DEPOT

MAINTENANCE

Air Force Faces

Challenges in Managing

to 50-50 Ceiling

Statement of David R. Warren, Director, Defense Management Issues,

National Security and International Affairs Division

United States General Accounting Office

GAO Testimony

Before the Subcommittee on Readiness, Committee on

Armed Services, United States Senate

For Release on Delivery

9:30 a.m. EDT

Friday, March 3, 2000

GAO/T-NSIAD-00-112
1 GAO/T-NSIAD-00-112 Depot Maintenance

Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss the Air Force’s recent waiver of the

10 U.S.C. 2466 provision that places a 50-percent ceiling on the amount of depot

maintenance funds that can be used for work performed by the private sector.

The statute allows the Secretary of a military department to waive the 50-percent

requirement for purposes of national security. In notifying the Congress of the

waiver, the Secretary of the Air Force explained the need for the waiver primarily

because the private sector was needed to temporarily support maintenance that is

being moved from the closing Sacramento, California, and San Antonio, Texas,

depots to other military depots or private sector sources.1As you requested, my

testimony today focuses on the basis for the waiver and the likelihood that the Air

Force will need additional waivers in the future.

RESULTS IN BRIEF

The Secretary of the Air Force acted within his legal authority to waive the

10 U.S.C. 2466 requirement that not more than 50 percent of the funds made

available for depot maintenance work be performed by private sector contractors.

Although the Air Force explanation for the waiver was based primarily on the

need to use temporary repair contracts2 and temporary contract personnel3 to

1

These depots are closing as a result of 1995 decisions of the Base Realignment and Closure Commission to close

McClellan Air Force Base and realign Kelly Air Force Base. 2

These contracts are for short-term workloads performed by a contractor to support requirements during workload

transitions between sources of repair.

3 Temporary contract personnel performing depot maintenance at a government facility.
2 GAO/T-NSIAD-00-112 Depot Maintenance

support workloads at closing depots, these temporary contracts represent only a

minor share of the Air Force contract workload and did not in and of themselves

create the need for a waiver. A significant factor leading to the waiver were

previous Air Force actions that increased the private sector share of depot

maintenance work from 36 percent in 1991 to the 50-percent ceiling in 2000--

leaving little room to respond to emergencies.

Preliminary Air Force data indicates the Air Force will be close to the 50-percent

ceiling through fiscal year 2004. Yet repair costs for work already on contract are

increasing more than previously estimated. For example, long-term depot

maintenance contracts are expected to grow from $1.1 billion in fiscal year 2000

to $1.5 billion in fiscal year 2004. In addition, the Air Force is implementing

initiatives to outsource total systems support responsibility to the private sector--

including depot maintenance--for 64 new or modified systems, including the Joint

Direct Attack Munition, AC-130U Gunship, Sensor Fuzed Weapon, and Joint Air to

Surface Standoff Attack Missile. While the Air Force indicated a waiver should not

be needed beyond 2001, the increasing amount of the Air Force’s contract depot

maintenance work and future outsourcing plans create a significant challenge to

the Air Force in managing its depot maintenance work within the 50-percent

ceiling.
3 GAO/T-NSIAD-00-112 Depot Maintenance

BACKGROUND

Depot maintenance involves the repair, overhaul, and upgrade of military systems

and equipment as well as the subsystems and reparable components that make up

these systems. It is performed in either military depots or contractor facilities but

is sometimes performed at military bases by government civilians or contractor

personnel. The amount of depot maintenance work done by the public and

private sectors is governed by 10 U.S.C. 2466. The statute states that not more

than 50 percent of the funds made available in a fiscal year to a military

department or a defense agency for depot-level maintenance and repair can be

used by the private sector. This percentage applies to each military department.

The statute also requires the Department of Defense to annually report to

Congress regarding the depot maintenance funds used by the public and private

sectors in the previous year and to estimate the split in the future years. It also

requires GAO to review and report on the data submitted by the Department.4

The law permits the Secretary of a military department to waive the 50-percent

ceiling for a fiscal year if the Secretary determines it is necessary for national

4

DOD submitted its report on the 1999 data to the Congress in February 2000 and we are currently analyzing that data.

DOD is scheduled to report its outyear data by April 1, 2000 and we have 60 days to review and report on that data.
4 GAO/T-NSIAD-00-112 Depot Maintenance

security reasons and notifies Congress of the reasons for the waiver. Another

provision, 10 U.S.C. 2460, defines what work is considered to be depot-levelmaintenance. The definition of depot maintenance that was established by this

provision has resulted in increased reporting of depot maintenance costs by the

military departments in recent years.

On January 11, 2000, the Air Force notified the Congress that the Secretary of the

Air Force had approved a waiver of the 50 percent requirement for the Air Force’s

depot activities for fiscal year 2000. Specifically, the Secretary’s notification

stated that contracts were required to support workloads of the closing

Sacramento and San Antonio Air Logistics Centers that had either been moved to

other Air Force centers or redistributed between the private sector and the other

Air Force centers as a result of public-private competitions within the last 3 fiscal

years. According to the Secretary, during the same time period, the Air Force had

experienced abnormally high demands and unusually low mission capable rates5

for key warfighting assets. As a result, the Air Force reported that it had to enter

into temporary contracts to compensate for shortfalls in maintenance and repair

capabilities. The Secretary noted that private sector contractor workloads would

closely approach 50 percent in fiscal year 2000 and the addition of the temporary

contracts could result in private sector contractors exceeding the 50 percent

ceiling.

5

Mission capable rates represent the reported percent of unit aircraft that are capable of performing at least one of their

assigned missions.
5 GAO/T-NSIAD-00-112 Depot Maintenance

NEED FOR TEMPORARY PRIVATE SECTOR CONTRACTS

NOT THE MAJOR REASON FOR THE WAIVER

Given the broad language of the waiver provision and the discretion agencies have

in interpreting and implementing their own statutes, we do not question the legal

propriety of the waiver. However, the explanation for the waiver understates key

factors that led to the need for the waiver. While the waiver principally cites the

need to use temporary repair contracts and temporary contract personnel to meet

workloads created by closing depots, these temporary contracts represent only a

small share of the Air Force contract workload and did not in and of themselves

create the need for a waiver. A more significant factor was the increase in the

amount of other contract depot maintenance work in recent years that brought

the Air Force up to the 50-percent ceiling.

Use of Temporary Repair Contracts and

Temporary Contract Personnel Is Limited

Collectively, the temporary repair contracts and temporary contract personnel are

estimated to cost $135 million in fiscal year 2000. This represents about 4.4

percent of the $3 billion in depot maintenance work the Air Force expects to

contract with the private sector for fiscal year 2000.

To carry out the transition of workloads from two closing depots, the Air Force

awarded temporary contracts with private companies to provide interim depot

maintenance support until new sources of repair work are operational. Some of

these contracts were awarded as early as 1998. As shown in table 1, the Air Force
6 GAO/T-NSIAD-00-112 Depot Maintenance

estimates that it could spend $104 million on these contracts during fiscal year

2000.6

Table 1: Estimated Temporary Contracts for Fiscal Year 2000

Dollars in millions

Center Amount

San Antonio $87.5

Sacramento 8.0

Warner Robins 6.0

Oklahoma City 1.6

Ogden 1.3

Total $104.4

Source: Air Force data.

Air Force officials at the Oklahoma, Ogden, and Warner Robins Air Logistics

Centers told us they do not anticipate needing these contracts beyond fiscal year

2000. San Antonio officials told us some of their center’s temporary contracts

might be needed through fiscal year 2001.

Although the Secretary of the Air Force also justified the need for a waiver based

on the increased use of temporary contract personnel, the cost for them is not

significant in fiscal year 2000. Temporary contract personnel were seldom used in

Air Force depots prior to the need to support workloads transitioning from

closing depots to other sources of repair. As shown in table 2, increased use of

temporary contract personnel peaked in fiscal year 1999. Its use is projected to

decrease by about $92 million during fiscal years 1999-2000.

6

The Air Force has another $42.7 million in temporary contracts for fiscal year 2000. These are for private sector contracts

for engine workloads that were already included in contract projections and consequently would not further impact the 50-

50 position.
7 GAO/T-NSIAD-00-112 Depot Maintenance

Table 2: Temporary Contract Personnel Costs

Dollars in millions

Fiscal year

1997

Fiscal year

1998

Fiscal year

1999

Fiscal year

2000

Fiscal year

2001

$31.9 $61.7 $122.3 $30.5 $2.6

Source: Air Force data.

About $27 million of fiscal year 2000’s temporary contract personnel cost is to

support workloads moving from closing centers: $14.4 million at the Warner

Robins depot to support the C-5 aircraft, $7.2 million at the Sacramento depot to

support work on remaining KC-135 aircraft, and $5.4 million at the Oklahoma City

depot that is associated with engine workload.

Air Force Has Significantly Increased Use

of Contract Depot Maintenance

As shown in figure 1, the Air Force--consistent with its plans and policies--has

increased the private sector share of its depot maintenance work from 36 percent

in fiscal year 1991 to about 50 percent in fiscal year 2000.
8 GAO/T-NSIAD-00-112 Depot Maintenance

Figure 1. Contractor Depot Maintenance Workload Allocations from 1991 to 2000

Note: Data for fiscal years 1991-1995 came from a March 1996 DOD report to the Congress, Depot

Level Maintenance and Repair Workload. Data for fiscal year 1996 comes from our report,

Defense Depot Maintenance: Information on Public and Private Sector Workload Allocations

(GAO/NSIAD-98-41, Jan. 20, 1998). Data for fiscal years 1997-1999 came from DOD reports to the

Congress on depot maintenance workloads. Data for fiscal year 2000 came from the Air Force

Materiel Command. The fiscal year 2000 estimate includes $104 million for temporary repair

contracts.

Source: Air Force data.

While increasing the private sector share of the Air Force’s depot maintenance

workload is consistent with DOD’s policy to increase outsourcing of all types of

logistics support activities, including depot maintenance, the Department has

consistently said that it would manage its depot maintenance program within the

50-percent ceiling. However, because of various management decisions in recent

years, the Air Force now has little flexibility to respond to emergency contract

requirements and stay within the ceiling for private sector work.

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Fiscal Year
9 GAO/T-NSIAD-00-112 Depot Maintenance

The following show some decisions that have brought the Air Force to this point.

• The Air Force increased the use of long-term depot maintenance contracts to

support new systems. The cost of these contracts has increased from $600

million in fiscal year 1996 to $1.1 billion in fiscal year 2000, an increase of 83

percent. This contract maintenance category includes support for such

systems as the F-117, U-2, KC-10, C-17 aircraft, and various classified

programs.

• The closure of the San Antonio, Texas, depot resulted in the transfer of about

66 percent of the engine workloads performed at that facility--which is

estimated to be valued at about $545 million annually--to the private sector.7

• The closure of the Sacramento, California, depot resulted in the transfer of

aircraft repair work valued at about $57 million annually to the private sector. 8

• The closure and privatization-in-place of the Newark, Ohio, depot resulted in

the transfer of aircraft and missile guidance repair work valued at about $94

million annually to the private sector.

These actions, along with the need for temporary contracts to support the work

being transferred from Sacramento and San Antonio, caused the Secretary of the

Air Force to waive the 50-percent limitation.

AIR FORCE FACES MAJOR FUTURE CHALLENGE

IN MANAGING TO THE 50-PERCENT CEILING

The Air Force stated that the need for a waiver of the 50-percent requirement is

temporary and should not be required beyond 2001. However, preliminary data

shows that the Air Force will be close to the 50-percent ceiling during fiscal years

2000 through 2005. Further, maintenance work for systems already on contract is

7

The Air Force contracted out the F100-229 engine, with an average annual workload of $128 million, to United

Technologies Corporation Pratt & Whitney San Antonio, Inc. The Air Force held a public-private competition to determine

the future source of repair of the remaining engine work from the San Antonio depot. The public sector offeror, which

consisted of a public-private partnership of the Oklahoma City Air Logistics Center and Lockheed Martin Kelly Aircraft

Company, won the competition--with Lockheed getting about 60 percent of the workload, which is valued at about $417

million annually.

8

The Air Force held a public-private competition to determine the future source of repair for most of the closing

Sacramento depot workloads. The public offeror, which consisted of a public-private partnership of the Ogden Air

Logistics Center and Boeing Aerospace Corporation, won the competition--with Boeing getting about 39 percent of the

workload. Sacramento’s ground communication equipment workload was moved outside the competition to the

Tobyhanna Army depot based on a recommendation of the Base Realignment and Closure Commission.
10 GAO/T-NSIAD-00-112 Depot Maintenance

growing more than previously expected, and the Air Force is planning further

outsourcing of maintenance work for new and modified systems in the future.

While the Air Force has embarked on several courses of action to help manage its

workload under the 50-percent ceiling, the Air Force faces major challenges if it is

to stay under the ceiling.

The Air Force Secretary said that a waiver could be required in fiscal year 2001

because of the continuing need for temporary maintenance contracts to support

the workloads transitioning from closing depots. We found that the San Antonio

depot is planning to continue to use that temporary support for 2001 at an

estimated cost of about $38 million. Nonetheless, other contract maintenance

work is increasing that will likely make it necessary for the Air Force to seek

future waivers unless workloads currently performed or planned for the private

sector are brought into the military depot system.

We have not yet been able to review the latest Air Force estimates for depot

maintenance work to be performed in the public and private sectors during fiscal

years 2000-2004. Air Force officials told us these estimates are still under review

and will be submitted to the Office of the Secretary of Defense in time to support

the required April 1, 2000, report of future years estimates to the Congress.

Nonetheless, our March 1, 2000, report9 on last year’s 50-50 estimates stated that

9

Depot Maintenance: Future Year Estimates of Public and Private Workloads Are Likely to Change (GAO/NSIAD-00-69,

Mar.1, 2000).
11 GAO/T-NSIAD-00-112 Depot Maintenance

preliminary data from the Air Force showed that expenditures for depot

maintenance workloads on contract could exceed the 50-percent ceiling in the

coming years. We adjusted the Air Force data for fiscal year 2000 to account for

temporary repair contracts and it indicates that the Air Force would exceed the 50

percent ceiling by $35.5 million, as seen in table 3.

Table 3. Available Funding Flexibility to Stay Within 50 Percent Ceiling

Dollars in millions

Fiscal year

2000

Fiscal year

2001

Fiscal year

2002

Fiscal year

2003

Fiscal year

2004

($35.5 ) $11.4 $147.7 $130.3 $136.8

Source: Air Force Materiel Command 1999 Data, adjusted by GAO for estimated

temporary repair contracts in fiscal year 2000.

The data also shows the flexibility the Air Force will have for growth in contract

maintenance in future years, given projected workload allocations at that time.

Several categories of contract depot maintenance work are growing more than

what had been previously estimated for years 2000 and beyond. For example, a

February 2000 Air Force Materiel Command memorandum stated that two

categories of long-term contract maintenance--contractor logistics support and

interim contractor support--were projected to grow $48 million more than had

previously been projected for fiscal year 2000. Contract costs for these categories

were said to be expected to grow from $1.1 billion in fiscal year 2000 to $1.5

billion in 2004. Depot maintenance for newer weapon systems such as the C-17

and F-117, that use contractor logistics support, are increasing at a faster pace
12 GAO/T-NSIAD-00-112 Depot Maintenance

than originally anticipated. As these weapons systems age and additional aircraft

enter the inventory, these trends will likely continue.

The Air Force is also planning to contract out total system program responsibility-

-including depot maintenance--for 64 new and modified systems. Additionally, we

reviewed 13 programs that had entered the source of repair process --a DOD

procedure for determining whether new maintenance workloads will be

performed in the public or private sector—between September 1999 and February

2000. Eleven of the 13 programs, with an estimated repair cost of $85.2 million

during fiscal years 2000- 2006 are currently recommended for private sector

contract repair. We found that some new maintenance workloads were being

contracted out without completing the source-of-repair process. For example, in

October 1999, a contract was signed for installation of modification kits for

C/KC-135 aircraft, even though a source of repair analysis had not been

completed. This contract involves installation costs of about $157 million over a 5-

year period. At the same time, the maintenance contract workload is increasing

faster than earlier anticipated, as older systems are phased out of the inventory.

As a result, the public sector share of the workload will decrease, aggravating the

Air Force’s problem of maintaining the 50-50 share.

Air Force officials indicate that they have embarked on several courses of action

to improve its management of depot maintenance workloads with respect to the

50-percent ceiling, including
13 GAO/T-NSIAD-00-112 Depot Maintenance

• exerting more control over and management attention to the assignment of

work to the public and private sectors for repairs to new and modified systems

and components,

• reviewing work that is currently on contract for possible performance in a

public depot,

• increasing attention to the impact of future depot workloads in the acquisition

process when depot support strategies are discussed, and

• continuing mid-year assessments and actively monitoring programs for

workload shifts and changes in scope.

We have not yet seen that these actions have significantly affected the Air Force's

workload allocation problem.

Despite the increasing trend toward outsourcing, Air Force Materiel Command

officials stated that some opportunities exist to bring additional older workloads

from private sector contract repair into the military depot system. For example,

landing gear for various aircraft previously repaired on contract is being

transitioned into the Ogden depot. This workload represents an estimated annual

value of $9.7 million. Officials at all three remaining Air Force depots noted that

some opportunities exist to move other work to government depots, for example,

work that both military depots and contractors are splitting. However, they said

that these opportunities are limited to work on older systems. They noted that the

workloads the depots need are those that would infuse the military depot system

with new technologies, including component and aircraft repair work for newer

systems such as the C-17 and F-22 aircraft and the F100-229 and F119 engines.

This idea was supported by a recent memorandum from the Ogden Air Logistics

Center to the Headquarters, Air Force Materiel Command, which noted that
14 GAO/T-NSIAD-00-112 Depot Maintenance

maintaining core capability--the capability that is to support requirements in a

contingency situation--requires the depots to establish repair capability for new

and modified systems. Nonetheless, should new initiatives be adopted to bring

new work into the depots, they would require funding and time would be needed

to establish a repair capability.

In conclusion, given the outsourcing trends discussed above as well as the downturn that is expected in the public sector share as older systems are phased out of

the inventory, the Air Force faces major challenges remaining under the 50-

percent ceiling in the future.

Mr. Chairman, this concludes my statement. I am prepared to respond to your

questions at this time.

-- -- -- --

Contacts and Acknowledgments

For future questions regarding this testimony, please contact me or my Assistant

Director, Julia Denman at (202) 512-4290. Other individuals making key

contributions to this testimony included Mike Kennedy, Bruce Fairbairn, John

Brosnan, and Pam Valentine, Larry Junek, and John Strong.

(709479)
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