United States General Accounting Office

GAO Report to the Honorable

Walter B. Jones

House of Representatives

September 1998 DEFENSE DEPOT

MAINTENANCE

Weaknesses in the

T406 Engine Logistics

Support Decision

Methodology

GAO/NSIAD-98-221

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-280621 

September 14, 1998

The Honorable Walter B. Jones

House of Representatives

Dear Mr. Jones:

The Navy recently designated the V-22 aircraft’s T4061

 engine a

commercial item for purposes of logistics support and contracted with

Allison Engine Company, the engine manufacturer, for a support

arrangement known as “power by the hour.”2

 The V-22 aircraft, otherwise

known as the Osprey, is a new vertical take-off and landing aircraft being

fielded primarily for use by the Marine Corps, but also for the Navy and

the Air Force. You have raised questions about the methodology the Navy

used for its decision to have the engine maintained by the contractor. We

briefed you on July 16, 1998, and, as requested, are providing this written

statement of our findings. This report, as it relates to logistics support,

addresses (1) the criteria used in determining that the T406 engine is a

commercial item for purposes of exemption from establishing in-house

maintenance capabilities for new systems identified by the Secretary of

Defense under 10 U.S.C. 2464, (2) the rationale and support for the

decision to designate the T406 a commercial item, and (3) the extent to

which the cost-effectiveness of the decision was evaluated.

Background Logistics support decisions are a critical part of the weapon systems

acquisition process. They affect the ability of operational units to meet

mission objectives and they drive significant portions of the life-cycle

costs of military systems and equipment. Traditionally, the services

established in-house capabilities for maintaining and supplying parts for

most new systems. Nonetheless, the services have also used a combination

of military and contractor support for maintaining and repairing military

systems and equipment. At the same time, a limited, but growing, number

of commercial items or commercial derivatives are being supported over

1

The T406 engine carries a commercial designation of AE1107C and is the turbo-shaft member of the

Allison Engine Company’s AE family of engines. In this report, we refer to this engine as the T406.

2

Under a power-by-the-hour arrangement, the contractor provides fixed-cost maintenance based on

the number of hours flown each year. Using this concept, the customer provides a fixed level of

funding and expects, subject to some exclusions, to receive a given level of support by the contractor.

The contractor expects to be provided a fixed level of funding up front and anticipates a long-term

support arrangement.

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the life of the systems through contractor logistics support,3 generally

through contracts with the original equipment manufacturer. Department

of Defense’s (DOD) policy guidance for supporting military systems, issued

in March 1996, calls for contractor logistics support for most new systems.

Our prior work shows that DOD is moving toward greater reliance on the

private sector for maintenance.4

 In line with this evolving strategy, the

Navy has adopted a depot maintenance strategy that provides for

performing core5

 maintenance capability in military depots and

contracting out noncore workload to the private sector when it is

cost-effective to do so.

Various statutes affect the mix of depot maintenance workloads between

the public and private sectors. The provision directly affecting the issues

discussed in this report is 10 U.S.C. 2464, which requires the Secretary of

Defense to identify and maintain a core logistics capability that is

government-owned and -operated unless the Secretary specifically waives

that requirement. The 1998 Defense Authorization Act, Public Law 105-85,

amended 10 U.S.C. 2464 to require that repair capability be established in

military depots for a new system that is identified as a core system (except

special access programs, nuclear carriers, and commercial items) within 

4 years of a system’s achievement of initial operational capability. The

determination as to whether an item is a commercial item for purposes of

meeting this exception to 10 U.S.C. 2464 is a matter of agency judgment.

The agency determination will be upheld unless shown to be

unreasonable. Moreover, there is no requirement that the agency

document the bases for those determinations, or to maintain any

supporting documentation.

On September 10, 1996, the V-22 program office identified the V-22 T406

engine as a commercial item as defined in 41 U.S.C. 403 and decided to

procure the engine using a commercial item acquisition strategy, and then

to explore the option of using contractor logistics support. Early in 1998,

subsequent to the amendment to 10 U.S.C. 2464, the V-22 program office

determined that the T406 engine was a commercial item under 10 U.S.C.

2464. Accordingly, the engine could be excluded from the 10 U.S.C. 2464

requirement for establishing a core logistics capability. Subsequently, on

3

Contractor logistics support is contractor-provided, long-term, total life-cycle logistics support that

combines depot level maintenance along with wholesale and selected retail material management

functions.

4

Defense Depot Maintenance: DOD Shifting More Workload for New Weapon Systems to the Private

Sector (GAO/NSIAD-98-8, Mar. 31, 1998). Also, see DOD Regulation 500.2-R.

5

Core capability is the equipment and resources required to be maintained in government facilities to

assure having the ability to respond to contingency situations and to otherwise provide mission critical

activities.

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March 2, 1998, the Naval Air Systems Command decided that the engine

did not require a core depot maintenance capability because of the

commercial item determination. Between March and April 1998, the

program office negotiated a contract modification with Allison Engine

Company to finalize the number of engines to be procured and to provide

for logistics support. During this period, the Navy also conducted a cost

analysis of contractor logistics support and completed a cost analysis

comparing contractor logistics support with military support.

Subsequently, on May 8, 1998, the Navy finalized its T406 engine logistics

support decision and executed the contract modification that included

both the purchase of 287 T406 engines and the logistics support for those

engines that will be operational between fiscal year 1999 and 2003.

During the first 6 years of logistics support, we estimate that those

logistics support costs will range from $6 million to $19 million, based on

an initial cost of approximately $200 per flying hour. Over the early years

of the program, the relatively small numbers of aircraft and engines in the

system will limit the overall flying hours and the support costs for the

engine. However, as the number of engines increase over the next 

20 years, these costs would be expected to increase proportionately with

the growth of the flying hour program. The estimated logistics support

costs for a 55-year period is $2.3 billion.

The T406 contract has a separate line item for logistics support for each

fiscal year, with different quantities of engines to be supported and

different hourly rates. The contract contains options for each of these

items, which the Navy may exercise by the specified dates.

Results in Brief As provided by 10 U.S.C. 2464, the Navy has determined that the T406

engine is a commercial item and that it is not required to establish

maintenance capability for the engine in a military depot. The

determination as to whether an item is a commercial one for purposes of

meeting this exception to 10 U.S.C. 2464 is a matter of agency judgment.

Given the discretion the agency has for making this determination, we

cannot conclude that the Navy’s judgment was unreasonable in

determining that the T406 engine is a commercial item. However, we

found that the Navy’s methodology for its commercial item determination

was inconsistent and poorly document.

Specifically, the Navy stated that it was relying on the contractor’s

assurance of 90-percent common parts between the T406 engine and

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others in the Allison engine family and also cited the technical judgment of

program officials. However, neither the Navy nor the contractor had

recently evaluated the extent of common parts in advance of the Navy’s

determination that the T406 was a commercial item. A subsequent analysis

was made by the Allison Engine Company to support the claim of

90 percent common parts, but our evaluation showed about 79 percent

common to at least one of the other engines in the AE family. The Navy

also stipulated that the limited number of engine modifications required to

produce the T406 engine was a factor in its commercial item

determination. However, data were not available to enable us to assess the

value of those engine modifications.

The Navy calculated that using contractor support rather than the military

support system would save $487 million over the 55-year life of the

program. Our limited review of that analysis identified significant errors

and inconsistencies that could both overstate and understate the

differences in cost between the two alternatives. For example, the Navy

did not consider the impact of a reduction in the T406 engine price on the

cost of other elements such as the estimated cost of spares, which resulted

in a net overstatement of the military alternative of $476.6 million.

Additionally, the Navy used a higher reliability factor for the commercial

alternative, which resulted in a $96.7 million understatement of the cost of

the commercial alternative. We discussed our findings with the Navy, and

Navy officials are continuing to update their analysis.

Logistics Commercial

Item Criteria

An item is exempt from the requirement in 10 U.S.C. 2464 regarding core

logistics capabilities if it is deemed to be a commercial item that has been

sold or leased in substantial quantities to the general public and is

purchased in the same form that is sold in the commercial market or with

minor modifications to meet federal government requirements. The basic

definition of a commercial item for the purposes of governmentwide

procurement is set forth in 41 U.S.C. 403 (12). That section states that a

commercial item is one of a type customarily used by the general public or

by nongovernmental entities for other than governmental purposes. There

is no requirement that the item have actually been sold—only that it have

been offered for sale.

In our view, to be considered a commercial item under 10 U.S.C. 2464, the

item would first have to meet the criteria set forth in 41 U.S.C. 403, along

with the added requirements that the item has actually been sold in

substantial quantities in the commercial market and meets government

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requirements with only minor modifications. The concept of minor

modifications also appears in 41 U.S.C. 403. Minor modifications, which

have been the subject of a number of bid protest decisions, are defined in

section 2.101 of the Federal Acquisition Regulation (FAR). Both the FAR and

our bid protest decisions provide that minor modifications are ones that

do not significantly alter the nongovernmental function or essential

physical characteristics of the item that is modified.

Factors to be considered in determining whether modifications are minor

include the value and size of the modifications and the comparative value

and size of the modifications to the final product. There is no definitive

test for assessing whether modifications are minor; the decision is left to

an agency’s judgment. Also, there is no requirement in the applicable

statute or regulation that an agency’s analysis supporting its commercial

item determinations must be documented.

Weaknesses in the

Navy’s Methodology

for T406 Commercial

Item Determination

Our review identified various weaknesses in the Navy’s methodology for

reaching its determination that the engine was a commercial item.

Although the Navy stated that the T406 had parts that were 90 percent

common to those in other engines in the Allison engine family, neither the

Navy nor the contractor had documented support for that position at the

time the Navy made its determination and we found that the subsequent

documentation overstated the percentage. Further, while the Navy stated

that the number of modifications was limited, neither the Navy nor the

contractor could provide us the value of the modifications required to

produce the T406 engine.

Navy Did Not

Independently Analyze the

Extent of Common Parts

Being Used

In making its February 2, 1998, commercial item determination under

10 U.S.C. 2464, the Navy stated that 90 percent of the parts in the T406

engine are common to Allison’s AE commercial family of engines.6

 While 

10 U.S.C. 2464 does not specifically contain a requirement for an analysis

of common parts, the Navy used the concept of common parts as an

indicator that the engine was a commercial item.

The Navy concluded that the engine was a commercial item based largely

on statements provided by the engine manufacturer that 90 percent of the

T406 engine’s parts were common to the AE family of engines. The Navy

6

According to the contractor, the AE family of engines includes the AE3007A and the AE3007A1, which

are in the Embraer ERJ-145 and ERJ-135 aircraft; the AE3007C, which is in the Cessna Citation X; the

AE3007H, which is in the Teledyne Ryan Global Hawk; the AE2100D3, which is in the Lockheed Martin

C-130J; the AE2100A, which is in the SAAB 2000; and the AE2100C, which is in the IPTN N-250.

Page 5 GAO/NSIAD-98-221 Navy Depot Maintenance
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also relied on program office officials’ expertise regarding technical

aspects of the aircraft and the engine. The program office did not make its

own assessment of common usage of parts between the T406 engine and

other engines in the AE family because, according to program officials, it

did not have access to information about the parts in Allison’s other

engines.

At the time the commercial item determination was made, neither the

Navy nor the contractor had completed a quantitative analysis to

document how common were the parts in the T406 engine with the other

engines. Contractor officials stated that they had performed a parts

number comparison in 1992, but they noted that this comparison was no

longer relevant because the numbers used to identify the parts had

changed since that time.

In response to our request, the contractor performed an analysis to

quantify how common were the parts. Comparing the parts in the T406

engine core with the parts in the core of other Allison engines, the

contractor concluded that about 90 percent of the parts in the T406 engine

core were common to one or more of the engines in the AE family.7

 To

verify the contractor’s calculations, we obtained parts lists for the T406

core and each engine core identified as being in the AE family of engines

and analyzed the extent to which common parts were in use. We measured

the parts from three perspectives, each of which resulted in a lower

indication of common parts than the Navy reported in its determination.

We found that common parts ranged from 44 to 79 percent, in contrast

with the Navy’s claim and the contractor’s subsequent statement that

90 percent were common.

In completing our analysis, we first measured common parts by using the

combined parts lists from the entire family of engines—the approach used

by the contractor in calculating 90-percent common parts. We found that

about 79 percent of the T406 parts are on at least one of the other engines

in the AE family. We determined that the difference between Allison’s

calculation of common parts and our calculation of 79 percent was caused

by their overstatement of the total number of parts used as a base for the

Allison calculation. We discussed our finding with the Allison officials

responsible for their analysis. Allison officials noted that to reduce

differences among the engines, they are continuing to make changes to

improve the extent to which common parts are in use.

7

While the Navy’s earlier statements did not specify the engine core as the basis of comparison, we

based our quantitative analysis only on part numbers in the engine core, as did the contractor.

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Second, we compared the T406 engine with the individual engines in the

AE family and determined that four of the engines had about 44 to

46 percent parts in common and the other three about 76 percent. (See

table 1).

Table 1: Our Analysis of Parts’

Commonality of T406 Engine and

Other Allison AE Commercial Family of

Engines Engine type

No. of parts in

common with

T406 engine

Percentage of

common parts

AE2100A 419 76.2

AE2100C 420 76.4

AE2100D3 416 75.6

AE3007A 245 44.5

AE3007A1 244 44.4

AE3007C 248 45.1

AE3007H 255 46.4

Weighted average of common parts 343 64.0

Third, to provide another perspective on the rate of common parts in use

across the Allison family of engines, we calculated a weighted average,8

which indicated that about 64 percent of the parts were common.

Moreover, there is a broad range of quantities and percentage of common

parts among the seven engine types. A weighted average provides one

means to gauge the volume of common parts across the family. Since

common parts’ usage is a significant driver in the ability to produce

logistics support cost reductions, we believe this can be an important

indicator in commercial item determinations.

Relative Value of T406

Modifications Not

Available

In making its commercial item determination, the Navy stated that it based

its decision also on the limited number of modifications required to

produce the engine. However, the Navy did not quantify the value of the

modifications required to produce the T406 engine or develop information

regarding the cost of the modifications relative to the overall engine cost.

Thus, the value of the changes required to modify the commercially used

engine to satisfy the Navy’s requirements is unclear. FAR 2.101 states that

the value and size of the modifications and the comparative value and size

of the final product are factors to be considered when determining

whether modifications are minor. The Navy did not develop data to

measure the comparative value and size of the T406 engine modifications.

8

To calculate the weighted average, we multiplied the number of each type of engines by the number of

common parts and then divided by the total number of engines to calculate a weighted per engine

average of common parts.

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We attempted to collect information regarding the value of the

modifications and the comparative value of the engines. However, the

Navy did not have this information and the contractor stated it would be

difficult to develop it. Accordingly, we were not able to obtain the

modifications cost information. We recognize that other factors in addition

to modifications could affect cost differences. Nonetheless, we did

determine that the Navy is paying significantly more for the T406 engine

than Lockheed Martin is paying for the AE2100D3 engine, an AE family

engine that closely resembles the T406 engine.9

Navy’s Evaluation of

Cost-Effectiveness

Having made the commercial item determination, the Navy decided to

evaluate the estimated difference in costs between performing repair and

maintenance activities in house and having it done by the private sector.

The Navy calculated that using a commercial source to repair the T406

engine would save about $487 million over the projected 55-year life of the

V-22 aircraft. We made a limited review of the Navy’s cost analysis and

found (1) inconsistencies between the way the Navy estimated the

in-house and commercial support costs and (2) significant errors in the

data used in the analysis. We did not determine the full extent of the errors

or the net effect on the cost estimate.

According to Navy officials, to award a logistics support contract for the

T406 engine, the outcome of the Navy’s cost analysis had to reflect savings

to the government through the use of a commercial source. In

August 1996, the Navy initially evaluated the comparative costs of

contractor versus military logistics support, projecting that contractor

support would be about $200 million more than military support over the

program’s life. Navy officials stated that they carefully reviewed the key

cost drivers and were able to reduce the cost of contractor support

through negotiations with the contractor. According to program office

officials, the Navy reduced the power-by-the-hour rate and engine price.

After negotiations, the Navy updated its cost analysis and projected that

contractor support would save $487 million over the life of the program.

Our review of the Navy’s analysis determined that when the Navy updated

its cost analysis to reflect the results of contractor negotiations, it did not

consider the impact of a reduction in the T406 engine price on the cost of

other elements, such as the estimated cost of spares.10 This factor affected

9

The AE2100D3 is used to power Lockheed Martin’s C130J aircraft. The Air Force is purchasing the

C130J using a commercial item acquisition strategy.

10The cost of spare parts was estimated by using a percentage of the cost of the engine.

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both the military and commercial cost projections and resulted in about a

$551.9 million overstatement of material costs to the military alternative

and about a $75.3 million overstatement of exclusion costs11 in the

commercial alternative—a net overstatement of about $476.6 million to the

cost of the military alternative. Navy officials said they inadvertently

overlooked this factor and did not adjust the cost analysis to reflect

changes resulting from changes to the engine price. Our review of the

Navy’s cost analysis identified other errors and/or omissions that could

both overstate and understate the differences in cost between both

alternatives. We found that the Navy

• did not include a cost estimate for jet fuel used in T406 test cells during

maintenance, which understated the military alternative cost by $5 million;

• did not include a cost estimate for the value of engine modifications for

the military alternative, which understated that alternative by an estimated

$36.8 million; and

• overstated the indirect logistics support cost in the commercial alternative

by an estimated $21.5 million.

We also identified inconsistencies in the assumptions used and in the way

data were collected. For example, the Navy used a higher engine reliability

factor for the commercial alternative, which resulted in a $96.7 million

understatement of the alternative’s cost. It also used a two-level

maintenance strategy for the commercial alternative but a three-level

maintenance strategy for the military alternative. Thus, the military

alternative included about $836 million for establishing and operating

intermediate maintenance capability.

V-22 program office officials stated that a two-level strategy was not

allowable under the Navy’s Operational Requirements Document. While

we did not independently review the potential costs and benefits of that

strategy for the military alternative, it would appear to have been a viable

option given that the Navy is pursuing a similar two-level strategy in-house

for another engine. With regard to historic engine repair cost data used to

estimate labor and material costs for the T406 engine, the Navy did not use

the same baseline data. For example, the Navy used fiscal year 1990

through 1994 data for the military option and fiscal year 1994 and 1995

data for the commercial option.

11Exclusion costs are those caused by abnormal operations; these costs are not covered by the

contractor’s power-by-the-hour rate. For example, repairs required as a result of misuse or negligence

are exclusion costs.

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We did not completely review the Navy’s cost analysis; therefore, we

cannot project what would have been the net effect of the errors and

omissions. At the time of our review, the Navy was continuing to correct

and update its cost analysis.

Conclusions Acting in accordance with the provisions of 10 U.S.C. 2464, pertaining to

core logistics capability, the Navy has determined that the T406 engine is a

commercial item and by virtue of that designation, that it is not required to

establish maintenance capability in a military depot within 4 years of the

establishment of operational capability. Given the discretion afforded

agencies in making such determinations, we cannot say that the Navy’s

action was unreasonable. However, we did find a number of weaknesses

in the methodology for its commercial item determination and an absence

of documentation to support that determination. Further, the accuracy of

the Navy’s life-cycle cost comparisons between military and contractor

alternatives is questionable due to data errors and omissions.

Recommendations This is the first commercial item determination DOD has made under the

requirements of 10 U.S.C. 2464 as it pertains to logistics support capability.

However, it is likely that other such determinations will be made in the

future. Thus, basic guidance should be provided on the type of supporting

data that should accompany such determinations. Accordingly, we

recommend that the Secretary of Defense:

• Issue guidance requiring the services to document in the contract file

support for their commercial item determinations under 10 U.S.C. 2464

and subsequent logistics support decisions. On the basis of our review of

the T406 case, examples of items that might be considered for

documentation include (1) percentage of common parts, (2) a comparative

value of the average sales price of the baseline commercial item with the

estimated price of the item that is the subject of the determination, (3) the

value of unique support and test equipment and tools required to support

the military requirement, and (4) a cost evaluation documenting that the

life-cycle logistics support in the private sector is expected to result in a

lower cost to the government.

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Additionally, we recommend that the Secretary of Defense:

• Require the Secretary of the Navy to complete a new and updated cost

analysis, correcting previous errors and inconsistencies, before executing

future option years under the current T406 contract.

Agency and

Contractor Comments

and Our Evaluation

DOD’s written comments on the draft of this report are presented in

appendix I. DOD agreed with our recommendation concerning a new and

updated cost analysis before executing future option years under the

current T406 contract. It disagreed with our recommendation concerning

the documentation of analyses supporting commercial item

determinations. DOD stated that such a requirement would impose a

stricter definition and criteria for commercial items subject to depot repair

than the legislative exemption for commercial items with minor

modifications. It also stated that our recommendation for a documented

analysis of percentage of common parts would restrict planned use of

commercial support for many current and future weapon systems, would

require system component assessments for which there is no standard

industry methodology, and would discourage many private sector

companies from doing business with the government.

The intent of our draft recommendation was that DOD establish a

consistent management process for documenting the support for

commercial item determinations and their cost-effectiveness under the

provisions of 10 U.S.C. 2464. In response to DOD’s concerns, we modified

our draft recommendation to make it clear the actions we listed were

meant to be illustrative.

We discussed our draft report with officials of Allison Engine Company.

These officials asked us to refer to the V-22 engine as the AE1107C rather

than the T406, the designation we used in the draft report. In response, we

added a footnote indicating that the commercial designation for the T406

is AE1107C. Allison officials also asked us to update our analysis to reflect

an additional 12 common parts that they had not identified to us. We

revised the figures contained in our draft report to reflect this contractor

update. Additionally, we made several minor technical changes to reflect

other contractor comments.

We made changes to the report, as appropriate, to address agency

comments.

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Scope and

Methodology

To identify the legal standards used in assessing the commercial status of

the T406, we interviewed responsible legal advisors at the Navy’s V-22

program office, Patuxent River Naval Air Station, Patuxent River,

Maryland; and the Allison Engine Company’s T406 Program Office,

Indianapolis, Indiana. We reviewed applicable statutes, regulations, and

relevant case law to identify the applicable commercial item criteria.

To assess the Navy’s rationale, justification, and support for designating

the T406 engine a commercial item, we interviewed Navy V-22 program

office officials at the Patuxent River Naval Air Station and Allison Engine

Company officials at the Allison T406 Program Office. Using the

commercial item criteria, we assessed compliance through discussions

with the Navy and Allison officials. We reviewed all documentation the

Navy provided to support its determination, and we independently

calculated the rate of parts commonality between the T406 and other

engines using parts lists Allison provided. We paralleled Allison’s approach

for calculating commonality rates across the family of engines, correcting

for inconsistencies between the numerator and the denominator used. To

calculate the commonality rates between the T406 and individual engines,

we performed a match of unique T406 parts to each individual engine in

the Allison family (as identified in table 1). To calculate the weighted

average of common parts, we multiplied the number of each type of engine

by the number of common parts and then divided by the total number of

engines to calculate a weighted per engine average of common parts.

To evaluate the extent to which the Navy evaluated the cost-effectiveness

of its decision, we interviewed and collected supporting documentation

from the cost evaluation team and V-22 program office officials at the

Patuxent River Naval Air Station, Maryland, and interviewed and collected

engine performance and cost data from officials at the Cherry Point Naval

Aviation Depot, North Carolina; Defense Contract Management Command

operating at the Allison Engine Company facilities, Indiana; and the Air

Force’s C130J Aircraft Program Office, Wright Patterson Air Force Base,

Ohio. We analyzed the supporting data to (1) determine whether the

assumptions the Navy used to structure its cost evaluation were

reasonable and consistently applied between the alternatives the Navy

evaluated and (2) identify errors in the Navy’s cost projections. Our cost

analysis was limited by the time we had available.

We conducted our review between May 8, 1998, and July 21, 1998, in

accordance with generally accepted auditing standards.

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We are sending copies of this report to the Chairmen of the Senate

Committees on Appropriations and on Armed Services and the House

Committees on Appropriations and on National Security; the Secretaries

of Defense and the Navy; and the Director of the Office of Management

and Budget. We will also make copies available to others on request.

Please contact me at (202) 512-8412 if you or your staff have any questions

concerning this report. Major contributors to this report are included in

appendix II.

Sincerely yours,

David R. Warren, Director

Defense Management Issues

Page 13 GAO/NSIAD-98-221 Navy Depot Maintenance
Contents

Letter 1

Appendix I 

Comments From the

Department of

Defense

16

Appendix II 

Major Contributors to

This Report

22

Table Table 1: Our Analysis of Parts’ Commonality of T406 Engine and

Other Allison AE Commercial Family of Engines

7

Abbreviations

DOD Department of Defense

FAR Federal Acquisition Regulation

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Appendix I 

Comments From the Department of Defense

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

Page 16 GAO/NSIAD-98-221 Navy Depot Maintenance
Appendix I 

Comments From the Department of Defense

Now on p. 10.

Now on p. 11.

Page 17 GAO/NSIAD-98-221 Navy Depot Maintenance
Appendix I 

Comments From the Department of Defense

Page 18 GAO/NSIAD-98-221 Navy Depot Maintenance
Appendix I 

Comments From the Department of Defense

See comment 2.

See comment 3.

See comment 4.

Page 19 GAO/NSIAD-98-221 Navy Depot Maintenance
Appendix I 

Comments From the Department of Defense

The following are GAO’s comments on the Department of Defense’s (DOD)

letter dated August 26, 1998.

GAO Comments 1. The intent of our recommendation concerning documentation of

commercial item determinations was not that a commercial item

designation be taken away. Rather, we were indicating the need for such

determinations to be well supported.

2. We recognize that program office officials have been working to deal

with problems identified during our review. That, along with their plans to

complete a new and updated cost analysis prior to executing contract

option years, should provide a more complete basis for assessing the

accuracy and completeness of data and expected savings.

3. We agree that the identified error in the Navy’s savings estimate

occurred after the negotiations over engine procurement and contractor

maintenance support were completed. The post negotiation rate update

referred to by the Navy involved an additional analysis by the Navy to

reassess contractor maintenance support costs. The Navy undertook that

update because at the time it had concluded its agreement with the

contractor for maintenance support, its analysis showed there were

additional costs, not savings, associated with contractor logistics support

versus in-house performance of this function. The update provided the

basis for a new cost savings estimate of $487 million from contractor

support. Our review raised questions about the reliability of the Navy’s

new estimate. Although the Navy has updated some of the data related to

its analysis of contractor maintenance support costs, it did not make a

similar update to the projected costs of in-house performance;

accordingly, it is not clear to us that the Navy has a full and complete basis

for an updated comparison of in-house versus contractor maintenance

support costs.

4. While DOD stated that there is a great degree of commonality between

the T406 and the Allison AE engine family and that many of the unique

parts have only slight or negligible differences, sufficient data were not

available to enable us to make such a determination. We attempted to

gauge the degree of differences between dissimilar parts by collecting cost

data on parts modifications, but the Navy and the contractor could not

provide such data. Thus, we cannot comment whether dissimilar parts are

likely to become common during full-rate production because our analysis

Page 20 GAO/NSIAD-98-221 Navy Depot Maintenance
Appendix I 

Comments From the Department of Defense

was limited to trying to determine the degree of commonality at the time

the commercial item determination was made.

Page 21 GAO/NSIAD-98-221 Navy Depot Maintenance
Appendix II 

Major Contributors to This Report

National Security and

International Affairs

Division Washington,

D.C.

Barry W. Holman

Julia Denman

Leticia Bates

Dallas Field Office Larry Junek

John Strong

Office of the General

Counsel

John Brosnan

Stephanie May

(709346) Page 22 GAO/NSIAD-98-221 Navy Depot Maintenance
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