GAO

United States General Accounting Office

Report to the Chairman, Committee on 

Armed Services, U.S. Senate

November 1999 DEFENSE LOGISTICS

New 120-mm Tank 

Training Round 

Procurement Will 

Result in Savings

GAO/NSIAD-00-34

Page 1 GAO/NSIAD-00-34 Defense Logistics

United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-282830 Leter

November 22, 1999

The Honorable John W. Warner

Chairman, Committee on Armed Services

United States Senate

Dear Mr. Chairman:

In March 1975, the Department of Defense designated the Army as the 

Single Manager for Conventional Ammunition1

 with responsibility for 

procuring conventional ammunition common to all military services. As the 

single manager, the Army has relied on government-owned and private 

sector facilities to meet its conventional ammunition requirements. 

However, with the reduction in ammunition budgets and declining 

requirements, the Army has significantly downsized the number of 

government-owned plants in recent years and currently has eight plants 

producing ammunition. One of these is the Radford Army Ammunition 

Plant, which historically has produced propellant used in making 

ammunition.

Tank training ammunition in fiscal year 1999 amounted to about

$205 million, or 24 percent of the total Army conventional ammunition 

budget, and, therefore, has a significant impact on the ammunition 

production base. In 1995, faced with dramatic reductions in ammunition 

requirements, the Army attempted to reduce costs by awarding multiyear 

firm fixed-price contracts covering fiscal years 1995 through 1998 for the 

production of 120-mm tank training rounds to two contractors, Alliant 

Techsystems and Primex Technologies. In addition, a 1993 study of the 

propellant production base showed that Radford’s ability to compete for 

propellant business was declining and the Army needed Radford for its 

wartime replenishment mission2

 for propellant. Therefore, both 

contractors were required to purchase the training round propellant from 

Radford. In 1999, the Army entered into new contracts for tank training 

1

 Conventional ammunition includes artillery, bombs, demolition material, fuzes, grenades, 

mines, mortars, propellant charges, pyrotechnics, unguided rockets, small arms, and tank 

training ammunition.

2 Replenishment means replacing ammunition losses after a conflict in accordance with 

defense planning guidance.
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rounds with the two contractors covering fiscal years 1999 through 2003. 

Because the Army believed that Radford’s industrial capability no longer 

required special protection, it allowed the contractors to purchase 

propellant competitively. As a consequence, one contractor chose to 

purchase propellant from a private company.

As requested, we determined whether the Army’s actions in 1999 resulted 

in savings on the purchase of 120-mm tank training rounds, the effect the 

Army’s decision to no longer direct that propellant be purchased from 

Radford had on plant overhead and employment, and the potential effect 

on Radford’s wartime replenishment mission.

Results in Brief The Army could achieve about $52 million in savings over a 5-year period 

from its 1999 contracts for the procurement of 120-mm tank training 

rounds if all contract options are exercised. The Army expects to achieve 

the savings based on a negotiated decrease in price per round from the 

1995 to the 1999 multiyear contracts. However, a decision by one of the 

contractors to use a propellant producer other than Radford resulted in a 

50-percent reduction in Radford’s propellant business for the tank training 

round program.

To absorb increased overhead costs due to the loss of business, the 

operating contractor at Radford negotiated price increases for propellant 

with the Army for two new contracts totaling at least $14 million. Another 

result of the Army’s decision to no longer direct that propellant be 

purchased from Radford was that the contractor reduced its workforce at 

Radford of 1,200 by 185 personnel. These personnel reductions required the 

contractor to incur certain employee separation costs and affected the 

contractor’s retirement funding liabilities. The Army recognized that the 

1999 multiyear contracts could affect Radford’s operations but believed the 

impact would be minimized because Radford was in a competitive position 

to win other Department of Defense contracts. 

The loss of propellant work does not affect Radford’s ability to meet its 

wartime replenishment mission. Radford’s facilities have the capacity to 

produce about 100 million pounds of propellant per year but currently are 

only producing 10 million pounds per year. With additional personnel, this 

provides more than adequate capacity for Radford to meet its 

replenishment requirements. Radford officials stated that as long as the 

propellant lines are operating, they would be able to replenish propellant in 
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accordance with requirements contained in current Defense Planning 

Guidance.

Background The Radford Army Ammunition Plant, located in Radford, Virginia, is the 

Army’s only government-owned, contractor-operated propellant production 

facility. Since 1994, the Army has contracted with Alliant Techsystems to 

operate Radford as the facility use contractor.3 Radford is currently capable 

of producing a variety of propellants used in Department of Defense 

ammunition products such as the 120-mm tank training and tank tactical 

rounds and the Hydra-70 rocket. 

Since 1987, the Army has procured its 120-mm tank training rounds from 

two prime contractors, Alliant Techsystems (formerly Honeywell) and 

General Defense (subsequently bought by Olin). The two contractors were 

responsible for choosing their subcontractors and obtaining all 

components. The contracts for fiscal year 1988 provided for a 70-percent/

30-percent split between the contractors, with the larger share going to the 

lowest offeror. From 1988 through 1994, contracts were awarded annually 

on a cost-plus basis. In 1993, to reduce costs, the Army decided to award 

multiyear firm fixed-price contracts for the 120-mm tank training rounds.

In 1993, with Alliant and Olin considering a merger, the Army became 

concerned that the contractors might acquire propellant from a source 

other than Radford. Based on a detailed study of the propellant production 

base, the Army determined that Radford, because of high costs, could not 

compete in an open market for tank training round propellant business, yet 

the facility could not remain viable without this business. Therefore, the 

Army, in awarding the first in a series of multiyear contracts for 120-mm 

tank training rounds for fiscal years 1995 through 1998, required that the 

prime contractors, Alliant and Olin,4

 purchase propellant for the training 

rounds from Radford.

3 The facility use contract provides for Alliant’s use of Radford facilities to complete work 

for government as well as commercial customers, subcontract work, and foreign sales. 

4

 Olin subsequently spun off its Ordnance and Aerospace Divisions, which became Primex 

Technologies. 
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In 1997, the Army began developing its tank training round acquisition 

strategy for fiscal years 1999 through 2003. Under this strategy, the Army 

believed that Radford could now compete in the open market because 

overhead costs at Radford were down due to the rents obtained through 

the Armament Retooling and Manufacturing Support Act 5

 as well as the 

infusion of Alliant’s own money for modernization purposes. Therefore, the 

Army no longer required that the manufacturing contractors purchase 

propellant from Radford for the 1999 multiyear contracts. The Army also 

planned to award firm fixed-price contracts and split the work between its 

two manufacturing contractors on a 60-percent/40-percent basis with the 

lowest price offeror receiving the larger share.

Multiyear Contracts 

Provide Savings but 

Reduce Radford 

Workload

The Army could achieve about $52 million in savings based on the 

negotiated decrease in price per round from the 1995 to the 1999 multiyear 

contracts if all contract year options are exercised.6 However, to absorb the 

impact of decreased work at Radford due to the 1999 multiyear contracts, 

Alliant negotiated price increases for propellant on other new contracts 

with the Army and reduced personnel. The reduction-in-force caused 

Alliant to incur certain separation costs, and affected retirement fund 

liabilities, including the employee pension fund, that funds retirees’ annual 

annuities, and the post-retirement benefits fund, that funds retiree health 

care costs. While the Army realized that Radford would be affected by the 

tank training round contracts, it believed Radford was capable of attracting 

additional business that would offset the loss of business due to the 1999 

multiyear awards.

Multiyear Contracts Savings According to the former head of the Army tank team, the Army wanted to 

achieve certain savings for the 1999 multiyear contracts. However, after the 

contractors had submitted their proposals, the Army realized that the 

proposals would not allow them to achieve their savings goal. Once the 

proposals were evaluated, the Army offered the contractors a price per 

round based on a 50-percent/50-percent split rather than the original

5

 The Armament Retooling and Manufacturing Support Act of 1992 encouraged, to the 

maximum extent practicable, nondefense commercial firms to use government-owned, 

contractor-operated ammunition manufacturing facilities of the Department of the Army.

6

 The contract is for a base year plus 4 option years for specific types and quantities of tank 

training rounds.
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60-percent/40-percent split. To protect the integrity of the procurement, 

this offer was limited to acceptance or rejection in a short time period. If 

either contractor rejected the offer, the contracts were to be awarded 

according to the allocation stated in the solicitation. The contractors 

accepted the Army’s proposed price per round, which reduced the price of 

the rounds from the original proposals by an additional $1.2 million over 

the life of the contracts. This potentially could result in a total savings of 

about $52 million over the life of the contracts if all options are exercised. 

As shown in table 1, each type of training round decreased in price from the 

1995 multiyear contracts to the 1999 multiyear contracts.

Table 1: Price Per Round Savings From 1995 Multiyear Contracts to 1999 Multiyear Contracts

a

Savings do not precisely calculate due to rounding associated with price difference per round.

Source: Army Industrial Operations Command.

Price Increases Negotiated 

for Propellant at Radford

As part of the acquisition strategy, the Army did not require the contractors 

to purchase propellant from Radford for the 1999 multiyear contracts. One 

of the contractors chose a different producer for its propellant needs, 

resulting in Radford losing 50 percent of the tank training round propellant 

business it had under the 1995 multiyear contracts. To absorb the loss to 

the propellant business base, Alliant, which operates the Radford plant, 

allocated a portion of its overhead costs to other propellant products. 

Alliant negotiated price increases with the Army on at least two propellant 

products directly related to the loss of propellant business for the tank 

training round. One such product was the propellant for the Hydra-70 

rocket, a weapon system fired from helicopters such as the Apache and 

Cobra and aircraft such as the Air Force F-16 Falcon. The Army also agreed 

to a price increase for propellant for tank tactical rounds. The total impact 

of the increased prices is at least $14 million over the life of the contracts.

Training round

1995 Multiyear

contract price

1999 Multiyear

contract price

Price difference

per round Quantity Savingsa

M831A1 $552.04 $518.07 $33.97 469,928 $15,961,461

M865 524.51 490.70 33.81 1,075,266 36,350,183

Total $52,311,644
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Reduced Employment 

Levels and Contractor Costs 

at Radford

To further reduce its overhead costs due to a reduction in its business base, 

Alliant reduced employment levels. As shown in table 2, as a result of losing 

50 percent of the tank training round propellant business, Alliant reduced 

its workforce at Radford of 1,200 by 185 personnel, or about 15 percent. 

Some left under a voluntary separation program or took Alliant’s offer of 

early retirement for affected employees; others were laid off.

Table 2: Personnel Reductions at Radford 

a

 Direct personnel are those who work directly on the production lines.

b

 Indirect personnel include non-production positions such as maintenance personnel.

Source: Alliant Techsystems−Radford.

According to an Alliant official, Alliant incurred about $3.2 million in 

severance and early retirement incentive costs to reduce employee levels 

as a result of the reduced workload. The reductions also increased Alliant’s 

liabilities for employee retirement pension and post-retirement benefits. 

According to an Alliant official, based on an actuarial evaluation, as of 

January 1, 1999, the pension fund was about $91.8 million overfunded. As a 

result of the retirements, outlays from the pension fund will reduce this 

surplus. At the time of this report, it is unknown how much the surplus will 

be reduced, but according to an Alliant official, the reduction is not 

expected to reduce the fund’s viability. The post retirement benefits 

account, on the other hand, as of January 1, 1999, is underfunded by about 

$57.2 million.7

 An Alliant official stated that until their actuaries complete 

their analysis at the end of calendar year 1999, the impact of losing the 

propellant business on this account will not be known. The official 

estimated that about $2.4 million in incentive costs it incurred for early 

retirements were paid out of Alliant’s overfunded pension fund at Radford. 

Type of reduction-in-force

Total number

of employees

Direct

personnela

Indirect

personnelb

Involuntary layoff 107 93 14

Voluntary separation program 21 6 15

Voluntary incentive retirement 57 0 57

Total 185 99 86

7 According to an Army official, Alliant has developed a schedule for funding this amount. 
B-282830

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Severance costs totaled about $814,000 and were paid out of the plant’s 

overhead account.

Army’s Assessment of 1999 

Multiyear Contracts’ Effect 

on Radford’s Operations

According to an Army official, Alliant and Members of Congress raised 

concerns about the effect of the loss of business on overhead rates and 

costs associated with a reduction-in-force. Due to these concerns, in 

January 1999, the Army performed a cost analysis that showed personnel 

would be reduced by about 11 percent and costs from the loss of propellant 

business totaling about $17.5 million over the life of the contract would be 

allocated to other Department of Defense programs. The Army’s Cost and 

Economic Analysis Center reviewed this analysis and found it to be 

reasonable. The Army did not alter its procurement strategy because, as 

previously discussed, Radford had decreased its overhead costs and, 

therefore, the Army believed Radford could successfully compete for 

future contracts, thereby minimizing the impact of the loss of tank training 

round propellant production to the business base. In fact, since the award 

of the tank training round contracts, Radford won the propellant contract 

for the Hydra-70 rocket.

Replenishment Mission 

Is Not Threatened

Radford has sufficient capacity to perform its replenishment mission with 

additional personnel. The plant is capable of producing about 100 million 

pounds of propellant per year; while its current production is 10 million 

pounds per year. According to current Defense Planning Guidance on 

ammunition replenishment, Department of Defense components are to 

provide the capability to replace the projected consumption (for one major 

theater war) of critical munitions, troop support items, and spares 

generally within 3 years. This mission requires Radford to produce about

92 million pounds of propellant and 97 million pounds of trinitrotoluene, 

also known as TNT, if needed. According to an Alliant official, in order to 

accomplish this mission, Radford has to maintain a large facility and 

operating production lines. The official stated that losing 50 percent of the 

tank training round propellant business has no immediate impact on 

Radford’s ability to meet its wartime replenishment mission since 

production lines are operating. However, if enough business is lost and 

lines are shut down, there is increased risk that replenishment schedules 

cannot be met within the Defense Planning Guidance time frames without 

increased expenses.
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Agency Comments On October 25, 1999, we requested comments on a draft of this report. The 

Director of Strategic and Tactical Systems in the Office of the Under 

Secretary of Defense for Acquisition and Technology provided oral 

comments on November 5, 1999. The Director concurred with the report.

Scope and 

Methodology

To determine whether the Army’s actions in 1999 resulted in savings on the 

purchase of 120-mm tank training rounds and the effect of the Army’s 

decision to no longer direct that propellant be purchased from Radford on 

plant overhead and employment, we reviewed the contract files for the 

1995 and 1999 multiyear contracts, compared the prices of other 

Department of Defense products produced at the plant before and after the 

award of the second multiyear contracts, reviewed the cost analysis 

performed by the Army, and analyzed employment levels at Radford before 

and after the loss of propellant business, including the effect of workforce 

reductions on retirement funds. We also interviewed officials at the Office 

of the Secretary of Defense, Washington, D.C.; the U.S. Army Cost & 

Economic Analysis Center, Falls Church, Virginia; the Army Materiel 

Command, Alexandria, Virginia; the Industrial Operations Command, Rock 

Island, Illinois; the Radford Army Ammunition Plant, Radford, Virginia; 

Alliant Techsystems Headquarters, Hopkins, Minnesota; and Primex 

Technologies Headquarters, St. Petersburg, Florida.

To determine the potential effect on Radford’s wartime replenishment 

mission, we reviewed the plant’s replenishment requirements and the 

requirements contained in the current Defense Planning Guidance and 

discussed replenishment with Army and contractor officials.

We conducted our review from May through October 1999 in accordance 

with generally accepted government auditing standards.

We are sending copies of this report to the Honorable William Cohen, 

Secretary of Defense; the Honorable Louis Caldera, Secretary of the Army; 

the Honorable Jacob Lew, Director, Office of Management and Budget; 

Senator Carl Levin, Ranking Minority Member, Senate Committee on 

Armed Services; Representative Floyd D. Spence, Chairman, and 

Representative Ike Skelton, Ranking Minority Member, House Committee 

on Armed Services. Copies will also be made available to others upon 

request.
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Key contributors to this report are listed in appendix I.

Sincerely yours,

David R. Warren, Director

Defense Management Issues
Page 10 GAO/NSIAD-00-34 Defense Logistics

Appendix I

GAO Contact and Staff Acknowledgments AAppeennxdedixIis

GAO Contact Ronald L. Berteotti (214) 777-5702

Acknowledgments In addition to the name above, Kimberly C. Seay, C. Douglas Mills, Jr., and 

Robert J. Rivas made key contributions to this report.

(709414) Letr
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