Defense Management
Processes to Estimate and Track Equipment Reconstitution Costs Can Be Improved Gao ID: GAO-05-293 May 5, 2005The high pace of military operations in Iraq and elsewhere has generated a multibillion dollar equipment maintenance requirement that must be addressed after units return home. Upon returning from deployments, active, reserve, and National Guard units reconstitute, or restore, their equipment to a condition that enables them to conduct training and prepare for future deployments. The Department of Defense (DOD) uses a two-phased process to develop equipment reconstitution supplemental budget estimates. GAO reviewed this process for the fiscal year 2004 supplemental budget to determine (1) the extent to which the process produced reliable estimates of reconstitution requirements in the fiscal year 2004 supplemental budget, and (2) whether DOD is accurately tracking and reporting reconstitution costs.
DOD's two-phased process to develop its fiscal year 2004 equipment reconstitution cost estimates contained weaknesses that produced errors, which may result in misstatements of future-year reconstitution cost requirements. The model DOD used to estimate costs in the first phase of the process generated unreliable estimates due to two main reasons. First, the model can overstate aircraft and ship reconstitution costs because these costs are covered in two different sections of the model. As a result, the model's estimate for Air Force aircraft reconstitution was overstated by over $1 billion. Second, there is uncertainty over what maintenance requirements the model covered. The Office of the Secretary of Defense (OSD) and the services developed their requirements with the understanding that the model did not calculate all maintenance requirements. GAO learned that the model may duplicate some requirements that the services manually calculated and included in their cost estimates. Consequently, DOD cannot have confidence that its equipment reconstitution budget estimate is reliable. There are also reconstitution estimating and guidance problems associated with the second phase of the process, where the services may develop alternative estimates outside of the model. For instance, the Army failed to consider funding in its baseline budget that would be available for equipment reconstitution. In another instance, the services included requirements in their reconstitution estimates that appear to go beyond equipment reconstitution as established by OSD's guidance. Nonetheless, GAO found an accumulation of unfulfilled equipment reconstitution requirements, because OSD guidance excluded the services from requesting funds for projected battle and other expected losses. The effect of losses not recognized in OSD's supplemental budget requirements have not yet been quantified and may be significant. GAO believes these problems are creating a backlog of equipment reconstitution requirements that will eventually need to be addressed in future budgets. DOD has not accurately tracked and reported its equipment reconstitution cost because the services are unable to segregate equipment reconstitution from other maintenance requirements as required. As a result, DOD cannot accurately report the cost of equipment reconstitution and, consequently, the total cost of the global war on terror. The Air Force does not break out its equipment reconstitution obligations from other global war-on-terrorism obligations in a DOD monthly cost report because it does not have a mechanism that can track the amounts obligated on equipment reconstitution and delineate such obligations from routine maintenance. Further, Army- and Navy-reported equipment reconstitution obligations are likely overstated in the monthly report because they include other maintenance costs--such as those related to equipment used in training exercises--that do not fall within DOD's description of equipment reconstitution.
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-05-293, Defense Management: Processes to Estimate and Track Equipment Reconstitution Costs Can Be Improved
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Report to Congressional Committees:
May 2005:
Defense Management:
Processes to Estimate and Track Equipment Reconstitution Costs Can Be
Improved:
GAO-05-293:
GAO Highlights:
Highlights of GAO-05-293, a report to congressional committees:
Why GAO Did This Study:
The high pace of military operations in Iraq and elsewhere has
generated a multibillion dollar equipment maintenance requirement that
must be addressed after units return home. Upon returning from
deployments, active, reserve, and National Guard units reconstitute, or
restore, their equipment to a condition that enables them to conduct
training and prepare for future deployments. The Department of Defense
(DOD) uses a two-phased process to develop equipment reconstitution
supplemental budget estimates. GAO reviewed this process for the fiscal
year 2004 supplemental budget to determine (1) the extent to which the
process produced reliable estimates of reconstitution requirements in
the fiscal year 2004 supplemental budget, and (2) whether DOD is
accurately tracking and reporting reconstitution costs.
What GAO Found:
DOD‘s two-phased process to develop its fiscal year 2004 equipment
reconstitution cost estimates contained weaknesses that produced
errors, which may result in misstatements of future-year reconstitution
cost requirements. The model DOD used to estimate costs in the first
phase of the process generated unreliable estimates due to two main
reasons. First, the model can overstate aircraft and ship
reconstitution costs because these costs are covered in two different
sections of the model. As a result, the model‘s estimate for Air Force
aircraft reconstitution was overstated by over $1 billion. Second,
there is uncertainty over what maintenance requirements the model
covered. The Office of the Secretary of Defense (OSD) and the services
developed their requirements with the understanding that the model did
not calculate all maintenance requirements. GAO learned that the model
may duplicate some requirements that the services manually calculated
and included in their cost estimates. Consequently, DOD cannot have
confidence that its equipment reconstitution budget estimate is
reliable. There are also reconstitution estimating and guidance
problems associated with the second phase of the process, where the
services may develop alternative estimates outside of the model. For
instance, the Army failed to consider funding in its baseline budget
that would be available for equipment reconstitution. In another
instance, the services included requirements in their reconstitution
estimates that appear to go beyond equipment reconstitution as
established by OSD‘s guidance. Nonetheless, GAO found an accumulation
of unfulfilled equipment reconstitution requirements, because OSD
guidance excluded the services from requesting funds for projected
battle and other expected losses. The effect of losses not recognized
in OSD‘s supplemental budget requirements have not yet been quantified
and may be significant. GAO believes these problems are creating a
backlog of equipment reconstitution requirements that will eventually
need to be addressed in future budgets.
DOD has not accurately tracked and reported its equipment
reconstitution cost because the services are unable to segregate
equipment reconstitution from other maintenance requirements as
required. As a result, DOD cannot accurately report the cost of
equipment reconstitution and, consequently, the total cost of the
global war on terror. The Air Force does not break out its equipment
reconstitution obligations from other global war-on-terrorism
obligations in a DOD monthly cost report because it does not have a
mechanism that can track the amounts obligated on equipment
reconstitution and delineate such obligations from routine maintenance.
Further, Army- and Navy-reported equipment reconstitution obligations
are likely overstated in the monthly report because they include other
maintenance costs”such as those related to equipment used in training
exercises”that do not fall within DOD‘s description of equipment
reconstitution.
What GAO Recommends:
GAO is making several recommendations to correct weaknesses identified
in DOD‘s equipment reconstitution cost estimating and tracking
processes. In commenting on a draft of this report, DOD concurred or
partially concurred with five recommendations and did not concur with
the other recommendation.
www.gao.gov/cgi-bin/getrpt?GAO-05-293. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact William M. Solis at (202) 512-8365 or
solisw@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
DOD's Equipment Reconstitution Estimating Process Contained Weaknesses
that Produced Errors:
DOD Not Accurately Reporting Equipment Reconstitution Costs:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix:
Appendix I: Scope and Methodology:
Tables:
Table 1: Fiscal Year 2004 Reconstitution Requirements Identified by
Services and Requested in Supplemental:
Table 2: Comparison of Army's Estimated Reconstitution Cost to Actual
Cost for 38 Selected Items for Fiscal Year 2004:
Table 3: Reconstitution Obligations Reported by Services in DFAS
Terrorist Cost Report, as of the End of September 2004:
Figures:
Figure 1: Army Prepositioned Equipment Awaiting Maintenance at Camp
Arifjan:
Figure 2: Bradley Fighting Vehicle--Example of Projected Equipment Item
Damage:
Letter May 5, 2005:
Congressional Committees:
The high pace of military operations in Iraq and elsewhere has
generated a multibillion dollar equipment maintenance requirement that
must be addressed after units return home. Upon returning from Iraq and
other global war-on-terrorism deployments, units reconstitute--that is,
restore--their equipment to a condition that enables them to conduct
training exercises, achieve required readiness levels, and prepare for
future deployments. While the Department of Defense (DOD) has not
formally defined equipment reconstitution, its financial regulation
describes reconstitution costs as including costs to clean, inspect,
maintain, replace, and restore equipment to the required condition at
the conclusion of the contingency operation or unit deployment.
Furthermore, the department has issued additional specific guidance as
to what costs should be included as reconstitution. Reconstitution is
performed at each level of maintenance-- organizational, intermediate,
and depot--depending on the condition of returning equipment and the
capacity available at each maintenance level.[Footnote 1] The
department's equipment reconstitution maintenance requirement is based
on the amount of repairs that need to be performed at all maintenance
levels. As the global war on terrorism continues, the department will
be generating additional equipment reconstitution requirements, which
will have to be estimated for inclusion in future baseline or
supplemental budgets.[Footnote 2]
The department has a two-phased process in place to estimate the
incremental costs[Footnote 3] of supporting contingency operations,
which includes the determination of equipment reconstitution
requirements. During the first phase, the Office of the Secretary of
Defense (OSD) comptroller and the services use an OSD model, developed
by the Institute for Defense Analyses (IDA), called the contingency
operations support tool (COST),[Footnote 4]which covers much of what is
needed to conduct contingency operations, as well as some aspects of
equipment reconstitution. Each service and OSD input information into
the model regarding the period of deployment for units and equipment
that will need reconstitution. The model generates an estimated funding
requirement. During the second phase, the services may accept or reject
the COST model's estimates and provide alternative estimates they
developed outside the model. When the services propose an estimate
other than that derived from the COST model, they meet with the OSD
comptroller and provide support for their estimate and, in conjunction
with the comptroller, determine the requirement to be submitted. The
services also provide estimates for some requirements that are not
covered by the model--such as depot-level maintenance and procurement
for replacement equipment. OSD then reviews these estimates and, in
conjunction with the services, determines a final estimate for
inclusion in OSD's supplemental budget submission. However, when
differences occur, the OSD comptroller has the final say in what
equipment reconstitution requirement will be submitted in the
supplemental budget.
This report focuses on DOD's planning, budgeting, and tracking and
reporting for equipment reconstitution for military units that have
returned from Iraq and other global war-on-terrorism operations. The
objectives of this report are to examine the extent to which (1) the
process DOD used to develop its fiscal year 2004 supplemental budget
equipment reconstitution requirements produced reliable estimates and
(2) the department is accurately tracking and reporting equipment
reconstitution obligations. We performed our work on the basis of the
authority of the Comptroller General[Footnote 5] and are reporting the
results to you because of your oversight roles.
We examined OSD's and the services' processes for developing their
fiscal year 2004 equipment reconstitution requirements and collected
data related to OSD and service equipment reconstitution requirements.
We held discussions at service headquarters and also visited Army and
Marine Corps units in the process of reconstituting equipment to review
the equipment reconstitution planning process at these levels, observe
implementation of these plans, and collect actual reconstitution costs.
We reviewed reported reconstitution costs for Army equipment and
determined that the reliability of these data was sufficient for our
purposes. We performed our work from September 2003 through March 2005
in accordance with generally accepted government auditing standards.
The scope and methodology section contains more detailed information
about the work we performed.
Results in Brief:
The two-phased process DOD used to develop its fiscal year 2004
equipment reconstitution cost estimates contained weaknesses that
produced errors, which, if not corrected, may result in misstatements
of future-year reconstitution cost requirements. Specifically, we
observed problems in both phases of the process, as follows.
* The COST model, which the department used during the first phase of
the process, generated unreliable estimates due to two main reasons.
First, the COST model contains an error that can result in a
duplication of reconstitution cost estimates. OSD and IDA officials
were unaware that the model's equipment reconstitution cost section
duplicated reconstitution costs that were already covered by the
operating cost section of the model. For example, the COST model
estimate for Air Force aircraft reconstitution was overstated by $1.2
billion because the department did not take into account that these
costs were already entered into the model as operating costs.
Duplication of cost elements causes an overstatement of cost estimates
and may result in DOD receiving more funds than are necessary to cover
reconstitution costs. Second, there is uncertainty over what
maintenance requirements the model covered. OSD and the services
developed their equipment reconstitution requirements with the
understanding that the COST model calculated organizational-and
intermediate-level maintenance only, and thus calculated their depot-
level maintenance requirements outside of the model during the second
phase of the process. However, we later learned that, according to IDA
officials, the model may include some depot-level maintenance, which
could have resulted in the model duplicating the depot-level
maintenance requirements calculated outside the model. This confusion
occurred because the OSD comptroller's office apparently did not
clearly identify what maintenance requirements are to be calculated by
the model. Furthermore, neither OSD nor IDA was able to provide us with
any written guidance regarding what maintenance requirements should be
covered in the model's equipment reconstitution section. Without
clearly identifying what maintenance requirements OSD expected the COST
model to estimate and clearly communicating this information to IDA,
IDA officials were not able to ensure that the COST model generates
accurate and complete reconstitution maintenance cost estimates, and
does not duplicate maintenance costs calculated outside of the model.
Consequently, the department cannot have confidence in the equipment
reconstitution budget estimate generated by the model.
* We also found reconstitution estimating and guidance problems during
the second phase of the process. These problems involve the services
developing requirements not calculated by the COST model and modifying
COST model estimates. In one instance, the Army did not consider
baseline peacetime operation and maintenance funding when calculating
its equipment reconstitution requirements outside of the COST model.
This was because the Army does not have a step in its supplemental
estimating process to offset estimates with the baseline budget, as
required by the department.[Footnote 6] Not recognizing and adjusting
for normal operating budgets overstates the funding requirement and
could, if not addressed, result in the Army overstating funding
requirements for equipment reconstitution in the future. Moreover, the
services included costs in their reconstitution estimates calculated
outside the COST model that appear not to be equipment reconstitution
as established by OSD's supplemental budget preparation guidance. For
example, while OSD guidance specifically directed the services to
request funds needed to restore forces to the same operational level as
prior to deployment, and to limit requests to those costs already
incurred as a direct result of operations in support of the global war
on terrorism, the Navy and the Air Force included unfunded fiscal year
2004 depot maintenance requirements in their supplemental funding cost
estimates that did not arise from Operation Iraqi Freedom and other
global war-on-terrorism operations. This occurred due to a lack of
clear guidance on how the services should calculate their
reconstitution costs, and according to Navy and Air Force officials,
they wanted all of their equipment in the best condition possible to
fight the global war on terrorism. Including these unfunded peacetime
requirements may overstate the estimated cost of reconstituting
equipment involved in operations in Iraq and Afghanistan. Nonetheless,
we found an accumulation of unfulfilled equipment reconstitution
requirements because OSD guidance limited the services to requesting
funding for replacement of known battle losses only. In preparing the
fiscal year 2004 supplemental budget, the services were not permitted
to request funds for projected battle losses and other expected losses.
The effect of losses not recognized in OSD's supplemental budget
calculations has not yet been quantified and may be significant.
DOD is unable to accurately track and report its equipment
reconstitution cost because the services are unable to segregate
equipment reconstitution from other maintenance requirements, as
required. In an effort to meet congressional requests for information
on global war-on-terrorism obligations[Footnote 7] and provide the OSD
comptroller with a means to assess variance between obligations and the
budget, Defense Finance and Accounting Service (DFAS) produces a
monthly report to track these obligations. The DFAS report on funds
obligated in support of the war includes a category for tracking
equipment reconstitution obligations. However, the data in the report
are not reliable for determining accurately how much money each service
is obligating on equipment reconstitution. For example, the Air Force
does not break out its equipment reconstitution obligations from other
global war-on-terrorism obligations in the DFAS report in accordance
with DOD guidance, because it does not have a mechanism in its
accounting system that can track the amounts specifically obligated for
equipment reconstitution. Thus, the Air Force is reporting zero dollars
in the DFAS report's equipment reconstitution category. Additionally,
Army and Navy equipment reconstitution obligations may also be
inaccurate in the DFAS report, because the services' accounting codes
for equipment reconstitution are capturing global war-on-terrorism and
other obligations that were not incurred exclusively for equipment
reconstitution. Consequently, Army-and Navy-reported equipment
reconstitution obligations are likely overstated because they include
other maintenance costs--such as those related to equipment used in
training exercises--that are not consistent with DOD's guidance
relating to reporting reconstitution obligations for equipment used in
support of the global war on terrorism. As a result, DOD cannot
accurately report the cost of equipment reconstitution and,
consequently, the total cost of the global war on terrorism.
We are making recommendations that correct weaknesses we identified in
DOD's process for estimating and tracking equipment reconstitution
costs. In concurring or partially concurring on our recommendations DOD
indicated that it was taking steps to eliminate the duplication of
maintenance requirements in its COST model, would consider including a
factor to reflect maintenance washout trends in future supplemental
budget requests, and has revised its financial management regulation to
improve the reporting of equipment reconstitution obligations. However,
we believe that further improvements, such as providing instructions in
the DOD financial management regulation regarding how to avoid
duplication of maintenance requirements in DOD's COST model, are needed
to meet the intent of our recommendations. In not concurring with our
recommendation that the Army establish a step to offset its equipment
reconstitution estimate with its baseline budget, department officials
said that their process for developing the supplemental budget already
includes a process for excluding costs for equipment maintenance funded
in the baseline budget. However, we believe that the Army's, and the
other services', supplemental budget-estimating processes also need to
have such assurances built in. DOD's comments and our evaluation of
them are discussed on page 25.
Background:
In preparation for the initiation of Operation Iraqi Freedom (OIF), the
United States deployed four Army divisions and their supporting reserve
component units, a Marine Expeditionary Force, and a significant
portion of the Navy's and Air Force's combat power to southwest Asia.
The Army's Third Infantry Division (mechanized) and its supporting
reserve component units were primarily equipped with Army-prepositioned
assets--consisting of over 17,000 pieces of rolling stock[Footnote 8]
and almost 6,000 standard 20-foot shipping containers of supplies--
drawn from prepositioned equipment sites located in southwest Asia and
offloaded from Army prepositioned ships. The 1ST Marine Expeditionary
Force was also primarily equipped with prepositioned assets offloaded
from Marine Corps prepositioned ships. By the height of the combat
portion of OIF, the United States had deployed a significant portion of
its combat power to southwest Asia. For example, during fiscal year
2003, the Army deployed four divisions and numerous supporting active,
reserve, and national guard units which participated in the combat
phase of OIF. As a result, the Army estimated that these units, with
assistance from other Army maintenance activities, would have to
reconstitute over 53,000 pieces of rolling stock[Footnote 9] when the
units redeployed to their home stations.
In Iraq and Afghanistan, the U.S. military--especially the Army and
Marine Corps--are operating at a pace well in excess of their normal
peacetime level, which is driven by units' training requirements. This
not only greatly increases the day-to-day operational maintenance
requirements, including spare parts demands, of deployed Army and
Marine Corps units, but also generates a large post-operational
maintenance requirement that must be addressed when the units redeploy
to their home station. Upon redeployment, the units need to bring their
equipment at least back up to fully mission-capable status[Footnote 10]
in order for the units to be able to train on their equipment and
achieve their readiness levels and be prepared for future deployments.
In addition, before leaving Iraq, redeploying units turned in a large
amount of prepositioned equipment that must undergo maintenance and
repair before the equipment can be reissued to units deploying to or
already in southwest Asia in support of OIF, or returned to
prepositioned equipment stock for future use. Figure 1 shows some
prepositioned equipment stored in Kuwait awaiting repair.
Figure 1: Army Prepositioned Equipment Awaiting Maintenance at Camp
Arifjan:
[See PDF for image]
Source: GAO.
[End of figure]
Army and Marine Corps units returning from deployments related to the
global war on terrorism have equipment that has been heavily used and
is in various degrees of disrepair. Upon returning to home station, the
units' equipment is inspected to determine what maintenance is needed
to bring the equipment back to the condition needed to allow the unit
to conduct mission-essential training and be prepared for future
deployments. The services use myriad repair and maintenance sources to
assist units in reconstituting their equipment. At military
installations, various maintenance personnel--including military
personnel within units, installation personnel (including contractors)
who support day-to-day maintenance operations, contractors who have
been hired to augment the units' and installations' day-to-day
workforces, and contractors who have been hired to increase an
installation's maintenance capacity--are all working in concert to
reconstitute the units' equipment in a timely manner so that the units
will be ready to again deploy. In addition, military depots and
contractors are using their vast maintenance and repair capabilities to
help in the equipment reconstitution effort.
To fund the global war on terrorism in fiscal year 2003, Congress
provided DOD with $62 billion in the fiscal year supplemental
appropriation, primarily funding operations in Iraq.[Footnote 11] While
most of this funding was used to cover the costs of combat operations,
the DFAS monthly terrorist report[Footnote 12] indicate that about $3.8
billion in funds were obligated for equipment reconstitution in fiscal
year 2003.
The fiscal year 2004 global war-on-terrorism supplemental budget
included a significantly larger amount for equipment reconstitution
than the previous supplemental budget. DOD requested $65.6 billion for
executing the global war on terrorism in its fiscal year 2004 global
war on terrorism supplemental budget request, which Congress funded at
$64.3 billion.[Footnote 13] In the budget-building process that was
used for developing its fiscal year 2004 global war-on-terrorism
supplemental budget request, the department included $5.9 billion for
equipment reconstitution. (See table 1.)
Table 1: Fiscal Year 2004 Reconstitution Requirements Identified by
Services and Requested in Supplemental:
Dollars in billions.
Service: Army;
Service requested: Unit level: $3.64;
Service requested: Depot level: $1.47;
Service requested: Total: $5.11;
OSD supplemental request: Unit level: $1.85;
OSD supplemental request: Depot level: $1.22;
OSD supplemental request: Total: $3.07.
Service: Navy;
Service requested: Unit level: $0.00;
Service requested: Depot level: $0.78[A];
Service requested: Total: $0.78;
OSD supplemental request: Unit level: $0.00;
OSD supplemental request: Depot level: $0.78[A];
OSD supplemental request: Total: $0.78.
Service: Air Force;
Service requested: Unit level: $1.30;
Service requested: Depot level: $0.98;
Service requested: Total: $2.28;
OSD supplemental request: Unit level: $1.30;
OSD supplemental request: Depot level: $0.72;
OSD supplemental request: Total: $2.02.
Service: Marine Corps;
Service requested: Unit level: $0.17;
Service requested: Depot level: $0.26;
Service requested: Total: $0.43;
OSD supplemental request: Unit level: $0.00;
OSD supplemental request: Depot level: $0.07;
OSD supplemental request: Total: $0.07.
Total;
Service requested: Unit level: $5.11;
Service requested: Depot level: $3.49;
Service requested: Total: $8.60;
OSD supplemental request: Unit level: $3.15;
OSD supplemental request: Depot level: $2.79;
OSD supplemental request: Total: $5.94.
Source: Unaudited DOD data.
[A] Includes ship intermediate maintenance.
[End of table]
For the fiscal year 2004 supplemental budget process, table 1 shows the
requirements the services developed and what OSD ultimately included in
its supplemental budget submission to Congress. The requirements are
broken down between unit-level and depot-level requirements. Unit-level
maintenance, which consists of organizational-and intermediate-level
maintenance, includes maintenance performed by military units in motor
pools and maintenance support units, and by DOD civilians and
contractor personnel at installation maintenance organizations. Depot-
level maintenance includes maintenance performed by DOD civilian
employees and DOD contractors at military depots or private facilities.
The fiscal year 2004 supplemental defense appropriation does not
delineate the amounts appropriated for unit-and depot-level equipment
reconstitution.
DOD's Equipment Reconstitution Estimating Process Contained Weaknesses
That Produced Errors:
The two-phased process DOD used to develop its fiscal year 2004
supplemental budget equipment reconstitution requirements contained
weaknesses that produced errors that may result in misstatements of
future-year budget estimates if not corrected. We observed two problems
with the COST model associated with the first phase of DOD's process
that have generated unreliable estimates. First, the COST model can
overstate reconstitution costs related to aircraft and ship costs
because these costs are covered in both the operations and
reconstitution sections of the model. Second, there is uncertainty in
DOD over the maintenance requirements covered by the model. We also
noted problems with the second phase of DOD's process. In one instance,
the Army did not consider funding in its baseline peacetime operation
and maintenance budget that would be available for equipment
reconstitution. The Army also significantly overestimated the
organizational-and intermediate-level maintenance costs to reconstitute
individual equipment items. In another instance, the services included
requirements in their reconstitution estimates that appear to be
inconsistent with equipment reconstitution activities established by
OSD's supplemental budget preparation guidance. Also, OSD guidance only
allowed the services to request funding to replace known battle losses--
excluding projected battle losses and other expected losses--in
preparing their fiscal year 2004 supplemental budget submissions.
Duplication of Cost Requirements Overstates Reconstitution Estimate:
The model that OSD and the services used in the first phase of the
process to calculate reconstitution requirements for fiscal year 2004
resulted in an overstatement of about $1.2 billion. This is because the
COST model contains an error that can result in a duplication of
reconstitution cost requirements. The equipment reconstitution section
of the COST model provides funding for aircraft and ship reconstitution
that is already funded through the operations section of the model.
All services support their aircraft through a flying-hour program that
covers costs associated with operating aircraft, such as petroleum, oil
and lubricants, consumables (supplies), and spare parts. As a result,
all organizational-and intermediate-level maintenance and repair
requirements are met through the flying-hour program.[Footnote 14]
Since the operations section of the COST model already includes flying-
hour program funding, the inclusion of an equation for aircraft
reconstitution in the equipment reconstitution section of the model is
redundant. Air Force officials told us that due to their flying-hour
program, additional funding specifically addressing organizational-and
intermediate-level reconstitution of aircraft was not needed. However,
the Air Force's fiscal year 2004 supplemental budget request included
about $1.2 billion in the equipment reconstitution section for aircraft
maintenance that was also covered by the operations section of the COST
model. According to Air Force officials, they were unaware that the
equipment reconstitution section duplicated the aircraft maintenance
costs that are covered in the operations section of the COST model. In
contrast, the Navy removed funding that the COST model's equipment
reconstitution section provided for aircraft organizational-and
intermediate-level maintenance.
The equipment reconstitution section of the COST model also duplicates
organizational-level ship reconstitution that is already covered in the
operations section of the model. However, the Navy treated this
potential duplication in the same manner as it treated the flying-hour
program duplication. Recognizing that this maintenance was already
covered in the COST model's operations section, the Navy only included
intermediate-level ship maintenance, and aircraft and ship depot-level
maintenance in the equipment reconstitution section of its requirements
calculation.
The different ways that the Air Force and Navy treated aircraft
reconstitution demonstrate how this potential redundancy is a weakness
in the structure of OSD's COST model. In discussing these redundancies
in the model with OSD comptroller officials, they told us that OSD and
IDA officials were unaware of this potential duplication. This lack of
awareness was demonstrated when OSD comptroller officials did not
identify and correct the Air Force's duplication described previously.
Air Force finance officials told us that they have taken steps when
preparing their fiscal year 2005 supplemental budget to prevent this
duplication from occurring again. We observed that the fiscal year 2005
supplemental budget did not repeat this duplication.
DOD Had Uncertainty Over Which Maintenance Requirements Were Covered by
Its COST Model:
There was uncertainty within the department regarding which maintenance
requirements were covered in the COST model. OSD and the services
developed their equipment reconstitution requirements with the
understanding that the COST model calculated organizational-and
intermediate-level maintenance only, and they thus calculated their
depot-level maintenance requirements outside of the model during the
second phase of the process. However, we later learned that the model
may have calculated some depot-level maintenance requirements, which
could have resulted in the model duplicating the depot-level
maintenance requirements calculated outside the model.
We held a series of discussions with officials from OSD--the owners of
the model--and IDA--the developers of the model--to determine what
types of maintenance requirements are included in the equipment
reconstitution section of the model. Both OSD and IDA officials
provided us with different descriptions of what was included in the
model. In addition, these officials were unable to produce any written
guidance that OSD provided IDA regarding what maintenance requirements
the model's equipment reconstitution section should cover. They stated
that this was determined so long ago that the paper trail no longer
exists and that in all probability the guidance was transmitted either
verbally or via e-mail, or both.
For example, in our initial meeting with OSD comptroller officials to
determine how OSD and the services developed their equipment
reconstitution estimates for the fiscal year 2004 supplemental budget,
we were told that the equipment reconstitution section of the COST
model included organizational-and intermediate-level maintenance
requirements and excluded depot-level maintenance requirements.
Officials from each of the services corroborated this viewpoint and
stated that they understood the equipment reconstitution section of the
COST model to include organizational-and intermediate-level maintenance
requirements and exclude depot-level requirements. Army, Navy, Air
Force, and Marine Corps finance officials also told us that they
developed depot-level maintenance estimates separate from the COST
model.
Next, we met with IDA officials to better understand what levels of
reconstitution maintenance were included in the equipment
reconstitution section of the COST model. The IDA officials said that
the model included organizational-and intermediate-levels of
maintenance, and could include some depot-level maintenance. However,
IDA could not provide us with the documentation to support this
assertion and we were therefore unable to determine whether model
calculations included or excluded depot-level maintenance.
We shared IDA's comments about the levels of maintenance covered in the
model with OSD comptroller officials in a follow-up meeting. At this
point, they told us that its COST model was intended to provide
organizational-level maintenance costs only, which represents a small
portion of the total equipment reconstitution requirement.[Footnote 15]
However, based on our analysis of the COST model, we concluded that
intermediate-level requirements are indeed included in the COST model
equations. In the end, OSD comptroller officials stated that they are
now taking steps to clear up confusion regarding the requirements for
each type of maintenance and repair.
As described previously, OSD comptroller officials did not clearly
establish and communicate to IDA what levels of maintenance they
expected the COST model to estimate. Without clearly identifying what
levels of maintenance OSD expected in the COST model and subsequently
clearly communicate this information to IDA, IDA officials are not able
to ensure that the COST model generates accurate and complete
organizational and intermediate maintenance cost estimates, and does
not duplicate depot maintenance costs calculated outside of the model.
Consequently, the department cannot have confidence in its equipment
reconstitution budget estimate.
Army's Equipment Reconstitution Estimate Did Not Consider Baseline
Peacetime Budget:
The Army did not consider funding in its baseline peacetime operation
and maintenance budget that would be available for equipment
reconstitution when developing its own estimate outside of the COST
model. As a result, the Army overestimated its equipment reconstitution
requirements.
The Army used the COST model as a starting point for determining its
equipment reconstitution requirements for fiscal year 2004. However,
Army officials concluded that the $1.9 billion calculated by the model
was inadequate. As a result, the Army developed its own methodology for
calculating equipment reconstitution requirements and estimated $3.0
billion would be needed for organizational-and intermediate-level
repair and maintenance, which was about $1 billion higher than the OSD
COST model estimate.
Our analysis of the Army's methodology for calculating equipment
reconstitution requirements revealed a major weakness in the Army
estimate. The Army's process for estimating its equipment
reconstitution requirements did not include steps to offset total
requirements with baseline funding.[Footnote 16] Consequently, we
estimate that the Army's equipment reconstitution estimate may have
been overstated by between $299 million to $497 million.
OSD's guidance to the services for developing the supplemental budget
specifies that the services were to offset funds already contained in
their baseline budgets--peacetime maintenance costs that would not be
incurred because the unit was deployed in support of the global war on
terrorism--when estimating a contingency operation's cost. Not
recognizing and adjusting for normal operating budgets overstates the
funding requirement and could result in the Army overstating funding
requirements for equipment reconstitution in the future if not
addressed. According to Army officials, this oversight occurred because
the Army did not establish a specific step in its supplemental
estimating process to offset the Army's estimate with baseline budget
funds.
Army Overestimated Organizational and Intermediate Maintenance Costs
for Numerous Equipment Items:
In the process of reviewing the Army's methodology for calculating
equipment reconstitution requirements, we also found that the Army
overestimated organizational-and intermediate-level maintenance costs
for numerous equipment items. A comparison of the actual fiscal year
2004 equipment reconstitution obligations reported by the Army with the
Army's equipment reconstitution cost estimate showed that
organizational-and intermediate-level repair costs for individual
equipment items were significantly overestimated. Specifically, we
collected actual cost data on 38 types of equipment included in the
Army's estimate and determined that the actual costs for reconstituting
the items were lower than the Army's estimates for 34 of the 38 items.
(See table 2.) The Army was unable to provide us with adequate support
for its estimates because it did not retain supporting documentation.
Consequently, we were not able to determine the reasons for differences
between estimated costs and reported equipment reconstitution
obligations.
Table 2: Comparison of Army's Estimated Reconstitution Cost to Actual
Cost for 38 Selected Items for Fiscal Year 2004:
Item: M119 howitzer;
Estimated reconstitution cost per item: $50,000;
Average actual reconstitution cost per item[A]: $1,869;
Actual as percent of estimate: 4%.
Item: M1101;
Estimated reconstitution cost per item: $12,931;
Average actual reconstitution cost per item[A]: $1,312;
Actual as percent of estimate: 10%.
Item: M88A1;
Estimated reconstitution cost per item: $140,000;
Average actual reconstitution cost per item[A]: $14,587;
Actual as percent of estimate: 10%.
Item: M969;
Estimated reconstitution cost per item: $30,000;
Average actual reconstitution cost per item[A]: $4,528;
Actual as percent of estimate: 15%.
Item: M1A1;
Estimated reconstitution cost per item: $120,000;
Average actual reconstitution cost per item[A]: $18,213;
Actual as percent of estimate: 15%.
Item: M916 (10T tractor);
Estimated reconstitution cost per item: $44,000;
Average actual reconstitution cost per item[A]: $8,560;
Actual as percent of estimate: 19%.
Item: M1078 (FMTV);
Estimated reconstitution cost per item: $33,000;
Average actual reconstitution cost per item[A]: $6,508;
Actual as percent of estimate: 20%.
Item: M35A3;
Estimated reconstitution cost per item: $33,000;
Average actual reconstitution cost per item[A]: $6,780;
Actual as percent of estimate: 21%.
Item: Compressor;
Estimated reconstitution cost per item: $9,000;
Average actual reconstitution cost per item[A]: $2,013;
Actual as percent of estimate: 22%.
Item: M9 ACE;
Estimated reconstitution cost per item: $60,000;
Average actual reconstitution cost per item[A]: $14,136;
Actual as percent of estimate: 24%.
Item: M113A3 (FOV);
Estimated reconstitution cost per item: $46,000;
Average actual reconstitution cost per item[A]: $11,391;
Actual as percent of estimate: 25%.
Item: MKT;
Estimated reconstitution cost per item: $9,000;
Average actual reconstitution cost per item[A]: $2,594;
Actual as percent of estimate: 29%.
Item: M113A2 (FOV);
Estimated reconstitution cost per item: $46,000;
Average actual reconstitution cost per item[A]: $13,738;
Actual as percent of estimate: 30%.
Item: M871;
Estimated reconstitution cost per item: $17,000;
Average actual reconstitution cost per item[A]: $5,319;
Actual as percent of estimate: 31%.
Item: M978 2.5K tankers;
Estimated reconstitution cost per item: $38,000;
Average actual reconstitution cost per item[A]: $11,932;
Actual as percent of estimate: 31%.
Item: M992 FAASV;
Estimated reconstitution cost per item: $50,000;
Average actual reconstitution cost per item[A]: $15,940;
Actual as percent of estimate: 32%.
Item: M1083 (LMTV);
Estimated reconstitution cost per item: $25,000;
Average actual reconstitution cost per item[A]: $8,830;
Actual as percent of estimate: 35%.
Item: AVLB;
Estimated reconstitution cost per item: $96,000;
Average actual reconstitution cost per item[A]: $34,917;
Actual as percent of estimate: 36%.
Item: Generator sets;
Estimated reconstitution cost per item: $5,565;
Average actual reconstitution cost per item[A]: $2,024;
Actual as percent of estimate: 36%.
Item: D7;
Estimated reconstitution cost per item: $25,000;
Average actual reconstitution cost per item[A]: $9,527;
Actual as percent of estimate: 38%.
Item: MICLIC;
Estimated reconstitution cost per item: $6,000;
Average actual reconstitution cost per item[A]: $2,327;
Actual as percent of estimate: 39%.
Item: M915 (8T tractor);
Estimated reconstitution cost per item: $25,000;
Average actual reconstitution cost per item[A]: $9,914;
Actual as percent of estimate: 40%.
Item: M2A2/M3A3;
Estimated reconstitution cost per item: $77,000;
Average actual reconstitution cost per item[A]: $31,266;
Actual as percent of estimate: 41%.
Item: M109A6 Paladin;
Estimated reconstitution cost per item: $55,000;
Average actual reconstitution cost per item[A]: $24,064;
Actual as percent of estimate: 44%.
Item: M1076 (PLS trailer);
Estimated reconstitution cost per item: $15,000;
Average actual reconstitution cost per item[A]: $6,851;
Actual as percent of estimate: 46%.
Item: M872;
Estimated reconstitution cost per item: $22,000;
Average actual reconstitution cost per item[A]: $10,740;
Actual as percent of estimate: 49%.
Item: PLS truck;
Estimated reconstitution cost per item: $39,000;
Average actual reconstitution cost per item[A]: $19,477;
Actual as percent of estimate: 50%.
Item: ATLAS forklift;
Estimated reconstitution cost per item: $15,000;
Average actual reconstitution cost per item[A]: $7,552;
Actual as percent of estimate: 50%.
Item: M984 HEMTT wrecker;
Estimated reconstitution cost per item: $39,000;
Average actual reconstitution cost per item[A]: $19,868;
Actual as percent of estimate: 51%.
Item: M977 10T cargo truck;
Estimated reconstitution cost per item: $38,000;
Average actual reconstitution cost per item[A]: $23,880;
Actual as percent of estimate: 63%.
Item: M149;
Estimated reconstitution cost per item: $3,777;
Average actual reconstitution cost per item[A]: $2,435;
Actual as percent of estimate: 64%.
Item: FLU-419;
Estimated reconstitution cost per item: $35,000;
Average actual reconstitution cost per item[A]: $24,629;
Actual as percent of estimate: 70%.
Item: M101;
Estimated reconstitution cost per item: $2,288;
Average actual reconstitution cost per item[A]: $1,612;
Actual as percent of estimate: 70%.
Item: 4K forklift;
Estimated reconstitution cost per item: $9,000;
Average actual reconstitution cost per item[A]: $8,363;
Actual as percent of estimate: 93%.
Item: M105;
Estimated reconstitution cost per item: $2,288;
Average actual reconstitution cost per item[A]: $2,654;
Actual as percent of estimate: 116%.
Item: PLS racks;
Estimated reconstitution cost per item: $1,200;
Average actual reconstitution cost per item[A]: $1,783;
Actual as percent of estimate: 149%.
Item: M1061;
Estimated reconstitution cost per item: $1,200;
Average actual reconstitution cost per item[A]: $1,973;
Actual as percent of estimate: 164%.
Item: M200A1 trailer;
Estimated reconstitution cost per item: $1,200;
Average actual reconstitution cost per item[A]: $2,390;
Actual as percent of estimate: 199%.
Sources: U.S. Army and GAO analysis.
[A] Represents incremental cost comprised of direct labor and material
costs and does not include any indirect cost allocation.
[End of table]
Alternative Service Estimates Included Equipment Maintenance That May
Exceed OSD's Reconstitution Guidance:
The services included costs in their reconstitution estimates
calculated outside the COST model that appear not to be equipment
reconstitution as established by OSD's guidance. In one case, the Navy
and the Air Force included unfunded fiscal year 2004 depot-level
maintenance requirements in their supplemental funding cost estimates
that did not arise from OIF and other operations related to the global
war on terrorism.
The Navy and Air Force used unfunded peacetime depot maintenance
requirements as the basis for the depot-level maintenance portion of
their fiscal year 2004 supplemental equipment reconstitution requests.
The Navy requested funding for unfunded ship overhauls, and according
to Atlantic fleet officials, unfunded ship overhauls occur every year.
These officials also stated that the Navy typically finds the funding
needed to perform unfunded overhauls somewhere in its baseline budget
or will delay the overhauls until the following year. In addition, the
Air Force's fiscal year 2004 supplemental request for depot-level
equipment reconstitution consisted of funding engine and airframe
overhauls that were not funded in its fiscal year 2004 baseline budget.
These requirements may not fall within the description of equipment
reconstitution as established in OSD's guidance, which directed the
services to request funds needed to restore forces to the same
operational level as prior to deployment and to limit requests to those
costs already incurred as a direct result of operations in support of
the war on terrorism. However, the DOD guidance also instructed the
services to prepare their supplemental budget estimates around the DOD
Financial Management Regulation, Chapter 23 Contingency Cost Breakdown
Structure, which provides a broader description of reconstitution
costs. Taken as a whole, the DOD supplemental budget preparation
guidance is unclear on what the services could and could not include in
their budget submissions. In addition, Air Force and Navy officials
said that funding for these requirements was needed to prepare their
forces to be fully ready to fight the global war on terrorism. However,
including these unfunded depot maintenance peacetime requirements may
overstate the estimated cost of reconstituting equipment involved in
operations in Iraq and Afghanistan.
OSD Guidance Excluded Estimates of Potential Equipment Losses During
the Budgeting Process:
In preparing the fiscal year 2004 global war-on-terrorism supplemental
budget, OSD only allowed the services to request funding to replace
known battle losses and excluded projected battle losses and other
expected losses. Such expected losses include equipment that would be
considered beyond economic repair, such as crash-damaged vehicles and
maintenance washouts.[Footnote 17] However, the replacement of these
excluded items ultimately will need to be funded in future budgets to
ensure that the Army and Marine Corps have an adequate amount of
equipment needed to meet future challenges.
Figure 2: Bradley Fighting Vehicle--Example of Projected Equipment Item
Damage:
[See PDF for image]
Source: GAO.
[End of figure]
The equipment replacement needs being quantified by the services for
inclusion in the fiscal year 2005 global war-on-terrorism supplemental
budget will incorporate some of the expenses excluded by OSD guidance
in the fiscal year 2004 supplemental budget request. However, as of
December 2004, the magnitude of this requirement is unknown.
Using the Army's equipment reconstitution requirements analysis, we
estimated that the fiscal year 2004 equipment replacement requirement
due to maintenance washouts ranged from $259 million to $562
million.[Footnote 18] Recognizing that not all OIF equipment losses
were covered in the fiscal year 2004 supplemental, the Army has
included some unknown battle losses, crash losses, and maintenance
washouts in its Tactical Wheeled Vehicle Study. The Army engaged this
study to identify shortfalls in its tactical wheeled vehicle fleets and
also included transformation and underfunded requirements in past
baseline budgets. This study will identify multiyear procurement
requirements and, according to Army resource officials, it is hoped the
Army will have these requirements funded through future baseline and
supplemental budgets. As of March 2005, the study has not been issued
and the Army has been unable to provide us with an estimate of the
procurement funding requirements, including the amount directly related
to OIF equipment reconstitution requirements.
Furthermore, the Army's and Marine Corp's reconstitution requirements
for prepositioned equipment still being used in Iraq will also increase
because the anticipated battle and crash losses and maintenance
washouts will also continue to increase the longer the equipment
remains in use. Until OSD allows the services to consider anticipated
operational equipment losses and maintenance washouts in their
supplemental budgeting process, equipment reconstitution requirements
generated during the current fiscal year will inevitably be pushed out
for funding in upcoming years. Not doing so could also have an impact
on the ability of the services to quickly reconstitute equipment in the
current fiscal year.
DOD Not Accurately Reporting Equipment Reconstitution Costs:
DOD has not accurately tracked and reported its equipment
reconstitution costs because the services are unable to segregate
equipment reconstitution from other maintenance requirements, as
required. In part to provide Congress with information on global war-
on-terrorism costs and provide the OSD comptroller with a means to
assess variance between obligations and the budget, DFAS compiles a
monthly report to track these obligations. The DFAS report on funds
obligated in support of the war includes a category for tracking
equipment reconstitution obligations and the guidance associated with
this report describes what reconstitution costs can include. Our
analysis of the DFAS report showed that 1) the Air Force is not
separately reporting equipment reconstitution obligations because it
does not have a mechanism within its current accounting system to track
them, 2) the Army is including unit reconstitution obligations that are
above and beyond equipment reconstitution and other maintenance costs,
and 3) the Navy is unable to segregate regular maintenance from
reconstitution maintenance for ship overhauls. As a result, the
equipment reconstitution obligations are being inconsistently reported
by the services and the report data are not reliable for accurately
determining how much the services are actually obligating for the
reconstitution of equipment returning from deployments in support of
the global war on terrorism. Table 3 lists the fiscal year 2004
obligations reported by the services in DFAS's report as of the end of
September 2004 for reconstitution.
Table 3: Reconstitution Obligations Reported by Services in DFAS
Terrorist Cost Report, as of the End of September 2004:
Dollars in thousands.
Army;
Obligations reported: $3,704,622.
Navy;
Obligations reported: $791,532.
Air Force;
Obligations reported: $0.
Marine Corps;
Obligations reported: $229,280.
Special Operations;
Obligations reported: $54,206.
Total;
Obligations reported: $4,779,640.
Source: DOD.
[End of table]
DOD reports the costs of the global war on terrorism largely in
accordance with the cost breakdown structure found in its financial
management regulation.[Footnote 19] This internal DOD guidance
describes equipment reconstitution costs as including the cost to
clean, inspect, maintain, replace, and restore equipment to the
required condition at the conclusion of the contingency operation or
unit deployment. This guidance, which includes a specific cost category
for equipment reconstitution along with specific budget guidance issued
by the OSD comptroller's office that addresses incremental costs of the
global war on terrorism, calls for the services to report equipment
reconstitution costs separately from other incremental costs.[Footnote
20] Despite this guidance, the Air Force is not separately reporting
equipment reconstitution obligations to DFAS for inclusion in its
monthly terrorism cost report owing to the way the Air Force accounting
system was designed. Air Force officials told us that the Air Force's
accounting system currently has no way to delineate equipment
reconstitution obligations from other global war-on-terrorism
obligations for DFAS reporting purposes. Specifically, the Air Force
does not have a mechanism nor has it established codes that can track
the dollar amounts obligated on equipment reconstitution in fiscal
years 2003 and 2004, which the guidance does not require. The Air
Force's accounting system has two types of codes for classifying
expenses: (1) element of expense investment codes, which are used for
tracking obligations by commodities (such as supplies, travel, and
civilian pay); and (2) emergency and special program codes, which are
used to collect costs incurred during an emergency or a special program
(such as the global war on terrorism). Neither of these codes,
individually or in combination, equates to equipment reconstitution.
Instead, equipment reconstitution obligations are spread throughout
other categories in the DFAS terrorist cost report, as appropriate, for
the type of obligations incurred. Thus equipment reconstitution
obligations are reported in the operations category of DFAS's report,
not the reconstitution category of the DFAS report, and are mixed with
other global war-on-terrorism obligations that are tracked by other
cost categories in the DFAS report. According to OSD comptroller
officials, having the ability to track actual global war-on-terrorism
obligations is important in that it allows them insight into the
accuracy of the supplemental budget that was generated, in part, from
the COST model.
Army and Navy equipment reconstitution obligations may also be
inaccurate in the DFAS report. The Army and Navy track their equipment
reconstitution obligations through the use of certain codes available
in their account encoding structure and may overstate reported
equipment reconstitution obligations, because these codes are
accumulating global war-on-terrorism and other obligations that were
not exclusively for equipment reconstitution.
During our review, we found that the Army is including obligations not
directly related to equipment reconstitution requirements arising from
global war-on-terrorism deployments. For example, units reconstituting
after returning from Iraq may be including maintenance obligations
generated during training exercises. Army officials stated that these
units are being ordered to rapidly prepare for subsequent deployments,
which includes reconstituting equipment and engaging in training
exercises among various other tasks. According to Army officials,
training exercises can require the use of equipment that has not yet
been fully reconstituted and the exercises generate additional
maintenance requirements not related to global war-on-terrorism
equipment reconstitution. However, these training-related maintenance
requirements are not readily separable from the equipment
reconstitution requirements, and are therefore being included as part
of the Army's reported reconstitution obligations. In addition, some
reconstitution obligations do not readily align with the cost
categories in the DFAS report and are thus included in existing
categories, such as equipment reconstitution. For example, Army budget
officials told us that when units return home from a deployment they
incur reconstitution expenses unrelated to their equipment. These
expenses include training needed to reestablish a unit's ability to
perform its mission and personnel expenses related to the movement of
soldiers in and out of the unit that occur after an extensive
deployment. The officials told us that these obligations are being
included in the equipment reconstitution section because this was the
best place to account for them. As a result, the Army's equipment
reconstitution amounts are likely overstated.
The Navy's reported reconstitution obligations include some maintenance
costs that did not appear to completely result directly from global war-
on-terrorism deployments. Portions of the Navy's reported obligations
for equipment reconstitution include major ship repairs and overhauls,
called "availabilities", which are accomplished at specified time
intervals independent of the ship's use during the global war on
terrorism. The specific maintenance tasks performed during an
availability depend on the type of ship, the type of repair or overhaul
being conducted, and the ship's condition. According to Navy officials,
they report all of the obligations incurred in conjunction with an
availability funded by the fiscal year 2004 supplemental budget as
equipment reconstitution regardless of whether the obligations are due
to conditions that existed prior to a global war-on-terrorism
deployment or to peacetime maintenance conducted during all
availabilities. The Navy reports all of these obligations as equipment
reconstitution, because it does not have a process to capture what
obligations for an availability are driven by the higher level of
operations generated by global war-on-terrorism deployments versus
baseline requirements generated by a ship during deployments not
related to the global war on terrorism. While all of the maintenance
tasks associated with availabilities that are funded by supplemental
money are needed to effectively maintain the condition of Navy ships,
not all of the maintenance performed during the availabilities resulted
from the ships being deployed in support of the global war on
terrorism. Thus, some of the Navy's reported obligations do not appear
to fit DOD's criteria for equipment reconstitution costs that should be
reported as an incremental cost of the global war on terrorism.
Conclusions:
As the services, especially the Army and Marine Corps, continue to
conduct operations related to the global war on terrorism at the
current high pace, they will continue to generate equipment
reconstitution requirements. OSD and the services will continue to use
the department's two-phased process to develop estimates of these
maintenance requirements so they can be funded through supplemental and
baseline budgets. However, DOD and the services cannot be assured that
its global war-on-terrorism supplemental budget requirements are as
reliable and complete as possible until the OSD comptroller:
* revises its contingency model to ensure that costs covered by the
model's operating tempo cost elements are not duplicated by costs in
the model's reconstitution cost elements;
* clearly establishes what equipment reconstitution maintenance
requirements should be covered by the COST model and communicates this
information to IDA to ensure that the model calculations reflect only
these maintenance costs;
* clarifies its guidance to the services on what types of maintenance
requirements should and should not be included as equipment
reconstitution when developing the supplemental budget; and:
* ensures that all anticipated equipment reconstitution requirements,
such as operational losses and maintenance washouts, are considered
when developing supplemental budget requests.
Overestimating these requirements could result in a misapplication of
funds, while underestimating them could require the services to draw
funds from baseline programs or result in the inability of the services
to fully reconstitute their equipment. Improving DOD's process for
estimating equipment reconstitution maintenance and equipment
replacement requirements will aid the services in reducing the risks
they face in executing the equipment reconstitution program and help
maintain a military that is able to meet the nation's needs.
With global war-on-terrorism operations continuing at a high pace, the
Army will be generating additional equipment reconstitution
requirements that will be funded through future supplemental budgets.
Although OSD did not use the Army's fiscal year 2004 equipment
reconstitution estimate for the fiscal year 2004 supplemental request,
that does not preclude OSD from using future Army estimates.
Consequently, it is important that the Army appropriately offset its
equipment reconstitution estimate with baseline peacetime funding,
which it did not do for its fiscal year 2004 estimate. Until the Army
establishes a step in its supplemental estimating process to offset the
estimate with the baseline budget, its calculation of equipment
reconstitution requirements for future supplemental budgets will
continue to be overstated. Further, if OSD uses the Army-calculated
equipment reconstitution estimate and does not adjust the estimate for
baseline funding, the Army's equipment reconstitution requirements
could be overfunded, which could limit the funding available for other
requirements, thus potentially increasing risks in other areas.
Inconsistencies between how the services are reporting equipment
reconstitution obligations in the DFAS global war-on-terrorism cost
report mean that equipment reconstitution and other related cost
categories are being inaccurately reported. Until DOD develops
comprehensive and consistent methods for tracking and reporting
equipment reconstitution obligations--including (1) developing a
mechanism within the Air Force for identifying, accumulating, and
reporting its equipment reconstitution obligations; and (2) refining
the Navy and Army processes for identifying obligations that are
incurred exclusively for equipment reconstitution--the usefulness of
the DFAS report will remain limited. Improving the accuracy and
completeness of the report will result in a DFAS cost report that will
be more useful to OSD and Congress in their oversight of global war-on-
terrorism obligations.
Recommendations for Executive Action:
To correct the weaknesses we identified in the equipment reconstitution
cost estimating process the department used when developing its fiscal
year 2004 supplemental budget request, we recommend that the Secretary
of Defense take the following five actions:
* Direct the OSD comptroller to revise its COST model to ensure that
costs covered by the model's operating tempo cost elements are not
duplicated by costs in the model's reconstitution cost elements;
* Direct the OSD comptroller to clearly establish what equipment
maintenance requirements should be covered by the COST model and
communicate this information to IDA to ensure that the model
calculations reflect only these maintenance costs;
* Direct the Secretary of the Army to establish a step in its
supplemental estimating process to offset the estimate with the
baseline budget to improve future contingency funding estimates;
* Direct the OSD comptroller to clarify its supplemental budget
guidance to the services on what types of maintenance requirements
should and should not be included as equipment reconstitution when
developing the supplemental budget; and:
* Direct the OSD comptroller to ensure that all potential equipment
reconstitution requirements are considered when developing supplemental
budget requests by allowing the services to include anticipated
equipment losses--both operational losses and maintenance washouts--in
their supplemental budgeting process.
To ensure that Congress has a clear insight into the cost of equipment
reconstitution, we also recommend that the Secretary of Defense direct
the services, in conjunction with DFAS, to develop comprehensive and
consistent methods for tracking and reporting equipment reconstitution
obligations. This includes (1) developing a mechanism within the Air
Force for identifying, accumulating, and reporting its equipment
reconstitution obligations; and (2) refining the Navy and Army
processes for identifying obligations that are incurred for equipment
reconstitution.
Agency Comments and Our Evaluation:
The OSD Comptroller, Director for Operations and Personnel provided
oral comments on a draft of this report for DOD and concurred with two
of our six recommendations, partially concurred with three
recommendations, and did not concur with the other recommendation.
In concurring with our recommendation that OSD clarify its supplemental
budget guidance to the services on what types of maintenance
requirements should and should not be included as equipment
reconstitution when developing the supplemental budget, the OSD
director stated that improvements are made to each iteration of the
guidance. We confirmed that the guidance provided to the services for
the fiscal year 2005 supplemental budget was much more detailed and
comprehensive than the guidance provided for developing the fiscal
years 2003 and 2004 supplemental budgets.
In concurring with our recommendation that the services, in conjunction
with DFAS, develop comprehensive and consistent methods for tracking
and reporting equipment reconstitution obligations, the OSD director
stated that they have already revised their financial management
regulation to improve reporting of equipment reconstitution. However,
until additional actions are taken, such as improving the services'
financial systems' ability to track obligations, our recommendation
will not be fully implemented.
In partially concurring with our recommendation regarding the
duplication of maintenance costs in the COST model, the OSD director
stated that they have made revisions to DOD's financial management
regulations to ensure that the cost of equipment maintenance is not
being duplicated in different COST model sections. However, as
currently written, the revised section does not have any instructions
on avoiding duplicating maintenance requirements calculated by the
model's operations section; instead it simply divides reconstitution
into four subcategories of maintenance. Until further changes are made,
the intent of our recommendation will not have been met.
In partially concurring with our recommendation that the OSD
comptroller clearly establish what equipment reconstitution maintenance
requirements should be covered by the COST model, the OSD director
stated that IDA, the model's operator, periodically receives specific
guidance from the comptroller's office on the criteria and elements of
costs to be included in the model's calculations. However, as we
reported, neither OSD comptroller nor IDA officials were able to
provide us with examples of this guidance when requested. The OSD
director also told us that they have taken action to ensure that the
model calculates costs in accordance with the DOD Financial Management
Regulation and that they issue guidance to the services on what costs
will be covered by the model. Although Volume 12, Chapter 23, Section
3.5 of the financial management regulation has been revised to
delineate equipment reconstitution into four categories--
organizational-, intermediate-, and depot-level maintenance; and
contractor logistics support--the section does not state which of these
categories are covered by the COST model. In addition, while OSD
guidance to the services for developing the fiscal year 2005
supplemental budget stated that intermediate-and depot-level
maintenance would be calculated outside the model, the guidance
provided for developing the fiscal years 2003 and 2004 supplemental
budgets only specified that depot-level maintenance would be calculated
outside the model. Until changes are made establishing what maintenance
requirements are in the COST model and clearly communicating this to
IDA, the intent of our recommendation will not have been met.
The OSD director did not concur with our recommendation that the
Secretary of the Army be directed to establish a step in its
supplemental budget process for estimating equipment reconstitution
requirements to offset the estimate with baseline funding. The OSD
director said that the process for developing the supplemental budget
already includes a process for excluding costs for equipment
maintenance funded in the baseline budget. As stated in this report, we
acknowledge that OSD's COST model equations for equipment
reconstitution contain a factor for reducing the reconstitution
requirements by taking baseline funding into account. We also
acknowledge that OSD's process for building the supplemental budget has
controls in place to help ensure that only incremental costs are
included in the supplemental budget. However, we believe that the
services' supplemental budget estimating processes also need to have
such assurances built in. We made our recommendation to address the
fiscal year 2004 equipment reconstitution requirement that the Army
developed separate from the COST model during what we have described in
this report as the second phase of DOD's process for building the
supplemental budget. When developing this requirement, the Army did not
take into account available baseline funding, because it did not have a
step in its supplemental budget estimating process to offset the
estimate with baseline funding. If the OSD comptroller had used this
Army-generated requirement in its fiscal year 2004 supplemental budget,
the potential exists that OSD comptroller officials might miss the
Army's failure to adjust this requirement for baseline funding.
Importantly, the very safeguards that the OSD comptroller stated it has
in place failed to offset the $1.2 billion duplication of aircraft
maintenance requirements that the Air Force included in its fiscal year
2004 supplemental budget requirement. Taking action on our
recommendation would provide the Army with the necessary safeguards to
submit accurate budget estimates and avoid the potential that future
supplemental budgets could provide more than incremental funding to the
Army. Therefore, we continue to believe our recommendation has merit.
In partially concurring with our recommendation that the services be
allowed to include equipment losses in their supplemental budget
requirements, the OSD director stated that they typically address these
potential future costs through subsequent budget requests or through
reprogramming efforts. The OSD director also told us that it is
conceivable that some factor reflecting maintenance washout trends
could be considered in future supplemental budget requests. If this
action is taken, it should satisfy the intent of our recommendation. As
we stated in our report, until OSD allows the services to consider
anticipated operational equipment losses and maintenance washouts in
their supplemental budgeting process, equipment reconstitution
requirements generated during the current fiscal year will inevitably
be pushed out for funding in upcoming years. Not doing so could also
have an impact on the ability of the services to quickly reconstitute
equipment in the current fiscal year.
We are sending copies of this report to other appropriate congressional
committees, the Secretary of Defense, the Secretary of the Army, the
Secretary of the Navy, the Secretary of the Air Force, the Commandant
of the Marine Corps, and the Director, Office of Management and Budget.
We will also make copies available to others upon request. In addition
the report will be available at no charge on GAO's Web site at
[Hyperlink, http://www.gao.gov].
If you or your staff have any questions on the matters discussed in
this letter, please contact me at (202) 512-8412 or
[Hyperlink, solisw@gao.gov] or my assistant director, Julia Denman, at
(202) 512-4290 or [Hyperlink, denmanj@gao.gov]. Other major
contributors to this letter were John Strong, Bob Malpass, Andy Marek,
Robert Wild, Dave Mayfield, and Charles Perdue.
Signed by:
William M. Solis:
Director, Defense Capabilities and Management:
Congressional Committees:
The Honorable John W. Warner, Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
The Honorable Ted Stevens, Chairman:
The Honorable Daniel K. Inouye:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable Duncan Hunter, Chairman:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representative:
The Honorable Jerry Lewis, Chairman:
The Honorable John Murtha:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
To determine if the process DOD used to develop its fiscal year 2004
supplemental budget equipment reconstitution requirements was accurate,
we met with officials from the OSD Under Secretary of Defense
(Comptroller); Assistant Secretary of the Army, Financial Management
and Comptroller; Assistant Secretary of the Navy, Financial Management
and Comptroller; Assistant Secretary of the Air Force, Financial
Management and Comptroller; Headquarters U.S. Marine Corps Programs and
Resources Department, and U.S. Marine Corps Deputy Commandant
Installations and Logistics. We also collected and reviewed OSD and
service equipment reconstitution guidance to develop an understanding
of the processes the department used to develop its fiscal year 2004
equipment reconstitution requirements. As part of this effort we also
met with officials from OSD Under Secretary of Defense (Comptroller);
Headquarters U.S. Army Deputy Chief of Staff G-4; Headquarters U.S.
Navy Deputy Chief of Naval Operations (Logistics); Headquarters U.S.
Air Force Deputy Chief of Staff Installation and Logistics; and
Headquarters U.S. Marine Corps Programs and Resources Department to
identify the methodologies used by OSD and each of the services for
determining equipment reconstitution requirements and collected related
documentation. To gain further insight into the accuracy of the process
the Army used to develop its equipment reconstitution requirement, we
met with officials at and collected data from the Army Materiel Systems
Analysis Activity; Forts Bragg, Campbell, Dix, Hood, Riley, and
Stewart; and Camps Arifjan and Doha, Kuwait. We collected actual
equipment reconstitution cost data from these activities and compared
them to the data the Army used in developing its equipment
reconstitution requirement. To determine the reliability of the actual
reconstitution costs for Army equipment, we discussed and observed the
equipment reconstitution data collection process at four of the Army
bases we visited where we observed a consistent process for collecting
and entering equipment reconstitution data into the Army's database. We
also visited the AMSAA team that was managing and summarizing the
Army's equipment reconstitution data collection effort to determine
that the personnel collecting the data and managing the data collection
effort were performing quality reviews to ensure completeness and
accuracy. Additionally, the AMSAA management team had the Army commands
review the data collected at their installations prior to passing the
data to higher commands. Based on this assessment, we concluded that
the data collection effort was sufficiently comprehensive and reliable
to provide data for this engagement. We also collected and analyzed
data the services use in developing their reconstitution requirements,
which were submitted to OSD. Further, we collected and analyzed data
OSD used to develop the department's overall equipment reconstitution
requirement that was included in the fiscal year 2004 global war-on-
terrorism supplemental budget request. To gain further insight into how
OSD developed the equipment reconstitution requirement, we met with IDA
officials to develop an understanding of how OSD's COST model
calculates this requirement. We limited our examination of the COST
model to the section that calculates equipment reconstitution
requirements, which consists of only 4 of the 188 equations that
comprise the COST model. To understand the extent to which equipment
reconstitution requirements generated during fiscal year 2004 will have
to be funded in upcoming budgets we met with and obtained guidance
issued by the OSD Under Secretary of Defense (Comptroller) regarding
how the services' equipment reconstitution requirements were
restricted. To quantify the effect of these limitations we collected
Army data on potential equipment losses and estimated their possible
impact on future budgets. To assess the equipment reconstitution
requirement inputs provided to the services by their component commands
and units we met with officials of and collected data at Army Forces
Command, Naval Air Systems Command, U.S. Atlantic Fleet, Air Combat
Command, and U.S. Marine Corps Logistics Command. Using the information
and analysis described here we assessed the reasonableness and
completeness of the department's equipment reconstitution requirements.
To determine how accurately and completely the department is tracking
and reporting equipment reconstitution costs we met with officials of
and collected documentation from the Assistant Secretary of the Army,
Financial Management and Comptroller; Assistant Secretary of the Navy,
Financial Management and Comptroller; Assistant Secretary of the Air
Force, Financial Management and Comptroller; and Headquarters U.S.
Marine Corps Programs and Resources Department. We reviewed the
structure of how the services are accumulating and reporting
obligations associated with their equipment reconstitution efforts. We
compared and contrasted what type of obligations each service
considered as equipment reconstitution for inclusion in the Defense
Financial Accounting Service's report that is tracking fiscal year 2004
global war-on-terrorism obligations. We discussed the inconsistencies
between the services noted during our review with the service officials
listed above to determine the reasons for the inconsistent manner in
which equipment reconstitution obligations were reported.
We performed our work from September 2003 through March 2005 in
accordance with generally accepted government auditing standards.
(350421):
FOOTNOTES
[1] Organizational maintenance normally consists of inspecting,
servicing, lubricating, adjusting, and replacing parts. Intermediate
maintenance includes calibration, and the repair or replacement of
damaged and unserviceable parts. Depot maintenance is performed on
equipment requiring major overhaul or a complete rebuild of parts.
[2] Fiscal years 2004 and 2005 global war-on-terrorism equipment
reconstitution requirements are included in the supplemental budget
requests.
[3] The term incremental costs means those directly attributable costs
that would not have been incurred if it were not for the operation.
Sections 230406 and 230902 of Department of Defense Financial
Management Regulations 7000.14R, volume 12, chapter 23, Contingency
Operations (February 2001) provide additional information on
incremental costs. We further note that DOD's financial systems only
capture total obligations and the services use various management
information systems to identify incremental obligations and to estimate
costs.
[4] IDA is a federally funded research and development center that OSD
used to develop, maintain, and modify its COST model.
[5] 31 U.S.C. 717.
[6] OSD fiscal year 2004 supplemental budget preparation guidance
instructed the services to offset costs from the baseline budget that
will not be incurred (e.g., peacetime training-and maintenance-related
activities that will not occur since units will be deployed in support
of the global war on terrorism) when calculating their incremental
costs.
[7] Obligations are incurred through actions such as orders placed,
contracts awarded, services received, or similar transactions made by
federal agencies during a given period that will require payments
during the same or a future period. See Department of Defense Financial
Management Regulations, 7000.14-R, vol. 1, Definitions, page xvii.
[8] Rolling stock includes items such as tanks, trucks, and trailers.
[9] This figure includes prepositioned rolling stock that has remained
in Iraq in support of ongoing operations.
[10] Fully mission capable means an item can "move, shoot and
communicate", and has no outstanding safety issues.
[11] Emergency Wartime Supplemental Appropriations Act for Fiscal Year
2003, Pub. L. 108-11 (Apr. 16, 2003).
[12] The DFAS monthly terrorist report tracks the amount of funds the
services are obligating on the global war on terrorism by various
categories, including equipment reconstitution.
[13] Emergency Supplement Appropriation Act for Defense and for the
Reconstruction of Iraq and Afghanistan Fiscal Year 2004, Pub. L. 108-
106 (Nov. 6, 2003).
[14] Depot-level aircraft maintenance and repair requirements are
funded through a process separate from the flying-hour program.
[15] OSD's supplemental request was split 53 percent for organizational-
and intermediate-level maintenance and 47 percent for depot-level
maintenance. OSD comptroller officials were not able to delineate
organizational-and intermediate-level maintenance.
[16] We have previously reported that contingency costs were being
overstated because they were not adjusted to reflect baseline budget
offsets. See GAO, Contingency Operations: DOD's Reported Costs Contain
Significant Inaccuracies, NSIAD-96-115 (Washington, D.C.: May 17,
1996).
[17] Maintenance washouts are equipment that has been deemed too
expensive to repair when compared to the cost to replace the equipment
item, and is removed from the active inventory.
[18] This estimate is based on the Army's ability to locate excess
carcasses that could be remanufactured at its intermediate-level
maintenance facilities and depots. If carcasses are unavailable or
maintenance capacity is unavailable due to operational and
reconstitution requirements, the funding needed will be higher because
the requirement will have to be met with procurement of new equipment.
[19] DOD Financial Management Regulation 7000.14-R, vol. 12, ch. 23,
sec. 230406, Contingency Operations (2001).
[20] Although not pointed out to us by the OSD comptroller office or
Air Force officials, we noted during the course of our review two
provisions of volume 12, chapter 23 of DOD's financial regulation that
could be viewed as being inconsistent with this requirement. These
provisions suggest that the services need not separately report
reconstitution obligations if 1) to do so would require them to
establish a cost accounting system solely for the purpose of
determining costs of contingency operations, or 2) they could not
separately identify the additive costs for equipment overall and
maintenance attributable to the contingency. This apparent
inconsistency could further confuse service budget and accounting
officials as to the extent they should specifically report
reconstitution costs apart from other incremental costs.
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