United States General Accounting Office

GAO Report to Congressional Requesters

December 1997 AIR FORCE

PRIVATIZATION-INPLACE

Analysis of Aircraft and

Missile Guidance System

Depot Repair Costs

GAO/NSIAD-98-35

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-277787 

December 22, 1997

Congressional Requesters

As requested, we reviewed the Air Force’s interim cost comparison of

operating its former Aerospace Guidance and Metrology Center (AGMC) in

Newark, Ohio, prior to its closure with the current privatized-in-place cost

as the Boeing Guidance Repair Center (BGRC).1

 We previously discussed

the AGMC/BGRC cost comparison issues in testimonies during March and

April 1997.2

 This report provides our assessment of the interim

comparison, including the major reasons for cost differences between the

two activities. This report contains no recommendations.

Background AGMC was closed as a result of a 1993 decision of the Base Realignment and

Closure (BRAC) Commission. In recommending the closure of the Newark

Air Force Base/AGMC, the Commission noted that the workload could be

privatized or moved to other depot maintenance activities. The BRAC

recommendation states

“The Aerospace Guidance and Metrology Center (AGMC) depot will be closed; some

workload will move to other depot maintenance activities including the private sector.”

After the BRAC recommendation to close AGMC was finalized, (1) the Air

Force moved a small portion of AGMC’s Air Force workload to other Air

Force depots, (2) the Navy moved most of its AGMC workload to other

sites, and (3) the Army moved all of its AGMC workload to other sites. The

Air Force decided to privatize-in-place the remaining AGMC workloads. At

the time it made this decision, the Air Force relied on an analysis that

estimated privatizing would save about $5 million in 1997. However, the

preaward analysis was not documented and Air Force officials do not

know the basis for the costs included. Consequently, the Air Force was not

able to reconcile its current interim study to its precontract award

analysis.

Since October 1996, the Newark, Ohio facility has been operated as the

Boeing Guidance Repair Center by two contractors—Boeing North

American, Inc., (Autonetics Electronics Systems Division) and Wyle

Laboratories, Inc. The BGRC repair contract is managed by the Air Force’s

1

The term Boeing Guidance Repair Center refers to the facility housing the two privatization-in-place

contractors —the Boeing Company and Wyle Laboratories.

2

Defense Depot Maintenance: Uncertainties and Challenges DOD Faces in Restructuring Its Depot

Maintenance Program (GAO/T-NSIAD-97-111, Mar. 18, 1997) and (GAO/T-NSIAD-97-112, Apr. 10, 1997).

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Ogden, Utah, Air Logistics Center program office. Weapon system and

item management functions for missile inertial guidance systems are

performed at Ogden and the same functions for aircraft inertial guidance

systems are managed at the Air Force’s Oklahoma City Air Logistics

Center. The Air Force is retaining ownership of depot plant equipment

with an estimated value of $326 million. The Newark-Heath-Licking

County Port Authority is in the process of purchasing the Newark Air

Force Base real property.3

 The Port Authority currently leases the facility

to Boeing, which then subleases a portion of the facility to Wyle

Laboratories. Additional details regarding the AGMC’s mission and the

depot’s closure and privatization-in-place are found in appendix I.

Privatization-in-Place

Experience

The Air Force’s AGMC and two Navy facilities are the only

privatizations-in-place resulting from BRAC decisions and have,

consequently, created much interest in the cost and benefits of this

concept.4

 The question of whether closing and privatizing-in-place AGMC’s

workload would result in savings arose soon after the 1993 BRAC closure

decision. After the decision, Air Force organizations conducted several

studies comparing the projected cost of privatizing-in-place the AGMC depot

maintenance workload against the historical costs of the Air Force depot.

These studies concluded that costs of a privatized-in-place operation

would exceed the historic costs by $6.2 million to $20 million, on a

projected workload of about $82 million to $90 million. However, in late

1995, at the time of the decision to award the contract, an Air Force

Materiel Command (AFMC) analysis concluded that privatization-in-place

would save about $5 million in 1997 and a total of $20 million over the

5-year contract period.

Preliminary Analysis of

Contract Costs

In April 1996, we testified that preliminary data showed (1) unit costs were

higher after privatization-in-place for 201, or about 79 percent of the items

we reviewed; and (2) overall, repair costs increased by about $6 million for

the 254 items reviewed.5

 We also noted that AFMC’s projected 5-year

savings of $20 million did not include all relevant costs. For example,

3

The Heath-Newark-Licking County Port Authority is the Ohio chartered local reuse authority

responsible for redeveloping and managing the closed Newark Air Force Base facilities.

4

The AGMC privatization-in-place is different from current Air Force outsourcing efforts at San

Antonio and Sacramento Air Logistics Centers. The Air Force is now conducting public-private

competitions at these centers following DOD’s December 1996 reinstitution of these competitions.

5

Defense Depot Maintenance: Privatization and the Debate Over the Public-Private Mix

(GAO/T-NSIAD-96-146, Apr. 16, 1996) and (GAO/T-NSIAD-96-148, Apr. 17, 1996).

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estimated contract costs excluded $15 million in material costs for eight

contract items.

Following a 9-month transition period, the first full year of the BGRC

contract operations began in October 1996. After the first quarter, Ogden

and Oklahoma City logistics center personnel noted that funds were being

expended faster than anticipated for the BGRC contract. The most

significant factor appeared to be the increased amount of material being

ordered. After reviewing Ogden and Oklahoma City information, we

requested that the aircraft guidance program office at the Oklahoma City

Air Logistics Center and the missile guidance program office at Ogden Air

Logistics Center compare contractor versus Air Force depot costs for the

fiscal year 1997 workload. Headquarters, AFMC, managed this evaluation.

Results in Brief The Air Force’s interim comparison estimates that BGRC’s first year

privatization-in-place costs will be higher than AGMC’s historical costs for

similar work. The methodology used in the comparison is analytically

sound and appears reasonable given the status of the program; however,

until actual cost data is available, it is premature to reach a final

conclusion on the cost issue. Three factors significantly influenced the

increased cost at the facility—estimated increased material cost, contract

oversight, and contractor award fee. As with any successful privatization,

improved contractor process efficiencies and operating cost reductions

are needed to offset such cost factors. The contractor disagrees with the

Air Force study and is working with AFMC to resolve their differences. The

Air Force will continue to monitor these contracts as actual cost data

becomes available. Specifically our work shows:

• The Air Force performed an interim analysis comparing both actual and

estimated aircraft and missile inertial navigation system repair and

metrology costs at the Boeing Guidance Repair Center to actual historic

costs for comparable workloads prior to privatization-in-place. The

analysis estimated that the first full year of operations at the

privatized-in-place Center will likely cost $14.1 million more than it would

have if the facility had continued to operate as a public activity. This is a

16-percent cost increase.

• Boeing questioned the Air Force Materiel Command’s assessment, saying

that its own estimate indicates that costs are about $6.8 million lower than

before privatization-in-place. Boeing also noted that it is exceeding

contract quality requirements and minimum delivery schedules. Air Force

officials stated that Boeing’s cost analysis is not complete and

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comprehensive. For example, they noted that Boeing’s estimate did not

include contract administration and oversight costs of about $3.4 million,

and overstated historic operations and maintenance costs by about

$5 million.

• The Air Force cost study methodology is analytically sound and used the

best available data. Based on the available data, the methodology provides

a reasonable interim estimate of costs for similar workloads performed by

the Air Force depot and during the first year of privatization-in-place. The

Air Force’s methodology is consistent with Department of Defense (DOD)

guidance on public-private depot competitions in the Defense Depot

Maintenance Council Cost Comparability Handbook and in supplemental

procedures provided by the Air Force for conducting public-private

competitions.

• The Air Force’s interim study does not include a variable-by-variable

comparison between historical and current costs of operations, but it does

identify three cost factors contributing to the increased costs at the

facility. They are: (1) estimated increased material cost of $3.4 million,

(2) contract administration and oversight costs of $5.5 million, and

(3) estimated contractor award fees of $5.2 million.

Air Force Interim

Study Indicates That

Contract Costs

Exceed Costs of

AGMC Operations

The Air Force’s July 1997 interim study projected that the

privatization-in-place of guidance repair and metrology workloads at BGRC

will result in fiscal year 1997 costs being from $3 million to $32 million

more than the costs of performing the same work when the facility was

operated as an Air Force depot. Actual data was used to determine AGMC’s

pre-closure costs and actual cost data available to date and estimates were

used to project BGRC’s costs for 1997. The Air Force plans to update BGRC’s

costs using complete actual data after the 1997 workload is closed out.

The contractor disagreed with the AFMC interim study and provided its own

analysis. Air Force officials said the Boeing analysis was not

comprehensive because it (1) did not include contract administration and

oversight costs and (2) overstated AGMC costs prior to

privatization-in-place.

Results of Air Force’s

July 1997 Interim

Study

In April 1997, AFMC estimated that privatized-in-place repair operations for

the year would cost from $7.7 million to $31.2 million more than historical

costs of AGMC operations—a 10.2- to 44.8-percent increase—with a most

likely increase of $16.1 million. In July 1997, AFMC expanded its interim

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cost analysis to include the metrology costs6 and revised its prior

estimates based on a reevaluation of overhead and base operation and

support costs. Using actual cost data, this reevaluation increased the costs

of each workload repaired prior to privatization by allocating all base

operation and support costs from the Newark Air Force Base, including

those not directly affecting the depot maintenance business area, to the

maintenance and metrology workloads. The later projection indicated that

the privatized-in-place repair and metrology operations during the first

year of the contract would cost from $3.4 to $32 million more than the

historical AGMC cost—a 3.8- to 39-percent increase—with a most likely

increase of $14.1 million, or about 16 percent. Because these comparisons

are subject to change, AFMC officials noted that they would be revisited

when the fiscal year 1997 contract period is over. Appendix II summarizes

the results of these analyses.

Earlier Study Results Cannot

Be Reconciled

The AFMC 1995 precontract award analysis indicated potential savings of

$5 million in fiscal year 1997 through privatization-in-place. However, the

more recent, interim study suggests that privatization-in-place may cost

$14.1 million more, which would indicate a 16-percent cost increase. The

interim analysis estimated the cost of operating the privatized facility to be

3.7 percent higher than the preaward study, and the preclosure cost of

operations to be about 15.6 percent less than the preaward study. Table 1

provides a comparison of total costs from AFMC’s preaward and interim

post-award analyses. We asked AFMC Headquarters officials for the

rationale for the difference between these estimates—particularly the

substantial decrease in AGMC’s preclosure cost. They stated that they do

not have the documentation supporting the $5 million savings, and,

therefore, they are not able to reconcile differences between the 1995 and

current analyses. They noted that the estimated inhouse costs from the

interim study were based on the fiscal year 1995 data obtained from the

end-item cost report dated September 30, 1995, adjusted for quantity

differences. Comparability adjustments were made to cost elements as

specified in the cost comparability handbook for public-private

competitions. Air Force officials said no data was available to support the

estimated inhouse costs included in the preaward study and the estimates

do not provide a valid comparative baseline of historical costs. On the

other hand, the interim study provides an accurate baseline of AGMC’s costs

for comparison with the current and future costs of the privatized activity.

Our review of historical data and study documentation supports this

conclusion.

6

AGMC performed overall technical direction and management of the Air Force Metrology and

Calibration Program and operated the Air Force Measurement Standards Laboratory.

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Table 1: Results of AFMC Studies

Comparing Estimated Fiscal Year 1997

Organic to Privatized-in-Place Costs

for Same Workload AFMC Cost Analyses

Dollars in millions

Operations

Preaward

study

Interim

study

AGMC (Air Force depot) $99.8 $84.2

BGRC (privatized depot) 94.8 98.3

Difference $ 5.0 –$14.1

Source: AFMC November 1995, April 1997, and July 1997 AGMC cost studies.

Boeing Disagrees With Air

Force Interim Study

Boeing officials disagreed with the results of AFMC’s most recent interim

study. They believe it overstates the contractor’s material consumption

and neglected to adjust for historic military construction expenditures. As

a result, they are concerned that AFMC miscalculated the cost of

privatization-in-place. In response, Boeing did its own analysis estimating

that privatization-in-place would cost $67.2 million compared to its

estimate of $74.0 million for government operations—a $6.8 million

savings over government operations in fiscal year 1997. Boeing officials

met with AFMC officials on August 5, 1997, to present their analysis and to

gain an understanding of the AFMC methodology. According to Boeing and

AFMC officials, the Boeing estimate did not include a detailed analysis of

specific workloads and costs. AFMC officials added that the Boeing analysis

was not comprehensive. For example, they pointed out that Boeing’s

estimate did not include contract administration and oversight costs of

about $3.4 million, and it overstated historic AGMC operations and

maintenance costs by about $5 million.

However, AFMC did acknowledge the need to address Boeing’s concern

about historic military construction expenditures and to meet with Boeing

to discuss the need for some adjustments to its cost comparison. AFMC

stated that the issue of material consumption would be resolved through

an Air Force Audit Agency review that is scheduled to be completed in

December 1997.

Boeing officials also pointed out that they are meeting or exceeding

contract requirements for cost, schedule, and performance. For example,

Boeing officials, noted that they are:

• underrunning target costs by 5 percent and 15 percent for Intercontinental

Ballistic Missile and aircraft guidance system repair;

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• exceeding minimum delivery schedules and delivering more end-items per

month than AGMC had been tasked to deliver in fiscal year 1995; and

• exceeding quality requirements by achieving less than a 3-percent quality

deficiency report rate versus the contract goal of 10 percent or less.

We agree with Boeing that preliminary indications show that it is meeting

contract goals. It will not be until all the costs are available for 1997, the

first full year of privatized operations, that we will be able to determine

how the cost of the privatized maintenance operations compares with cost

of comparable maintenance operations by the Air Force depot.

AFMC Interim Study

Methodology Is

Reasonable and

Provides Indications

of Reason for Cost

Increases

Our work indicates that, in general, AFMC’s methodology for estimating the

cost of work performed at the privatized-in-place BGRC facility and the cost

for the same work based on AGMC cost data was reasonable. The

methodology was analytically sound and used the best available data. In

selecting its methodology and identifying the appropriate data, AFMC

gathered input and addressed criticisms from various Air Force, Defense

Contract Management Command, and contractor officials. AFMC’s

methodology is consistent with DOD guidance on public-private depot

competitions found in the Defense Depot Maintenance Council Cost

Comparability Handbook and in supplemental Air Force procedures for

conducting public-private competitions. Defense contractors participated

in the development of the handbook and in subsequent revisions. We

previously reviewed the handbook as a part of our assessment of depot

maintenance public-private competitions and found that it generally

covers the factors that should be considered in such competitions. In

performing its analysis, the Air Force Materiel Command used actual data

where it was known and estimated costs when actual costs were not

available. Estimated costs were expressed as ranges, using most likely,

low, and high estimates. A summary of the methodology used for the

analysis is provided in appendix III.

Reasons for Increased

Contractor Cost

AFMC’s interim study does not include a variable-by-variable comparison

between historical and current costs of operations. However, the study

provides sufficient data to identify three factors that increased costs at the

facility: (1) material cost, (2) contract administration and oversight, and

(3) contractor award fee.

Materials Material orders have significantly increased since privatization. However,

the Air Force has not determined the extent to which material

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consumption has increased. Therefore, the interim AFMC study results

covered the range of possible contractor material consumption from no

increase at the low end to a 100-percent increase, or about $15.7 million at

the high end, with the most likely increase being 35 percent, or about

$5.5 million.

AFMC asked the Air Force Audit Agency to determine the contractor’s

actual material consumption. While the Audit Agency does not anticipate

completing the audit until December 1997, auditors have visited BGRC to

review material ordering and consumption with the contractor and

program offices. Based on work performed thus far, the auditors made the

following observations:

• Contractor inventory records are not sufficiently complete to allow them

to determine the value of total inventory on hand.

• Contractor inventory records do not provide an accurate basis for

determining the value of inventory usage.

• The contractor appears to have a greater amount of government-furnished

material than necessary for existing needs.

• Items to be repaired have been misclassified as government-furnished

material.

According to Audit Agency officials, two factors will inhibit AFMC’s ability

to reconcile physical inventory with the inventory records and establish

material consumption rates. First, with Air Force and contractor

concurrence, the contractor accepted a transfer of initial material

inventory from the Air Force without the Air Force performing a physical

inventory. According to the Audit Agency, the contractor disputes the

accuracy of the Air Force’s inventory transfer documents and, therefore, it

may be impossible to determine how much material the contractor has

consumed. In addition, the contractor assumed control over stock already

issued to the shop floor that was not on Air Force inventory records.

Therefore, the Air Force has no accurate way to measure consumption of

those items typically held in stock at repair work benches.

According to the Air Force Audit Agency, because the contract award fee

structure does not emphasize minimizing the use of government-furnished

material, the contractor may have used a greater amount of such material

than necessary in order to reduce repair turn around time on items.

Nonetheless, BGRC personnel maintain that BGRC’s consumption of material

does not vary significantly from prior AGMC consumption levels because it

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is repairing items using the same people, the same facilities, and the same

repair procedures.

While the increased ordering of material clearly represents an increased

cost to the program during the period evaluated, it is uncertain how

material consumption will compare over a longer period. Considering the

significant increase in material orders and the absence of actual

consumption data, we believe it is reasonable for AFMC to reflect this

increase in its treatment of material consumption at this time.

Contract Oversight and

Administration

Consistent with the Defense Depot Maintenance Council’s Cost

Comparability Handbook, the interim study includes contract oversight

and administration as an additional cost to privatization. AFMC estimated

this cost for the two BGRC contracts to be $3.4 million for 1997. The

contracts require oversight from three entities: the Defense Contract

Management Command (DCMC), the Ogden Air Logistics Center’s program

office, and the Defense Contract Audit Agency (DCAA). The payroll costs

for these organizations as well as the cost of supplies and travel expenses

added by AFMC seem appropriate for the cost comparison.

Contractor Award Fee AFMC’s interim study recognizes that the award fee earned by the

contractor accounts for a portion of the cost of privatization-in-place.

While the fee can range from zero to 10 percent of the estimated contract

cost, the average Air Force fee for performance reviews to date has been

9.4 percent. In its cost study, AFMC provided for varying projections of

contractor award fees, based on historical data and contractor

performance during the first half of 1997. The estimated fee ranged from

5 percent to 10 percent, with 9 percent being suggested as the most likely

award fee rate, equating to a most likely contractor fee of about

$5.2 million for 1997.

Including this cost element is consistent with a December 1996 joint

memorandum from the Principal Deputy Assistant Secretaries of the Air

Force for Acquisitions and for Financial Management, which called for

recognizing award fees in evaluating public-private depot competitions.

According to AFMC officials, the award fee adjustment was added to the

standard adjustments provided for in the Cost Comparability Handbook to

enhance the Air Force’s ability to arrive at decisions that provide the best

overall value to the government. The methodology followed in estimating

this cost element appears reasonable.

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Conclusions The Air Force’s interim comparison estimates that BGRC’s first year

privatization-in-place costs will be higher than AGMC’s historical costs for

similar work. The methodology used in the comparison is analytically

sound and appears reasonable given the status of the program; however,

until actual cost data is available, it is premature to reach a final

conclusion on the cost issue. Three factors significantly influenced the

increased cost at the facility—estimated increased material cost, contract

oversight, and contractor award fee. As with any successful privatization,

improved contractor process efficiencies and operating cost reductions

are needed to offset such cost factors. The contractor disagrees with the

Air Force study and is working with AFMC to resolve their differences.

Further, the Air Force will continue to monitor these contracts as actual

cost data becomes available.

Agency and

Contractor Comments

and Our Evaluation

DOD officials provided oral comments on a draft of this report addressing

two points. The first pertained to our reference to the Air Force’s interim

analysis as using 0 percent, 35 percent and 100 percent to simulate the

minimum, most likely, and maximum cost. Air Force officials stated that

its interim analysis actually assigned 100 percent to both the minimum and

most likely material consumption cost computations and 200 percent to

the maximum material costs. The 100 percent referred to by the Air Force

is the same as the historic material consumptions costs and represents the

0-percent increase we use in our explanation for the minimum condition.

In stating that there was no increase in material assigned to the most likely

scenario, the Air Force was referring to the material consumption variable

input to the model. Our discussion of this factor refers to the material

consumption cost estimates that resulted from the processing of the

model. The second comment dealt with our discussion of the employee

benefits proposal submitted by Boeing. Since the benefit proposal has

since been rejected, we have removed from the draft of this report our

discussion of the proposal and its potential cost.

Officials from the Autonetics and Missile Systems Division of Boeing

North American, Inc., also commented, raising concerns about comments

made by the Air Force Audit Agency and about the material usage

assumptions in the AFMC interim study. Boeing officials said they thought

the Audit Agency’s comments about material consumption were

misleading because the level of inventory was not properly recorded at the

time of transition. Moreover, they said that the Audit Agency’s approach

greatly overstated material usage. As previously discussed, lacking precise

data on material consumption, the Air Force study used a range from no

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increase on the low end to a high of a 100-percent increase, with a

35-percent increase used to represent the most likely usage. In the absence

of actual consumption data, Air Force officials stated that they based their

treatment of consumption on material orders, which should provide a

good indicator of consumption. Given the high material usage indicators

but the lack of definitive data, the Air Force also took several independent

actions. It initiated a material consumption review by the Air Force Audit

Agency and made plans for a follow-on analysis when actual consumption

data is available. We believe the Air Force study approach and follow-on

actions provide a reasonable approach.

Scope and

Methodology

To obtain information for this report, we reviewed documents and

interviewed officials from the Office of the Secretary of Defense and the

Headquarters, Air Force, Washington, D.C.; Headquarters, Air Force

Materiel Command, Wright-Patterson Air Force Base, Ohio; and two

subordinate activities—the Ogden Air Logistics Center, Hill Air Force

Base, Utah, and the Oklahoma Air Logistics Center, Tinker Air Force Base,

Oklahoma. Since some of the actual data needed to make such an

assessment is not yet available, we reviewed preliminary cost estimates.

We also discussed and gathered documentation on the program and the

benefits and costs of privatization-in-place with representatives from the

BGRC, Heath, Ohio; the Newark-Heath-Licking County Port Authority; and

Defense Contract Management Command at BGRC.

We discussed and reviewed the supporting data for the AFMC’s cost

analysis with representatives from the Ogden and Oklahoma Air Logistics

Centers, as well as with Boeing representatives and the AFMC cost-analysis

team. We reviewed DOD’s guide for making cost comparisons between

public depots and private contractors (the Defense Depot Maintenance

Council’s Cost Comparability Handbook) to ensure that the AFMC study

included all applicable cost elements and included any necessary

adjustments. We also reviewed Air Force procedures for conducting

public-private depot competitions. To test the reasonableness of the AFMC

methodology used to allocate the Newark Air Force Base operating

support costs to AGMC aircraft, missile, and metrology workloads, we

consulted responsible officials in the DOD comptroller and Air Force

financial management organizations, and reviewed applicable DOD

instructions on reimbursable base support costs. We reviewed the type of

source used for each cost element to ensure that actual data was used

when available instead of estimates. We reviewed contractor cost reports

to assess for shifts in cost trends that may impact the cost analysis.

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Further, during the development of the cost study, we held extensive

discussions with the cost-analysis team to review adjustments, both

additions and deletions, for reasonableness.

We conducted our review from March through August 1997 in accordance

with generally accepted government auditing standards.

We are sending copies of this report to the Director, Office of Management

and Budget; the Secretaries of Defense and the Air Force; and other

interested parties. We will make copies available to others upon request.

Please contact me at (202) 512-4812 if you or your staff have any questions

concerning this report. Major contributors to this report were Jim Wiggins,

Julia Denman, Larry Junek, and John Strong.

David R. Warren, Director

Defense Management Issues

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List of Requesters

The Honorable James M. Inhofe

Chairman

The Honorable Charles S. Robb

Ranking Minority Member

Subcommittee on Readiness

Committee on Armed Services

United States Senate

The Honorable Neil Abercrombie

The Honorable Saxby Chambliss

The Honorable Tillie K. Fowler

The Honorable James V. Hansen

The Honorable John N. Hostettler

The Honorable Ernest J. Istook

The Honorable Walter B. Jones, Jr.

The Honorable Solomon P. Ortiz

The Honorable Norman Sisisky

The Honorable J.C. Watts, Jr.

House of Representatives

Page 13 GAO/NSIAD-98-35 Air Force Privatization-in-Place
Contents

Letter 1

Appendix I 

AGMC Mission and

Closure History

16

Appendix II 

AFMC Interim Cost

Analysis Summaries

23

Appendix III 

AFMC Cost Analysis

Methodology

24

Related GAO Products 26

Tables Table 1: Results of AFMC Studies Comparing Estimated Fiscal

Year 1997 Organic to Privatized-in -Place Costs for Same

Workload

6

Table II.1: AFMC Estimated Fiscal Year 1997 Costs for Missile

and Aircraft Workload Before and After Privatization-in-Place

23

Table II.2: AFMC Estimated Fiscal Year 1997 Costs for Missile,

Aircraft, and Metrology Workloads Before and After

Privatization-in-Place

23

Figures Figure I.1: Photographs of Boeing Guidance and Repair Center 17

Figure I.2: Examples of Various Test and Repair Stations at

Boeing Guidance and Repair Center, Heath, Ohio

19

Figure I.3: Air Force, Contractor, and Local Reuse Authority

Relationship

22

Page 14 GAO/NSIAD-98-35 Air Force Privatization-in-Place
Contents

Abbreviations

AFMC Air Force Materiel Command

AGMC Aerospace Guidance and Metrology Center

BGRC Boeing Guidance Repair Center

BRAC Base Realignment and Closure

DCAA Defense Contract Audit Agency

DCMC Defense Contract Management Command

DOD Department of Defense

Page 15 GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix I 

AGMC Mission and Closure History

Prior to its closure in 1996, Newark Air Force Base supported the

industrial complex comprising the Aerospace Guidance and Metrology

Center (AGMC), supporting two Air Force missions—depot maintenance

and metrology and calibration. AGMC provided the Air Force with

depot-level repair for inertial guidance and inertial navigation systems and

displacement gyroscopes for the Minuteman and Peacekeeper

intercontinental ballistic missiles and most of the Air Force’s aircraft. In

fiscal year 1994, AGMC’s depot maintenance workload consisted of about

900,000 hours; almost 10,500 items were produced to support repair

requirements for 66 Air Force, Navy, and Army systems and components.

This work was accomplished by about 500 maintenance and engineering

personnel and 325 management and support personnel. Figure I.1 shows

an aerial view of the Newark facility.

Page 16 GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix I 

AGMC Mission and Closure History

Figure I.1: Photographs of Boeing Guidance and Repair Center

Navy DMINS test station.

Aircraft guro repair

Technician in clean room.

Inertial Navigator Unit testing Gyro Test Station

Page 17 GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix I 

AGMC Mission and Closure History

AGMC was different from the Air Force air logistics centers because it did

not have weapon system and item management responsibility collocated

at the same base. For Air Force systems repaired at AGMC, weapon system

and item management functions are performed primarily at the Ogden,

Utah, or Oklahoma City, Oklahoma, Air Logistics Centers.

Page 18 GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix I 

AGMC Mission and Closure History

Figure I.2: Examples of Various Test and Repair Stations at Boeing Guidance and Repair Center, Heath, Ohio

Receiving area for missile guidance induction showing shipping 

containers for minute man missiles.

Automatic testing on guidance gyros.

Diagnostic and functional testing on Pendulous Integrating Gyro 

Accelerometer (PIGA), a component of the minute man inertial 

guidance system.

PIGA test station Minute Man ICBM platform vibration station

Page 19 GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix I 

AGMC Mission and Closure History

For its second Air Force mission—metrology and calibration—AGMC

performed overall technical direction and management of the Air Force

Metrology and Calibration Program and operated the Air Force

Measurement Standards Laboratory. About 200 personnel were involved in

the metrology and calibration mission—109 in generating technical orders,

certification of calibration equipment, and management operations and 89

in the standards laboratory.

The Department of Defense (DOD) considered AGMC’s work conducive to

conversion to the private sector and recommended closing Newark Air

Force Base/AGMC through privatization and/or transferring the workload to

other depots. DOD justified the closure by (1) identifying at least 8.7 million

hours of excess Air Force depot maintenance capacity, with the closure of

AGMC expected to reduce the excess by 1.7 million hours and (2) applying

the eight base closure criteria to Air Force bases having depots and

ranking Newark Air Force Base low relative to the others.

DOD estimated that implementing its recommendation on Newark Air

Force Base/AGMC would cost $31 million, result in an annual savings of

$3.8 million, and have an 8-year payback period for closure and relocation

expenses. In our report on the base closure and realignment

recommendations and selection process, we estimated that the Newark

Air Force Base/AGMC closure costs would be $38.29 million, with a 13-year

payback. The Base Closure and Realignment Commission determined that

the AGMC workload could either be contracted out or privatized-in-place at

the same location, although the BRAC noted that industry interest in

privatization-in-place was limited. The BRAC recommended closing Newark

Air Force Base/AGMC—noting that workload could be moved to other

depot maintenance activities, including the private sector.

Our December 1994 report questioned the impending closure of AGMC and

recommended reassessment of the Air Force closure and

privatization-in-place plans.1 DOD reevaluated its decision and reaffirmed

its closure and privatization-in-place plans. In December 1995, the Air

Force awarded two 5-year contracts for repair and metrology services at

Newark: an estimated $264 million cost plus award fee contract to

Rockwell International for AGMC’s repair mission2

 and a $19 million cost

plus award fee contract to Wyle Laboratories for operation of the Air

1

Aerospace Guidance and Metrology Center: Cost Growth and Other Factors Affect Closure and

Privatization (GAO/NSIAD-95-60, Dec. 9, 1994).

2

Following the decision to close AGMC, the Army and the Navy transferred about 95,000 direct labor

hours of work to other sources of repair.

Page 20 GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix I 

AGMC Mission and Closure History

Force’s standard metrology laboratory. In October 1996, Boeing acquired

the AGMC repair operations through its acquisition of Rockwell

International.

In addition to these contract operations, the Air Force retained about 

130 government employees at Newark—about 69 percent of the preclosure

metrology staff. They perform such functions as (1) periodically reviewing

and certifying the operations of the Air Force’s 130 metrology laboratories

and (2) helping the Defense Contract Management Command monitor

Wyle Laboratories’ metrology contract. In addition, 24 government civilian

employees of the Defense Contract Management Command provide on-site

contract oversight.

The Newark-Heath-Licking County Port Authority is in the process of

purchasing the Newark Air Force Base real property.3

 The Port Authority

currently leases the facility to Boeing, which then subleases a portion of

the facility to Wyle Laboratories. Figure I.3 depicts the relationship

between the Air Force, the contractors, and the local reuse authority.

3

The Newark-Heath-Licking County Port Authority is the Ohio chartered reuse authority responsible

for redeveloping and managing the closed Newark Air Force Base facilities.

Page 21 GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix I 

AGMC Mission and Closure History

Figure I.3: Air Force, Contractor, and Local Reuse Authority Relationship

Page 22 GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix II 

AFMC Interim Cost Analysis Summaries

Table II.1: AFMC Estimated Fiscal Year

1997 Costs for Missile and Aircraft

Workload Before and After

Privatization-in-Place (Mar./Apr. 1997

analyses)

Optimistic Most likely Pessimistic

Missiles AGMC $39,654,845 $38,143,561 $37,625,067

Missiles BGRC 43,010,320 44,933,117 50,858,073

Difference $3,355,475 $6,789,556 $13,233,006

Aircraft AGMC $35,540,990 $33,092,111 $32,002,958

Aircraft BGRC 39,923,218 42,416,090 49,954,755

Difference $4,382,228 $9,323,979 $17,951,797

Total AGMC $75,195,835 $71,235,672 $69,628,025

Total BGRC 82,933,538 87,349,207 100,812,828

Total difference $7,737,703 $16,113,535 $31,184,803

Source: AFMC March/April 1997 AGMC cost analyses.

Table II.2: AFMC Estimated Fiscal Year

1997 Costs for Missile, Aircraft, and

Metrology Workloads Before and After

Privatization-in-Place (June/July 1997

analyses)

Optimistic Most likely Pessimistic

Missiles AGMC $42,993,855 $41,154,587 $40,512,943

Missiles BGRC 43,527,092 45,509,268 51,321,727

Difference $533,237 $4,354,681 $10,808,784

Aircraft AGMC $37,147,039 $34,386,422 $33,271,371

Aircraft BGRC 39,920,618 42,380,471 50,710,634

Difference $2,773,579 $7,994,049 $17,439,263

Metrology AGMC $9,529,315 $8,671,675 $8,196,359

Metrology BGRC 9,654,497 10,453,622 11,982,424

Difference $125,182 $1,781,947 $3,786,065

Total AGMC $89,670,209 $84,212,684 $81,980,673

Total BGRC 93,102,207 98,343,361 114,014,785

Total difference $3,431,998 $14,130,677 $32,034,112

Source: AFMC June/July 1997 AGMC cost analyses.

Page 23 GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix III 

AFMC Cost Analysis Methodology

In performing its cost analysis, the Air Force Materiel Command (AFMC)

used actual cost data when it was known. Estimated cost data were

expressed as ranges, using most likely, low, and high estimates. The cost

analysis was constructed using triangular probability distributions for

each estimated cost element. The cost elements were then summed

statistically using a probability simulation model, with all estimated costs

stated in fiscal year 1997 dollars. To provide a valid basis for comparison,

AFMC determined that it was necessary to derive AGMC and contract cost

estimates using two distinct methodologies.

The AGMC estimate is based largely on fiscal year 1995 data obtained from

the end-item cost report dated September 30, 1995, adjusted for quantity

differences. The cost categories in that report consist of (1) depot product

direct hours, (2) direct labor, (3) direct material, (4) shop overhead,

(5) support overhead, and (6) general and administrative costs. The

organic estimate also included cost categories for unprogrammed work

and cost comparability adjustments. Comparability adjustments were

additions to the Defense Maintenance Business Area for expenditures

funded by other sources. These adjustments were made in accordance

with the Defense Depot Maintenance Council Cost Comparability

Committee Handbook dated August 10, 1993. Cost comparability

adjustments consisted of the following cost elements: state unemployment

tax, unfunded civilian retirement, casualty insurance, impact aid, retiree

health benefits, other operation and maintenance costs, and costs

associated with the guidance replacement program (new cost on the

contract).

For the contract estimate, AFMC based many of the most likely input

variables on costs as stated in the current contract. Latest revised

estimates for the contract cost categories were obtained from the

Contractor/Schedule Status Report dated end-of-month December 1996

and February 1997. Additional cost categories for the contract estimate

included security, lease, depot maintenance business area contract fees,

equipment depreciation, capital expenditures, and privatization-in-place

costs.

Page 24 GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix III 

AFMC Cost Analysis Methodology

Page 25 GAO/NSIAD-98-35 Air Force Privatization-in-Place
Related GAO Products

Outsourcing DOD Logistics: Savings Achievable but Defense Science

Board’s Projections Are Overstated (GAO/NSIAD-98-48, Dec. 8, 1997).

Air Force Depot Maintenance: Information on the Cost Effectiveness of

B-1B and B-52 Support Options (GAO/NSIAD-97-210BR, Sept. 12, 1997).

Navy Depot Maintenance: Privatizing the Louisville Operations in Place Is

Not Cost Effective (GAO/NSIAD-97-52, July 31, 1997).

Defense Depot Maintenance: Challenges Facing DOD in Managing Working

Capital Funds (GAO/T-NSIAD/AIMD-97-152, May 7, 1997).

Depot Maintenance: Uncertainties and Challenges DOD Faces in

Restructuring Its Depot Maintenance Program (GAO/T-NSIAD-97-111, Mar. 18,

1997) and (GAO/T/NSIAD-112, Apr. 10, 1997).

Defense Outsourcing: Challenges Facing DOD as It Attempts to Save

Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar. 12, 1997).

Navy Ordnance: Analysis of Business Area Price Increases and Financial

Losses (GAO/AIMD/NSIAD-97-74, Mar. 14, 1997).

High-Risk Series: Defense Infrastructure (GAO/HR-97-7, Feb. 1997).

Air Force Depot Maintenance: Privatization-in-Place Plans Are Costly

While Excess Capacity Exists (GAO/NSIAD-97-13, Dec. 31, 1996).

Army Depot Maintenance: Privatization Without Further Downsizing

Increases Costly Excess Capacity (GAO/NSIAD-96-201, Sept. 18, 1996).

Navy Depot Maintenance: Cost and Savings Issues Related to

Privatizing-in-Place the Louisville, Kentucky, Depot (GAO/NSIAD-96-202,

Sept. 18, 1996).

Defense Depot Maintenance: Commission on Roles and Mission’s

Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July 15,

1996).

Defense Depot Maintenance: DOD’s Policy Report Leaves Future Role of

Depot System Uncertain (GAO/NSIAD-96-165, May 21, 1996).

Page 26 GAO/NSIAD-98-35 Air Force Privatization-in-Place
Related GAO Products

Defense Depot Maintenance: More Comprehensive and Consistent

Workload Data Needed for Decisionmakers (GAO/NSIAD-96-166, May 21, 1996).

Defense Depot Maintenance: Privatization and the Debate Over the

Public-Private Mix (GAO/T-NSIAD-96-146, Apr. 16, 1996) and (GAO/T-NSIAD-96-148,

Apr. 17, 1996).

Military Bases: Closure and Realignment Savings Are Significant, but Not

Easily Quantified (GAO/NSIAD-96-67, Apr. 8, 1996).

Depot Maintenance: Opportunities to Privatize Repair of Military Engines

(GAO/NSIAD-96-33, Mar. 5, 1996).

Closing Maintenance Depots: Savings, Personnel, and Workload

Redistribution Issues (GAO/NSIAD-96-29, Mar. 4, 1996).

Navy Maintenance: Assessment of the Public-Private Competition Program

for Aviation Maintenance (GAO/NSIAD-96-30, Jan. 22, 1996).

Depot Maintenance: The Navy’s Decision to Stop F/A-18 Repairs at Ogden

Air Logistics Center (GAO/NSIAD-96-31, Dec. 15, 1995).

Military Bases: Case Studies on Selected Bases Closed in 1988 and 1991

(GAO/NSIAD-95-139, Aug. 15, 1995).

Military Base Closure: Analysis of DOD’s Process and Recommendations

for 1995 (GAO/T-NSIAD-95-132, Apr. 17, 1995).

Military Bases: Analysis of DOD’s 1995 Process and Recommendations for

Closure and Realignment (GAO/NSIAD-95-133, Apr. 14, 1995).

Aerospace Guidance and Metrology Center: Cost Growth and Other

Factors Affect Closure and Privatization (GAO/NSIAD-95-60, Dec. 9, 1994).

Navy Maintenance: Assessment of the Public and Private Shipyard

Competition Program (GAO/NSIAD-94-184, May 25, 1994).

Depot Maintenance: Issues in Allocating Workload Between the Public and

Private Sectors (GAO/T-NSIAD-94-161, Apr. 12, 1994).

Depot Maintenance (GAO/NSIAD-93-292R, Sept. 30, 1993).

Page 27 GAO/NSIAD-98-35 Air Force Privatization-in-Place
Related GAO Products

Depot Maintenance: Issues in Management and Restructuring to Support a

Downsized Military (GAO/T-NSIAD-93-13, May 6, 1993).

Air Logistics Center Indicators (GAO/NSIAD-93-146R, Feb. 25, 1993).

Defense Force Management: Challenges Facing DOD as It Continues to

Downsize Its Civilian Workforce (GAO/NSIAD-93-123, Feb. 12, 1993).

Navy Maintenance: Public-Private Competition for F-14 Aircraft

Maintenance (GAO/NSIAD-92-143, May 20, 1992).

(709265, 709240) Page 28 GAO/NSIAD-98-35 Air Force Privatization-in-Place
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