Defense Budget
Trends in Operation and Maintenance Costs and Support Services Contracting Gao ID: GAO-07-631 May 18, 2007The Department of Defense (DOD) spent about 40 percent of the total defense budget to operate and maintain the nation's military forces in fiscal year 2005. Operation and maintenance (O&M) funding is considered one of the major components of funding for readiness. O&M appropriations fund the training, supply, and equipment maintenance of military units as well as the infrastructure of military bases. Over the past several years, DOD has increasingly used contractors, rather than uniformed or DOD civilian personnel, to provide O&M services in areas such as logistics, base operations support, information technology services, and administrative support. The House Appropriations Committee directed GAO to examine growing O&M costs and support services contracting. This GAO report (1) identifies the trends in O&M costs and services contracts and the reasons for the trends, (2) discusses whether increased services contracting has exacerbated the growth of O&M costs, and (3) provides perspectives on the benefits and concerns associated with increased contracting for support services. GAO analyzed DOD's O&M appropriations, budgets, and services contract costs over a 10-year period and developed case studies of outsourced O&M-related work at three installations. GAO is not making any recommendations. DOD made only technical comments on a draft of this report.
DOD's O&M and services contract costs increased substantially between fiscal years 1995 and 2005, with most growth occurring since fiscal year 2001. DOD's O&M costs were almost constant between fiscal years 1995 and 2000. However, between fiscal years 2000 and 2005, DOD's O&M costs increased from $133.4 billion to $209.5 billion--an increase of $76.1 billion, or 57 percent, in constant fiscal year 2007 dollars. This growth was primarily caused by increased military operations associated with the global war on terrorism and other contingencies. In addition to increased O&M costs, DOD has increasingly relied on contractors to perform O&M-related work. Between fiscal years 2000 and 2005, DOD's services contract costs in O&M-related areas increased by 73 percent. According to DOD and service officials, several factors have contributed to the increased use of contractors for support services: (1) increased O&M requirements from the global war on terrorism and other contingencies, which DOD has met without an increase in active duty and civilian personnel, (2) federal government policy, which is to rely on the private sector for needed commercial services that are not inherently governmental in nature, and (3) DOD initiatives, such as its competitive sourcing and utility privatization programs. Sufficient data are not available to determine whether increased services contracting has caused DOD's costs to be higher than they would have been had the contracted activities been performed by uniformed or DOD civilian personnel. Because existing policy generally does not require a public/private competition for contractor performance of a new or expanded commercial requirement, in-house cost estimates have not been prepared for most of the work awarded to contractors as a result of increased O&M requirements from expanded military operations. Without this information, an overall determination cannot be made of the effect of increased services contracting on O&M cost growth. DOD does maintain data from its competitive sourcing, or A-76, program. GAO's analysis of the military services' reported information on 538 A-76 decisions during fiscal years 1995 through 2005 to contract out work formerly performed by uniformed and DOD civilian personnel showed that the decisions generally resulted in reducing the government's costs for the work. However, the number of A-76 public/private competition contracts is relatively small and the results from this program may not be representative of the results from all services contracts for new or expanded O&M work. Although DOD officials have cited certain benefits from increased use of contractors for support services, such as allowing more uniformed personnel to be available for combat missions, concerns have also been cited. For example, Congress recently required DOD to prescribe guidelines giving consideration to performing more work using government employees and GAO has noted concerns over DOD's approach to services acquisition.
GAO-07-631, Defense Budget: Trends in Operation and Maintenance Costs and Support Services Contracting
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
May 2007:
Defense Budget:
Trends in Operation and Maintenance Costs and Support Services
Contracting:
GAO-07-631:
GAO Highlights:
Highlights of GAO-07-631, a report to congressional committees
Why GAO Did This Study:
The Department of Defense (DOD) spent about 40 percent of the total
defense budget to operate and maintain the nation‘s military forces in
fiscal year 2005. Operation and maintenance (O&M) funding is considered
one of the major components of funding for readiness. O&M
appropriations fund the training, supply, and equipment maintenance of
military units as well as the infrastructure of military bases. Over
the past several years, DOD has increasingly used contractors, rather
than uniformed or DOD civilian personnel, to provide O&M services in
areas such as logistics, base operations support, information
technology services, and administrative support.
The House Appropriations Committee directed GAO to examine growing O&M
costs and support services contracting. This GAO report (1) identifies
the trends in O&M costs and services contracts and the reasons for the
trends, (2) discusses whether increased services contracting has
exacerbated the growth of O&M costs, and (3) provides perspectives on
the benefits and concerns associated with increased contracting for
support services. GAO analyzed DOD‘s O&M appropriations, budgets, and
services contract costs over a 10-year period and developed case
studies of outsourced O&M-related work at three installations. GAO is
not making any recommendations. DOD made only technical comments on a
draft of this report.
What GAO Found:
DOD‘s O&M and services contract costs increased substantially between
fiscal years 1995 and 2005, with most growth occurring since fiscal
year 2001. DOD‘s O&M costs were almost constant between fiscal years
1995 and 2000. However, between fiscal years 2000 and 2005, DOD‘s O&M
costs increased from $133.4 billion to $209.5 billion”an increase of
$76.1 billion, or 57 percent, in constant fiscal year 2007 dollars.
This growth was primarily caused by increased military operations
associated with the global war on terrorism and other contingencies. In
addition to increased O&M costs, DOD has increasingly relied on
contractors to perform O&M-related work. Between fiscal years 2000 and
2005, DOD‘s services contract costs in O&M-related areas increased by
73 percent. According to DOD and service officials, several factors
have contributed to the increased use of contractors for support
services: (1) increased O&M requirements from the global war on
terrorism and other contingencies, which DOD has met without an
increase in active duty and civilian personnel, (2) federal government
policy, which is to rely on the private sector for needed commercial
services that are not inherently governmental in nature, and (3) DOD
initiatives, such as its competitive sourcing and utility privatization
programs.
Sufficient data are not available to determine whether increased
services contracting has caused DOD‘s costs to be higher than they
would have been had the contracted activities been performed by
uniformed or DOD civilian personnel. Because existing policy generally
does not require a public/private competition for contractor
performance of a new or expanded commercial requirement, in-house cost
estimates have not been prepared for most of the work awarded to
contractors as a result of increased O&M requirements from expanded
military operations. Without this information, an overall determination
cannot be made of the effect of increased services contracting on O&M
cost growth. DOD does maintain data from its competitive sourcing, or A-
76, program. GAO‘s analysis of the military services‘ reported
information on 538 A-76 decisions during fiscal years 1995 through 2005
to contract out work formerly performed by uniformed and DOD civilian
personnel showed that the decisions generally resulted in reducing the
government‘s costs for the work. However, the number of A-76
public/private competition contracts is relatively small and the
results from this program may not be representative of the results from
all services contracts for new or expanded O&M work.
Although DOD officials have cited certain benefits from increased use
of contractors for support services, such as allowing more uniformed
personnel to be available for combat missions, concerns have also been
cited. For example, Congress recently required DOD to prescribe
guidelines giving consideration to performing more work using
government employees and GAO has noted concerns over DOD‘s approach to
services acquisition.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-631].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Brian Lepore at (202) 512-
4523 or leporeb@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
O&M and Services Contract Costs Have Increased Significantly:
Data Are Insufficient to Determine Whether Increased Services
Contracting Has Exacerbated O&M Cost Growth:
Different Perspectives Exist on the Benefits and Concerns Associated
with Increased Contracting for Support Services:
Concluding Observations:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Changes in Service Contract Costs in Selected Categories:
Table 2: A-76 Public/Private Competition Decisions for Fiscal Years
1995 through 2005:
Figures:
Figure 1: O&M Costs for Fiscal Years 1995 through 2005:
Figure 2: Percent Change in DOD Costs by Major Budget Category from
Fiscal Year 1995 to 2000:
Figure 3: Percent Change in DOD Costs by Major Budget Category from
Fiscal Year 2000 to 2005:
Figure 4: Percent Change in the Services' O&M Costs:
Figure 5: Supplemental O&M Appropriations for Fiscal Years 2000 through
2005:
Figure 6: Services' O&M Costs with and without Supplemental Funding,
Transfers, and Reprogrammings:
Figure 7: First Performance Period Results from Army A-76 Public/
Private Competition Decisions to Outsource Work between Fiscal Years
1995 and 2005:
Figure 8: First Performance Period Results from Navy and Marine Corps A-
76 Public/Private Competition Decisions to Outsource Work between
Fiscal Years 1995 and 2005:
Figure 9: First Performance Period Results from Air Force A-76 Public/
Private Competition Decisions to Outsource Work between Fiscal Years
1995 and 2005:
Abbreviations:
DOD: Department of Defense:
GWOT: global war on terrorism:
O&M: operation & maintenance:
United States Government Accountability Office:
Washington, DC 20548:
May 18, 2007:
Congressional Committees:
The Department of Defense (DOD) spent about $210 billion, or 40 percent
of the total defense budget, to operate and maintain the nation's
military forces in fiscal year 2005.[Footnote 1] As a major component
of DOD's funding for readiness, operation and maintenance (O&M)
appropriations fund the training, supply, and equipment maintenance of
military units as well as the administrative and facilities
infrastructure of military bases. Over the past several years, DOD has
increasingly used private sector contractors, rather than uniformed or
DOD civilian personnel, to provide O&M-related services in areas such
as logistics, weapon systems, and base operations support; information
technology services; and administrative support.
In its June 2006 report accompanying the DOD Appropriations Bill, 2007,
the House Appropriations Committee expressed concern about the
increasing costs of operating our military forces.[Footnote 2] The
committee further stated that this trend may have been exacerbated by
efforts to contract out a substantial portion of the military services'
logistic and support activities. To gain better insight about the costs
and consequences of contracting out, as well as other factors
generating an increase in operation and maintenance costs, the
committee directed us to prepare a comprehensive analysis covering
fiscal years 1995 through 2005. Accordingly, this report (1) identifies
the trends in O&M costs and services contracts and the reasons for the
trends, (2) discusses whether increased services contracting has
exacerbated the growth of O&M costs, and (3) provides perspectives on
the benefits and concerns associated with increased contracting for
support services.
To address these objectives, we reviewed and analyzed DOD's O&M
appropriations, budget documentation, and services contract costs and
identified the related trends for fiscal years 1995 through 2005. To
consider inflation, we adjusted cost data to constant fiscal year 2007
dollars using DOD's adjustment factors.[Footnote 3] We discussed with
DOD and service headquarters officials the reasons for the trends and
how greater reliance on the private sector for O&M activities formerly
performed in-house has affected the overall O&M budget. We also
assessed the availability of information related to services contracts,
reviewed and analyzed information from DOD's competitive sourcing, or A-
76, program, and visited three installations to develop case study
examples of O&M-related work that was contracted out either as a result
of A-76 public/private competitions or because the uniformed personnel
who formerly performed the work were needed to support other missions.
For the case study examples, we identified cost estimates for the work
when performed by government employees, the reasons that the work was
contracted out, the actual contract costs, and the reasons for any
contract cost growth. We did not review the actual contracts. In
reviewing contract costs, we relied on cost data provided by
installation officials. We also discussed with installation officials
any consequences associated with increased contracting out of O&M work.
Additionally, we examined DOD's response to recent legislation
requiring DOD to consider performing more work by government employees,
reviewed steps recently taken by the military services to control
support services contract costs, and summarized our recent reports
concerning DOD's acquisition of services.
We conducted our review from August 2006 through March 2007 in
accordance with generally accepted government auditing standards. A
more detailed description of our scope and methodology is included in
appendix I.
Results in Brief:
Largely driven by increased military operations related to the global
war on terrorism (GWOT) and other military contingencies, DOD's O&M and
services contract costs increased substantially since fiscal year 2001.
DOD's O&M costs were almost constant from fiscal years 1995 to 2000,
increasing by about 2 percent in the Army and declining about 1 percent
in the Navy and Marine Corps and 2 percent in the Air Force. However,
between fiscal years 2000 and 2005, DOD's O&M costs, including
supplemental O&M funds, increased from $133.4 billion to $209.5
billion, an increase of $76.1 billion, or 57 percent. Among the
military services during this period, O&M costs increased by 137
percent in the Army, 30 percent in the Navy and Marine Corps, and 29
percent in the Air Force. Most of this growth occurred since fiscal
year 2001 and was primarily caused by increased military operations
associated with GWOT and other contingencies such as hurricane relief.
In addition, DOD and service officials stated that other factors also
contributed to the growth in O&M costs, such as the aging of military
infrastructure and equipment; increased costs for installation
security, antiterrorism force protection, communications, information
technology, transportation, fuel, and utilities; and certain changes in
acquisition approaches. While O&M costs have increased, so has DOD's
reliance on contractors to perform O&M-related work. For example,
between fiscal years 2000 and 2005, DOD's service contract costs in O&M-
related areas increased by 73 percent. According to DOD and service
officials, several factors have contributed to the increased use of
contractors for support services. First, the GWOT and other
contingencies have significantly increased O&M requirements and DOD has
met these requirements without an increase in active duty and civilian
personnel. To do this, DOD relied not only on reserve personnel
activations, but also on increased use of contractor support. Second,
federal government policy is to rely on the private sector for needed
commercial services that are not inherently governmental in nature,
which includes many of the requirements generated from the GWOT in
areas such as logistics and base operations support. Third, some
initiatives, such as DOD's competitive sourcing and utility
privatization programs, have resulted in greater reliance on the
private sector.
Sufficient data are not available to determine whether increased
services contracting has caused DOD's costs to be higher than they
would have been had the contracted activities been performed by
uniformed or DOD civilian personnel. Because existing policy generally
does not require a public/private competition for private sector
performance of a new requirement or segregable expansion of an existing
commercial activity performed by government personnel, DOD officials
stated that in-house cost estimates have not been prepared for most of
the work awarded to contractors as a result of increased O&M
requirements from GWOT and other contingencies. Without this
information, an overall determination cannot be made of the effect of
increased services contracting on O&M cost growth. DOD does maintain
detailed data from its competitive sourcing program, commonly referred
to as the A-76 program. These data include information on contracts for
work formerly performed in-house that were awarded to the private
sector as a result of a public/private cost competition.[Footnote 4]
Our analysis of the military services' reported information on 538
decisions during fiscal years 1995 through 2005 to contract out work
formerly performed by uniformed and DOD civilian personnel showed that
the decisions generally resulted in reducing the government's costs for
the work. However, compared to all O&M-related contracts, the number of
A-76 public/private competition contracts is small and the results from
this program may not be representative of the results from all services
contracts for new or expanded O&M work. DOD officials further noted
that outsourcing work formerly performed by uniformed personnel may
reduce the cost of the work but also increase O&M costs because
military personnel appropriations are used to compensate uniformed
personnel and O&M appropriations are used to pay contractors for their
services.
Differing perspectives exist on the benefits and concerns associated
with increased contracting for support services. DOD officials noted
that under certain circumstances increased use of contractors for
support services can be beneficial by allowing more uniformed personnel
to be available for combat missions and providing certain support
capabilities that are in short supply in the active and reserve
components. On the other hand, concerns over increased contracting for
support services have been cited by the Congress, the military
services, and us. For example, the Congress recently required DOD to
prescribe guidelines giving consideration to performing more work using
government employees. Section 343 of the National Defense Authorization
Act for Fiscal Year 2006 required the Secretary of Defense to prescribe
guidelines and procedures for ensuring that consideration is given to
using government employees for work that is currently performed or
would otherwise be performed by contractors[Footnote 5]. In February
2007, DOD officials stated that they plan to issue the required
guidance in the near future and that the use of government employees
instead of contractors to meet O&M-related requirements in some
circumstances might result in savings. Further, citing the need to
control costs and achieve fiscal efficiencies, the Army and the Air
Force recently issued policy memorandums calling for a reduction in
services contract costs. The Secretary of the Army stated in a January
2007 memorandum that he expected to see significant reductions in the
number of Army contracted services personnel during the remainder of
fiscal year 2007 and the Secretary of the Air Force set targets for
realizing estimated savings in Air Force support services contract
cost[Footnote 6]s. Navy officials stated that although they had not
issued any new policy on contracted services, the issue is a concern
and the Navy had reduced its planned contractor support budgets in both
fiscal year 2007 and 2008. At the three installations we visited, local
officials also cited concerns over increased contracting for support
services--such as the loss of flexibility that is inherent with the use
of uniformed and DOD civilian personnel in some circumstances, the
difficulty in preparing accurate contract statements of work to help
avoid contract modifications, and the availability of sufficient
resources to ensure adequate contract oversight. Finally, in November
2006, we reported that DOD's approach to services acquisition did not
always take the necessary steps to ensure that customer needs were
translated into well-defined contract requirements or that postcontract
award activities resulted in expected outcomes[Footnote 7]. As a
result, DOD was potentially exposed to a variety of risks, including
purchasing services that did not fully meet customer needs or that
should have been provided in a different manner or with better results.
DOD concurred with the report's recommendations to address these
concerns and stated that the department was taking or planned to take
actions to improve the acquisition of services.
Although there may be some merit in DOD developing more information on
the cost-effectiveness of its O&M services contracts that were not
awarded through the A-76 public/private competitive process, at this
time we are not recommending that DOD do this because performing the
analyses to determine the estimated in-house costs to perform this work
can be expensive and time consuming; contracting with the private
sector may be the only alternative to meet certain requirements in the
short term, especially during times of increased operations; and, as
long as DOD uses competition in its contract solicitations for new and
expanded requirements and provides adequate contract oversight, cost
efficiencies could be achieved through normal market forces. DOD made
no comments on a draft of this report except for technical comments,
which we incorporated where appropriate.
Background:
O&M appropriations support the training, supply, and equipment
maintenance of military units as well as the administrative and
facilities infrastructure of military bases. Along with military
personnel costs, which are funded with separate military personnel
appropriations, O&M funding is considered one of the major components
of DOD's funding for readiness.
O&M funds provide for a diverse range of programs and activities that
include the salaries and benefits for most DOD civilian employees;
depot maintenance activities; fuel purchases; flying hours; base
operations; consumable supplies; health care for active duty service
personnel and other eligible beneficiaries; reserve component
operations; and DOD-wide support functions including several combat
support agencies, four intelligence agencies, and other agencies that
provide common information services, contract administration, contract
audit, logistics, and administrative support to the military
departments.
The Congress provides O&M appropriations to 11 service-oriented O&M
accounts--the Army, Navy, Marine Corps, Air Force, Army Reserve, Navy
Reserve, Marine Corps Reserve, Air Force Reserve, Army National Guard,
Air National Guard, and defensewide--and to program accounts, such as
the defense health program. In addition to the regular annual O&M
appropriations, the Congress can make supplemental O&M appropriations
to finance the incremental costs above the peacetime budget that are
associated with contingencies, such as the GWOT.
Since late 1995, DOD has encouraged the services and the defense
agencies to conduct cost comparison studies as provided for in the
Office of Management and Budget's Circular A-76. Under the A-76
process, otherwise known as competitive sourcing, the military services
and other defense components conduct a public/private competition for a
commercial activity currently performed by government personnel to
determine whether it would be cost-effective to contract with the
private sector for that activity's performance. On the other hand, a
public/private competition is not required for private sector
performance of a new requirement, private sector performance of a
segregable expansion of an existing commercial activity performed by
government personnel, or continued private sector performance of a
commercial activity. However, before government personnel may perform a
new requirement, an expansion to an existing commercial activity, or an
activity performed by the private sector, a public/private competition
is required to determine whether government personnel should perform
the commercial activity.
The DOD Commercial Activities Management Information System is DOD's
database of record established to meet reporting requirements on the
conduct of A-76 competitions and the results from implementing A-76
decisions, whether the decisions are to continue using government
employees to perform the work or to outsource the work. For contracts
awarded to the private sector, the database includes the estimated cost
to perform the work using government employees, the contract award
amount, the actual contract cost for each contract performance period,
and brief reasons for any cost growth over the performance periods. A
contract performance period is normally for 12 months, although the
first performance period may cover a shorter transition period when the
work is initially conveyed to the contractor. Contract information is
to be maintained through the end of the last performance period
included in the competition. Installation officials are responsible for
reporting information on the A-76 program for input into the DOD
database.
O&M and Services Contract Costs Have Increased Significantly:
Driven primarily by increased operations associated with GWOT and other
contingencies, DOD's O&M costs increased substantially between fiscal
years 1995 and 2005, with the most growth occurring since fiscal year
2001. DOD's reliance on contractors for support services also increased
substantially during this period in order to meet increased military
requirements without an increase in active duty and civilian personnel
and because federal government policy is to rely on the private sector
for needed commercial services that are not inherently governmental in
nature, which includes many of the requirements generated from the GWOT
in areas such as logistics and base operations support.
Most Growth in O&M Costs Occurred since Fiscal Year 2001:
Although DOD's O&M costs increased significantly between fiscal years
1995 and 2005, there was a distinct difference in the rate of growth
between the early and latter years of this 10-year period.
Specifically, as shown in figure 1, DOD's annual O&M costs were
practically constant until 2001, when the costs began to increase.
Figure 1: O&M Costs for Fiscal Years 1995 through 2005:
[See PDF for Image]
Source: GAO analysis of DOD data.
Note: The costs shown in the figure are actual total obligation
authority, which includes regular O&M appropriations, any supplemental
O&M appropriations, and any funding from other appropriation accounts
transferred or reprogrammed into the O&M account during budget
execution.
[End of figure]
Figure 2 shows that during the first half of the 10-year period from
fiscal year 1995 to fiscal year 2000, DOD's O&M costs increased about 1
percent. In comparison, costs in DOD's other major budget categories
during this period changed as follows: military personnel costs
declined about 13 percent; procurement costs increased about 21
percent; research and development costs increased about 4 percent; and
other costs increased about 1 percent. DOD total costs were almost
constant between fiscal year 1995 and fiscal year 2000.
Figure 2: Percent Change in DOD Costs by Major Budget Category from
Fiscal Year 1995 to 2000:
[See PDF for Image]
Source: GAO analysis of DOD data.
[End of figure]
Figure 3 shows that a significant change in cost growth occurred during
the subsequent 5-year period from fiscal year 2000 to fiscal year 2005,
when DOD's O&M costs increased about 57 percent. In the other major
budget categories during this period, military personnel costs
increased about 36 percent, procurement costs increased by about 62
percent, research and development increased by about 62 percent, and
other costs increased about 13 percent. DOD total costs increased about
51 percent between fiscal year 2000 and fiscal year 2005.
Figure 3: Percent Change in DOD Costs by Major Budget Category from
Fiscal Year 2000 to 2005:
[See PDF for Image]
Source: GAO analysis of DOD data.
[End of figure]
Trends in O&M costs at the military service level generally reflect the
overall DOD trend. As shown in figure 4, between fiscal years 1995 and
2000, little change occurred in each service's O&M costs. However,
considerable cost growth occurred between fiscal years 2000 and 2005.
Among the services, the Army had the largest percentage of growth in
O&M costs between fiscal years 2000 and 2005. During this period, the
Army's O&M costs increased by about 137 percent, while the Navy and
Marine Corps' and the Air Force's O&M costs increased by about 30
percent and 29 percent, respectively.
Figure 4: Percent Change in the Services' O&M Costs:
[See PDF for Image]
Source: GAO analysis of DOD data.
[End of figure]
Increased Military Operations Were the Primary Reason for O&M Cost
Growth:
According to DOD and service officials, the primary cause for increased
O&M costs since fiscal year 2001 is the increase in military operations
associated with GWOT and other contingencies, including hurricane
relief. However, the officials also stated that other factors have
contributed to the growth in O&M costs, such as the aging of military
infrastructure and equipment; increased costs for installation
security, antiterrorism force protection, communications, information
technology, transportation, and utilities; and certain changes in
acquisition approaches.
The fight against terrorism has resulted in operations and deployments
around the globe that are in addition to the usual peacetime
operations. According to DOD, the related costs have included not only
the personnel costs associated with mobilizing National Guard and
reserve forces but also the costs of supporting these forces and the
increased pace of operations. O&M-funded costs include a wide range of
activities and services supporting operations including costs related
to (1) predeployment and forward-deployed training of units and
personnel; (2) personnel support costs including travel, subsistence,
reserve component personnel activation and deactivation costs, and unit-
level morale, welfare, and recreation; (3) establishment, maintenance,
and operation of housing and dining facilities and camps in the
theaters of operation; (4) petroleum, oils and lubricants, spare parts,
consumable end items, and other items necessary to support the
deployment of air, ground, and naval units; (5) establishment,
maintenance, and operation of facilities including funds for roads,
water, supply, fire protection, hazardous waste disposal, force
protection bunkers and barricades; (6) command, control,
communications, computers and intelligence within the contingency areas
of operations; (7) organization-level maintenance including repairs to
equipment and vehicles; (8) intermediate-and depot-level maintenance of
weapons and weapon system platforms requiring service after the wear
and tear of combat operations; and (9) contracts for services for
logistics and infrastructure support to deployed forces.
The additional military costs associated with GWOT and other
contingencies have been primarily funded through supplemental
appropriations. Figure 5 shows the annual amount of supplemental O&M
funds appropriated each year from fiscal year 2000 through fiscal year
2005. During this period, supplemental O&M appropriations totaled about
$210 billion and, according to the services, additional amounts were
transferred or reprogrammed from other accounts to the O&M accounts of
the military services.
Figure 5: Supplemental O&M Appropriations for Fiscal Years 2000 through
2005:
[See PDF for Image]
Source: GAO analysis of congressional data.
Note: GAO analyzed the annual supplemental O&M appropriations for DOD.
[End of figure]
Although costs associated with the GWOT and other contingencies have
been the primary reason for increased O&M costs between fiscal years
2000 and 2005, other factors also contributed to the O&M cost growth in
the military services. To illustrate, if the services' annual O&M total
obligation authority is adjusted by removing annual supplemental O&M
appropriations and net transfers and reprogrammings into the O&M
account, the result shows that O&M costs still grew during this time
period, as illustrated in figure 6. Specifically, between fiscal years
2000 and 2005, O&M costs after the adjustment grew by about 44 percent
in the Army, 17 percent in the Navy and Marine Corps, and 2 percent in
the Air Force.
Figure 6: Services' O&M Costs with and without Supplemental Funding,
Transfers, and Reprogrammings:
[See PDF for Image]
Source: GAO analysis of congressional and DOD data.
Note: GAO analyzed annual supplemental O&M appropriations and DOD data
on the military services excluding the services' reserve components.
[End of figure]
According to service officials, baseline O&M costs have increased
between fiscal years 2000 and 2005 because of many factors, such as
aging of military infrastructure and equipment, and increased costs for
installation security, antiterrorism force protection, communications,
information technology, transportation, and utilities. Navy officials
particularly cited the implementation of DOD's utility privatization
program as a factor contributing to increased O&M costs. In a September
2006 report, we noted that DOD's utility costs could potentially
increase by another $954 million to pay costs associated with remaining
utility systems that might be privatized.[Footnote 8] Increased O&M
costs are also attributable to certain changes in DOD's acquisition
approaches. For example, the Air Force historically bought space launch
vehicles, such as the Delta and Titan rockets, as products paid for
with procurement appropriations. Now, under the Evolved Expendable
Launch Vehicle program, the Air Force uses O&M appropriations to
purchase launch services using contractor-owned launch vehicles. The
projected cost of this program is $28 billion. Further, as we noted in
our September 2006 report, the Army and the Air Force turned to service
contracts for simulator training primarily because efforts to modernize
existing simulator hardware and software had lost out in the
competition for procurement funds.[Footnote 9] As a result, the
simulators were becoming increasingly obsolete. Buying training as a
service meant that O&M funds could be used instead of procurement
funds.
DOD's Reliance on Contractors for Support Services Has Increased since
Fiscal Year 2000 for Several Reasons:
To meet military requirements during a period of increased operations
without an increase in active duty and civilian personnel, DOD has
relied not only on reserve personnel activations but also on increased
use of contractor support in areas such as management and
administrative services, information technology services, medical
services, and weapon systems and base operations support. Between
fiscal years 2000 and 2005, DOD's service contract costs in O&M-related
areas increased over $40 billion, or 73 percent. Table 1 highlights the
growth in several service contract categories.
Table 1: Changes in Service Contract Costs in Selected Categories:
Fiscal year 2007 dollars in billions.
Service category: Professional, administrative, and management support;
Contract costs: Fiscal year 2000: $14.6;
Contract costs: Fiscal year 2005: $30.1;
Change from fiscal year 2000 to 2005: Amount: $15.5;
Change from fiscal year 2000 to 2005: Percentage: 107.
Service category: Maintenance and repair of equipment;
Contract costs: Fiscal year 2000: 7.7;
Contract costs: Fiscal year 2005: 12.3;
Change from fiscal year 2000 to 2005: Amount: 4.6;
Change from fiscal year 2000 to 2005: Percentage: 60.
Service category: Data processing and telecommunications;
Contract costs: Fiscal year 2000: 6.3;
Contract costs: Fiscal year 2005: 11.0;
Change from fiscal year 2000 to 2005: Amount: 4.7;
Change from fiscal year 2000 to 2005: Percentage: 74.
Service category: Medical;
Contract costs: Fiscal year 2000: 2.8;
Contract costs: Fiscal year 2005: 8.4;
Change from fiscal year 2000 to 2005: Amount: 5.6;
Change from fiscal year 2000 to 2005: Percentage: 199.
Service category: Maintenance and repair of real property;
Contract costs: Fiscal year 2000: 6.6;
Contract costs: Fiscal year 2005: 8.0;
Change from fiscal year 2000 to 2005: Amount: 1.5;
Change from fiscal year 2000 to 2005: Percentage: 22.
Service category: Utilities and housekeeping;
Contract costs: Fiscal year 2000: 3.9;
Contract costs: Fiscal year 2005: 7.0;
Change from fiscal year 2000 to 2005: Amount: 3.1;
Change from fiscal year 2000 to 2005: Percentage: 79.
Service category: Transportation and travel;
Contract costs: Fiscal year 2000: 3.4;
Contract costs: Fiscal year 2005: 6.6;
Change from fiscal year 2000 to 2005: Amount: 3.3;
Change from fiscal year 2000 to 2005: Percentage: 97.
Service category: Conservation and natural resources;
Contract costs: Fiscal year 2000: 1.7;
Contract costs: Fiscal year 2005: 2.3;
Change from fiscal year 2000 to 2005: Amount: 0.7;
Change from fiscal year 2000 to 2005: Percentage: 39.
Service category: Operation of government-owned facilities;
Contract costs: Fiscal year 2000: 2.3;
Contract costs: Fiscal year 2005: 2.1;
Change from fiscal year 2000 to 2005: Amount: (0.2);
Change from fiscal year 2000 to 2005: Percentage: -9.
Service category: Technical representative services;
Contract costs: Fiscal year 2000: 1.4;
Contract costs: Fiscal year 2005: 1.7;
Change from fiscal year 2000 to 2005: Amount: 0.3;
Change from fiscal year 2000 to 2005: Percentage: 23.
Service category: Special studies and analyses;
Contract costs: Fiscal year 2000: 1.2;
Contract costs: Fiscal year 2005: 1.5;
Change from fiscal year 2000 to 2005: Amount: 0.2;
Change from fiscal year 2000 to 2005: Percentage: 19.
Service category: Modification of equipment;
Contract costs: Fiscal year 2000: 1.1;
Contract costs: Fiscal year 2005: 1.4;
Change from fiscal year 2000 to 2005: Amount: 0.3;
Change from fiscal year 2000 to 2005: Percentage: 29.
Service category: Educational and training services;
Contract costs: Fiscal year 2000: 1.1;
Contract costs: Fiscal year 2005: 1.4;
Change from fiscal year 2000 to 2005: Amount: 0.3;
Change from fiscal year 2000 to 2005: Percentage: 23.
Service category: Other[A];
Contract costs: Fiscal year 2000: 1.3;
Contract costs: Fiscal year 2005: 2.0;
Change from fiscal year 2000 to 2005: Amount: 0.7;
Change from fiscal year 2000 to 2005: Percentage: 58.
Total;
Contract costs: Fiscal year 2000: $55.4;
Contract costs: Fiscal year 2005: $95.9;
Change from fiscal year 2000 to 2005: Amount: $40.6;
Change from fiscal year 2000 to 2005: Percentage: 73.
Source: GAO analysis of DOD data.
Notes: GAO analyzed DOD's DD350 database of all contracting actions
exceeding $25,000. Some numbers in the table may not calculate
correctly due to rounding.
[A] "Other" includes contracts for quality control, testing, and
inspection; equipment lease, rental, and installation; social services;
photographic, mapping, and printing services; and salvage services.
[End of table]
DOD officials noted several factors that have contributed to DOD's
increased use of contractor support. First, the GWOT and other
contingencies have significantly increased O&M requirements and DOD has
met these requirements without an increase in active duty and civilian
personnel. To do this, DOD relied not only on reserve personnel
activations, but also on increased use of contractor support.
Second, Office of Management and Budget Circular A-76 notes that the
long-standing policy of the federal government has been to rely on the
private sector for needed commercial services and that commercial
activities should be subject to the forces of competition to ensure
that the American people receive maximum value for their tax
dollars.[Footnote 10] The circular notes that a public/private
competition--which can involve a lengthy and costly process--is not
required for contractor performance of a new requirement or private
sector performance of a segregable expansion of an existing commercial
activity. On the other hand, the circular states that before government
personnel may perform a new requirement or an expansion of an existing
commercial activity a public/private competition is required to
determine whether government personnel should perform the work.
Third, DOD initiatives that have required that consideration be given
to outsourcing certain work performed by uniformed and DOD civilian
personnel have resulted in outsourcing decisions. For example, between
fiscal years 1995 and 2005, DOD's competitive sourcing, or A-76 public/
private competition, program resulted in 570 decisions to contract out
work that had been performed by over 39,000 uniformed and DOD civilian
personnel. Also, in 1997, DOD decided that privatization of military
installation utility systems was the preferred method for improving
utility systems and services because privatization would allow
installations to benefit from private sector financing and
efficiencies. As of March 2006, DOD had awarded contracts to privatize
117 systems and had an additional 904 systems in various phases of the
privatization evaluation and solicitation process.
Fourth, service officials noted that in some instances certain
personnel issues tend to favor the use of contractor support. For
example, service officials stated that because of limitations on
headquarters personnel authorizations, the use of contractor support is
often the only readily available option to accomplish new or expanded
commercial work requirements at service headquarters. Service officials
also noted that it is generally easier to terminate or not renew a
contract than to lay off government employees in the event of reduced
work requirements. For this reason, use of contractor support is often
favored when there is uncertainty over the length of time that support
services will be needed, which is the case for some work supporting
GWOT and other contingencies.
Data Are Insufficient to Determine Whether Increased Services
Contracting Has Exacerbated O&M Cost Growth:
Sufficient data are not available to determine whether increased
services contracting has caused DOD's costs to be higher than they
would have been had the contracted activities been performed by
uniformed or DOD civilian personnel. Although overall quantitative
information was not available, our analysis of the military services'
reported information from its competitive sourcing program, commonly
referred to as the A-76 public/private competition process, and case
studies of O&M-related work contracted out at three installations
showed that outsourcing decisions generally resulted in reducing the
government's costs for the work. However, compared to all O&M-related
contracts, the number of A-76 public/private competition contracts is
small, the results from this program may not be representative of the
results from all services contracts for new or expanded O&M work, and
certain limitations exist with the use of the A-76 data. Further, a
recent DOD study found that the Army's use of contract security guards
at domestic installations cost more than the use of guards employed by
the Army.[Footnote 11]
Information Needed to Assess the Effect of Increased Services
Contracting Is Unavailable:
To determine whether increased services contracting has exacerbated the
growth of O&M costs, information is needed that allows for a comparison
of the contract costs with the costs of performing the same work in-
house with uniformed or DOD civilian personnel. However, in most cases
DOD does not know how much contracted services work would cost if the
work were performed by government employees. DOD officials noted that
existing policy generally does not require a public/private competition
for private sector performance of a new or expanded commercial
requirement and, as a result, in-house cost estimates have not been
prepared for most of the work awarded to contractors as a result of
increased O&M requirements from GWOT and other contingencies. In the
absence of such quantitative data, information is not available to
determine whether the government's costs are higher than they would
have been had the contracted services work been performed by uniformed
or DOD civilian personnel.
A-76 Public/Private Competition Data Indicate Outsourcing Decisions
Were Cost-effective but Data Limitations Exist:
While overall information was not available to determine whether
increased services contracting has exacerbated O&M cost growth, DOD
does maintain data on its competitive sourcing program, otherwise known
as the A-76 public/private competition process, which allows a
comparison of in-house and contract costs for some O&M related work.
Specifically, DOD's A-76 program data include in-house and contract
cost information on contracts for work formerly performed by uniformed
or DOD civilian personnel that were awarded to the private sector as a
result of a public/private cost competition or, under certain
conditions prior to May 2003, direct conversion to contractor
performance. As shown in table 2, of the 1,112 total A-76 public/
private competition decisions that were made between fiscal years 1995
and 2005, the military services decided to outsource the work in 570,
or 51 percent, of the cases. These decisions resulted in contracting
out the work formerly performed by over 39,000 uniformed and DOD
civilian personnel. In the remaining cases, based on the public/private
cost comparison the military services decided to continue performing
the work in-house.
Table 2: A-76 Public/Private Competition Decisions for Fiscal Years
1995 through 2005:
Military service: Army;
A-76 decisions: Total: 222;
A-76 decisions: To outsource: 98;
A-76 decisions: Percent outsourced: 44;
Positions covered by A-76 decisions: Total: 31,481;
Positions covered by A-76 decisions: To outsource: 13,395;
Positions covered by A-76 decisions: Percent outsourced: 43.
Military service: Navy;
A-76 decisions: Total: 405;
A-76 decisions: To outsource: 99;
A-76 decisions: Percent outsourced: 24;
Positions covered by A-76 decisions: Total: 28,746;
Positions covered by A-76 decisions: To outsource: 6,440;
Positions covered by A-76 decisions: Percent outsourced: 22.
Military service: Marine Corps;
A-76 decisions: Total: 35;
A-76 decisions: To outsource: 15;
A-76 decisions: Percent outsourced: 43;
Positions covered by A-76 decisions: Total: 4,072;
Positions covered by A-76 decisions: To outsource: 1,214;
Positions covered by A- 76 decisions: Percent outsourced: 30.
Military service: Air Force;
A-76 decisions: Total: 450;
A-76 decisions: To outsource: 358;
A-76 decisions: Percent outsourced: 80;
Positions covered by A-76 decisions: Total: 27,892;
Positions covered by A-76 decisions: To outsource: 18,116;
Positions covered by A-76 decisions: Percent outsourced: 65.
Total;
A-76 decisions: Total: 1,112;
A-76 decisions: To outsource: 570;
A-76 decisions: Percent outsourced: 51;
Positions covered by A-76 decisions: Total: 92,191;
Positions covered by A-76 decisions: To outsource: 39,165;
Positions covered by A-76 decisions: Percent outsourced: 42.
Source: GAO analysis of DOD data.
[End of table]
At the time of our review, the Army, Navy, Marine Corps, and Air Force
had reported detailed contract cost data on 538 of the 570 A-76
decisions to outsource work. Our analysis of these data showed that the
public/private competition decisions generally resulted in reducing the
government's costs for the work.[Footnote 12] Specifically, according
to data reported during the first contract performance period, the Army
estimated savings of about $33 million from 96 contracts, the Navy and
Marine Corps estimated savings of about $74 million from 88 contracts,
and the Air Force estimated savings of about $115 million from 354
contracts.[Footnote 13] Figures 7, 8, and 9 show each service's
reported A-76 outsourcing information for contracts resulting from both
public/private competitions and direct conversion from government to
contractor performance between fiscal years 1995 and 2005.
Figure 7: First Performance Period Results from Army A-76 Public/
Private Competition Decisions to Outsource Work between Fiscal Years
1995 and 2005:
[See PDF for Image]
Source: GAO analysis of DOD data.
Note: Numbers in the figure may not total correctly due to rounding.
[End of figure]
Figure 8: First Performance Period Results from Navy and Marine Corps A-
76 Public/Private Competition Decisions to Outsource Work between
Fiscal Years 1995 and 2005:
[See PDF for Image]
Source: GAO analysis of DOD data.
[End of figure]
Figure 9: First Performance Period Results from Air Force A-76 Public/
Private Competition Decisions to Outsource Work between Fiscal Years
1995 and 2005:
[See PDF for Image]
Source: GAO analysis of DOD data.
Note: Numbers in the figure may not total correctly due to rounding.
[End of figure]
Although the services' A-76 data show that decisions to outsource work
were cost-effective, several limitations are associated with the use of
this information. First, DOD officials noted that when work performed
by uniformed personnel is outsourced, the personnel generally are
assigned to other duties. Thus, while the cost to perform the
outsourced work may be less than when it was performed in-house, the
overall cost to the government may actually increase because the
uniformed personnel continue to be paid to perform different work and a
contractor is now paid to do the work formerly performed by the
uniformed personnel. Also, outsourcing of work formerly performed by
uniformed personnel may also increase O&M costs because military
personnel appropriations are used to compensate uniformed personnel and
O&M appropriations are used to pay contractors for services work.
Second, compared to all O&M-related contracts, the number of A-76
public/private competition contracts is small and the results from this
program may not be representative of the results from all services
contracts for new or expanded O&M work. For example, for the 538 A-76
outsourcing decisions for fiscal years 1995 through 2005 with reported
cost data, the total contract value for the first performance period
was about $1.2 billion. Yet, in fiscal year 2005 alone, the value of
DOD's O&M-related services contracts exceeded $95 billion.
Third, the available A-76 public/private competition information
compares the contract costs with the cost estimates for work using
government employees during the first contract performance period. Our
review of contract costs in subsequent performance periods showed that
contractor costs frequently grew and in many cases exceeded the
government employee cost estimate in subsequent periods. However,
according to DOD cost information, the cost growth was usually
attributed to requirements being added to the contract and contract
wage increases, which the government employee cost estimate did not
reflect. As a result, information is normally not available to
determine whether the outsourcing continued to be cost-effective for
those contracts that subsequently cost more than the estimate using
government employees.
Fourth, the reliability of the services' reported A-76 public/private
competition contract costs and savings appears questionable. The DOD
Inspector General reported in November 2005 that DOD had not
effectively implemented a system to track and assess costs of
performance under the A-76 program.[Footnote 14] The report stated that
because system users did not always maintain supporting documentation
for key data elements and entered inaccurate and unsupported costs, and
the military services used different methodologies to calculate
baseline costs, DOD's A-76 database included inaccurate and unsupported
costs, and as a result, reported costs and estimated savings may be
either overstated or understated. DOD officials noted that, while the
estimated savings may be either overstated or understated, there were
still savings and that DOD was in the process of addressing the
report's recommendations for improving the tracking system.
During our visits to Fort Hood, Naval Air Station Pensacola, and
Langley Air Force Base, we reviewed the accuracy of reported cost
information on contracts awarded as a result of A-76 public/private
competitions. According to information provided by Fort Hood officials,
we found that actual contract costs were greater than the costs
reported in the DOD A-76 database for one contract. However, the
difference was less than 1 percent. At Naval Air Station Pensacola,
there were no differences in the costs reported in the A-76 database
and the actual costs for eight contracts awarded as a result of A-76
competitions. At Langley Air Force Base, we found some differences in
the reported and actual costs for four contracts awarded as a result of
A-76 competitions. For the four contracts over 4 years, the actual
contract costs, according to installation officials, were about
$250,000, or 5 percent, more than reported in the database. However,
even with the increased actual costs, the contracts still showed
considerable savings over the estimated costs using government
employees.
Case Studies Generally Show That Decisions to Contract Out Were Cost-
effective:
During our visits to Fort Hood, Naval Air Station Pensacola, and
Langley Air Force Base, we reviewed examples of O&M-related work that
was contracted out, or slated to be contracted out, either as a result
of an A-76 public/private competition or because the uniformed
personnel who formerly performed the work were needed to support other
missions. According to installation officials, the outsourcing of work
formerly performed in-house had not resulted in any unexpected funding
or other consequences. Officials at each installation stated that their
outsourcing efforts had resulted in reduced costs for performing the
work and that they were satisfied with contractor performance. The
following examples illustrate the outsourcing results from specific
cases of work formerly performed in-house at the three installations we
visited and in general show that the outsourcing efforts appeared to be
cost-effective.
Fort Hood:
* In June 2000, as a result of an A-76 public/private competition, Fort
Hood contracted the operation and maintenance of the installation's
firing range. During the A-76 competition, the cost estimate to
continue performing the work in-house was $37.1 million over the 4-year
and 7-month total performance period. The estimate was based on using
118 civilian and 11 military personnel to do the work. The work was
awarded to a contractor who bid $30.8 million to perform the work. Fort
Hood officials stated that between the time of the contract
solicitation and the time the contractor took over range operations,
changes occurred in unit training events and range operating standards
which caused the work requirement to increase far above the level
included in the solicitation's statement of work. As a result, the
officials stated that the contract was modified to provide for the
increased workload and actual contract costs totaled $38.2 million
through the end of the total performance period in December 2004.
Although the contract costs exceeded the in-house estimate by $1.1
million, or 3 percent, Fort Hood officials stated that they were
confident that the outsourcing was cost-effective because the in-house
cost estimate would have exceeded the actual contract costs if the in-
house estimate had included the cost of the workload subsequently added
to the contract. The officials also stated that they were satisfied
with the contractor's performance.
* In January 2003, Fort Hood contracted the installation's ammunition
supply work because the uniformed personnel who formerly performed the
work at Fort Hood were needed to help support the GWOT. According to
installation officials, the work, which included the receipt, storage,
and issue of training ammunition, had historically been performed by
approximately 180 uniformed personnel, who were also responsible for
completing collateral military duties. The officials stated that the
work was converted to contractor performance by modifying an existing
Fort Hood support services contract to add the ammunition supply work
for about $1.8 million annually. According to the officials, the
contractor used between 45 and 56 people to do the work, and
performance metrics, such as inventory accuracy, improved after the
contractor took over the work. Although an analysis was not performed
to compare the contract cost with the cost to perform the work with
uniformed personnel, Fort Hood officials stated that they believe that
the outsourcing was cost-effective because the contractor was
performing the work with far fewer people compared to the number of
uniformed personnel who formerly did the work. The officials stated
that a new contract for the work was awarded in June 2006 at an annual
cost of about $2.3 million. The officials attributed the increase in
contract costs to new requirements that were added to the scope of the
work.
Naval Air Station Pensacola:
* In January 2001, as a result of an A-76 public/private competition,
Naval Air Station Pensacola contracted the installation's receipt,
storage, and distribution of petroleum, oil, and lubrication products.
The work had previously been performed by 14 civilian personnel at an
estimated annual cost of about $700,000. During the A-76 competition,
the cost estimate to continue performing the work using government
employees was $355,000 annually based on reducing the number of
employees needed to do the work to seven. Naval Air Station Pensacola
officials stated that the work was awarded to a contractor who bid
$250,000 annually to do the work. This amount was about $450,000 less
than the original cost of the work and about $105,000 less than the
estimate to continue performing the work in-house. Primarily because of
added work requirements, reported data showed that the actual contract
costs increased to $315,000 by the fifth contract performance period.
Nevertheless, Naval Air Station Pensacola officials noted that this
outsourcing effort continued to cost less than the estimated cost to
perform the work in-house. The officials also stated that they were
satisfied with the contractor's performance.
* In March 2002, as a result of another A-76 public/private
competition, Naval Air Station Pensacola contracted the management of
household goods shipments for military personnel arriving and departing
the installation. The work had previously been performed by 21 civilian
personnel at an estimated cost of about $6.1 million over a 5-year
period. During the A-76 competition, the cost estimate to continue
performing the work in-house was $3.8 million over the 5-year total
contract performance period, based on streamlining the work and
reducing the number of employees needed to do the work. Naval Air
Station Pensacola officials stated that the work was awarded to a
contractor who bid $2.8 million to perform the work over the total
performance period. This amount was about $1.1 million less than the in-
house estimate. Through the first 3 years and 3 months of the contract,
reported data showed that the actual contract costs were about 13
percent higher than the contractor's bid amount but were still less
than the estimated cost to perform the work in-house. Naval Air Station
Pensacola officials stated that contract costs were higher because of
wage rate increases. The officials also stated that they were satisfied
with the contractor's performance.
Langley Air Force Base:
* In June 2000, as a result of an A-76 public/private competition,
Langley Air Force Base contracted transient aircraft services work.
During the A-76 competition, the cost estimate to continue performing
the work in-house was $1.1 million annually based on using 14 military
and 7 civilian personnel to do the work. According to Langley Air Force
Base officials, the work was awarded to a contractor who bid $365,000
to perform the work, and the actual contract cost to perform the work
during the first performance period was about $374,000. This amount was
about $726,000, or about 66 percent, less than the estimated cost to do
the work in-house. Although reported data showed that contract costs
increased by 8 percent by the third contract performance period
primarily because of wage rate adjustments, the contract still cost
less than the estimated in-house cost to perform the work. Langley Air
Force Base officials stated that they were satisfied with the
contractor's performance and that the contract was recompeted in 2003
and awarded at approximately the same cost.
* In October 2001, as a result of another A-76 public/private
competition, Langley Air Force Base contracted certain records
management services. During the A-76 competition, the cost estimate to
continue performing the work in-house was $643,000 annually based on
using 13 uniformed personnel to do the work. According to Langley Air
Force Base officials, the work was awarded to a contractor who bid
about $337,000 to perform the work during the first annual performance
period. This amount was $306,000, or about 48 percent, less than the
estimated cost to perform the work in-house. According to the available
data and Langley Air Force Base officials, the actual contract cost
during the first performance period was the same as the bid amount.
Although reported data showed that contract costs increased to about
$394,000 by the fifth contract performance period primarily because of
wage rate adjustments, the officials noted that the cost was still less
than the in-house estimate for the work. The officials also stated that
they were satisfied with the contractor's performance.
DOD Report Noted That Contract Security Guards Cost More than
Government-Employed Guards:
A recent DOD report provides another comparison of costs for work
performed by contractors and government personnel.[Footnote 15] In this
case, DOD found that contract security guards at domestic installations
cost more than use of guards employed by the government. However, as
with the reported results from A-76 contracts, because the data used in
DOD's report is from a relatively small number of contracts, the
results may not be representative of the results of all O&M related
services contracts.
The John Warner National Defense Authorization Act for Fiscal Year 2007
required the Secretary of Defense to submit a report including an
explanation of the Army's progress in responding to our April 2006
report that assessed the Army's acquisition of security guards and an
assessment of the cost-effectiveness and performance of contract
security guards.[Footnote 16] Our report noted that in the aftermath of
the September 11, 2001, attacks, DOD sent numerous active-duty, U.S.-
based personnel to Afghanistan, Iraq, and other destinations to support
the GWOT.[Footnote 17] These deployments depleted the pool of military
security guards at a time when DOD was faced with increased security
requirements at its U.S. installations. To ease this imbalance, the
Congress authorized DOD to waive a prohibition against the use of
contract security guards at domestic military installations. The Army,
the first service to use the authority, had awarded contracts worth
nearly $733 million for contract guards at 57 installations as of
December 2005.
Our report also noted that the Army had relied heavily on sole-source
contracts to acquire contract security guards, despite the Army's
recognition early on that it was paying considerably more for its sole-
source contracts than for those awarded competitively. Our report made
recommendations to the Secretary of Defense to improve management and
oversight of the contract security guard program.
In early 2007, DOD issued its report, which stated that the Army
concurred with our recommendations and was in the process of
resoliciting security guard contracts to increase the use of
competition. In regard to comparing the costs of government-employed
and contract security guards, DOD reported that the contract security
guards were more expensive than use of government guards. However, the
amount of the cost difference varied widely depending on whether the
contract was awarded competitively. In cases where the contracts were
awarded competitively, the contracts cost about 5 percent more than use
of government guards. However, in cases where the contracts were not
awarded competitively; the contracts cost about 42 percent more than
government guards. DOD's report also noted its view that the security
guard contracts provided greater flexibility in this instance to adjust
the workforce level up or down when the threat level changes and a
performance test showed no difference in the effectiveness between
government and contract security guards.
Different Perspectives Exist on the Benefits and Concerns Associated
with Increased Contracting for Support Services:
DOD officials cited several benefits associated with the increased use
of contractors for support services in certain circumstances. On the
other hand, concerns over increased contracting have also been cited by
the Congress, the military services, and us.
Benefits from Increased Use of Contractor Support:
DOD officials noted that when expanded military missions, deployments,
and other contingencies increase operational requirements, additional
personnel are needed to perform the extra work. For mission support
work, additional personnel might be obtained from several alternatives,
such as increasing the size of the active military force, mobilizing
reserve forces, hiring government employees, or contracting for
services with the private sector. In certain circumstances, the
officials stated that increased use of contractor support to help meet
expanded mission support work has certain benefits. For example, the
officials noted that the use of contractors can provide a force
multiplier effect when contractor personnel perform military support
missions to allow more uniformed personnel to be available for combat
missions. Moreover, contractors can provide support capabilities that
are in short supply in the active and reserve components, thus reducing
the frequency and duration of deployments for certain uniformed
personnel. The officials also stated that obtaining contractor support
in some instances can be faster than hiring government workers and,
when there is uncertainty over the length of time that support services
will be needed, the use of contractor support instead of government
employees can be advantageous because it is generally easier to
terminate or not renew a contract than to lay off government employees
when the operations return to normal. Further, the officials stated
that they believed that contracts for new and expanded requirements can
be cost-effective when the contracts are subjected to the forces of
competition in the private sector.
Concerns from Increased Use of Contractor Support:
Recently cited concerns associated with increased use of contractor
support have included (1) the need for DOD to consider performing more
work using government employees, (2) controlling support services
contract costs, (3) reduced operational flexibility resulting from some
outsourcing contracts, (4) the difficulty in ensuring accurate contract
statements of work and sufficient contract oversight, and (5) questions
on the adequacy of DOD's services acquisition process.
The Congress Recently Required DOD to Consider Performing More Work In-
house:
The National Defense Authorization Act for Fiscal Year 2006 required
DOD to prescribe guidelines and procedures for ensuring that
consideration is given to performing more work using government
employees.[Footnote 18] Section 343 of the Act requires the Secretary
of Defense to prescribe guidelines and procedures for ensuring that
consideration is given to using government employees for work that is
currently performed or would otherwise be performed by contractors. The
guidance is to provide for special consideration to be given to
contracts that (1) have been previously performed by federal government
employees at any time on or after October 1, 1980; (2) are associated
with the performance of inherently governmental functions; (3) were not
awarded on a competitive basis; or (4) have been determined to be
poorly performed due to excessive costs or inferior quality. In
February 2007, DOD officials stated that they had been working on
developing the required guidelines and that they planned to issue the
new guidance in the near future. The officials also stated that the use
of government employees instead of contractors to meet O&M-related
requirements in some circumstances might result in savings.
Military Services Have Taken Steps to Control Support Services Contract
Costs:
Each of the military services has expressed concerns over increasing
contract costs for support services. Citing the need to control costs,
the Secretaries of the Army and the Air Force have issued policy
memorandums calling for review and reduction in services contracts. For
example, the Secretary of the Army stated in a January 2007 memorandum
that he expected to see significant reductions in the number of Army
contracted services personnel during the remainder of fiscal year 2007.
Also, in a March 2006 memorandum, the Secretary of the Air Force set
targets for realizing estimated savings in Air Force contract support
services costs. Navy officials stated that although they have not
issued any new policy statements on contracted services, the issue is a
concern. The officials stated that the Navy proactively reduced its
planned contractor support budgets in both fiscal year 2007 and 2008.
Installation Officials Noted Reduced Flexibility in Some Instances and
Other Concerns with Outsourcing:
During our installation visits, local officials noted some concerns
with outsourcing of support services. For example, Fort Hood officials
stated that outsourcing of work formerly performed in-house can result
in reduced flexibility in being able to quickly respond to changing
requirements. The officials noted that in some instances when a new or
different work requirement develops, uniformed and DOD civilian
personnel can be reassigned to perform the tasks on a temporary basis
or as a collateral duty. However, before contractors perform new or
different work requirements, contract changes normally have to be
negotiated, which can result in delays before the new work is started.
Installation officials also noted concern over the difficulty in
preparing accurate contract statements of work in order to avoid
contract changes. Naval Air Station Pensacola officials stated that in
some cases numerous contract changes occurred when the original
statement of work did not anticipate or accurately define certain work
situations. Further, installation officials cited concerns over
ensuring adequate contract oversight. Officials at Naval Air Station
Pensacola noted that ensuring adequate oversight becomes increasingly
difficult as the number of contracts increases.
GAO Has Noted Concerns with Services Acquisition:
In November 2006, we reported that DOD's approach to managing service
acquisitions has tended to be reactive and has not fully addressed the
key factors for success at either the strategic or transactional
level.[Footnote 19] As a result, the growth in service contracting over
the past 10 years was, in large part, not a managed outcome. Further,
DOD's approach did not always take the necessary steps to ensure
customer needs were translated into well-defined contract requirements
or that postcontract award activities resulted in expected outcomes. As
a result, DOD was potentially exposed to a variety of risks, including
purchasing services that did not fully meet customer needs or that
should have been provided in a different manner or with better results.
Also, in January 2007 testimony before the Subcommittee on Readiness
and Management Support, Senate Committee on Armed Services, we noted
that long-standing problems with contract management continue to
adversely affect service acquisition outcomes even as DOD has become
more reliant on contractors to provide services for DOD's
operations.[Footnote 20] For example, the lack of sound business
practices--poorly defined requirements, inadequate competition, and
inadequate monitoring of contractor performance--exposes DOD to
unnecessary risk and wastes resources. We have found cases in which the
absence of well-defined requirements and clearly understood objectives
complicates efforts to hold DOD and contractors accountable for poor
service acquisition outcomes. Likewise, obtaining reasonable prices
depends on the benefits of a competitive environment, but we have
reported on cases in which DOD sacrificed competition for the sake of
expediency. Monitoring contractor performance to ensure DOD receives
and pays for required services is another control we have found
lacking. In the testimony, we noted DOD has taken some steps to improve
its management of services acquisition, and it is developing an
integrated assessment of how best to acquire services.
Concluding Observations:
DOD's O&M costs and reliance on contractors to perform O&M-related work
have increased substantially since fiscal year 2001. However,
sufficient data are not available to determine whether increased
services contracting has caused DOD's costs to be higher than they
would have been had the contracted activities been performed by
uniformed or DOD civilian personnel. While we believe that there may be
some merit in DOD developing more information on the cost-effectiveness
of its O&M services contracts that fall outside of the A-76 public/
private competition process, at this time we are not recommending that
DOD do this for several reasons. First, performing the analyses to
determine the estimated in-house costs to perform work awarded to
contractors can be expensive and time consuming. Second, according to
DOD officials, contracting with the private sector may be the only
alternative to meet certain requirements in the short term, such as
when uniformed personnel must be diverted from performing peacetime
work to supporting operational missions. Third, as long as DOD uses
competition in its contract solicitations for new and expanded
requirements and provides adequate contract oversight, cost
efficiencies could be achieved through normal market forces.
Agency Comments:
DOD made no comments on a draft of this report except for technical
comments, which we incorporated where appropriate.
We are sending copies of this report to the Secretaries of Defense, the
Army, the Navy, and the Air Force; the Commandant of the Marine Corps;
and the Director, Office of Management and Budget. We will make copies
available to others upon request. In addition, the report will be
available at no charge on GAO's Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please
contact me at (202) 512-4523 or by e-mail at leporeb@gao.gov. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. The GAO staff members who
made key contributions to this report are listed in appendix II.
Signed by:
Brian J. Lepore, Director:
Defense Capabilities and Management:
List of Committees:
The Honorable Carl Levin:
Chairman:
The Honorable John McCain:
Ranking Member:
Committee on Armed Services:
United States Senate:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Ted Stevens:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable Ike Skelton:
Chairman:
The Honorable Duncan L. Hunter:
Ranking Member:
Committee on Armed Services:
House of Representatives:
The Honorable John P. Murtha:
Chairman:
The Honorable C.W. Bill Young:
Ranking Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
To identify the trends in operations and maintenance (O&M) costs and
services contracts and the reasons for the trends, we reviewed and
analyzed the Department of Defense's (DOD) O&M appropriations, budget
documentation, and services contract costs and identified the related
trends for fiscal years 1995 through 2005. We used costs as reflected
by total obligation authority, which includes regular O&M
appropriations, any supplemental O&M appropriations, and any funding
from other appropriation accounts transferred or reprogrammed into the
O&M account during budget execution. To consider inflation, we adjusted
cost data to constant fiscal year 2007 dollars using DOD's adjustment
factors. We discussed with DOD and service headquarters officials the
reasons for the trends in O&M costs and how outsourcing of O&M
activities formerly performed in-house has affected the overall O&M
budget. We shared the results of our analyses with DOD and service
officials and incorporated their comments as appropriate.
To discuss whether increased services contracting has exacerbated the
growth of O&M costs, we determined the availability of information
related to services contracts including whether in-house cost estimates
were available for all contracts for new or expanded work awarded as a
result of the global war on terrorism (GWOT) and other contingencies.
We also reviewed and analyzed information from DOD's competitive
sourcing, or A-76, program. Further, we visited three installations--
Fort Hood, Texas; Naval Air Station Pensacola, Florida; and Langley Air
Force Base, Virginia--to develop case study examples of O&M-related
work that was contracted out either as a result of A-76 public/private
competitions or because the uniformed personnel who formerly performed
the work were needed to support other missions. Fort Hood and Langley
Air Force Base were selected based on discussions with our requesters,
and Naval Air Station Pensacola was selected based on recommendations
from Navy officials who stated that the installation had a cross
section of contracts for O&M work that was formally performed in-house.
At each installation, we reviewed O&M budget information and discussed
with local officials any adverse consequences associated with
contracting out O&M-related work. For the case studies highlighting
examples of work that was outsourced to private contractors, we
identified cost estimates for the work if performed by government
employees, the reasons that the work was contracted out, the actual
contract costs, and the reasons for any contract cost growth. We relied
on cost data provided by the installation officials and did not review
any actual contracts. However, we did review the accuracy of reported
information on selected contracts awarded as a result of A-76 public/
private competitions.
To provide perspectives on the benefits and concerns associated with
increased contracting for support services, we discussed this issue
with DOD officials. We also examined DOD's response to recent
legislation requiring DOD to give consideration to performing more work
using government employees. We also discussed with DOD and service
headquarters officials the effect of increased contracting support for
support services and reviewed steps recently taken by the military
services to control service contract costs. We also discussed with
installation officials concerns associated with outsourcing O&M-
related work that was formally performed in-house. Additionally, we
summarized recent GAO reports that identified concerns with DOD's
acquisition of services.
We conducted our review from August 2006 through March 2007 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Brian J. Lepore, (202) 512-4523 or leporeb@gao.gov:
Acknowledgments:
In addition to the contact named above, Mark A. Little, Assistant
Director; Alissa Czyz; Kevin Keith; Harry Knobler; Gary Phillips; and
Sharon Reid made key contributions to this report.
FOOTNOTES
[1] Unless otherwise stated, operation and maintenance (O&M) costs in
this report are total obligation authority and are expressed in
constant fiscal year 2007 dollars.
[2] H.R. Rep. No. 109-504, at 46-47 (2006).
[3] Office of the Under Secretary of Defense (Comptroller), National
Defense Budget Estimates for Fiscal Year 2007, "Table 5-4, Department
of Defense Deflators--Total Obligation Authority" (Washington, D.C.:
March 2006).
[4] Under the A-76 program prior to 2003, commercial activities
involving 10 or fewer full time employees could be directly converted
to performance by a private contractor without a cost comparison under
certain circumstances.
[5] National Defense Authorization Act for Fiscal Year 2006, Pub. L.
No. 109-163, § 343 (2006).
[6] Secretary of the Army, Memorandum for Distribution, Subject:
Improved Management and Justification of Service Contract Requirements
(Washington, D.C.: Jan. 29, 2007); and Secretary of the Air Force,
Memorandum for All Major Commands, Subject: Contractor Support Approval
Authority Policy Memo 06A-002 (Washington, D.C.: Mar. 9, 2006).
[7] GAO, Defense Acquisitions: Tailored Approach Needed to Improve
Service Acquisition Outcomes, GAO-07-20 (Washington, D.C.: Nov. 9,
2006).
[8] GAO, Defense Infrastructure: Actions Taken to Improve the
Management of Utility Privatization, but Some Concerns Remain, GAO-06-
914 (Washington, D.C.: Sept. 5, 2006).
[9] GAO, Contract Management: Service Contract Approach to Aircraft
Simulator Training Has Room for Improvement, GAO-06-830 (Washington,
D.C.: Sept. 22, 2006).
[10] Office of Management and Budget, Circular No. A-76 (Revised),
Subject: Performance of Commercial Activities (Washington, D.C.: May
29, 2003).
[11] Deputy Under Secretary of Defense (Installations and Environment),
Report to Congress: Contractor Performance of Security Guard Functions
(Washington, D.C.: January 2007).
[12] Our analysis relied on the data reported by the services. We did
not review the actual contracts.
[13] All amounts in this report related to A-76 contracts are in
current year dollars--not fiscal year 2007 dollars.
[14] See DOD Office of Inspector General, D-2006-028.
[15] See Deputy Under Secretary of Defense (Installations and
Environment), Report to Congress: Contractor Performance of Security
Guard Functions (January 2007).
[16] John Warner National Defense Authorization Act for Fiscal Year
2007, Pub. L. No. 109-364, § 333 (2006).
[17] GAO, Contract Security Guards: Army's Guard Program Requires
Greater Oversight and Reassessment of Acquisition Approach, GAO-06-284
(Washington, D.C.: Apr. 3, 2006).
[18] National Defense Authorization Act for Fiscal Year 2006, Pub. L.
No. 109-163, § 343 (2006).
[19] See GAO-07-20.
[20] GAO, Defense Acquisitions: DOD Needs to Exert Management and
Oversight to Better Control Acquisition of Services, GAO-07-359T
(Washington, D.C.: Jan. 17, 2007).
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