Defense Management
Continuing Questionable Reliance on Commercial Contracts to Demilitarize Excess Ammunition When Unused, Environmentally Friendly Capacity Exists at Government Facilities Gao ID: GAO-04-427R April 2, 2004In April 2001, we reported that the Army Materiel Command's guidance required that 50 percent of the excess conventional ammunition demilitarization budget--a figure for which we did not find any analytical basis--be set aside for commercial firms that use environmentally friendly demilitarization processes. This resulted in the retention and underutilization of environmentally friendly demilitarization capabilities at government facilities and in additional program costs. We thus recommended that the Department of Defense (DOD) develop a plan in consultation with Congress that included procedures for assessing the appropriate mix of government and commercial sector capacity needed to demilitarize excess ammunition. Our intent was to have DOD reexamine the cost-effectiveness of using commercial versus government facilities to demilitarize excess ammunition. Over the past several months we have conducted work to determine the specific actions taken to implement our recommendation. We made extensive use of our prior work as a baseline to compare the changes in demilitarization capacity and utilization at government-owned facilities since our prior report. We conducted our analysis of DOD's demilitarization program in accordance with generally accepted government auditing standards. The purpose of this letter is to note that (1) the Army has taken only limited steps in response to our recommendation and (2) additional actions are needed to address our recommendation.
The Army continues to set aside 50 percent of the demilitarization budget to commercial firms, resulting in program inefficiencies and additional costs. In commenting on our recommendation in the April 2001 report, DOD stated that the Army was preparing a study for Congress, due September 30, 2001, that could be used to address the mix of government and commercial sector capacity needed to demilitarize excess ammunition. The Army study concluded that, based upon its analysis of different commercial/government facility mixes, more ammunition could be demilitarized through greater reliance on existing environmentally friendly processes available at government-owned facilities. Nonetheless, the excess ammunition demilitarization program is still operated on Army Materiel Command guidance that requires a 50/50 split of funding between government and commercial demilitarization projects. This predetermined funding allocation, combined with increased government facility capacity to demilitarize excess ammunition and paying a commercial firm to have ammunition demilitarized by government employees, exacerbates the costs and related inefficiencies to operate the program.
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-04-427R, Defense Management: Continuing Questionable Reliance on Commercial Contracts to Demilitarize Excess Ammunition When Unused, Environmentally Friendly Capacity Exists at Government Facilities
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April 2, 2004:
The Honorable Donald H. Rumsfeld:
The Secretary of Defense:
Subject: Defense Management: Continuing Questionable Reliance on
Commercial Contracts to Demilitarize Excess Ammunition When Unused,
Environmentally Friendly Capacity Exists at Government Facilities:
Dear Mr. Secretary:
In April 2001, we reported that the Army Materiel Command's guidance
required that 50 percent of the excess conventional ammunition
demilitarization budget--a figure for which we did not find any
analytical basis--be set aside for commercial firms that use
environmentally friendly demilitarization processes. This resulted in
the retention and underutilization of environmentally friendly
demilitarization capabilities at government facilities and in
additional program costs.[Footnote 1] We thus recommended that the
Department of Defense (DOD) develop a plan in consultation with
Congress that included procedures for assessing the appropriate mix of
government and commercial sector capacity needed to demilitarize excess
ammunition. Our intent was to have DOD reexamine the cost-effectiveness
of using commercial versus government facilities to demilitarize excess
ammunition. Over the past several months we have conducted work to
determine the specific actions taken to implement our recommendation.
We made extensive use of our prior work as a baseline to compare the
changes in demilitarization capacity and utilization at government-
owned facilities since our prior report. We conducted our analysis of
DOD's demilitarization program in accordance with generally accepted
government auditing standards. The purpose of this letter is to bring
to your attention that (1) the Army has taken only limited steps in
response to our recommendation and (2) additional actions are needed to
address our recommendation.
Results in Brief:
The Army continues to set aside 50 percent of the demilitarization
budget to commercial firms, resulting in program inefficiencies and
additional costs. In commenting on our recommendation in the April 2001
report, DOD stated that the Army was preparing a study for Congress,
due September 30, 2001, that could be used to address the mix of
government and commercial sector capacity needed to demilitarize excess
ammunition.[Footnote 2] The Army study concluded that, based upon its
analysis of different commercial/government facility mixes, more
ammunition could be demilitarized through greater reliance on existing
environmentally friendly processes available at government-owned
facilities. Nonetheless, the excess ammunition demilitarization
program is still operated on Army Materiel Command guidance that
requires a 50/50 split of funding between government and commercial
demilitarization projects. This predetermined funding allocation,
combined with increased government facility capacity to demilitarize
excess ammunition and paying a commercial firm to have ammunition
demilitarized by government employees, exacerbates the costs and
related inefficiencies to operate the program.
Based on our follow-up efforts and analysis, this letter includes
recommendations for executive action to enable the Army to operate a
more efficient program and be better able to assess the
demilitarization capacity needed at its government facilities. In
commenting on a draft of the letter, DOD concurred with our
recommendations and identified steps that it is taking to implement
them.
Background:
The Secretary of the Army is the designated single manager of
conventional ammunition for the Department of Defense. Under that
umbrella, the Product Manager for Demilitarization is responsible for
managing the demilitarization of conventional munitions for all of the
military services.[Footnote 3] Demilitarization of conventional
munitions takes place at government ammunition depots, plants, and
centers--operated by the Joint Munitions Command, a subordinate command
of the Army Materiel Command--and at contracted commercial
firms.[Footnote 4] With the end of the Cold War, the services' need for
conventional ammunition was significantly reduced, and by 1993 the Army
reported a backlog of excess ammunition awaiting demilitarization that
amounted to 354,000 tons, an amount that has since increased to about
381,000 tons at the end of fiscal year 2003. To address this backlog,
the Product Manager for Demilitarization's strategic plan includes a
goal to reduce, through reasonable measures, the stockpile of excess
conventional ammunition to 100,000 tons and 30,000 missiles in future
years--considered a manageable level because higher quantities of
excess ammunition are believed to impede access to needed ammunition
and hinder the Army's ability to effectively support contingency
operations.
In April 2001, we reported that the Army Materiel Command had
previously issued guidance requiring that at least 50 percent of the
excess conventional ammunition demilitarization budget be set aside for
commercial firms that use resource, recovery, and recycling
processes.[Footnote 5] While this guidance came about as a result of a
request by the Chairman of the Senate Appropriations Subcommittee on
Defense for DOD to look to commercial firms for environmentally
friendly processes that could be used to help demilitarize excess
ammunition, the Army Materiel Command initiated and expanded this
effort without considering the impact on government facilities that
have similar environmentally friendly demilitarization processes. Our
report showed that the increased use of commercial firms to perform
demilitarization resulted in the retention and underutilization of the
more environmentally friendly resource, recovery, and recycling
capabilities at government facilities. In fiscal year 2001, the
government facilities were projected to operate at only 20 percent of
their overall resource, recovery, and recycling demilitarization
capacity. We also reported that additional costs were being incurred
when a commercial firm undertook ammunition demilitarization for the
Army, then contracted a portion of the work to three government
facilities. The Army could have demilitarized the ammunition for less
had it overseen the work itself.
Our report stressed the need for a greater emphasis on cost-
effectiveness and efficiency in deciding the appropriate mix of
government and commercial demilitarization capacities instead of
setting aside a predetermined 50 percent of the demilitarization budget
for commercial firms--a percentage for which we did not find any
analytical basis. In response to our concern, DOD stated that the Army
was already preparing a study for Congress that addressed the
feasibility of replacing open burning and open detonation with closed
disposal technologies, and that this report, due September 30, 2001,
could also be used to address the mix of government/commercial sector
capacity needed to demilitarize excess ammunition.[Footnote 6]
The Army's Closed Disposal Technology Study used a computer-modeling
input-output tool that integrates operating costs, capacity, and other
variables in the demilitarization program to produce an optimal long-
range demilitarization plan to help determine the government/contractor
mix for its demilitarization program.[Footnote 7] The study considered
three options. Option 1 represented the current practice of allocating
a predetermined 50 percent of the demilitarization funding to
commercial firms; option 2 eliminated commercial firms from
consideration; and option 3 had no predetermined funding allocation
between commercial firms and government facilities. All three options
required a minimum 65 percent utilization of environmentally friendly
resource, recovery, and recycling processes.
According to the Army study, option 1 resulted in the greatest overall
cost per ton over the 10-year period. Option 2 resulted in the lowest
overall cost per ton; however, this was not considered a viable option
because government facilities do not have resource, recovery, and
recycling processes to demilitarize some types of ammunition. Under
option 3, which was not constrained by a predetermined funding
percentage assigned to commercial firms and government facilities, the
study analysis identified a more cost-effective option than currently
being pursued. The Army's model projected that the Army could more
effectively use about $70.8 million in planned funding and demilitarize
an additional 4,001 tons of ammunition during fiscal years 2002 through
2011 compared to the current practice of allocating 50 percent of the
demilitarization funding to commercial firms (see table 1). Under this
option, over a 10-year period 29 percent of the demilitarization budget
would go to commercial firms and 71 percent would go to government
facilities, including use of the government's own environmentally
friendly processes.
Table 1: Army Study Results Comparing Costs and Tons of Excess
Ammunition Demilitarized by Devoting 50 Percent and 29 Percent of the
Demilitarization Budget to Commercial Firms, Aggregate for Fiscal Years
2002-11:
[See PDF for image]
Source: GAO analysis of Closed Disposal Technology Study.
[End of table]
The Army study concluded that, based upon its analysis, the
demilitarization program should not assign a predetermined funding
percentage to commercial firms and government facilities.
Army Practice Remains Unchanged,
Resulting in Inefficiencies and Additional Costs:
Despite the results of the Closed Disposal Technology Study, the Army
continues to set aside 50 percent of the demilitarization budget to
commercial firms, resulting in program inefficiencies and additional
costs. According to the Product Manager for Demilitarization, the
demilitarization program is still operated on guidance received from
the Army Materiel Command that requires a 50/50 split of funding
between government and commercial demilitarization projects. Moreover,
since 2001, government facilities have increased their capacity to
demilitarize excess ammunition using resource, recovery, and recycling
processes from about 81,100 tons per year to about 156,600 tons per
year, which has further exacerbated the inefficiencies associated with
the existence of excess capacities in government facilities. This
excess is further compounded by the realization that the maximum amount
of excess ammunition that the Army can demilitarize using the resource,
recovery, and recycling methods is limited to 170,946 tons out of the
381,000 tons in the stockpile.
The increased government capacity and continued use of commercial firms
to demilitarize excess ammunition at the same time the government
facilities have existing excess capacity continues to raise questions
about the appropriate mix of government and commercial sector capacity
needed to demilitarize excess ammunition and the cost efficiency of the
demilitarization program. Specifically, based on the current practice
of setting aside 50 percent of the demilitarization budget for
commercial demilitarization, we estimate that government facilities
will operate at only 6 percent of their overall environmentally
friendly demilitarization capacity to recover and reuse 156,600 tons of
excess ammunition in fiscal year 2004 (see table 2).
Table 2: Government Facility Recovery and Reuse Demilitarization
Capacity and Planned Use in Fiscal Year 2004:
Location: Anniston;
Recovery and reuse capacity (tons): 1,000;
Recovery and reuse demilitarization planned (tons): 0;
Percent of capacity to be used: 0.
Location: Blue Grass;
Recovery and reuse capacity (tons): 14,000;
Recovery and reuse demilitarization planned (tons): 0;
Percent of capacity to be used: 0.
Location: Crane;
Recovery and reuse capacity (tons): 13,300;
Recovery and reuse demilitarization planned (tons): 1,584;
Percent of capacity to be used: 12.
Location: Hawthorne;
Recovery and reuse capacity (tons): 49,000;
Recovery and reuse demilitarization planned (tons): 4,599;
Percent of capacity to be used: 9.
Location: Iowa;
Recovery and reuse capacity (tons): 14,000;
Recovery and reuse demilitarization planned (tons): 1,517;
Percent of capacity to be used: 11.
Location: Letterkenny;
Recovery and reuse capacity (tons): 1,000;
Recovery and reuse demilitarization planned (tons): 0;
Percent of capacity to be used: 0.
Location: Lone Star;
Recovery and reuse capacity (tons): 2,000;
Recovery and reuse demilitarization planned (tons): 0;
Percent of capacity to be used: 0.
Location: Milan;
Recovery and reuse capacity (tons): 1,800;
Recovery and reuse demilitarization planned (tons): 0;
Percent of capacity to be used: 0.
Location: McAlester;
Recovery and reuse capacity (tons): 25,000;
Recovery and reuse demilitarization planned (tons): 2,010;
Percent of capacity to be used: 8.
Location: Pine Bluff;
Recovery and reuse capacity (tons): 3,500;
Recovery and reuse demilitarization planned (tons): 0;
Percent of capacity to be used: 0.
Location: Red River;
Recovery and reuse capacity (tons): 1,000;
Recovery and reuse demilitarization planned (tons): 0;
Percent of capacity to be used: 0.
Location: Sierra;
Recovery and reuse capacity (tons): 24,000;
Recovery and reuse demilitarization planned (tons): 0;
Percent of capacity to be used: 0.
Location: Tooele;
Recovery and reuse capacity (tons): 7,000;
Recovery and reuse demilitarization planned (tons): 0;
Percent of capacity to be used: 0.
Total;
Recovery and reuse capacity (tons): 156,600;
Recovery and reuse demilitarization planned (tons): 9,710;
Percent of capacity to be used: 6.
Source: GAO analysis of data provided by the Defense Ammunition Center
and the Product Manager for Demilitarization.
[End of table]
In addition, the Army continues to incur additional and unnecessary
costs to the demilitarization program through its practice of
contracting with a commercial firm to undertake ammunition
demilitarization, which in turn contracted a portion of the work to
three government facilities.[Footnote 8] In essence, the Army paid a
commercial firm to have the ammunition demilitarized by government
employees and incurred higher than necessary costs. More specifically,
in one instance the commercial firm undertook ammunition
demilitarization of 1,848 items for the Army for about $563 per item,
and then contracted some of the work to a government facility for about
$141 per item. If the Army had placed greater emphasis on cost-
effectiveness and cost-efficiency, the Army could have demilitarized
the ammunition for about $780,000 less had it overseen the work itself.
Conclusion:
As we have previously noted, while it may be appropriate to rely on the
private sector to enhance demilitarization capabilities, the continued
use of the private sector to demilitarize excess ammunition at the same
time the government facilities have excess capacity raises the question
of whether the government is sponsoring too much capacity. Likewise,
such limitations in use of government facilities continues to result in
less demilitarization than would otherwise be possible even under
existing funding levels. We do not believe that the Army has taken
sufficient action to address the recommendation we made in our April
2001 report, which called for the department to develop a plan in
consultation with Congress that includes procedures for assessing the
appropriate mix of government and commercial sector capacity needed to
demilitarize excess ammunition and the cost-effectiveness of using
contractors versus government facilities to demilitarize excess
ammunition, with specific actions identified for addressing the
capacity issue. We also do not believe that the Army has taken
sufficient action to address the results of its Closed Disposal
Technology Study, which concluded that the demilitarization program
should not assign a predetermined funding percentage to commercial
firms and government facilities, thus validating our findings and
recommendation. Further, by paying a commercial firm to have excess
ammunition demilitarized by government employees, the Army incurs
higher than necessary costs. Until the Army discontinues its practice
of setting aside 50 percent of the demilitarization budget to
commercial firms and implements a more analytically based approach to
workload allocations--such as set forth in the Closed Disposal
Technology Study--that eliminates any predetermined funding allocation
and discontinues the practice of paying a commercial firm to oversee
the work of government employees, the Army will continue to
underutilize demilitarization capacity at government facilities and
risk incurring additional program costs.
Recommendations for Executive Action:
To enable the Army to operate a more efficient program and be better
able to assess the demilitarization capacity needed at its government
facilities, we recommend that you direct the Secretary of the Army to
take the following three steps:
* discontinue the practice of setting aside an arbitrary 50 percent of
the demilitarization budget to commercial firms;
implement a more analytically based approach to demilitarization
workload allocations such as demonstrated in the Closed Disposal
Technology Study analysis in which no arbitrary, predetermined funding
allocation is made to commercial firms and government facilities; and:
discontinue the practice of paying a commercial firm to have ammunition
demilitarized by government employees when the work can be overseen by
the Army for less cost.
:
As you know, 31 U.S.C. 720 requires the head of a federal agency to
submit a written statement of the actions taken on our recommendations
to the Senate Committee on Governmental Affairs and the House Committee
on Government Reform not later than 60 calendar days after the date of
this letter. A written statement must also be sent to the House and
Senate Committees on Appropriations with the agency's first request for
appropriations made more than 60 calendar days after the date of this
letter.
Agency Comments and Our Evaluation:
The Director of Defense Systems in the Office of the Under Secretary of
Defense for Acquisition, Technology, and Logistics provided written
comments on a draft of this letter. DOD's comments are reprinted in the
enclosure. DOD agreed with our recommendations and identified steps
that it is taking to implement them. In commenting on our
recommendation to discontinue the practice of setting aside an
arbitrary 50 percent of the demilitarization budget to commercial
firms, DOD stated that the U.S. Army Materiel Command has rescinded
this policy and that the fiscal year 2005 demilitarization program will
not be constrained by a predetermined percentage set aside for the
private sector.
In commenting on our recommendation to implement a more analytically
based approach to demilitarization workload allocations, DOD stated
that it will establish a team to perform a study to determine an
analytical based approach for allocating demilitarization workload for
the private sector and government and for enhancing its computer-
modeling program to be more robust as a decision making tool, including
performing planning and analysis of government and commercial
demilitarization workload. DOD stated that it plans to complete the
study during fiscal year 2004 and to implement the results early in
fiscal year 2005.
In commenting on our recommendation to discontinue the practice of
paying a commercial firm to have ammunition demilitarized by government
employees when the work can be overseen by the Army for less cost, DOD
stated that it will add language to the follow-on commercial contract,
anticipated for award in early fiscal year 2005, addressing the
involvement between industry and government that considers an economic-
cost benefit analysis and awards demilitarization workload without
regard to location of execution when an effort is in the best interests
of the government.
Scope and Methodology:
To identify any limitations in the actions that the Army has taken in
response to a recommendation contained in our prior report on the
Army's management and oversight of excess ammunition, we reviewed
applicable policies, procedures, and documents governing the
demilitarization program. We made extensive use of our prior work as a
baseline to compare the changes in demilitarization capacity and
utilization at government-owned facilities since our prior
report.[Footnote 9] We reviewed the Army's Closed Disposal Technology
Study and analyzed the report's scope and methodology, findings, and
conclusions related to the appropriate mix of government and commercial
sector utilization needed to demilitarize excess ammunition. The Army's
study used a computer-modeling tool that integrates operating cost,
capacity, and other variables in the demilitarization program to
produce an optimal long-range demilitarization plan. Additionally,
various forms of constraints can be placed on the model, such as
requiring the model to execute a certain percentage of demilitarization
operations using resource, recovery, and recycling processes;
allocating a certain minimum funding to commercial firms; or providing
a specified level of workload to selected locations, either commercial
firms or government facilities. For the study, the model used the
following input data:
demilitarization capabilities and capacities available at government
and commercial facilities;
existing and forecasted inventory levels of excess ammunition;
funding levels for each year's forecasted demilitarization program;
transportation costs between demilitarization locations, to include
packing, crating, and handling;
percentages of resource, recovery, and recycling processes and open
burning and open detonation/incineration processes, by weight, for
various types of ammunition; and:
costs to perform demilitarization at government and commercial
facilities.
While we did not assess the reliability of the model or validate the
results, we did interview agency officials knowledgeable about the
model and its data and we reviewed the types of input data and the
constraints placed on the model to assure ourselves that the results
appeared to be consistent. This allowed us to understand whether DOD's
current practice is the most cost-effective program, considering
capability, capacity, and cost data for both government and commercial
facilities. Based on our analyses, we determined that the data were
sufficiently reliable for the purposes of this letter.
To obtain current demilitarization program information and action taken
since our report was published in April 2001, we met with officials and
performed work at the Office of the Product Manager for
Demilitarization, Picatinney Arsenal, New Jersey; McAlester Army
Ammunition Plant, McAlester, Oklahoma; Army Materiel Command, Fort
Belvoir, Virginia; and U.S. Army Defense Ammunition Center, McAlester,
Oklahoma. For example, to assess the extent that the Army used
commercial firms to demilitarize excess ammunition and its impact on
the utilization of environmentally friendly demilitarization processes
at government facilities, we obtained Army data on the government
facilities' capabilities to demilitarize excess ammunition and compared
the Army's demilitarization plans to these capabilities. This allowed
us to identify and calculate excess capacity situations and compare
this data with our prior work done on excess capacity at government
facilities. We also obtained and reviewed contractor agreements with
government facilities to perform the demilitarization work and
evaluated contract information provided by the Army and by one
government facility to determine if the government facility could have
demilitarized the ammunition for less cost than was incurred by the
Army's contract with this firm. We interviewed Army officials about the
cost-effectiveness of relying on commercial firms to demilitarize
excess ammunition at the same time that government facilities have
similar demilitarization capabilities.
We conducted our analysis of DOD's demilitarization program from June
2003 through January 2004 in accordance with generally accepted
government auditing standards.
We are sending copies of this letter to the appropriate congressional
committees and interested congressional committees and members. The
letter is also available on GAO's homepage at http://www.gao.gov. If
you or your staff have any questions on the matters discussed in this
letter, please contact me at (202) 512-5581. Key contributors to this
letter were Ron Berteotti, Roger Tomlinson, Chad Factor, and Robert
Wild.
Sincerely yours,
Signed by:
Barry Holman, Director:
Defense Capabilities and Management:
Enclosure:
(350394):
FOOTNOTES
[1] U.S. General Accounting Office, Defense Inventory: Steps the Army
Can Take to Improve the Management and Oversight of Excess Ammunition,
GAO-01-372 (Washington, D.C.: Apr. 12, 2001). As described in the
report, the Army defines demilitarization as the act of removing the
military offensive or defensive characteristics from munitions or
otherwise rendering munitions innocuous or ineffectual for military
use. Demilitarization includes, but is not limited to, processes
involving resource recovery, recycling, reutilization, disassembly,
conversion, melt out/steam out/wash out, incineration, open burning,
and open detonation, to name a few.
[2] Joint Ordnance Commanders Group Munitions Demil/Disposal Subgroup
Closed Disposal Technology Study (McAlester, Okla.: Sept. 2001). The
study was in response to H.R. 106-754, directing the Army to prepare a
report on the feasibility of replacing open burning and detontating
processes with closed disposal technologies.
[3] The Product Manager for Demilitarization is a management office of
the Army Acquisition Corps and chartered by the Army Acquisition
Executive (the Assistant Secretary of the Army for Acquisition,
Logistics & Technology). The Product Manager for Demilitarization is
under the Office of the Project Manager for Joint Services reporting to
the Program Executive Officer for Ammunition. The Secretary of the Army
is the DOD-designated Single Manager for Conventional Ammunition and
the Program Executive Officer for Ammunition, as designated by the
Secretary of the Army, acts as the single manager for conventional
ammunition executor.
[4] Until December 2002, the Commander, U.S. Army Materiel Command, as
designated by the Secretary of the Army, acted as the single manager
for conventional ammunition for DOD.
[5] GAO-01-372.
[6] Joint Ordnance Commanders Group Munitions Demil/Disposal Subgroup,
Closed Disposal Technology Study (McAlester, Okla.: Sept. 2001).
HouseReport106-754 directed the study. H.R. Conf. Rep. No. 106-754, at
99 (2000). On September 27, 2001, the study was sent to the Chairman
and Ranking Member of the Senate Appropriations Subcommittee on
Defense; the Chairman and Ranking Member of the Senate Committee on
Armed Services; the Chairman and Ranking Member of the House
Appropriations Subcommittee on Defense; and the Chairman and Ranking
Member of the House Committee on Armed Services.
[7] We did not assess the reliability of the model or validate the
results; however, we did interview agency officials knowledgeable about
the model and its data and we did take steps to confirm that the model
results appeared to be consistent. Additional details are provided in
the scope and methodology section.
[8] The commercial firm entered into agreements for demilitarization
services with government facilities at McAlester, Oklahoma; Crane,
Indiana; and Tooele, Utah.
[9] GAO-01-372.
