GAO

United States General Accounting Office

Report to Congressional Requesters

July 1999 ARMY LOGISTICS

Status of Proposed 

Support Plan for 

Apache Helicopter

GAO/NSIAD-99-140

Page 1 GAO/NSIAD-99-140 Army Logistics

United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-282580 Letter

July 1, 1999

The Honorable Herbert H. Bateman

Chairman

The Honorable Solomon P. Ortiz

Ranking Minority Member

Subcommittee on Military Readiness

Committee on Armed Services

House of Representatives

Consistent with the results of the 1997 Quadrennial Defense Review, the 

Department of Defense (DOD) has embarked on a strategy to reengineer its 

logistics support for weapon systems, placing greater reliance on the 

private sector for this support. The Apache AH-64 helicopter has been 

designated by DOD as a pilot effort for implementing this new strategy.1

 At 

the same time, the Army has been considering a logistics support concept 

called Prime Vendor Support2

 (PVS) for the Apache helicopter. Apache PVS 

is a contractor’s proposal to use commercial practices to reengineer 

logistics support, improve readiness, reduce life-cycle costs and provide 

savings that can be used to modernize the Apache aircraft.3

 The program is 

also intended to rely on private-sector capital to upgrade Apache 

components and to manage the parts pipeline. The program also 

corresponds with an Army General Officer Steering Committee’s desire to 

seek ways to reengineer logistics support for the Apache helicopter, lower 

costs, and provide savings for modernization.

1

The Apache helicopter is the Army’s premier aviation weapon system. Its mission as an attack 

helicopter is to perform rear, close, and deep operations and deep precision strikes and to provide 

armed reconnaissance and security. The terms rear, close, and deep refer to where in the battlefield 

military operations take place. These vary according to the depth of the battlefield. Depth is the 

extension of operations in time, space, resources, and purpose.

2

Prime vendors typically are third-party contractors that buy inventory from a variety of suppliers, store 

it in commercial warehouses, and ship it to customers when ordered. In the case of the Apache 

helicopter, the prime vendor concept is much different in that the major equipment manufacturers are 

teaming together to provide the full range of logistics support along with continuous product 

improvement and modernization.

3

The proposed contract amount of the PVS offer and the value of the government’s estimate of its 

in-house best-case approach are considered proprietary and competition sensitive, respectively; 

therefore, this data is not included in this report.

Letr
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Section 346 of the Strom Thurmond National Defense Authorization Act for 

Fiscal Year 1999 (P.L. 105-261) prohibits the Secretary of Defense from 

entering into a prime vendor contract for depot maintenance and repair of 

a weapon system until 30 days after the Secretary submits a report to the 

Congress that describes the competitive procedures used to select the 

awardee and provides a cost analysis that shows savings to the government 

over the life of the contract. As you requested, we determined the status of 

the Apache PVS proposal. This report addresses the evolution of the PVS 

concept and the financial and operational issues that have been raised over 

whether the Army should implement the concept.

Results in Brief The Apache PVS concept began as an unsolicited contractor proposal 

whose scope has evolved over time. As would be expected when a new 

concept of this magnitude is introduced, there are significantly different 

views about various aspects of the proposal. Although the Apache PVS 

proposal is viewed by various Office of the Secretary of Defense (OSD) and 

Army officials as a key effort to test improved weapon system logistics 

support, the proposal remains under study within the Army to address 

unresolved issues. The Army does not know when a decision will be made 

on whether or not the program will go forward. Key questions remain 

regarding how certain cost factors should be considered in evaluating the 

PVS proposal. Estimates of the cost differences between PVS and the 

government’s best-case cost study of the in-house approach vary 

significantly, and each is considered the most cost-effective depending on 

which assumptions, including program requirements, are used. Also, a 

number of questions have been raised about the potential operational 

impact of PVS on meeting warfighters’ logistics support needs. Because of 

uncertainties and differing views and issues that have emerged, the Under 

Secretary of the Army directed in January and March 1999 that more 

rigorous and comprehensive analyses be conducted of cost, operational, 

and requirement issues. Those efforts are still underway.

Because the PVS studies directed by the Under Secretary are not yet 

complete, we are not making any recommendations in this report.

Background In recent years, DOD has concluded that its logistics support system needs 

to be more efficient and effective in meeting war-fighters’ needs. DOD has 

recently designated the AH-64 Apache helicopter as one of several pilot 

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programs to test improvements in program management responsibility for 

life-cycle logistical support of specific weapon systems. 

Traditional Logistics 

Management System

The Army currently manages its logistics system through a network of 

federal workers who acquire spare parts, manage the configuration and the 

upgrades, and oversee all logistics functions.4

 This extensive and 

interrelated logistics support system is executed by dedicated program and 

commodity management personnel that work for the Army as well as 

contractor personnel and employees of the Defense Logistics Agency 

(DLA). The Army’s Aviation and Missile Command—a major subordinate 

command under the Army Materiel Command—manages support of the 

Apache system through a broad range of activities and functions, including 

determining the need for and acquiring spare parts and depot level 

maintenance, managing inventory, and managing configuration and 

engineering upgrades.

The Apache program manager is responsible for the development, 

acquisition, and fielding of the system. The manager reports to the Aviation 

Program Executive Officer (PEO) under the Assistant Secretary of the 

Army for Acquisition, Logistics, and Technology. The PEO is responsible 

for providing executive-level management of assigned weapon system 

programs such as the Apache helicopter. At the unit level, a combination of 

federal civilian, military, and contractor maintenance and supply activities 

provide support to the Apache system.

Working Capital Funds 

Finance Logistics Support

The Army and DLA use working capital funds to finance logistics support 

for the Apache system.5

 Customers that buy supplies through working 

capital funds pay the latest acquisition or repair price plus a surcharge for 

additional costs such as transportation, inventory management, and 

depreciation. Sales related to the Apache system represent a sizable 

4

The Army has a two-tiered, wholesale and retail logistics support system. The wholesale system is comprised of 

the four major commands subordinate to the Army Materiel Command; these subordinate commands procure 

supplies directly from vendors and hold inventories of stocks to meet the demands of retail customers. Retail 

customers are field-operating commands, which receive support from the wholesale level.

5

DOD has used revolving or working capital funds for years. However, in December 1996, the Under 

Secretary of Defense (Comptroller) reorganized the Defense Business Operations Fund and created 

four working capital funds—Army, Navy, Air Force, and Defense-wide. Under the working capital fund 

concept, Defense components are expected to break even over time by charging customers the full cost 

of goods and services provided to them. Customers use appropriated funds, primarily Operations and 

Maintenance appropriations, to finance purchases.
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portion of the Army Working Capital Fund’s business activity. For fiscal 

year 1999, the Army estimated that total sales for the fund would be about 

$2.94 billion and that sales involving the Apache system would be about 

$543 million. Surcharges represent about 25 percent of the fund’s total 

sales value. For fiscal year 1998, sales in DLA’s Working Capital Fund 

totaled $7.39 billion, including about $52.6 million for the Apache system. 

DLA estimated that its surcharge rate was about 24 percent of total sales.

Policy and Legislative 

Guidance Applicable to 

Outsourcing Decisions

Although OSD has designated the Apache PVS proposal a pilot effort, this 

designation did not provide an exemption from policy and legal 

requirements that might otherwise affect outsourcing decisions.

Since 1955, federal agencies have been encouraged to obtain commercially 

available goods and services from the private sector if doing so is 

cost-effective. In 1966, the Office of Management and Budget (OMB) 

issued Circular A-76, which established federal policy for the government’s 

performance of commercial activities and set forth the procedures for 

studying them for potential contracting. The circular and its Supplemental 

Handbook provide guidance to federal agencies on procedures to follow in 

determining whether commercial activities should be performed in-house, 

by another federal agency through interservice support agreements, or by 

the private sector. This guidance generally applies to commercial functions 

except those involving depot maintenance workloads performed in-house 

and valued at more than $3 million—those are subject to the competitive 

requirements of 10 U.S.C. 2469. Under the Apache PVS proposal, the 

current plan is for in-house depot maintenance work to remain in Army 

depots; under these circumstances, section 2469 and its requirements for 

competing depot workloads would not apply.

Generally, the A-76 process requires (1) developing a performance work 

statement and quality assurance surveillance plan; (2) conducting a 

management study to determine the government’s most efficient 

organization (MEO); (3) developing an in-house government cost estimate 

for the MEO; (4) issuing a request for proposal or invitation for bid;

(5) evaluating the proposals or bids and comparing the in-house estimate 

with a private-sector offer or interservice support agreement and selecting 

the winner of the cost comparison; and (6) considering any appeals 

submitted under the administrative appeals process, which is designed to 

ensure that all costs are fair, accurate, and calculated in the manner 

prescribed by the A-76 handbook.
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The A-76 Supplemental Handbook provides that under certain 

circumstances agencies may waive cost comparisons and direct conversion 

to or from in-house, contract, or interservice support agreements. A waiver 

may be granted where the appropriate official determines that

• the conversion will result in a significant financial or service quality 

improvement and will not serve to significantly reduce the level or 

quality of competition in the future award or performance of work or

• the waiver will establish why in-house or contract offers have no 

reasonable expectation of winning a competition conducted under the 

cost comparison procedures of the handbook.

In addition to A-76, DOD must consider the effect of 10 U.S.C. 2461 when it 

plans changes to an industrial- or commercial-type function performed by 

its civilian employees. Section 2461, as amended by the Strom Thurmond 

National Defense Authorization Act for Fiscal Year 1999, requires an 

analysis of the activity, including a comparison of the cost of performance 

by DOD civilian employees and by a contractor, to determine whether 

contractor performance could result in savings to the government. It also 

requires DOD to notify the Congress and to provide other information prior 

to instituting a change in performance.6

 In October 1997, the Army 

provided an initial notification to the Congress regarding its intent to study 

Apache logistics functions for possible performance by a contractor. This 

notification included the Army’s intent to make appropriate cost 

comparisons between current government operations and proposed 

contractor operations.7

Evolution and Status of 

PVS Support Proposal 

The Apache PVS concept began as an unsolicited contractor proposal, 

whose scope has evolved over time. However, because of questions and 

uncertainties regarding PVS requirements, cost-effectiveness, and 

operational impact, the proposal was the subject of various studies and 

reviews that provided differing results. In January and March 1999, the 

Under Secretary of the Army directed a comprehensive review of various 

6

Further, section 8014 of the Department of Defense Appropriations Act for Fiscal Year 1999

(P.L. 105-262) requires that DOD certify its in-house estimate to congressional committees before 

outsourcing any activity performed by more than 10 DOD civilian employees.

7

The Army’s notification was submitted under 10 U.S.C. 2461 prior to the 1999 Defense Authorization 

Act amendments. The earlier version of section 2461 contains similar, but less detailed, analysis and 

notification requirements.
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issues surrounding the PVS proposal. Those reviews are still underway, but 

no milestone has been established for their completion.

Program Evolution In April 1997, the Army received an unsolicited proposal from McDonnell 

Douglas (now Boeing) and Lockheed Martin to provide full wholesale

logistics support for the Apache helicopter. The Apache PVS proposal 

would outsource almost all of the Army’s traditional logistics support 

functions8

 to a contractor, Team Apache Systems (TAS).9 The proposal 

would significantly reengineer logistics support for the Apache helicopter 

while meeting a 120,000 flying-hour requirement each year. The program 

would be expected to lower total ownership costs, improve parts 

availability, and leverage private-sector resources for modernization.

In assessing the value of the PVS proposal, the Aviation PEO stated that the 

government’s traditional logistics management system was a problem 

because of split management responsibility and shared control between the 

government and contractors. In his view, under the current approach, no 

single entity is responsible for identifying and implementing cost-saving 

changes to improve Apache logistics support. The Aviation PEO also 

described the current system as having parts shortages, requiring extensive 

use of local special repair activities to meet needs, needing controlled 

substitution of spare parts to meet maintenance requirements, and having 

declining financial resources to support the wholesale system due to the 

use of local options and high flying-hour costs. In his view, decapitalizing10

the Apache system from the Army Working Capital Fund and converting it 

to PVS as a pilot program would test whether the Army can develop a 

better way to manage its logistics business operations.

8

Current plans for the Apache PVS proposal provide that the Corpus Christ Army Depot, the Army’s 

in-house helicopter depot, would accomplish about 85,000 direct labor hours of Apache depot 

maintenance work. The components repaired by Corpus Christi would be provided as government 

furnished materiel to the PVS contractor. Although a limited amount of direct labor hours of Apache 

work is currently being performed by the Anniston and Tobyhanna Army depots, the Army has not yet 

determined how or to what extent this work would continue to be done at Army depots under the 

proposed PVS program.

9

Team Apache Systems is a limited liability company formed by Boeing, Lockheed Martin, and General 

Electric.

10Decapitalization is the transfer of fund inventories to other appropriations or funds without 

reimbursement. Decapitalizing a weapon system leaves the fund with essentially the same costs, at 

least in the short term, but reduces the number of contributors that will continue to pay their share of 

the costs.
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The Aviation PEO office expects the PVS contractor to 

• use commercial best practices to develop and implement design and 

logistics support changes to improve performance and reduce life-cycle 

support costs;

• improve stock availability and maximize rapid distribution without 

impacting safety, readiness, supportability, or performance; and

• reduce failures and removals and repairs and improve supportability 

through component reliability improvements.

After receiving the PVS proposal, the Army initiated several actions to 

establish a framework for analyzing Apache PVS for a 5-year period, from 

fiscal year 1999 through 2003:

• In May 1997, the Army’s commercialization General Officer Steering 

Committee concluded that the Army had to reengineer the Apache 

logistics support functions to lower costs and provide savings for 

modernization. Thus, the committee designated Apache PVS as a pilot 

program and directed the Army Aviation PEO to study the acceptability 

of the proposal.

• In October 1997, the Acting Assistant Secretary of the Army for 

Research, Development, and Acquisition, authorized the Army Aviation 

and Missile Command to pursue a PVS contract through other than full 

and open competition because the original equipment manufacturers 

were considered the only entities technically capable of providing 

complete logistics support for the Apache system.11

• In October 1997, the Aviation PEO and Army Aviation and Missile 

Command began negotiations with the PVS contractor to jointly develop 

a proposal acceptable to both parties. Under an approach referred to as 

alpha contracting, the Army’s team and TAS jointly developed 

requirements and a PVS performance work statement that defined the 

performance-based products and services to be provided by the firm.

• In November 1997, consistently with A-76 requirements, representatives 

from the Army Materiel Command began an internal evaluation to 

develop the government’s best case cost estimate for its in-house 

approach under a streamlined concept to provide Apache logistics 

support.

11The approval to negotiate a PVS contract on the basis of other than a full and open competition 

conditioned the award of the contract on approval of an OMB Circular A-76 waiver to the requirement 

for a cost study that compares the negotiated price of the contract with the cost of government 

performance.
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• In December 1997, representatives from the Aviation PEO’s Office and 

the Army’s Cost and Economic Analysis Center developed a cost 

baseline for the Apache system. This baseline represented the 

estimated operational costs for the 5-year period.

• In March 1998, the Army Materiel Command provided its best-case 

government estimate for accomplishing the Army’s in-house effort to 

improve the efficiency of in-house logistics support for the 5-year 

period.

• In June 1998, contract negotiations resulted in an offer from TAS for 

Apache PVS for the 5-year period.

To facilitate developing the government’s best estimate of its in-house 

approach, in September 1997 the Aviation PEO provided the Army Materiel 

Command a number of proposed metrics and requirements that had been 

developed for Apache PVS. In developing its in-house estimate, Army 

Materiel Command expected to improve the current logistical support 

system through a number of efficiencies related to actions such as 

• reducing overhead costs,

• reducing the number of civilian personnel devoted to material 

management and contract oversight,

• reducing the cost of Apache components, and

• establishing logistics centers of excellence and consolidating repair 

functions to provide support for the Apache system.

Where Things Stand Today Because of uncertainties and differing views and issues that have emerged 

from the Army’s acquisition, logistics, and operational communities 

regarding requirements of the proposed Apache PVS program, 

cost-effectiveness, and operational impact, the Under Secretary of the 

Army directed in January 1999 that a more rigorous and comprehensive 

analysis be conducted. More specifically, he directed Army components to 

expand the PVS analysis to include

• a review of the Aviation PEO’s A-76 waiver package for proper 

accounting;

• a 20-year cash flow analysis to determine the net present value of 

positive and negative cash flow if PVS were implemented;

• identification of PVS implementation costs and of the financial impact of 

the Army’s transition to PVS, to include a validation of inventory and 

pipeline values and determination of the impact on the Army Working 

Capital Fund and customer funding;
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• an update of the government’s best-case proposal cost estimate, 

extending it beyond the original 5-year period to be as compatible as 

possible with the current PVS proposal;

• a determination of how much the PVS and management information 

systems will be transparent to the soldiers;

• an evaluation of how PVS would work in a transition to war; and

• an assessment of the impact of an increase in the Apache flying-hour 

requirement on expected PVS operations and costs.

Also, in March 1999 the Under Secretary of the Army tasked the Deputy 

Chief of Staff for Operations and Plans to identify the Army’s requirements 

to satisfy the Apache flying-hour program. This would include determining 

whether additional services offered by the PVS contractor would be 

needed. If they are, the Army does not know at this time whether or not 

further analysis might be required to ensure a more level playing field 

between the government and the private sector to determine which could 

provide the most cost-effective option.

Various Army components have proposed milestones for completing the 

Apache PVS study and transitioning to PVS operations. However, the 

Under Secretary of the Army’s expansion of the study process has resulted 

in a stretching out of the time frames for completing the study effort. As of 

May 1999, the Army had not established a firm milestone for completing its 

study efforts.

Significant Financial 

Issues Led the Under 

Secretary to Request 

More Detailed 

Analyses

There are significant differences of opinions within the Army over the 

cost-effectiveness of the Apache PVS proposal. On one hand, there are 

those within the PEO community who believe the proposal is more 

cost-effective than the government’s in-house approach; on the other hand, 

there are others who believe the government’s approach is the most 

cost-effective. Army analysts tasked with studying the matter have reached 

varying conclusions ranging from increased costs to significant savings 

about the financial effects of Apache PVS. The Aviation PEO, based on 

analysis and adjustments to PVS contractor and government cost estimates 

made by his office, concluded that the PVS proposal was the more 

cost-effective solution to meeting the Apache program’s needs. The PEO 

office also concluded that waiver provisions of OMB Circular A-76 applied 

in this instance and submitted a formal request for the waiver to the 

Assistant Secretary of the Army for Installations, Logistics, and 

Environment. Continuing debate within the Army over cost adjustments 
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introduced by the PEO office and other issues led, as indicated earlier, to 

the Under Secretary’s request for additional analyses.

The primary controversy over the different conclusions reached by various 

Army organizations involves how key features introduced by the Aviation 

PEO should be considered when comparing the costs of the PVS offer and 

the government’s best-case estimate. These features include the 

contractor’s offer of (1) increased field technical assistance and 

engineering support and reliability improvements and (2) a reliability 

improvement program. Another issue is the impact that removing Apache 

inventory support from that system would have on the Army’s Working 

Capital Fund. The Army is considering these factors in its evaluation.

Aviation PEO’s Conclusions 

Differed From Results of 

Initial Cost Comparison

An Army cost team completed an initial cost comparison of the Apache 

PVS offer and the government’s best-case estimate in August 1998. The 

team concluded that the Apache PVS offer did not represent a significant 

financial advantage to the Army and that the government’s best-case 

estimate could be competitive. After reviewing the results of the cost 

team’s comparison, the Aviation PEO office adjusted the cost estimates and 

drew different conclusions. These adjustments became the focus of 

subsequent efforts to determine whether the Apache PVS proposal would 

be financially advantageous to the Army.

After completing an evaluation of the PVS and the government’s best-case 

estimate, an Army cost team, with representatives from the Army’s Aviation 

and Missile Command, Materiel Command, Apache Program Office, and 

the Army’s Cost and Economic Analysis Center (CEAC), concluded that 

available data would not support an A-76 waiver and, that if implemented, 

PVS would become a significant affordability issue. During its analysis, the 

Army team adjusted the Apache PVS proposal and the government’s 

best-case estimate to reflect common costs and savings. For example, the 

team added $542.3 million in costs to the PVS offer, including $437.2 million 

for the estimated impact on the working capital fund.12 Also included in the 

added costs to the PVS offer were $105.1 million for factors such as 

transition, contract maintenance services purchased at the local level to 

support the Apache system, and the value of government-furnished depot 

12This $437.2 million would represent the estimated loss of revenue from the sale of Apache parts—the 

surcharge loss and nonsystem specific fixed costs—and the value of inventory on order but not yet 

delivered.
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maintenance work. The team added $44.9 million to the government’s 

best-case estimate for local contract maintenance services and contractor 

field service representatives that would remain in place under the 

government’s approach. The study did not address the issue of 

transitioning to the contractor Apache parts already in the Army’s 

inventory. The Army cost team’s August 1998 analysis concluded that, 

overall, the government’s best-case estimate would cost $431 million less 

than the PVS proposal.

PEO Adjustments to Initial Cost 

Comparison

After reviewing the results of the cost team’s analysis, the Aviation PEO’s 

office made sufficient adjustments to the government’s cost estimate to 

reach the conclusion that the PVS proposal would cost $362.5 million less 

than the government’s approach. These adjustments were based primarily 

on features of the contractor’s offer that the PEO office considered 

superior to the government’s approach—increased technical and 

engineering services and a reliability improvement program for Apache 

components. The office also reduced the estimated impact of PVS on the 

Army’s Working Capital Fund by limiting the impact from 5 years to 1 year 

and by using a more current estimate of due-in inventory (parts that have 

been ordered but not yet received). The costs that the Aviation PEO added 

to the government’s estimate were primarily to reflect the value of the 

contractor’s proposed field technical assistance and engineering support 

and for reliability improvements and obsolescence engineering. These 

improvements related primarily to improving the reliability of the Target 

Designation Sight/Pilot Night Vision Sensor (TADS/PNVS). 13

After the PEO concluded that the PVS’ and not the government’s approach 

was the most cost-effective option, he formally requested a waiver of

A-76 cost comparison requirements. He justified this decision in his waiver 

request in part on the basis of his belief that neither the government nor 

another contractor would have a reasonable expectation of winning a 

competition under the A-76 process. 

13The TADS/PNVS provides pitch/roll/yaw rate stabilization data for proper flight operation of the 

aircraft and provides the capability to fly at night and in poor weather conditions. The aircraft uses 

TADS/PNVS to control all weapons targeting functions.
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PEO Offered Further 

Adjustments to Include the 

Introduction of Second 

Generation Forward Looking 

Infrared Program

In addition, to further support his position that PVS was more cost-effective 

than the government’s approach, the Aviation PEO included in his waiver 

request an assessment of the contractor’s proposal to upgrade the Second 

Generation Forward Looking Infrared Program (2nd Gen FLIR), a program 

that was not part of the original Apache PVS proposal and was not 

addressed by the Army’s cost analysis.14 The Army has a requirement to 

introduce the 2nd Gen FLIR program into the Apache system. However, the 

Army’s current funding stream is not adequate to fully fund the program. 

The Army’s total estimated costs for a stand-alone program to introduce the 

2nd Gen FLIR are $961 million—$575 million for the PVS reliability 

improvement program and $386 million for the 2nd Gen FLIR. At the time of 

the Aviation PEO’s waiver request, the Army had a funding commitment of 

only $317 million for the 2nd Gen FLIR. Outside of inclusion under the 

Apache PVS, it is not clear how 2nd Gen FLIR requirements—either funded 

or unfunded—would be evaluated against other Army requirements in a 

constrained budget environment.

Although the 2nd Gen FLIR was not part of the Apache PVS statement of 

work, the PVS contractor offered to introduce the program along with the 

upgrade of the TADS/PNVS components so that improved reliability 

components in the TADS/PNVS would be compatible with the 2nd Gen FLIR. 

Additionally, although completion of the 2nd Gen FLIR program would take 

longer than the 5 years covered in the Army’s cost comparison, the Aviation 

PEO extrapolated the 5-year costs through fiscal year 2010 to support his 

A-76 waiver request. This extrapolation allowed the PEO to increase the 

cost difference between the PVS’ and the government’s best case estimate 

to the point that the PVS proposal would cost $420 million less than the 

government’s estimate. 

PEO’s Proposal to Consign 

Apache Inventory to PVS 

Contractor

The Army’s original cost comparison did not address how Apache parts 

already in the Army’s inventory would be incorporated into the proposed 

Apache PVS. The Aviation PEO, as part of his waiver request, also 

proposed that the Army retain ownership of all existing inventory and 

consign it to the PVS contractor as government-furnished materiel. As of 

September 1998, the existing inventory was reportedly valued at $745.5 

million for both serviceable and unserviceable items. The Aviation PEO 

believes that consignment would be the most cost-effective option because 

14The purpose of the 2nd Gen FLIR is to improve the performance of the TADS/PNVS system in target 

acquisition. As part of the PVS proposal, the contractor proposed to replace the obsolete 1st Gen FLIR 

with the 2nd Gen FLIR within the program budget.
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the contractor would not incur and pass to the government the costs of 

insurance and taxes on the inventory, both of which would be likely if the 

contractor owned the inventory.

Army Analysts Raised 

Questions About the 

Aviation PEO’s Adjustments

Subsequent analyses by Army analysts questioned the Aviation PEO’s 

adjustments, concluding that, for the most part, the adjustments were not 

necessary to meet the proposed flying-hour requirements for the Apache 

helicopter and that some of the claimed savings in the cost comparison 

were inappropriate. Analyses of the A-76 waiver request by CEAC and the 

Army Audit Agency questioned the Aviation PEO’s adjustments. CEAC and 

the Army Audit Agency did not support the Aviation PEO’s conclusion that 

the Apache PVS was less costly than the best-case government estimate 

and that the government had no chance of winning an A-76 competition. 

Also, the Army Comptroller opposed the consignment of inventory to the 

PVS contractor without reimbursement.

CEAC Analysis In addition to participating in the original cost comparison, CEAC, at the 

request of the Army Comptroller, made a subsequent analysis of the cost 

adjustments made by the Aviation PEO’s office. Its February 18, 1999, 

report on these adjustments concluded that the government’s estimate was 

cheaper than the PVS proposal by about $154.3 million. CEAC’s 

conclusions were:

• The value of the contractor’s proposed field technical assistance and 

engineering support should not be added to the government’s estimate 

because, among other things, it includes an excessively high labor rate, 

and the government’s proposal is sufficient to meet the 120,000 

flying-hour requirement included in the statement of work.

• The PEO’s adjustment for the reliability improvement program related 

to the TADS/PNVS should be reduced to reflect the funding amount 

already in the government’s estimate. Although CEAC pointed out that 

the program may not result in savings to the government, the Center 

believed that adding an amount for the program to the government’s 

estimate would help make the analysis more equitable.

• The impact of Apache PVS on the Army’s Working Capital Fund was 

correctly computed by the initial cost team. For comparison purposes, 

CEAC noted that the value of the due-in inventory should be consistent 

with other cost elements in the analysis and that the government’s 

estimate should not be charged for inventory that would be issued free 

to the PVS contractor. Also, CEAC determined that a 5-year surcharge 

loss was more appropriate than a 1-year loss for the cost comparison 
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because nonweapon system specific or common costs, such as the 

surcharge, were already embedded in the government’s best-case 

estimate.

Regarding the 2nd Gen FLIR program, CEAC recommended that the cost 

comparisons for the A-76 waiver analysis should not extend beyond the 

5-year period, in part because the proposed PVS contract does not extend 

beyond 2003. CEAC’s report also noted that PVS costs could be impacted 

by the findings of the ongoing study of the Army Working Capital Fund.

Army Audit Agency Analysis In addition, the Under Secretary of the Army asked the Army Audit Agency 

to examine the adjustments made by the Aviation PEO’s office and 

reflected in the A-76 waiver justification. On February 22, 1999, the Army 

Audit Agency released the results of its review of the A-76 waiver 

justification. It stated that

• Army leaders above the Aviation PEO should determine the adjustments 

needed to satisfy Army requirements and

• the cost comparisons could be impacted by the results of an ongoing 

study of the Working Capital Fund.

Like CEAC report, the Army Audit Agency considered the Aviation PEO’s 

adjustment to the government’s in-house approach for field technical 

assistance and engineering support unnecessary because it represented a 

different approach to achieving the same requirement. The Army Audit 

Agency concluded that the government’s best-case cost estimate should not 

necessarily be adjusted for the engineering program as related to the 

TADS/PNVS, as the program may not be needed to satisfy the Army’s 

120,000 flying-hour requirement. The Army Audit Agency did not comment 

on the Army Working Capital Fund impact adjustment, noting that the issue 

was still under review. At the time we completed our work, the Army 

Working Capital Fund study team had not yet completed its study of the 

impact of Apache PVS on the fund. 

Army Comptroller Concern When the PEO office proposed a waiver to the A-76 study requirements, it 

also expressed the desire to consign existing Army Apache parts inventory 

at no cost to the contractor, should the contractor’s proposal be accepted. 

The Army Comptroller opposed consigning the inventory without 

reimbursement to the Fund. The Comptroller’s primary concern was that 

consignment without reimbursement would cause the Army Working 

Capital Fund to absorb a large operating loss, increasing future sale prices 

for other items in the fund. The Army is studying the issue of inventory 
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consignment without reimbursement. Officials in the Office of the 

Assistant Secretary of the Army for Financial Management and Comptroller 

told us that the Army may have to seek a waiver from the Under Secretary 

of Defense, Comptroller, to consign the inventory without reimbursement. 

However, at the time of our review, the Army had not requested a waiver. 

Army Analysts’ Concern About 

Potential for Funding Shortfall 

Under Either Proposal

Army analysts identified additional short-term investment cost issues that 

could affect implementation of either the contractor’s or the government’s 

approaches; however, the initial investment costs appeared much greater 

under the PVS proposal.

Preliminary results from the Army’s follow-on analysis indicated that both 

the government’s estimate and the PVS proposal would cause a funding 

shortfall in the first year of implementation because insufficient funding 

was included in the Army’s proposed budget to cover costs. The results 

showed that the government’s approach would create a $34-million 

shortfall in the first year of implementation, compared with a $209-million 

shortfall estimated for the Apache PVS.15 In its continuing analysis of 

Apache PVS, the Army Audit Agency said on March 16, 1999, that, for the 

most part, the government’s estimate would support the Apache flying-hour 

requirements and that implementation costs were generally reasonable. 

The Agency did not project shortfalls in funding for future years. In its 

continuing analysis of Apache PVS, on March 9, 1999, the Army Budget 

Office estimated that the costs to implement PVS in the first year would 

exceed available funding by about $209 million and that future years could 

also have funding shortfalls.

Logistical and Other 

Operational Issues 

Being Addressed by the 

Army

Army logistics managers and operational commanders have concerns 

about the impact Apache PVS would have on the Army’s support 

infrastructure for the Apache system. They question whether Apache PVS 

operations could (1) pair well with the Army’s current logistics support 

structure, (2) adversely impact transitioning to war, or (3) limit 

commanders’ flexibility to meet changing funding needs. The Army is 

considering these concerns in its continuing analysis of Apache PVS, 

mostly as a result of the Under Secretary’s January 1999 directive.

15The government’s best-case estimate proposed improvements to the government’s current support 

system that would require some upfront investment costs. For instance, the proposal to implement 

centers of excellence for the Apache system would require additional funds to establish the centers and 

consolidate existing support sites.
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PVS Compatibility With Existing 

Army Logistics Support 

Structure

U.S. Army Forces Command (FORSCOM) officials at several subordinate 

locations have emphasized that the PVS support system should appear the 

same as other support systems so as to be easy for soldiers to use. But 

there are questions about how the proposed PVS would interface with 

standard Army systems.

The Aviation PEO has stated that Apache users in the field would be 

unaware of the difference between the Apache’s and other support 

systems. However, FORSCOM officials have emphasized that they desire a 

clearer definition of the proposed integration of PVS supply and financial 

systems with standard Army systems. For example, the Standard Army 

Retail Supply System does not automatically provide a free exchange of 

broken parts for new parts, as the PVS proposal would offer. FORSCOM 

officials have requested that a functional test be made of the proposed PVS 

supply system to determine how it would work, whether Apache PVS will 

require a separate management information system, and whether 

intermediate level operations would require two independent supply and 

support systems. They said that a demonstration is also needed to show 

how a supply requisition would be processed at the intermediate- level to 

the contractor without any functional problems or additional soldier 

requirements. Further, they want more input into deciding the criteria used 

to measure the effectiveness of the contractor’s support.

FORSCOM’s views were similar to those expressed in August 1998, when a 

team from the Army Materiel Command, the U.S. Army Aviation and Missile 

Command, and the Aviation PEO made a technical evaluation of the 

Apache PVS’ and the government’s approach. The team’s report noted that 

the PVS system should provide the same level of data and management 

visibility for the Apache system as that provided by DOD systems. This 

would require the PVS contractor to modify its current systems. The PVS 

system would also have to be expanded to include all members of the PVS 

contractor consortium. Furthermore, the government would have to 

modify its automated requisition system so that data could flow to the PVS 

contractor. The Apache program manager and the contractor have agreed 

to conduct a demonstration of the proposed PVS support system prior to 

any formal conversion to the proposed PVS support system.

Concerns Over How PVS Would 

Affect Transitioning to War

Amidst concerns by Army officials at various levels about the operational 

flexibility of PVS, the Army is studying how Apache PVS operations would 

function in peacetime as well as how it would respond to contingency 

operations.
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The PVS proposal covers support for all wartime and contingency 

operations, and contractor personnel would be expected to deploy with 

military units. The concept calls for PVS assistance to include on-site field 

technical support and operational and supply support to Apache units for 

contingency operations. However, officials at the Army Aviation and 

Missile Command have expressed concern that the PVS proposal that 

would relieve the contractor of responsibility for delivering supplies into 

theaters of operation and allow the contractor to turn in-transit materiel 

over to government distribution/transportation channels. Under this 

approach, the government would become responsible for transportation of 

parts and contractor equipment, along with combat units, into and within 

theaters of operations. Thus, the government might have to take over the 

PVS distribution and transportation system during contingency operations. 

The officials also pointed out that the proposed contract would authorize 

additional costs for other than normal peacetime operations. According to 

the Command, these types of costs have increased significantly during 

prior contingency operations.

In wartime contingencies, DOD-owned depots play a role in supporting 

readiness and sustainability requirements of warfighters and, by design, 

can quickly increase their output to high levels in a short period of time to 

accomplish required contingency workloads. Under the proposed PVS 

structure, the Army would retain surge capability at its depots by having 

the depots perform Apache maintenance work. The proposed PVS contract 

would include an option for up to an additional 25,000 flying hours to 

respond to surge requirements. The Army is currently studying the cost 

impact of increased flying hour requirements on the proposed PVS 

contract.

Loss of Flexibility to 

Balance Funding Priorities

FORSCOM officials were concerned about the impact of PVS operations on 

commanders in the field. Their concerns focused on funding and unit-level 

repair issues.

Currently, field commanders receive annual funding for expenses related to 

readiness, infrastructure, and soldiers’ quality of life. Various Army 

officials expressed concerns that adoption of the PVS approach would 

result in their receiving less direct funding for support and give them less 

flexibility to shift funds between support areas to adjust to changing 

priorities. According to FORSCOM representatives, PVS would place the 

funding for wartime and contingency wholesale support under the Aviation 

PEO contracting officer. FORSCOM officials said that the PVS proposal 
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would require Apache units to become dependent on the wholesale system 

because they would not have the funding to pursue alternatives for Apache 

parts repair, as they do now. Under the government’s approach, funding for 

the Apache helicopter too would no longer go directly to the field 

commanders.

In a memorandum to the Army Chief of Staff (Aug. 20, 1998), the 

FORSCOM Commander provided his fiscal year 1999 funding assessment. 

He noted that FORSCOM commanders could no longer train and sustain 

the force, stop infrastructure degradation, and provide soldiers the quality 

of life programs critical to long-term readiness. In discussing the areas 

impacted by insufficient funding levels, the Commander noted that 

flexibility in meeting all programs would be further hampered by funding 

designated for and restricted to use by specific programs that are becoming 

an increasingly larger percentage of FORSCOM’s budget.

Conclusions As would be expected when a new concept is being considered, there are 

significantly differing views within the Army regarding various aspects of 

the Apache PVS proposal. The key questions and uncertainties that remain 

unresolved regarding the Apache PVS proposal are related to cost and 

operational issues. From a cost standpoint, there are uncertainties

concerning whether the additional services and the reliability improvement 

program offered by the PVS contractor are appropriate for use in the 

public-private cost comparison and what level of costs should be

recognized—and for how long—if the Apache system were to be removed 

from the Army Working Capital Fund. A number of operational questions 

have also been raised about the potential impact of PVS on meeting 

warfighters’ logistical support needs. Consequently, at the end of our 

review the Army was continuing to study these issues and had not 

established a firm milestone for a decision on whether or when the

program would go forward.

Agency Comments and 

Our Evalutation

DOD’s comments to our draft report are reprinted in appendix I. In its 

comments, DOD concurred with our findings but suggested several 

technical changes. DOD suggested that we include a planned 

implementation date for PVS of October 1, 1999; recognize that the PVS 

proposal is for wholesale-level logistics while retail-level logistics 

performed by soldiers would be left unchanged; and recognize that the 

Department plans to review expected savings and readiness from Apache 
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PVS in 2 years. DOD also noted that the Army is currently defining the 

Apache’s capability and reliability requirements which will be used as the 

basis for comparing PVS and the government’s in-house cost estimate. We 

incorporated DOD’s technical comments in the report as appropriate.

Scope and 

Methodology

In conducting our work, we obtained documents from and interviewed 

officials from the Army headquarters, including the Office of the Assistant 

Secretary of the Army (Acquisition, Logistics, and Technology) and its 

Office of the Aviation PEO; Army Materiel Command; Army Aviation and 

Missile Command; U.S. Army Forces Command; Army Audit Agency; Army 

Cost and Economic Analysis Center; and Defense Logistics Agency, 

regarding the Army’s study of Apache PVS. At these locations, we made 

extensive use of the work that was ongoing to identify and evaluate issues 

concerning the outsourcing of government activities and programs.

To determine the status of the Army’s Apache PVS study, we discussed and 

reviewed the study process, extent of work completed, and the specific 

taskings that remained to be completed for all levels within the Army 

logistics and financial community. To evaluate the Army’s study process 

and its preliminary results, we examined the methodology, assumptions, 

and procedures that were being used to develop the government’s 

estimated costs and to negotiate the PVS offer. In testing the 

reasonableness of the preliminary results, we examined the cost 

comparisons and the cost elements that were used, including the 

adjustments made for comparison purposes. Specifically, due to the 

significance of the cost impact and the internal disagreement about the 

applicability of the adjustments to the cost comparisons, we focused on the 

normalization adjustments made by the Aviation PEO. Further, we 

reviewed pertinent documentation regarding the PVS study, including the 

Army’s Justification and Approval for Other than Full and Open 

Competition, the Aviation PEO’s A-76 cost comparison waiver package, the 

technical evaluation of the government’s estimate and the contractor’s 

offer, and the PVS transition plan. Finally, we reviewed the cost 

comparison requirements of OMB Circular A-76 and Supplemental 

Handbook and the applicable DOD financial regulations regarding the 

operations of the Army Working Capital Fund.

To identify the potential impact that Apache PVS would have on other 

Army activities and programs, we examined documentation and discussed 

operational issues with Army logistics managers and field commands. We 

obtained data from DLA regarding its support for the Apache system and 
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how Apache PVS would impact that supporting role. Finally, we examined 

applicable statutory requirements affecting the Army’s outsourcing 

decisions and the Army’s legal analysis of how Apache PVS would meet 

these requirements.

We conducted our review from October 1998 to April 1999 in accordance 

with generally accepted government auditing standards.

We are sending copies of this report to the Honorable William S. Cohen, the 

Secretary of Defense; the Honorable Louis Caldera, the Secretary of the 

Army; and the Honorable Jacob J. Lew, Director, Office of Management and 

Budget. We will also make copies available to others upon request.

If you have any questions regarding this report, please contact me on

(202) 512-8412. Key contributors to this assignment were Barry Holman, 

Julia Denman, and Bobby Worrell.

David R. Warren, Director

Defense Management Issues
Page 21 GAO/NSIAD-99-140 Army Logistics
Page 22 GAO/NSIAD-99-140 Army Logistics

Appendix I

Comments From the Department of Defense ApIexndi

(709374) Lret
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