a

GAO

United States Government Accountability Office

Report to the Subcommittee on 

Readiness and Management Support, 

Committee on Armed Services, 

U.S. Senate

August 2004 DEFENSE 

MANAGEMENT

Opportunities to 

Enhance the 

Implementation of 

Performance-Based 

Logistics

GAO-04-715
www.gao.gov/cgi-bin/getrpt?GAO-04-715.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact William M. Solis 

at (202) 512-8365 or solisw@gao.gov. 

Highlights of GAO-04-715, a report to the 

Subcommittee on Readiness and 

Management Support, Committee on 

Armed Services, U.S. Senate 

August 2004

DEFENSE MANAGEMENT 

Opportunities to Enhance the 

Implementation of Performance-Based 

Logistics 

DOD’s current policy for implementing performance-based logistics as a 

preferred support approach at the weapon system platform level does not 

reflect the practices of private-sector companies that support expensive and 

complex equipment with life-cycle management issues. The companies GAO 

interviewed use performance-based contracting as a tool rather than as a 

preferred support concept at the weapon system platform level. While 7 of 

the 14 companies GAO interviewed use some type of performance-based 

contracting, they use it at the subsystem or component level—for 

commodities such as engines, wheels, and brakes—when it is cost-effective 

and reduces risk in a noncompetitive environment. DOD’s proposed policy 

of pursuing performance-based logistics as the preferred support approach 

at the platform level results in contracting out the program-integration 

function—a core process the private-sector firms consider integral to 

successful business operations. Further, this proposed policy could limit 

opportunities to take advantage of competition when it is available for 

subsystems or components as well as limit opportunities to gain purchasing 

power from volume discounts on components across an entire fleet and 

avoid the administrative costs charged by a prime integrator. 

While DOD is proposing the aggressive use of performance-based logistics 

on both older and new weapon system platforms, the companies GAO 

interviewed use performance-based contracting at the subsystem or 

component level when it is cost-effective—often in a noncompetitive 

environment when the manufacturer controls expensive repair parts, such as 

engines. In general company officials said they rely more widely on other 

contracting vehicles, such as time and material contracts, particularly for 

new systems. Company officials noted that in the absence of accurate and 

reliable information on system performance to establish a baseline for 

evaluating the cost-effectiveness of a performance-based contract for new 

systems, the risk of the negotiated price’s being excessive is increased. 

The companies GAO interviewed also emphasized the importance of having 

rights to the technical data—such as maintenance drawings, specifications, 

and tolerances—needed to support the management of all logistics contracts 

and, should the service provider arrangements fail, to support competition 

among alternate providers. In contrast, DOD program managers often opt to 

spend limited acquisition dollars on increased weapon system capability 

rather than on rights to the technical data—thus limiting their flexibility to 

perform work in-house or to support alternate source development should 

contractual arrangements fail. 

 

The Department of Defense (DOD) 

is pursuing a policy that promotes 

performance-based logistics at the 

platform level as the preferred 

product support strategy for its 

weapon systems, based in part on 

DOD’s perception that this is an 

industry best practice. GAO was 

asked to compare industry 

practices for activities using 

complex and costly equipment with 

life-cycle management issues 

similar to those of military systems 

to identify lessons learned that can 

be useful to DOD. This is the first 

of two reports addressing DOD’s 

implementation of performancebased logistics and is intended to 

facilitate DOD’s development of 

new guidance on the use of this 

approach. 

GAO recommends that DOD 

(1) revise its policy and guidance to 

the services to reflect the industry 

practice of using performancebased logistics as a tool to achieve 

economies at the subsystem or 

component level, rather than at the 

platform-level, and (2) provide for 

sufficient technical data to support 

alternative support options using 

either the public or the private 

sector. DOD concurred with our 

recommendations, noting that it 

would re-emphasize via policy and 

training the use of performancebased logistics at the subsystem 

level and take steps to update 

acquisition policy to include 

guidance on purchasing rights or 

long-term access to technical data. 
Page i GAO-04-715 Performance-Based Logistics 

Letter 1

Results in Brief 3

Background 4

DOD’s Current Preferred Approach to Performance-Based 

Logistics May Limit Opportunities for Competition and Savings 9

Conclusions 18

Recommendations for Executive Action 20

Agency Comments and Our Evaluation 20

Scope and Methodology 22

Appendix I Comments from the Department of Defense 25 

Tables 

Table 1: Company Use of Contracting Tools to Outsource 

Subsystem and Component Support 11

Table 2: Percentage of Maintenance Dollars for Outsourced 

Subsystems and Components Managed Using 

Performance-Based Contracts 12

Abbreviations 

APU auxiliary power unit 

DOD Department of Defense 

Contents 

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Page 1 GAO-04-715 Performance-Based Logistics 

August 16, 2004 

The Honorable John Ensign 

Chairman 

The Honorable Daniel Akaka 

Ranking Minority Member 

Subcommittee on Readiness and Management Support 

Committee on Armed Services 

United States Senate 

In the past 4 to 5 years, the Department of Defense (DOD) has taken steps 

to manage the total life-cycle support costs of its weapon systems and to 

improve logistics support to the warfighter by reengineering its processes 

for both acquiring and sustaining weapon systems. As part of these 

reengineered processes, DOD has directed weapon system program 

managers to develop acquisition strategies that maximize competition, 

innovation, and interoperability and to capitalize on commercial 

technologies to reduce costs. Within the area of weapon system 

sustainment, DOD is pursuing a policy to implement a concept it calls 

performance-based logistics as the preferred support strategy for DOD 

weapon systems. This concept is a variation on other contractor logistics 

support strategies calling for long-term support of military systems by 

the systems’ manufacturers.1

 The concept involves defining a level of 

performance for a weapon system already fielded or about to be fielded 

that is to be achieved over a fixed period of time for a fixed level of annual 

funding. More recently, in February 2004, the Deputy Secretary of Defense 

issued a memorandum promoting a more aggressive implementation of 

performance-based logistics that was in part based on the perception that 

this is an industry best practice. 

As requested, we are reviewing DOD’s process of implementing 

performance-based logistics as the preferred support strategy for its 

weapon systems. As a part of this review we determined what types of 

contractor logistics support arrangements the private sector uses for 

activities that have complex and costly equipment with life-cycle 

management issues similar to those of military systems, and what 

 1

 There is a performance-based logistics agreement between the program office and the 

Tobyhanna Army Depot to support the Common Ground Station. 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-04-715 Performance-Based Logistics 

potential lessons can be learned from a comparison between privatesector contractor support practices and the contractor logistics support 

practices DOD is urging the services to implement. While conducting our 

work, we learned that DOD soon will be issuing additional policy guidance 

on its use of performance-based logistics. This is the first of two GAO 

reports addressing DOD’s implementation of performance-based logistics 

and is intended to provide the Secretary of Defense with 

recommendations that should facilitate DOD’s development of new 

guidance. Our follow-on report in early 2005 will determine similarities 

and differences in the way the identified DOD programs are structured 

and managed, identify approaches that appear to offer the greatest 

opportunities to achieve cost effectiveness, and evaluate the demonstrated 

cost savings or improved responsiveness of the new DOD concept. 

As a part of this review, we examined Office of the Secretary of Defense 

and service policies and guidance; collected data on performance-based 

logistics programs identified by the services; and conducted case studies 

on a limited number of the programs. We also reviewed the logisticscontracting practices of 14 private-sector companies from the air carrier, 

maritime shipping, energy exploration, mining, and entertainment 

industries—companies that use complex and costly equipment with 

life-cycle issues similar to those of military weapon systems and that are 

motivated by the desire to minimize costs and maximize profits to choose 

the most cost-effective option.2

 We held group discussions covering 

standard questions about the industries’ contractor logistics support 

practices, and we compared the results of these interviews with the 

preliminary information obtained from our analyses of DOD policies and 

programs. We reviewed the reliability of the projected cost and savings 

data used in this report and determined that it was sufficient for our 

purposes. We performed our work from September 2003 through June 

2004 in accordance with generally accepted government auditing 

standards. The scope and methodology section contains more detailed 

information about the work we performed. 

 2

 This equipment includes airline and air cargo aircraft, cruise ships and oil tankers, heavy 

mining equipment, offshore drilling and production platforms, and unique electronic 

equipment. 
Page 3 GAO-04-715 Performance-Based Logistics 

DOD’s current policy for implementing performance-based logistics as a 

preferred support approach at the weapon system platform level does not 

reflect the practices of private-sector companies that support expensive 

and complex equipment with life-cycle management issues. A Deputy 

Secretary of Defense memorandum to the services cites the private 

sector’s use of performance-based logistics as the basis for aggressively 

pursuing this concept. Private-sector companies we interviewed having 

complex and expensive assets with life-cycle issues similar to those of 

military weapon systems do not use performance-based contracting this 

way. Although 7 of the 14 companies we interviewed use some type of 

performance-based contracting, they use it at the subsystem or component 

level, when it is cost-effective and reduces risk in a noncompetitive 

environment. The companies rely more widely on other contracting 

methods to benefit from competition for those subsystems or components 

where it is practicable. DOD’s approach supports aggressive 

implementation of performance-based logistics at the weapon system 

platform level and for new as well as older systems. As a result, DOD’s 

proposed approach to implementing performance-based logistics could 

limit opportunities for achieving cost savings from competition, volume 

discounts, and reduced administrative costs. Further, it could result in the 

contracting out of the program-integration function—a core process that 

the private-sector firms consider integral to successful business 

operations. Private-sector company officials we interviewed reported that 

their firms use the following approaches: 

• Use performance-based contracting selectively when it is cost-effective—

often in a noncompetitive environment when the manufacturer controls 

expensive repair parts, such as engines. In general, company officials said 

they rely more widely on other contracting vehicles, such as time and 

material contracts, particularly for newer systems that don’t have a 

performance history. DOD’s approach, in contrast, proposes aggressive 

implementation of performance-based contracts on both older and newer 

weapon systems. Company representatives emphasized that in the 

absence of accurate and reliable information on system performance 

to establish a baseline for evaluating the cost-effectiveness of a 

performance-based contract for new systems, the risk of the negotiated 

price being excessive is increased. 

• Use performance-based logistics at the subsystem or component level, 

such as for engines; DOD’s approach, in contrast, proposes to support 

implementation at the weapon system platform level, such as was tried for 

the T-45 trainer aircraft. We found no private-sector performance-based 

contracts being used at the platform level. The company representatives 

preferred to retain the program integration function that they consider a 

Results in Brief 
Page 4 GAO-04-715 Performance-Based Logistics 

core function essential to the success of their business operations. 

Additionally, they prefer to (1) take advantage of competition when it is 

available for subsystems or components, (2) gain purchasing power from 

volume discounts on subsystems or components across their entire fleet, 

and (3) avoid the administrative costs that would be charged by a prime 

integrator. Indeed, Navy officials told us that the T-45 platform level 

performance-based logistics contract resulted in their paying the 

contractor for hours that the Navy did not fly and that the contract was 

not cost-effective. But by dividing the airframe and engine into separate 

contracts, adding a sortie completion metric, and competing the airframe 

workload, the Navy projects that savings of $144 million ($118 for the 

airframe and $26 million for the engine) can be achieved over 5 years. 

• Emphasize the importance of having rights to the technical data needed to 

support the management of all logistics contracts—such as detailed 

maintenance drawings, specifications, and tolerances—and, should the 

companies’ service provider arrangements fail, to support competition 

among alternate providers. DOD program managers, in contrast, often opt 

to spend limited acquisition dollars on increased weapon system capability 

rather than on the rights to technical data. This trade-off limits DOD’s 

flexibility, because although DOD may be obtaining access to technical 

data needed to manage performance-based contracts, it may not be 

developing product-support strategies that provide for the future delivery 

of technical data when required to support competition or alternate source 

development if performance-based logistics arrangements were to fail. 

We are making recommendations that, if followed and included in the 

soon to be issued guidance, should improve the implementation of 

performance-based logistics in the department. In commenting on a draft 

of this report, DOD concurred with our findings and recommendations. 

DOD’s response is included as appendix I. 

Performance-based logistics is the DOD term for the process of 

(1) identifying a level of performance required by the warfighter and 

(2) negotiating a performance-based contract between the government 

and the product support integrator—that is generally the original 

equipment manufacturer of the total system—to provide long-term total 

system support for a weapon system at a fixed level of annual funding. 

Instead of buying spares, repairs, tools, and data in individual transactions, 

the method in a performance-based logistics arrangement is to buy a 

predetermined level of availability that meets the warfighter’s objectives. 

To implement performance-based logistics, DOD selects a product support 

integrator to serve as the single point of accountability, integrating support 

from all sources to achieve the performance outcome metrics specified 

Background 
Page 5 GAO-04-715 Performance-Based Logistics 

in the performance-based support agreement. The metrics used include 

operational availability (a measure of the degree to which an item is in an 

operable state and can be committed at the start of a mission when the 

mission is called for at an unknown point in time); mission capability 

(the material condition, indicating that it can perform at least one and 

potentially all of its designated missions); and customer wait time 

(the total elapsed time between issuance of a customer order and 

fulfillment of that order). For example, the Navy now uses two metrics for 

its performance-based contract for the T-45 aircraft system3

—“ready for 

training,” which requires that the contractor have a minimum number of 

aircraft ready for training at 7:00 AM each business day in order to achieve 

a 57 percent aircraft availability; and “sortie completion,” which requires 

that the contractor meet 98 percent of the requirements for the scheduled 

training flights. As an incentive, the contract pays a performance bonus 

(maximum of $5 million annually) if the contractor exceeds the 

performance metrics. If the contractor only meets—or fails to meet—the 

minimum metrics, the contractor then receives none of the annual 

performance bonus. 

DOD Directive 5000.1, the Defense Acquisition System, highlights the 

department’s preference for using performance-based logistics at the 

platform level, stating, “Program Managers shall develop and implement 

performance-based logistics strategies that optimize total system 

availability while minimizing cost and logistics footprint.” As part of its 

implementation of this strategy, in 2003 DOD proposed that the Congress 

adopt legislative changes that would allow the services to increase the 

appropriations allocation flexibility within a weapon system program, 

allowing the program manager to use funds from different accounts 

(such as operation and maintenance; research, development, test, and 

evaluation; and procurement) to pay for system support costs. Although 

this proposal was not adopted, DOD continues to pursue various avenues 

that would support the overall objective of having greater flexibility by 

using a single line of support funding managed by the program office for 

total system operation and maintenance costs. Most recently, on 

 3

 Initially the Navy had one contract for the entire T-45 aircraft system and had only 

one metric, aircraft availability, for evaluating the contract. Under this approach the Navy 

was paying the contractor based on its forecasted flying hours rather than actual hours. 

Because forecasted hours were more than actual hours, the Navy paid for hours it was not 

flying. The Navy added the second metric and a fixed labor rate for over-and-above work 

when it revised the T-45 performance approach and negotiated separate contracts for the 

aircraft and engine systems. 
Page 6 GAO-04-715 Performance-Based Logistics 

February 4, 2004, the Deputy Secretary of Defense (1) directed the 

Under Secretary of Defense (Acquisition, Technology, and Logistics) in 

conjunction with the Under Secretary of Defense (Comptroller) to issue 

clear guidance on purchasing using performance criteria; and (2) directed 

each service to provide a plan to aggressively implement performancebased logistics, including transferring appropriate funding as needed,4

 on 

current and planned weapon system platforms for fiscal years 2006–2009. 

While this directive does not preclude the services from using 

performance-based logistics contracts below the platform level, it does 

express DOD’s intent to apply the concept at the platform level as a 

preferred practice. As we discuss in the next section, DOD has established 

separate goals for implementing performance-based service contracts, and 

the services have identified many contracts as performance-based logistics 

arrangements that are, in fact, below the platform level. However, 

according to Office of Secretary of Defense officials, DOD would like to 

implement performance-based logistics at the platform level to move from 

contracting for material availability to weapon system availability. DOD 

considers that the platform level offers the metrics needed to implement a 

true performance-based logistics arrangement. 

The Office of Management and Budget indicates that performance-based 

service contracting, from which performance-based logistics has evolved, 

has been referenced in regulation, guidance, and policy for more than two 

decades, and federal agencies have used performance-based contracting to 

varying degrees for acquiring a range of services. In 1991 the Office of 

Management and Budget issued a policy letter establishing the use of a 

performance-based approach for service contracting, and in 1994 it 

initiated a governmentwide pilot project to encourage the use of 

performance-based service contracts in federal agencies, including DOD. 

 4

 DOD officials suggest this might involve establishing a single line of accounting for all 

operations and maintenance funding for a program that would be managed by the system 

program office. Today, operation and maintenance funds are managed by different parties 

including the operational commands, the weapon system managers, and the program 

offices. We have previously reported that warfighters have expressed a concern about the 

loss of flexibility of operational commanders when system operation and maintenance 

funding is fenced and controlled by the program manager. See U.S. General Accounting 

Office, Defense Logistics: Air Force Lacks Data to Assess Contractor Logistics Support 

Approaches, GAO-01-618 (Washington, D.C.: Sept. 7, 2001) and Defense Logistics: 

Opportunities to Improve the Army’s and Navy’s Decision-making Process for Weapons 

Systems Support, GAO-02-306 (Washington, D.C.: Feb. 28, 2002). 

DOD Performance-Based 

Logistics Evolving from Its 

Use of Performance-Based 

Service Contracting 
Page 7 GAO-04-715 Performance-Based Logistics 

The use of performance-based service contracts to acquire services offers 

a number of potential benefits, particularly when services are acquired 

by means of a fixed price agreement. Performance-based contracts can 

encourage contractors to be innovative and to find cost-effective ways of 

delivering services for a fixed level of funding. By shifting the focus from 

process to results, these contracts can potentially produce better 

outcomes and reduced costs. 

In view of the potential benefits, Congress has been encouraging greater 

use of performance-based service contracting.5

 In an August 2003 

memorandum to the military departments, the Under Secretary of Defense 

(Acquisition, Technology and Logistics) stated that DOD should continue 

to increase its use of performance-based service acquisitions. He noted 

that DOD has a goal to award 50 percent of contract actions and dollars 

using performance-based specifications by fiscal year 2005. 

The more specific concept of performance-based logistics as an approach 

for supporting military systems emerged from DOD’s 1999 study, Product 

Support for the 21st Century, which identified 30 pilot programs (10 in 

each military department) to test logistics support reengineering concepts 

that placed greater reliance on the private sector. Many of the pilots 

involved various types of contractor logistics support, prime vendor 

support, or performance-based type arrangements. Others focused on 

including reduced operation and support costs and improved readiness 

as performance requirements for new system development.6

 The 

September 30, 2001, Quadrennial Defense Review advanced DOD’s 

move toward this concept by advocating the implementation of 

performance-based logistics with appropriate metrics that would be 

designed to compress the supply chain and improve the readiness of 

major weapon systems and commodities. 7

 A November 2001 Office of the 

 5

 In October 2000, Congress passed section 821 (b) of the National Defense Authorization 

Act for Fiscal Year 2001, which allows DOD to treat performance-based service contracts 

or task orders as contracts for the procurement of commercial items under certain 

conditions (Public Law No. 106-398). 

6

 U.S. General Accounting Office, Best Practices: Setting Requirements Differently Could 

Reduce Total Ownership Costs, GAO-03-57 (Washington, D.C.: Feb. 11, 2003), emphasized 

the need to include total ownership cost goals and readiness rates as performance metrics 

equal to any others in the development of major weapon systems. 

7

 Supply chain management refers to all of the inter-related components and processes 

required to ensure that the correct amount of product is in the correct location at the right 

time and at the lowest cost. 
Page 8 GAO-04-715 Performance-Based Logistics 

Deputy Under Secretary of Defense document, Product Support for the 

21st Century: A Program Manager’s Guide to Buying Performance, 

intended as a guide for program managers, stated that program managers 

will implement performance-based logistics on all new systems and on 

acquisition category I and II fielded systems selected on the basis of a 

sound business case. 

It is unclear how many performance-based logistics programs the 

services have implemented. In response to our inquiries, the Army 

identified 74 performance-based logistics programs, the Navy identified 

106, the Air Force 4, and the Marine Corps 1. We noted a broad range of 

contract arrangements is identified under the performance-based logistics 

umbrella, with many of them initiated under a different name, such as 

contractor logistics support or total systems support responsibility and 

later identified as performance-based logistics arrangements. Most of the 

DOD performance-based logistics arrangements currently identified by the 

services are used for subsystems or components rather than for weapon 

system platforms. 

Fiscal years 2003 to 2007 Defense Planning Guidance required the 

services to submit plans that identified their implementation schedules for 

performance-based logistics to all new weapon systems and acquisition 

category I and II fielded systems. Similarly, a February 13, 2002, letter from 

the Under Secretary of Defense (Acquisition, Technology, and Logistics) to 

the services emphasized the need for the plans required by the Defense 

Planning Guidance and directed that the plans be issued by May 1, 2002. 

But although the services issued plans, they did not take an aggressive 

approach toward adopting this concept, according to Office of Secretary 

of Defense logistics officials. An October 2003 Defense Business Board 

report encouraged the department to move more quickly in adopting the 

performance-based logistics, stating, “Performance-based logistics is an 

industry best practice and a DOD best practice. DOD should consider 

using it for all its weapon systems, new and legacy, provided it is 

supported by a business-case analysis.”8

 This task force was chartered by 

the Under Secretary of Defense (Comptroller) and Chief Financial Officer 

to describe private-sector best practices used in managing supply chain 

 8

 The Supply Chain/Performance-Based Logistics Task Group’s October 15, 2003, report to 

the Senior Executive Council provided this group’s perspective regarding what needed to 

be done to implement performance-based logistics in the Department of Defense. 
Page 9 GAO-04-715 Performance-Based Logistics 

partnering arrangements and to propose how to apply such practices to 

the supply chain processes used by DOD. Citing this task force report, the 

aforementioned February 2004 Deputy Secretary of Defense memorandum 

to the military departments stated, “Delay in implementing this practice 

complicates our funding, limits industry flexibility, and increases DOD 

inventory. We must streamline our contracting and financing mechanisms 

aggressively to buy availability and readiness measured by performance 

criteria.”9

Because DOD proposes using performance-based logistics at the platform 

level as the predominant support strategy for its military systems, it may 

limit opportunities for savings from competition, volume discounts, and 

reduced administrative costs. Also, by often not contracting for long-term 

access to technical data, programs officials are further limiting their 

support options. 

In the private sector, performance-based contracting is a tool used 

according to the applicability of subsystem or component and 

circumstance, when it is cost-effective and reduces risk in a 

noncompetitive environment. DOD, by contrast, proposes using it as the 

predominant product support strategy for its military systems. Further, 

when private-sector companies use performance-based contracting, they 

use it at the subsystem or component level, retaining the program 

integration function themselves as a core business function essential to 

successful business operations. Conversely, DOD policy memoranda 

support using performance-based contracting at the platform level and 

using the contractor as the support integrator. Moreover, private sector 

companies emphasize the importance of having the rights to contracts and 

competition. DOD, in contrast, is frequently not acquiring the same level of 

technical data in its acquisition of new programs. 

 9

 Memorandum from the Deputy Secretary of Defense to the Secretaries of the Military 

Departments and the Under Secretary of Defense (Comptroller), February 4, 2004. 

DOD’s Current 

Preferred Approach 

to Performance-Based 

Logistics May Limit 

Opportunities 

for Competition 

and Savings 
Page 10 GAO-04-715 Performance-Based Logistics 

While our review of private sector companies did find that half of those 

we interviewed are using performance-based contracting, the industry 

approach is much different from DOD’s preferred approach for 

performance-based logistics. As previously discussed, Office of the 

Secretary of Defense guidance has over the past several years encouraged 

the services to use performance-based logistics at the weapon system level 

as the preferred approach for life-cycle management of military systems. 

DOD officials have stated that this is an industry best practice and should 

be adopted more aggressively, but in 7 of 14 companies we interviewed 

that used some type of performance-based contracting, this agreement 

was used at the subsystem or component level—that is, for engines, 

auxiliary power units, wheels, or brakes— and it was generally used for 

older systems. 

The following chart characterizes the companies we interviewed by 

industry type, by the extent to which they outsource logistics support 

activities, by the predominant contracting practices used, and by the types 

of subsystems or components outsourced using performance-based 

contracting. Pseudonyms are used rather than the actual company names. 

These companies generate annual revenue generally exceeding $1 billion, 

and they use complex and expensive equipment for which they require 

high levels of availability and reliability as well as efficiency in managing 

lifecycle costs. The life-cycle management issues are comparable to those 

of DOD in managing its weapon system sustainment programs. 

Performance-Based 

Contracting for Logistics 

Used as a Tool in Industry 

Rather Than a Preferred 

Support Concept as 

Proposed by DOD 
Page 11 GAO-04-715 Performance-Based Logistics 

Table 1: Company Use of Contracting Tools to Outsource Subsystem and Component Support 

Industry/company 

Percent 

outsourced 

 Predominate type of 

contracting tool 

Subsystem or component 

outsourced 

Air carrier industry 

Company A 65 Fixed price—time and material Airframes 

 Performance-based Engines, auxiliary power units (APUs), 

avionics, wheels and brakes 

Company B 20 Fixed price—time and material Airframe, engines, avionics 

 Performance-based APUs, avionics, wheels and brakes 

Company C 38 Fixed price—time and material Engines 

 Performance-based Engines, APUs 

Company D 90 Fixed price—time and material Airframes, engines, APUs, avionics 

 Performance-based Engines, avionics, wheels and brakes 

Company E 76 Fixed price—time and material Airframes, engines, avionics 

 Performance-based Engines, APUs, wheels and brakes 

Company F 33 Fixed price—time and material Airframes, engines, APUs, avionics 

 Performance-based Engines, APUs, brakes 

Energy exploration and mining industries

Company G 75 Fixed price—time and material Engines 

 Performance-based Engines, transmission, torque converters, 

wheels and brakes 

Company H 5 Fixed price—time and material All components 

Company I 65 Fixed price—time and material Engines, pumps 

Company J 65 Fixed price—time and material Engines, hydraulics, pumps, 

transmissions 

Maritime and entertainment industries 

Company K 75 Fixed price—time and material Subsystems/components 

Company L 75 Fixed price—time and material Subsystems/components 

Company M 35 Fixed price—time and material Subsystems/components 

Company N 20 Fixed price—time and material Subsystems/components 

Source: GAO analysis of company data. 

As shown above, performance-based contracting in the companies we 

interviewed is most widely used in the air carrier industry, and it also has 

limited use in the energy exploration and mining industry. According to air 

carrier officials, time and material contracts are more prevalent than 

performance contracts, because industry prefers to use short-term (2 to 

3 years) competitive contracts when possible. In a sole-source 

environment companies sometimes use longer-term (10 to12 years) 
Page 12 GAO-04-715 Performance-Based Logistics 

performance-based contracts for supporting some subsystems such as 

engines, if they have sufficient historical data to establish an accurate 

baseline. For example, all but one of the air carrier industry companies 

had performance-based contracts for one or more engines. The amount of 

engine workload managed by performance-based contracts varied from 

company to company. For example, Company C, which outsourced 

38 percent of its total maintenance workload, used performance-based 

contracts for one-fifth of its outsourced engine work; while Company A, 

which outsourced 65 percent of its maintenance workload, used 

performance-based contracts for all of its engine work. The air carrier 

companies did not use performance-based contracts for contracted work 

on airframes, work that generally comprises about 30 percent of the 

commercial aviation maintenance and repair market.10 Table 2 provides 

information regarding the percentage of dollars spent on the repair of each 

type of subsystem or component managed using performance-based 

contracts by the air carrier companies and the one non-air carrier 

company that used performance-based contracts. The subsystems or 

components for which the companies used performance-based contracts 

most widely were auxiliary power units and wheels and brakes. 

Table 2: Percentage of Maintenance Dollars for Outsourced Subsystems and 

Components Managed Using Performance-Based Contracts 

Source: GAO analysis of company data. 

Note: N/A = Not applicable because some subsystems and components are not applicable to all 

industries. 

a

Includes only brakes. Wheels are maintained in-house. 

 10 Additionally, 29 percent of the total is for engines, 23 percent for line maintenance, and 

19 percent for components. 

Companies 

Out sourced subsystems and 

components A B C D E F G

Engines 100% 0% 20% 90% 57% 28% 45%

Auxiliary power units 90 100 100 0 100 41 N/A

Avionics 36 35 0 5 0 0 N/A

Wheels and brakes 100 100 0 100 100 80a25

Transmission and torque converters N/A N/A N/A N/A N/A N/A 100
Page 13 GAO-04-715 Performance-Based Logistics 

Company officials noted that performance-based contracts are a tool most 

often used selectively in a noncompetitive environment in an effort to 

control cost and reduce risk. Additionally, they said that performancebased contracting works better for subsystems and components where 

available cost and performance data are sufficient to establish a good 

business case analysis, noting that this is more difficult to accomplish for 

new systems, where performance data are uncertain. Performance-based 

contracts differ from traditional logistics contracts by focusing on the 

purchase of weapon system sustainment as an integrated package based 

on output measures—such as a predetermined level of system availability. 

In contrast, traditional transaction-based time and material contracts are 

used to purchase logistics inputs—such as quantities of spare parts, 

specific repair tasks, and engineering studies. Under transaction-based 

contracts, the government pays for each transaction as a separate 

deliverable; whereas under a performance-based contract, the contractor 

is being paid for achieving an outcome performance metric, regardless of 

what he does to achieve that performance. 

In concept, performance-based contracts encourage the contractor to 

achieve a high level of performance at a fixed cost. However, air carrier 

industry officials we interviewed said that entering into a performancebased contract without good baseline data introduces a higher level of risk 

that the arrangement may not be cost-effective. For example, officials 

from one company said they used a performance-based contract for the 

older of the two types of engines in the company’s inventory. Officials said 

they would wait to collect sufficient performance data on the newer 

engine before considering a performance-based contract. The officials 

noted that they had originally used a performance-based contract on the 

newer engine, but found that, because the reliability of the engine was 

greater than expected, the contract arrangement was not cost-effective. 

The company was able to change the contract to a time and material 

contract, to allow time to collect sufficient performance data to support a 

fact-based business case analysis to determine the company’s “should” 

cost amount for a performance-based contract. 

Performance-based contracting offers DOD opportunities to 

provide contractors incentives to achieve desired levels of operational 

performance at a fixed cost when the department has historical 

performance information. But in the absence of reliable and 

complete performance data as a baseline, the adoption of this approach 

as the preferred support strategy for new weapon systems could 

undermine DOD’s ability to negotiate cost-effective terms—particularly 

since the performance-based contracts at the weapon system level have 
Page 14 GAO-04-715 Performance-Based Logistics 

cost-reimbursement elements, while the private-sector companies 

generally used fixed-price agreements. Private-sector officials noted that it 

is important to use fixed prices for materials, since the high price of 

materials is a key factor driving the companies to use performance-based 

contracts. 

DOD policy promotes using performance-based contracting differently 

from the way private-sector firms use it in supporting complex and 

expensive systems. The companies we reviewed generally used 

performance-based contracting at the subsystem level for engines and 

certain other components rather than at the platform level, as proposed by 

DOD. Furthermore, when using performance-based contracting, these 

companies do not contract out the program integration function, as the 

military services are doing. 

We found no performance-based contracts for maintenance of airframes 

or maintenance of any equipment platform among the private-sector 

companies we reviewed. Industry officials cited three reasons why they 

believe the use of performance contracts is more advantageous at the 

subsystem or component level. First, they prefer to take advantage of 

competition whenever it is available and to manage support contracts 

through the use of competitive procedures. For example, because airframe 

maintenance support is available from a competitive market, the 

companies generally use a combination of fixed price and time and 

material contracts for this category of service. Conversely, performancebased contracts are often used for engine repair because of the high cost 

of spare and repair parts that are available only from the original 

equipment manufacturer. Officials said that there are too few third-party 

repair vendors to foster competition. Second, company officials 

emphasized the importance of gaining purchasing power from volume 

discounts on subsystems or components across their entire fleet of 

systems as a reason for not implementing performance contracting at the 

platform level. Finally, by having contracts at the subsystem or component 

level, companies can avoid the administrative costs that would be charged 

by a prime integrator. 

Similar to the approach used by the companies we reviewed, we noted 

that the Navy has used performance-based contracts primarily at the 

subsystem or component level. Navy officials said that implementation at 

this level is easier because the service could implement this concept more 

readily under DOD’s current funding structure. The funding is handled 

through the working capital fund, with reimbursement to the fund coming 

Private Sector Applies 

Performance-Based 

Logistics at the Subsystem 

or Component Level 

Rather Than at the 

Platform Level and Retains 

System Integrator 

Function 
Page 15 GAO-04-715 Performance-Based Logistics 

from the sale of subsystems or components to the fleet. Navy officials also 

noted that by implementing performance-based logistics at this level, they 

can save money by competing subsystems or components where a 

competitive market exists, consolidating the requirements of multiple 

programs and leveraging their buying power to obtain a pricing advantage, 

and reducing administrative costs—advantages also recognized by the 

private sector. 

The Navy’s history of using a performance-based contract for logistics 

support of the T-45 trainer aircraft illustrates how savings may be achieved 

by implementing the concept at the subsystem level rather than the 

weapon system level. The program office originally had a performancebased contract for the entire weapon system with the original equipment 

manufacturer. The contract was a 5-year firm-fixed price with an option 

for a sixth year period. Program office officials said the sole metric used, 

ready-for-training aircraft, resulted in there being an insufficient number 

of aircraft available to fly scheduled training sorties. Additionally, because 

actual flying hours were fewer than forecasted, the Navy was paying for 

flying hours it was not flying. Concluding that benefits weren’t as 

expected, that the costs were too high, and that savings were achievable 

by negotiating separate contracts for the airframe and engine, the program 

office chose not to exercise the option. The new engine contract is a 

performance-based contract awarded on a sole-source basis to the engine 

manufacturer, and the airframe performance-based contract was awarded 

competitively. According to Navy program office officials, the revised 

approach resulted in a projected savings of $37 million in the first year and 

projected savings of $144 million at the end of a 5-year period.11 The 

savings are being achieved through elimination of the administrative costs 

charged by the prime contractor for the engine work and through 

competition for the aircraft system. 

Another potential adverse effect of awarding a performance-based 

contract at the weapon system level is the loss of management control and 

expertise over the system that private-sector firms said was essential to 

 11 The savings estimates were calculated independent of the program office by the Naval 

Air System Command’s cost estimators within the Research and Engineering Competency, 

and they follow a standard methodology called the “Maintenance and Trade Analysis.” 

A baseline was established by updating the original baseline cost analysis supporting 

the initial contract with actual costs from the 2001 through 2004. The calculation also 

quantified the pass-through administrative cost charged by the prime contractor for 

the engine work. This analysis identified that the Navy would save $118 million on the new 

competitively awarded airframe contract and $26 million on the new engine contract. 
Page 16 GAO-04-715 Performance-Based Logistics 

the success of their business operations. Industry officials said that 

managing their supplier base and ensuring the availability of their 

equipment to generate revenue is too critical to entrust to a second party. 

Further, they believe that contracting out support at a platform level by 

using a system integrator limits the potential to optimize savings through 

competition and volume discounts and adds administrative costs charged 

by the prime integrator for managing subcontractors. 

The spokespersons for every company we visited told us that when they 

purchase equipment they make sure to acquire the technical data12

necessary to support it, regardless of whether the company intends to 

support the equipment in-house or outsource some of its support 

operations. Company officials said that this data was essential to their own 

management and oversight functions. For example, officials from a 

company that outsources most of its repairs pointed out that its engineers 

use the data to perform such tasks as establishing reliability metrics, 

evaluating performance, and revising repair standards. Additionally, 

officials stated that owning the technical data afforded their companies 

the flexibility that enabled them either to perform the work in-house or to 

offer the work up for competition. Several company officials said that it is 

best to obtain the technical data at the time the equipment is purchased, 

when the buyer has the most leverage in its negotiations with the 

manufacturer. Trying to obtain the technical data at a later time is difficult 

to negotiate and more expensive. These companies do not price their 

technical data items separately. DOD program offices, however, negotiate 

a price for maintenance-and-repair technical data separately from the 

price of the military hardware systems. According to service competitionadvocate officials, program managers faced with limited acquisition 

dollars often make trade-off decisions to buy increased weapon system 

capability in lieu of technical data. 

We reported in 2002 that DOD program offices have often failed to put 

adequate emphasis on obtaining needed technical data during the 

acquisition process.13 We recommended that DOD emphasize the 

 12 Technical data includes detail maintenance drawings and repair publications containing 

specifications and tolerances. 

13 U.S. General Accounting Office, Defense Logistics: Opportunities to Improve the 

Army’s and Navy’s Decision-making Process for Weapons Systems Support, GAO-02-306

(Washington, D.C.: Feb. 28, 2002). 

Not Obtaining Sufficient 

Rights to Technical Data 

Could Limit Long-Term 

Support Options and Could 

Increase Long-Term Costs 
Page 17 GAO-04-715 Performance-Based Logistics 

importance of obtaining technical data and consider including a priced 

option for the purchase of technical data when considering proposals for 

new weapon systems or modifications to existing systems. DOD concurred 

with our recommendation, noting that there was a requirement in DOD 

5000.2R for program offices to provide long-term access to data required 

for the competitive sourcing of systems support throughout the life cycle. 

Additionally, by implementing total life-cycle systems management, DOD 

would strengthen its emphasis on acquiring technical data when 

negotiating support agreements with logistics providers. Nonetheless, the 

DOD has further diminished the emphasis it places on the need to acquire 

rights to technical data. For example, in May 2003, DOD replaced its 

acquisition regulation with a streamlined instruction,14 which eliminated 

the prior regulation’s requirement for the program manager to provide for 

long-term access to data required for the competitive sourcing of weapon 

system support throughout the life cycle of the system. This language is 

now provided as guidance in the Interim Defense Acquisition Guidebook, 

but it is not mandatory that this guidance be followed. 

According to DOD and service logistics officials, program managers 

should develop strategies that provide the government with sufficient and 

affordable technical data rights to enable them to put the work out for 

competition or develop alternate public or private sources for weapon 

system support if performance-based logistics arrangements fail or 

become too expensive. Logistics officials recognize that program 

managers who implement performance-based logistics contracts on new 

weapon systems may wish to delay taking delivery of technical data early 

in the life of the system, because unlike the stable designs of commercial 

equipment purchased in the private sector, the data for cutting edge 

technology lacks maturity and is frequently changed. Alternatively, 

program managers sometimes pay the original equipment manufacturers 

both to maintain the technical and weapon system configuration data and 

to provide the program managers with sufficient access to enable them to 

manage and oversee the performance-based logistics contract. However, 

logistics officials agree that the product support strategy should clearly 

provide for the future delivery of the technical data when required to 

support competition or alternative source development. 

 14 DOD Regulation 5000.2-R, Mandatory Procedures for Major Defense Acquisition 

Programs and Major Automated Information System Acquisition Programs was 

replaced by DOD instruction 5000.2, Operation of the Defense Acquisition System, to 

create a simplified and flexible management framework for acquisition. 
Page 18 GAO-04-715 Performance-Based Logistics 

Service logistics and competition-advocate officials said that it is critical 

that this strategy be developed during the weapon system acquisition 

phase, when the program office has its greatest leverage in negotiating 

the price of the technical data and the conditions under which the 

manufacturer must deliver the data. For example, in the course of the 

acquisition of the V-22 aircraft engine, the Navy program office obtained a 

technical data license agreement, according to which the manufacturer 

agreed to deliver a complete data package if it failed to perform in 

compliance with the statement of work at the agreed-to price and 

schedule. Conversely, when the program office does not obtain the 

technical data at the time of purchase, the future costs for obtaining these 

data are not knowable and, without the leverage of the original package 

purchase, could be prohibitively expensive. In our review of data collected 

from DOD’s performance-based logistics program offices, we noted that 

DOD had not negotiated for the maintenance drawing packages for the 

Javelin missile, F-117 aircraft, and TOW missile improved target 

acquisition system, and DOD would have to purchase them at a later date 

at a price to be negotiated. 

In April 2004, the Logistics Management Institute reported in a review of 

performance-based logistics arrangements that it found no evidence to 

indicate either the quantity or the quality of logistics management data—

including technical data—available to the government was compromised 

by the use of performance-based logistics arrangements.15 This report also 

noted, however, that the acquisition guidance published by the Office of 

the Secretary of Defense does not address strategies for terminating 

interim contractor support or performance-based logistics contracts. The 

Logistics Management Institute report recommended that the Defense 

Acquisition Working Group include performance-based logistics “exit 

strategy” guidance in the defense acquisition guidebook. Nonetheless, as 

we have previously noted, guidance in this handbook is not mandatory. 

The use of performance–based contracting for the support of complex 

and costly military systems offers opportunities for military program 

managers to incentivize contractors to achieve desired levels of weapon 

system performance. However, our review of the use of the practice in 

private-sector firms indicates that DOD’s proposed guidance to adopt 

 15 Logistics Management Institute, Visibility of Maintenance Data in Performance-Based 

Logistics Arrangements, LG301L4 (McLean, Va.: Apr. 2004.) 

Conclusions 
Page 19 GAO-04-715 Performance-Based Logistics 

performance-based logistics aggressively at the platform level could limit 

competition, and such guidance might not be the most cost-effective 

approach for using this concept. Additionally, although DOD based its 

rationale for using performance-based logistics at least partially on the 

perception that this is an industry best practice, it appears that perception 

is not the case. DOD’s approach toward implementing the concept appears 

inconsistent with the way private-sector companies we interviewed use 

performance-based contracting in acquiring support for their equipment, 

and DOD’s approach has risks that should be addressed as it develops its 

guidance for using performance-based logistics. 

Using performance-based logistics as the preferred approach for managing 

the support of major weapon system programs—even though privatesector company officials use performance-based contracting selectively, 

when appropriate and cost-effective—carries the risk of increasing lifecycle cost. Both private- and public-sector experiences with performancebased contracting illuminate the challenges involved in developing a 

meaningful baseline for establishing a performance-based arrangement for 

new systems, because not enough is known early in the program about 

performance characteristics and because there is risk to both the program 

office and the contractor that may translate into high cost. Additionally, 

the use of performance-based logistics can limit the competition that 

would be available for providing logistics support when support decisions 

are made at the subsystem or component level rather than at the platform 

level. Using performance-based logistics at the platform level also creates 

risk by contracting out the program integration function—a core function 

that private contractors consider essential for the cost-effective 

management of costly and complex systems over their life cycle. 

Finally, adopting performance-based logistics at the weapon system 

platform level may be influencing program offices to obtain access only to 

technical data necessary to manage the performance-based contract 

during the acquisition phase—and not to provide a strategy for the future 

delivery of technical data in case the performance-based arrangement 

fails. In such a case, the program manager would have limited flexibility in 

choosing whether to perform maintenance in-house, select an alternative 

vendor, or offer the work for competition. 
Page 20 GAO-04-715 Performance-Based Logistics 

In order for the department to improve the implementation of 

performance-based logistics, we recommend that the Secretary of Defense 

direct that the Under Secretary of Defense (Acquisition, Technology and 

Logistics) and the Under Secretary of Defense (Comptroller) implement 

the following two recommendations: 

1. Incorporate in DOD’s guidance to the services the private sector’s 

practice of using performance-based logistics as a tool to achieve 

economies at the subsystem or component level, rather than as a 

preferred practice at the platform level. Also, incorporate the private 

sector’s practice of using it when sufficient performance data are 

available to establish a meaningful cost baseline and 

2. Consider requiring program offices, during weapon system acquisition, 

to develop acquisition strategies that provide for the future delivery of 

sufficient technical data to enable the program office to select an 

alternate source—public or private—or to offer the work out for 

competition if the performance-based arrangement fails or becomes 

prohibitively expensive. 

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

recommendations to enhance the implementation of performance-based 

logistics. 

Regarding our recommendation to incorporate in its performance-based 

logistics guidance to the services the private sector’s practice of using 

performance-based logistics as a tool to achieve economies at the 

subsystem or component level, DOD’s response stated that the department 

recognizes the need to re-emphasize the use of performance-based 

logistics for subsystems and components in its policy memorandum and 

guide books. Nonetheless, the response noted that the department 

believes that it is still prudent to pursue performance-based logistics 

strategies at the platform level where supported by a business case 

analysis. The private sector companies we interviewed noted that the 

more cost effective alternative is to use competitive procedures where 

practicable at the subsystem or component level supported by a cost 

analysis using reliable performance data. 

Recommendations for 

Executive Action 

Agency Comments 

and Our Evaluation 
Page 21 GAO-04-715 Performance-Based Logistics 

Regarding our comment that DOD also incorporate in its guidance the 

private sector practice of using performance-based logistics when 

sufficient performance data are available to establish a meaningful cost 

baseline, DOD stated that its policy is that a business case analysis should 

be performed to help make the determination to use performance-based 

logistics or traditional logistics support arrangement, and that the business 

case analysis incorporate the use of performance data, if available, in 

establishing a meaningful cost baseline. DOD stated that it will emphasize 

the use of performance data in a revised policy memorandum on 

performance-based logistics. However, based on information we obtained 

from the private sector companies we interviewed, developing reliable 

cost and performance data to support a valid cost analysis at the platform 

level for a new system will be a challenge and may not be reliable in 

identifying the most cost-effective support option over the life cycle of the 

system. As we noted in our report, one company tried a performancebased contract for a new engine but found that because the reliability of 

the engine was greater than expected, this contract management was not 

cost-effective. Company officials said they preferred to collect reliable 

performance data over a period of time to support negotiations for a 

performance-based contract. 

In response to our recommendation to consider requiring program offices 

to develop acquisition strategies that provide for the future delivery of 

sufficient technical data to select an alternate source—public or private—

or to offer the work out for competition if the performance-based 

arrangement fails or becomes prohibitively expensive, DOD stated that it 

will take steps to address this issue in the next iteration of the DOD 

Directive 5000.1 and DOD Instruction 5000.2 acquisition regulation policy. 

According to the response, the new policy will require the program 

manager to establish a data management strategy that requires access to 

the minimum data necessary to sustain the fielded system, recompete or 

reconstitute sustainment if necessary, promote real time access vice 

delivery of the data, and provide for the availability of quality data at the 

point of need for the intended user. According to DOD, for performancebased logistics arrangements, these actions will include acquiring the 

appropriate technical data to support an exit strategy should the 

arrangement fail or become too expensive. 
Page 22 GAO-04-715 Performance-Based Logistics 

The objectives of our review were to determine (1) what types of 

contractor support practices the private sector used to support complex 

and costly equipment that have life-cycle management issues similar to 

military weapons systems and (2) what potential lessons could be learned 

through a comparison of private sector contractor logistics support 

practices that DOD currently uses, or plans to use, under its 

implementation of performance-based logistics. 

To identify commercial industries that use complex and costly equipment 

with life-cycle management issues similar to military weapon systems, we 

interviewed DOD depot maintenance and logistics policy officials. We also 

conducted a literature search to identify appropriate industry groups and 

interviewed officials from the Industrial College of the Armed Forces, the 

Aerospace Industries Association, the American Association of Port 

Authorities, International Council of Cruise Lines, the Society for Mining 

Metallurgy and Exploration, the Construction Industry Institute, and the 

Council of Logistics Management to validate and refine the identified 

industries and to identify appropriate candidate companies within the 

industry groups. Within the air carrier, maritime shipping, energy 

exploration, mining, and entertainment industries, we identified over 250 

companies and selected 67 companies based on sales/revenues, 

production rankings, and management awards that might be good 

candidates for our study. We eliminated three companies that did not 

outsource significant amounts of logistics support, and 50 companies 

either did not respond to our initial inquires or declined to participate in 

the study. Fourteen companies agreed to participate and completed our 

interviews and follow-up questions. Thirteen of the 14 companies we 

interviewed agreed to be identified and are listed below by industry group: 

Air carriers (Continental Airlines, Houston, Texas; Delta Air Lines, Atlanta, 

Georgia; FedEx Corp., Memphis, Tennessee; Southwest Airlines, Dallas, 

Texas; and United Airlines, San Francisco, California); Energy Exploration 

and Mining (British Petroleum, Houston, Texas; Diamond Offshore, 

Houston, Texas; Phelps Dodge, Phoenix, Arizona; and Vulcan Material, 

Birmingham, Alabama); Maritime (Carnival Cruises, Miami, Florida; 

Conoco Philips Polar Tanker, Long Beach, California; and Disney Cruise, 

Orlando, Florida); and Entertainment (Disney World, Orlando, Florida). 

To identify private sector support practices, including performance-based 

logistics, we conducted group discussions with respective company 

officials responsible for maintenance and support operations, budgeting, 

and contracting. To collect consistent information among the companies, 

we developed standard group discussion questions based on our literature 

search and discussions with industry experts. We also included questions 

Scope and 

Methodology 
Page 23 GAO-04-715 Performance-Based Logistics 

to determine how the companies addressed logistics and contracting 

issues similar to those that DOD faced in implementing performancebased logistics. We analyzed the responses to identify the prevailing 

industry practices in supporting complex and costly equipment, especially 

focusing on the contracting approaches and practices used to outsource 

support functions and activities. 

We reviewed and discussed with Office of the Secretary of Defense and 

military department officials at the headquarters and major acquisition 

commands the department’s plans, policies, and procedures for using 

performance-based logistics. We also collected policy and guidance 

(published and under development) by the Office of the Secretary of 

Defense as well as the military departments’ policies and implementation 

plans. 

To assess what lessons could be drawn from the private sector companies’ 

experiences to guide DOD’s logistics support efforts, we interviewed 

DOD officials and reviewed ongoing logistics programs. We assessed the 

reliability of the projected cost and savings data we used in this report by 

reviewing supporting documentation and interviewing knowledgeable 

personnel; and we determined that it was sufficient for our purposes. We 

compared and contrasted the contract logistic approaches and practices 

used by private sector activities with those currently used by DOD and 

envisioned under its plans for implementing performance-based logistics. 

This comparison included such elements as the (1) use of performancebased contracting and the extent of its application, (2) assigning a single 

integrator for equipment or weapons system maintenance and logistics 

support on a platform level, (3) management and oversight including the 

importance of technical data, and (4) the degree of competitive sourcing 

and the importance of leveraging purchasing power. As part of our 

continuing review we are also conducting case studies on DOD 

performance-based logistics weapon systems to further compare the new 

DOD approach and practices with those of the private sector. This work is 

continuing and we expect to complete our final report early in 2005. 

We performed our work from September 2003 through June 2004 in 

accordance with generally accepted government auditing standards. 

We are sending copies of this report to the appropriate congressional 

committees, and it will be available at no charge on GAO’s Web site at 

http://www.gao.gov. We are continuing with our review of performance-
Page 24 GAO-04-715 Performance-Based Logistics 

based logistics in the private sector and in DOD and plan to report the 

results early in 2005. 

If you or your staff have any questions on the matters discussed in this 

letter, please contact me at (202) 512-8412 or solisw@gao.gov or my 

assistant director, Julia Denman, at (202) 512-4290 or denmanj@gao.gov. 

Larry Junek, Thom Barger, Pamela Valentine, Judith Collins, and Cheryl 

Weissman were major contributors to this report. 

William Solis, Director 

Defense Capabilities and Management 
Appendix I: Comments from the Department 

of Defense 

Page 25 GAO-04-715 Performance-Based Logistics 

Appendix I: Comments from the Department 

of Defense 

Note: A GAO comment 

supplementing those in 

the report text appears at 

the end of this appendix. 

See comment 1. 
Appendix I: Comments from the Department 

of Defense 

Page 26 GAO-04-715 Performance-Based Logistics 

Note: Page numbers in 

the draft report may differ 

from those in this report. 
Appendix I: Comments from the Department 

of Defense 

Page 27 GAO-04-715 Performance-Based Logistics 
Appendix I: Comments from the Department 

of Defense 

Page 28 GAO-04-715 Performance-Based Logistics 

1. Only 7 of the 14 companies we interviewed use some type 

of performance-based contracting arrangements. None of the 

performance-based arrangements in the seven companies using them 

were at the platform level. 

GAO’s Comment 

(350424) 
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