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Report to Congressional Committees:

United States General Accounting Office:

GAO:

September 2003:

DEPOT MAINTENANCE:

DOD's 50-50 Reporting Should Be Streamlined:

Depot Maintenance:

GAO-03-1023:

GAO Highlights:

Highlights of GAO-03-1023, a report to Congressional Committees 

Why GAO Did This Study:

Under 10 U.S.C. 2466, not more than 50 percent of each military 
departments annual depot maintenance funding can be used for work 
done by private-sector contractors. The Department of Defense (DOD) 
also must submit two reports to the Congress annually on the division 
of depot maintenance funding between the public and private sectors
one about the percentage of funds spent in the previous 2 fiscal years 
(prior-years report) and one about the current and 4 succeeding fiscal 
years (future-years report). As required, GAO reviewed the two DOD 
reports submitted in early 2003 and is, with this report, submitting 
its views to the Congress on whether (1) the military services met the 
so-called 50-50 requirement for fiscal years 2001-2 and (2) the 
projections for fiscal years 2003-7 are reasonable estimates. GAO also 
identified opportunities to improve the reporting process.

What GAO Found:

Continuing weaknesses in DODs data gathering, reporting processes, 
and financial systems prevented GAO from determining with precision if 
the military services complied with the 50-50 requirement in fiscal 
years 2001-2. DOD data show all the services, except the Air Force in 
fiscal year 2001, to be below the 50-percent funding limit on private 
sector work. However, as before, GAO found errors in the data that, if 
corrected, would overall increase funding of the private sector and 
move each service closer to the contract limit. For example, for 
fiscal year 2002, the Navy did not include about $401 million in 
private sector maintenance work on aircraft carriers and surface 
ships. Correcting for these and other errors would increase the Navys 
percentage of private sector depot maintenance funds for that year 
from the 42.6 percent reported to 46.9 percent. Such data weaknesses 
show that prior-years reports do not precisely measure the division of 
maintenance funding. At best, over time these results provide rough 
approximations and indicate trends that may be useful to decision 
makers.

Because of data deficiencies and changing budget projections, the 
future-years report does not provide reasonable estimates of public 
and private sector maintenance funding for fiscal years 2003-7 and 
limits its usefulness to decision makers. GAO reported this 
shortcoming in the past, and problems continue. For example, the Army 
underreported maintenance work at nondepot locations as it continues 
to consolidate the work and better control it at such locations. Other 
Army work was not reported because some commands did not receive 
guidance and others misapplied it. These errors would add about $200 
million annually to the Armys future estimate and increase the 
percent of projected funding in the private sector.

Opportunities still exist for improvements, including for streamlining 
the 50-50 reports, continued service audit agency support, and data 
development. Streamlining the 50-50 reports could help address 
problems caused by, among other factors, inexact program estimates. 
Second, although DOD is concerned that recent revisions to federal 
audit standards could keep service auditors from further participation 
in the 50-50 process, GAO believes that a way can be developed to 
enable auditors continued support yet ensure their independence. 
Third, data development could be helped by better disseminating 
guidance and training participating personnel.

What GAO Recommends:

GAO suggests that the Congress consider amending 10 U.S.C. 2466 to 
require only one annual 50-50 report to cover the prior, current, and 
budget years for which data are generally more reliable and potential 
impacts more immediate. GAO also recommends that DOD improve 50-50 
data collection and validation by, among other actions, using service 
audit agencies for timely review and validation of 50-50 data. DOD 
concurs with the report recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-03-1023. 

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Barry W. Holman at 
(202) 512-5581 or holmanb@gao.gov.

[End of section]

Contents:

Letter:

Results in Brief:

Background:

Weaknesses in Data Preclude Determinations of Compliance in Prior-Years 
Report:

Future-Year Projections Are Not Reasonable and Not Very Useful:

Opportunities Exist to Improve DOD Reporting:

Conclusions:

Matter for Congressional Consideration:

Recommendations for Executive Action:

Agency Comments and Our Evaluation:

Appendix I: GAO Adjustments for Errors, Omissions, and Inconsistencies 
in Military Departments 50-50 Data for Fiscal Year 2002:

Department of the Army:

Department of the Navy:

Department of the Air Force:

Appendix II: Scope and Methodology:

Appendix III: Comments from the Department of Defense:

Related GAO Products:

Tables:

Table 1: DOD Reported Depot Maintenance Funding Allocations:

Table 2: GAO Changes to Army's FY 2002 50-50 Data:

Table 3: GAO Changes to Navy's and Marine Corps' FY 2002 50-50 Data:

Table 4: GAO Changes to Air Force's FY 2002 50-50 Data:

Abbreviations:

DOD: Department of Defense:

OSD: Office of the Secretary of Defense:

United States General Accounting Office:

Washington, DC 20548:

September 15, 2003:

The Honorable John Warner 
Chairman 
The Honorable Carl Levin 
Ranking Minority Member
Committee on Armed Services 
United States Senate:

The Honorable Duncan Hunter 
Chairman 
The Honorable Ike Skelton 
Ranking Minority Member 
Committee on Armed Services 
House of Representatives:

Under 10 U.S.C. 2466, not more than 50 percent of annual depot 
maintenance funding provided to the military departments and 
defense agencies can be used for work accomplished by private-sector 
contractors. Section 2466 also directs the Department of Defense (DOD) 
to submit two annual reports to the Congress on the distribution of 
depot maintenance funding between the public and private sectors. The 
first report is to identify the percentage of funds expended by each 
military department and defense agency during the preceding 2 fiscal 
years for the performance of depot maintenance workloads by the public 
and private sectors (the "prior-years report"). The second report is to 
project the same information for the current and 4 succeeding fiscal 
years (the "future-years report"). For 2003, DOD issued the prior-years 
report on February 11, 2003, and the future-years report on April 7, 
2003.

Section 2466 also requires us to submit our views to the Congress on 
whether DOD complied with the so-called "50-50 requirement" in the 
prior-years report and whether the projections in the future-years 
report are reasonable. Accordingly, this report discusses whether (1) 
the military departments met the 50-50 requirement for fiscal years 
2001 and 2002 and (2) the projections for fiscal years 2003 through 
2007 represent reasonable estimates. As part of our work, we also 
identified opportunities to improve the reporting process. To 
accomplish these objectives, we analyzed the 50-50 reported data and 
each service's procedures and internal management controls for 
collecting, aggregating, and validating depot maintenance information 
for purposes of responding to the section 2466 requirements. We limited 
our analysis of future-years data because initial audit efforts 
identified significant continuing problem areas, similar to those found 
in prior audits, that are not likely to change.

Results in Brief:

Continuing weaknesses in DOD's data gathering, reporting processes, and 
financial systems prevented us from determining with precision whether 
the services were in compliance with the 50-50 requirement for fiscal 
years 2001 and 2002. DOD's data as submitted to the Congress shows the 
military departments to be below the 50-percent funding limitation on 
private sector work, except for the Air Force, which for 2001 reported 
itself above the limit[Footnote 1] but below it in 2002. However, as in 
past years, we found errors and omissions in the data that, if 
corrected, would overall increase the percentages of funding going to 
the private sector and move each department closer to the contract 
limit. For example, in its data for fiscal year 2002, the Navy did not 
include about $401 million in private sector maintenance work on 
aircraft carriers accomplished during the same time as nuclear 
refueling and on surface ships being placed in an inactive status. The 
Marine Corps, which compared to the other services has the smallest 
workload but the largest proportion of errors, did not report most 
depot maintenance workloads from the command responsible for system 
acquisitions and upgrades, understating private-sector workloads by 
about $32 million and public sector workloads by about $7 million. 
Correcting for these and other errors we found would increase the 
Department of the Navy's percentage of depot funds for work 
accomplished in the private sector during fiscal year 2002 from the 
42.6 percent reported to 46.9 percent, a gain of over 4 percentage 
points. These weaknesses indicate the data in the prior-years report 
cannot be relied on to provide a precise measure of the balance of 
funding between the public and private sectors for the military 
departments. At best, over time these reports provide rough 
approximations of the public-private funding allocations, with some 
indications of trends that may be useful information to the Congress in 
exercising its oversight role and to DOD officials in managing the 
depot maintenance program.

Because of supporting data deficiencies and the changing nature of 
budget projections, the future-years report does not provide reasonable 
estimates of public and private sector depot maintenance funding 
allocations for fiscal years 2003 through 2007, thereby limiting its 
usefulness to congressional and DOD decision makers. We have reported 
this shortcoming with the future-years report in the past, and the 
problems continue to occur. For example, as in past years, the Army 
underreported public and private sector depot-level maintenance work at 
field locations as it continues unfinished efforts to consolidate 
maintenance activities and better control the proliferation of depot-
level tasks at nondepot locations. Other Army work was not reported 
because some commands did not receive 50-50 guidance and others 
misapplied the guidance. While the Army's supporting documentation for 
the projected data was inadequate, errors and omissions of similar 
magnitude to the prior years data would add more than $200 million 
annually to the Army's reported future work for both public and private 
sectors. As with the prior years, the net effect of the problems we 
found generally increases the percentage of workload expected to be 
accomplished by the private sector. Besides reporting errors, other 
internal and external factors can create large fluctuations in reported 
data, which in turn can provide a distorted and misleading view to 
outside observers about efforts to remain compliant with the 50-50 
requirement. For example, in the current future-years report, the Air 
Force's projected public sector work financed through the working 
capital fund is $3.0 billion higher than the amount reported for the 
same 4-year time period in the future-years report submitted in 2002. 
Although this would appear to indicate a large influx of new work to 
the public depots, in reality the amount of work, according to budget 
estimates and management reports, is expected to remain fairly level 
during this reporting period in terms of production hours and size of 
workforce. Most of the dollar (and percentage) increase in public 
sector work is the result of price hikes in the sales rate charged to 
its customers, a condition primarily caused by increases in the cost of 
spare and repair parts used in the maintenance process.

Recently DOD's improvements in 50-50 guidance and operating processes 
have reached a plateau in terms of quality and direction. However, 
opportunities still exist to improve 50-50 data and management 
processes and controls, including through a streamlined 50-50 report, 
service audit agency participation in that process, and an improved 
data development process. Streamlining the 50-50 report to focus on the 
data that are likely to be more accurate and extending the time DOD 
officials have to put the data together should improve the quality of 
the reported 50-50 data. Furthermore, DOD officials indicated their 
concerns that the issue of auditor independence, arising from a recent 
revision of government auditing standards, could keep service auditors 
from further participation in 50-50 reviews. However, the continued 
participation of the service audit agencies--to verify data and 
identify errors to be corrected by 50-50 managers before reports are 
submitted to the Congress--is critical to improving data accuracy and 
completeness. We believe that, as such participation by auditors has 
been done with regard to the base realignment and closure process, a 
process can be developed to enable service auditors' valuable 
participation to continue while the services are compiling their data, 
with audit agencies still maintaining their independence. Lastly, 
opportunities for improvement in the data development process include 
better dissemination of guidance and enhanced training for personnel 
who collect and report the data.

We are including a matter for congressional consideration regarding the 
streamlining of the 50-50 reports by reducing the number of years of 
future data that are collected and combining the prior-year and future-
year reports into one report with a later reporting date. We are also 
making recommendations to the Department of Defense for improving the 
50-50 data reported to the Congress (1) by assuring the timely 
participation of the service audit agencies in reviewing the data 
before reports are submitted to the Congress and (2) by increasing 
management's attention to the dissemination of guidance to all 
organizations and personnel participating in the process and to the 
improvement of training for personnel responsible for developing and 
aggregating data.

In written comments on a draft of this report, DOD concurred with the 
report's recommendations while disagreeing with limited portions of our 
analyses. The department's comments are included in appendix III.

Background:

Governing Legislation and Previous Reports Concerning the 50-50 
Requirement:

In addition to the 50-50 requirement in 10 U.S.C. 2466, two other title 
10 provisions directly affect the reporting of workload allocations to 
the public and private sectors.

* Section 2460 defines depot maintenance to encompass material 
maintenance or repair requiring the overhaul, upgrade, or rebuilding of 
parts, assemblies, or subassemblies and the testing and reclamation of 
equipment, regardless of the source of funds or the location at which 
maintenance or repair is performed. Depot maintenance also encompasses 
software maintenance, interim contractor support,[Footnote 2] and 
contractor logistics support[Footnote 3] to the extent that work 
performed in these categories is depot maintenance. The statute 
excludes from depot maintenance the nuclear refueling of an aircraft 
carrier, the procurement of major modifications or upgrades of weapon 
systems, and the procurement of parts for safety modifications, 
although the term does include the installation of parts for safety 
modifications.

* Section 2474 directs DOD to designate public depots as Centers of 
Industrial and Technical Excellence and to improve their operations so 
as to serve as recognized leaders in their core competencies.[Footnote 
4] Section 342 of the National Defense Authorization Act for Fiscal 
Year 2002 (P.L. 107-107, Dec. 28, 2001) amended this statute to exclude 
qualifying public-private partnerships[Footnote 5] from the 50-percent 
funding limitation on contracting in section 2466. Section 342 provides 
that the funds expended for the performance of depot-level maintenance 
by nonfederal government personnel located at the centers shall not be 
counted when applying the 50-percent limitation if the personnel are 
provided pursuant to a public-private partnership. This exclusion 
initially applied to depot maintenance funding for fiscal years 2002 
through 2005. Section 334 of the National Defense Authorization Act for 
Fiscal Year 2003 (P.L. 107-314, Dec. 2, 2002) extended this period to 
include all contracts entered into through fiscal year 2006.

The Office of the Secretary of Defense (OSD) has issued guidance to the 
military departments for reporting public-private workload 
allocations. The guidance is consistent with the definition of depot-
level maintenance and repair in 10 U.S.C. 2460.[Footnote 6] The 
military departments have also issued internal instructions to manage 
the data collection and reporting process, tailored to their individual 
organizations and operating environments.

Based on the congressional mandate regarding the DOD 50-50 requirement, 
this is the sixth year that we have reported on the prior-year numbers 
and the fourth year reporting on the future-year numbers.[Footnote 7] 
In past years, we have reported on continuing data errors and 
inconsistencies in reporting by the military departments and problems 
in documenting and independently validating 50-50 data. We have 
recommended increasing management attention to and emphasis on the 50-
50 reporting process, improving guidance in specific maintenance 
categories, and implementing better internal controls. We have also 
observed that the 50-50 process is complex, involving numerous 
reporting entities and commands, and requiring the incorporation of 
evolving new concepts of logistics support, changing locations and 
organizations for accomplishing depot maintenance, and changes in 
statutory provisions. Service officials told us that the reporting 
process is somewhat burdensome and time frames for collecting data are 
constrictive. Further complications in reporting result from relatively 
high turnover in staff responsible for collecting and managing data and 
uneven management attention and priority accorded the 50-50 process.

Our work has historically been augmented by the efforts of the service 
audit agencies, which have participated in the 50-50 processes in 
varying degrees. We have recommended the continued involvement of the 
auditors to review and validate reporting processes and results and to 
correct substantial errors and omissions before the 50-50 data are 
submitted to the Congress.

Our prior reports also recognized the limitations of DOD's financial 
systems, operations, and controls. Our audits of DOD's financial 
management operations have routinely identified pervasive weaknesses in 
financial systems, operations, and internal controls that impede its 
ability to provide useful, reliable, and timely financial information 
for day-to-day management and decision making. In the financial 
management systems area, DOD continues to struggle in its efforts to 
implement systems to support managerial decision-making. As we recently 
reported,[Footnote 8] DOD can ill afford to invest in systems that are 
not capable of providing DOD management with more accurate, timely, and 
reliable information on the results of the department's business 
operations.

To date, none of the military services or major DOD components has 
passed the test of an independent financial audit. A continuing 
inability to capture and report the full cost of its programs 
represents one of the most significant impediments facing DOD. 
Nonetheless, the data used to develop the 50-50 report are the only 
data available and are accepted and used for DOD decision making and 
for congressional oversight.

Summary of Data in DOD's 50-50 Reports:

Table 1 provides a consolidated summary of DOD's 2003 prior-years and 
future-years reports to the Congress on public and private sector 
workload allocations for depot maintenance. The amounts shown are DOD's 
record of actual obligations incurred for depot maintenance work in 
fiscal years 2001 and 2002 and projected obligations for fiscal years 
2003-2007 based on the defense budget and service funding 
baselines.[Footnote 9] The percentages show the relative allocations 
between the public and private sectors and the exempted workloads. 
Adding the private and private-exempted percentages together shows what 
the private-sector amount would have been reported as, absent the 
recent legislation to exempt qualified partnership workload.

Table 1: DOD Reported Depot Maintenance Funding Allocations:

Dollars in millions.

: Prior fiscal years: [Empty].

Army: 

Public; Prior fiscal years: 2001: $1,205; Prior fiscal years: 2002: 
$1,373; Future fiscal years: 2003: $1,781; Future fiscal 
years: 2004: $1,790; Future fiscal years: 2005: $1,907; Future fiscal 
years: 2006: $2,017; Future fiscal years: 2007: $2,008.

Prior fiscal years: 2001: 52.2%; Prior fiscal years: 2002: 51.5%; 
Future fiscal years: 2003: 55.8%; Future fiscal years: 2004: 
52.8%; Future fiscal years: 2005: 53.6%; Future fiscal years: 2006: 
52.6%; Future fiscal years: 2007: 52.7%.

Private; Prior fiscal years: 2001: $1,102; Prior fiscal years: 2002: 
$1,239; Future fiscal years: 2003: $1,325; Future fiscal 
years: 2004: $1,517; Future fiscal years: 2005: $1,562; Future fiscal 
years: 2006: $1,729; Future fiscal years: 2007: $1,716.

Prior fiscal years: 2001: 47.8%; Prior fiscal years: 2002: 46.5%; : 
Future fiscal years: 2003: 41.5%; Future fiscal years: 2004: 
44.7%; Future fiscal years: 2005: 43.9%; Future fiscal years: 2006: 
45.1%; Future fiscal years: 2007: 45.0%.

Private exempt[A]; Prior fiscal years: 2001: -; Prior fiscal years: 
2002: $51; Future fiscal years: 2003: $84; Future fiscal 
years: 2004: $86; Future fiscal years: 2005: $87; Future fiscal years: 
2006: $87; Future fiscal years: 2007: $87.

Prior fiscal years: 2002: 1.9%; Future fiscal years: 
2003: 2.6%; Future fiscal years: 2004: 2.5%; Future fiscal 
years: 2005: 2.4%; Future fiscal years: 2006: 2.3%; Future 
fiscal years: 2007: 2.3%.

Total; Prior fiscal years: 2001: $2,307; Prior fiscal years: 2002: 
$2,663; Future fiscal years: 2003: $3,190; Future fiscal 
years: 2004: $3,393; Future fiscal years: 2005: $3,556; Future fiscal 
years: 2006: $3,833; Future fiscal years: 2007: $3,812.

Navy/Marine Corps: 

Public; Prior fiscal years: 2001: $4,342; Prior fiscal years: 2002: 
$5,258; Future fiscal years: 2003: $4,986; Future fiscal 
years: 2004: $4,594; Future fiscal years: 2005: $5,237; Future fiscal 
years: 2006: $5,172; Future fiscal years: 2007: $5,178.

Prior fiscal years: 2001: 54.7%; Prior fiscal years: 2002: 54.5%;  
Future fiscal years: 2003: 54.1%; Future fiscal years: 2004: 
54.2%; Future fiscal years: 2005: 55.2%; Future fiscal years: 2006: 
55.0%; Future fiscal years: 2007: 56.3%.

Private; Prior fiscal years: 2001: $3,593; Prior fiscal years: 2002: 
$4,110; Future fiscal years: 2003: $4,188; Future fiscal 
years: 2004: $3,836; Future fiscal years: 2005: $4,173; Future fiscal 
years: 2006: $4,144; Future fiscal years: 2007: $3,903.

Prior fiscal years: 2001: 45.3%; Prior fiscal years: 2002: 42.6%;  
Future fiscal years: 2003: 45.4%; Future fiscal years: 2004: 
45.2%; Future fiscal years: 2005: 44.0%; Future fiscal years: 2006: 
44.0%; Future fiscal years: 2007: 42.5%.

Private exempt[A]; Prior fiscal years: 2001: -; Prior fiscal years: 
2002: $273; Future fiscal years: 2003: $46; Future fiscal 
years: 2004: $51; Future fiscal years: 2005: $74; Future fiscal years: 
2006: $94; Future fiscal years: 2007: $111.

Prior fiscal years: 2002: 2.8%; : Future fiscal years: 
2003: 0.5%; Future fiscal years: 2004: 0.6%; Future fiscal 
years: 2005: 0.8%; Future fiscal years: 2006: 1.0%; Future 
fiscal years: 2007: 1.2%.

Total; Prior fiscal years: 2001: $7,935; Prior fiscal years: 2002: 
$9,642; Future fiscal years: 2003: $9,220; Future fiscal 
years: 2004: $8,481; Future fiscal years: 2005: $9,484; Future fiscal 
years: 2006: $9,411; Future fiscal years: 2007: $9,192.

Air Force: 

Public; Prior fiscal years: 2001: $3,322; Prior fiscal years: 2002: 
$4,467; Future fiscal years: 2003: $4,456; Future fiscal 
years: 2004: $4,993; Future fiscal years: 2005: $5,404; Future fiscal 
years: 2006: $5,530; Future fiscal years: 2007: $5,629.

Prior fiscal years: 2001: 47.7%; Prior fiscal years: 2002: 54.1%;  
Future fiscal years: 2003: 51.9%; Future fiscal years: 2004: 
56.8%; Future fiscal years: 2005: 57.9%; Future fiscal years: 2006: 
56.6%; Future fiscal years: 2007: 53.7%.

Private; Prior fiscal years: 2001: $3,643; Prior fiscal years: 2002: 
$3,781; Future fiscal years: 2003: $4,120; Future fiscal 
years: 2004: $3,791; Future fiscal years: 2005: $3,922; Future fiscal 
years: 2006: $4,230; Future fiscal years: 2007: $4,848.

Prior fiscal years: 2001: 52.3%; Prior fiscal years: 2002: 45.8%;  
Future fiscal years: 2003: 48.0%; Future fiscal years: 2004: 
43.1%; Future fiscal years: 2005: 42.0%; Future fiscal years: 2006: 
43.3%; Future fiscal years: 2007: 46.2%.

Private exempt[A]; Prior fiscal years: 2001: -; Prior fiscal years: 
2002: $12; Future fiscal years: 2003: $9; Future fiscal years: 
2004: $8; Future fiscal years: 2005: $7; Future fiscal years: 2006: $7; 
Future fiscal years: 2007: $8.

Prior fiscal years: 2002: 0.1%; : Future fiscal years: 
2003: 0.1%; Future fiscal years: 2004: 0.1%; Future fiscal 
years: 2005: 0.1%; Future fiscal years: 2006: 0.1%; Future 
fiscal years: 2007: 0.1%.

Total; Prior fiscal years: 2001: $6,965; Prior fiscal years: 2002: 
$8,260; Future fiscal years: 2003: $8,585; Future fiscal 
years: 2004: $8,792; Future fiscal years: 2005: $9,333; Future fiscal 
years: 2006: $9,768; Future fiscal years: 2007: $10,484.

Source: DOD's "50-50" Reports, dated Feb. 11 and Apr. 7, 2003.

[A] The provision in 10 U.S.C. 2474 to exempt qualified public-private 
partnerships from the 50-percent funding limitation began with the 2002 
reporting year and is now continued for all contracts entered into 
through fiscal year 2006. DOD interpreted this to mean that exemptions 
should also be reported for fiscal year 2007 for contracts initiated in 
2002 through 2006.

[End of table]

Weaknesses in Data Preclude Determinations of Compliance in Prior-Years 
Report:

DOD's prior-years report for fiscal years 2001 and 2002 as submitted to 
the Congress shows the Departments of the Army and Navy to be below the 
50-percent funding limitation on private sector workloads for both 
years. The Air Force reported itself over the limitation in 2001 and 
below it in 2002. (See table 1.) The net effects of correcting for the 
errors and omissions we identified would increase the percentages of 
workload going to the private sector and move each department closer to 
the contract limit. Appendix I shows the amounts and effects of our 
adjustments to the reported data submitted by the military departments 
for fiscal year 2002 and provides a description of the major 
deficiencies we found. Overall, however, recurring weaknesses in DOD's 
data gathering, reporting processes, and financial systems prevented us 
from determining with precision whether the services were in compliance 
with the 50-50 requirement for fiscal years 2001 and 2002.

Department of the Army:

The Army reported its private sector funding to be below the 50-percent 
limit for both fiscal years 2001 and 2002. Army 50-50 reporting 
involves multiple commands with somewhat different processes for 
collecting, summarizing, and validating data. Although the Army 
utilized a new, more centralized financial system to collect 50-50 data 
that corrected some of the transcription errors we found last 
year,[Footnote 10] we continued to find errors, omissions, and 
inconsistencies in its data.

For example, as in past years, the Army underreported public and 
private sector depot-level maintenance work at field locations as it 
continues unfinished efforts to consolidate maintenance activities and 
better control the proliferation of depot-level tasks at nondepot 
locations. Other Army work was not reported because some commands did 
not receive 50-50 instructions and others misapplied the guidance. 
Unfamiliarity with the guidance was caused in some instances by the 
large turnover from last year in the staff responsible for collecting 
and summarizing data. Staff turnover was cited by each of the military 
services as contributing to increased errors and training needs. To the 
extent we identified them, these specific errors would add about $228 
million in total to the Army's public and private sector workloads in 
2002; the net effect of correcting for these errors would add 2.5 
percent to the private sector percentage allocation in 2002. (See table 
2 in app. I.):

Department of the Navy, including the Marine Corps:

The Navy reported its private sector funding to be below the 50-percent 
limit for both fiscal years. Similar to the Army, the Navy's 50-50 
process also involves multiple naval commands as well as the Marine 
Corps. As in prior years, we believe this increases the complexity in 
managing the process and in ensuring consistency in application of the 
guidance. It also exacerbates the less than adequate data validation 
efforts.

We identified several problems that carried over from last year's 50-50 
efforts. The Navy did not report any depot maintenance work 
accomplished along with the nuclear refueling of its aircraft carriers, 
citing the exclusion of nuclear refueling from the 10 U.S.C. 2460 
definition of depot maintenance. We continue to believe that depot 
repairs not directly associated with refueling tasks should be reported 
because these kinds of repair actions are reported by other 
organizations and funding for these tasks are identifiable in contracts 
and financial systems. The Navy also continues to inconsistently report 
inactivation activities that involve the servicing and preservation of 
systems and equipment before it is placed in storage or in an inactive 
status. Officials report public sector workloads for inactivation 
activities on nuclear ships but do not report such work on nonnuclear 
ships, saying that the former workload is complex while the latter is 
not. We think all such depot-level work should be counted since the 
statute and implementing guidance does not make a distinction of 
complexity. These two examples would add about $401 million to the 
private sector workloads in fiscal year 2002.

We also determined that about $41 million of partnership workloads were 
incorrectly exempted from reporting because the work was not 
accomplished at a designated depot or was not performed by contract 
employees.

The Marine Corps data are included as part of the Department of the 
Navy 50-50 report for compliance purposes, but the Corps exercises a 
separate process for collecting data. Compared to the other services, 
the Marine Corps has a small depot program but makes more relative 
errors and has substantial shortcomings in its management oversight and 
control actions. For example, most of the program offices in the 
command that is responsible for acquiring and upgrading weapon systems 
did not report at all. Our review found that this understated the 
private sector total for fiscal year 2002 by about $32 million and the 
public sector total by almost $7 million. We also identified other 
errors including a nearly $19 million overstatement of the public 
sector when an official incorrectly included obligations from fiscal 
year 2001 in the total for 2002.

On balance, for the Department of the Navy as a whole we found the 
total dollar amount of errors affected the private sector data more 
than the public sector. Correcting for the errors we found 
substantially increases the private sector percentage share in fiscal 
year 2002 from 42.6 percent to 46.9 percent, a gain of over 4 percent. 
(See table 3 in app. I.):

Department of the Air Force:

The Air Force reported that it exceeded the 50-percent funding 
limitation for the private sector in 2001. As provided by law at the 
time, the Secretary of the Air Force issued a waiver.[Footnote 11] The 
Air Force reported itself back below the limitation for fiscal year 
2002.

Most of the errors we found were the same or similar from past reviews. 
For example, the Air Force continues to make a significant adjustment 
in its reporting for contract administration and oversight costs. The 
adjustment increases the reported public sector funding and decreases 
the private sector. The total adjustment was $125 million (in absolute 
terms) for fiscal year 2002. Consistent with the 50-50 guidance, which 
states that costs should be associated with the end product (i.e., the 
repaired item), we think these costs should instead be treated as 
contracting expenses. Accordingly, we reversed this adjustment in our 
analysis. The Air Force also continues to count some component repair 
costs twice, once when the component is repaired and again when it is 
installed in an equipment item or assembly during a periodic overhaul. 
Officials said these are both reportable events, while we think this 
overstates the amount of actual repair work done. Eliminating the 
double count would affect about $666 million in 2002--a $485 million 
decrease in the public sector amount and a $181 million decrease in the 
private sector.

As in past years, we also identified many errors in the amounts 
reported for programs supported by interim and contractor logistics 
support contracts. We determined that several programs used incorrect 
factors and assumptions to calculate the depot portion of total 
contract costs. We found other programs that could not adequately 
explain or justify their estimating methods--some had been developed 
years ago by officials no longer in the program and simply applied by 
new staff without checking their validity nor maintaining adequate 
supporting documentation to explain and rationalize the results. 
Relatively high turnover of staff responsible for collecting and 
managing 50-50 data tends to increase the number and persistence of 
errors and omissions. In total, the net effect of the errors we found 
would increase the private sector allocation in 2002 by about 2.7 
percent. (See table 4 in app. I.):

Future-Year Projections Are Not Reasonable and Not Very Useful:

Because of the changing nature of budget projections and supporting 
data deficiencies, the future-years report does not provide reasonable 
estimates of public and private sector depot maintenance funding 
allocations for fiscal years 2003 through 2007. Furthermore, the 
services tend to place less emphasis and priority on collecting and 
validating future-years data. The reported projections are based, in 
part, on incorrect data, questionable assumptions and estimating 
factors, and some inconsistencies with existing budgets and management 
plans. As with the prior years, the net effect of the problems we found 
generally increases the percentage of funding for projected private 
sector work. The uncertainty and instability of budget estimates 
combined with the errors and omissions we found result in a future-
years report that is not very useful to congressional and DOD decision 
makers.

We found many of the same problems identified in the prior-years data 
were continued in the future-years projections. The Army continued to 
underreport maintenance work at field locations and made other errors 
similar to its prior-years presentation. While supporting documentation 
for the Army's projected data was inadequate, errors and omissions of 
the same magnitude as fiscal year 2002 would add more than $200 million 
annually to the totals projected for the public and private sectors in 
the Army's future-years report. Similarly, in its respective 
projections, the Navy continued to not report depot maintenance 
accomplished with, but not directly related to nuclear refueling; the 
Marine Corps underreported work from the acquisition command; and the 
Air Force contract estimates again involved some questionable 
estimating factors and assumptions. Overall, we found this year as in 
the past that the services tend to place less emphasis and priority on 
collecting and validating the future-years data compared to efforts on 
the prior-years data.

Besides errors in reporting, other internal and external factors can 
create large fluctuations in reported data, which in turn can provide a 
distorted and misleading view to outside observers about efforts to 
remain compliant with the 50-50 requirement. For example, in the 
current future-years report, the Air Force's projected public-sector 
work financed through the working capital fund is about $3.0 billion 
higher than the total amount reported for the same 4-year time period 
in the future-years report submitted in 2002. Although this would 
appear to indicate a large influx of new work to the public depots, in 
reality the amount of work, according to budget estimates and 
management reports, is expected to remain fairly level during this 
reporting period in terms of production hours and size of workforce. 
Most of the dollar (and percentage) increase in public-sector work is 
the result of price hikes in the sales rate charged to its customers. 
Price hikes were caused primarily by increases in the cost of spare and 
repair parts that were used in the repair process.

The future-year estimates are not reasonable because they represent 
budget and planning data that change over time, incorporate the same 
errors found in prior-year data, and also have other problems. The 
budget and planning data used to project the share of depot maintenance 
work to be performed in the public and private sectors in the future 
are estimates. At best, they provide only rough estimates of future 
funding allocations; and these estimates change over time. As an 
illustration, our comparison of the consistency of the 2003 reported 
data with that in DOD's 50-50 reports submitted in 2002 showed that 
congressional and DOD decision makers were given quite a different view 
this year of the public-private sector workload mix than that presented 
just last year. With so many errors and frequent changes, the future-
years data may be misleading and not very useful to congressional and 
DOD decision makers, particularly the further estimates are in the 
future. While we have identified these shortcomings in the past, the 
problems continue and show no signs of getting better.

DOD officials agreed that the planning and budget data available for 
making future projections beyond the budget year are not very useful as 
predictors of the balance of future workloads between the public and 
private sectors. They also noted that when the services are within a 
few percentage points of the 50-50 ceiling, as they are now, the 
accuracy of the conclusions drawn from the unreliable future 
projections does not provide a very good basis for forecasting the 
future.

Opportunities Exist to Improve DOD Reporting:

Despite prior improvements, opportunities continue to exist to make 50-
50 data a more complete and accurate representation of the balance of 
funding for depot maintenance work assigned to the public and private 
sectors. First, streamlining the 50-50 report would offer an 
opportunity to focus improvement efforts on the data where improvements 
are most likely to be realized. Second, continued participation of the 
service audit agencies should improve the quality of the 50-50 data, 
particularly if the audit support is timely to allow for corrections to 
be made before the 50-50 report goes to the Congress. Finally, there 
are opportunities to improve the data development process.

Streamlining the 50-50 Report:

As previously discussed, the future-years dataparticularly that 
estimated for the years beyond the current year and budget yeardo not 
provide a reasonable estimate of the future balance of funding for 
depot maintenance between the public and private sectors. Further, the 
data may be so bad as to be misleading. Streamlining the data collected 
to provide data for a shorter period of time could allow responsible 
officials to focus more closely on the data that are more accurate. 
Additionally, if the report date to the Congress were extended, the 
report could be based on more actual costs and require fewer 
projections, improving the quality of the reported data.

Participation of Service Audit Agencies:

While we continue to believe that the service audit agencies could help 
the military departments improve 50-50 reporting, their future 
involvement is uncertain. As we have reported in the past, auditor 
involvement typically identified and corrected substantial errors in 
the data before the 50-50 reports went to the Congress. However, this 
year the Air Force Audit Agency did not participate; while the Army did 
participate, some of the errors they identified were not corrected in 
the reports to the Congress; and the Navy audit was not done in time to 
result in changes to the 50-50 data submitted to the Congress. A more 
meaningful review would be one that was carried on when the data are 
being aggregated, with input to the process in time to influence the 
reported data. DOD officials told us that the audit services were not 
expecting to work on future 50-50 efforts. Audit services are 
reconsidering their roles because of recent changes to government 
auditing standards regarding auditor independence when performing both 
audit and nonaudit management assistance services to the same 
client.[Footnote 12]

Air Force auditors have had a positive role in the 50-50 process in 
past years. Serving in an advisory capacity, they identified errors and 
cognizant program officials made corrections before the Air Force input 
was finalized and forwarded to the Office of the Secretary of Defense. 
This year, however, Air Force auditors decided not to participate. 
Officials said they were concerned about conflict of interest because 
auditors participating in the management services review could also be 
involved in audit service reviews of depot maintenance programs, 
processes, and funds. While Army auditors participated in the process 
during this year's cycle and some of their work influenced changes in 
this year's reported data, some errors were not corrected because of 
time constraints imposed by the 50-50 reporting schedule. Army 
officials said the Army Audit Agency would not likely be involved in 
next year's 50-50 process primarily because of concerns about 
independence. Navy auditors became involved in the process this year 
after we recommended their participation in prior reports. However, the 
Navy Audit Service work was not done in time to influence the Navy's 
50-50 report. According to audit service officials, their decision to 
do an audit of the data after it was submitted rather than providing 
advisory services to cognizant officials developing the Navy's 50-50 
report was influenced by the before-mentioned change in audit 
standards. Navy program officials said that because a post-process 
audit did not improve the 50-50 data, the audit service would not be 
used next year.

We recognize that recent changes in government auditing standards have 
been made to better address and specify independence issues arising 
when an audit organization undertakes both audit and nonaudit services 
for the same client. Nonetheless, the new auditing standards do not 
preclude auditors from verifying the accuracy of data; providing other 
technical assistance to the 50-50 process; and accomplishing other 
audits of the depot maintenance process, programs, and activities. 
Improved planning, management involvement, and documentation of roles 
and responsibilities may be required; but a process can be developed to 
ensure independence will not be compromised. This has already been done 
so that the service audit agencies can perform similar functions--
evaluating validity and consistency of data as it is being developed 
for subsequent decision making--in support of the base realignment and 
closure process.

Improving the Data Development Process:

Incremental improvements in data development were noticeable in the 
first several years of 50-50 reporting as guidance was clarified and 
expanded. However, as we reported last year, the quality of the 50-50 
data is not continuing to improve as it did in earlier years of the 
reporting requirement.[Footnote 13] Overall quality and direction of 
DOD's reporting seems to have reached a plateau where further major 
improvements have been limited. As we have previously discussed, one of 
the reasons this has occurred is that 50-50 guidance was not always 
distributed to the people who needed it. Further, significant turnover 
of personnel responsible for developing the data without providing 
sufficient time and training to familiarize them regarding the 50-50 
requirement and process adversely affected the quality of the 50-50 
data. In short, the priority afforded this process by management at all 
levels in the department is not sufficient to ensure that the data are 
as accurate as possible.

Conclusions:

Continuing errors and omissions in the data for both the prior-and 
future-years reports indicate that each of the service components is 
closer to exceeding the limitation on percentage of work permitted to 
be performed by the private sector than DOD's reporting would indicate. 
At best, DOD's data over time should be treated as providing a rough 
approximation of the allocation of depot maintenance workloads between 
the public and private sectors with some indication of trends. As such, 
the information on actual prior-years allocations can be useful to the 
Congress in its oversight role and to DOD officials in deciding support 
strategies for new systems and in evaluating depot policies and 
practices. On the other hand, because it provides an increasingly less 
reliable estimate of projected allocations the further it gets from the 
current year, the future-years report is not a very useful tool for 
informing the Congress or DOD officials about likely future compliance. 
This occurs because of the changing nature of projections, a 
combination of errors and omissions, less emphasis by the services on 
the collection and validation of future-years data, and the use of 
ever-changing budgetary estimates to construct projections. These 
budgetary estimates--and built-in assumptions--become more inexact and 
more problematic the further into the future the projections are made 
due to their very speculative and volatile natures. Indeed, tracking 
the 50-50 projected data from year to year reveals wide swings in the 
total amounts reported and in the relative allocations to the public 
and private sectors. As a result, congressional and DOD decision makers 
were given quite a different view this year of the public-private 
sector workload mix than that presented just last year. We believe that 
these problems are likely to continue and we question the cost-
effectiveness of collecting and aggregating data for 3 years past the 
current and budget years given the problems identified with the 
estimates.

Furthermore, after the first several years of 50-50 reporting, the 
overall quality of DOD reporting in terms of accuracy and completeness 
has not improved significantly. Indeed, the overall quality and 
direction seem to have reached a plateau where further major 
improvements to reporting may be unachievable and where the 
environmental factors that complicate reporting are not expected to 
change much. These complicating factors--including a burdensome 
collection process, tight timeframes for collecting data, high staff 
turnover, uneven management attention, changing concepts about 
maintenance organization and delivery--present continued challenges to 
the services in their ability to make significant improvements to their 
collection, documentation, and reporting processes. Notwithstanding 
these constraints, opportunities still exist to improve the reporting, 
including continued use of the audit services and renewed efforts to 
ensure guidance is appropriately disseminated and staff trained in its 
use.

Matter for Congressional Consideration:

Given that we continue to see the same problems and complicating 
factors in our current and past assessments of 50-50 reports and 
considering that the volatile nature of budget estimates is not likely 
to change, the Congress should consider amending 10 U.S.C. 2466 to 
require only one annual 50-50 report. The single report would cover a 
3-year period (prior year, current year, and budget year) for which the 
data are generally more reliable and the potential impacts more 
immediate. The Congress should also consider extending the due date for 
the single report from February 1 of each year to April 1; this would 
provide more time for the military departments to collect and validate 
data and allow for the incorporation of more actual cost data for the 
current year estimate.

Recommendations for Executive Action:

To enhance data verification and validation, we recommend that the 
Secretary of Defense require the secretaries of the military 
departments to direct the use of service audit agencies, or an agreed-
upon alternate method, for third-party review and validation of 50-50 
data and to ensure that auditor-identified errors in the data are 
rectified before reports are submitted to the Congress.

To ensure consistent and complete reporting, we recommend that the 
Secretary of Defense direct the secretaries of the military departments 
to ensure that 50-50 reporting guidance is appropriately disseminated 
to reporting organizations and individuals and that staff are properly 
and timely trained in the application of the guidance.

Agency Comments and Our Evaluation:

In written comments on a draft of this report from the Deputy Under 
Secretary of Defense for Logistics and Materiel Readiness, DOD 
concurred with the report's recommendations. However, the department 
did not agree with limited portions of our analyses regarding some 
selected workloads and the resulting impacts on the percentage 
allocation of funds between the public and private sectors. These 
workloads involve the Navy's nuclear carrier refueling and surface ship 
inactivation and the Air Force's adjustment for general and 
administrative expenses and double counting of some reparable 
workloads. DOD's written comments, and our evaluation of these items in 
question, are reprinted in appendix III.

We are sending copies of this report to congressional committees; the 
Secretary of Defense; the Secretaries of the Army, the Navy, and the 
Air Force; and the Director, Office of Management and Budget. We will 
make copies available to others upon request. In addition, the report 
will be available at no charge on the GAO Web site at http://
www.gao.gov.

If you or your staff has questions regarding this report, please 
contact me at (202) 512-8412 or holman@gao.gov or Julia Denman, 
Assistant Director, at (202) 512-4290 or denmanj@gao.gov. Other major 
contributors to this report were David Epstein, Bruce Fairbairn, Jane 
Hunt, Larry Junek, Robert Malpass, Andy Marek, Marjorie Pratt, John 
Strong, and Bobby Worrell.

Barry W. Holman 
Director, Defense Capabilities and Management:

Signed by Barry W. Holman: 

[End of section]

Appendix I: GAO Adjustments for Errors, Omissions, and Inconsistencies 
in Military Departments 50-50 Data for Fiscal Year 2002:

Our review of the data supporting the Department of Defense's (DOD) 
prior-years report identified errors, omissions, and inconsistencies 
that, if corrected, would revise the total workloads and increase the 
private-sector allocations for each of the military departments. Brief 
descriptions of the larger and more extensive problems found follow the 
adjusted figures.

Department of the Army:

Our review of fiscal year 2002 data reported by the Army and of 
supporting documentation for selected activities identified errors, 
omissions, and inconsistencies that, if corrected, would result in 
significant adjustments in the public and private sector percentages 
reported to the Congress, as shown in table 2.

Table 2: GAO Changes to Army's FY 2002 50-50 Data:

Dollars in millions.

Public work reported; $1,372.6; 51.5%.

Net adjustments; 50.9.

Public work adjusted; $1,423.5; 49.2%.

Private work reported; $1,238.7; 46.5%.

Net adjustments; 177.0.

Private work adjusted; $1,415.7; 49.0%.

Private work exempted; $51.4; 1.9%.

Net adjustments; 0.

Exempted adjusted; $51.4; 1.8%.

Source: GAO analysis of DOD data.

[End of table]

Errors we found included the following examples:

* Unreported depot-level work associated with the Army's ongoing 
efforts to consolidate maintenance activities and craft a national 
maintenance program. Our prior 50-50 reports have documented continuing 
problems and shortcomings in accurately and consistently reporting 
depot maintenance accomplished by both public and private sector 
sources at nondepot locations.

* Unreported one-time repair actions. These are depot repairs that are 
accomplished at non-depot locations following an organization's request 
and approval to do this work on a limited basis.

* Unreported work by commands that did not receive Army reporting 
guidance and other misreported and understated work by some commands 
that received but misapplied the guidance.

* Other adjustments included (1) errors identified by the Army Audit 
Agency but not corrected in the data sent to the Office of the 
Secretary of Defense (OSD) for inclusion in the prior-years 50-50 
report to the Congress; and (2) depot support work identified in a 
contractor's study of the proliferation of depot work at non-depot 
locations.

Department of the Navy:

Our review of fiscal year 2002 data reported by the Navy and Marine 
Corps and of supporting documentation for selected activities 
identified errors, omissions, and inconsistencies that, if corrected, 
would result in significant adjustments in the public and private 
sector percentages reported to the Congress, as shown table 3.

Table 3: GAO Changes to Navy's and Marine Corps' FY 2002 50-50 Data:

Dollars in millions.

Public work reported; $5,258.1; 54.5%.

Net adjustments; (115.5).

Public work adjusted; $5,142.6; 50.8%.

Private work reported; $4,110.4; 42.6%.

Net adjustments; 640.9.

Private work adjusted; $4,751.3; 46.9%.

Private work exempted; $273.1; 2.8%.

Net adjustments; (40.7).

Exempted adjusted; $232.4; 2.3%.

Source: GAO analysis of DOD data.

Note: Numbers in parentheses are negative.

[End of table]

Errors we found included the following examples:

* Unreported depot work on nuclear aircraft carriers. As reported last 
year, Navy officials cite the definition in 10 U.S.C. 2460, which 
excludes from depot maintenance the nuclear refueling of aircraft 
carriers, in justifying why they do not report any of the depot work 
accomplished at the same time as refueling. We believe that depot work 
that is reportable elsewhere and separate from the refueling tasks 
should be reported.

* Inconsistent reporting of ship inactivations, which include depot 
tasks for servicing and preserving equipment before they are placed in 
storage or in an inactive status. Navy officials report for 50-50 
purposes the nuclear ship inactivation work performed in the public 
sector but do not report surface ship inactivation work performed by 
the private sector.

* Underreporting of maintenance work by the command responsible for 
acquiring and upgrading Marine Corps weapon systems. Failure to report 
has several causes, including misunderstanding of what should be 
reported, limited dissemination of the 50-50 guidance, and inadequate 
management and oversight of the collection process to identify and 
resolve reporting deficiencies.

* Incorrectly exempting some private-sector activities from reporting. 
The Navy exempted more work than did the other departments; but we 
found some in error, including partnering work accomplished at a 
contractor facility and some work actually performed by government 
employees. Partnership work qualifying for the exemption must be 
accomplished at designated public depots by contractor employees.

* Other errors included (1) work subcontracted by the public shipyards 
to the private sector reported as public sector work and (2) 
misreporting by the Marine Corps of work obligated in fiscal year 2001 
rather than 2002.

Department of the Air Force:

Our review of fiscal year 2002 data reported by the Air Force and of 
supporting documentation for selected activities identified errors, 
omissions, and inconsistencies that, if corrected, would result in 
significant adjustments in the public and private sector percentages 
reported to the Congress, as shown in table 4.

Table 4: GAO Changes to Air Force's FY 2002 50-50 Data:

Dollars in millions.

Public work reported; $4,467.0; 54.1%.

Net adjustments; (547.9).

Public work adjusted; $3,919.1; 51.4%.

Private work reported; $3,781.4; 45.8%.

Net adjustments; (82.5).

Private work adjusted; $3,698.9; 48.5%.

Private work exempted; $11.9; 0.1%.

Net adjustments; 0.

Exempted adjusted; $11.9; 0.2%.

Source: GAO analysis of DOD data.

Note: Numbers in parentheses are negative.

[End of table]

Errors we found included the following examples:

* As in past years, Air Force officials continue to adjust the 50-50 
data for the salaries and overhead expenses of government employees 
administering depot maintenance contracts funded through the working 
capital fund. Officials subtract these amounts from the reported 
private sector amount--where they are accounted for within the working 
capital fund--and add them to the public sector funding for 50-50 
reporting. Consistent with the 50-50 guidance that states that costs 
should be associated with the end product, we think these costs should 
be treated as contracting expenses.

* Our review of Air Force workloads determined that funding for some 
component repairs was counted twice in 50-50 data, once when the item 
was repaired and the second time when it was installed into a weapon 
system or major subsystem during its overhaul. This resulted in 
overstating both public sector work and, by a lesser amount, private 
sector work.

* Errors occurred in reporting depot costs on interim contractor 
support and contractor logistics support contracts. Our review of 
selected programs identified numerous errors resulting in net 
underreporting of depot maintenance work performed by contractors. Many 
problems resulted from questionable factors and assumptions used in 
developing estimating methodologies. Because interim contractor 
support and contractor logistics support contracts often cover more 
than just depot maintenance (including lower levels of maintenance, 
supply operations, and logistics program management), the OSD guidance 
allows for the use of estimating methods. This can cause complications 
and introduce subjectivity into the data collection process. Newer 
contract approaches under acquisition reform efforts pose particularly 
challenging problems in identifying the depot portion.

Examples of errors and questionable practices we found included:

* not updating a methodology when contract provisions and circumstances 
change, resulting in not reporting additional maintenance work from 
increased operational contingencies and new orders of materials;

* assuming a straight percentage of total cost as depot work where data 
exists to make a more exact accounting;

* not reporting maintenance on a newly acquired modification; and:

* not reporting software depot maintenance.

[End of section]

Appendix II: Scope and Methodology:

To determine whether the military departments met the 50-50 requirement 
in the prior-years report, we analyzed each service's procedures and 
internal management controls for collecting and reporting depot 
maintenance information for purposes of responding to the section 2466 
requirement. We reviewed supporting details (summary records, 
accounting reports, budget submissions, and contract documents) at 
departmental headquarters, major commands, and selected maintenance 
activities. We compared processes to determine consistency and 
compliance with legislative provisions, OSD guidance, and military 
service instructions. We selected certain programs and maintenance 
activities for a more detailed review.[Footnote 14] We particularly 
examined reporting categories that DOD personnel and we had identified 
as problem areas in current and past reviews. These areas included 
interserviced workloads,[Footnote 15] contractor logistics support, 
warranties, software maintenance, and depot maintenance at nondepot 
locations. We evaluated processes for collecting and aggregating data 
to ensure accurate and complete reporting and to identify errors, 
omissions, and inconsistencies. We coordinated our work, shared 
information, and obtained results of the Army and Air Force service 
audit agencies' data validation efforts.

To determine whether the future-year projections were based on accurate 
data, valid assumptions, and existing plans and represented reasonable 
estimates, we followed the same general approach and methodology used 
to review the prior-years report. Although the future-years report is a 
budget-based projection of obligations, the definitions, guidance, 
organization, and processes used to report future data are much the 
same as for the prior-years report of actual obligations. We discussed 
with DOD officials the main differences between the two processes and 
the manner in which the data were derived from budgets and planning 
requirements and key assumptions made in the outyear data.

For reviews of both 50-50 reports, we performed certain checks and 
tests, including variance analyses, to judge the consistency of this 
information with data from prior years and with the future-years 
budgeting and programming data used in DOD's budget submissions and 
reports to the Congress. For example, we compared each service's 50-50 
data reported in February and April 2003 for the period 2001 through 
2006 with data reported for these same years in the 50-50 reports 
submitted in 2002. We found repeated and significant changes, even 
though the estimates were prepared only about 1 year apart. We used 
this analysis to further discuss with officials and analyze reasons for 
changes in reported data and percentage allocations between the 2002 
and 2003 reports submitted to the Congress. Variance analysis showed 
that congressional and DOD decision makers were given quite a different 
view of the public-private sector workload mix than that presented just 
last year.

Several factors concerning data validity and completeness were 
considered in our methodology and approach to reviewing the prior-and 
future-years reports. One key factor is the continuing deficiencies we 
have noted in DOD's financial systems and reports that preclude a clean 
opinion on its financial statements and that result in limited accuracy 
of budget and cost information. Another factor is that documenting 
depot maintenance workload allocations between the public and private 
sectors is becoming more complicated by the consolidation of 
maintenance activities and the performance of depot-level maintenance 
at field locations. These complicating factors (1) make it more 
difficult to identify work that meets the statutory definition of depot 
maintenance, (2) complicate workload reporting, and (3) result in 
underreporting of depot maintenance for both the public and private 
sectors. In addition, changes in business philosophy and approach can 
make analysis more difficult. For example, many new contracts are 
performance-based and may not discretely identify maintenance 
activities or account separately for their costs. This can result in 
under-and overreporting of depot maintenance work performed in the 
private sector. It also forces more reliance on the contractor for 
providing information needed in 50-50 reporting and may result in DOD 
officials having to use more assumptions and estimating methodologies 
in lieu of contract data.

As part of our efforts to identify areas for improvement, we reviewed 
DOD's efforts to improve the accuracy and completeness of reports. We 
discussed with officials managing and coordinating the reporting 
process their efforts to address known problem areas and respond to 
recommendations by the audit agencies and us. We compared this year's 
sets of instructions with last year's to identify changes and 
additions. We reviewed efforts to identify reporting sources and to 
distribute guidance and taskings. We asked primary data collectors to 
provide their opinions on how well efforts were managed and data 
verified and to identify "pain points" and ideas they had to improve 
reporting. We reviewed prior recommendations and service audit agency 
findings to determine whether known problem areas were being addressed 
and resolved. We applied this knowledge to identify additional areas 
for improving the reporting process and management controls.

We interviewed officials, examined documents, and obtained data at OSD, 
Army, Navy, Marine Corps, and Air Force headquarters in the Washington, 
D.C., area; Army Materiel Command in Alexandria, Virginia; Naval Sea 
Systems Command in Washington, D.C.; Naval Air Systems Command in 
Patuxent River, Maryland; Marine Corps Materiel Command in Albany, 
Georgia; Air Force Materiel Command in Dayton, Ohio; Army Audit Agency 
in Washington, D.C.; Naval Audit Service in Crystal City, Virginia; 
several public depots managed by the military departments' materiel 
commands; and selected operating bases. We conducted our review from 
February to July 2003 in accordance with generally accepted government 
auditing standards.

[End of section]

Appendix III: Comments from the Department of Defense:

Note: GAO's comments supplementing those in the report text appear at 
the end of this appendix.

DEPUTY UNDER SECRETARY OF DEFENSE FOR LOGISTICS AND MATERIEL READINESS 
3500 DEFENSE PENTAGON WASHINGTON, DC 20301-3500:

August 26, 2003:

Mr. Barry W. Holman:

Director, Defense Capabilities and Management U.S. General Accounting 
Office:

441 G Street, N.W. Washington, DC 20548:

Dear Mr. Holman:

This is the Department of Defense (DoD) response to the GAO draft 
report, "DEPOT MAINTENANCE: 50-50 Reporting Should Be Streamlined," 
dated July 25, 2003 (GAO Code 350315/GAO-03-1023).

The Department concurs with recommendations 1 and 2. Detailed comments 
on the GAO recommendations and report are enclosed.

Enclosure: As stated:

Sincerely,

Signed for Diane K. Morales: 

GAO DRAFT REPORT - DATED JULY 25, 2003 GAO CODE 350315/GAO-03-1023:

"DEPOT MAINTENANCE: 50-50 Reporting Should Be Streamlined":

DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:

RECOMMENDATION 1: To enhance data verification and validation, the GAO 
recommended that the Secretary of Defense require the Secretaries of 
the Military Departments to direct the use of Service audit agencies, 
or an agreed-upon alternate method, for third-party review and 
validation of 50-50 data to ensure that auditor-identified errors in 
the data are rectified before reports are submitted to the Congress. 
(p. 21 /GAO Draft Report):

DOD RESPONSE: Concur. The Department agrees that past efforts utilizing 
third-party review within the military departments to validate data 
prior to submission of the report to Congress have decreased errors and 
that the recommendation should be implemented.

RECOMMENDATION 2: To ensure consistent and complete reporting, the GAO 
recommended that the Secretary of Defense direct the Secretaries of the 
Military Departments to ensure that 50-50 reporting guidance is 
appropriately disseminated to reporting organizations and individuals 
and that staff are properly and timely trained in the application of 
the guidance. (p. 22/GAO Draft Report):

DOD RESPONSE: Concur. The Department will reinforce this existing 
policy during future reporting cycles.

COMMENTS ON THE REPORT:

1. Page 21. "... the Congress should consider amending 10 U.S.C. 2466 
to require only one annual 50-50 report. The single report would cover 
a 3-year period (prior year, current year and budget year) for which 
the data are generally more reliable and the potential impacts more 
immediate. The Congress should also consider extending the due date for 
the single report from February 1 of each year to April 1; this would 
provide more time for the military departments to collect and validate 
data and allow for the incorporation of more actual cost data for the 
current year estimate.":

Comment: The Department agrees with this GAO "Matter for Congressional 
Consideration" which is fully consistent with the Department's 
initiative on congressional reports reduction and simplification.

2. Page 25, Table 3. The Department does not agree with the two GAO 
adjustments for nuclear aircraft carriers and surface ship 
inactivations. The $401 million in adjustments for nuclear aircraft 
carriers and surface ship inactivations should be removed from Table 3, 
resulting in a net adjustment of $239.9 million in private work 
reported for the Navy.

a. The Navy has always interpreted 10 U.S.C. 2460 to broadly exclude 
from the 10 U.S.C. 2466 reporting limitation all work associated with 
the Refueling Complex Overhaul (RCOH) of a nuclear aircraft carrier. 
Although 10 U.S.C. 2460 contains the term "nuclear refueling of an 
aircraft carrier" to describe the 50-50 exclusion, the Navy considers 
this to be an abbreviated substitute for the standard terminology 
"Refueling Complex Overhaul (RCOH)" of a nuclear aircraft carrier. GAO 
states non-nuclear depot repairs are "severable" tasks identifiable in 
contracts and financial systems (page 11). The Department does not 
agree with GAO, because these tasks are not "severable" from an RCOH 
contract. The Navy would never arbitrarily split the scope of work for 
an RCOH into nuclear and non-nuclear portions, with the nuclear work 
being accomplished in the private sector, and the non-nuclear work 
being accomplished in the public sector. This approach would be 
extremely inefficient, costly, and problematic to manage. Instead, the 
Navy awards a single contract for RCOH work to the private sector, the 
only certified depot source of repair.

b. The Department considers the relatively complex process of nuclear 
ship inactivation workload to be equivalent to depot level maintenance 
and repair. It does not consider conventional ship inactivation 
workload performed in the private sector to be equivalent to depot 
level maintenance and repair. Also, work is accomplished either by the 
ship's force or by the NAVSEA Inactive Ship Maintenance Offices at 
Pearl Harbor, HI, Bremerton, WA, and Philadelphia, PA. Neither the 
private sector nor the public sector conventional inactivation work is 
reported.

3. Page 27. "As in past years, Air Force officials continue to adjust 
the 50-50 data for the salaries and overhead expenses of government 
employees administering depot maintenance contracts funded through the 
working capital fund. Officials subtract these amounts from the 
reported private sector amount - where they are accounted for within 
the working capital fund - and add them to the public sector funding 
for 50-50 reporting. Consistent with the 50-50 guidance that states 
these costs should be associated with the end product, we think these 
costs should be treated as contracting expenses.":

Comment: The Air Force consistently reports costs for government 
personnel managing depot maintenance contracts as part of the public 
sector. Counting these costs as contract would misrepresent the 
percentages of funds expended for work by DoD versus non-government 
employees. However, the Air Force expanded guidance on the General and 
Administrative (G&A) adjustment in Air Force procedures. The adjustment 
represents the Federal employee resources required for managing the 
contract depot maintenance administrative requirements.

4. Page 27. "Our review of Air Force workloads determined that funding 
for some component repairs was counted twice in 50-50 data, once when 
the item was repaired and the second time when it was installed into a 
weapon system or major subsystem during its overhaul. This resulted in 
overstating both public sector work and, by a lesser amount, private 
sector work.":

Comment: The Department does not agree that the treatment of component 
repair costs, when repaired items are used in higher level assemblies, 
is inconsistent with statutory requirements. The repair of 
exchangeables and the use of exchangeables during system and subsystem 
overhaul and repair are two distinct and separate transactions. Both 
transactions are depot-level maintenance events that must be reported 
in accordance with the requirements of 10 U.S.C. 2466(e), based on 
application of the definition contained in 10 U.S.C. 2460.
The following are GAO's comments on the Department of Defense's letter 
dated August 26, 2003.

GAO Comments:

The department did not agree with our adjustment for nuclear aircraft 
carriers. The Navy interprets the 10 U.S.C. 2460 exclusion of nuclear 
refueling of aircraft carriers from the definition of depot maintenance 
to mean that no work associated with the refueling complex overhaul of 
nuclear carriers is reportable for 50-50 purposes. Navy officials also 
said that non-nuclear depot repairs on carriers are not severable tasks 
to be split out from contracts. We continue to believe that the costs 
of depot repairs and tasks not directly associated with nuclear 
refueling tasks during carrier overhauls should be reported. Many 
maintenance tasks performed at the same time as the nuclear refueling 
are not related to the refueling; and when these and similar tasks are 
performed during other maintenance activities, the Navy does report 
them as depot maintenance. We found that the funding for these tasks is 
clearly identifiable in the contract financial records and could be 
counted just like other 50-50 work. In our view, without some nexus 
between that work and refueling work, it would be inconsistent with the 
plain language of section 2460 to exempt that work simply because it 
was performed during a refueling complex overhaul of nuclear carriers. 
We deleted the reference to severable tasks in the body of the report, 
as our intent was not to suggest that the Navy break out non-nuclear 
work from nuclear work onto separate contracts or work orders, but 
rather that the funding for non-nuclear refueling work accomplished on 
existing contracts be identified and reported.

The department did not agree with our adjustment for surface ship 
inactivations. DOD considers nuclear ship inactivation work to be a 
relatively complex process that is equivalent to depot level 
maintenance, but that conventional ship inactivation work performed by 
the private sector is not as complex and is not equivalent to depot-
level maintenance. In addition, the department's written response 
indicated that surface ship inactivation work accomplished by the 
public sector is also not reported in the 50-50 data. We believe that 
inactivation work should be reported because the relevant title 10 
statutes and OSD's 50-50 guidance do not make this distinction of 
relative complexity and requires reporting of all depot maintenance, 
regardless of location and source of funding. Further, DOD's Financial 
Management Regulation 7000.14-R, vol. 6A, ch. 14 (which prescribes 
depot maintenance reporting requirements) includes inactivation as a 
depot maintenance activity. Although we did not review inactivation 
work accomplished by public sector workers, it should also be reported 
if it meets the definition of depot maintenance.

The Air Force did not agree with our reversal of the 50-50 reporting 
adjustment it makes for the salaries and overhead expenses of 
government employees administering depot maintenance contracts. The Air 
Force believes that the costs for government personnel managing depot 
maintenance contracts represent public sector costs; therefore, to 
report them as contract would misrepresent the public-private sector 
percentage allocations. However, OSD's 50-50 guidance requires that all 
the costs associated with accomplishing a specific depot workload--
labor, material, parts, indirect, and overhead--should be counted for 
50-50 purposes in the sector accomplishing the actual maintenance. The 
guidance cites examples, such as counting the contract maintenance on 
depot plant equipment as public sector costs because the plant 
equipment is part of the costs incurred to perform maintenance at the 
depot. Similarly, we think that contract administrative costs should be 
counted as part of the costs incurred to accomplish the work in the 
private sector. We note that the Air Force will stop making this 
adjustment after this year when financing for the depot contracts is 
moved from the working capital fund to direct appropriations. It 
remains to be seen, however, how the Air Force will account for 
contract administrative expenses in the future.

The department did not agree that counting the repair costs twice for 
some components installed in higher level assemblies is inconsistent 
with the statutory requirements of 10 U.S.C. 2466(e) and 10 U.S.C. 
2460. The Air Force believes that the original repair cost for a 
component and its subsequent cost as material used in system or 
subsystem overhaul are two distinct and separate transactions and that 
both costs should be reported for 50-50 purposes. We continue to 
believe that counting some component repair costs twice when the 
components are incorporated in a higher-level assembly distorts the 50-
50 reports and the actual amount of work accomplished by both the 
public and private sectors. In our view, there is no reason to conclude 
that the intent of title 10 requires double counting component repairs 
and that a more reasonable reading is that DOD can implement those 
provisions so as to allow for adjustments in reporting to more 
accurately reflect the cost of depot work. DOD adopted a similar 
approach in response to a recommendation in our 2001 report.[Footnote 
16] In that report, we found that unrealistic and outdated budget data 
were being reported when there were other, more accurate information 
sources. Accordingly, OSD revised its 50-50 guidance to allow for 
revising budgetary estimates to better reflect known and anticipated 
changes in workloads, workforce, priorities, and performance execution 
rates. This resulted in the Air Force reporting additional hundreds of 
millions of dollars in projected depot work based on current workload 
estimates. A similar approach could be used to eliminate the effects of 
double counting reparables later used in higher-level assemblies.

[End of section]

Related GAO Products:

Depot Maintenance: Key Unresolved Issues Affect the Army Depot System's 
Viability. GAO-03-682. Washington, D.C.: July 7, 2003.

Department of Defense: Status of Financial Management Weaknesses and 
Progress Toward Reform. GAO-03-931T. Washington, D.C.: June 25, 2003.

Depot Maintenance: Change in Reporting Practices and Requirements Could 
Enhance Congressional Oversight. GAO-03-16. Washington D.C.: October 
18, 2002.

Depot Maintenance: Management Attention Needed to Further Improve 
Workload Allocation Data. GAO-02-95. Washington, D.C.: November 9, 
2001.

Defense Logistics: Actions Needed to Overcome Capability Gaps in the 
Public Depot System. GAO-02-105. Washington, D.C.: October 12, 2001.

Defense Maintenance: Sustaining Readiness Support Capabilities 
Requires a Comprehensive Plan. GAO-01-533T. Washington, D.C.: March 23, 
2001.

Depot Maintenance: Key Financial Issues for Consolidations at Pearl 
Harbor and Elsewhere Are Still Unresolved. GAO-01-19. Washington, D.C.: 
January 22, 2001.

Depot Maintenance: Action Needed to Avoid Exceeding Ceiling on Contract 
Workloads. GAO/NSIAD-00-193. Washington, D.C.: August 24, 2000.

Depot Maintenance: Air Force Waiver to 10 U.S.C. 2466. GAO/
NSIAD-00-152R. Washington, D.C.: May 22, 2000.

Depot Maintenance: Air Force Faces Challenges in Managing to 50-50 
Ceiling. GAO/T-NSIAD-00-112. Washington, D.C.: March 3, 2000.

Depot Maintenance: Future Year Estimates of Public and Private 
Workloads Are Likely to Change. GAO/NSIAD-00-69. Washington, D.C.: 
March 1, 2000.

Depot Maintenance: Army Report Provides Incomplete Assessment of Depot-
type Capabilities. GAO/NSIAD-00-20. Washington, D.C.: October 15, 
1999.

Depot Maintenance: Status of the Navy's Pearl Harbor Project. GAO/
NSIAD-99-199. Washington, D.C.: September 10, 1999.

Depot Maintenance: Workload Allocation Reporting Improved, but 
Lingering Problems Remain. GAO/NSIAD-99-154. Washington, D.C.: 
July 13, 1999.

Navy Ship Maintenance: Allocation of Ship Maintenance Work in the 
Norfolk, Virginia, Area. GAO/NSIAD-99-54. Washington, D.C.: February 
24, 1999.

Defense Depot Maintenance: Public and Private Sector Workload 
Distribution Reporting Can Be Further Improved. GAO/NSIAD-98-175. 
Washington, D.C.: July 23, 1998.

Defense Depot Maintenance: DOD Shifting More Workload for New Weapon 
Systems to the Private Sector. GAO/NSIAD-98-8. Washington, D.C.: March 
31, 1998.

Defense Depot Maintenance: Information on Public and Private Sector 
Workload Allocations. GAO/NSIAD-98-41. Washington, D.C.: January 20, 
1998.

Defense Depot Maintenance: Uncertainties and Challenges DOD Faces in 
Restructuring Its Depot Maintenance Program. GAO/T-NSIAD-97-112. 
Washington, D.C.: May 1, 1997. Also GAO/T-NSIAD-97-111. Washington, 
D.C.: March 18, 1997.

Defense Depot Maintenance: DOD's Policy Report Leaves Future Role of 
Depot System Uncertain. GAO/NSIAD-96-165. Washington, D.C.: May 21, 
1996.

Defense Depot Maintenance: More Comprehensive and Consistent Workload 
Data Needed for Decisionmakers. GAO/NSIAD-96-166. Washington, D.C.: May 
21, 1996.

Defense Depot Maintenance: Privatization and the Debate Over the 
Public-Private Mix. GAO/T-NSIAD-96-148. Washington, D.C.: April 17, 
1996. Also GAO/T-NSIAD-96-146. Washington, D.C.: April 16, 1996.

Depot Maintenance: Issues in Allocating Workload Between the Public and 
Private Sectors. GAO/T-NSIAD-94-161. Washington, D.C.: April 12, 1994.

FOOTNOTES

[1] The Secretary of the Air Force issued a national security waiver 
for fiscal year 2001 as provided by 10 U.S.C. 2466(b) at that time. 
This provision was subsequently amended (sec. 341, P.L. 107-107, Dec. 
28, 2001) to designate the Secretary of Defense as the waiver authority 
instead of the secretaries of the military departments.

[2] Interim contractor support is designed to be an interim support 
arrangement in which a contractor provides depot maintenance (and 
sometimes other logistics support) as part of the acquisition strategy 
for new systems.

[3] Contractor logistics support is designed to be a lifetime support 
concept in which a contractor provides most or all elements of 
logistics support, including depot maintenance.

[4] Core competencies are depot-level maintenance capabilities to be 
retained in public depots to meet defense strategic and contingency 
plans and for which the military departments believe that DOD should be 
a recognized leader in the national technology and industrial base.

[5] DOD guidance defines a public-private partnership for depot 
maintenance as an agreement between a public-sector depot maintenance 
activity and one or more private industry or other entities to perform 
work or utilize facilities and equipment. Such an arrangement includes 
use of public facilities, equipment, and employees to perform work for 
the private sector under certain defined circumstances; private-sector 
use of public-sector equipment and facilities to perform work for the 
public sector; and work-sharing agreements using both public-and 
private-sector facilities and/or employees.

[6] Because of the difficulty of segregating installation costs for 
safety modifications from costs for installing other modifications 
(e.g., for improved performance), OSD's guidance specifies that all 
modification installation costs be reported when an installation is 
considered to be a depot-level service.

[7] For the two most recent reports, see U.S. General Accounting 
Office, Depot Maintenance: Change in Reporting Practices and 
Requirements Could Enhance Congressional Oversight, GAO-03-16 
(Washington, D.C.: Oct. 18, 2002) and Depot Maintenance: Management 
Attention Required to Further Improve Workload Allocation Data, 
GAO-02-95 (Washington, D.C.: Nov. 9, 2001). Other related GAO products 
are listed at the end of this report.

[8] See U.S. General Accounting Office, Department of Defense: Status 
of Financial Management Weaknesses and Progress Toward Reform, 
GAO-03-931T (Washington, D.C.: June 25, 2003).

[9] Although 10 U.S.C. 2466 specifies reporting of funds expended in 
the prior years and projected to be expended in the future years, DOD's 
past and current 50-50 reports are based on obligation data. A DOD 
official explained that obligation data are considered to be more 
appropriate because of the statutory requirement to report funds made 
available in a given fiscal year and because expenditure data may not 
be completely recognized in the accounting records for a year or more 
following the funds' obligation.

[10] GAO-03-16.

[11] The Air Force also reported itself as exceeding the 50-percent 
limit in fiscal year 2000, and a notice of the waiver was duly issued 
to the Congress.

[12] See revised standards in U.S. General Accounting Office, 
Government Auditing Standards: 2003 Revision, GAO-03-673G (Washington, 
D.C.: June 1, 2003). 

[13] GAO-03-16. 

[14] We selected the programs reviewed based on size and importance, 
leads obtained from internal auditors, and any previously identified 
areas of concern. Given the nature of our sample, the results are not 
projectible to the universe of depot maintenance activities. We also 
did not audit the integrity of DOD's financial systems and accounting 
data used to prepare the 50-50 reports.

[15] Interserviced workload is maintenance that one military service 
performs on equipment owned and funded by another service.

[16] GAO-02-95.

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