deficiencies and the changing nature of
budget projections, the future-years report does not provide reasonable
estimates of public and private sector depot maintenance funding
allocations for fiscal years 2003 through 2007, thereby limiting its
usefulness to congressional and DOD decision makers. We have reported
this shortcoming with the future-years report in the past, and the
problems continue to occur. For example, as in past years, the Army
underreported public and private sector depot-level maintenance work at
field locations as it continues unfinished efforts to consolidate
maintenance activities and better control the proliferation of depot-
level tasks at nondepot locations. Other Army work was not reported
because some commands did not receive 50-50 guidance and others
misapplied the guidance. While the Army's supporting documentation for
the projected data was inadequate, errors and omissions of similar
magnitude to the prior years data would add more than $200 million
annually to the Army's reported future work for both public and private
sectors. As with the prior years, the net effect of the problems we
found generally increases the percentage of workload expected to be
accomplished by the private sector. Besides reporting errors, other
internal and external factors can create large fluctuations in reported
data, which in turn can provide a distorted and misleading view to
outside observers about efforts to remain compliant with the 50-50
requirement. For example, in the current future-years report, the Air
Force's projected public sector work financed through the working
capital fund is $3.0 billion higher than the amount reported for the
same 4-year time period in the future-years report submitted in 2002.
Although this would appear to indicate a large influx of new work to
the public depots, in reality the amount of work, according to budget
estimates and management reports, is expected to remain fairly level
during this reporting period in terms of production hours and size of
workforce. Most of the dollar (and percentage) increase in public
sector work is the result of price hikes in the sales rate charged to
its customers, a condition primarily caused by increases in the cost of
spare and repair parts used in the maintenance process.
Recently DOD's improvements in 50-50 guidance and operating processes
have reached a plateau in terms of quality and direction. However,
opportunities still exist to improve 50-50 data and management
processes and controls, including through a streamlined 50-50 report,
service audit agency participation in that process, and an improved
data development process. Streamlining the 50-50 report to focus on the
data that are likely to be more accurate and extending the time DOD
officials have to put the data together should improve the quality of
the reported 50-50 data. Furthermore, DOD officials indicated their
concerns that the issue of auditor independence, arising from a recent
revision of government auditing standards, could keep service auditors
from further participation in 50-50 reviews. However, the continued
participation of the service audit agencies--to verify data and
identify errors to be corrected by 50-50 managers before reports are
submitted to the Congress--is critical to improving data accuracy and
completeness. We believe that, as such participation by auditors has
been done with regard to the base realignment and closure process, a
process can be developed to enable service auditors' valuable
participation to continue while the services are compiling their data,
with audit agencies still maintaining their independence. Lastly,
opportunities for improvement in the data development process include
better dissemination of guidance and enhanced training for personnel
who collect and report the data.
We are including a matter for congressional consideration regarding the
streamlining of the 50-50 reports by reducing the number of years of
future data that are collected and combining the prior-year and future-
year reports into one report with a later reporting date. We are also
making recommendations to the Department of Defense for improving the
50-50 data reported to the Congress (1) by assuring the timely
participation of the service audit agencies in reviewing the data
before reports are submitted to the Congress and (2) by increasing
management's attention to the dissemination of guidance to all
organizations and personnel participating in the process and to the
improvement of training for personnel responsible for developing and
aggregating data.
In written comments on a draft of this report, DOD concurred with the
report's recommendations while disagreeing with limited portions of our
analyses. The department's comments are included in appendix III.
Background:
Governing Legislation and Previous Reports Concerning the 50-50
Requirement:
In addition to the 50-50 requirement in 10 U.S.C. 2466, two other title
10 provisions directly affect the reporting of workload allocations to
the public and private sectors.
* Section 2460 defines depot maintenance to encompass material
maintenance or repair requiring the overhaul, upgrade, or rebuilding of
parts, assemblies, or subassemblies and the testing and reclamation of
equipment, regardless of the source of funds or the location at which
maintenance or repair is performed. Depot maintenance also encompasses
software maintenance, interim contractor support,[Footnote 2] and
contractor logistics support[Footnote 3] to the extent that work
performed in these categories is depot maintenance. The statute
excludes from depot maintenance the nuclear refueling of an aircraft
carrier, the procurement of major modifications or upgrades of weapon
systems, and the procurement of parts for safety modifications,
although the term does include the installation of parts for safety
modifications.
* Section 2474 directs DOD to designate public depots as Centers of
Industrial and Technical Excellence and to improve their operations so
as to serve as recognized leaders in their core competencies.[Footnote
4] Section 342 of the National Defense Authorization Act for Fiscal
Year 2002 (P.L. 107-107, Dec. 28, 2001) amended this statute to exclude
qualifying public-private partnerships[Footnote 5] from the 50-percent
funding limitation on contracting in section 2466. Section 342 provides
that the funds expended for the performance of depot-level maintenance
by nonfederal government personnel located at the centers shall not be
counted when applying the 50-percent limitation if the personnel are
provided pursuant to a public-private partnership. This exclusion
initially applied to depot maintenance funding for fiscal years 2002
through 2005. Section 334 of the National Defense Authorization Act for
Fiscal Year 2003 (P.L. 107-314, Dec. 2, 2002) extended this period to
include all contracts entered into through fiscal year 2006.
The Office of the Secretary of Defense (OSD) has issued guidance to the
military departments for reporting public-private workload
allocations. The guidance is consistent with the definition of depot-
level maintenance and repair in 10 U.S.C. 2460.[Footnote 6] The
military departments have also issued internal instructions to manage
the data collection and reporting process, tailored to their individual
organizations and operating environments.
Based on the congressional mandate regarding the DOD 50-50 requirement,
this is the sixth year that we have reported on the prior-year numbers
and the fourth year reporting on the future-year numbers.[Footnote 7]
In past years, we have reported on continuing data errors and
inconsistencies in reporting by the military departments and problems
in documenting and independently validating 50-50 data. We have
recommended increasing management attention to and emphasis on the 50-
50 reporting process, improving guidance in specific maintenance
categories, and implementing better internal controls. We have also
observed that the 50-50 process is complex, involving numerous
reporting entities and commands, and requiring the incorporation of
evolving new concepts of logistics support, changing locations and
organizations for accomplishing depot maintenance, and changes in
statutory provisions. Service officials told us that the reporting
process is somewhat burdensome and time frames for collecting data are
constrictive. Further complications in reporting result from relatively
high turnover in staff responsible for collecting and managing data and
uneven management attention and priority accorded the 50-50 process.
Our work has historically been augmented by the efforts of the service
audit agencies, which have participated in the 50-50 processes in
varying degrees. We have recommended the continued involvement of the
auditors to review and validate reporting processes and results and to
correct substantial errors and omissions before the 50-50 data are
submitted to the Congress.
Our prior reports also recognized the limitations of DOD's financial
systems, operations, and controls. Our audits of DOD's financial
management operations have routinely identified pervasive weaknesses in
financial systems, operations, and internal controls that impede its
ability to provide useful, reliable, and timely financial information
for day-to-day management and decision making. In the financial
management systems area, DOD continues to struggle in its efforts to
implement systems to support managerial decision-making. As we recently
reported,[Footnote 8] DOD can ill afford to invest in systems that are
not capable of providing DOD management with more accurate, timely, and
reliable information on the results of the department's business
operations.
To date, none of the military services or major DOD components has
passed the test of an independent financial audit. A continuing
inability to capture and report the full cost of its programs
represents one of the most significant impediments facing DOD.
Nonetheless, the data used to develop the 50-50 report are the only
data available and are accepted and used for DOD decision making and
for congressional oversight.
Summary of Data in DOD's 50-50 Reports:
Table 1 provides a consolidated summary of DOD's 2003 prior-years and
future-years reports to the Congress on public and private sector
workload allocations for depot maintenance. The amounts shown are DOD's
record of actual obligations incurred for depot maintenance work in
fiscal years 2001 and 2002 and projected obligations for fiscal years
2003-2007 based on the defense budget and service funding
baselines.[Footnote 9] The percentages show the relative allocations
between the public and private sectors and the exempted workloads.
Adding the private and private-exempted percentages together shows what
the private-sector amount would have been reported as, absent the
recent legislation to exempt qualified partnership workload.
Table 1: DOD Reported Depot Maintenance Funding Allocations:
Dollars in millions.
: Prior fiscal years: [Empty].
Army:
Public; Prior fiscal years: 2001: $1,205; Prior fiscal years: 2002:
$1,373; Future fiscal years: 2003: $1,781; Future fiscal
years: 2004: $1,790; Future fiscal years: 2005: $1,907; Future fiscal
years: 2006: $2,017; Future fiscal years: 2007: $2,008.
Prior fiscal years: 2001: 52.2%; Prior fiscal years: 2002: 51.5%;
Future fiscal years: 2003: 55.8%; Future fiscal years: 2004:
52.8%; Future fiscal years: 2005: 53.6%; Future fiscal years: 2006:
52.6%; Future fiscal years: 2007: 52.7%.
Private; Prior fiscal years: 2001: $1,102; Prior fiscal years: 2002:
$1,239; Future fiscal years: 2003: $1,325; Future fiscal
years: 2004: $1,517; Future fiscal years: 2005: $1,562; Future fiscal
years: 2006: $1,729; Future fiscal years: 2007: $1,716.
Prior fiscal years: 2001: 47.8%; Prior fiscal years: 2002: 46.5%; :
Future fiscal years: 2003: 41.5%; Future fiscal years: 2004:
44.7%; Future fiscal years: 2005: 43.9%; Future fiscal years: 2006:
45.1%; Future fiscal years: 2007: 45.0%.
Private exempt[A]; Prior fiscal years: 2001: -; Prior fiscal years:
2002: $51; Future fiscal years: 2003: $84; Future fiscal
years: 2004: $86; Future fiscal years: 2005: $87; Future fiscal years:
2006: $87; Future fiscal years: 2007: $87.
Prior fiscal years: 2002: 1.9%; Future fiscal years:
2003: 2.6%; Future fiscal years: 2004: 2.5%; Future fiscal
years: 2005: 2.4%; Future fiscal years: 2006: 2.3%; Future
fiscal years: 2007: 2.3%.
Total; Prior fiscal years: 2001: $2,307; Prior fiscal years: 2002:
$2,663; Future fiscal years: 2003: $3,190; Future fiscal
years: 2004: $3,393; Future fiscal years: 2005: $3,556; Future fiscal
years: 2006: $3,833; Future fiscal years: 2007: $3,812.
Navy/Marine Corps:
Public; Prior fiscal years: 2001: $4,342; Prior fiscal years: 2002:
$5,258; Future fiscal years: 2003: $4,986; Future fiscal
years: 2004: $4,594; Future fiscal years: 2005: $5,237; Future fiscal
years: 2006: $5,172; Future fiscal years: 2007: $5,178.
Prior fiscal years: 2001: 54.7%; Prior fiscal years: 2002: 54.5%;
Future fiscal years: 2003: 54.1%; Future fiscal years: 2004:
54.2%; Future fiscal years: 2005: 55.2%; Future fiscal years: 2006:
55.0%; Future fiscal years: 2007: 56.3%.
Private; Prior fiscal years: 2001: $3,593; Prior fiscal years: 2002:
$4,110; Future fiscal years: 2003: $4,188; Future fiscal
years: 2004: $3,836; Future fiscal years: 2005: $4,173; Future fiscal
years: 2006: $4,144; Future fiscal years: 2007: $3,903.
Prior fiscal years: 2001: 45.3%; Prior fiscal years: 2002: 42.6%;
Future fiscal years: 2003: 45.4%; Future fiscal years: 2004:
45.2%; Future fiscal years: 2005: 44.0%; Future fiscal years: 2006:
44.0%; Future fiscal years: 2007: 42.5%.
Private exempt[A]; Prior fiscal years: 2001: -; Prior fiscal years:
2002: $273; Future fiscal years: 2003: $46; Future fiscal
years: 2004: $51; Future fiscal years: 2005: $74; Future fiscal years:
2006: $94; Future fiscal years: 2007: $111.
Prior fiscal years: 2002: 2.8%; : Future fiscal years:
2003: 0.5%; Future fiscal years: 2004: 0.6%; Future fiscal
years: 2005: 0.8%; Future fiscal years: 2006: 1.0%; Future
fiscal years: 2007: 1.2%.
Total; Prior fiscal years: 2001: $7,935; Prior fiscal years: 2002:
$9,642; Future fiscal years: 2003: $9,220; Future fiscal
years: 2004: $8,481; Future fiscal years: 2005: $9,484; Future fiscal
years: 2006: $9,411; Future fiscal years: 2007: $9,192.
Air Force:
Public; Prior fiscal years: 2001: $3,322; Prior fiscal years: 2002:
$4,467; Future fiscal years: 2003: $4,456; Future fiscal
years: 2004: $4,993; Future fiscal years: 2005: $5,404; Future fiscal
years: 2006: $5,530; Future fiscal years: 2007: $5,629.
Prior fiscal years: 2001: 47.7%; Prior fiscal years: 2002: 54.1%;
Future fiscal years: 2003: 51.9%; Future fiscal years: 2004:
56.8%; Future fiscal years: 2005: 57.9%; Future fiscal years: 2006:
56.6%; Future fiscal years: 2007: 53.7%.
Private; Prior fiscal years: 2001: $3,643; Prior fiscal years: 2002:
$3,781; Future fiscal years: 2003: $4,120; Future fiscal
years: 2004: $3,791; Future fiscal years: 2005: $3,922; Future fiscal
years: 2006: $4,230; Future fiscal years: 2007: $4,848.
Prior fiscal years: 2001: 52.3%; Prior fiscal years: 2002: 45.8%;
Future fiscal years: 2003: 48.0%; Future fiscal years: 2004:
43.1%; Future fiscal years: 2005: 42.0%; Future fiscal years: 2006:
43.3%; Future fiscal years: 2007: 46.2%.
Private exempt[A]; Prior fiscal years: 2001: -; Prior fiscal years:
2002: $12; Future fiscal years: 2003: $9; Future fiscal years:
2004: $8; Future fiscal years: 2005: $7; Future fiscal years: 2006: $7;
Future fiscal years: 2007: $8.
Prior fiscal years: 2002: 0.1%; : Future fiscal years:
2003: 0.1%; Future fiscal years: 2004: 0.1%; Future fiscal
years: 2005: 0.1%; Future fiscal years: 2006: 0.1%; Future
fiscal years: 2007: 0.1%.
Total; Prior fiscal years: 2001: $6,965; Prior fiscal years: 2002:
$8,260; Future fiscal years: 2003: $8,585; Future fiscal
years: 2004: $8,792; Future fiscal years: 2005: $9,333; Future fiscal
years: 2006: $9,768; Future fiscal years: 2007: $10,484.
Source: DOD's "50-50" Reports, dated Feb. 11 and Apr. 7, 2003.
[A] The provision in 10 U.S.C. 2474 to exempt qualified public-private
partnerships from the 50-percent funding limitation began with the 2002
reporting year and is now continued for all contracts entered into
through fiscal year 2006. DOD interpreted this to mean that exemptions
should also be reported for fiscal year 2007 for contracts initiated in
2002 through 2006.
[End of table]
Weaknesses in Data Preclude Determinations of Compliance in Prior-Years
Report:
DOD's prior-years report for fiscal years 2001 and 2002 as submitted to
the Congress shows the Departments of the Army and Navy to be below the
50-percent funding limitation on private sector workloads for both
years. The Air Force reported itself over the limitation in 2001 and
below it in 2002. (See table 1.) The net effects of correcting for the
errors and omissions we identified would increase the percentages of
workload going to the private sector and move each department closer to
the contract limit. Appendix I shows the amounts and effects of our
adjustments to the reported data submitted by the military departments
for fiscal year 2002 and provides a description of the major
deficiencies we found. Overall, however, recurring weaknesses in DOD's
data gathering, reporting processes, and financial systems prevented us
from determining with precision whether the services were in compliance
with the 50-50 requirement for fiscal years 2001 and 2002.
Department of the Army:
The Army reported its private sector funding to be below the 50-percent
limit for both fiscal years 2001 and 2002. Army 50-50 reporting
involves multiple commands with somewhat different processes for
collecting, summarizing, and validating data. Although the Army
utilized a new, more centralized financial system to collect 50-50 data
that corrected some of the transcription errors we found last
year,[Footnote 10] we continued to find errors, omissions, and
inconsistencies in its data.
For example, as in past years, the Army underreported public and
private sector depot-level maintenance work at field locations as it
continues unfinished efforts to consolidate maintenance activities and
better control the proliferation of depot-level tasks at nondepot
locations. Other Army work was not reported because some commands did
not receive 50-50 instructions and others misapplied the guidance.
Unfamiliarity with the guidance was caused in some instances by the
large turnover from last year in the staff responsible for collecting
and summarizing data. Staff turnover was cited by each of the military
services as contributing to increased errors and training needs. To the
extent we identified them, these specific errors would add about $228
million in total to the Army's public and private sector workloads in
2002; the net effect of correcting for these errors would add 2.5
percent to the private sector percentage allocation in 2002. (See table
2 in app. I.):
Department of the Navy, including the Marine Corps:
The Navy reported its private sector funding to be below the 50-percent
limit for both fiscal years. Similar to the Army, the Navy's 50-50
process also involves multiple naval commands as well as the Marine
Corps. As in prior years, we believe this increases the complexity in
managing the process and in ensuring consistency in application of the
guidance. It also exacerbates the less than adequate data validation
efforts.
We identified several problems that carried over from last year's 50-50
efforts. The Navy did not report any depot maintenance work
accomplished along with the nuclear refueling of its aircraft carriers,
citing the exclusion of nuclear refueling from the 10 U.S.C. 2460
definition of depot maintenance. We continue to believe that depot
repairs not directly associated with refueling tasks should be reported
because these kinds of repair actions are reported by other
organizations and funding for these tasks are identifiable in contracts
and financial systems. The Navy also continues to inconsistently report
inactivation activities that involve the servicing and preservation of
systems and equipment before it is placed in storage or in an inactive
status. Officials report public sector workloads for inactivation
activities on nuclear ships but do not report such work on nonnuclear
ships, saying that the former workload is complex while the latter is
not. We think all such depot-level work should be counted since the
statute and implementing guidance does not make a distinction of
complexity. These two examples would add about $401 million to the
private sector workloads in fiscal year 2002.
We also determined that about $41 million of partnership workloads were
incorrectly exempted from reporting because the work was not
accomplished at a designated depot or was not performed by contract
employees.
The Marine Corps data are included as part of the Department of the
Navy 50-50 report for compliance purposes, but the Corps exercises a
separate process for collecting data. Compared to the other services,
the Marine Corps has a small depot program but makes more relative
errors and has substantial shortcomings in its management oversight and
control actions. For example, most of the program offices in the
command that is responsible for acquiring and upgrading weapon systems
did not report at all. Our review found that this understated the
private sector total for fiscal year 2002 by about $32 million and the
public sector total by almost $7 million. We also identified other
errors including a nearly $19 million overstatement of the public
sector when an official incorrectly included obligations from fiscal
year 2001 in the total for 2002.
On balance, for the Department of the Navy as a whole we found the
total dollar amount of errors affected the private sector data more
than the public sector. Correcting for the errors we found
substantially increases the private sector percentage share in fiscal
year 2002 from 42.6 percent to 46.9 percent, a gain of over 4 percent.
(See table 3 in app. I.):
Department of the Air Force:
The Air Force reported that it exceeded the 50-percent funding
limitation for the private sector in 2001. As provided by law at the
time, the Secretary of the Air Force issued a waiver.[Footnote 11] The
Air Force reported itself back below the limitation for fiscal year
2002.
Most of the errors we found were the same or similar from past reviews.
For example, the Air Force continues to make a significant adjustment
in its reporting for contract administration and oversight costs. The
adjustment increases the reported public sector funding and decreases
the private sector. The total adjustment was $125 million (in absolute
terms) for fiscal year 2002. Consistent with the 50-50 guidance, which
states that costs should be associated with the end product (i.e., the
repaired item), we think these costs should instead be treated as
contracting expenses. Accordingly, we reversed this adjustment in our
analysis. The Air Force also continues to count some component repair
costs twice, once when the component is repaired and again when it is
installed in an equipment item or assembly during a periodic overhaul.
Officials said these are both reportable events, while we think this
overstates the amount of actual repair work done. Eliminating the
double count would affect about $666 million in 2002--a $485 million
decrease in the public sector amount and a $181 million decrease in the
private sector.
As in past years, we also identified many errors in the amounts
reported for programs supported by interim and contractor logistics
support contracts. We determined that several programs used incorrect
factors and assumptions to calculate the depot portion of total
contract costs. We found other programs that could not adequately
explain or justify their estimating methods--some had been developed
years ago by officials no longer in the program and simply applied by
new staff without checking their validity nor maintaining adequate
supporting documentation to explain and rationalize the results.
Relatively high turnover of staff responsible for collecting and
managing 50-50 data tends to increase the number and persistence of
errors and omissions. In total, the net effect of the errors we found
would increase the private sector allocation in 2002 by about 2.7
percent. (See table 4 in app. I.):
Future-Year Projections Are Not Reasonable and Not Very Useful:
Because of the changing nature of budget projections and supporting
data deficiencies, the future-years report does not provide reasonable
estimates of public and private sector depot maintenance funding
allocations for fiscal years 2003 through 2007. Furthermore, the
services tend to place less emphasis and priority on collecting and
validating future-years data. The reported projections are based, in
part, on incorrect data, questionable assumptions and estimating
factors, and some inconsistencies with existing budgets and management
plans. As with the prior years, the net effect of the problems we found
generally increases the percentage of funding for projected private
sector work. The uncertainty and instability of budget estimates
combined with the errors and omissions we found result in a future-
years report that is not very useful to congressional and DOD decision
makers.
We found many of the same problems identified in the prior-years data
were continued in the future-years projections. The Army continued to
underreport maintenance work at field locations and made other errors
similar to its prior-years presentation. While supporting documentation
for the Army's projected data was inadequate, errors and omissions of
the same magnitude as fiscal year 2002 would add more than $200 million
annually to the totals projected for the public and private sectors in
the Army's future-years report. Similarly, in its respective
projections, the Navy continued to not report depot maintenance
accomplished with, but not directly related to nuclear refueling; the
Marine Corps underreported work from the acquisition command; and the
Air Force contract estimates again involved some questionable
estimating factors and assumptions. Overall, we found this year as in
the past that the services tend to place less emphasis and priority on
collecting and validating the future-years data compared to efforts on
the prior-years data.
Besides errors in reporting, other internal and external factors can
create large fluctuations in reported data, which in turn can provide a
distorted and misleading view to outside observers about efforts to
remain compliant with the 50-50 requirement. For example, in the
current future-years report, the Air Force's projected public-sector
work financed through the working capital fund is about $3.0 billion
higher than the total amount reported for the same 4-year time period
in the future-years report submitted in 2002. Although this would
appear to indicate a large influx of new work to the public depots, in
reality the amount of work, according to budget estimates and
management reports, is expected to remain fairly level during this
reporting period in terms of production hours and size of workforce.
Most of the dollar (and percentage) increase in public-sector work is
the result of price hikes in the sales rate charged to its customers.
Price hikes were caused primarily by increases in the cost of spare and
repair parts that were used in the repair process.
The future-year estimates are not reasonable because they represent
budget and planning data that change over time, incorporate the same
errors found in prior-year data, and also have other problems. The
budget and planning data used to project the share of depot maintenance
work to be performed in the public and private sectors in the future
are estimates. At best, they provide only rough estimates of future
funding allocations; and these estimates change over time. As an
illustration, our comparison of the consistency of the 2003 reported
data with that in DOD's 50-50 reports submitted in 2002 showed that
congressional and DOD decision makers were given quite a different view
this year of the public-private sector workload mix than that presented
just last year. With so many errors and frequent changes, the future-
years data may be misleading and not very useful to congressional and
DOD decision makers, particularly the further estimates are in the
future. While we have identified these shortcomings in the past, the
problems continue and show no signs of getting better.
DOD officials agreed that the planning and budget data available for
making future projections beyond the budget year are not very useful as
predictors of the balance of future workloads between the public and
private sectors. They also noted that when the services are within a
few percentage points of the 50-50 ceiling, as they are now, the
accuracy of the conclusions drawn from the unreliable future
projections does not provide a very good basis for forecasting the
future.
Opportunities Exist to Improve DOD Reporting:
Despite prior improvements, opportunities continue to exist to make 50-
50 data a more complete and accurate representation of the balance of
funding for depot maintenance work assigned to the public and private
sectors. First, streamlining the 50-50 report would offer an
opportunity to focus improvement efforts on the data where improvements
are most likely to be realized. Second, continued participation of the
service audit agencies should improve the quality of the 50-50 data,
particularly if the audit support is timely to allow for corrections to
be made before the 50-50 report goes to the Congress. Finally, there
are opportunities to improve the data development process.
Streamlining the 50-50 Report:
As previously discussed, the future-years dataĉparticularly that
estimated for the years beyond the current year and budget yearĉdo not
provide a reasonable estimate of the future balance of funding for
depot maintenance between the public and private sectors. Further, the
data may be so bad as to be misleading. Streamlining the data collected
to provide data for a shorter period of time could allow responsible
officials to focus more closely on the data that are more accurate.
Additionally, if the report date to the Congress were extended, the
report could be based on more actual costs and require fewer
projections, improving the quality of the reported data.
Participation of Service Audit Agencies:
While we continue to believe that the service audit agencies could help
the military departments improve 50-50 reporting, their future
involvement is uncertain. As we have reported in the past, auditor
involvement typically identified and corrected substantial errors in
the data before the 50-50 reports went to the Congress. However, this
year the Air Force Audit Agency did not participate; while the Army did
participate, some of the errors they identified were not corrected in
the reports to the Congress; and the Navy audit was not done in time to
result in changes to the 50-50 data submitted to the Congress. A more
meaningful review would be one that was carried on when the data are
being aggregated, with input to the process in time to influence the
reported data. DOD officials told us that the audit services were not
expecting to work on future 50-50 efforts. Audit services are
reconsidering their roles because of recent changes to government
auditing standards regarding auditor independence when performing both
audit and nonaudit management assistance services to the same
client.[Footnote 12]
Air Force auditors have had a positive role in the 50-50 process in
past years. Serving in an advisory capacity, they identified errors and
cognizant program officials made corrections before the Air Force input
was finalized and forwarded to the Office of the Secretary of Defense.
This year, however, Air Force auditors decided not to participate.
Officials said they were concerned about conflict of interest because
auditors participating in the management services review could also be
involved in audit service reviews of depot maintenance programs,
processes, and funds. While Army auditors participated in the process
during this year's cycle and some of their work influenced changes in
this year's reported data, some errors were not corrected because of
time constraints imposed by the 50-50 reporting schedule. Army
officials said the Army Audit Agency would not likely be involved in
next year's 50-50 process primarily because of concerns about
independence. Navy auditors became involved in the process this year
after we recommended their participation in prior reports. However, the
Navy Audit Service work was not done in time to influence the Navy's
50-50 report. According to audit service officials, their decision to
do an audit of the data after it was submitted rather than providing
advisory services to cognizant officials developing the Navy's 50-50
report was influenced by the before-mentioned change in audit
standards. Navy program officials said that because a post-process
audit did not improve the 50-50 data, the audit service would not be
used next year.
We recognize that recent changes in government auditing standards have
been made to better address and specify independence issues arising
when an audit organization undertakes both audit and nonaudit services
for the same client. Nonetheless, the new auditing standards do not
preclude auditors from verifying the accuracy of data; providing other
technical assistance to the 50-50 process; and accomplishing other
audits of the depot maintenance process, programs, and activities.
Improved planning, management involvement, and documentation of roles
and responsibilities may be required; but a process can be developed to
ensure independence will not be compromised. This has already been done
so that the service audit agencies can perform similar functions--
evaluating validity and consistency of data as it is being developed
for subsequent decision making--in support of the base realignment and
closure process.
Improving the Data Development Process:
Incremental improvements in data development were noticeable in the
first several years of 50-50 reporting as guidance was clarified and
expanded. However, as we reported last year, the quality of the 50-50
data is not continuing to improve as it did in earlier years of the
reporting requirement.[Footnote 13] Overall quality and direction of
DOD's reporting seems to have reached a plateau where further major
improvements have been limited. As we have previously discussed, one of
the reasons this has occurred is that 50-50 guidance was not always
distributed to the people who needed it. Further, significant turnover
of personnel responsible for developing the data without providing
sufficient time and training to familiarize them regarding the 50-50
requirement and process adversely affected the quality of the 50-50
data. In short, the priority afforded this process by management at all
levels in the department is not sufficient to ensure that the data are
as accurate as possible.
Conclusions:
Continuing errors and omissions in the data for both the prior-and
future-years reports indicate that each of the service components is
closer to exceeding the limitation on percentage of work permitted to
be performed by the private sector than DOD's reporting would indicate.
At best, DOD's data over time should be treated as providing a rough
approximation of the allocation of depot maintenance workloads between
the public and private sectors with some indication of trends. As such,
the information on actual prior-years allocations can be useful to the
Congress in its oversight role and to DOD officials in deciding support
strategies for new systems and in evaluating depot policies and
practices. On the other hand, because it provides an increasingly less
reliable estimate of projected allocations the further it gets from the
current year, the future-years report is not a very useful tool for
informing the Congress or DOD officials about likely future compliance.
This occurs because of the changing nature of projections, a
combination of errors and omissions, less emphasis by the services on
the collection and validation of future-years data, and the use of
ever-changing budgetary estimates to construct projections. These
budgetary estimates--and built-in assumptions--become more inexact and
more problematic the further into the future the projections are made
due to their very speculative and volatile natures. Indeed, tracking
the 50-50 projected data from year to year reveals wide swings in the
total amounts reported and in the relative allocations to the public
and private sectors. As a result, congressional and DOD decision makers
were given quite a different view this year of the public-private
sector workload mix than that presented just last year. We believe that
these problems are likely to continue and we question the cost-
effectiveness of collecting and aggregating data for 3 years past the
current and budget years given the problems identified with the
estimates.
Furthermore, after the first several years of 50-50 reporting, the
overall quality of DOD reporting in terms of accuracy and completeness
has not improved significantly. Indeed, the overall quality and
direction seem to have reached a plateau where further major
improvements to reporting may be unachievable and where the
environmental factors that complicate reporting are not expected to
change much. These complicating factors--including a burdensome
collection process, tight timeframes for collecting data, high staff
turnover, uneven management attention, changing concepts about
maintenance organization and delivery--present continued challenges to
the services in their ability to make significant improvements to their
collection, documentation, and reporting processes. Notwithstanding
these constraints, opportunities still exist to improve the reporting,
including continued use of the audit services and renewed efforts to
ensure guidance is appropriately disseminated and staff trained in its
use.
Matter for Congressional Consideration:
Given that we continue to see the same problems and complicating
factors in our current and past assessments of 50-50 reports and
considering that the volatile nature of budget estimates is not likely
to change, the Congress should consider amending 10 U.S.C. 2466 to
require only one annual 50-50 report. The single report would cover a
3-year period (prior year, current year, and budget year) for which the
data are generally more reliable and the potential impacts more
immediate. The Congress should also consider extending the due date for
the single report from February 1 of each year to April 1; this would
provide more time for the military departments to collect and validate
data and allow for the incorporation of more actual cost data for the
current year estimate.
Recommendations for Executive Action:
To enhance data verification and validation, we recommend that the
Secretary of Defense require the secretaries of the military
departments to direct the use of service audit agencies, or an agreed-
upon alternate method, for third-party review and validation of 50-50
data and to ensure that auditor-identified errors in the data are
rectified before reports are submitted to the Congress.
To ensure consistent and complete reporting, we recommend that the
Secretary of Defense direct the secretaries of the military departments
to ensure that 50-50 reporting guidance is appropriately disseminated
to reporting organizations and individuals and that staff are properly
and timely trained in the application of the guidance.
Agency Comments and Our Evaluation:
In written comments on a draft of this report from the Deputy Under
Secretary of Defense for Logistics and Materiel Readiness, DOD
concurred with the report's recommendations. However, the department
did not agree with limited portions of our analyses regarding some
selected workloads and the resulting impacts on the percentage
allocation of funds between the public and private sectors. These
workloads involve the Navy's nuclear carrier refueling and surface ship
inactivation and the Air Force's adjustment for general and
administrative expenses and double counting of some reparable
workloads. DOD's written comments, and our evaluation of these items in
question, are reprinted in appendix III.
We are sending copies of this report to congressional committees; the
Secretary of Defense; the Secretaries of the Army, the Navy, and the
Air Force; and the Director, Office of Management and Budget. We will
make copies available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at http://
www.gao.gov.
If you or your staff has questions regarding this report, please
contact me at (202) 512-8412 or holman@gao.gov or Julia Denman,
Assistant Director, at (202) 512-4290 or denmanj@gao.gov. Other major
contributors to this report were David Epstein, Bruce Fairbairn, Jane
Hunt, Larry Junek, Robert Malpass, Andy Marek, Marjorie Pratt, John
Strong, and Bobby Worrell.
Barry W. Holman
Director, Defense Capabilities and Management:
Signed by Barry W. Holman:
[End of section]
Appendix I: GAO Adjustments for Errors, Omissions, and Inconsistencies
in Military Departments 50-50 Data for Fiscal Year 2002:
Our review of the data supporting the Department of Defense's (DOD)
prior-years report identified errors, omissions, and inconsistencies
that, if corrected, would revise the total workloads and increase the
private-sector allocations for each of the military departments. Brief
descriptions of the larger and more extensive problems found follow the
adjusted figures.
Department of the Army:
Our review of fiscal year 2002 data reported by the Army and of
supporting documentation for selected activities identified errors,
omissions, and inconsistencies that, if corrected, would result in
significant adjustments in the public and private sector percentages
reported to the Congress, as shown in table 2.
Table 2: GAO Changes to Army's FY 2002 50-50 Data:
Dollars in millions.
Public work reported; $1,372.6; 51.5%.
Net adjustments; 50.9.
Public work adjusted; $1,423.5; 49.2%.
Private work reported; $1,238.7; 46.5%.
Net adjustments; 177.0.
Private work adjusted; $1,415.7; 49.0%.
Private work exempted; $51.4; 1.9%.
Net adjustments; 0.
Exempted adjusted; $51.4; 1.8%.
Source: GAO analysis of DOD data.
[End of table]
Errors we found included the following examples:
* Unreported depot-level work associated with the Army's ongoing
efforts to consolidate maintenance activities and craft a national
maintenance program. Our prior 50-50 reports have documented continuing
problems and shortcomings in accurately and consistently reporting
depot maintenance accomplished by both public and private sector
sources at nondepot locations.
* Unreported one-time repair actions. These are depot repairs that are
accomplished at non-depot locations following an organization's request
and approval to do this work on a limited basis.
* Unreported work by commands that did not receive Army reporting
guidance and other misreported and understated work by some commands
that received but misapplied the guidance.
* Other adjustments included (1) errors identified by the Army Audit
Agency but not corrected in the data sent to the Office of the
Secretary of Defense (OSD) for inclusion in the prior-years 50-50
report to the Congress; and (2) depot support work identified in a
contractor's study of the proliferation of depot work at non-depot
locations.
Department of the Navy:
Our review of fiscal year 2002 data reported by the Navy and Marine
Corps and of supporting documentation for selected activities
identified errors, omissions, and inconsistencies that, if corrected,
would result in significant adjustments in the public and private
sector percentages reported to the Congress, as shown table 3.
Table 3: GAO Changes to Navy's and Marine Corps' FY 2002 50-50 Data:
Dollars in millions.
Public work reported; $5,258.1; 54.5%.
Net adjustments; (115.5).
Public work adjusted; $5,142.6; 50.8%.
Private work reported; $4,110.4; 42.6%.
Net adjustments; 640.9.
Private work adjusted; $4,751.3; 46.9%.
Private work exempted; $273.1; 2.8%.
Net adjustments; (40.7).
Exempted adjusted; $232.4; 2.3%.
Source: GAO analysis of DOD data.
Note: Numbers in parentheses are negative.
[End of table]
Errors we found included the following examples:
* Unreported depot work on nuclear aircraft carriers. As reported last
year, Navy officials cite the definition in 10 U.S.C. 2460, which
excludes from depot maintenance the nuclear refueling of aircraft
carriers, in justifying why they do not report any of the depot work
accomplished at the same time as refueling. We believe that depot work
that is reportable elsewhere and separate from the refueling tasks
should be reported.
* Inconsistent reporting of ship inactivations, which include depot
tasks for servicing and preserving equipment before they are placed in
storage or in an inactive status. Navy officials report for 50-50
purposes the nuclear ship inactivation work performed in the public
sector but do not report surface ship inactivation work performed by
the private sector.
* Underreporting of maintenance work by the command responsible for
acquiring and upgrading Marine Corps weapon systems. Failure to report
has several causes, including misunderstanding of what should be
reported, limited dissemination of the 50-50 guidance, and inadequate
management and oversight of the collection process to identify and
resolve reporting deficiencies.
* Incorrectly exempting some private-sector activities from reporting.
The Navy exempted more work than did the other departments; but we
found some in error, including partnering work accomplished at a
contractor facility and some work actually performed by government
employees. Partnership work qualifying for the exemption must be
accomplished at designated public depots by contractor employees.
* Other errors included (1) work subcontracted by the public shipyards
to the private sector reported as public sector work and (2)
misreporting by the Marine Corps of work obligated in fiscal year 2001
rather than 2002.
Department of the Air Force:
Our review of fiscal year 2002 data reported by the Air Force and of
supporting documentation for selected activities identified errors,
omissions, and inconsistencies that, if corrected, would result in
significant adjustments in the public and private sector percentages
reported to the Congress, as shown in table 4.
Table 4: GAO Changes to Air Force's FY 2002 50-50 Data:
Dollars in millions.
Public work reported; $4,467.0; 54.1%.
Net adjustments; (547.9).
Public work adjusted; $3,919.1; 51.4%.
Private work reported; $3,781.4; 45.8%.
Net adjustments; (82.5).
Private work adjusted; $3,698.9; 48.5%.
Private work exempted; $11.9; 0.1%.
Net adjustments; 0.
Exempted adjusted; $11.9; 0.2%.
Source: GAO analysis of DOD data.
Note: Numbers in parentheses are negative.
[End of table]
Errors we found included the following examples:
* As in past years, Air Force officials continue to adjust the 50-50
data for the salaries and overhead expenses of government employees
administering depot maintenance contracts funded through the working
capital fund. Officials subtract these amounts from the reported
private sector amount--where they are accounted for within the working
capital fund--and add them to the public sector funding for 50-50
reporting. Consistent with the 50-50 guidance that states that costs
should be associated with the end product, we think these costs should
be treated as contracting expenses.
* Our review of Air Force workloads determined that funding for some
component repairs was counted twice in 50-50 data, once when the item
was repaired and the second time when it was installed into a weapon
system or major subsystem during its overhaul. This resulted in
overstating both public sector work and, by a lesser amount, private
sector work.
* Errors occurred in reporting depot costs on interim contractor
support and contractor logistics support contracts. Our review of
selected programs identified numerous errors resulting in net
underreporting of depot maintenance work performed by contractors. Many
problems resulted from questionable factors and assumptions used in
developing estimating methodologies. Because interim contractor
support and contractor logistics support contracts often cover more
than just depot maintenance (including lower levels of maintenance,
supply operations, and logistics program management), the OSD guidance
allows for the use of estimating methods. This can cause complications
and introduce subjectivity into the data collection process. Newer
contract approaches under acquisition reform efforts pose particularly
challenging problems in identifying the depot portion.
Examples of errors and questionable practices we found included:
* not updating a methodology when contract provisions and circumstances
change, resulting in not reporting additional maintenance work from
increased operational contingencies and new orders of materials;
* assuming a straight percentage of total cost as depot work where data
exists to make a more exact accounting;
* not reporting maintenance on a newly acquired modification; and:
* not reporting software depot maintenance.
[End of section]
Appendix II: Scope and Methodology:
To determine whether the military departments met the 50-50 requirement
in the prior-years report, we analyzed each service's procedures and
internal management controls for collecting and reporting depot
maintenance information for purposes of responding to the section 2466
requirement. We reviewed supporting details (summary records,
accounting reports, budget submissions, and contract documents) at
departmental headquarters, major commands, and selected maintenance
activities. We compared processes to determine consistency and
compliance with legislative provisions, OSD guidance, and military
service instructions. We selected certain programs and maintenance
activities for a more detailed review.[Footnote 14] We particularly
examined reporting categories that DOD personnel and we had identified
as problem areas in current and past reviews. These areas included
interserviced workloads,[Footnote 15] contractor logistics support,
warranties, software maintenance, and depot maintenance at nondepot
locations. We evaluated processes for collecting and aggregating data
to ensure accurate and complete reporting and to identify errors,
omissions, and inconsistencies. We coordinated our work, shared
information, and obtained results of the Army and Air Force service
audit agencies' data validation efforts.
To determine whether the future-year projections were based on accurate
data, valid assumptions, and existing plans and represented reasonable
estimates, we followed the same general approach and methodology used
to review the prior-years report. Although the future-years report is a
budget-based projection of obligations, the definitions, guidance,
organization, and processes used to report future data are much the
same as for the prior-years report of actual obligations. We discussed
with DOD officials the main differences between the two processes and
the manner in which the data were derived from budgets and planning
requirements and key assumptions made in the outyear data.
For reviews of both 50-50 reports, we performed certain checks and
tests, including variance analyses, to judge the consistency of this
information with data from prior years and with the future-years
budgeting and programming data used in DOD's budget submissions and
reports to the Congress. For example, we compared each service's 50-50
data reported in February and April 2003 for the period 2001 through
2006 with data reported for these same years in the 50-50 reports
submitted in 2002. We found repeated and significant changes, even
though the estimates were prepared only about 1 year apart. We used
this analysis to further discuss with officials and analyze reasons for
changes in reported data and percentage allocations between the 2002
and 2003 reports submitted to the Congress. Variance analysis showed
that congressional and DOD decision makers were given quite a different
view of the public-private sector workload mix than that presented just
last year.
Several factors concerning data validity and completeness were
considered in our methodology and approach to reviewing the prior-and
future-years reports. One key factor is the continuing deficiencies we
have noted in DOD's financial systems and reports that preclude a clean
opinion on its financial statements and that result in limited accuracy
of budget and cost information. Another factor is that documenting
depot maintenance workload allocations between the public and private
sectors is becoming more complicated by the consolidation of
maintenance activities and the performance of depot-level maintenance
at field locations. These complicating factors (1) make it more
difficult to identify work that meets the statutory definition of depot
maintenance, (2) complicate workload reporting, and (3) result in
underreporting of depot maintenance for both the public and private
sectors. In addition, changes in business philosophy and approach can
make analysis more difficult. For example, many new contracts are
performance-based and may not discretely identify maintenance
activities or account separately for their costs. This can result in
under-and overreporting of depot maintenance work performed in the
private sector. It also forces more reliance on the contractor for
providing information needed in 50-50 reporting and may result in DOD
officials having to use more assumptions and estimating methodologies
in lieu of contract data.
As part of our efforts to identify areas for improvement, we reviewed
DOD's efforts to improve the accuracy and completeness of reports. We
discussed with officials managing and coordinating the reporting
process their efforts to address known problem areas and respond to
recommendations by the audit agencies and us. We compared this year's
sets of instructions with last year's to identify changes and
additions. We reviewed efforts to identify reporting sources and to
distribute guidance and taskings. We asked primary data collectors to
provide their opinions on how well efforts were managed and data
verified and to identify "pain points" and ideas they had to improve
reporting. We reviewed prior recommendations and service audit agency
findings to determine whether known problem areas were being addressed
and resolved. We applied this knowledge to identify additional areas
for improving the reporting process and management controls.
We interviewed officials, examined documents, and obtained data at OSD,
Army, Navy, Marine Corps, and Air Force headquarters in the Washington,
D.C., area; Army Materiel Command in Alexandria, Virginia; Naval Sea
Systems Command in Washington, D.C.; Naval Air Systems Command in
Patuxent River, Maryland; Marine Corps Materiel Command in Albany,
Georgia; Air Force Materiel Command in Dayton, Ohio; Army Audit Agency
in Washington, D.C.; Naval Audit Service in Crystal City, Virginia;
several public depots managed by the military departments' materiel
commands; and selected operating bases. We conducted our review from
February to July 2003 in accordance with generally accepted government
auditing standards.
[End of section]
Appendix III: Comments from the Department of Defense:
Note: GAO's comments supplementing those in the report text appear at
the end of this appendix.
DEPUTY UNDER SECRETARY OF DEFENSE FOR LOGISTICS AND MATERIEL READINESS
3500 DEFENSE PENTAGON WASHINGTON, DC 20301-3500:
August 26, 2003:
Mr. Barry W. Holman:
Director, Defense Capabilities and Management U.S. General Accounting
Office:
441 G Street, N.W. Washington, DC 20548:
Dear Mr. Holman:
This is the Department of Defense (DoD) response to the GAO draft
report, "DEPOT MAINTENANCE: 50-50 Reporting Should Be Streamlined,"
dated July 25, 2003 (GAO Code 350315/GAO-03-1023).
The Department concurs with recommendations 1 and 2. Detailed comments
on the GAO recommendations and report are enclosed.
Enclosure: As stated:
Sincerely,
Signed for Diane K. Morales:
GAO DRAFT REPORT - DATED JULY 25, 2003 GAO CODE 350315/GAO-03-1023:
"DEPOT MAINTENANCE: 50-50 Reporting Should Be Streamlined":
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
RECOMMENDATION 1: To enhance data verification and validation, the GAO
recommended that the Secretary of Defense require the Secretaries of
the Military Departments to direct the use of Service audit agencies,
or an agreed-upon alternate method, for third-party review and
validation of 50-50 data to ensure that auditor-identified errors in
the data are rectified before reports are submitted to the Congress.
(p. 21 /GAO Draft Report):
DOD RESPONSE: Concur. The Department agrees that past efforts utilizing
third-party review within the military departments to validate data
prior to submission of the report to Congress have decreased errors and
that the recommendation should be implemented.
RECOMMENDATION 2: To ensure consistent and complete reporting, the GAO
recommended that the Secretary of Defense direct the Secretaries of the
Military Departments to ensure that 50-50 reporting guidance is
appropriately disseminated to reporting organizations and individuals
and that staff are properly and timely trained in the application of
the guidance. (p. 22/GAO Draft Report):
DOD RESPONSE: Concur. The Department will reinforce this existing
policy during future reporting cycles.
COMMENTS ON THE REPORT:
1. Page 21. "... the Congress should consider amending 10 U.S.C. 2466
to require only one annual 50-50 report. The single report would cover
a 3-year period (prior year, current year and budget year) for which
the data are generally more reliable and the potential impacts more
immediate. The Congress should also consider extending the due date for
the single report from February 1 of each year to April 1; this would
provide more time for the military departments to collect and validate
data and allow for the incorporation of more actual cost data for the
current year estimate.":
Comment: The Department agrees with this GAO "Matter for Congressional
Consideration" which is fully consistent with the Department's
initiative on congressional reports reduction and simplification.
2. Page 25, Table 3. The Department does not agree with the two GAO
adjustments for nuclear aircraft carriers and surface ship
inactivations. The $401 million in adjustments for nuclear aircraft
carriers and surface ship inactivations should be removed from Table 3,
resulting in a net adjustment of $239.9 million in private work
reported for the Navy.
a. The Navy has always interpreted 10 U.S.C. 2460 to broadly exclude
from the 10 U.S.C. 2466 reporting limitation all work associated with
the Refueling Complex Overhaul (RCOH) of a nuclear aircraft carrier.
Although 10 U.S.C. 2460 contains the term "nuclear refueling of an
aircraft carrier" to describe the 50-50 exclusion, the Navy considers
this to be an abbreviated substitute for the standard terminology
"Refueling Complex Overhaul (RCOH)" of a nuclear aircraft carrier. GAO
states non-nuclear depot repairs are "severable" tasks identifiable in
contracts and financial systems (page 11). The Department does not
agree with GAO, because these tasks are not "severable" from an RCOH
contract. The Navy would never arbitrarily split the scope of work for
an RCOH into nuclear and non-nuclear portions, with the nuclear work
being accomplished in the private sector, and the non-nuclear work
being accomplished in the public sector. This approach would be
extremely inefficient, costly, and problematic to manage. Instead, the
Navy awards a single contract for RCOH work to the private sector, the
only certified depot source of repair.
b. The Department considers the relatively complex process of nuclear
ship inactivation workload to be equivalent to depot level maintenance
and repair. It does not consider conventional ship inactivation
workload performed in the private sector to be equivalent to depot
level maintenance and repair. Also, work is accomplished either by the
ship's force or by the NAVSEA Inactive Ship Maintenance Offices at
Pearl Harbor, HI, Bremerton, WA, and Philadelphia, PA. Neither the
private sector nor the public sector conventional inactivation work is
reported.
3. Page 27. "As in past years, Air Force officials continue to adjust
the 50-50 data for the salaries and overhead expenses of government
employees administering depot maintenance contracts funded through the
working capital fund. Officials subtract these amounts from the
reported private sector amount - where they are accounted for within
the working capital fund - and add them to the public sector funding
for 50-50 reporting. Consistent with the 50-50 guidance that states
these costs should be associated with the end product, we think these
costs should be treated as contracting expenses.":
Comment: The Air Force consistently reports costs for government
personnel managing depot maintenance contracts as part of the public
sector. Counting these costs as contract would misrepresent the
percentages of funds expended for work by DoD versus non-government
employees. However, the Air Force expanded guidance on the General and
Administrative (G&A) adjustment in Air Force procedures. The adjustment
represents the Federal employee resources required for managing the
contract depot maintenance administrative requirements.
4. Page 27. "Our review of Air Force workloads determined that funding
for some component repairs was counted twice in 50-50 data, once when
the item was repaired and the second time when it was installed into a
weapon system or major subsystem during its overhaul. This resulted in
overstating both public sector work and, by a lesser amount, private
sector work.":
Comment: The Department does not agree that the treatment of component
repair costs, when repaired items are used in higher level assemblies,
is inconsistent with statutory requirements. The repair of
exchangeables and the use of exchangeables during system and subsystem
overhaul and repair are two distinct and separate transactions. Both
transactions are depot-level maintenance events that must be reported
in accordance with the requirements of 10 U.S.C. 2466(e), based on
application of the definition contained in 10 U.S.C. 2460.
The following are GAO's comments on the Department of Defense's letter
dated August 26, 2003.
GAO Comments:
The department did not agree with our adjustment for nuclear aircraft
carriers. The Navy interprets the 10 U.S.C. 2460 exclusion of nuclear
refueling of aircraft carriers from the definition of depot maintenance
to mean that no work associated with the refueling complex overhaul of
nuclear carriers is reportable for 50-50 purposes. Navy officials also
said that non-nuclear depot repairs on carriers are not severable tasks
to be split out from contracts. We continue to believe that the costs
of depot repairs and tasks not directly associated with nuclear
refueling tasks during carrier overhauls should be reported. Many
maintenance tasks performed at the same time as the nuclear refueling
are not related to the refueling; and when these and similar tasks are
performed during other maintenance activities, the Navy does report
them as depot maintenance. We found that the funding for these tasks is
clearly identifiable in the contract financial records and could be
counted just like other 50-50 work. In our view, without some nexus
between that work and refueling work, it would be inconsistent with the
plain language of section 2460 to exempt that work simply because it
was performed during a refueling complex overhaul of nuclear carriers.
We deleted the reference to severable tasks in the body of the report,
as our intent was not to suggest that the Navy break out non-nuclear
work from nuclear work onto separate contracts or work orders, but
rather that the funding for non-nuclear refueling work accomplished on
existing contracts be identified and reported.
The department did not agree with our adjustment for surface ship
inactivations. DOD considers nuclear ship inactivation work to be a
relatively complex process that is equivalent to depot level
maintenance, but that conventional ship inactivation work performed by
the private sector is not as complex and is not equivalent to depot-
level maintenance. In addition, the department's written response
indicated that surface ship inactivation work accomplished by the
public sector is also not reported in the 50-50 data. We believe that
inactivation work should be reported because the relevant title 10
statutes and OSD's 50-50 guidance do not make this distinction of
relative complexity and requires reporting of all depot maintenance,
regardless of location and source of funding. Further, DOD's Financial
Management Regulation 7000.14-R, vol. 6A, ch. 14 (which prescribes
depot maintenance reporting requirements) includes inactivation as a
depot maintenance activity. Although we did not review inactivation
work accomplished by public sector workers, it should also be reported
if it meets the definition of depot maintenance.
The Air Force did not agree with our reversal of the 50-50 reporting
adjustment it makes for the salaries and overhead expenses of
government employees administering depot maintenance contracts. The Air
Force believes that the costs for government personnel managing depot
maintenance contracts represent public sector costs; therefore, to
report them as contract would misrepresent the public-private sector
percentage allocations. However, OSD's 50-50 guidance requires that all
the costs associated with accomplishing a specific depot workload--
labor, material, parts, indirect, and overhead--should be counted for
50-50 purposes in the sector accomplishing the actual maintenance. The
guidance cites examples, such as counting the contract maintenance on
depot plant equipment as public sector costs because the plant
equipment is part of the costs incurred to perform maintenance at the
depot. Similarly, we think that contract administrative costs should be
counted as part of the costs incurred to accomplish the work in the
private sector. We note that the Air Force will stop making this
adjustment after this year when financing for the depot contracts is
moved from the working capital fund to direct appropriations. It
remains to be seen, however, how the Air Force will account for
contract administrative expenses in the future.
The department did not agree that counting the repair costs twice for
some components installed in higher level assemblies is inconsistent
with the statutory requirements of 10 U.S.C. 2466(e) and 10 U.S.C.
2460. The Air Force believes that the original repair cost for a
component and its subsequent cost as material used in system or
subsystem overhaul are two distinct and separate transactions and that
both costs should be reported for 50-50 purposes. We continue to
believe that counting some component repair costs twice when the
components are incorporated in a higher-level assembly distorts the 50-
50 reports and the actual amount of work accomplished by both the
public and private sectors. In our view, there is no reason to conclude
that the intent of title 10 requires double counting component repairs
and that a more reasonable reading is that DOD can implement those
provisions so as to allow for adjustments in reporting to more
accurately reflect the cost of depot work. DOD adopted a similar
approach in response to a recommendation in our 2001 report.[Footnote
16] In that report, we found that unrealistic and outdated budget data
were being reported when there were other, more accurate information
sources. Accordingly, OSD revised its 50-50 guidance to allow for
revising budgetary estimates to better reflect known and anticipated
changes in workloads, workforce, priorities, and performance execution
rates. This resulted in the Air Force reporting additional hundreds of
millions of dollars in projected depot work based on current workload
estimates. A similar approach could be used to eliminate the effects of
double counting reparables later used in higher-level assemblies.
[End of section]
Related GAO Products:
Depot Maintenance: Key Unresolved Issues Affect the Army Depot System's
Viability. GAO-03-682. Washington, D.C.: July 7, 2003.
Department of Defense: Status of Financial Management Weaknesses and
Progress Toward Reform. GAO-03-931T. Washington, D.C.: June 25, 2003.
Depot Maintenance: Change in Reporting Practices and Requirements Could
Enhance Congressional Oversight. GAO-03-16. Washington D.C.: October
18, 2002.
Depot Maintenance: Management Attention Needed to Further Improve
Workload Allocation Data. GAO-02-95. Washington, D.C.: November 9,
2001.
Defense Logistics: Actions Needed to Overcome Capability Gaps in the
Public Depot System. GAO-02-105. Washington, D.C.: October 12, 2001.
Defense Maintenance: Sustaining Readiness Support Capabilities
Requires a Comprehensive Plan. GAO-01-533T. Washington, D.C.: March 23,
2001.
Depot Maintenance: Key Financial Issues for Consolidations at Pearl
Harbor and Elsewhere Are Still Unresolved. GAO-01-19. Washington, D.C.:
January 22, 2001.
Depot Maintenance: Action Needed to Avoid Exceeding Ceiling on Contract
Workloads. GAO/NSIAD-00-193. Washington, D.C.: August 24, 2000.
Depot Maintenance: Air Force Waiver to 10 U.S.C. 2466. GAO/
NSIAD-00-152R. Washington, D.C.: May 22, 2000.
Depot Maintenance: Air Force Faces Challenges in Managing to 50-50
Ceiling. GAO/T-NSIAD-00-112. Washington, D.C.: March 3, 2000.
Depot Maintenance: Future Year Estimates of Public and Private
Workloads Are Likely to Change. GAO/NSIAD-00-69. Washington, D.C.:
March 1, 2000.
Depot Maintenance: Army Report Provides Incomplete Assessment of Depot-
type Capabilities. GAO/NSIAD-00-20. Washington, D.C.: October 15,
1999.
Depot Maintenance: Status of the Navy's Pearl Harbor Project. GAO/
NSIAD-99-199. Washington, D.C.: September 10, 1999.
Depot Maintenance: Workload Allocation Reporting Improved, but
Lingering Problems Remain. GAO/NSIAD-99-154. Washington, D.C.:
July 13, 1999.
Navy Ship Maintenance: Allocation of Ship Maintenance Work in the
Norfolk, Virginia, Area. GAO/NSIAD-99-54. Washington, D.C.: February
24, 1999.
Defense Depot Maintenance: Public and Private Sector Workload
Distribution Reporting Can Be Further Improved. GAO/NSIAD-98-175.
Washington, D.C.: July 23, 1998.
Defense Depot Maintenance: DOD Shifting More Workload for New Weapon
Systems to the Private Sector. GAO/NSIAD-98-8. Washington, D.C.: March
31, 1998.
Defense Depot Maintenance: Information on Public and Private Sector
Workload Allocations. GAO/NSIAD-98-41. Washington, D.C.: January 20,
1998.
Defense Depot Maintenance: Uncertainties and Challenges DOD Faces in
Restructuring Its Depot Maintenance Program. GAO/T-NSIAD-97-112.
Washington, D.C.: May 1, 1997. Also GAO/T-NSIAD-97-111. Washington,
D.C.: March 18, 1997.
Defense Depot Maintenance: DOD's Policy Report Leaves Future Role of
Depot System Uncertain. GAO/NSIAD-96-165. Washington, D.C.: May 21,
1996.
Defense Depot Maintenance: More Comprehensive and Consistent Workload
Data Needed for Decisionmakers. GAO/NSIAD-96-166. Washington, D.C.: May
21, 1996.
Defense Depot Maintenance: Privatization and the Debate Over the
Public-Private Mix. GAO/T-NSIAD-96-148. Washington, D.C.: April 17,
1996. Also GAO/T-NSIAD-96-146. Washington, D.C.: April 16, 1996.
Depot Maintenance: Issues in Allocating Workload Between the Public and
Private Sectors. GAO/T-NSIAD-94-161. Washington, D.C.: April 12, 1994.
FOOTNOTES
[1] The Secretary of the Air Force issued a national security waiver
for fiscal year 2001 as provided by 10 U.S.C. 2466(b) at that time.
This provision was subsequently amended (sec. 341, P.L. 107-107, Dec.
28, 2001) to designate the Secretary of Defense as the waiver authority
instead of the secretaries of the military departments.
[2] Interim contractor support is designed to be an interim support
arrangement in which a contractor provides depot maintenance (and
sometimes other logistics support) as part of the acquisition strategy
for new systems.
[3] Contractor logistics support is designed to be a lifetime support
concept in which a contractor provides most or all elements of
logistics support, including depot maintenance.
[4] Core competencies are depot-level maintenance capabilities to be
retained in public depots to meet defense strategic and contingency
plans and for which the military departments believe that DOD should be
a recognized leader in the national technology and industrial base.
[5] DOD guidance defines a public-private partnership for depot
maintenance as an agreement between a public-sector depot maintenance
activity and one or more private industry or other entities to perform
work or utilize facilities and equipment. Such an arrangement includes
use of public facilities, equipment, and employees to perform work for
the private sector under certain defined circumstances; private-sector
use of public-sector equipment and facilities to perform work for the
public sector; and work-sharing agreements using both public-and
private-sector facilities and/or employees.
[6] Because of the difficulty of segregating installation costs for
safety modifications from costs for installing other modifications
(e.g., for improved performance), OSD's guidance specifies that all
modification installation costs be reported when an installation is
considered to be a depot-level service.
[7] For the two most recent reports, see U.S. General Accounting
Office, Depot Maintenance: Change in Reporting Practices and
Requirements Could Enhance Congressional Oversight, GAO-03-16
(Washington, D.C.: Oct. 18, 2002) and Depot Maintenance: Management
Attention Required to Further Improve Workload Allocation Data,
GAO-02-95 (Washington, D.C.: Nov. 9, 2001). Other related GAO products
are listed at the end of this report.
[8] See U.S. General Accounting Office, Department of Defense: Status
of Financial Management Weaknesses and Progress Toward Reform,
GAO-03-931T (Washington, D.C.: June 25, 2003).
[9] Although 10 U.S.C. 2466 specifies reporting of funds expended in
the prior years and projected to be expended in the future years, DOD's
past and current 50-50 reports are based on obligation data. A DOD
official explained that obligation data are considered to be more
appropriate because of the statutory requirement to report funds made
available in a given fiscal year and because expenditure data may not
be completely recognized in the accounting records for a year or more
following the funds' obligation.
[10] GAO-03-16.
[11] The Air Force also reported itself as exceeding the 50-percent
limit in fiscal year 2000, and a notice of the waiver was duly issued
to the Congress.
[12] See revised standards in U.S. General Accounting Office,
Government Auditing Standards: 2003 Revision, GAO-03-673G (Washington,
D.C.: June 1, 2003).
[13] GAO-03-16.
[14] We selected the programs reviewed based on size and importance,
leads obtained from internal auditors, and any previously identified
areas of concern. Given the nature of our sample, the results are not
projectible to the universe of depot maintenance activities. We also
did not audit the integrity of DOD's financial systems and accounting
data used to prepare the 50-50 reports.
[15] Interserviced workload is maintenance that one military service
performs on equipment owned and funded by another service.
[16] GAO-02-95.
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