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Defense Depot Maintenance: More Comprehensive and Consistent Workload Data Needed for Decisionmakers (Letter Report, 05/21/96, GAO/NSIAD-96-166).

Pursuant to a legislative requirement, GAO reviewed the Department of
Defense's (DOD) "Depot Maintenance and Repair Workload" report, focusing
on: (1) the effect of the legislative requirement concerning the
allocation of depot maintenance workloads between the public and private
sectors; (2) historical public and private sector depot maintenance
workload allocations; and (3) projected public and private depot
maintenance workload allocations for fiscal years 1997 and 2001.

GAO found that: (1) the legislative provision that limits the percentage
of DOD depot maintenance work performed in the private sector has not
harmed military readiness or national security; (2) while DOD plans to
save money by increasing the proportion of depot maintenance preformed
by private contractors, it has not proved that privatization will be
cost-effective; (3) privatization could reduce depot maintenance costs,
but a competitive market place for depot maintenance work does not
exist; (4) the DOD depot system has a large excess capacity due to
efforts by some DOD components to conduct repairs at field level
maintenance activities; (5) the data reported by DOD about historical
public and private depot maintenance workloads could have been more
inclusive; and (6) some data reported in historical workloads, such as
interim contractor support and contractor logistics support costs were
excluded from future projections and reported workload projections will
likely change based on the services assessments on core requirements.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-96-166
     TITLE:  Defense Depot Maintenance: More Comprehensive and 
             Consistent Workload Data Needed for Decisionmakers
      DATE:  05/21/96
   SUBJECT:  Cost effectiveness analysis
             Combat readiness
             Defense cost control
             Department of Defense contractors
             Privatization
             Maintenance services contracts
             Projections
             Military downsizing
             Equipment repairs
IDENTIFIER:  Bradley Fighting Vehicle
             OH-58D Helicopter
             CH-47D Helicopter
             Apache Helicopter
             Blackhawk Helicopter
             
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Cover
================================================================ COVER


Report to Congressional Committees

May 1996

DEFENSE DEPOT MAINTENANCE - MORE
COMPREHENSIVE AND CONSISTENT
WORKLOAD DATA NEEDED FOR
DECISIONMAKERS

GAO/NSIAD-96-166

Defense Depot Maintenance

(709187)


Abbreviations
=============================================================== ABBREV

  DOD - Department of Defense
  OSD - Office of the Secretary of Defense

Letter
=============================================================== LETTER


B-272043

May 21, 1996

The Honorable Strom Thurmond
Chairman
The Honorable Sam Nunn
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Floyd Spence
Chairman
The Honorable Ronald Dellums
Ranking Minority Member
Committee on National Security
House of Representatives

As required by section 311 of the National Defense Authorization Act
for Fiscal Year 1996, we analyzed the Department of Defense's (DOD)
report, Depot Maintenance and Repair Workload, which was submitted to
Congress April 4, 1996.  Specifically, we focused on DOD's analysis
of (1) the need for and effect of the 60/40 legislative requirement
concerning the allocation of depot maintenance workloads between the
public and private sectors, (2) historical public and private sector
depot maintenance workload allocations, and (3) projected public and
private depot maintenance workload allocations. 


   BACKGROUND
------------------------------------------------------------ Letter :1

DOD spends about $15 billion annually--or about 6 percent of its
$243-billion fiscal year 1996 budget--on depot maintenance
activities.  Depot maintenance involves repairing, overhauling, and
modifying and upgrading defense systems and equipment.  It also
includes limited manufacture of parts, technical support,
modifications, testing, and reclamation as well as software
maintenance.  About $2 billion is spent on contractor logistics
support, interim contractor support, and labor used to install some
major modifications and parts of depot software maintenance, which
are contracted to the private sector using procurement, rather than
operation and maintenance funds.  Depot maintenance is accomplished
in both the DOD depot system and by about 1,300 defense contractors. 
Currently, there are 29 DOD depot maintenance facilities; 15 depots
have been or are in the process of being closed.  The DOD depot
system employs about 89,000 DOD civilian personnel.  This is 43
percent lower than the employment level in the peak year, 1987. 

The depot maintenance workload mix has been the subject of
considerable debate in recent years.  Historically, depot maintenance
on most wartime critical systems was largely performed in DOD depots. 
The peacetime workload for such critical systems constituted what is
referred to as depot maintenance core workload.  During the Cold War,
there was not much pressure to move work from DOD depots to the
private sector.  Military leaders expressed a clear preference for
retaining much of their work in DOD depots.  They expressed the view
that the defense depots were highly flexible and responsive to
changing military requirements and priorities and produced
high-quality work.  However, with the end of the Cold War and the
subsequent declines in defense spending, there is now increased
pressure to privatize more depot maintenance work.  As acquisition
programs began to decline, a growing concern focused on how the
industrial base can be maintained without large development and
production programs.  Attention began to shift to DOD depot workloads
as a potential source of work to keep the industrial base viable and
reduce DOD infrastructure costs. 

Efforts to increase the private sector's share are affected by
several statutes that relate to the mix of maintenance work performed
by the public and private sectors.  Three of the most significant
statutes affecting the workload mix are 10 U.S.C.  2464, 10 U.S.C. 
2466, and 10 U.S.C.  2469.  Title 10 U.S.C.  2464 provides that DOD
activities should maintain a logistics capability sufficient to
ensure technical competence and resources necessary for an effective
and timely response to a mobilization or other national defense
emergency.  Title 10 U.S.C.  2466 prohibits the use of more than 40
percent of the funds made available in a fiscal year for depot-level
maintenance or repair for private sector performance:  the so-called
"60/40" rule.  Title 10 U.S.C.  2469 provides that DOD-performed
depot maintenance and repair workloads valued at $3 million or more
cannot be changed to another DOD activity without the use of
merit-based selection procedures or changed to contractor performance
without the use of competitive procedures for competitions among
private and public sector entities.  In recent years DOD has sought
relief from statutes DOD officials believe limit their flexibility to
contract out additional depot maintenance workloads--including 10
U.S.C.  2466 and 2469 and other statutes affecting competition and
privatization. 

Directions for Defense, the 1995 report of the Commission on Roles
and Missions, recommended that DOD privatize most existing depot
maintenance work and all support for new and future weapon systems.\1
In his letter forwarding the Commission Report to Congress, the
Secretary of Defense agreed with the Commission's recommendations but
expressed a need for DOD to retain a limited organic core capability
to meet essential wartime surge demands, promote competition, and
sustain institutional expertise.  DOD established joint teams and
working groups to plan and direct efforts aimed at increasing
privatization and outsourcing.  DOD's January 1996 Plan for
Increasing Depot Maintenance Privatization and Outsourcing provides
for substantially increasing reliance on the private sector. 

Section 311 of the National Defense Authorization Act for Fiscal Year
1996 reiterated long-standing congressional support for maintaining
core capabilities within DOD depots as essential to national
security.\2 Congress found that DOD did not have a comprehensive
policy regarding the performance of depot-level maintenance and
repair and expressed a compelling need for DOD to (1) articulate
known and anticipated core maintenance and repair requirements, (2)
organize its resources to meet those requirements economically and
efficiently, and (3) determine what work should be performed by the
private sector and how such work should be managed.  Congress
specified that DOD submit a policy report that provides for properly
sizing depot capabilities to meet security requirements effectively
and efficiently, competition between public and private entities for
noncore workload, and performance of maintenance and repair for any
new weapon systems defined as core in facilities owned and operated
by the United States. 

Section 311 also required DOD to provide a workload distribution
report that included (1) an analysis of the need for 10 U.S.C. 
2466--the 60/40 rule, its effects on readiness and national security,
and a description of specific difficulties experienced by DOD as a
result of that requirement; (2) an analysis of the public-private
distribution of depot maintenance and repair workloads for fiscal
years 1991 through 1995; and (3) a projection of the public-private
workload distribution for fiscal years 1997 through 2001.  The act
also required us to analyze and report to Congress on each of these
reports within 45 days of their submission.  Our analysis of DOD's
policy report is being provided separately.\3


--------------------
\1 The Commission was formed in accordance with section 954(b) of the
National Defense Authorization Act for Fiscal Year 1994.  The
Commission's report was submitted to the DOD May 24, 1995.  The
Secretary of Defense forwarded this report to Congress on August 24,
1995. 

\2 Core maintenance is the capability maintained within DOD depots to
meet readiness and sustainability requirements of the weapon systems
that support the Joint Chiefs of Staff contingency scenarios.  Core
exists to minimize operational risks and to guarantee required
readiness for these weapon systems.  Core depot maintenance
capabilities are intended to comprise only the minimum essential
facilities, equipment, and skilled personnel necessary to ensure a
ready and controlled source of required technical competence.  Depot
maintenance for the designated weapon systems have historically been
the primary workloads assigned to DOD depots to support core depot
maintenance capabilities. 

\3 Defense Depot Maintenance:  DOD's Policy Report Leaves Future Role
of Depot System Uncertain (GAO/NSIAD-96-165, May 21,1996). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

DOD generally complied with the section 311 requirements regarding
workload data, except that it did not provide direct labor hour data
as required by Congress.  DOD stated that it does not collect labor
hour statistics from private contractors.  However, our analysis of
DOD's workload report shows that the use of more comprehensive and
consistent data would provide Congress and DOD decisionmakers a more
accurate picture of historical and future projections of depot
maintenance workload allocations between the public and private
sectors.  Without such data, the reports are of limited use to
Congress and defense decisionmakers when considering public and
private sector workload allocation policy.  Specifically: 

  -- The 60/40 rule has not adversely affected military readiness. 
     DOD's workload report primarily justifies eliminating the 60/40
     rule on the premise that the allocation is arbitrary and the
     restriction does not allow the Department to operate in a
     business-like manner.  Our work shows that, with few exceptions,
     the 60/40 rule has not affected past public-private workload
     allocation decisions.  When DOD's workload allocation decision
     process determined that the most cost-effective source of repair
     should be in the private sector, workloads were privatized. 
     However, if not repealed, the 60/40 rule would restrict DOD's
     plans for large-scale privatization.  In this context, we
     believe any large-scale privatization initiative will also
     require actions to resolve the excess capacity problem that
     currently exists at defense depots.  Also, a depot maintenance
     privatization initiative that is cost-effective will require a
     more competitive environment than exists today. 

  -- The historical public-private depot workload data for fiscal
     years 1991 to 1995 presented in the workload distribution report
     includes in the public sector workload share, the value of
     repair parts and services they purchase from the private sector. 
     Some of these parts are furnished to the private sector as
     government-furnished material.  Also, although requested by
     Congress to report workload data in direct labor hours, the
     report does not do so.  DOD states that it does not collect such
     data from the private sector. 

  -- The report's projections of public-private depot workloads for
     fiscal years 1997 to 2001 are not consistent and comparable to
     historical data.  Like the historical data, the future data
     includes in the public workload share the repair parts and
     services DOD purchases from the private sector, including those
     that are provided to private sector contractors as
     government-furnished material.  However, the future data does
     not include certain types of private sector depot maintenance
     costs, including interim contractor support and contractor
     logistics support, which are included in the historical data. 
     Projections of workload mix will be further affected by risk
     assessments relating to repair workloads that are yet to be
     made.  Our report includes a matter for congressional
     consideration for improving the methodology and process DOD uses
     to collect, analyze, and report depot maintenance workload data
     for the public and private sectors. 


   EFFECTS OF THE 60/40 PROVISION
------------------------------------------------------------ Letter :3

DOD's report questions the need for the 60/40 legislative rule (10
U.S.C.  2466) that limits the percentage of depot maintenance work
performed in the private sector.  The report stated that the
provision has influenced DOD's approach to depot maintenance
management and cited various types of privatization options that the
rule has precluded.  It noted that such options could be more
cost-effective.  The report does not cite any readiness effects,
adverse or otherwise.  If the 60/40 provision is repealed, DOD's
policy preference for privatizing depot maintenance could result in a
large shift of work from the public to the private sector.  Under
current conditions, a large shift to the private sector, if not
properly managed, could result in a more costly depot maintenance
system and could increase readiness risks.  We found that (1) depot
workload competition is limited and privatization without competition
may not achieve expected savings, (2) privatization could increase
public depot excess capacity and increase depot maintenance costs,
and (3) privatization of some mission-essential workloads could
increase readiness risks. 


      READINESS NOT SEEN AS A
      PROBLEM
---------------------------------------------------------- Letter :3.1

DOD's workload distribution report did not cite any direct effects of
the 60/40 provision on military readiness or national security.  DOD
officials stated that there were no readiness concerns to report. 
However, the report discussed potential costs and the need to
downsize DOD's Cold War depot maintenance infrastructure.  Further,
the report noted that relief from 10 U.S.C.  2466 would allow DOD to
consider lower cost depot maintenance options, such as establishing
government-owned and contractor-operated operations, outsourcing new
systems, teaming with industry, and using contract employees at DOD
facilities. 

Section 311 also provided that the DOD report describe any specific
difficulties experienced as a result of the 60/40 provision. 
Although the report indicated the section 2466 requirement has
influenced the Department's approach to depot management for some
time, it provided no examples of particular instances when the 60/40
provision has inhibited the Department from contracting out depot
maintenance workload that it wanted to privatize.  We asked service
officials to identify examples of this situation, but only the Army
was able to identify one.  According to Army officials, when DOD was
conducting public-private competitions, one planned Army aviation
public-private competition was changed to a public-public
competition.  This was done because of concern that if a contractor
won the competition, the resulting reallocation of Army aviation
maintenance would have violated the 60/40 rule for this particular
Army commodity, although not for the Army as a whole.  This situation
caused the Army to discontinue public-private competitions for
aviation programs before DOD terminated the program. 

DOD officials noted that they have not experienced negative effects
on military readiness resulting from 60/40.  Further, DOD depots
historically have produced high-quality work and have been responsive
to the needs of military commanders.  The issue is whether, as DOD
reported, the 60/40 provision limited the Department's flexibility to
move depot maintenance workloads to the private sector, where
contractor maintenance can be more cost-effective. 


      MANAGEMENT FLEXIBILITY IS
      THE KEY CONCERN
---------------------------------------------------------- Letter :3.2

DOD's workload distribution report emphasized that DOD needs the
flexibility to make source of repair decisions without being
constrained by mandated limits.  However, DOD officials acknowledged
that given the current methodology for computing public-private
workload mix, the services have some latitude to contract out
additional depot maintenance work without breaching the 40-percent
threshold for almost all services and commodities.  Using the 60/40
rule and the current methodology for developing the mix for fiscal
year 1996, we estimate that the Air Force can contract out additional
workloads valued at $559 million, the Army $69 million, the Marine
Corps $40 million, the naval aviation community $33 million, and the
naval ship community $223 million.  As discussed later in our report,
we are concerned that the current methodology for computing the
public-private workload mix overstates the public sector's share and
understates the private sector's share. 

DOD's workload report states that relief from the 60/40 rule is
needed to permit a shift in the workload mix to the private sector
and that the Department has developed a reasonable, quantitative
approach for identifying the need for and size of required organic
core capabilities.  However, as discussed in our companion report
analyzing DOD's depot maintenance policy report, DOD's new core
methodology is based on subjective judgments of risks--the procedures
and criteria for which have not yet been established.  Further, DOD's
depot maintenance policy limits DOD depots from competing with the
private sector for noncore workloads, even though the current DOD
depot market is not highly competitive, which limits the potential
for privatization savings.  Lastly, DOD depots that will remain open
after completion of depot closures directed by previous Base
Realignment and Closure processes, have substantial excess
capacity--a factor that also reduces potential cost-saving
opportunities resulting from large-scale privatizations. 


      CURRENT DEPOT MAINTENANCE
      MARKET IS NOT HIGHLY
      COMPETITIVE
---------------------------------------------------------- Letter :3.3

Although DOD's workload distribution report stated that privatization
would lower depot maintenance costs, DOD offered no documentation to
show that its plans to rapidly increase the private sector's share of
depot maintenance workload will be cost-effective.  Our work has
found that privatization savings result primarily from market place
competition and that such an environment does not currently exist for
many depot maintenance workloads. 

While the DOD policy discusses competition for depot maintenance
work, we found that the actual contracting environment for most types
of equipment is largely noncompetitive.  We asked 12 DOD buying
commands to identify depot maintenance contracts that were open
during 1995.  They identified 8,452 contracts valued at $7.3 billion. 
We selected
240 high-dollar value contracts valued at $4.3 billion to analyze the
commands' use of competitive procedures for the contracted workloads. 
Table 1 shows the results of our analysis. 



                                     Table 1
                     
                      Procedures for Contract Award (dollars
                                   in billions)



Service command   Number   Value  Number   Value  Number   Value  Number   Value
----------------  ------  ------  ------  ------  ------  ------  ------  ------
Army                  10   $.578       3  $0.017      43  $0.538      56  $1.133
Air Force             37   1.348       1   0.100      60   0.900      98   2.348
Navy                   2   0.286       5   0.048      79   0.518      86   0.852
================================================================================
Total                 49  $2.212       9  $0.165     182  $1.956     240  $4.333
--------------------------------------------------------------------------------
\a Limited competition refers to those that are conducted using other
than full and open competition. 

As shown, the 12 buying commands awarded 182, or 76 percent, of the
contracts through sole-source negotiation; 49, or 20 percent, through
full and open competition; and 9, or 4 percent, through limited
competition.  The 49 fully competitive awards accounted for about 51
percent of the total dollar value, while the 182 sole-source
contracts accounted for about 45 percent of the dollar value. 

In reviewing the number of offerors for the 49 contracts valued at
$2.2 billion that were awarded through full and open competition, we
found that the commands averaged 3.6 offers for the 49 contracts--
ranging from a low of only 2 offers to a high of 10.  For 30 of the
49 contracts--about 86 percent of the $2.2 billion--the number of
offers was 4 or less.  Five contracts valued at $525.8 million had
only 2 offers, while only 19 contracts valued at $309.4 million had 5
or more offers. 

A large portion of the dollar value of the contracts went to 71
contractors.  Of these 71 contractors, 13 had about 76 percent of the
$4.3 billion.  Three of these 13 contractors had workload valued at
$1.3 billion--30 percent of the $4.3 billion. 

The private sector market was more competitive for certain types of
systems and equipment than for others.  For example, competitive
awards were more frequent for repair of ground vehicles, trucks,
airframes, engines, and other items while sole-source contracts were
prevalent for fire control systems, communications and radar
equipment, electronic components, and other components.  We noted
that one buying activity that obligates about $180 million per year
for depot maintenance contracts for repair of ship components used
sole-source contracts 100 percent of the time--with many of the
awards based on cost-type contracts.  Officials said they did not
have the technical data, technical manpower, or contracting skills to
use competitive contracting.  Additionally, officials noted that the
process for qualifying repair sources is difficult and
time-consuming. 

We also analyzed the impact of other conditions on competition.  DOD
buying commands reported that not having access to required technical
data and their inability to precisely define the repair work that
must be done frequently influenced their using sole-source repair
contracts.  The buying commands reported that adequately defining the
types of depot maintenance tasks required to complete any given
repair or overhaul presents a difficult challenge.  For much of the
depot maintenance work, specific tasks that must be done, spare and
repair parts that will be required, and the type and skill level of
the labor required cannot be identified until the equipment or
component is inducted into the repair facility for inspection and
repair.  Our review of depot maintenance contracts showed the
difficulty in constraining cost growth in this
environment--particularly when cost-type contracts are used.  It also
showed the large costs normally associated with drafting statements
of work, conducting the competitions, and administering the
contracts.  DOD officials stated that because of these difficulties,
DOD depots can often perform depot maintenance work more
cost-effectively than contractors.  For example, DOD buying commands
sometimes used both DOD depots and private sector repair sources for
repairing a limited number of items.  To compare prices, we looked at
414 items that both sectors maintained.  For 62 percent of the items,
the contractor's repair price was higher than the DOD depot's price
for the same item.  Further, our review of DOD's public-private
competition program showed that DOD depots won 67 percent of the
nonship competitions. 

Given the influence that competition has on the potential for savings
when outsourcing DOD work, achieving savings from contracting out
depot maintenance workloads will require significant changes in the
way the Department manages its contract workload.  However, given
that the DOD policy proposes using a contractor logistic support
model for depot maintenance and that this model has historically
involved sole-source contracting to the original equipment
manufacturer, it is unclear that large-scale contracting will get the
savings DOD states it expects to achieve. 



      DOD DEPOT SYSTEM HAS LARGE
      EXCESS CAPACITY
---------------------------------------------------------- Letter :3.4

Another factor that must be considered when assessing the 60/40 rule
is the excess capacity that exists in DOD's depot system.  A
combination of factors created the extensive excess capacity in the
DOD depot system.  These factors include (1) the downsizing of the
armed forces due to the end of the Cold War; (2) efforts by some DOD
components to conduct more repairs in field-level maintenance
activities; (3) contracting out more depot work to the private
sector; and (4) the increased reliability, maintainability, and
durability of most military systems and equipment. 

While depot maintenance personnel have been reduced by 43 percent
since 1987, similar depot infrastructure reductions have not been
made.  DOD's depot system had 40 percent excess capacity for fiscal
year 1996, based on an analysis of maximum potential capacity and
programmed workload as the basis for comparison and assuming a 5-day
week, one 8-hour-per-day shift operation.  The excess capacity varied
in each service, from a low of 33 percent in naval aviation, to 35
percent for naval shipyards, 42 percent for the Army, and a high of
45 percent for the Air Force.  Some initiatives have been used in
recent years to reduce some of DOD's excess capacity.  These
initiatives include consolidating workloads, implementing competition
between government depots and the private sector, mothballing depot
plant equipment, and tearing down unused buildings or converting them
to other military uses.  However, depot downsizing has largely
occurred through the Base Realignment and Closure process. 

Fifteen depots have closed or are in the process of being closed as a
result of base closure decisions.\4 Although this will eliminate some
excess capacity, privatization-in-place rather than closure and
consolidation of workloads in remaining depots has been proposed for
seven depots.  Privatization-in-place will result in privatizing
excess capacity rather than eliminating it.  We are reporting
separately on in-place privatizations. 


--------------------
\4 Additionally, the Red River Army Depot, which is being realigned
rather than closed, is not included in this number. 


   REPORTED HISTORICAL WORKLOADS
   COULD BE MORE COMPREHENSIVE
------------------------------------------------------------ Letter :4

Section 311 did not provide specific guidance on data to be included
in the workload reports.  The data reported in DOD's historical
public-private workloads for fiscal years 1991 through 1993 were
extracted from data collected by the Defense Science Board.  This
data collection included the value of parts and services the depots
purchase from the private sector as public sector costs.  Some of
these repair parts were provided to private sector contractors as
government-furnished material and should have been reported as costs
of contractor maintenance.  Additionally, repair contracts awarded by
DOD depots were included as public depot maintenance costs rather
than private sector maintenance costs and some contractor depot
maintenance costs for classified systems were not included in the
private sector data.  The services followed a similar approach for
fiscal years 1994 and 1995.  These conditions resulted in overstating
the public sector's reported share of depot maintenance workload and
understating the private sector's share.  Reporting workload in
direct labor hours would provide a more accurate picture of workload
mix in that it would address the repair parts problem.  Section 311
of the Authorization Act specified that, in addition to dollar
values, DOD should report workload mix in direct labor hours. 
However, DOD's report did not include such data.  DOD officials
stated that they do not collect direct labor hour data from
commercial contractors and could not provide such data or provide a
reasonable labor hour comparison estimate. 

In 1994, we testified about our concern that repair parts and
materials, maintenance and engineering services, and other goods and
services procured from the private sector were included in the public
sector's depot maintenance funding.\5 Additionally, the costs
associated with private contractors did not include maintenance costs
for some classified systems.  Further, the cost for parts and
materials that were provided to contractors as government-furnished
material were included as public sector rather than private sector
costs.  In quantifying the impact of these factors, we noted that in
1994 about $437 million of the $1.2 billion expended by Army depots
in fiscal year 1993--about 31 percent--went to the private sector. 
About 21 percent of the dollars expended by the Army depots went to
buy parts and material and about 10 percent for other goods and
services.  If these expenditures were added to the amount of depot
maintenance funds spent directly in the private sector, we estimated
that about 58 percent of the Army's depot maintenance budget was
spent at that time in the private sector.  We identified similar
results in the Navy and the Air Force.  Further, we found that a
Defense Science Board Task Force Report estimated that the
public-private ratio becomes nearly 50-50 when dollars spent at DOD
depots for parts and components--but purchased from the private
sector--are included as part of the private sector's share.  If
included, other goods and services procured from the private sector
would increase the private sector's share above 50 percent. 


--------------------
\5 Depot Maintenance:  Issues in Allocating Workload Between the
Public and Private Sectors (GAO/T-NSIAD-94-161, Apr.  12, 1994). 


   DATA REPORTED IN HISTORICAL
   WORKLOADS EXCLUDED FROM FUTURE
   PROJECTIONS
------------------------------------------------------------ Letter :5

Like the historical data provided for fiscal years 1991 through 1995,
the future workload projections for fiscal years 1997 through 2001
also overstate the public sector's share by the treatment of funding
for repair parts and subcontracts to the private sector and
understate the private sector's share by including the funding of
government-furnished material in the public sector's share and by not
including in the private sector share the costs of contract depot
maintenance for some classified systems and the cost of contracts
awarded by DOD depots for maintenance and repair services.  The
future projections further understate the private sector share by not
including maintenance costs for interim contractor support and
contractor logistics support--although these costs were included in
the historical analysis.  DOD officials noted that section 311 did
not provide specific guidance on what data should be included in the
reports.  The reported projected workload data could be further
understating the private share since it reflects only preliminary
calculations of revised core requirements.  Since the services do not
have an approved methodology for conducting repair base assessments
or risk analyses, they have not yet conducted these assessments. 
Therefore, it is not possible to determine how much of the existing
DOD depot workload may be privatized.  Our companion report analyzing
DOD's report, Policy Regarding Performance of Depot-Level Maintenance
and Repair, discusses this issue further.  After the risk assessments
are completed, additional workloads will likely be privatized. 
However, the precise amounts cannot be estimated. 


      REPORTED WORKLOAD
      PROJECTIONS EXCLUDE SOME
      CONTRACTED WORKLOADS
---------------------------------------------------------- Letter :5.1

DOD's future workload projections exclude funding for two categories
of contractor maintenance activities, interim contractor support and
contractor logistics support, that are included in the historical
data.  Although the services included funding for these categories in
the fiscal years 1997 through 2001 data they forwarded to the Office
of the Secretary of Defense (OSD), the decision was made to exclude
this information from the projected workload report.  Officials
stated that congressional direction was not specific regarding what
should be included.  We noted that for the Air Force, which has
considerably more contractor maintenance in these categories than the
other services, including these categories would significantly limit
the Air Force's ability to implement planned privatization
initiatives if 60/40 is not repealed.  It would have little impact in
the other services.  Nonetheless, as a result of the exclusion of
interim contractor support and contractor logistics support from the
projected workloads, the historical and future workload data are not
directly comparable. 

Appendix I shows adjusted future workload data that includes interim
contractor support and contractor logistics support funding
projections as contractor costs.  The percentage split between public
and private for fiscal year 1997 is 60/40 when these contractor
maintenance categories are included compared to DOD's reported 64/36. 
In 2001, the workload going to the private sector would increase to
53 percent from the reported 50 percent.  The impact of these two
categories of contractor maintenance would be far more significant on
the Air Force, altering its projections of public-private sector mix
in 2001 from 46/54 to 40/60.  We asked DOD officials about the
reliability of the data reported for interim contractor support and
contractor logistics support.  They stated that these estimates are
probably understated to some extent since some costs are covered in
weapon system program costs and are not readily available. 

Also as part of our analysis of DOD's workload data, we noted that
the Marine Corps included several categories of contractor
maintenance in the future workload projections that it did not
include in the historical data.  Consequently, a comparison of the
Marine Corps' historical and future data gives the impression that
the Marine Corps will significantly increase its contractor
maintenance.  However, when we adjusted the data to make it
comparable, the historical and future data are relatively consistent. 


      REPORTED WORKLOAD
      PROJECTIONS WILL LIKELY
      CHANGE
---------------------------------------------------------- Letter :5.2

In January 1996, the services were directed by OSD to submit two
views of their estimated depot maintenance workload distribution
projections.  The first view of the future workload distribution
projection was to show the actual fiscal year 1995 results and
projected workload distributions for fiscal years 1996 through 2001
based on the services' existing assessment of core requirements.  The
second was to show a revised projection of fiscal year 1996 through
2001 workloads based on the recomputation of core using a revised
core methodology and an assumption that all noncore workload would be
privatized.  The revised methodology includes a risk assessment of
mission-essential workloads previously defined as core to determine
if they can be outsourced.  For the most part, the services were not
able to complete the assessments for the second requirement. 

With the exception of the naval ship community, the services have notcompleted calculations of their core requirements using their new
methodology.  They are only now beginning to conduct risk assessments
of critical workloads to determine which ones can be contracted out
to the private sector with an acceptable risk.  Until the services
conduct these assessments, it is uncertain what workloads DOD will
move to the private sector. 


         AIR FORCE
-------------------------------------------------------- Letter :5.2.1

The public-private sector mix in 2001 for the Air Force is projected
to be 46/54, if interim contractor support and contractor logistics
support costs of $524 million are excluded as contractor maintenance. 
The Air Force public-private mix for 2001, including these additional
contractor maintenance costs is 40/60. 

The Air Force data shows a 57-percent increase in contract depot
maintenance, representing a projected $723 million increase between
1997 and 2001.  The Air Force's projections of future workload
distribution used the fiscal year 1997 core computation as its base. 
The Air Force workload projections assumed that all workloads from
the three closing Air Force depots will be privatized, except for
workload expected to be transferred to an Army depot.  These
projections show no additional privatizations would likely result
from future risk analyses.  Further, they do not reflect significant
new system workloads.  Most of the Air Force's major new system
acquisitions will be managed under interim contractor support or
contractor logistics support during this time period.  As previously
reported, these expenditures are not included in the reported
workload projections. 

The Air Force's calculation of its fiscal year 1997 core is 25.5
million direct labor hours, down from 27.7 million direct labor hours
calculated for fiscal year 1994.  The Air Force's projection of
future depot maintenance workload distribution was based on the
following assumptions: 

  -- privatization-in-place of depot maintenance and metrology and
     calibration workloads at the Aerospace Guidance and Metrology
     Center (fiscal year 1996);

  -- privatization of five prototype workloads, including hydraulics,
     electronic accessories, software, C-5 paint/depaint, and fuel
     accessories at San Antonio and Sacramento Air Logistics Centers
     (fiscal year 1997);

  -- privatization of remaining San Antonio and Sacramento depot
     maintenance workloads by 2001, when these activities are to be
     closed as government depots; and

  -- establishment of joint venture private sector partnerships at
     Warner Robins and Oklahoma City Air Logistics Centers (fiscal
     years 1998 through 2001). 


         ARMY
-------------------------------------------------------- Letter :5.2.2

Using the data provided in the workload report, the public-private
sector mix in 2001 is projected to be 56/44 for the Army.  The Army
workload data shows a 28-percent increase in contract depot
maintenance, which represents a projected $111-million increase
between 1997 and 2001.  When including $72 million for interim
contractor support and contractor logistics support, the Army
public-private mix for 2001 is 53/47. 

In projecting public-private workload distribution, the Army
recomputed its core capability requirements, slightly reducing its
previous depot maintenance core requirements to support the two-major
regional contingency scenario.  The Army did not use the revised
methodology to determine if any mission-essential workloads
previously identified as core could be privatized.  Instead,
top-level Army managers met and approved plans to change the status
of some workloads previously identified as core to noncore--thereby
allowing these workloads to be privatized over the next few years. 
This reduced the Army's core workload requirement by about 3.4
million direct labor hours. 

The Army, in developing its projected workload distribution, made the
following assumptions: 

  -- All the missile work at Letterkenny Army Depot would be
     privatized by creating a government-owned, contractor-operated
     missile facility and a government-owned, contractor-operated
     Paladin operation.\6

  -- All troop support vehicles and trucks currently repaired at the
     Red River Army Depot would be privatized and a public-private
     partnership arrangement would be created to support the Bradley
     Fighting Vehicle system core workload. 

  -- Noncore small arms workload currently repaired at the Anniston
     Army Depot would be privatized, and partnership agreements would
     be established with private sector firms for combat vehicles and
     artillery support. 

  -- Repair work on the OH-58D and CH-47D helicopters currently
     repaired at the Corpus Christi Army Depot would be privatized,
     if the peacetime workload requirements for the Apache and
     Blackhawk helicopters equal or exceed core. 


--------------------
\6 We are currently reviewing privatization-in-place options being
considered for Army depots and plan to issue a report on this work at
a later date. 


         MARINE CORPS
-------------------------------------------------------- Letter :5.2.3

Using the data provided in the workload report, the public-private
sector mix in 2001 for the Marine Corps is projected to be 81/19. 
The Marine Corps data shows a $12-million decline in the amount of
contract depot maintenance workload between 1997 and 2001, when the
Marine Corps data is normalized by taking out contract data included
in the future data, but not in the historical data.  The Marine Corps
public-private mix for 2001 using corrected data is 95/05. 

Marine Corps officials stated that its depot maintenance core
requirements will not significantly change over the 5-year period. 
Further, officials noted that because of the small quantities and
irregular and varied nature of workloads maintained in its depots, it
is usually not cost-effective to privatize noncore workloads. 
Although some future privatization initiatives are under
consideration, since they have not yet been studied for feasibility
and interest, they were not factored into the Marine Corps' workload
distribution analysis.  The potential Marine Corps privatization
initiatives are the paint booth and blast booth facilities on both
Marine Corps ground system depots, outsourcing disassembly functions
of certain commodity lines, and developing a partnership with the
private sector for the amphibious assault vehicle hull rework. 


         NAVAL SHIPS
-------------------------------------------------------- Letter :5.2.4

Using the data provided in the workload report, the public-private
sector mix in 2001 is projected to be 48/52 for naval ships.  The $8
million reported for interim contractor support and contractor
logistics support is not large enough to affect the workload mix for
ships.  The naval shipyard workload data shows a 70-percent increase
in contract work between 1997 and 2001, a projected $797-million
increase in privatized work.  The growth in contracted ship workload
will result from the closure of four naval shipyards, which will
eliminate the two DOD shipyards that only performed nonnuclear work. 

Only the Naval Sea Systems Command has completed its 1996 core
determination, including risk assessments.  The Command calculated
its revised ship repair core as 23.3 million direct labor hours, down
16.5 million from 39.8 million in fiscal year 1994.  In revising its
core computation, it used the same risk analysis process as in fiscal
year 1994, which was based on the following three risk factors: 

  -- the absence of an assured competitive private sector source of
     depot-level maintenance and modernization;

  -- scenario numerical requirements in relation to total ship-class
     inventory (number of ships in class compared with scenario
     requirement); and

  -- unique maintenance requirement, including large deck ship
     drydocking and maintenance, complex combatant modernization and
     depot-level maintenance, nuclear ship defueling or refueling,
     maintenance and modernization engineering, and battle damage
     repair. 

Each class containing ships specified by the Joint Chiefs of Staff
contingency scenarios was evaluated on the basis of the above risk
factors.  If there were no risk factors present, the ship class was
classified as low risk and considered noncore.  If one or two risk
factors were present, the class was considered moderate and could be
considered core or noncore.  If all three risk factors were present,
the class was placed in the high- risk category and considered core. 
These ships are assigned to the public or private sector on the basis
of assured capability.  Naval shipyards were assigned 43 scenario
ships as core, while private shipyards were assigned 148 scenario
ships on the basis of assured capability. 

The results of the revised risk assessment were the same as the
results in 1994.  However, to better reflect workload schedule
realities, such as homeporting issues and split work packages on
aircraft carriers, the closure or planned closure of 4 naval
shipyards, and the planned deactivation of four ballistic missile
submarines, Navy officials said that they reduced the 1994
requirement by 11 ships.  This reduction includes the planned
deactivations of the four ballistic missile submarines and seven
ships that will move from pre-risk core to mission-essential but
noncore in the private sector--two ballistic missile submarines, two
aircraft carriers, two amphibious ships, and one surface combatant. 


         NAVAL AVIATION
-------------------------------------------------------- Letter :5.2.5

Using the data provided in the workload report, the public-private
sector mix in 2001 is projected to be 55/45 for naval aviation. 
Adjusting the private sector to account for the projected $26 million
interim contractor support and contractor logistics support program
would change the mix to 54/46.  The naval aviation workload data
shows a $62-million decline in projected contract workload between
1997 and 2001, and a $120-million decline in projected DOD depot
workload over this period. 

The Naval Aviation Systems Command did not use the revised core
methodology when calculating its core requirements.  Accordingly, the
computation did not change from the 13-million direct labor hour
requirement previously identified.  Navy officials stated that a
contractor is helping to develop a risk assessment methodology, but
this has not yet been completed.  When a methodology is approved and
risk assessments are completed for core workloads, the Navy's core
requirements will be revised. 

Given the current status of its reassessment, the revised projected
workload distribution for naval aviation was developed using the
assumption that workload valued at $184 million that had been
identified as noncore using the old criteria would be privatized. 
This workload includes various engine overhauls; modifications and
upgrades on the F-14 aircraft; maintenance work on missiles,
components, ground support equipment, gear boxes, and torque meters;
and scheduled depot-level maintenance on various aircraft.  According
to Navy officials, a significant portion of this work is currently
interserviced to other service depots. 


         NAVAL WARFARE CENTERS
-------------------------------------------------------- Letter :5.2.6

Additionally, the Navy is also privatizing-in-place the Naval Surface
Warfare Center, Crane Division Detachment, Louisville, Kentucky, and
Naval Air Warfare Center, Aircraft Division, Indianapolis, Indiana. 
The Louisville privatization involves sole-source awards to two
original equipment manufacturers.  The Navy expects to award these
contracts in July 1996.  The Indianapolis privatization is expected
in 1997. 


   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :6

More comprehensive and consistent workload data would improve
congressional oversight of the allocation of workload between the
public and private sectors.  Congress may wish to consider providing
specific guidance to DOD regarding how depot maintenance data should
be collected, analyzed, and reported to reflect the balance of
workload between DOD depots and the private sector.  More
specifically, Congress may wish to require that (1) all contractor
maintenance categories be included, regardless of the funding source
or security classification of the systems, (2) repair parts be
appropriately categorized or excluded, and (3) local purchases of
maintenance and repair services be allocated to the private sector's
share. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

DOD officials commented orally on a draft of this report.  The
officials were concerned that the report's discussion of reported
workload data implied that DOD had not complied with the guidance
contained in section 311 of the Authorization Act.  They noted that
the act did not provide specific guidance on the data to be included
in the report and that the DOD workload report noted that certain
logistic support data was not included in the workload projections. 
The officials also noted that the report's treatment of public depot
purchases of repair parts and services from the private sector is
consistent with how DOD has historically reported the data.  We
revised the report to make it clear that our concerns with the
reported data were not implying noncompliance with the section 311
reporting requirement.  We also deleted one draft recommendation that
DOD change its methodology for reporting workload data and added
matters for congressional consideration that address this issue. 
With the above exceptions and a few technical corrections, DOD
officials stated that they did not disagree with the data presented
in our report. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

We reviewed DOD's Depot-Level Maintenance and Repair Workload Report,
which DOD submitted to Congress April 4, 1996.  We compared the DOD
data and commentary with the requirements cited in section 311 of the
National Defense Authorization Act for Fiscal Year 1996.  From each
military service and OSD, we obtained back-up data and discussed
privatization initiatives.  We also drew extensively from information
gathered in our related reviews of depot maintenance, including
privatization-in-place, closing depots, public-private competitions,
and depot maintenance contracting. 

We interviewed officials and examined documents at OSD, the Army, the
Navy, the Marine Corps, and the Air Force headquarters, Washington,
D.C.; Army Materiel Command, Alexandria, Virginia; Naval Air Systems
Command, Arlington, Virginia; Marine Corps' Logistics Plan and
Strategic Mobility Division, Arlington, Virginia; Naval Sea Systems
Command, Arlington, Virginia; Air Force Materiel Command, Dayton,
Ohio; Army Industrial Operations Command, Rock Island, Illinois;
Naval Aviation Depot, Jacksonville, Florida; Ogden Air Logistics
Center, Ogden, Utah; Oklahoma City Air Logistics Center, Oklahoma
City, Oklahoma; and Warner Robins Air Logistics Center, Warner
Robins, Georgia. 

We conducted our review from February to May 1996 in accordance with
generally accepted government auditing standards.  We discussed our
draft report with agency officials and included their comments where
appropriate. 


---------------------------------------------------------- Letter :8.1

We are sending copies of this report to the Chairmen and Ranking
Minority Members, House and Senate Committees on Appropriations, the

Senate Committee on Governmental Affairs, and the House Committee on
Government Reform and Oversight; the Secretaries of Defense, the
Army, the Navy, and the Air Force; and the Director, Office of
Management and Budget.  Please contact me at (202) 512-8412 if you
have any questions.  Major contributors to this report are listed in
appendix II. 

David R.  Warren
Director, Defense Management Issues


SERVICES' PROJECTED WORKLOAD
INCLUDING INTERIM CONTRACTOR
SUPPORT/CONTRACTOR LOGISTICS
SUPPORT
=========================================================== Appendix I

                      (Constant Fiscal Year 1996 (dollars in
                                    millions))


                                                     Air          Marine
                                            Army   Force    Navy   Corps     DOD
----------------------------------------  ------  ------  ------  ------  ------
Fiscal year 1997
Total workload (including ICS/CLS)\a      $1,329  $4,261  $5,338    $213  $11,14
                                                                               1
Public                                       872   2,421   3,223     163   6,679
Private                                      398   1,279   2,089      50   3,816
ICS/CLS\a                                     59     561      26       0     646
Total private                               $457  $1,840  $2,115     $50  $4,462
Public-private mix (percent)               66/34   57/43   60/40   77/23   60/40
Fiscal year 1998
Total workload (including ICS/CLS)\a      $1,225  $4,202  $5,316    $186  $10,92
                                                                               9
Public                                       678   2,054   3,115     152   5,999
Private                                      494   1,549   2,173      34   4,250
ICS/CLS\a                                     53     598      28       0     679
Total private                               $547  $2,147  $2,201     $34  $4,929
Public-private mix (percent)               55/45   49/51   59/41   82/18   55/45
Fiscal year 1999
Total workload (including ICS/CLS)\a      $1,314  $4,341  $5,754    $187  $11,59
                                                                               6
Public                                       729   1,834   2,983     147   5,693
Private                                      520   1,930   2,740      39   5,229
ICS/CLS\a                                     65     577      31       0     673
Total private                               $585  $2,507  $2,771     $39  $5,902
Public-private mix (percent)               55/45   42/58   52/48   79/21   49/51
Fiscal year 2000
Total workload (including ICS/CLS)\a      $1,266  $4,378  $6,060    $187  $11,89
                                                                               1
Public                                       669   1,755   3,184     144   5,752
Private                                      529   2,060   2,842      43   5,474
ICS/CLS\a                                     68     563      34       0     665
Total private                               $597  $2,623  $2,876     $43  $6,139
Public-private mix (percent)               53/47   40/60   53/47   77/23   48/52
Fiscal year 2001
Total workload (including ICS/CLS)\a      $1,238  $4,236  $5,628    $186  $11,28
                                                                               7
Public                                       657   1,710   2,788     151   5,306
Private                                      509   2,002   2,806      35   5,352
ICS/CLS\a                                     72     524      34       0     630
Total private                               $581  $2,526  $2,840     $35  $5,982
Public-private mix (percent)               53/47   40/60   50/50   81/19   47/53
--------------------------------------------------------------------------------
\a Interim Contractor Support/Contractor Logistics Support. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II


   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix II:1

James Wiggins, Associate Director
Julia Denman, Assistant Director
Marilyn Wasleski, Evaluator-in-Charge
Glenn Knoepfle, Senior Evaluator
Gregory Harmon, Evaluator
Edward Waytel, Senior Evaluator


   OFFICE OF GENERAL COUNSEL,
   WASHINGTON, D.C. 
-------------------------------------------------------- Appendix II:2

John Brosnan, Assistant General Counsel


   CHICAGO FIELD OFFICE
-------------------------------------------------------- Appendix II:3

Bruce Fairbairn, Senior Evaluator


   LOS ANGELES FIELD OFFICE
-------------------------------------------------------- Appendix II:4

Dennis DeHart, Senior Evaluator
Jean Orland, Evaluator


   ATLANTA FIELD OFFICE
-------------------------------------------------------- Appendix II:5

Bobby Worrell, Senior Evaluator


*** End of document. ***