Report to Congressional Committees

United States General Accounting Office

GAO

September 2001 DEFENSE LOGISTICS

Air Force Lacks Data

to Assess Contractor

Logistics Support

Approaches

GAO-01-618
Page i GAO-01-618 Defense Logistics

Letter 1

Results in Brief 2

Background 4

Data to Assess Contractor Logistics Support Approaches Are

Insufficient 5

Data Are Insufficient to Compare Depot Maintenance Performed

by Contractors With Maintenance Performed by Military Depots 11

Major Commands’ Concerns About Expansion of Contractor

Logistics Support Have Not Been Fully Addressed 14

Conclusions 17

Recommendations for Executive Action 17

Agency Comments and Our Evaluation 18

Scope and Methodology 20

Appendix I Recent Department of Defense Studies on Logistics

Restructuring 23

Appendix II Details on the Air Force’s B-2 Source of Repair Decision

26

Appendix III Comments From the Department of Defense 29

Appendix IV Staff Acknowledgements 33

Tables

Table 1: Contractors’ Overall Performance Ratings From 1994

Through 1999 9

Table 2: Workload Placement for B-2 Depot Support Based on

DOD’s February 1995 Report to Congress 26

Contents
Page ii GAO-01-618 Defense Logistics

Figures

Figure 1: Comparison of Contractors’ and Military Depots’

Performance in Meeting Air Combat Command

Spare Parts Standards for 16 Aircraft Systems, Fiscal

Years 1990-2000 10

Figure 2: Comparison of Average Airframe Overhaul Prices for

KC-135 Aircraft as Performed by Air Force Depots and

Contractors, Fiscal Years 1996-2000 12

Abbreviations

DOD Department of Defense

GAO General Accounting Office
Page 1 GAO-01-618 Defense Logistics

September 7, 2001

The Honorable Carl Levin

Chairman

The Honorable John W. Warner

Ranking Minority Member

Committee on Armed Services

United States Senate

The Honorable Bob Stump

Chairman

The Honorable Ike Skelton

Ranking Minority Member

Committee on Armed Services

House of Representatives

Since the end of the Cold War, the Department of Defense (DOD) has

dramatically reduced its fighting forces and logistics infrastructure. At the

same time, the armed services have significantly reduced their

procurements of new weapons systems and are now keeping their

weapons longer. The Department estimates that it is spending about $59

billion a year on logistics support to operate and sustain weapons systems1

but believes that it could reduce these costs by 20 percent or more by

adopting a variety of different logistics support practices. DOD has

directed the services to pursue logistics “reengineering” efforts to achieve

these savings. To this end, the Air Force has several efforts under way that

involve commercial best practices and have, as a key feature, increased

reliance on private-sector capabilities for logistics support.2

The Air Force’s acquisition process provides for developing a system’s

logistics support concept prior to completing the production of a weapon

system. DOD and Air Force policy provide a preference for using long-

 1

 DOD does not routinely capture these costs in its accounting and estimating systems.

However, beginning in 1999, the Undersecretary of Defense for Acquisition and Technology

hired a contractor to estimate the amount of funds that DOD spends annually on logistics

support.

2

 The Air Force uses different terms to describe logistics support provided by the private

sector, including “contractor logistics support,” “total system performance responsibility,”

“total system sustainment responsibility,” “total system support,” and “flexible

sustainment.”

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-618 Defense Logistics

term contractor logistics support. Nonetheless, the process for making

logistics support decisions involves conducting an analysis comparing

whether the private sector or Air Force activities will provide the most

cost-effective and technically sound logistics support approach. These

initial cost and performance expectations form the basis for the Air

Force’s decision to rely on a contractor, the government, or some

combination of the two for support. If a contractor logistics support

approach is selected, the Air Force develops and implements its

contracting strategy, which includes an analysis of what performance and

costs the Air Force expects from the selected contractor. After selection,

the Air Force monitors the contractor’s performance against the

negotiated performance and cost expectations, not against the initial cost

and performance estimates that led to the decision to use contractor

logistics support.

Your committees have expressed concerns about the cost-effectiveness of

these new contractor logistics support approaches and the management

challenges that these approaches may create for major commands. As

agreed with your office, we reviewed the Air Force’s practices because the

Air Force has had broader experience with contractor logistics support

than the other services. You asked us to (1) analyze the differences

between the cost-effectiveness estimates for proposed contractor logistics

support approaches and actual implementation experience, (2) compare

the performance of contractors and Air Force depots in terms of cost and

responsiveness for the same or similar work, and (3) determine to what

extent the Air Force has addressed concerns raised by major commands

regarding the increased use of long-term contractor support. We will

address the Army’s and Navy’s experience with contractor logistics

support approaches in a subsequent report. DOD is currently engaged in a

strategic review of its war-fighting goals, objectives, and capabilities,

which could influence the way it approaches its use of contractor logistics

support when completed.

In general, it is impossible to determine whether the cost-effectiveness

estimates for proposed contractor logistics support approaches are being

achieved during implementation because the Air Force does not have the

data required to do so. Consequently, the Air Force may be testing and

adopting support approaches without sufficient information to assess

whether expected readiness improvements and cost-reduction goals are

being met. The Air Force established and retained documentation

supporting proposed contractor logistics support approaches for only 2 of

the 35 systems we reviewed (the C-17 and the B-2 aircraft). Data for the

Results in Brief
Page 3 GAO-01-618 Defense Logistics

C-17 do not permit a comparison between the proposed approaches and

the contractor’s actual performance, while the available cost data for the

B-2 indicate a significant cost increase over the Air Force’s initial estimate.

The Air Force’s analysis shows that while a portion of this increase was

due to changes in work requirements, the large majority was due to the

contractor’s cost omissions and cost increases. Furthermore, the Air

Force’s 10 ongoing pilot programs—which are intended to provide a basis

for evaluating new contractor logistics support approaches—are unlikely

to provide the information needed to evaluate the cost-effectiveness of

these approaches. The Air Force does have data to compare the

contractor’s performance with the criteria established in the contract and

with the weapons systems’ performance standards set by operating

commands. These data indicate that contract requirements are being met.

A comparison of the same or similar depot maintenance work performed

by Air Force depots and contractors does not provide a sufficient basis for

determining the most cost-effective option. Available cost data indicate

that Air Force depots were more cost-effective than contractors in

overhauls of the KC-135 and B-1 aircraft, while Air Force depots and

contractors were equally cost-effective in repairing various aircraft

components. Nonetheless, the Air Force’s limited experience to date in

repairing the same aircraft and components in both the public and private

sectors and the lack of comparable and reliable historical financial data

make it difficult to assess the cost-effectiveness of private versus public

repair facilities. Consequently, the Air Force does not have the data to

assess whether greater reliance on the private sector will help it achieve

the Department’s goal of a 20-percent reduction in logistics support costs.

Major commands have raised concerns about the impact of the increased

use of contractor logistics support on the management of their day-to-day

operations that have not been fully addressed. Operating commands are

especially concerned that the increased use of contractor logistics support

may limit their funding flexibility. According to the Air Force, past

experience has shown that the operating commands have had adequate

flexibility with contractor-provided logistics support. The officials noted

that this past experience has not been on the same scale as might occur

under current logistics reengineering plans and therefore may indeed

constrain the funding flexibility of operating commands. According to

operating command officials, such constraints eventually may affect their

ability to support missions by committing large amounts of funds to

previously established support agreements. The Air Force has taken

actions in response to other concerns raised by major commands—about

possible reductions in their ability to perform essential logistics
Page 4 GAO-01-618 Defense Logistics

management functions and possible reductions in their command

authority, and about the lacking availability of technical data—but all

issues have not been fully addressed.

We are making recommendations aimed at improving the Air Force’s

ability to assess the cost-effectiveness of contractor logistics support

approaches and to address the management concerns raised by major

commands that are associated with these approaches. In commenting on a

draft of this report, DOD generally concurred with our recommendations.

The Department of Defense is moving to greater reliance on the private

sector for the logistics support of new weapons systems and major

upgrades.3 For example, DOD has 30 pilot programs under way to test

various logistics support reengineering concepts that place greater

reliance on the private sector. At the same time, defense manufacturers

are increasingly interested in expanding their participation in weapons

systems support.

Various DOD studies—including the 1995 Commission on Roles and

Missions and Defense Science Board reports, and the 1997 Defense

Reform Initiative and Quadrennial Defense Review reports—discussed the

adoption of long-term contractor logistics support to improve logistics

processes and achieve savings. (See app. I for details of these studies.)

Generally, each study focused on increasing reliance on the private sector

to meet DOD’s logistical support needs as well as on making greater use of

improved technologies, new business processes, and commercial

transportation.

However, as we have previously reported, the support for these projected

savings contained little substantive data to support their savings

projections or they made inaccurate assumptions about how experiences

in the private sector might relate to depot maintenance activities. For

example, DOD used projected savings from the outsourcing of

commercial-type activities as the basis for its estimated savings of 20

percent or more for outsourcing logistics support activities. However, the

projected savings were based on conditions that do not currently exist for

 3

 See Defense Depot Maintenance: DOD Shifting More Workload for New Weapon Systems

to the Private Sector (GAO/NSIAD-98-8, Mar. 31, 1998).

Background
Page 5 GAO-01-618 Defense Logistics

most military depot maintenance work.4 The commercial-type activities

are unlike military depot maintenance in that they involve relatively

simple, routine, and repetitive tasks that do not generally require large

capital investment or highly skilled and trained personnel. Additionally,

the commercial activity contracts were awarded in a competitive

environment—a condition not generally present for depot maintenance

contracts. As a result, projected savings generally resulted from

competition rather than from contractor performance, whereas most DOD

depot maintenance contracts are not competitively awarded.

The Air Force has not routinely captured the data necessary to assess

contractor logistics support approaches for sustaining weapons systems

against actual experience. Furthermore, those limited cases where data

are available show mixed results. The available data are not sufficiently

detailed or reliable to provide the basis for evaluating the cost of support

approaches for certain weapons systems. Also, the Air Force’s ongoing

pilot programs have a similar limitation and are unlikely to provide the

data needed to assess the support approaches’ expectations against actual

results. DOD does assess contractors’ performance against contract

requirements. With regard to contract performance standards, available

indicators show that contractors have met or exceeded the contract

criteria and supply performance standards established by operating

commands.

The Air Force either did not perform a cost benefit analysis or did not

retain information on the analysis that was used to support its decisions to

use the private sector to support weapons systems. Consequently, it

cannot determine whether contractor logistics support approaches have

performed better or worse than initially expected.

The Air Force’s program offices are responsible for analyzing the costeffectiveness of contractor logistics support approaches in developing lifecycle support plans. These analyses are supposed to form the basis for

deciding to what extent the private and public sectors will be relied upon

to provide logistics support. However, program offices have not generally

 4

 See Defense Depot Maintenance: Commission on Roles and Mission’s Privatization

Assumptions Are Questionable (GAO/NSIAD-96-161, July 15, 1996) and Outsourcing DOD

Logistics: Savings Achievable but Defense Science Board’s Projections Are Overstated

(GAO/NSIAD-98-48, Dec. 8, 1997).

Data to Assess

Contractor Logistics

Support Approaches

Are Insufficient

The Air Force Does Not

Have Sufficient Data to

Assess the CostEffectiveness of Proposed

Approaches
Page 6 GAO-01-618 Defense Logistics

retained the initial cost and performance estimates used to make these

contractor logistics support approach decisions. The Air Force does not

have an established requirement to assess the cost-effectiveness of these

decisions after they are implemented. Air Force Instruction 63-107, which

provides guidance on logistics support decisions for weapons systems,

does not require assessing the cost-effectiveness of these decisions after

they are made against initial expectations. While the instruction requires

the documentation of the analyses supporting the logistics support

approach decisions for weapons systems, the instruction does not specify

retention requirements for the documentation. Once a contractor support

decision has been made, the contractor’s performance is measured against

the contract—not the initial expectations supporting the decisions. As a

result, the Air Force has not had sufficient data to determine whether the

logistics support provided by contractors achieved the cost and

performance expectations that initially supported the logistics support

approach decisions. A recently added provision to Air Force Instruction

63-107 requires that program managers review how effectively their

sustainment strategy for weapons systems is working and, if needed,

adjust the strategy to improve performance and cost-effectiveness.5

However, the instruction does not require program managers to compare

actual logistics sustainment performance with initial cost and performance

expectations.

Thirty-three of the 35 contractor-supported systems that we reviewed did

not retain sufficient historical data to compare estimated cost and

performance expectations with implementation results. Seventeen of these

systems had no documentation of original cost and performance

expectations, 8 had incomplete documentation, and 8 had not developed

any cost or other performance expectations. The only systems that had

established expectations and retained supporting documentation were

those for the C-17 and B-2 aircraft, and the documentation for these

systems was available only because it had been included in reports to

Congress.6

 The Air Force has not compared the C-17 contractor’s

performance with initial expectations, and program office officials said

 5

 The revised version of Air Force Instruction 63-107, Integrated Product Support Planning

and Assessment, was issued in May 2001.

6

 The Office of the Secretary of Defense’s 1995 Report on the Most Efficient and Effective

Utilization of Both Public and Private Facilities for Depot Maintenance Support of the

B-2 Advanced Technology Bomber, the Air Force’s 1994 Report to Congress: B-2 Depot

Support Plan, and the Air Force’s 1997 Report to Senate Appropriations Committee:

Depot Support Strategy: Flexible Sustainment, which addressed the C-17.
Page 7 GAO-01-618 Defense Logistics

that such a comparison is impossible because the available data are not

detailed enough and the logistics support approach taken does not match

the approach initially anticipated in the Air Force’s report to Congress. For

example, the approach being used for C-17 logistics support relies on the

private sector for approximately 99 percent of the depot maintenance

workload, while the report to Congress estimated that this depot

maintenance work would be more or less evenly divided between the

private sector and military depots.

The Air Force recently completed a detailed analysis of scheduled

airframe depot maintenance costs for the B-2 aircraft, comparing the

service’s 1995 estimate (when the Air Force decided to contract for B-2

support) with the contractor’s actual costs. The review found that

scheduled depot maintenance of the airframe cost more than twice what

was originally estimated and that while a portion of this increase was due

to changes in work requirements, the large majority was due to the

contractor’s cost omissions and cost increases. This analysis concluded

that having the Air Force perform airframe maintenance at any of four

military facilities would cost less over the system’s estimated 20-year life

span.7

 Furthermore, the Air Force’s ongoing reassessment of the B-2 depot

support approach for components and avionics items thus far indicates

that the contractor’s total cost estimate for these items for 1995 may have

been understated by at least 52 percent. (For details on the Air Force’s

1995 decision to contract for B-2 logistics support and its latest review of

the 1995 decision, see app. II.)

DOD’s pilot programs that are meant to test the cost-effectiveness of

contractor logistics support may not provide data useful enough to

adequately assess the different logistics support approaches. The pilots

will not provide sufficient measurable results for several years, and the

results will not differentiate between the effects of the various changes

being tested in a specific weapon system. We found that the pilot

programs’ test schedules are unlikely to produce sufficient and timely data

and that test results may not demonstrate a clear link to specific concepts.

The Air Force believes that lessons learned from 10 Air Force, 10 Navy,

and 10 Army pilot programs will provide sufficient evidence to support a

decision to expand reliance on the private sector for logistics support.

 7

 The quality of the data generated by the Air Force’s financial systems creates a degree of

uncertainty regarding these estimates, but it represents the best data available.

Pilot Programs May Not

Provide Data to Support

Expansion of

Reengineering Approach
Page 8 GAO-01-618 Defense Logistics

However, the pilot programs face problems in evaluating the costeffectiveness of logistics reengineering concepts, such as the long-term

use of contractors to replace government personnel. Consequently, even if

savings do eventually occur, it will not be clear whether they come from

any one reengineering concept or from other program changes.

One example of such uncertainty is the F-117 pilot program, which is

testing ways to reduce sustainment costs and improve aircraft

performance through such initiatives as downsizing the system program

office, transferring some aspects of performance responsibility to a

contractor, using a long-term contract, providing stabilized funding, and

modernizing through spares.8

 However, according to the F-117 program

office, the data will not allow the Air Force to differentiate each initiative’s

impact on the pilot program’s overall success. The transfer of logistics

functions, such as transferring supply management to the contractor, for

example, is supposed to reduce program management costs by $80 million.

But the pilot program’s approach analyzes overall system performance

measures, not discreet tasks, and the program office is not collecting

detailed information on individual support tasks.

While data are not available to compare contractor logistics support

approach expectations with actual results, information on actual

contractor performance against contract requirements indicates that,

generally, the Air Force is satisfied with contractors’ performance and

weapons systems’ performance. Overall indicators show that contractors

generally meet or exceed established performance criteria contained in

their contracts and that weapons systems that use contractor logistics

support meet the operating commands’ supply performance standards.

According to the Air Force Materiel Command’s contractor performance

reports, program mangers evaluated most contractor performance as

having met and in some cases exceeded all contractual requirements from

1994 through 1999. Contractors’ performance is evaluated through various

measures specified in their contracts, such as meeting delivery schedules

and product quality standards. Program offices conducted periodic

assessments of whether contractors met these measures in order to make

award fee decisions, and they completed annual performance assessment

 8

 Modernization through spares involves replacing outdated components with new

components with greater reliability, maintainability, or supportability.

Management Data Show

Satisfaction With

Contractor Logistics

Support

Contractors’ Performance

Generally Meets Contractual

Requirements
Page 9 GAO-01-618 Defense Logistics

reports.9 While not all contractors met contractual expectations, most did.

(See table 1.)

Table 1: Contractors’ Overall Performance Ratings From 1994 Through 1999

Percent

Rating Calendar year

1994 1995 1996 1997a1998 1999

Exceptional 19 22 24 N/A 26 25

Satisfactory to very goodb 70 68 66 N/A 64 68

Marginal 9 8 9 N/A 9 6

Unsatisfactory 2 2 1 N/A 1 1

Legend

N/A = not applicable

a

Data for calendar year 1997 are not available.

b

In calendar year 1998, DOD split the “satisfactory” category into two categories—”satisfactory” and

“very good.” For consistency, we combined these two categories for calendar years 1998 and 1999.

Source: Air Force’s contractor performance reports.

Operating commands reported that weapons systems supported by

contractors met their supply-related performance standards. We compared

the Air Combat Command’s supply-related performance data with the

command’s standards10 for 16 aircraft systems supported by contractors

and military depots and found that the systems supported by contractors

typically met or exceeded applicable performance standards. (See fig. 1.)

 9

 Air Force Material Command Instruction 64-107 provides guidance on the preparation and

reporting of contractor performance assessments.

10 The military has various metrics for measuring weapons systems’ readiness and

performance. We used the “nonmission capable supply” metric to assess how well

contractor logistics support affects aircraft readiness. According to Air Combat Command

officials, this is the metric that best reflects contractors’ performance.

Contractor-Supported Weapons

Systems Met

Supply-Related Performance

Standards
Page 10 GAO-01-618 Defense Logistics

Figure 1: Comparison of Contractors’ and Military Depots’ Performance in Meeting

Air Combat Command Spare Parts Standards for 16 Aircraft Systems, Fiscal Years

1990-2000

Note: Because each aircraft system has a different spare parts nonavailability standard, we

normalized the standards so that 100 percent represents the standard for each aircraft system.

Consequently, data points on this chart above 100 percent indicate that, on average, the standards

were exceeded. Also, of the 16 systems reflected in this chart, military depots support 9 systems, and

contractors support 7.

Source: Air Force’s data.

In fiscal year 2000, the Air Combat Command established interim goals for

the availability of parts that took into account reported shortfalls in the

funding for spare parts. Using these interim goals for the performance

comparison instead of the parts availability standards, military depots’

performance would have closely matched that of contractors in fiscal year

2000.

Air Force Combat Command officials stated that funding priorities should

be considered when assessing these data. They pointed out that

contractor-supported systems are usually in high demand and have few

aircraft. As a result, they have a higher funding priority than military

depot-supported systems, which generally have large numbers of aircraft.

Air Combat Command, for example, has 44 F-117 fighters, which are high-
Page 11 GAO-01-618 Defense Logistics

demand aircraft managed and supported by a contractor, and 303 F-16

fighters, which are managed by an Air Logistics Center and supported by

military depots and contractors. According to command officials,

whenever the budget faces reductions or unforeseen requirements for

contingency operations, the F-16 typically faces a proportionally greater

budget cut than the F-117 or other contractor-supported aircraft.

The Air Force’s limited amount of experience with using both the Air

Force depots and contractors to perform like depot maintenance work

does not provide a sufficient basis to evaluate performance. Furthermore,

a comparison of contractors’ and Air Force depots’ repair prices may be

limited because the quality of financial data generated by the Air Force’s

accounting systems is questionable, and for contractor-managed systems,

data that are reported under contract may not provide detail at the

component-level.

11 Notwithstanding these concerns, the few cases where

price data were available to make such a comparison showed mixed

results. We found only three such cases involving large and comparable

depot-level maintenance: overhauls of KC-135 and B-1 aircraft, and repairs

of components for aircraft and missile guidance systems.

Contractors’ prices for overhauling these two aircraft systems were

relatively higher than those of Air Force depots’.

12 Figure 2 shows the

average airframe overhaul price for 447 KC-135 aircraft (245 at Air Force

depots and 202 at contractor facilities). The higher price of Air Force

overhauls in 1996 was due to wiring modifications that Air Force depots

began that year. The contractor began performing the same modifications

in 1997. As for the B-1, we previously reported that overhauls performed

 11 See Air Force Supply Management: Analysis of Activity Groups’ Financial Reports,

Prices, and Cash Management (GAO/AIMD/NSIAD-98-118, June 8, 1998). As discussed in

our May 2001 testimony on the results of auditors’ review of the Department’s fiscal year

2000 financial statements (GAO-01-681T), DOD does not yet have the systems and

processes in place to capture the required cost information.

12 The KC-135 is the only Air Force aircraft that currently uses both contractors and Air

Force depots for overhauling airframes in the United States (the Air Force uses foreign

contractors to support some aircraft overseas). Until 1998, both an Air Force depot and a

contractor overhauled the B-1 bomber. Currently, all B-1 overhauls are performed at an Air

Force depot.

Data Are Insufficient

to Compare Depot

Maintenance

Performed by

Contractors With

Maintenance

Performed by Military

Depots

KC-135 and B-1 Overhauls
Page 12 GAO-01-618 Defense Logistics

by a contractor were priced twice as high as they would have been if an

Air Force depot had performed them.13

Figure 2: Comparison of Average Airframe Overhaul Prices for KC-135 Aircraft as

Performed by Air Force Depots and Contractors, Fiscal Years 1996-2000

Source: Air Force’s data.

The Air Force initially estimated that it would save about $5 million a year

by privatizing the repair of components for aircraft and missile guidance

systems at a Newark, Ohio, facility. Instead, as we reported in 1997, the Air

Force was paying about 16 percent more than it would have, had it

continued to operate the facility.14 Cost increases were due to material

costs, government costs for contract administration and oversight, and

 13 See Air Force Depot Maintenance: Information on the Cost-Effectiveness of B-1 and

B-52 Support Options (GAO/NSIAD-97-210BR, Sept. 12, 1997).

14 See Military Base Closures: Lack of Data Inhibits the Cost-Effectiveness Analyses of

Privatization-in-Place Initiatives (GAO/NSIAD-00-23, Dec. 20, 1999).

Components for Aircraft

and Missile Guidance

System
Page 13 GAO-01-618 Defense Logistics

award fees. The facility was privatized in response to a 1993

recommendation by the Base Realignment and Closure Commission.

Comparisons of contractors’ and the Air Force depots’ repair price data

for similar component repair workloads is inconclusive in determining

whether one entity is a more cost-effective source of component repair.

Contractors and Air Force depots both repaired 28 components in ways

and under conditions that allow for an objective comparison of their

performance.15 In addition, pricing data were available for both Air Force

and contractor component repairs. However, as discussed previously,

DOD’s pricing data are of questionable reliability. Such reliability concerns

notwithstanding, pricing comparisons are not conclusive. The Air Force

depots’ prices were lower for 16 of the 28 components. For example, a

contractor repaired a radio circuit card for $1,680 each, while the Air

Force depot did so for $624 (63 percent less); another contractor repaired

an engine augmentor16 for $4,742 each, while the Air Force depot made the

repair for $1,930 (59 percent less). However, contractors’ repair prices

were lower for the other 12 components. For example, an Air Force depot

repaired an F-16 multifunction display for $4,583 each, while the

contractor repaired it for $2,118 (46 percent less); another Air Force depot

repaired an F-16 radar receiver circuit card for $2,754 each, while the

contractor repaired it for $775 (72 percent less).

Our analysis also showed that, overall, Air Force depots and contractors

performed their work at acceptable levels for the components comprising

our sample. Air Force officials stated they had no problems with the

quality of the Air Force depots’ recent performance. However, two

contractors have recently had problems with meeting their delivery

schedules, a third contractor was replaced by an Air Force depot because

of concerns over the decreasing quality of the contractor’s repair work,

and a fourth contractor was replaced by another firm because the original

contractor defaulted on the work.

 15 We reviewed 54 components from an Air Force list of components repaired at both Air

Force depots and contractor facilities. These components had significant variances

between the Air Force depots’ and contractors’ repair prices. For 26 of the 54 components,

the repairs performed by Air Force depots and contractors were not the same or did not

have sufficient data available to analyze relative cost and performance.

16 The augmentor drives afterburner fuel nozzles.

Component Repairs
Page 14 GAO-01-618 Defense Logistics

According to Air Force Materiel Command officials, the cost of repair is

not the condition driving where repairs are performed. In some cases, we

found that meeting the depots’ core capability requirements and fully

utilizing depots’ repair capacity in order to comply with the laws governing

the public-private depot workload mix were the reasons for using a

military depot when available data indicated that the contractor was the

less expensive repair source.17 For example, the Air Force repairs

expandable program display generators for the F-16 at one of its depots to

satisfy these requirements, even though a contractor repairs this item for

19 percent less. More expensive repairs by contractors were used to

supplement shortfalls in depots’ capacity and to facilitate workload

transfers brought on by the closure of two Air Force depots. Additionally,

according to these officials, the Air Force’s approach is to maintain both a

commercial and in-house source of repair to meet potential surge and

contingency requirements for some components.

Major operating command officials have raised concerns about the impact

on their operations that may result from the expanded use of contractor

logistics support. They are concerned that expanding the approach may

(1) limit their funding flexibility, (2) limit their operational authority, and

(3) reduce program offices’ ability to perform essential management

functions. Additionally, Air Force Material Command logistics officials are

concerned that not acquiring technical data for a new weapon system,

along with the widespread use of contractor logistics support, may, in

effect, force the Air Force to obtain support from a single private source,

limiting competition among suppliers. The Air Force is taking actions on

these concerns, but all issues have not been fully addressed.

Funding flexibility. Air Force operating command, program office, and

budget officials generally believe that logistics support contracts, to a

degree, represent fixed obligations and limit operating commands’ ability

to transfer funds in and out of various weapons systems’ budget accounts

to adjust for changing requirements or budget cuts. Air Force headquarters

officials stated that the operating commands have always been able to

accomplish their missions in spite of funding constraints and that they will

 17 10 U.S.C. 2466 prohibits the use of more than 50 percent of funds made available in a

fiscal year for depot-level maintenance and repair for private-sector performance. 10 U.S.C.

2464 provides for a core logistics capability that is to be identified by the Secretary of

Defense and is government owned and operated. These provisions can limit the amount of

depot-level maintenance and repair work that can be performed by contractors.

Major Commands’

Concerns About

Expansion of

Contractor Logistics

Support Have Not

Been Fully Addressed
Page 15 GAO-01-618 Defense Logistics

continue to do so, notwithstanding decreased funding flexibility.

Command officials agreed that they have been able to accomplish their

missions in spite of funding constraints but reiterated that such

constraints may increase as their ability to transfer funds decreases. These

officials could not specify at what point the reduced funding flexibility

associated with the expansion of contractor logistics support might

adversely affect their ability to accomplish their missions.

Operational authority. According to Air Force Space Command

officials, including unit-level maintenance in sustainment contracts

managed by Air Force Materiel Command would give another command

the final decision-making authority over this aspect of unit operations. The

officials were concerned that this could potentially diminish a unit

commander’s ability to effectively manage the basic maintenance of the

unit’s equipment. They cited the example of a fiscal year 2000 Air Force

Materiel Command proposal for sustaining the Global Positioning System,

which included unit-level maintenance. These officials stated that

sustainment contractors’ responsiveness to a unit’s requests for critical

maintenance functions under such a management arrangement could be

slow or nonresponsive to the operating unit’s needs and could thus affect

readiness. In response to this concern, Air Force headquarters officials

stated that final decisions on changes to operational-level maintenance

that result from reengineering logistics initiatives can occur only with the

operating command’s approval.

Program office functions. Program office and command officials alike

are concerned that the widespread contracting of logistics support may

create a “brain drain” that would limit the Air Force’s ability to effectively

manage logistics support and deplete the resources and expertise needed

to monitor program performance and oversee contractors. For example,

the F-117 program office’s staff was reduced by three-fourths as a result of

the new support contract, and officials fear that similar staff cuts in other

programs would severely curtail the service’s ability to perform such

fundamental tasks as evaluating the cost-effectiveness of modifications

and upgrades proposed by contractors, being aware of a system’s overall

health, and evaluating or negotiating contract proposals. In other words,

these officials are concerned that the Air Force may lose the technical

resources needed to ensure that the government’s best interests are taken

into account during subsequent contract negotiations or new workload

competitions. The Air Force expects to complete an ongoing assessment

of the necessary logistics management functions by September 2001.

However, discussions with the assessment team managers indicated that

not all logistics functions are being addressed in this assessment.
Page 16 GAO-01-618 Defense Logistics

Consequently, the effort likely will not adequately address the concerns

raised.

Program offices do not always obtain the technical data of a new weapon

system. Air Force Materiel Command logistics officials are concerned

about the way the Air Force acquires technical data18 for weapons systems

because the current trend may hinder efforts to develop a competitive

base of logistics support providers. Competitive sourcing support is a key

element of the logistics reengineering strategy, and DOD’s acquisition

regulations19 require that program managers provide long-term access to

the technical data needed for competing a system’s support throughout its

life cycle.

In October 2000, the command completed a review of 31 repair source

decisions for Air Force systems and concluded that in at least 9 cases,

program offices either had not included a provision in the acquisition

contract to obtain rights to technical data or had secured rights to the data

through an unpriced contract option. If the Air Force does not purchase

technical data with a new system, the program office will have to rely

heavily on a single contractor (usually the system’s manufacturer) for

maintenance and will have little or no opportunity to compete the

workload. Furthermore, when the time comes to negotiate a price, the

data can be prohibitively expensive because the production contract will

have been awarded by this time and the contractor will have less incentive

to offer a lower price. Air Force officials believe that, in order to avoid this

problem, program offices should include a priced option for the purchase

of technical data when proposals for new weapons systems or

modifications to existing systems are being considered—in other words,

when program offices are still in a position to bargain. Air Force

headquarters officials agreed that affordable technical data have not

always been available, but they have not yet adopted an approach for

addressing this concern.

 18 Technical data include descriptions and drawings that provide the necessary level of

detail to repair and maintain items or equipment purchased and, in some cases, to produce

needed component repair parts.

19 Mandatory Procedures for Major Defense Acquisition Programs (MDAP) and Major

Automated Information System Acquisition Programs, DOD 5000.2-R (June 2001).

Technical Data Needed to

Ensure Competitive

Pricing
Page 17 GAO-01-618 Defense Logistics

The Air Force is unable to assess the cost-effectiveness of past contractor

logistics support decisions for weapons systems and ongoing pilot

programs. The Air Force monitors contractors’ performance against the

negotiated performance and costs expectations—not against the initial

cost and performance estimates that led to the decision to use contractor

logistics support. Also, the Air Force is uncertain of which logistics

support approaches are most appropriate to the different characteristics

of various weapons systems, such as the number of aircraft in a fleet and

the uniqueness of equipment and spares contained in a system. Without

this basic management information, the Air Force is uncertain of which

logistics support approaches will provide the best return on investment in

terms of cost and system readiness for the service’s constrained logistics

support dollars. The B-2 program, which retained its documentation for

logistics sustainment decisions, is using these data to reassess its initial

logistics support decisions and explore more cost-effective alternatives.

Also, the overall impact of implementing contractor logistics support

approaches may cause adverse operational and contract management

situations. These relate to the areas of funding flexibility and operational

authority for operational commands, loss of program office capability, and

ensuring the consideration of technical data needs for future maintenance

actions and workload competitions. However, these have not been fully

considered as the contractor logistics support approach decisions are

being made and expanded.

We recommend that the Secretary of Defense direct the Secretary of the

Air Force to enhance accountability over logistics support decisions by (1)

developing a requirement to have program managers of weapons systems

retain documentation for logistics support decisions, including that for the

ongoing pilot programs, and conduct periodic assessments of these

decisions to assess their cost-effectiveness; (2) using the data from those

assessments to develop lessons learned information that can be used to

assess existing support strategies and new programs to identify the

conditions under which the various support approaches are likely to

achieve the most cost-effective results; and (3) using an existing corporate

senior-level forum to address issues raised by major commands about

expanding the use of contractor logistics support and to formally report on

solutions recommended and actions taken to address these issues.

Conclusions

Recommendations for

Executive Action
Page 18 GAO-01-618 Defense Logistics

In providing written comments on a draft of this report, the Department of

Defense generally concurred with our recommendations. (See app. III.)

The Air Force provided technical comments, which we incorporated as

appropriate.

With regard to the first recommendation that the Air Force develop a

requirement to retain documentation for logistics support decisions and

periodically assess the cost-effectiveness of these decisions, the

Department’s response concurred with the intent of the recommendation.

Nonetheless, the Department stated that as DOD migrates toward

performance-based logistics support arrangements, program managers

should focus on the current environment, rather than on historical

baselines. We agree that managers should ensure that contractors’

performance meets current requirements. In fact, our report notes that the

requirements for logistics support contracts are being met. However, in

performing baseline studies, which determined that contractor support

would be used to provide long-term logistics support, the Air Force

established an expectation that the contractor logistics support approach

was the most cost-effective alternative. By not using baseline studies and

data to evaluate the extent to which the selected logistics support option

met the baseline expectations, the Air Force has created an expectation

gap as to whether contractor support was the most cost-effective and

responsive logistics support alternative. This type of assessment can

provide a better basis for improving logistics support approaches for the

assessed system as well as providing lessons learned as input to future

logistics support decisions. Furthermore, while DOD plans to expand the

use of performance-based support arrangements, the degree to which the

Department will be successful in expanding this concept is uncertain.

Consequently, we continue to believe that assessing actual cost and

performance against historical baselines would provide a useful tool for

managing logistics support approaches for weapons system programs.

With regard to the second recommendation that the Air Force use

assessments of documentation for logistics support decisions to develop

lessons learned for improving support strategies for existing and new

programs, the Department concurred and stated that the Air Force is

developing a product-support knowledge-management Web site as a

means for sharing logistics support lessons learned among weapons

system programs. While this a step in the right direction, unless the

historical baseline documentation discussed in our first recommendation

is retained and assessed against actual performance, the Air Force may not

have the information needed to develop lessons learned information

regarding the cost-effectiveness of a weapon system’s initial support

Agency Comments

and Our Evaluation
Page 19 GAO-01-618 Defense Logistics

approach decision. Furthermore, the expectation gap will not be resolved,

and questions will remain regarding whether the contractor logistics

support option is the most cost-effective long-term support approach.

With regard to the third recommendation in our draft report that the Air

Force establish a panel process for addressing the issues being raised by

major commands about expanding the use of contractor logistics support,

the Department did not concur with establishing a panel process to

address supportability issues raised by the Air Force’s major commands.

In its comments, DOD stated that the major commands’ interests are

maintained throughout the Air Force’s acquisition process, which includes

the development of the logistics support strategy. In addition, the

Department identified the Air Force’s corporate-level reviews that it

believes serve as effective forums for addressing the major commands’

concerns regarding the expanded use of contractor logistics support.

Finally, DOD’s comments specifically addressed the major commands’

issue of long-term access to the technical data needed for the logistics

support for weapons systems. This comment concluded that both DOD’s

and the Air Force’s policies requiring that program managers provide for

long-term access to technical data are sufficient. We believe that the

weapons systems acquisition process, which focuses on the individual

weapon system rather than on the major commands’ operational and

funding issues that cut across multiple Air Force programs, will not

adequately address the overarching issues we raised in our report.

Furthermore, while we agree that existing Air Force forums provide an

opportunity for discussing and addressing the major commands’ concerns,

the fact that these commands raised issues during our review evidences

that more work is needed. Accordingly, we modified our draft report’s

recommendation to state that the Secretary of the Air Force should task

one of its existing forums to review and address the issues that major

commands have raised on expanding the use of contractor logistics

support and to formally report on the solutions recommended and actions

taken to address the issues raised. Finally, we believe that the

Department’s comment on technical data missed our primary point, since

it did not address the concern that the high cost of technical data when

they are not acquired or priced at the time the system’s initial acquisition

may preclude the adoption of more cost-effective support options in the

future. Thus, while our revised recommendation no longer specifically

refers to “technical data” as one of the support issues to be addressed by

an Air Force forum, we continue to believe that it is important for the Air

Force to explore this concern. The Air Force may want to consider having

this important issue addressed.
Page 20 GAO-01-618 Defense Logistics

To determine the differences between cost-effectiveness estimates for

contractor logistics support approaches and actual implementation

experiences, we identified weapons systems that primarily relied on

contractor-provided logistics support through discussions with officials at

Air Force headquarters, system program offices, and logistics centers. For

these systems, we collected and reviewed available cost and performance

data, and to the extent that sufficient information was available, compared

initial estimates with actual results of contractors’ performance. For Air

Combat Command aircraft, we compared contractors’ and Air Force

depots’ performance with the command’s parts-availability standards as an

indicator of relative performance. We also reviewed data from the Air

Force’s assessment reports database on contractors’ performance to

determine how contractors performed against contract requirements.

Finally, we discussed the quality of contractors’ performance with

weapons systems program managers and representatives of major defense

contractors. We did not independently verify the quality of contractor

performance of logistics support.

To compare the performance of contractors and Air Force depots in terms

of cost and responsiveness for the same or similar work, we reviewed cost

and performance data for weapons systems and components repaired by

both Air Force depots and contractors. We collected, analyzed, and

discussed data regarding the relative performance of contractors and Air

Force depots for the workloads with logistics center and program office

officials, in addition to relying on our prior work and analyses to the

extent practical. In addition, for components, we obtained an Air Force

listing of the components repaired at both military depots and contractor

facilities,20 and reviewed 54 components for an analysis of repair costs and

performance. For the components selected, we met with the responsible

item managers, contracting officers, and equipment specialists to ensure

that the same repairs were being performed at both military and

contractor facilities. As a result, we determined that the repairs being

performed by the military and contractors were comparable for 39

components. We relied on the military’s and contractors’ repair cost data

provided by Air Force item managers, contracting officers, equipment

specialists, and production specialist. Of the 39 components with

comparable repairs, we determined that the circumstances surrounding

 20 The Air Force developed this dual-source list as part of an exercise to find depot-level

workloads that could be transferred from contractors to Air Force depots in order to avoid

not meeting the congressionally mandated requirement that at least 50 percent of depotlevel work must be performed in Air Force depots.

Scope and

Methodology
Page 21 GAO-01-618 Defense Logistics

the repairs of 11 components did not permit an objective comparison of

contractors’ and the military’s repair costs. For example, the Air Force

could not always identify the cost of government material provided to the

contractor for item repair when more than one type of component was

repaired under the same contract. In other cases, the contractors were

performing more extensive repairs or upgrading components in

conjunction with those repairs that the Air Force depots were not doing.

To determine to what extent the Air Force has addressed concerns raised

by major commands regarding the increased use of long-term contractor

support, we identified concerns with this logistics support approach

through discussions with Air Combat Command, Air Force Space

Command, Air Education and Training Command, Air Mobility Command,

and Air Force Materiel Command officials. We determined whether Air

Force headquarters had taken actions to address these concerns in its

pursuit of the expanded use of long-term contractor logistics support. We

then assessed the sufficiency of the actions through follow-on discussions

with major command officials and a review of the information collected

during the review relevant to each concern.

We met with officials at headquarters, U.S. Air Force; headquarters, Air

Force Materiel Command; System Program Offices; Air Combat

Command; Air Force Space Command; Air Mobility Command; Air

Education and Training Command; Aeronautical Systems Center; Ogden,

Oklahoma City, and Warner Robins Air Logistics Centers; Lockheed Martin

Palmdale; Northrop Grumman Palmdale; Boeing Aircraft Company-Long

Beach; Defense Contract Audit Agency-El Segundo, Defense Contract

Audit Agency-Palmdale; and Defense Contract Management AgencyPalmdale.

We conducted our review from November 2000 through June 2001 in

accordance with generally accepted government auditing standards.

We are sending copies of this report to the appropriate congressional

committees; the Secretary of Defense; the Secretary of the Army; the

Secretary of the Navy; the Secretary of the Air Force; and the Director,
Page 22 GAO-01-618 Defense Logistics

Office of Management and Budget. We will also make copies available to

others upon request. Please contact me on (202) 512-8412 if you or your

staff have any questions concerning this report. Key contributors to this

report are listed in appendix IV.

David R. Warren, Director

Defense Capabilities and Management
Appendix I: Recent Department of Defense

Studies on Logistics Restructuring

Page 23 GAO-01-618 Defense Logistics

The May 1995 report of the Commission on Roles and Missions of the

Armed Forces—Directions for Defense—identified a number of

commercial activities, including depot maintenance, that could be

performed by the private sector. The Commission concluded that the

privatization of such commercial activities through meaningful

competition was the primary path to more efficient support. It noted that

such competition typically lowers cost by 20 percent. The Commission

recommended that the Department of Defense (DOD) privatize most

existing depot maintenance work and all logistics support for new and

future weapons systems. In July 1996, we reported that the savings and

readiness assumptions of the Commission on Roles and Missions study

were based on conditions that do not currently exist for many military

depot workloads.1

 The study’s assumptions were based mainly on the

reported savings from public–private competitions for commercial

activities under Office Management and Budget Circular A-76. These

commercial activities were generally dissimilar to military depot

maintenance activities because they involved relatively simple routine and

repetitive tasks that did not require large capital investment or highly

skilled and trained personnel.

The Defense Science Board, a civilian advisory board to DOD, reported

in 1996 that DOD could realize savings of 30 to 40 percent of logistics costs

and achieve broad improvements in service delivery and responsiveness

by outsourcing support service traditionally done by government

personnel.2

 However, in reviewing the estimated savings from logistics

activities in the continental United States, the DOD Program Analysis and

Evaluation Office and we concluded that the board’s logistics savings

estimates were not well supported and were unlikely to be as large as

estimated.3

The 1997 Quadrennial Defense Review called on DOD to reduce its

support infrastructure and streamline its business practices. It proposed

 1

 See Defense Depot Maintenance: Commission on Roles and Mission’s Privatization

Assumptions Are Questionable (GAO/NSIAD-96-161, July 15, 1996).

2

 See Report of the Defense Science Board Task Force on Outsourcing and Privatization

(Aug. 1996) and Report on the Defense Science Board 1996 Summer Study on Achieving

an Innovative Support Structure for 21st Century Military Superiority: Higher

Performance at Lower Costs (Nov. 1996).

3

 See Outsourcing DOD Logistics: Savings Achievable But Defense Science Board’s

Projections Are Overstated (GAO/NSIAD-98-48, Dec. 8, 1997).

Appendix I: Recent Department of Defense

Studies on Logistics Restructuring
Appendix I: Recent Department of Defense

Studies on Logistics Restructuring

Page 24 GAO-01-618 Defense Logistics

that DOD (1) improve the efficiency and performance of support functions

by adopting innovative management and business practices, including

reengineering, downsizing, and commercializing operations, and (2)

consider outsourcing more non-combat-related DOD support functions,

inviting commercial companies to compete with the public sector to

undertake certain support functions. Regarding outsourcing, the

Quadrennial Defense Review stated that DOD’s experience thus far shows

that it can enjoy many of the benefits that private industry has gained,

including better service quality, more responsiveness and agility, better

access to new technologies, and lower costs. The report asserts that

outsourcing and privatizing would help to reduce infrastructure and

personnel costs and that savings would be achieved as a result of publicprivate competitions for the depot maintenance workload. However, the

report did not provide evidence to support the cost-effectiveness of these

proposed initiatives. Furthermore, as previously discussed, it is

questionable whether a sufficiently competitive market exists for the

depot maintenance workloads included in the Quadrennial Defense

Review’s initiatives.

The 1997 Defense Reform Initiative called for DOD to expand the use

of competitive sources to open DOD’s commercial activities to

competition from the private sector. The Defense Reform Initiative study

anticipated that DOD would be able to streamline its logistics support

through competition, citing reported savings from Office Management and

Budget Circular A-76 competitions and the C-5 aircraft competition. The

study reports that increased public-private competition will improve the

performance of military depot maintenance. As discussed above, the

Circular A-76 competitions involved commercial activities that were

generally dissimilar to depot maintenance activities and, consequently, do

not provide evidence to support the cost-effectiveness of outsourcing

depot maintenance workloads. However, our reviews of the workload

competitions for C-5 aircraft maintenance and other Air Force depot

maintenance support DOD’s conclusion regarding the benefits of publicprivate competition for this workload. In total, the competitions resulted

in reported savings of $638 million over the life of the contracts. These

competitions involved capable competitors, which may not exist in all

cases. In a previous review, we reported that 91 percent of nonship depot

maintenance contracts were awarded on a sole-source basis.4

 Therefore, in

 4

 See Depot Maintenance: Contracting Approaches Should Address Workload

Characteristics (GAO/NSIAD-98-130, June 15, 1998).
Appendix I: Recent Department of Defense

Studies on Logistics Restructuring

Page 25 GAO-01-618 Defense Logistics

the absence of viable competition, the cost-effectiveness of the Air Force’s

ongoing outsourcing of depot maintenance and logistics support may be

limited.
Appendix II: Details on the Air Force’s B-2

Source of Repair Decision

Page 26 GAO-01-618 Defense Logistics

In fiscal year 2000, the Air Force began to assess the contractor’s

performance as part of the reexamination of its B-2 depot maintenance

support plan. This assessment has determined that airframe maintenance

costs are significantly higher than initial estimates. Furthermore, initial

estimates for component and avionics repair appear to be significantly

understated. DOD’s 1995 B-2 depot support report concluded that the B-2

depot maintenance workload for the various system modules should be

split between the contractor and the Air Force’s depot system. (See table

2.)

Table 2: Workload Placement for B-2 Depot Support Based on DOD’s February 1995

Report to Congress

Dollars in millions

Module Air Force depot Contractor

Airframe maintenance $415

Avionics repair $107

Software support 2,613

Components 49 11

Engine maintenance 125

Training systems 190

Total $281 $3,229

The Air Force has experienced a significant cost increase for airframe

depot-level maintenance over the contractor’s original estimates. While the

Air Force initially estimated that the contract cost for airframe

maintenance would be 18 percent higher than the Air Force’s depot costs,

DOD concluded that because the B-2 system was highly complex, had not

yet reached configuration maturity, and would inevitably have future

system modification requirements, the contractor should perform airframe

maintenance at the Air Force’s Palmdale facilities.1

 At the time of its 1995

depot support decision, DOD estimated that the scheduled depot

maintenance for the B-2 airframe would be $6.57 million per aircraft.

However, recent cost figures for this maintenance equated to $14.65

 1

 The contractor maintains B-2 aircraft at Air Force Plant 42, a government-owned,

contractor-operated facility in Palmdale, California.

Appendix II: Details on the Air Force’s B-2

Source of Repair Decision

Airframe Depot

Maintenance

Contract’s Cost Is

Significantly Greater

Than Originally

Estimated
Appendix II: Details on the Air Force’s B-2

Source of Repair Decision

Page 27 GAO-01-618 Defense Logistics

million per aircraft, an increase of about 123 percent.2 The Air Force has

analyzed the reasons for the cost growth and concluded that several

factors contributed to the increases.

• 47 percent of this cost growth was due to the contractor’s cost increases;

the most significant portion was due to increases in the estimated labor

rate.

• 36 percent of the cost growth was due to the contractor’s omitting the

costs for various requirements, such as engineering design and testing,

product support, and fire and security.

• 17 percent of the cost growth was due to maintenance requirements added

or changed by the government after the original cost estimates were

calculated.

After analyzing the estimated increases in the programmed depot

maintenance for the B-2, the Air Force began to evaluate alternative

support options for the airframe maintenance and concluded that three

alternative approaches are feasible for reducing airframe maintenance

costs. First, the study indicated that transferring the workload and using

government labor at any one of three existing government facilities would

be less costly alternatives over the system’s estimated 25-year life. Second,

the analysis determined that converting the contractor’s Palmdale

operations to performance by government employees would also be less

costly than the current approach. Third, the analysis determined that if the

contractor could establish a separate B-2 cost center within its costaccounting system, the result would mean a less costly approach than is

currently being used.

The Air Force has not made a decision on which if any of the three

alternatives it may adopt to address increased airframe maintenance costs

for the B-2. Regarding the first and second alternatives, the Air Force

determined that each alternative would require an up-front investment

cost of $112 million to $144 million, and program officials doubted

whether the program could secure such funding. Regarding the third

alternative, the Air Force began pursuing the establishment of a separate

B-2 cost center at the Palmdale facility in 1995. While the contractor

 2

 The estimated average depot-maintenance-cost-per-airframe increase is based on

comparisons between 1994 estimates and 1999 estimates, and both figures are expressed in

calendar year 2000 dollars.
Appendix II: Details on the Air Force’s B-2

Source of Repair Decision

Page 28 GAO-01-618 Defense Logistics

established its separate B-2 cost center in January 2001, its cost impact on

the B-2 and other military programs has not yet been analyzed by the Air

Force or the Defense Contract Management Agency. Consequently,

whether the separate cost center will achieve the desired cost reductions

for the B-2 program are not yet known.

The Air Force’s reassessment of the 1995 B-2 depot support report

indicates that the original contractor’s cost estimates for all components

and avionics items were understated by at least 52 percent on the basis of

the contractor’s cost estimates for nine B-2 subsystems. In 1999, the B-2

program office began a cost reassessment by reviewing the original cost

estimates for avionics and components from nine B-2 subsystems. In

comparing the revised estimates with the original estimates, the costs for

the nine subsystems exceeded the total original cost for all components

and avionics items included in the 1995 report. Because of the limited

detail in the 1995 report, we were not able to evaluate variances between

the 1995 and 1999 cost estimates for all of the components and avionics

items included in the 1999 reassessment. However, the 1995 report

included sufficient detail to compare revised and original cost estimates

for two items—the antenna and the defensive management subsystem. For

both items, the Air Force’s cost calculations, which are based on the

contractor’s current costs and estimates, indicate that the 1995 estimates

were understated by about 79 percent for the antenna and 96 percent for

the defensive management subsystem. The program office is currently

reassessing another seven B-2 subsystems, but the results are not yet

available. Consequently, we are not able to make a comprehensive

determination of the variance between the contractor’s earlier cost

estimates and estimates based on the contractor’s current cost

performance.

Original Estimate for

B-2 Components’ and

Avionics’ Depot

Maintenance Costs

Were Significantly

Understated
Appendix III: Comments From the Department of Defense

Page 29 GAO-01-618 Defense Logistics

Appendix III: Comments From the

Department of Defense
Appendix III: Comments From the Department of Defense

Page 30 GAO-01-618 Defense Logistics
Appendix III: Comments From the Department of Defense

Page 31 GAO-01-618 Defense Logistics
Appendix III: Comments From the Department of Defense

Page 32 GAO-01-618 Defense Logistics
Appendix IV: Staff

Acknowledgements

Page 33 GAO-01-618 Defense Logistics

Julia Denman, Larry Junek, Robert Malpass, John Strong, Bobby Worrell,

John Brosnan, and Stefano Petrucci made key contributions to this report.

Appendix IV: Staff Acknowledgements

(350022)

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