a

GAO

United States Government Accountability Office

Report to the Subcommittee on 

Readiness and Management Support, 

Committee on Armed Services, U.S. 

Senate

September 2005 DEFENSE 

MANAGEMENT

DOD Needs to 

Demonstrate That 

Performance-Based 

Logistics Contracts 

Are Achieving 

Expected Benefits

GAO-05-966
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-966.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact William Solis at 

(202) 512-8412 or solisw@gao.gov. 

Highlights of GAO-05-966, a report to the 

Subcommittee on Readiness and 

Management Support, Committee on 

Armed Services, U.S. Senate 

September 2005

DEFENSE MANAGEMENT 

DOD Needs to Demonstrate That 

Performance-Based Logistics Contracts 

Are Achieving Expected Benefits 

DOD program offices could not demonstrate that they have achieved cost 

savings or performance improvements through the use of performancebased logistics arrangements. Although DOD guidance on implementing 

these arrangements states program offices should update their business case 

analysis based on actual cost and performance data, only 1 of the 15 

program offices included in GAO’s review had performed such an update 

consistent with DOD guidance. In the single case where the program office 

had updated its business case analysis, it determined that the performancebased logistics contract did not result in expected cost savings and the 

weapon system did not meet established performance requirements. In 

general, program offices had not updated their business case analysis after 

entering into a performance-based logistics contract because they assumed 

that the costs for weapon system maintenance incurred under a fixed-price 

performance-based logistics contract would always be lower than costs 

under a more traditional contracting approach and because they lacked 

reliable cost and performance data needed to validate assumptions used. 

Furthermore, the Office of the Secretary of Defense has not established 

procedures to monitor program offices to ensure they follow guidance and 

update the business case analysis. Additionally, program officials said 

because of limitations in their own information systems, they typically relied 

on cost and performance data generated by the contractors’ information 

systems to monitor performance-based logistics contracts. The program 

offices, however, had not determined whether contractor-provided data 

were sufficiently reliable to update their business case analysis. Although 

the Defense Contract Management Agency and the Defense Contract Audit 

Agency are most commonly used to monitor higher risk contracts, such as 

cost plus contracts, they are potential resources available to assist program 

offices in monitoring fixed-price performance-based contracts. In doing so, 

these DOD agencies have the capability to verify the reliability of 

contractors’ information systems and collect cost and performance data 

needed to update their business case analysis. Until program offices follow 

DOD’s guidance and update their business case analysis based on reliable 

cost and performance data, DOD cannot evaluate the extent to which 

performance-based logistics arrangements are achieving expected benefits 

and being effectively implemented within DOD. 

The Department of Defense (DOD) 

contracts with private sector 

companies to perform depot 

maintenance of weapon systems 

using performance-based logistics 

—that is, purchasing a defined level

of performance over a defined time 

period at a fixed cost to the 

government. After implementing 

such contracts, program offices are 

to validate their efficacy using cost 

and performance data; DOD cannot 

otherwise ensure cost savings and 

improved performance are being 

achieved through the use of 

performance-based logistics. GAO 

was asked to review the 

implementation of performancebased logistics to determine 

whether DOD could demonstrate 

cost savings and improved 

responsiveness from these 

arrangements. In conducting its 

review, GAO analyzed the 

implementation of performancebased logistics arrangements for 15 

weapon system programs. 

What GAO Recommends

GAO recommended that DOD, to 

demonstrate whether performancebased logistics contracts are 

resulting in reduced costs and 

increased performance, develop 

procedures to track whether 

program offices validate their 

business case decisions and verify 

the reliability of contractor cost 

and performance data. DOD 

concurred with GAO’s 

recommendations. 
Page i GAO-05-966 Performance-Based Logistics

Contents

Letter 1

Results in Brief 3

Background 4

DOD Program Offices Could Not Demonstrate Cost Savings and 

Performance Improvement Resulting from the Use of 

Performance-Based Logistics 7

Conclusions 11

Recommendations for Executive Action 12

Agency Comments and Our Evaluation 12

Scope and Methodology 13

Appendixes

Appendix I: Comments from the Department of Defense 16

Appendix II: GAO Contact and Staff Acknowledgments 18

Table Table 1: Performance-Based Logistics Programs Included in Our 

Review 13

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Page 1 GAO-05-966 Performance-Based Logistics

United States Government Accountability Office

Washington, D.C. 20548

A

September 9, 2005 Letr

The Honorable John Ensign

Chairman

The Honorable Daniel K. Akaka

Ranking Minority Member

Subcommittee on Readiness and Management Support

Committee on Armed Services

United States Senate

The Department of Defense (DOD) reported that it spent $23.6 billion in 

fiscal year 2004 for depot maintenance of military weapon systems.1

 

Almost half of those expenditures were paid to private sector companies to 

perform depot maintenance activities for selected weapon systems. DOD’s 

preferred approach for providing long-term total system support for 

weapon systems is a concept it calls performance-based logistics. 

Performance-based logistics is a variation of other contractor logistics 

support strategies and involves defining a level of performance that the 

weapon system is to achieve over a period of time at a fixed cost to the 

government.2

 Specific performance measures are established in each 

contract. DOD believes this contracting strategy for supporting weapon 

systems and components will achieve higher levels of performance while 

minimizing costs. For example, DOD has claimed millions of dollars in cost 

savings and significant performance improvements in such areas as 

material availability and logistics response time through the use of 

performance-based logistics. As a result of aggressively pursuing this 

contracting strategy, DOD expected an increasing number of weapon 

systems and components to be maintained for the military services by 

private sector companies under long-term, fixed-price, performance-based 

contracts. To justify the use of a performance-based logistics strategy, 

according to DOD guidance, program offices should conduct a business 

case analysis prior to adopting this approach. Following implementation of 

a performance-based logistics contract, program offices should update 

their business case analysis to validate the assumptions used based on 

1

Depot maintenance encompasses materiel maintenance or repair requiring the overhauling, 

upgrading, or rebuilding of parts, assemblies, or subassemblies and the testing and 

reclamation of equipment. 

2

Performance-based logistics arrangements for weapon system support can include either a 

contract with a private sector company or an arrangement to use a government facility. 
Page 2 GAO-05-966 Performance-Based Logistics

actual cost and performance data and to support future weapon systems 

plans. 

As requested, we reviewed DOD’s implementation of performance-based 

logistics arrangements. Our objective was to determine whether DOD 

could demonstrate cost savings or improved responsiveness through the 

use of performance-based logistics arrangements. This is the second of 

two reports addressing DOD’s implementation of performance-based 

logistics. In an August 2004 report,3

 we identified the types of contractor 

logistics support arrangements the private sector used when outsourcing 

the maintenance of complex and costly equipment with life-cycle 

management issues similar to those of military systems. We also identified 

several lessons learned from comparisons between private sector 

contractor support practices and the performance-based logistics approach 

that DOD was urging the services to use. That report recommended that 

DOD incorporate into guidance the private sector’s practice of using 

performance-based contracts to achieve economies at the component 

level, rather than as a preferred practice at the platform level. DOD issued 

policy memoranda and revised its guidebook to implement our 

recommendation. 

As part of our current review, we collected and analyzed data on 15 weapon 

system programs that were among those identified by the Office of the 

Secretary of Defense and the military services as programs that have 

successfully used performance-based logistics arrangements. We selected 

weapon system programs that were sufficiently mature to provide lessons 

learned on the use of performance-based logistics. We reviewed contracts 

and related files and interviewed program officials to determine how these 

arrangements were structured and managed. We examined business case 

analysis documents prepared by the program offices to justify the use of a 

performance-based logistics strategy. We discussed with program officials 

the systems they used to monitor contractor cost and performance. We 

also reviewed DOD policies, procedures, and guidance related to the use of 

performance-based logistics for weapon system support. We determined 

that the data used were sufficiently reliable for our purposes. We 

performed our work from August 2004 through June 2005 in accordance 

with generally accepted government auditing standards. The Scope and 

3

GAO, Defense Management: Opportunities to Enhance the Implementation of 

Performance-Based Logistics, GAO-04-715 (Washington, D.C.: Aug. 16, 2004). 
Page 3 GAO-05-966 Performance-Based Logistics

Methodology section contains more detailed information about the work 

we performed. 

Results in Brief DOD program offices could not demonstrate that they have achieved cost 

savings or performance improvements through the use of performancebased logistics arrangements. Although DOD guidance on implementing 

these arrangements states program offices should update their business 

case analysis based on actual cost and performance data, only 1 of the 15 

program offices included in our review had performed such an update 

consistent with DOD guidance. In the single case where the program office 

had updated its business case analysis, it determined that the performancebased logistics contract did not result in expected cost savings and the 

weapon system did not meet established performance requirements. In 

general, program offices had not updated their business case analysis after 

entering into a performance-based logistics contract because they assumed 

that the costs for weapon system maintenance incurred under a fixedprice, performance-based logistics contract would always be lower than 

costs under a more traditional contracting approach and because they 

lacked reliable cost and performance data needed to validate assumptions 

used. Furthermore, the Office of the Secretary of Defense has not 

established procedures to monitor program offices to ensure they follow 

guidance and update the business case analysis. Additionally, program 

officials said because of limitations in their own information systems, they 

typically relied on cost and performance data generated by the contractors’ 

information systems to monitor performance-based logistics contracts. 

The program offices, however, had not determined whether the contractorprovided data were sufficiently reliable to update their business case 

analysis. Although the Defense Contract Management Agency (DCMA) and 

the Defense Contract Audit Agency (DCAA) are most commonly used to 

monitor higher risk contracts, such as cost plus contracts, they are 

potential resources available to assist program offices in monitoring fixedprice performance-based contracts. In doing so, these DOD agencies have 

the capability to verify the reliability of contractors’ information systems 

and collect cost and performance data needed to update the business case 

analysis. Until program offices follow DOD’s guidance and update their 

business case analysis based on reliable cost and performance data, DOD 

cannot evaluate the extent to which performance-based logistics 

arrangements are achieving expected benefits and being effectively 

implemented within DOD. 
Page 4 GAO-05-966 Performance-Based Logistics

This report contains recommendations aimed at ensuring that DOD 

program offices follow DOD guidance for updating their business case 

analyses and verify the reliability of contractor cost and performance data. 

In commenting on a draft of this report, DOD concurred with our findings 

and recommendations. DOD’s response is included in appendix I. 

Background DOD has increasingly relied on contractors to provide logistics support for 

weapon system maintenance. These logistics support arrangements have 

taken various forms. In fiscal year 1998, DOD directed the armed services 

to pursue logistics support “reengineering” efforts with contractors to 

achieve cost savings and improve efficiency.4

 A 1999 DOD study identified 

30 pilot programs to test logistics support concepts that placed greater 

reliance on the private sector. Some of the pilot programs involved 

performance-type arrangements that were subsequently converted to, or 

designated as, performance-based logistics contracts.5

 DOD’s Quadrennial 

Defense Review Report6

 advocated the implementation of performancebased logistics, with appropriate metrics, to compress the supply chain7

 by 

removing steps in the warehousing, distribution, and order fulfillment 

processes; reducing inventories; and reducing overhead costs while 

improving the readiness of major weapon systems and commodities. 

Over the last few years, DOD has issued guidance on the implementation of 

performance-based logistics. In November 2001, the Office of the Deputy 

Under Secretary of Defense issued guidance recommending that program 

managers conduct a sound business case analysis to decide whether they 

4

Reengineering was the term DOD used to describe its efforts to increase the costeffectiveness of its weapon systems throughout their life cycles by ensuring that support 

infrastructures were competitive, timely, and efficient. 

5

Examples of these logistics support arrangements include (1) contractor logistics support, 

where the contractor provided most or all elements of logistics support, including depot 

maintenance; (2) total system performance responsibility, under which the contractor 

assumed responsibility for the weapon system’s life-cycle management; and (3) total system 

sustainment responsibility or total system support responsibility, which gave the contractor 

responsibility for all contracted sustainment actions including parts management and depotlevel repair. 

6

DOD, Quadrennial Defense Review Report, (Washington, D.C.: Sept. 30, 2001). 

7

Supply chain management refers to all of the interrelated components and processes 

required to ensure that the correct amount of product is in the correct location at the right 

time and at the lowest cost. 
Page 5 GAO-05-966 Performance-Based Logistics

should implement performance-based logistics for new systems and major 

acquisitions for already fielded systems.8

 In an August 2003 memorandum 

to the military departments, the Under Secretary of Defense (Acquisition, 

Technology and Logistics) stated that DOD should continue to increase its 

use of performance-based logistics acquisitions. On February 4, 2004, the 

Deputy Secretary of Defense (1) directed the Under Secretary of Defense 

(Acquisition, Technology and Logistics), in conjunction with the Under 

Secretary of Defense (Comptroller), to issue clear guidance on purchasing 

logistics support using performance criteria and (2) directed each service 

to provide a plan to aggressively implement performance-based logistics 

for current and planned weapon system platforms. Then, based on 

recommendations in our August 2004 report,9

 the Under Secretary of 

Defense (Acquisition, Technology and Logistics) issued a memorandum 

reemphasizing that the use of this type of support strategy was intended to 

optimize weapon system availability while minimizing costs and the 

logistics footprint10 and may be applied to weapon systems, subsystems, 

and components. The memorandum also provided specific definitions of 

performance metrics to be used. 

DOD describes performance-based logistics as the process of

(1) identifying a level of performance required by the warfighter and 

(2) negotiating a performance-based arrangement between the government 

and a contractor or government facility to provide long-term total system 

support for a weapon system at a fixed level of annual funding. Instead of 

buying spare parts, repairs, tools, and data in individual transactions, DOD 

program offices that use a performance-based logistics arrangement buy a 

predetermined level of performance that meets the warfighter’s objectives. 

Although established performance measures should be tailored to reflect 

the unique circumstances of each performance-based logistics 

arrangement, the measures are expected to support five general objectives: 

(1) percentage of time that a weapon system is available for a mission 

(operational availability); (2) percentage of mission objectives met 

(operational reliability); (3) operating costs divided by a specified unit of 

8

DOD, Product Support for the 21st Century: A Program Manager’s Guide to Buying 

Performance (Washington, D.C.: Nov. 6, 2001). 

9

GAO-04-715. 

10The logistics footprint refers to the size or presence of the government or contractor 

personnel, equipment, inventory, facilities, transportation assets, or real estate needed to 

deploy, sustain, and move the weapon systems or components. 
Page 6 GAO-05-966 Performance-Based Logistics

measure (cost per unit usage); (4) size or presence of support required to 

deploy, sustain, or move a weapon system (logistics footprint); and 

(5) period of time that is acceptable between the demand or request for 

support and the satisfactory fulfillment of that request (logistics response 

time). Currently, a DOD task force is refining these objectives into DOD 

standard performance definitions to be used by program offices in every 

service when preparing performance-based logistics arrangements. 

DOD guidance recommends that program offices prepare a business case 

analysis prior to adopting a performance-based logistics approach to 

support a weapon system.11 The aim of the business case analysis is to 

justify the decision to enter into a performance-based logistics contract. 

The business case analysis is to include cost savings that are projected as a 

result of using a performance-based logistics approach and the 

assumptions used in developing the business case analysis. Furthermore, 

DOD guidance states that program offices should update their business 

case analyses at appropriate decision points when sufficient cost and 

performance data have been collected to validate the assumptions used in 

developing the business case analyses, including the costs of alternative 

approaches, projected cost savings, and expected performance levels. 

Further, GAO Internal Control Standards state that it is necessary to 

periodically review and validate the propriety and integrity of program 

performance measures and indicators. Also, actual performance data 

should be continually compared against expected or planned goals, and 

any difference should be analyzed. Additionally, management should have 

a monitoring strategy that emphasizes to program managers their 

responsibility for internal controls (i.e., to review and validate performance 

measures and indicators) and that includes a plan for periodic evaluation of 

control activities. 

11DOD, Performance-Based Logistics: A Program Manager’s Product Support Guide

(Washington, D.C.: Sept. 30, 2004); Product Support Strategy (PSS) Business Case 

Analysis (BCA) Guiding Principles, (Washington, D.C.: Jan. 23, 2004); and Business Case 

Development Guide (Washington, D.C.). 
Page 7 GAO-05-966 Performance-Based Logistics

DOD Program Offices 

Could Not 

Demonstrate Cost 

Savings and 

Performance 

Improvement Resulting 

from the Use of 

Performance-Based 

Logistics

DOD program offices could not demonstrate that their use of performancebased logistics arrangements had achieved cost savings and performance 

improvements because they had not updated their business case analysis 

as suggested by DOD guidance. Specifically, of the 15 DOD program 

offices, only 1 updated its business case analysis to validate assumptions 

concerning cost and performance. Other DOD program offices had not 

updated their business case analysis in part because they lacked reliable 

contractor cost and performance data. The program offices typically relied 

on cost and performance data generated by contractors’ information 

systems without verifying that the data were sufficiently reliable to update 

the business case analysis. Two DOD agencies, DCMA and DCAA, have the 

capability to assist program offices in monitoring fixed-price performancebased contracts, verifying the reliability of contractors’ information 

systems, and collecting cost and performance data. 

Projected Cost Savings and 

Performance Improvements 

Were Not Validated

None of the 15 program offices included in our review could demonstrate 

that use of a performance-based logistics arrangement had achieved cost 

savings and performance improvements. Although an updated business 

case analysis based on actual cost and performance data might show that 

cost savings and performance improvements were being achieved, only 

1 of the 15 program offices had updated its business case analysis 

consistent with DOD guidance. Of the 15 program offices, 11 had 

developed a business case analysis prior to entering into a performancebased logistics arrangement.12 In their analysis, these program offices 

projected that they would achieve significant cost savings. For example, an 

12Four of the 15 program offices we reviewed had not prepared a business case analysis. 

Officials at two program offices stated that their contracting arrangements did not meet the 

existing definition of a performance-based logistics contract and, therefore, the requirement 

to conduct a business case analysis was not applicable. Subsequently, the Under Secretary 

of Defense (Acquisition, Technology and Logistics) issued guidance on purchasing weapon 

systems logistics support using performance-based criteria and clarified the types of 

contract arrangements to be considered as performance-based logistics arrangements. 

DOD determined that under these clarified criteria, these two contracts meet the definition 

of a performance-based logistics contract. The other two program offices determined that 

they lacked sufficient cost and performance information necessary to prepare business case 

analyses. To collect baseline cost and performance data, they entered into cost-plus 

contracts rather than fixed-price contracts. On the basis of an assessment of baseline data 

collected in the course of the cost-plus contracts, the program offices expect to determine 

at a later time if it would be advantageous to transition from the cost-plus contract to fixedprice performance-based logistics arrangements. Before doing so, they would prepare a 

business case analysis as suggested under DOD guidance. 
Page 8 GAO-05-966 Performance-Based Logistics

Army program office projected total cost savings of $508.5 million, and a 

Navy program office projected cost savings of $29.7 million. However, only 

the Navy’s T-45 program office had subsequently updated its business case 

analysis consistent with DOD guidance to determine whether cost savings 

were being achieved.13 Realizing that the contractor was not meeting the 

aircraft availability performance measure, the program office reassessed 

its business case assumptions and found that costs per flying hour were 

higher than estimated because the aircraft was flying fewer hours than 

forecasted. As a result, the program office negotiated separate contracts 

for the airframes and engines, which resulted in estimated cost savings of 

$144 million over 5 years. 

Performance indicators tracked by the program offices showed that the 

contractors met or exceeded performance requirements. Of the 15 

programs, 10 reported that performance levels exceeded contract 

requirements, and 5 reported that performance levels were meeting 

contract requirements. For example, an Army program office reported a 

weapon system availability rate of 99 percent, which is 7 percent higher 

than what was projected in the business case analysis. Similarly, a Navy 

program office reported a weapon system availability rate of 97 percent, 

which is 7 percent higher than projected. 

Despite the reported performance improvements, the program offices had 

not analyzed the performance data to validate the improvements and 

determine whether these improvements could be attributed directly to 

their use of performance-based logistics arrangements to support the 

weapon systems. In addition, we noted that program offices in the past 

reported they had also met or exceeded required levels of performance 

using other contractual arrangements for weapon system maintenance. 

Moreover, the DOD program offices reporting that performance levels were 

exceeding contract requirements under performance-based logistics 

arrangements had not determined the incremental costs associated with 

achieving these higher levels of performance. As a result, they had no way 

of knowing whether incremental costs outweighed the benefits derived 

from achieving performance levels in excess of requirements. 

Program officials did not follow DOD guidance to update and validate their 

business case analyses because they assumed that costs incurred under 

13The T-45 Goshawk is a tandem-seat jet trainer aircraft used by the Navy and Marine Corps 

for training in carrier aviation and tactical strike missions. 
Page 9 GAO-05-966 Performance-Based Logistics

fixed-price performance-based logistics arrangements would always be 

lower than costs incurred under more traditional contracting 

arrangements, and several program officials cited a lack of reliable data 

needed to validate expected costs savings and improved performance. 

However, the experience of the T-45 program showed that it is possible for 

program offices to validate the assumptions in the business case analysis 

and to determine whether expected cost savings and performance 

improvements were achieved. There are also other benefits derived from 

validating the assumptions used in the business case analysis. Validation 

can provide a better understanding of costs associated with the repair and 

maintenance of weapon systems, ensure that proper performance metrics 

are in place to satisfy logistical demand, isolate incremental costs 

associated with achieving higher levels of performance, and make cost and 

performance data available for contract renegotiations in order to obtain 

the best value for the government. Furthermore, we did not find evidence 

that the Office of the Secretary of Defense had established procedures to 

monitor whether program offices were following its guidance to update 

their business case analyses. The results of these updates could be used by 

DOD to assess the implementation of performance-based logistics 

arrangements and evaluate the extent to which performance-based 

logistics arrangements are achieving expected benefits. 

DOD Program Offices 

Relied on Contractors’ Data 

Without Verifying the 

Reliability of the Data

DOD program offices included in our review stated that because of 

limitations in their own information systems, they typically relied on cost 

and performance data generated by the contractors’ information systems to 

monitor performance-based logistics contracts. Program offices 

acknowledged limitations in their own information systems in providing 

reliable data to closely monitor contractor cost and performance. Existing 

systems are capable of collecting some cost and performance information 

on performance-based logistics contracts; however, according to program 

officials, the systems are not capturing sufficiently detailed cost and 

performance information for monitoring performance-based logistics
Page 10 GAO-05-966 Performance-Based Logistics

contracts.14 Program officials told us they had more confidence in the 

accuracy and completeness of contractor systems than in their legacy 

systems. The program offices, however, had not determined whether the 

contractor-provided data were sufficiently reliable to update their business 

case analyses. As a result, the program offices did not have the reliable 

data they needed to validate the assumptions used in the business case 

analysis and to determine whether their performance-based logistics 

arrangements were achieving expected cost savings and improved 

performance. 

As we noted in a prior report on DOD’s management of depot maintenance 

contracting,15 to reduce personnel and save costs, DOD decided to rely 

more on contractors to manage and oversee fixed-price contracts because 

these contracts are considered low risk. The contractor assumes most of 

the risks for fixed-priced contracts, with the government taking a more 

limited role in monitoring these contracts. In our prior work on defense 

contract management, we discussed the importance of monitoring 

contractors’ systems to ensure the accuracy and completeness of 

information generated by these systems.16 In addition, during our review of 

the private sector’s use of performance-based logistics,17 we noted that 

private-sector companies that use performance-based logistics contracts, 

whether fixed price or cost-plus, closely monitor cost and performance 

information to effectively manage their contracts. These companies said 

they rely on their own systems and personnel to verify the cost and quality 

of work performed by the contractor. The private sector takes this 

approach (1) to ensure that expected costs under the contracts are 

accurate and meet the company’s reliability standards, (2) to validate the 

business case decision used to justify a performance-based logistics 

arrangement, and (3) to obtain the data necessary to renegotiate the 

contract. 

14In a previous report, we found that despite a significant investment in business systems, 

DOD continues to have long-standing financial and business management problems that 

preclude the department from producing reliable and timely information for making 

decisions. See GAO, DOD Business System Modernization: Billions Being Invested 

without Adequate Oversight, GAO-05-381 (Washington, D.C.: April 29, 2005). 

15GAO, Defense Depot Maintenance: Contracting Approaches Should Address Workload 

Characteristics, GAO/NSIAD-98-130 (Washington, D.C.: June 15, 1998). 

16GAO, High Risk Series: Defense Contract Management, GAO/HR-97-4 (Washington, D.C.: 

Feb. 1997). 

17See GAO-04-715. 
Page 11 GAO-05-966 Performance-Based Logistics

DOD Program Offices Made 

Limited Use of Resources 

Available to Assist in 

Monitoring PerformanceBased Logistics Contracts

DCMA and DCAA have the capability to monitor contractor cost and 

performance, verify the reliability of contractor-provided data, and collect 

detailed cost and performance data. However, most of the DOD program 

offices we reviewed made limited use of these agencies’ resources because 

they viewed fixed-price performance-based logistics contracts to be low 

risk compared with other types of contracts. Before a contract is awarded, 

DCMA can provide advice and service to help construct effective 

solicitations, identify potential risk, select the most capable contractors, 

and write contracts that meet the needs of DOD customers. After the 

contract is awarded, DCMA can monitor contractors’ information systems 

to ensure that cost, performance, and delivery schedules are in compliance 

with the terms and conditions of the contracts. DCAA performs contract 

audits for DOD components and provides accounting and financial 

advisory services during contract negotiation and administration of 

contracts. 

DCMA and DCAA officials said that they have a greater role in monitoring 

cost information for cost-plus contracts because such contracts are 

considered high risk. According to DCMA and DCAA officials, their level of 

oversight is significantly less for fixed-priced contracts, including 

performance-based logistics arrangements, because DOD considers these 

contracts to be low risk, thereby diminishing the need for monitoring 

contractor performance. Without a request from program offices or 

specific contract clauses, DCMA and DCAA generally would not conduct 

periodic reviews or audits of fixed-price contracts to verify cost and 

performance information. DCMA and DCAA officials also said that in the 

past, monitoring fixed-price contracts was included in their workload, but 

because of a reduction in staff and streamlining of operations, they focused 

their efforts on contract areas that have the highest risk for cost growth. 

DCMA and DCAA officials said they would support increasing their role in 

monitoring fixed-price performance-based contracts depending on the 

availability of their resources. 

Conclusions DOD is expanding its use of performance-based logistics as its preferred 

support strategy in support of weapon systems but has not yet 

demonstrated that this long-term support strategy is being effectively 

implemented DOD-wide. DOD guidance states that program offices, after 

entering into performance-based logistics arrangements, should update 

their original business case analysis using actual cost and performance 

data to validate their assumptions, but most of the program offices we 
Page 12 GAO-05-966 Performance-Based Logistics

reviewed had not followed this guidance, and the Office of the Secretary of 

Defense was not monitoring whether program offices were following the 

guidance. The program offices therefore could not substantiate that cost 

savings and performance improvements for weapon system support were 

being achieved through the use of performance-based logistics 

arrangements. Program offices also have lacked reliable cost and 

performance data needed to validate the results of performance-based 

logistics arrangements. Reliable data could be collected and analyzed by 

increasing oversight of these contracts with the assistance of DCMA and 

DCAA. 

Recommendations for 

Executive Action

To demonstrate that performance-based logistics arrangements are 

resulting in reduced costs and increased performance, and to improve 

oversight of performance-based logistics contracts, we recommend that 

the Secretary of Defense direct the Under Secretary of Defense 

(Acquisition, Technology and Logistics) to take the following two actions: 

1. Reaffirm DOD guidance that program offices update their business 

case analyses following implementation of a performance-based 

logistics arrangement and develop procedures, in conjunction with the 

military services, to track whether program offices that enter into these 

arrangements validate their business case decisions consistent with 

DOD guidance. 

2. Direct program offices to improve their monitoring of performancebased logistics arrangements by verifying the reliability of contractor 

cost and performance data. The program offices may wish to increase 

the role of DCMA and DCAA in overseeing performance-based logistics 

contracts.

Agency Comments and 

Our Evaluation

In commenting on a draft of this report, DOD concurred with our 

recommendations regarding the validation of business case decisions for 

performance-based logistics arrangements and verification of reliability of 

contractor data. While DOD was generally responsive to our 

recommendations, specific details on how DOD planned to validate and 

verify contractor data were not provided.

Regarding our recommendation to reaffirm guidance and develop 

procedures to track whether program offices validate their business case 
Page 13 GAO-05-966 Performance-Based Logistics

decisions, DOD stated that the department will reaffirm DOD guidance on 

updating the business case analysis after implementing performance-based 

logistics arrangements and will work with the military services to develop 

procedures to track whether program offices validate their business case 

decisions consistent with DOD guidance. 

With regard to our second recommendation to direct program offices to 

verify the reliability of contractor cost and performance data, DOD stated 

that it will issue guidance on verifying the reliability of contractor cost and 

performance data. DOD did not provide specific information on what the 

guidance would include nor did it indicate whether it would increase the 

use of DCMA or DCAA to verify the reliability of contractor cost and 

performance data.

DOD also provided technical comments, which we have incorporated as 

appropriate.

Scope and 

Methodology

To determine whether DOD could demonstrate that cost savings and 

improved performance were being achieved through the use of 

performance-based logistics arrangements, we collected and analyzed data 

on 15 weapon system programs identified by the Office of the Secretary of 

Defense and the military services as programs that have successfully used 

performance-based logistics arrangements. The 15 programs are listed in 

table 1. 

Table 1: Performance-Based Logistics Programs Included in Our Review

Military service

Weapon system or 

component Program office

Air Force C-17 Air Force Materiel Command

Air Force F-117 Air Force Materiel Command

Air Force JSTARS Warner Robins Air Logistics Center 

Air Force C-130J Air Force Materiel Command

Navy ALR-67 (V3) Naval Supply Systems Command

Navy Auxiliary Power Units Naval Supply Systems Command and Naval Air Systems Command

Navy F-18 E/F FIRST Naval Supply Systems Command and Naval Air Systems Command

Navy F-404 Naval Supply Systems Command and Naval Air Systems Command

Navy T-45 engines Naval Supply Systems Command and Naval Air Systems Command
Page 14 GAO-05-966 Performance-Based Logistics

Source: GAO analysis of services’ data. 

a

 This is a joint contract with the Navy and Marine Corps. 

b

 The Marine Corps’ maintenance contracting was handled by a Navy team. 

We reviewed DOD and service policies, procedures, and guidance related 

to the use of performance-based logistics and met with program officials to 

discuss how their performance-based logistics contracts were structured 

and managed and how these contracts were validated to ensure that cost 

savings and improved performance were being achieved as a result of using 

performance-based logistics. We also obtained and analyzed available 

documentation, including business case analyses, contracts, and related 

files. We did not assess the methodology program offices used to prepare 

their business case analyses or the quality of these analyses. We discussed 

with program officials the systems they used to monitor contractor cost 

and performance. We also interviewed officials from the Office of the 

Secretary of Defense and military department headquarters to discuss 

implementation of performance-based logistics, lessons learned, and the 

benefits derived from using performance-based logistics approaches and 

practices. To determine how private-sector companies ensure that cost 

and performance levels under a performance-based contract are as 

expected, we reviewed the information provided by seven companies 

identified in our prior report that used complex and costly equipment that 

had life-cycle management issues similar to military weapon systems, and 

outsourced some portion of their maintenance work under performancebased contracts. These seven companies consisted of six airline 

companies and one mining company. We contacted officials at DCMA and 

DCAA to determine those agencies’ roles in monitoring the costs and 

performance of fixed-priced contracts, including performance-based 

logistics contracts, how audits are requested or initiated, and the 

procedures for reporting the results of the audits. 

Navy V-22 engines a Naval Air Systems Command

Navy/Marine Corps KC-130J b Naval Supply Systems Command and Naval Air Systems Command

Army HIMARS Aviation and Missile Command

Army Javelin CLU Aviation and Missile Command

Army TOW-ITAS Aviation and Missile Command

Army TUAV Shadow Aviation and Missile Command

(Continued From Previous Page)

Military service

Weapon system or 

component Program office
Page 15 GAO-05-966 Performance-Based Logistics

We are sending this report to the Chairman and Ranking Minority Member, 

Senate Subcommittee on Readiness and Management Support, Committee 

on Armed Services. We will also send copies to the Under Secretary of 

Defense (Acquisition, Technology and Logistics). Copies of this report will 

be made available to others upon request. In addition, the report will be 

available at no charge on GAO’s Web site at http://www.gao.gov. If you or 

your staff have any questions on the matters discussed in this report, please 

contact me at (202) 512-8412 or solisw@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on the 

last page of this report. GAO staff who made major contributions to this 

report are listed in appendix II. 

William M. Solis

Director, Defense Capabilities and Management
Page 16 GAO-05-966 Performance-Based Logistics

Appendix I

Comments from the Department of Defense AAppenednxidexiIs
Appendix I

Comments from the Department of Defense

Page 17 GAO-05-966 Performance-Based Logistics
Page 18 GAO-05-966 Performance-Based Logistics

Appendix II

GAO Contact and Staff Acknowledgments ApendxiI

GAO Contact William M. Solis (202) 512-8412 or solisw@gao.gov. 

Acknowledgments In addition to the contact named above, Thomas Gosling, Assistant 

Director; Thom Barger; Judith Collins; Pamela Valentine; and Cheryl 

Weissman were major contributors to this report. 

(350551)
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