United States Government Accountability Office

GAO Report to Congressional Committees

DEPOT 

MAINTENANCE 

Improvements Needed 

to Achieve Benefits 

from Consolidations 

and Funding Changes 

at Naval Shipyards 

September 2006 

 

GAO-06-989 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 2006

DEPOT MAINTENANCE

Improvements Needed to Achieve 

Benefits from Consolidations and 

Funding Changes at Naval Shipyards 

Highlights of GAO-06-989, a report to 

congressional committees 

To improve fleet support activities,

the Navy is consolidating 

maintenance facilities and 

converting its shipyards from 

financing under the Navy Working 

Capital Fund to funding through 

direct appropriations (direct 

funding). Puget Sound Naval 

Shipyard was converted to direct 

funding in 2003. The National

Defense Authorization Act for 

Fiscal Year 2006 directed the Navy

to assess the impact of converting

Puget Sound to direct funding and 

directed that GAO review the 

Navy’s report. The Navy submitted 

its report to Congress in March

2006, confirming its position that 

direct funding was more

advantageous than working capital 

funding and can best satisfy fleet 

maintenance priorities. GAO’s 

objectives were to evaluate the 

extent to which the Navy’s report

(1) provided data and other 

supporting evidence for its overall 

assessment of the impact of 

converting Puget Sound to direct 

funding, (2) addressed unresolved 

issues that had been identified in

prior studies, and (3) disclosed any 

other issues that have affected the 

implementation of direct funding. 

What GAO Recommends

GAO is recommending actions to 

improve total cost visibility,

performance measures, and 

information systems at naval 

shipyards, and DOD concurred.

GAO has added a matter for 

congressional consideration to

assist in addressing information 

system improvements. 

The Navy’s March 2006 report to Congress did not provide data and other 

supporting evidence for its overall assessment of the impact of converting 

Puget Sound Naval Shipyard to direct funding. While the Navy reported on 

the matters specified in the defense authorization act, it did not provide data 

needed to support the Navy’s position that direct funding was more 

advantageous than working capital funding and can best satisfy fleet 

maintenance priorities. More specifically, the report did not provide 

evidence that direct funding had provided for a more agile workforce—the 

ability to more easily move workers among maintenance projects in 

response to fleet priorities—which was a key benefit the Navy claimed was 

achieved by converting to direct funding. 

The Navy’s March 2006 report did not show data that adequately addressed 

two key issues—cost visibility and performance metrics—which had been 

identified as unresolved in prior studies by GAO and others. First, the report 

did not present the Navy’s approach and methodology for achieving total 

cost visibility for specific work performed. Determining the total cost of 

delivering specific ship maintenance work is recommended by federal 

accounting standards and is a key metric for evaluating a consolidated 

facility’s productivity and performance. Although the Navy was attempting 

to gather cost data to show the full costs of operations at its shipyards, GAO 

found that the Navy has not developed policies and procedures to routinely 

and systematically accumulate these total cost data. Second, with respect to

performance metrics, the Navy’s report did not provide data that

demonstrated improved results, such as increased productivity, of 

consolidating ship maintenance facilities at Puget Sound and converting the 

shipyard to direct funding. Prior reviews have raised issues related to total 

cost visibility and performance metrics as unresolved issues and 

recommended the Navy take corrective actions. While the Department of 

Defense concurred, it has not yet resolved these issues. Consequently, 

complete and reliable cost data are lacking for making fully informed 

decisions related to ship maintenance activities. Further, without 

performance metrics to measure progress toward meeting goals and 

objectives, the Navy lacks data needed for evaluating the changes it has

made and making fully informed decisions related to the management of 

consolidated ship maintenance activities. 

The Navy’s March 2006 report did not disclose shortcomings in its 

information systems at Puget Sound Naval Shipyard that have hindered its 

ability to efficiently and reliably meet its financial and business operations 

reporting requirements. The information systems at the consolidated facility

were not designed to provide the types of cost and operational data being 

requested under direct funding. As a result, the systems have required 

extensive changes and manual administrative efforts by shipyard personnel 

to support the consolidated facilities’ financial and business operations 

reports being requested. 

www.gao.gov/cgi-bin/getrpt?GAO-06-989.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact William Solis at 

(202) 512-5140 or solisw@gao.gov. 
Contents 

Letter 1

Results in Brief 3 

Background 6

Navy Did Not Provide Data and Other Supporting Evidence for Its 

Overall Assessment 7 

Navy Did Not Address Unresolved Issues Identified in Prior Studies 9 

Navy Report Did Not Identify Problems with Information Systems 

Not Designed for Direct Funding 13 

Conclusions 15

Recommendations for Executive Action 16 

Matter for Congressional Consideration 16 

Agency Comments and Our Evaluation 16 

Scope and Methodology 17 

Appendix I Matters in Section 322(b)(2) of the National 

Defense Authorization Act for Fiscal Year 2006 21 

Appendix II Comments from the Department of Defense 23 

Appendix III GAO Contact and Staff Acknowledgments 25 

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Page i GAO-06-989 Ship Maintenance
United States Government Accountability Office

Washington, DC 20548 

September 14, 2006 

Congressional Committees 

Since the 1990s, the Navy has implemented changes aimed at making its 

fleet support activities more efficient and effective. These changes have 

included consolidation of the management, operations, and funding of 

facilities performing ship maintenance. The first facilities to be 

consolidated, in 1998, were the Pearl Harbor Naval Shipyard and the Naval 

Intermediate Maintenance Facility in Hawaii.1 In 2003, Puget Sound Naval

Shipyard in Washington State was consolidated with the Naval 

Intermediate Maintenance Facility, which includes the Trident Refit 

Facility Bangor and Everett Intermediate Maintenance Facility. Prior to 

these consolidations the shipyards were financed through the Navy 

working capital fund, while the intermediate maintenance facilities were 

funded through direct appropriations that authorized the Department of 

Defense (DOD) to incur obligations for designated purposes (such as ship 

maintenance or modifications), sometimes referred to as direct funding or 

mission funding.2

 A working capital fund is a type of intragovernmental 

revolving fund that operates as a self-supporting entity that conducts a 

regular cycle of businesslike activities. Working capital funds function 

from the fees charged for the services they provide consistent with their 

statutory authority. With the consolidations of maintenance facilities at 

Pearl Harbor and Puget Sound, the shipyards have been converted to 

direct funding so that the consolidated facilities operate under a single 

financial structure. The Navy set up a single financial structure for the 

consolidated facilities using direct funding in the belief that direct funding 

was more flexible than working capital funding and would help enable the 

 1

 The Navy maintains its surface ships and submarines at three levels: organizational, 

intermediate, and depot. Organizational maintenance involves routine tasks, such as

inspection, lubrication, and assembly of minor parts that are typically performed by a ship’s 

crew. Maintenance beyond the capability or capacity of a ship’s crew is performed at Navy

intermediate maintenance facilities and consists of short-term, time-critical projects. 

Depot-level maintenance, traditionally done in shipyards, requires high levels of skills and 

equipment beyond the capability or capacity of ships’ crews and intermediate personnel 

and facilities.

2

 A direct-funded activity receives an operating budget that provides the total appropriated

funding for the fiscal year without identification of the specific work to be accomplished.

Direct-funded shipyards use appropriated funds for a specific fiscal year to perform depotlevel maintenance. 

Page 1 GAO-06-989 Ship Maintenance
consolidated facilities to better achieve Navy fleet readiness goals. The 

Navy plans to convert its two remaining shipyards on the East Coast—

Norfolk and Portsmouth—to direct funding starting October 1, 2006. 

In our prior reviews of the consolidation of maintenance facilities at Pearl 

Harbor, we identified unresolved issues in financial management related 

to the conversion of the shipyard to direct funding. A more recent review 

of the conversion of Puget Sound Naval Shipyard to direct funding by the 

DOD Office of the Inspector General (DOD-IG) identified weaknesses in 

cost visibility and financial management at that facility. Also, the 

Congressional Budget Office (CBO) has recently identified issues related 

to reduced cost visibility and financial management in converting 

shipyards from working capital funding to direct funding. Section 322(a) of

the National Defense Authorization Act for Fiscal Year 2006 prohibited the 

Navy from converting its two East Coast shipyards to direct funding prior 

to October 1, 2006, and Section 322(b) of the act required the Secretary of 

the Navy to submit a report to the congressional defense committees by 

March 1, 2006, that assessed the effects of converting Puget Sound from 

the working capital fund to direct funding.3

 The Navy report was to include 

an assessment of 11 matters, including cost visibility, operational and 

financial flexibility, capital improvements, buyout costs4

 associated with

the transfer of the Navy’s two East Coast shipyards from the Navy working 

capital fund to direct funding, and compliance with legislative provisions. 

(The 11 specific matters in Section 322(b)(2) are listed in app. I.) The Navy

submitted its report to Congress on March 1, 2006. The report’s overall 

assessment was that direct funding provides for a more agile workforce 

that can best satisfy fleet maintenance priorities without sacrificing cost 

visibility, performance accountability, or quality of work. According to the 

Navy, direct funding, in concert with regional consolidation, enabled 

 3

 The Navy was also required by Section 322(c) of the National Defense Authorization Act

for Fiscal Year 2006 to submit a report to congressional defense committees that proposed 

congressional budget exhibits for use in connection with the funding of Navy shipyards on

a direct basis. Congress also requested that CBO submit a review of the Navy’s report on 

the proposed budget exhibits. The Navy provided preliminary information in the March 1,

2006, report, and a more complete response March 20, 2006. In April 2006, CBO reported

that, in general, the Navy’s proposed budget exhibits for direct-funded shipyards addressed

the matters specified in the congressional request and were consistent with CBO’s template 

for reporting. 

4

 Buyout costs are the costs associated with making the working capital fund financially 

whole when transferring working fund activities to direct funding. These costs include 

undepreciated capital assets, accrued employee leave, liabilities, and accumulated 

operating results. 

Page 2 GAO-06-989 Ship Maintenance
maintenance activities to quickly respond to emergent fleet operational 

requirements. 

Section 322(b)(3) also directed our office to review the Navy’s report, 

which was to include our assessment of whether the report adequately 

addresses the 11 matters identified in Section 322(b)(2) of the act. Our 

objectives were to evaluate the extent to which the Navy’s report (1) 

provided data and other supporting evidence for its overall assessment of 

the impact of converting Puget Sound to direct funding, (2) addressed 

unresolved issues that had been identified in prior studies, and (3) 

disclosed any other issues that have affected the implementation of direct 

funding at Puget Sound Naval Shipyard. On May 18 and 19, 2006, we 

briefed congressional staff on our preliminary observations. This report 

expands on the information delivered in those briefings and includes 

recommendations to the Secretary of Defense. 

To conduct our evaluation we reviewed the information and data 

presented in the Navy’s report to support its assessment of the matters 

specified in Section 322(b)(2). We obtained prior reports on the 

conversion of Pearl Harbor and Puget Sound naval shipyards to direct 

funding and identified issues that were determined to be unresolved at the 

time these studies were conducted. We discussed the Navy’s March 2006 

report with officials responsible for its development and visited the 

consolidated facility at Puget Sound to obtain information on the 

implementation of direct funding. We also obtained and analyzed 

additional supporting documentation from Navy officials regarding the 

matters covered in the report. As a part of our assessment of cost 

visibility, performance metrics, and information systems, we discussed 

with Navy officials the quality and reliability of financial and operations 

data generated for the consolidated facility. We conducted our work 

between March and May 2006 in accordance with generally accepted

government auditing standards. Our scope and methodology are discussed 

in more detail at the end of this letter. 

Our review of the Navy’s March 2006 report to Congress showed that the

report did not provide data and other supporting evidence for its overall 

assessment of the impact of converting Puget Sound Naval Shipyard to 

direct funding. While the Navy reported on each of the matters specified in 

Section 322(b)(2), it did not provide data and other information needed to

support the Navy’s position that direct funding was more advantageous 

than working capital funding and can best satisfy fleet maintenance 

priorities. More specifically, the report did not provide evidence that direct 

Results in Brief 

Page 3 GAO-06-989 Ship Maintenance
funding had provided for a more agile workforce—the ability to more 

easily move workers among maintenance projects in response to fleet 

priorities—which was a key benefit the Navy claimed was achieved by

converting to direct funding. The Navy’s report also did not provide 

complete information on some specific matters. For example, complete 

information was not provided in the report on the shipyard’s capital 

improvement program because the report did not show the extent to 

which approved funding met program requirements. In addition, buyout 

costs for the two East Coast shipyards are still pending because the final

amounts have not been negotiated. Thus, while the report addressed each 

matter and argued for direct funding, it did not present data and other 

supporting evidence for its overall conclusion that direct funding can best 

satisfy fleet maintenance priorities without sacrificing cost visibility, 

performance accountability, or quality of work. 

The Navy’s March 2006 report did not show data that adequately 

addressed two key issues—cost visibility and performance metrics—

which had been identified as unresolved in prior studies. First, the report 

did not present the Navy’s approach and methodology for achieving total

cost visibility for specific work performed. Prior reports by our office and 

the DOD-IG identified weaknesses in total cost visibility as an unresolved 

issue, and contained recommendations to develop guidance and 

appropriate costing methodologies or techniques that improve total cost 

visibility. Reporting the full cost of ship maintenance operations is 

recommended by federal accounting standards and is a key metric for 

evaluating a consolidated facility’s productivity and performance. 

Although the Navy was attempting to gather cost data to show the full 

costs of operations at its shipyards, we found that the Navy has not 

developed policies and procedures to routinely and systematically 

accumulate these total cost data. Consequently, Office of the Secretary of

Defense (OSD) and Navy officials do not yet have complete and reliable 

cost data needed for making fully informed decisions related to ship 

maintenance activities. Second, with respect to performance metrics, the 

Navy’s report did not provide data that demonstrated improved results, 

such as increased productivity, of consolidating ship maintenance 

facilities at Puget Sound and converting the shipyard to direct funding. 

Prior reports by our office and the DOD-IG identified a lack of

performance metrics as an unresolved issue, and both reports contained

recommendations that the Navy establish appropriate metrics. DOD 

concurred, but did not identify proposed actions or completion dates. 

Without performance metrics to measure progress toward meeting goals 

and objectives, the Navy lacks data needed for evaluating the changes it 

Page 4 GAO-06-989 Ship Maintenance
has made and making fully informed decisions related to the management 

of consolidated ship maintenance activities. 

The Navy’s March 2006 report did not disclose shortcomings in its 

information systems at Puget Sound Naval Shipyard that have hindered its 

ability to efficiently and reliably meet its financial and business operations 

reporting requirements. The information systems at the consolidated 

facility were not designed to provide the types of cost and operational data 

being requested under direct funding. As a result, the systems have 

required extensive changes and manual administrative efforts by shipyard 

personnel to support the consolidated facility’s financial and business 

operations reports being requested under direct funding. For example, 

considerable manual effort is required to assemble information for reports 

and data calls for the consolidated activity. Also, data reliability is a 

concern because of problems encountered when the shipyard and the 

intermediate maintenance facility personnel, cost, material, and industrial 

data systems and databases were linked together for the consolidation and 

conversion to direct funding. The Navy recognizes it needs improved 

information systems to support the consolidated facility at Puget Sound 

under direct funding, and the DOD-IG found improvements are crucial to 

avoiding costly fixes and workarounds. However, the Navy has not 

identified a solution—including requirements, corrective actions, time 

frames, and resources—to address shortcomings in the information 

systems supporting Puget Sound. Furthermore, this issue is not unique to 

Puget Sound Naval Shipyard, but impacts all shipyards converting to direct 

funding. In the long term, the Navy plans to install an enterprisewide 

system as part of DOD’s business systems modernization program. 

However, this new enterprisewide system will not be available for years 

under current Navy plans. Addressing the need for improvement in the 

information systems could contribute to the Navy’s long-term plans to 

install an enterprisewide system. 

This report recommends that the Navy, as it moves ahead to improve fleet

support activities by consolidating regional maintenance activities and 

converting its remaining two shipyards to direct funding, take actions to 

improve management of these changes and achieve expected benefits. 

More specifically, the Navy should improve its ability to routinely and

systematically provide for total cost visibility, develop performance 

metrics aimed at demonstrating expected benefits such as increased 

productivity, and develop specific plans for information systems designed 

to efficiently support financial and business operations at its shipyards. 

DOD provided written comments on a draft of this report. In commenting 

on a draft of this report, DOD concurred with our recommendations. On 

Page 5 GAO-06-989 Ship Maintenance
the basis of our evaluation of DOD’s comments, we have revised our 

recommendation regarding performance metrics to be more specific. We

have also added a matter for congressional consideration to provide 

increased oversight of the Navy’s plans for improving its information 

systems. DOD’s comments are reprinted in appendix II. 

In 1999, we reported that the preliminary results of the Pearl Harbor pilot 

were mixed and recommended that DOD and the Navy address unresolved 

issues related to the financial management of the consolidation as the 

Navy proceeded with similar consolidations in other locations.5

 In 2001, 

we updated this assessment and concluded that while the consolidation of 

shipyard and intermediate maintenance activities offered benefits for 

using resources more efficiently, financial management issues existed that 

needed to be resolved.6

 We highlighted problems concerned with 

inadequate cost visibility and accountability, and with data used to show 

compliance with applicable statutes. In December 2005, CBO issued an 

interim report comparing working capital funding and direct funding for 

Naval shipyards.7

 Its preliminary findings indicated that working capital 

funding and direct funding each has strengths and weaknesses as shipyard 

funding systems, but did not conclude whether one system was best. 

CBO’s report noted concerns that direct funding makes shipyards’ costs 

and operations less visible. Also in December 2005, the DOD-IG issued a 

report that raised concerns about the conversion of other shipyards to 

direct funding.8

 The report’s main findings were that Puget Sound did not 

routinely accumulate financial information as they had done when 

financed as a working capital fund activity, metrics and goals used to track 

results of the transition were unreliable and did not address the impacts of 

direct funding, and the information systems did not fully support 

operations. As a result, DOD-IG was unable to determine the effectiveness 

of the transition of Puget Sound to direct funding. 

Background 

 5

 GAO, Depot Maintenance: Status of the Navy’s Pearl Harbor Pilot Project, 

GAO/NSIAD-99-199 (Washington, D.C.: Sept. 10, 1999).

6

 GAO, Depot Maintenance: Key Financial Issues for Consolidations at Pearl Harbor and 

Elsewhere Are Still Unresolved, GAO-01-19 (Washington, D.C.: Jan. 22, 2001). 

7

 CBO, Comparing Working-Capital Funding and Mission Funding for Naval Shipyards: 

An Interim Report (Dec. 1, 2005). 

8

 DOD-IG, Financial Management: Puget Sound Naval Shipyard Mission-funded

Prototype, D-2006-037 (Dec. 9, 2005). 

Page 6 GAO-06-989 Ship Maintenance
The Navy’s March 2006 report to Congress included sections

corresponding to each of the matters specified in Section 322(b)(2) of the 

National Defense Authorization Act for Fiscal Year 2006. However, 

although the report addressed the Navy’s assessment of the conversion of 

Puget Sound to direct funding, it did not provide data and other supporting 

evidence for the Navy’s overall assessment that direct funding was more 

advantageous than working capital funding and can best satisfy fleet 

maintenance priorities. 

Navy Did Not Provide 

Data and Other 

Supporting Evidence 

for Its Overall 

Assessment 

More specifically, the report did not provide evidence that direct funding 

had provided for a more agile workforce—the ability to more easily move 

workers among maintenance projects in response to fleet priorities—

which was a key benefit the Navy claimed was achieved by converting to 

direct funding. It did not provide data to support the Navy’s position that 

direct funding enabled the maintenance activities to quickly respond to 

emergent operational requirements by reprioritizing work, minimizing the 

financial impact of unplanned maintenance, and optimizing the use of all

resources available in a region. While it said that some sharing of 

production personnel had occurred prior to consolidation, this required 

special actions and burdensome administrative processes, all causing 

delay in accomplishing needed work, but provided no data showing 

differences before and after the conversion. Regarding operational and 

financial flexibility, the Navy said that while the working capital fund 

allows for continued operations on a limited basis, it considered this 

limited flexibility minor compared to the overall benefits of direct funding, 

particularly its ability to move workers among projects as workload 

priorities change, increasing the agility of the workforce and minimizing 

the administrative burden. Again, no data were provided on increased 

workforce agility or reduced administrative burden. Moreover, it did not

provide data to support the overall conclusion that direct funding can best

satisfy fleet maintenance priorities without sacrificing cost visibility, 

performance accountability, or quality of work. 

More broadly, the use of direct funding rather than working capital 

funding as a financing mechanism for shipyard maintenance reflects 

fundamental choices about how DOD goods and services are provided.9

Naval shipyards have operated under some type of revolving fund 

 9

 For a broader discussion of performance budgeting within the federal government, see 

GAO, Performance Budgeting: Efforts to Restructure Budgets to Better Align Resources 

with Performance, GAO-05-117SP (Washington, D.C.: February 2005). 

Page 7 GAO-06-989 Ship Maintenance
financing system, which includes working capital funds, for decades. 

Working capital funding requires shipyards to track and report their total 

costs in order to determine operating results (profits and losses) and 

future billing rates. In doing so, the working capital fund focuses attention 

on the total costs of providing a good or service. The fees that a working 

capital-funded shipyard charges for the services provided are based on 

total projected costs and projected workload for the year. Total costs 

include fixed costs and sunk costs that are independent of the amount of

work performed as well as costs that vary according to workload. 

Consequently, the price that shipyards charge may be viewed by the 

customers as too high. If customers view shipyard rates as too high, they

may defer maintenance, reduce the scope, or shift to a new maintenance 

provider, such as an intermediate maintenance facility that is direct 

funded or does not include fixed costs in its prices. Under direct funding,

direct appropriations authorize DOD to incur obligations for designated 

purposes, such as ship maintenance or modifications. Direct-funded 

shipyards provide maintenance services to the fleets for free, but they are

still reimbursed for modifications and conversions. Both capital 

expenditures and military construction at direct-funded shipyards are 

funded through separate direct appropriations. Thus, direct funding may 

reduce the availability of data on shipyards’ total costs unless the data are 

specifically requested or developed.

The Navy’s report also did not provide complete information on some 

specific matters. For example, the Navy’s report did not provide complete

information on the capital improvement program. The Navy report noted 

differences in funding of the shipyard’s capital improvement program 

since the conversion to direct funding. Under working capital funding, 

funds function from the fees charged for the services they provide 

consistent with their statutory authority. Under direct funding,

appropriations authorize DOD to incur obligations for designated 

purposes. However, more information would have helped in 

understanding whether, after the conversion to direct funding, the 

approved funding met total shipyard capital improvement program 

requirements as well as requirements for the shipyard’s sustainment, 

restoration, and modernization program, which provides funds to keep the 

facilities in good working order, restores facilities, and makes alterations 

to meet higher standards or accommodate new functions or missions. As 

we pointed out in our 2001 report, Pearl Harbor was budgeted for less than 

5 percent of the identified capital improvement program requirements for 

the consolidated facility over 3 fiscal years. 

Page 8 GAO-06-989 Ship Maintenance
In addition, buyout costs for the two East Coast shipyards are still pending 

because the final amounts have not been negotiated. The Navy report 

stated that it had not fully resolved buyout costs for converting the two 

East Coast shipyards. These costs are to be negotiated by the Navy, OSD, 

and the Defense Finance and Accounting Service after the end of fiscal 

year 2006. Based on end-of-fiscal-year projections, buyout costs will total 

$231.5 million for these shipyards. The Navy included $140.1 million in the 

President’s fiscal year 2007 budget for projected working capital fund 

buyout costs for the two East Coast shipyards, leaving a projected balance 

of $91.4 million. The report also did not note that Puget Sound will incur 

additional buyout costs of more than $53 million due to operating losses 

for working capital fund projects carried over during the transition to 

direct funding. 

The Navy’s March 2006 report did not show data that adequately 

addressed issues identified as unresolved in prior studies. Specifically, the

Navy did not identify (1) methodologies for achieving total cost visibility 

and (2) performance metrics to measure improved results, such as 

increased productivity, achieved by the consolidation of maintenance 

facilities and the conversion to direct funding. 

The Navy’s report did not discuss the Navy’s approach and methodology 

for achieving total cost visibility at the consolidated facility. Section 

322(b)(2) called for the Navy to address, among other things, the effect of

direct funding on (1) the cost visibility of specific work performed and (2) 

the total cost of consolidated ship maintenance operations on an ongoing

basis. The Navy stated that the conversion to direct funding had been

made without sacrificing cost visibility because the same information 

systems used to accumulate costs under the working capital fund have 

remained in place. The Navy report identified broad cost categories, 

provided total budget and expenditures figures for the consolidated 

facility for fiscal years 2004 and 2005, and compared the total percentage 

of actual to budgeted expenditures. However, the report did not discuss 

how the conversion to direct funding had changed the way the Navy has to 

accumulate cost data and achieve total cost visibility for specific work 

performed. 

Navy Did Not Address 

Unresolved Issues 

Identified in Prior 

Studies

Navy Did Not Identify 

Methodologies for Total 

Cost Visibility 

Prior reviews have raised issues about the Navy’s ability to provide data 

showing total cost visibility. We reported in 2001 that the management and 

financial systems at Pearl Harbor did not have reliable data on an ongoing

basis to determine the cost of delivering a direct labor hour of ship 

Page 9 GAO-06-989 Ship Maintenance
maintenance work, a key metric for evaluating the consolidated facility’s 

productivity and performance. Determining the total cost of delivering 

specific ship maintenance is important for other reasons as well. The 

Statement of Federal Financial Accounting Standard No. 4 states that 

reporting entities should accumulate and report the costs of their activities 

on a regular basis for management information purposes and that costs 

may be accumulated through cost accounting systems or “cost finding” 

techniques. The full cost of an output is the sums of (1) the cost of 

resources consumed that directly or indirectly contribute to the output 

and (2) the cost of identifiable supporting services provided by other 

entities. Also, we reported that the Navy had not implemented a method to 

routinely and systematically accumulate and account for the full cost of 

operations, such as tracking indirect overhead costs as closely under 

direct funding. We recommended in our 2001 report that the Navy 

implement a method to account for the total cost of consolidated ship 

maintenance operations on an ongoing basis. DOD concurred with our 

recommendation, and our current work supports the validity of this 

recommendation. 

The DOD-IG reported in December 2005 that cost information was not 

collected to determine the total cost (including all associated overhead

costs) required to establish an overhead rate to charge non-DOD 

customers for maintenance performed. The DOD-IG found that, according 

to Puget Sound officials, under direct funding the consolidated activity no

longer routinely accumulated costs necessary to compute an overhead 

rate to charge its customers. They did not track these costs because 

Commander, Pacific Fleet, is responsible for funding all overhead costs 

under mission funding. The DOD-IG’s report recommended that the Navy 

develop an instruction addressing the processes and business practices to

be used at direct-funded shipyards, issue guidance to address financial 

reporting and cost information accumulation requirements, and update 

existing reporting and cost guidance to reflect changes since consolidating 

and transitioning to direct funding. The Navy did not concur with these 

recommendations, but indicated they supported improving top-down 

guidance, operating procedures, and consistency of financial information, 

and ensuring compliance with fiscal policy. 

Our current review confirmed the Navy has not yet developed policies, 

procedures, and information systems to routinely and systematically

accumulate and account for the total cost of specific work performed or 

total costs of consolidated shipyard operations on an ongoing basis. Under 

direct funding, the shipyard does not track and provide cost accounting 

for all costs associated with specific projects. While the shipyard can

Page 10 GAO-06-989 Ship Maintenance
generate data on direct labor and material costs associated with individual

projects, other Navy commands must provide the remaining cost data 

needed to determine the total costs for the consolidated facility. 

The Navy’s report did not discuss the added complexities in systematically

producing the total cost data for auditable financial statements under 

direct funding. Developing a methodology to collect total cost data under 

direct funding would help produce auditable financial statements, and it 

would better inform congressional defense committees’ authorization and 

appropriation decisions. Navy officials said they still needed to develop

procedures for efficiently generating the data in new budget exhibits being 

developed for Navy direct-funded shipyards. They also said developing a 

methodology on the total cost of shipyard work would help them abide by

the definition and comply with annual reporting required, respectively, by

Sections 2460 and 2466 of Title 10, United States Code. These sections 

define depot maintenance and limit the percentage allocation of funds that 

may be expended for contractor performance of depot-level maintenance 

and repair work. More specifically, the military departments and defense 

agencies cannot expend more than 50 percent of annual depot 

maintenance funding to contract for depot-level maintenance and repair 

by nonfederal contractor personnel. The Secretary of Defense is required

to submit a report annually identifying, for each of the armed forces and 

each defense agency, the percentage of workload funding expended 

between the public and private sectors for the preceding fiscal year, and

projected expenditures for the current and ensuing fiscal year. The Navy 

has developed data needed to respond to these reporting requirements for 

Puget Sound Naval Shipyard each year, but its methods have not provided 

the total cost visibility needed. Naval Audit Service officials said they are 

reviewing the Navy’s processes for complying with this annual reporting 

requirement. Consequently, OSD and Navy officials do not yet have 

complete and reliable cost and related data needed for making fully 

informed decisions related to ship maintenance activities. 

Navy Did Not Identify 

Performance Metrics 

Demonstrating Improved 

Results Achieved by 

Consolidating Maintenance 

Facilities and Converting 

to Direct Funding 

The Navy’s report did not provide performance metrics demonstrating 

improved results associated with consolidating ship maintenance facilities

at Puget Sound and converting the shipyard to direct funding. For 

example, the Navy’s report asserts that benefits of direct funding are 

increased agility of the workforce and minimized administrative burden 

associated with reassignment of workers to high-priority projects. 

However, the report provided no performance metric data demonstrating 

these or other benefits, such as increased productivity and quality of work, 

that might be expected from the consolidation of maintenance facilities 

Page 11 GAO-06-989 Ship Maintenance
and adoption of a single financing structure. Outcome-oriented 

performance metrics provide a means for agencies to assess their progress 

toward meeting goals and objectives under an analytical framework. 

Prior reviews have raised concerns about the Navy’s lack of performance 

metrics regarding the consolidation of ship maintenance facilities. Our 

2001 review at Pearl Harbor found that although the consolidation had 

made more effective use of workers and facilities in Hawaii, the 

performance metrics tested by the Navy had not provided a conclusive 

assessment of the consolidated facility’s accomplishments in achieving 

greater efficiencies and lowering costs. We recommended that the Navy

develop additional metrics to measure the efficiency and effectiveness of 

consolidated ship maintenance activities, drawing on lessons learned from

the consolidation at Pearl Harbor. DOD concurred with our 

recommendation. 

The DOD-IG report also found that the Navy lacked adequate performance 

metrics for the consolidated Puget Sound facility. The DOD-IG found that 

the Navy did not have metrics and goals for Puget Sound that would help 

show the impact of direct funding on operations at the consolidated 

shipyard. The report recommended that OSD and the Navy jointly 

establish metrics and goals and baseline these metrics to evaluate Puget 

Sound’s transition to direct funding. It also recommended that the Navy 

establish policies and procedures for direct-funded metrics and goals to 

ensure information is consistently collected and reported and supporting 

documentation is maintained to fully support reported results. The Navy 

concurred, but did not identify the proposed actions and completion dates. 

The Navy further stated that the primary advantage of converting the 

shipyards to direct funding is that it allows fleet commanders as opposed 

to fleet support activities to control priorities and, further, that this benefit 

does not fit neatly into a metric that can be compared in “before and after” 

snapshots. Without performance metrics to measure progress toward 

meeting goals and objectives, the Navy lacks data needed for evaluating

the changes it has made and making fully informed decisions related to the 

management of consolidated ship maintenance activities. The CBO 

reported that having appropriately structured annual summary reports for 

each shipyard could enable Congress to monitor shipyards’ finances and

performance regardless of the type of funding used to pay for their 

operations. While the CBO is currently evaluating proposed metrics that 

are intended to demonstrate naval shipyards’ performance, the metrics 

being proposed do not address assessing the progress being made to 

consolidate facilities and convert to direct funding. 

Page 12 GAO-06-989 Ship Maintenance
We determined that after the initial consolidation of facilities at Puget 

Sound, Navy officials identified a need for metrics that would be used to 

provide an ongoing assessment of the consolidation process of the 

shipyard and intermediate maintenance facility. More specifically, the 

region placed high importance on the establishment of metrics designed to 

fully measure the progress and assess the effects of consolidation, 

including quality, cost, schedule, and workforce development. These 

metrics were to provide a factual basis for management actions as the 

consolidation continued into maturity. However, efforts to collect these 

metric data were halted in July 2005, and although the shipyard had a 

variety of metrics at the time of our review, it did not have metrics in place 

related specifically to the consolidation or direct funding. As a result, it 

was not quantifying or measuring the level of productivity achieved since 

the consolidation and conversion to direct funding. 

The Navy’s report did not disclose shortcomings in its information systems 

at Puget Sound Naval Shipyard that have hindered its ability to efficiently 

and reliably meet its financial and business operations reporting 

requirements. The consolidated shipyard’s information systems were not 

designed for reporting direct-funding operations. The Navy’s report said 

the shipyard utilized its existing information system, enabling it to 

maintain the same cost data as a shipyard financed by the working capital 

fund. It stated only that Puget Sound experienced some data collection 

and reporting anomalies that were corrected by the end of fiscal year 2004. 

Navy Report Did Not 

Identify Problems 

with Information 

Systems Not Designed 

for Direct Funding 

The DOD-IG reported in December 2005 that the information systems 

available at Puget Sound Naval Shipyard did not fully support the 

consolidated activity’s operations. It found that after the consolidation and 

conversion to direct funding, Puget Sound decided to maintain two 

information systems and their subsystems to manage operations and 

activities. For example, multiple subsystems and databases from the Puget 

Sound shipyard information system and the Trident Refit Facility were 

maintained and manual interfaces established to reflect the consolidated 

facility’s projects. Those systems and databases required considerable 

manual effort to assemble information and reports for the consolidated 

activity. For projects that spanned multiple fiscal years, Puget Sound 

personnel had to extract data from multiple databases and add them 

together to determine the total cost of a specific project. Furthermore, the 

shipyard had to implement new procedures to enable the appropriated 

funds to be deobligated at the end of the year, and new obligations set up 

for the next year. The report recommended that the Navy identify 

information system requirements for supporting the operations of all 

Page 13 GAO-06-989 Ship Maintenance
consolidated activities affected by the shipyard transition to direct funding

in order to avoid costly manual workarounds and manage communications 

between systems. The DOD-IG considered the need to properly plan and 

identify information system requirements crucial to avoiding costly fixes 

and workarounds, and requested the Navy provide a plan of action with 

milestones. The Navy concurred with the recommendation; however, it did 

not identify any proposed actions or completion dates. 

Our review verified that the information systems at Puget Sound Naval 

Shipyard consolidated facility were not designed to provide the types of 

cost and operational data being requested under direct funding. As a 

result, the systems have required extensive changes and manual 

administrative efforts by shipyard personnel to support the consolidated 

facility’s financial and business operations reports being requested under 

direct funding. As a test, we requested data on the total cost of specific 

work performed on a multiyear direct-funded ship maintenance project. 

The data the shipyard could provide were limited to direct costs, mainly 

labor and material. According to shipyard officials, determining total costs 

for a ship maintenance project was simpler under the working capital fund 

because the projects were funded on a multiyear basis, and the system 

was set up to track costs that spanned more than a single fiscal year. 

However, to identify the total amount spent over several years on a ship 

maintenance project under direct funding, they have to identify the total

amount spent each year, and manually enter it into another spreadsheet to

add the data together. 

Also, data reliability is of concern. For example, shipyard and intermediate 

maintenance facility personnel we talked with said numerous problems 

were encountered and manually addressed when the shipyard and the 

intermediate maintenance facility personnel, cost, material, and industrial 

data systems and databases were linked together for the consolidation and 

conversion to direct funding. For example, senior staff spent considerable

time checking output data for errors with the shipyard, intermediate 

maintenance facility, and Defense Finance and Accounting Service 

information systems. When causes of problems were identified, systems 

files were set up to catch problems so the data could be corrected. 

Although the Navy was able to collect cost and performance data to

populate its proposed shipyard budget exhibits in the March 2006 report, 

Navy officials said its processes need to become more efficient and visible, 

and show how the data are collected.

Navy officials in headquarters and Puget Sound recognized the need for 

improved information systems to support the Puget Sound Naval Shipyard

Page 14 GAO-06-989 Ship Maintenance
consolidated facility and other East Coast shipyards converting from 

working capital funding to direct funding. However, the Navy has not 

identified a solution—including requirements, corrective actions, time 

frames, and resources—to address shortcomings in the information 

systems supporting Puget Sound. Furthermore, this issue is not unique to 

Puget Sound Naval Shipyard, but impacts all shipyards converting to direct 

funding. Addressing the need for improvement in the information systems 

could also contribute to the Navy’s long-term plan to install an

enterprisewide system as part of DOD’s business systems modernization 

program. However, they said this new enterprisewide system will not be 

available for years under current Navy plans, and in the meantime they are 

limited each year to a relatively small amount of funds that can be 

requested for data system improvements. Consequently, the Navy is 

requesting additional funds annually for critical short-term information 

system changes needed as Norfolk and Portsmouth Naval Shipyards 

convert to direct funding, in lieu of redesigning efficient and reliable 

information systems that meet the needs of these shipyards. 

The Navy has expected to achieve benefits from consolidating

maintenance activities at Pearl Harbor and Puget Sound and converting 

the shipyards to direct funding. These changes are intended to make these 

fleet support activities more efficient and effective. The Navy has asserted 

that using a single financing system (direct funding) at the consolidated 

facilities enables it to move workers more freely among projects in 

response to fleet priorities. DOD intends to convert the remaining two 

East Coast shipyards to direct funding in fiscal year 2007, expecting even

greater benefits. However, the Navy has not developed a methodology for 

determining total cost visibility or performance metrics for measuring 

outcome-oriented results associated with consolidating the facilities and 

converting the shipyards to direct funding. In addition, the Navy does not

have information systems in place that systematically produce reliable

information needed for both total cost visibility and performance metrics. 

Thus, the Navy will not have the data needed to evaluate the changes it has 

made at its consolidated facilities. Furthermore, although prior reviews 

have reported on these issues, they continue to persist because specific 

actions and time frames have not been established and monitored. As the 

Navy moves ahead to improve fleet support activities by consolidating 

regional maintenance activities and converting its remaining two 

shipyards to direct funding, opportunities exist to improve the 

management of these changes and achieve expected benefits. 

Conclusions 

Page 15 GAO-06-989 Ship Maintenance
To improve the Navy’s management of consolidated maintenance facilities 

and the conversion of shipyards to direct funding, we recommend that the 

Secretary of Defense direct the Secretary of the Navy to take the following

three actions: 

• Implement a method to routinely and systematically provide for total cost 

visibility of ship maintenance work performed. 

• Develop metrics to ensure that the planned changes to consolidate the 

management, operations, and funding of facilities performing ship 

maintenance are being implemented; that specific productivity 

improvements and other benefits are being achieved; and that areas where 

performance is lacking or problems exist are identified. 

• Develop specific plans for information systems designed to efficiently

support the financial and business operations at its shipyards, including 

identification of requirements, corrective actions, time frames, and 

resources needed. 

The Congress should require the Navy to periodically report on its specific 

improvement plans and progress, as well as any impediments requiring 

congressional action, to ensure that shortcomings in the information 

systems supporting the Navy’s consolidation of regional maintenance 

facilities and conversion to direct funding are addressed in a timely 

manner. 

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

recommendations and cited actions it would take to implement them. 

Concerning our recommendation that DOD implement a method to 

routinely and systematically provide for total cost visibility of ship 

maintenance work performed, DOD reported that the Navy will implement 

revised policy and initiatives to systematically provide the desired total 

cost visibility of ship maintenance work performed at the four Naval 

shipyards, and that proposed guidance is being coordinated for 

implementation by September 30, 2006, pending final congressional 

approval of the fiscal year 2007 President’s Budget. 

On the recommendation to develop metrics, DOD said it will continue to 

refine the Naval shipyard exhibit to ensure Committee concerns related to 

shipyard performance are fully addressed and that alternative metrics, 

including a metric addressing increased productivity, will be developed.

While DOD’s response is encouraging, it is not clear whether DOD intends 

to develop specific metrics that measure and assess the effects of 

Recommendations for 

Executive Action 

Matter for 

Congressional 

Consideration 

Agency Comments 

and Our Evaluation 

Page 16 GAO-06-989 Ship Maintenance
consolidation and funding changes, as discussed in our report. Such 

metrics would identify the scope of the consolidation and workforce 

affected, and ensure that the planned changes to consolidate the 

management, operations, and funding of facilities performing ship 

maintenance are being implemented; specific productivity improvements 

and other benefits are being achieved; and areas where performance is 

lacking or problems exist are identified. As a result, we have revised this 

recommendation to be more specific. 

Regarding our recommendation on information systems designed to 

efficiently support financial and business operations at its shipyards, DOD 

commented that the existing information technology workarounds at 

Puget Sound Naval Shipyard reflected a temporary situation associated 

with a pilot program. DOD said the Navy will resolve the longer term 

information technology needs to eliminate manual workarounds and 

provide the necessary tools to support the Regional Maintenance Plan. As

noted in the report, Navy officials have previously told us that they are 

limited each year to a relatively small amount of funds that can be 

requested for data system improvements. Consequently, they have 

requested funding only for critical short-term information system changes 

needed as shipyards convert to direct funding, in lieu of redesigning 

efficient and reliable information systems that meet the needs of these 

shipyards. Because of the funding issues involved and the critical need for 

information system improvements supporting the Navy’s direct-funded 

shipyards, we believe that additional congressional oversight could assist 

the Navy in its efforts to implement planned changes in a timely manner. 

Therefore, we have added a matter for congressional consideration. 

To assess the Navy’s March 2006 report to Congress, we reviewed the 

Navy’s reporting requirements established in Section 322(b)(2) of the 

National Defense Authorization Act for Fiscal Year 2006. We evaluated the 

information and data presented in the Navy’s report to support its 

assessment of the matters specified in Section 322(b)(2) as well as the 

report’s overall conclusions. We discussed the Navy’s report with officials 

responsible for its development and visited the consolidated facility at 

Puget Sound to obtain information on the implementation of direct 

funding. We also obtained and analyzed additional supporting 

documentation from Navy officials regarding the matters covered in the 

report. We discussed this work with officials in the Office of the Under 

Secretary of Defense for Acquisition, Technology, and Logistics; the OSD 

Comptroller; the Assistant Secretary of the Navy for Financial 

Management and Comptroller; the Chief of Naval Operations; the Naval

Scope and 

Methodology 

Page 17 GAO-06-989 Ship Maintenance
Sea Systems Command; and the Puget Sound Naval Shipyard and Trident

Refit Facility in the state of Washington. We reviewed prior GAO, CBO, 

DOD-IG, and Naval Audit Service reports on the conversion of Pearl 

Harbor and Puget Sound naval shipyards to direct funding. We discussed 

the issues of cost visibility and performance metrics with those who 

conducted these reviews and with Navy headquarters and Puget Sound 

officials. We reviewed performance metrics the Puget Sound Naval 

Shipyard uses in managing the shipyard and intermediate maintenance 

facilities. We also obtained an understanding of issues related to the 

information systems supporting Puget Sound. We met with officials 

responsible for data system management and discussed challenges and

changes that have been needed to support Puget Sound’s operations and 

how these issues may affect other shipyards converting to direct funding. 

We asked for data on the total cost of operations for a full fiscal year and 

the cost of work for specific ship maintenance projects. We also discussed 

information system and performance metrics issues related to

consolidation and direct funding with officials at the Trident Refit Facility. 

As a part of our assessment of cost visibility, performance metrics, and 

information systems, we discussed with Navy officials quality and 

reliability of the financial and operations data generated for the 

consolidated facility. We conducted our work between March and May 

2006 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 Navy, and the 

Director, Office of Management and Budget. We will also make copies 

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

no charge on the GAO Web site at http://www.gao.gov. If you or your staffs 

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

me at (202) 512-5140. Contact points for our Offices of Congressional 

Page 18 GAO-06-989 Ship Maintenance
Relations and Public Affairs may be found on the last page of this report. 

Key contributors to this report are listed in appendix III. 

William M. Solis, Director 

Defense Capabilities and Management 

Page 19 GAO-06-989 Ship Maintenance
List of Congressional Committees

The Honorable John Warner 

Chairman 

The Honorable Carl Levin 

Ranking Minority Member 

Committee on Armed Services 

United States Senate 

The Honorable Ted Stevens 

Chairman 

The Honorable Daniel K. Inouye 

Ranking Minority Member 

Subcommittee on Defense 

Committee on Appropriations 

United States Senate 

The Honorable Duncan L. Hunter 

Chairman 

The Honorable Ike Skelton 

Ranking Minority Member 

Committee on Armed Services 

House of Representatives 

The Honorable C.W. Bill Young 

Chairman 

The Honorable John P. Murtha 

Ranking Minority Member 

Subcommittee on Defense 

Committee on Appropriations 

House of Representatives 

Page 20 GAO-06-989 Ship Maintenance
A

the Nationa

Fisca

ppendix I: Matters in Section 322(b)(2) of

l Defense Authorization Act for 

l Year 2006 

Page 21 GAO-06-989

Appendix I: Matters in Section 322(b)(2) of 

the National Defense Authorization Act for 

Fiscal Year 2006 

The National Defense Authorization Act for Fiscal Year 2006 required the 

Secretary of the Navy to submit a report to the congressional defense 

committees by March 1, 2006, containing the Secretary’s assessment on 

the effects of converting Puget Sound from the working capital fund to 

direct funding on 11 matters. The matters are listed below. 

A. The cost visibility of specific work performed. 

B. The total cost of consolidated ship maintenance operations on an 

ongoing basis. 

C. The ability to distinguish between depot and intermediate work of 

consolidated ship maintenance activities. 

D. The costs associated with buyout expenses for the transfer of the 

shipyards of the Navy on the east coast of the United States from funding 

through the working capital fund of the Navy to funding on a direct basis. 

E. The flexibility of the shipyard to continue routine ship maintenance 

operations during a potential funding gap at the beginning of a fiscal year 

or when expected maintenance costs exceed annual appropriations. 

F. Operational and financial flexibility and responsiveness of funding on a 

direct basis compared to funding through the working capital fund of the 

Navy. 

G. Long-term funding for the capital improvement programs of the 

shipyard. 

H. Compliance with Section 2460 of Title 10, United States Code, which 

defines the work that is considered to be depot-level maintenance and 

repair versus work that is considered to be a major modification of a 

weapons system. 

I. Compliance with Section 2466 of Title 10, United States Code, which 

limits the amount of depot-level maintenance and repair workload of the 

Department of Navy that is performed by nonfederal government 

personnel in any fiscal year to not more than 50 percent of the total depot 

workload reported to the department in that fiscal year. 

J. Compliance with Sections 1115 and 1116 of Title 31, United Stated Code, 

which require agencies to set annual performance goals, measure 

Matters Identified in 

Section 322(b)(2) 

Ship Maintenance
Appendix I: Matters in Section 322(b)(2) of

the National Defense Authorization Act for 

Fiscal Year 2006 

performance toward the achievement of those goals, and publicly report 

on progress. 

K. Compliance with Chapter 35 of Title 31, United States Code, which 

requires audited financial statements to include the ability to properly 

charge and account for reimbursable workload. 

Page 22 GAO-06-989 Ship Maintenance
Appendix II: Comments from the Department Appendix II: Comments from the Department of Defense 

of Defense 

Page 23 GAO-06-989 Ship Maintenance
Appendix II: Comments from the Department 

of Defense 

Now on p. 16. 

Now on p. 16. 

Now on p. 16. 

Page 24 GAO-06-989 Ship Maintenance
Appendix III: GAO

A

 Contact and Staff 

cknowledgments 

Page 25 GAO-06-989

Appendix III: GAO Contact and Staff 

Acknowledgments 

William Solis (202) 512-5140 or solisw@gao.gov 

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

Director; Grace Coleman; Lee Cooper; and Amy Sheller were major 

contributors to this report. 

Ship Maintenance

GAO Contact 

Acknowledgments 

(350817) 
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