United States General Accounting Office

GAO Report to the Ranking Minority Member,

Subcommittee on Defense, Committee

on Appropriations, U.S. Senate

January 1996 NAVY MAINTENANCE

Assessment of the

Public-Private

Competition Program

for Aviation

Maintenance

GAO/NSIAD-96-30

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-270593 

January 22, 1996

The Honorable Daniel K. Inouye

Ranking Minority Member

Subcommittee on Defense

Committee on Appropriations

United States Senate

Dear Senator Inouye:

As requested, we reviewed the Navy’s plans and procedures for public-private competitions of

aviation depot-level maintenance workloads. Various factors limited the amount of past

depot-level work available for competitive awards, including the time and costs for performing

competitions. While actual savings were difficult to quantify, we found that the Navy’s

competition programs generally reduced operating costs and in many cases resulted in

streamlined production processes. The Navy terminated its aviation maintenance competition

program in 1993 and the Department of Defense (DOD) terminated the program in 1994.

However, as the DOD begins to implement recommendations by the Commission on Roles and

Missions leading to the possible privatization of most depot maintenance, use of competitive

procedures for distribution of workloads between the public and private sectors should prove

cost-effective.

We are sending copies of this report to the Chairmen and Ranking Minority Members, House

and Senate Committees on Appropriations; Senate Committee on Armed Services; House

Committee on National Security; the Director, Office of Management and Budget; and the

Secretaries of Defense, the Navy, and the Air Force.

Please contact me at (202) 512-8412 if you have any questions concerning this report. Major

contributors were Julia Denman, Assistant Director; Gary Phillips, Evaluator-in-Charge; and

James Ellis, Evaluator.

Sincerely yours,

David R. Warren

Director, Defense Management Issues
Executive Summary

Purpose The Navy’s aviation depot competition program began in fiscal year 1987

when the Congress authorized the Navy to expand its competition

program for ship maintenance and repair to include public-private

competitions for aircraft depot repair work. Because of significant savings

generated from the ship competition program, the concept was first

applied to F-14 fighter aircraft depot overhauls. In 1990, the Navy decided

to greatly expand the program to achieve savings in the Navy’s $1.5 billion

aviation depot maintenance program. In 1993, the Navy implemented a

new industrial strategy that did not include public-private competitions

and in May 1994, DOD terminated the public-private competition program,

despite continued congressional support for it.

At the request of the former Chairman, and now Ranking Minority

Member, of the Subcommittee on Defense, Senate Committee on

Appropriations, GAO reviewed the Navy’s aviation depot maintenance

competition program to determine (1) the nature and extent of past

competitions, (2) whether savings resulted, (3) prospects for and

impediments to future competitions, and (4) whether program

improvements can be made.

Background Before the public-private competition program, most depot-level

maintenance for the Navy’s airframes, engines, and aviation components

was automatically assigned to Navy depots. The depots were paid a set

price for each type of repair based on labor standards, material estimates,

and past experience. Other maintenance work was performed by private

contractors with the price determined through competitive bidding or

contract negotiations. Most Navy aviation maintenance contract workload

was awarded on a noncompetitive basis. Under the public-private

competition program, the depots and private companies directly competed

for selected maintenance work and the bidder offering the best value to

the government was awarded the contract.

The Navy public-private competition program was first applied to a Navy

aircraft repair requirement in 1987, and in 1992 the Navy started using

public-private competition for determining the source of repair for some

component repair work. In May 1994, the Deputy Secretary of Defense

terminated the program.

The conference committee on the fiscal year 1995 defense appropriations

bill noted that both the House and Senate reports raised serious concerns

regarding the Department of Defense’s (DOD) policy on competition for

Page 2 GAO/NSIAD-96-30 Navy Maintenance
Executive Summary

depot maintenance workloads. The conferees agreed that public-private

competition for depot maintenance workloads should be reinstituted.

Results in Brief Navy public-private competitions generally resulted in savings and

benefits, although precisely quantifying such savings is not possible. For

competition workloads, public depots substantially reduced operating

costs by streamlining production processes and reducing overhead.

However, the Navy’s expectations to greatly expand public-private

competitions and to thereby achieve over $550 million in savings over a

6-year period never materialized. The time and cost of performing such

competitions, combined with a rapidly declining depot maintenance

workload and a private sector concern about fairness, resulted in much

less maintenance work being subjected to public-private competition than

had been projected. The issue of fairness centers on private sector

concerns that military depot prices did not reflect the total cost to the

government of performing this work, including the labor and material to

be applied to competition work as well as an appropriate share of

overhead.

Congressional direction to reinstitute public-private competitions together

with recommendations by the Commission on Roles and Missions to

privatize most depot maintenance work has resulted in DOD reexamining

its depot workload with a view toward moving more work to the private

sector. Since 10 U.S.C. 2469 requires a public-private competition before

any depot workload valued at $3 million or more can be moved to the

private sector, efforts to privatize depot maintenance work will increase

the need for DOD to perform public-private competitions, both to comply

with the statute as well as to assure that privatization is cost-effective.

While DOD maintains it has reinstituted its public-private competition

program, in practice no competitions have been held since DOD terminated

the program in 1994.

A number of factors may limit or impede a major competition program in

the current environment. They include (1) the cost and difficulties of

performing such competitions and (2) the amount of work available for

competition under current law and policies limiting the mix of public and

private depot maintenance work.

Initiatives, such as improving cost accounting systems for depot work, can

be taken to improve public-private competitions to assure their future

Page 3 GAO/NSIAD-96-30 Navy Maintenance
Executive Summary

usefulness in identifying the most cost-effective source of repair for depot

maintenance workloads.

Principal Findings

Relatively Little Workload

Competed

Relatively little depot maintenance workload has been competed between

the public and private sectors. Of the $4.6 billion spent on aircraft and

engine maintenance since 1988, only $268 million, or about 6 percent, was

included in the public-private competition program. Similarly, of the 

$3.2 billion spent on component repairs since 1992, only $196 million, or

about 6 percent, was competed.

Plans to save $550 million by competing most Navy aviation depot

maintenance work never materialized, primarily because of declining

maintenance requirements, greater than expected cost and time

requirements to conduct competitions, concerns over fairness, and a

change in Navy industrial strategy. Navy officials noted that administrative

delays in completing the competitions were caused by the need to clarify

maintenance requirements and develop statements of work. However, they

conceded that these factors also impede the Navy’s ability to conduct

competitions among private sector contractors. For example, although

Navy officials told GAO they intended to privatize some of the maintenance

workload being relocated from closing Navy aviation depots, they are

using a two-step process that first relocates the workload to another Navy

depot. This is primarily caused by the time requirements to technically and

administratively prepare for contracting out the workloads.

Measuring Precise Savings

Not Possible

Precisely comparing costs and quantifying savings resulting from

public-private competition is not possible because (1) few major

competitions have been performed and there is little baseline data

allowing a comparison of maintenance costs before and after the

competition, (2) maintenance requirements increased as aircraft aged,

(3) workloads decreased from precompetition levels, and (4) inflation

increased costs. However, available data suggests that savings resulted

from the competition program.

Available Data Indicates

Savings Generally Resulted

The public-private competition program has reduced depot maintenance

costs for the competed workloads. The threat of reduced workloads and

Page 4 GAO/NSIAD-96-30 Navy Maintenance
Executive Summary

job losses provided an incentive for Navy depots to minimize costs. In

response to the competitions, the depots took several steps to lower their

costs, such as identifying the most efficient process to accomplish each

repair task, developing new staffing requirements to ensure that the

minimum number of people with the correct skill levels were assigned,

and making organizational changes that would focus on reducing overhead

costs.

GAO’s comparisons of maintenance and repair costs before and after

competitions showed, in most instances, that costs after competition were

significantly lower. In cases where the costs were higher, the higher cost

was attributable primarily to inflation, increases in required maintenance

tasks, and reductions in total workload volume. In these cases, the cost

may have been even higher without the competition. GAO’s comparison of

component repair costs after public-private competition showed that, even

with inflation, costs declined in 25 of 33 cases by an average of 41 percent.

In eight cases, the costs increased by an average of 37 percent. When

adjusted for inflation, the average cost of an F-14 airframe overhaul,

competed in 1987 and won by Navy depots, decreased from an average

$1.69 million in the year before the competition to $1.29 million after the

competition. In the first 4 years after the competition, the average cost per

F-14 airframe overhaul was about 22 percent lower than the

precompetition cost.

Public-Private

Competitions Could Be a

Useful Tool, but Some

Factors May Limit Its Use

The public-private competition program has been beneficial and the

conference report on the fiscal year 1995 defense appropriations bill,

directed DOD to reinstitute public-private competitions. Further, DOD

efforts to privatize a greater share of depot work, as recommended by the

Commission on Roles and Missions, will be subject to the 10 U.S.C. 2469

requirement that depot-level maintenance workloads valued at $3 million

or more not be changed to performance by a contractor unless the change

is made using competitive procedures that allow DOD depots to participate.

Despite an environment that calls for greater public-private competitions,

some of the factors that led the Navy to terminate its competition program

even before the Deputy Secretary formally terminated the program

throughout DOD may still limit the program’s use. For example, depot

repair and maintenance workloads continue to decline and the Navy

depots are still in a state of transitioning workload from closing depots.

However, one of the Navy’s key points—that a large part of the remaining

work must be retained in the public sector in order to preserve critical

Page 5 GAO/NSIAD-96-30 Navy Maintenance
Executive Summary

core capabilities—is under review. The core concept was challenged by

the May 1995 Report of the Commission on Roles and Missions.

Furthermore, the Secretary of Defense’s August 1995 comments to the

Senate Armed Services Committee on the Commission report stated that

DOD agrees with the Commission’s recommendation to outsource a

significant portion of the Department’s depot maintenance work. If this

position is implemented as DOD policy, it could significantly increase the

amount of Navy workload available for competition, since current law

generally requires such changes to be made using competitive procedures

that include public depots. However, concerns regarding the time and cost

of conducting competitions and the fairness of the program have not been

fully resolved.

In March 1995, DOD notified the Senate and House Appropriations

Committees that DOD did not plan to reinstate the competition program at

that time. According to the DOD’s report to the Congress, the financial

systems and databases within DOD are not capable of supporting the

determination of actual cost of specific workloads. Further, according to

DOD officials, there was an expectation that the DOD would be successful in

its efforts to have 10 U.S.C. 2469 repealed.

The public-private competition program could be a useful tool for

determining where depot maintenance workload can be performed more

cost effectively. DOD initiated some actions that could improve the public

depots’ ability to identify, allocate, and track depot maintenance costs for

specific competition workloads, but the termination of the competition

program in May 1994 appears to have lessened the incentive to fully

implement these programs. Opportunities also exist to implement other

improvement initiatives.

Recommendations GAO recommends that the Secretary of Defense (1) reinstitute

public-private competition for depot maintenance workloads as quickly as

possible; (2) develop and issue guidelines regarding the conditions,

framework, policies, procedures, and milestones for reinstituting

public-private competition; and (3) require the Defense Contract Audit

Agency to review internal controls and accounting policies and procedures

of DOD depots to assure they are adequate for identifying, allocating, and

tracking costs of depot maintenance programs and to ensure proper costs

are identified and considered as part of the bids by DOD depots.

Page 6 GAO/NSIAD-96-30 Navy Maintenance
Executive Summary

Agency Comments DOD officials provided official oral comments on a draft of this report that

have been incorporated as appropriate. DOD generally concurred with the

information regarding (1) limited public-private competitions held to date,

(2) benefits achieved from previous competition programs and difficulties

quantifying savings, and (3) factors leading GAO to suggest reinstatement of

public-private competition programs. However, they noted concerns that

depot prices may not fully reflect the cost to the government of performing

competition work, including all labor, material, and overhead.

DOD officials generally concurred with GAO’s recommendations, but only

partially concurred with the recommendation to reinstitute competitions.

DOD officials state that a November 1994 memorandum from the Deputy

Under Secretary of Defense to the service secretaries notified depot

activities that they can compete for workloads if certain conditions were

met. DOD also states that it will comply with all applicable legislation when

making source of repair decisions—including the 10 U.S.C. 2469

requirement that prohibits changing workloads valued at $3 million or

more from a public depot without using competitive procedures that

include both public and private entities. However, DOD also cites its policy

of prohibiting public-private competitions until financial accounting

systems are improved and the Defense Finance and Accounting Service

certifies that adequate procedures are in place to identify and track all

pertinent costs. DOD also cites its policy that only core workloads should

be performed in its depots and notes that it plans to seek legislative relief

from the 10 U.S.C. 2469 requirement.

DOD’s actions show that in practice it has not reinstituted public-private

competitions. DOD has not conducted a public-private competition since it

terminated the program in 1994 and it has not provided guidance to the

services for reinstituting public-private competitions. Furthermore, GAO

believes the November 1994 memorandum provided guidance to the

services regarding the conditions which DOD depots could compete for

complementary workloads of non-DOD agencies, such as the Federal

Aviation Administration’s ground communications equipment.

GAO agrees that DOD needs to improve its financial accounting and

information systems; however, completion of these improvements should

not preclude public-private competitions. GAO believes that development

of the Cost Comparability Handbook for preparing bids and the availability

of the Defense Contract Audit Agency to review the current cost systems

and assure that successful bids include comparable estimates of all direct

Page 7 GAO/NSIAD-96-30 Navy Maintenance
Executive Summary

and indirect costs provide reasonable bases for conducting such

competitions.

Regarding GAO’s recommendation that the Defense Contract Audit Agency

certify the adequacy of internal controls and accounting procedures, DOD

officials stated that they agreed that certifications were required and that

they planned to have the Defense Finance and Accounting Service perform

this task. Since the Defense Finance and Accounting Service owns the DOD

accounting systems and for other reasons, GAO continues to believe the

Defense Contract Audit Agency would provide a more rigorous,

independent assessment of the ability of military depots to identify and

track the costs of competition work and to prepare competition bids that

include all appropriate costs.

Page 8 GAO/NSIAD-96-30 Navy Maintenance
Page 9 GAO/NSIAD-96-30 Navy Maintenance
Contents

Executive Summary 2

Chapter 1 

Introduction

12

Public-Private Competition 13

Objectives, Scope, and Methodology 15

Chapter 2 

Public-Private

Competition for Navy

Aviation Repairs Has

Been Limited

17

Limited Workload Included in Program 17

Competition for Airframe and Engine Repairs 18

Competition for Aviation Component Repairs 19

Reasons for Limited Program 19

Chapter 3 

Competition Program

Considered

Beneficial, but

Quantifying Savings Is

Difficult

22

Competition Program Has Been Beneficial 22

Limitations in Quantifying Competition Savings 23

Maintenance Costs After Competition 24

Conclusions 29

Chapter 4 

Future Use of

Public-Private

Competition Appears

Advantageous

30

Current Environment Calls for Public-Private Competitions 30

Factors That Might Limit the Future of the Program 31

Possible Improvements to the Program 33

Conclusions 36

Recommendations 36

Agency Comments 36

Appendixes Appendix I: Public-Private Competitions for Aviation Component

Repairs

40

Related GAO Reports and Testimonies 44

Tables Table 1.1: Fiscal Year 1994 Depot Maintenance Funding for Major

Programs

12

Table 2.1: Value of Public-Private Competition Awards 17

Table 2.2: Public-Private Competitions for Airframe and Engine

Maintenance

18

Page 10 GAO/NSIAD-96-30 Navy Maintenance
Contents

Table 3.1: F-14 Overhaul Costs Before and After Competition 26

Table 3.2: Changes in Component Repair Costs After Competition 29

Abbreviations

ASO Aviation Supply Office

DOD Department of Defense

GAO General Accounting Office

NAVAIR Naval Air Systems Command

NADEP Naval Aviation Depot

Page 11 GAO/NSIAD-96-30 Navy Maintenance
Chapter 1 

Introduction

The Navy historically has accomplished required depot-level maintenance

for aircraft by assigning work to Naval Aviation Depots (NADEP) and by

contracting out work to private companies. NADEPs mainly repair the

airframes, engines, and components associated with key aircraft such as

the F-14 Tomcat and the P-3C Orion. Private contractors perform Navy

aviation maintenance work such as the repair of certain cargo and training

aircraft, selected engines, and designated components. A limited amount

of Navy aviation maintenance work is performed by other service

maintenance depots.

The Naval Air Systems Command (NAVAIR), which operates NADEPs,

determines depot maintenance requirements for airframes and engines on

the basis of fleet needs and administers the airframe and engine repair

programs. Similarly, the Naval Aviation Supply Office (ASO) determines

repair requirements for aircraft and engine components and administers

the component repair program.

Table 1.1 shows the Navy’s funding for airframe, engine, and component

depot-level maintenance in fiscal year 1994.

Table 1.1: Fiscal Year 1994 Depot

Maintenance Funding for Major

Programs Public depots Private companies

Dollars in millions

Program Amount Percent Amount Percent Total

Airframes $240.9 73 $87.1 27 $328.0

Engines 168.1 86 27.1 14 195.2

Components 625.5 61 398.1 39 1,023.6

Total $1,034.5 67 $512.3 33 $1,546.8

In an April 12, 1994, testimony,1 we pointed out that previous reports of

workload mix between the public and private sectors understate the

portion of funding going to the private sector. We noted that an actual

accounting of what percentage of the depot maintenance dollars

ultimately going to the private sector, either directly or through the

purchase of repair parts or secondary services is not readily available

because of limitations in the way the Department of Defense (DOD) collects

data. However, based on our review of available data, we projected that

more than 50 percent of depot maintenance funding goes to the private

sector.

1

Depot Maintenance: Issues in Allocating Workload Between the Public and Private Sectors

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

Page 12 GAO/NSIAD-96-30 Navy Maintenance
Chapter 1 

Introduction

Public-Private

Competition

Competition between the public and private sectors for depot

maintenance work initially began in fiscal year 1985 when the Congress

authorized a test program to allow public and private shipyards to

compete for the overhaul of selected ships on the basis of cost

comparisons. The competition program’s goal was to help balance public

and private industrial base concerns while achieving economy through

competition. The Congress believed that by allowing public and private

shipyards to directly compete for work, depot performance would be

improved and depot maintenance costs would be reduced. Our 1994 report

provided the history and status of the Navy’s ship competition program.2

In fiscal year 1987, the Congress authorized the Navy to expand the scope

of the competition program to include public-private competitions for

depot repair of aircraft. The first NAVAIR work package subjected to

public-private competition was for F-14 standard depot-level maintenance.

In December 1990, NAVAIR published plans to greatly expand its

public-private competition program to meet the savings goal of a Defense

Management Review initiative regarding aviation depot maintenance. The

NAVAIR plan assumed that most airframe and engine overhaul work above

the minimum levels required to support the depot industrial base would be

subjected to public-private competition. The plan specifically included

future competition for 10 different airframes and 4 different engines.

Partly based on initial results from the F-14 competition, the plan also

assumed that the new competitions would result in a 20-percent savings in

maintenance costs, or about $550 million by fiscal year 1995. In fiscal year

1992, ASO began its public-private competition program for aviation

components with a goal to achieve significant maintenance cost savings.

Because of concerns over rapidly declining depot maintenance

requirements, the need to reduce excess depot capacity and help preserve

the private sector industrial base, NAVAIR announced a new depot industrial

strategy in April 1993 that basically eliminated future use of public-private

competition for Navy aviation maintenance. The new strategy called for

NADEPs to perform core maintenance work and for private contractors to

perform non-core work. Core work was defined as the work necessary to

maintain fleet readiness throughout the life cycle of front line weapon

systems. The strategy expected that as the public and private sectors

specialized, the public depots would only compete against private

companies when there was insufficient competition in the private sector to

ensure reasonable repair prices. The strategy did not specify criteria for

2

Navy Maintenance: Assessment of the Public and Private Shipyard Program, (GAO/NSIAD-94-183,

May 25, 1994).

Page 13 GAO/NSIAD-96-30 Navy Maintenance
Chapter 1 

Introduction

assessing insufficient competition. It also did not recognize the impact of

the 10 U.S.C. 2469 provision that was enacted in October 1992 requiring

that public depots be allowed to compete for depot maintenance

workloads valued at $3 million or more before moving this work to the

private sector.

In a May 4, 1994, memorandum on depot maintenance operations policy,

the Deputy Secretary of Defense discontinued the DOD’s public-private

competition program. He cited a report of the Defense Science Board3

 that

identified several concerns with continuing the program and

recommended eliminating it. The report noted the difficulties in

conducting fair competitions, the high costs associated with the

competition program, and the divisive effects of a policy that asks private

sector firms to aggressively compete with their major (sometimes only)

customer.

In its report on the fiscal year 1995 DOD appropriation bill, the conference

committee disagreed with DOD’s announced policy and directed DOD to

reinstitute public-private competition. Additionally, the conferee’s directed

DOD to respond to issues raised in House and Senate Appropriations

Committee reports regarding public-private competition for depot

maintenance workloads.

In its February 1995 report to the Senate and House Appropriations

Committees, DOD stated that the financial systems and databases within

the Department are not capable of supporting the determination of actual

cost of specific workloads. Further, DOD perceives that competitions

involving the organic depots have had disruptive and divisive effects on

the military services, particularly the depot maintenance community. Last,

the report noted that since DOD is moving to size its organic capabilities

consistent with its core depot maintenance policy, it is questionable

whether additional capacity and resources should be retained in order to

compete. The report also stated that DOD is developing policies,

procedures, and automated systems that will permit actual cost

accounting for specific workloads accomplished in organic depots to

overcome these problems and concerns. However, substantial changes are

required that will be time-consuming to complete and implement. The

report concluded that DOD cannot reinstate public-private competition

until cost accounting and data systems are in place to conduct fair and

open competitions. Nevertheless, the House and Senate conference

3

Depot Maintenance Management, Defense Science Board Task Force, Office of the Under Secretary of

Defense for Acquisition and Technology, April 1994.

Page 14 GAO/NSIAD-96-30 Navy Maintenance
Chapter 1 

Introduction

agreement on the fiscal year 1996 National Defense authorization bill

continues to support public-private competitions.

Objectives, Scope,

and Methodology

As requested, we reviewed the Navy’s public-private competition program

for aviation depot maintenance to determine (1) the nature and extent of

past competitions, (2) whether savings resulted, (3) prospects for and

impediments to future competitions, and (4) whether program

improvements can be made.

We performed our review at the following organizations having

management responsibility for the Navy’s aviation maintenance program:

NAVAIR, Washington, D.C.; its subordinate office, the Naval Aviation Depot

Operations Center, Patuxent River, Maryland; and the Naval ASO,

Philadelphia, Pennsylvania. We also performed detailed audit work at

NADEPs that participated in major public-private competitions: the Norfolk

NADEP, Norfolk, Virginia; the North Island NADEP, San Diego, California; and

Jacksonville NADEP, Jacksonville, Florida. At each location, we interviewed

responsible agency personnel and reviewed applicable policies,

procedures, and documents.

To assess the program’s impact on depot maintenance costs, we attempted

to compare the maintenance costs for competed work before and after the

competition. Our cost comparisons did not include the costs to perform

the competitions or administer the awards and, except for the F-14

competition program, adjustments were not made to account for inflation.

Because some competitions involved new maintenance work, our

assessment was limited to those involving maintenance work that had

been performed before the competition. Our assessment was also limited

by the small number of competitions performed and by many factors that

make historical cost comparisons difficult such as changes in the amount

of maintenance work required, changes in total workload, changes in

worker efficiency, and the impact of inflation.

To examine the future potential of the program, we interviewed key

managers at headquarters and NADEPs that have been involved with the

public-private competition program. We asked the managers questions

concerning benefits from the program, barriers limiting the future use of

the program, and suggestions for improving the program.

Our analyses used cost data reported by the NAVAIR Industrial Financial

Management System. This standardized, automated cost accounting

Page 15 GAO/NSIAD-96-30 Navy Maintenance
Chapter 1 

Introduction

system provides the Navy’s official cost information for NADEP operations.

We did not make an independent assessment of the reliability of the data.

The Navy considers the NADEPs’ actual cost information on competition

work to be business sensitive. Thus, this report does not disclose the

actual costs of competition work. Instead, we disclose (1) average

maintenance costs per unit over time and (2) differences between actual

costs and amounts approved for payment by the contract administrator.

Our review was performed between March 1994 and October 1995 in

accordance with generally accepted government auditing standards.

Page 16 GAO/NSIAD-96-30 Navy Maintenance
Chapter 2 

Public-Private Competition for Navy

Aviation Repairs Has Been Limited

Between fiscal years 1987 and 1990, the Navy’s public-private competition

program for aviation depot maintenance went from a limited pilot program

to a planned program that was to include nearly all aircraft and engine

maintenance work and result in savings of $550 million over 6 years. The

program never matured to the level planned. Only about 6 percent of the

Navy’s aviation maintenance workload was actually competed between

the public and private sectors.

NAVAIR and ASO officials stated that planned program growth never

occurred for many reasons, including difficulty in conducting

public-private competitions, declining maintenance workloads, and the

need to eliminate excess depot capacity. Further, during most years the

naval aviation competition program was active, the program was limited to

no more than 4 percent of depot maintenance funds.

Limited Workload

Included in Program

Relatively little of the funds spent on Navy aviation depot maintenance has

been for work competed between the public and private sectors. Of the

$4.6 billion NAVAIR spent on aircraft and engine maintenance since 1988,

only $268 million, or about 6 percent, was included in the public-private

competition program. In ASO, only $196 million, or about 6 percent, of the

$3.2 billion spent on component repairs since 1992 was competed between

the public and private sectors. However, ASO officials noted the number of

competition program candidates has increased since the program was first

used and would have continued to increase if DOD had not terminated the

competition program in 1994. Table 2.1 compares total depot maintenance

funding to the value of the maintenance work awarded through

public-private competition.

Table 2.1: Value of Public-Private

Competition Awards Dollars in millions

Program

Total depot

maintenance

fundinga

Value of

public-private

competition

awards Percent

Airframes $2,953.4 $237.3 8.0

Engines 1,693.7 30.3 1.8

Components 3,168.8 196.3 6.2

Total $7,815.9 $463.9 5.9

aTotal maintenance funding includes funding in the years that the public-private competition

program was operational for each program. For airframes and engines, total maintenance funding

includes fiscal years 1988 through 1994. For components, total maintenance funding includes

fiscal years 1992 through 1994.

Page 17 GAO/NSIAD-96-30 Navy Maintenance
Chapter 2 

Public-Private Competition for Navy

Aviation Repairs Has Been Limited

Table 2.1 also shows that the percentage of competed engine workload

was significantly lower than the percentage of competed airframe and

component workloads. NAVAIR officials stated that less engine work was

competed because the projected savings from engine competitions were

much smaller than the other programs. The primary reason for this is that

a greater portion of engine costs is for material rather than labor. NAVAIR

officials stated that potential competition savings normally are greater for

workloads with higher labor costs.

Competition for

Airframe and Engine

Repairs

NAVAIR’s public-private competition program for airframe and engine

maintenance has included six competitions, five for aircraft work and one

for engine work. Four of the six competitions were for maintenance work

that had been routinely performed before the competition and two

competitions were primarily for new work to upgrade aircraft.

The public sector won four of the competitions valued at $215.9 million

and the private sector won two valued at $51.7 million. Of the four public

sector awards, three went to NADEPs and one was won by an Air Force

depot. Table 2.2 summarizes the public-private competitions performed by

NAVAIR.

Table 2.2: Public-Private Competitions

for Airframe and Engine Maintenance

Number of

bidders

Dollars in millions

Workload

Year

competed

Type of

work Public Private Winner

Award value

estimate

F-14A airframe

overhaul

1988 Public

existing

1 2 Public

NADEP

$81.8

P-3C

aircraft

upgrade

1988 New 1 1 Public

NADEP

31.5

SH-2F

airframe

overhaul

1990 Private

existing

1 2 Private 22.0

S-3A

aircraft

upgrade

1990 New 1 1 Private 29.7

F/A-18

airframe

rework

1993 Public

existing

2 2 Public

Air 

Force

72.3

J-52 engine

repair

1993 Public

existing

2 1 Public

NADEP

30.3

Page 18 GAO/NSIAD-96-30 Navy Maintenance
Chapter 2 

Public-Private Competition for Navy

Aviation Repairs Has Been Limited

The winning bid was the lowest bid in five of the six NAVAIR public-private

competitions. For these five competitions, the winning bid averaged

42 percent less than the next closest bid. In the competition for the SH-2F

helicopter overhaul, NAVAIR awarded the contract to a private company

that had bid higher than the lowest bid. The award was made because the

company offered the best value to the government after considering the

results from a technical evaluation of all bids.

Competition for

Aviation Component

Repairs

ASO’s public-private competition program included 33 competitions for the

repair of aviation components. The estimated total value of the competed

workload is about $196 million. Before the competitions, NADEPs

performed the maintenance for 21, or 64 percent, of the components and

private companies performed the maintenance for 9, or 27 percent, of the

components. The public and private sectors both performed maintenance

on the remaining three components.

Three of the competitions had no bids from the private sector and 19

competitions had only 1 private bidder. Ten of the competitions had 2 bids

from the private sector and 1 had 3—with only one-third of the

competitions having two or more private sector bidders. ASO officials

noted that overhaul and repair of complex aviation components is a

market area where in many cases only one private sector firm, generally

the equipment manufacturer, is interested in and qualified to do the work.

These officials noted that most of ASO’s contracted workload with the

private sector is awarded without competition.

NADEPs won 14, or 42 percent, of the 33 public-private competitions valued

at $61.9 million and private companies won 17, or 52 percent, of the

competitions valued at $120.7 million. In two, or 6 percent, of the

competitions, ASO awarded work valued at $13.7 million jointly to a NADEP

and a private company. Each competition award was made to the lowest

bidder. Details concerning each of the ASO public-private competitions are

included in appendix I.

Reasons for Limited

Program

In the early years of the competition program, the Navy’s public-private

program for aviation maintenance was limited to not more than 10 percent

of the non-core depot funds, or 4 percent of the total depot funds. There

was a statutory limitation on the amount of work that could be competed

by the Army and the Air Force. However, because the DOD competition

program was structured as a prototype program, the Navy adhered to the

Page 19 GAO/NSIAD-96-30 Navy Maintenance
Chapter 2 

Public-Private Competition for Navy

Aviation Repairs Has Been Limited

limitation as well. The Fiscal Year 1993 National Defense Authorization

Act rescinded the limitation on the amount of depot maintenance funds

eligible to be spent for workload that was awarded based on public-private

competitions.

While Navy planning documents suggested that the Navy expected to

expand the program to incorporate much of its non-core engine and

aircraft workload, NAVAIR officials stated that the planned expansion was

not realistic. Although the Navy had been authorized to conduct

public-private competitions for its aviation workloads since 1987, in

May 1993 testimony,1

 we noted that it had completed only four

competitions—two aircraft and two component parts. Additionally, a 1992

Naval Audit Service report concluded that the Naval Air Systems

Command was not obtaining the full potential benefit of the competition

program and attributed this condition to several factors, including a lack

of guidance. Although the Navy subsequently initiated action that was

expected to substantially increase the amount of competed work, the

planned expansion never occurred for the following reasons:

• The time and cost of performing competitions. For example, in 1990 NAVAIR

found that preparing the statements of work and request for proposals

necessary to conduct the competitions was much more difficult and

time-consuming than had been expected. As a result, about 2 years passed

before additional workload packages were ready to compete. Navy

officials conceded the amount of time required should have been

anticipated since administering a competition program that only involves

private sector bidders also requires significant time for performing

required technical and administrative tasks.

• Defense downsizing resulted in rapidly declining maintenance workloads

and less workload available for public-private competition. Since core

workload was to be maintained in Navy depots, there were fewer

opportunities to identify above-core workloads that were large enough to

make it worthwhile to undertake a competition. Moreover, uncertainties

involving workload shifts from closing depots made it difficult to plan for

and accomplish additional public-private competitions.

• Implementation of a new Navy maintenance strategy that called for

downsizing Navy depots to core and contracting out non-core workload

with the private sector. The introduction of this strategy in the Navy

basically terminated the Navy’s public-private competition program, even

though DOD did not cancel the program until May 1994. Moreover, this

1

Depot Maintenance: Issues in Management and Restructuring to Support a Downsized Military

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

Page 20 GAO/NSIAD-96-30 Navy Maintenance
Chapter 2 

Public-Private Competition for Navy

Aviation Repairs Has Been Limited

strategy did not recognize the 10 U.S.C. 2469 provision requiring that

before privatizing workloads of $3 million or more, public depots be

allowed to compete for the work.

ASO officials also stated that their public-private competition program was

limited for several reasons, including the relatively late start of the

program in 1992. In addition, ASO officials agreed with NAVAIR that

performing a public-private competition was difficult, time-consuming,

and resource intensive. As a result, few competitions were completed

before DOD’s termination of the program in 1994. However, these officials

pointed out that the same limitations impact this activity when it attempts

to conduct competitive procedures that involve only the private sector.

Officials noted that most of ASO’s contract depot maintenance workload is

awarded without competition—generally to the original equipment

manufacturer. Additionally, officials noted that the number of systems

competed through the public-private competition program had been

increasing at the time the Deputy Secretary of Defense terminated the

program in May 1994.

Page 21 GAO/NSIAD-96-30 Navy Maintenance
Chapter 3 

Competition Program Considered

Beneficial, but Quantifying Savings Is

Difficult

Steps implemented by NADEPs in response to public-private competition

have resulted in maintenance savings. However, precisely comparing costs

and quantifying the savings is difficult because many variables affect

maintenance costs other than competition, such as changing maintenance

requirements and decreasing total workload. Nonetheless, available

information indicates that competition generally resulted in lower costs,

particularly when inflation and workload changes are considered.

Competition Program

Has Been Beneficial

We interviewed 14 officials at NAVAIR, ASO, the Naval Aviation Depot

Operations Center, the Norfolk NADEP, and the Jacksonville NADEP to obtain

opinions on public-private competition for aviation maintenance. Each

official had detailed experience with the program.

All of the officials believed that public-private competition has been

beneficial to the government and has resulted in maintenance savings for

the involved workloads. They stated that, as competitions were performed

for maintenance work that had always been assigned to the depots, NADEPs

knew that many jobs could be eliminated if they lost the competitions. As

a result, the program motivated NADEPs to streamline overhead, improve

work processes, reduce labor and material requirements, and implement

other cost-saving initiatives in order to submit the lowest possible bids.

For example, in preparing their competition bids, we were told that NADEPs

carefully evaluated the maintenance specifications to ensure that they

would only perform required repair work and eliminate unnecessary tasks.

Each required task was closely evaluated to ensure that the most efficient

process would be used to accomplish the work. In addition, new staffing

requirements were developed from the bottom up to ensure that only the

minimum number of people with the correct skill levels were assigned to

the repair process.

As a result of the competition for the F-14 overhaul, the Norfolk NADEP

went from a two-shift operation to a one-shift operation and reduced the

number of personnel assigned to the program. In this process, Norfolk

reduced the F-14 production staff by over 100 people. Norfolk also made

other changes to increase cost awareness and control. For example, the

number of cost centers was increased to provide better visibility of

production overhead costs and cost center managers were made

responsible for controlling these costs. General overhead costs also were

reviewed to eliminate unnecessary expenses.

Page 22 GAO/NSIAD-96-30 Navy Maintenance
Chapter 3 

Competition Program Considered

Beneficial, but Quantifying Savings Is

Difficult

In response to the public-private competition for the F/A-18 work, the

North Island NADEP did a detailed review of the F/A-18 repair operations

with a view to reduce costs. One of the changes adopted reduced labor

and processing time by moving work crews to each aircraft as work

progressed instead of physically moving the aircraft to different work

stations. Other cost saving changes included establishing central approval

authority for recommended repair tasks, having daily progress meetings

between the managers and artisans at the site of each aircraft in the plant,

and reducing component repair time by only repairing the items needed

for safe operation instead of completely overhauling the entire

component. Although North Island lost the F/A-18 competition to an Air

Force depot, the changes were incorporated into the NADEP’s operations

for core aircraft that were not included in the competition package.

Additionally, NADEP North Island submitted an unsolicited proposal for the

F/A-18 workload being performed at the Air Force depot and the Navy

decided not to exercise an option with the Air Force depot for the second

year and returned the workload to North Island.1

Navy officials stated that the measures adopted by NADEPs in response to

competition caused the depots to become more businesslike, with an

increased focus on efficiency and bottom-line results. Similarly,

public-private competition also provided an increased incentive for private

companies to minimize their bids in order to win competed workload. As a

result, the officials stated that public-private competition has helped to

ensure that maintenance work was performed by the activity, public or

private, that provided the best value to the government. However, officials

acknowledged that after the public-private competition program was

canceled, it no longer served as an impetus for implementing many of the

program improvements.

Limitations in

Quantifying

Competition Savings

Although NADEP managers believe the public-private competition program

had a positive impact on reducing depot maintenance costs, precisely

quantifying the program’s impact is difficult for several reasons. First,

because relatively little workload has been subjected to public-private

competition, only limited quantitative information is available for analysis.

For example, only four of NAVAIR’s six competitions (F-14 airframe, SH-2F

airframe, F/A-18 airframe, and J-52 engine) involved existing workload

where baseline data is available to allow a comparison of maintenance

costs before and after competition. Further, although baseline data was

1

The Navy’s decision is discussed in our report, Depot Maintenance: The Navy’s Decision to Stop

F/A-18 Repairs at Ogden Air Logistics Center (GAO/NSIAD-96-31, Dec. 15, 1995).

Page 23 GAO/NSIAD-96-30 Navy Maintenance
Chapter 3 

Competition Program Considered

Beneficial, but Quantifying Savings Is

Difficult

available for the ASO component competitions, the 33 competitions

represent a very small portion of the many thousands of different

components managed by ASO.

Second, of the competitions with baseline data, work was still in process

on the J-52, F/A-18, and all ASO competition awards at the time of our

review. Thus, only limited actual performance information was available

for analysis.

Third, a comparison of average maintenance costs per unit before and

after competition is affected by many variables other than the competition

itself. For example, as aircraft get older, generally more repair work is

required, which increases repair costs. These cost increases can be a

significant factor over a 5-year period such as that involving the F-14

competition work. Other factors making cost analyses difficult include

decreases in total workload that increase overhead costs per unit, the

impact of inflation, possible inconsistencies in cost accounting

procedures, changes in worker efficiency, and possible productivity losses

from decisions to close depots such as the 1993 decision to close the

Norfolk NADEP.

Maintenance Costs

After Competition

Recognizing the limitations on quantifying savings, we compared actual

average maintenance costs per unit for F-14 airframes, F/A-18 airframes,

and J-52 engines before and after public-private competition. For SH-2F

airframe maintenance, we compared the average contract costs before and

after the competition. For the ASO component competitions, we compared

amounts paid for the work before the competitions with the amounts

included in the competition awards.

F-14 Overhaul Costs

Declined

NAVAIR’s first work package subjected to public-private competition was

for F-14 standard depot-level maintenance. This work, which basically is

an overhaul of the airframe, had always been performed by the Norfolk

and North Island NADEPs. However, all F-14 overhauls, both competitive

and noncompetitive, were to be performed in the same manner.

The F-14 competition package consisted of 4 F-14 overhauls for the first

year of the award and 20 overhauls a year for 4 subsequent years.

Although never used, the package also gave the Navy an option to include

up to five additional overhauls each year under the competition program.

Page 24 GAO/NSIAD-96-30 Navy Maintenance
Chapter 3 

Competition Program Considered

Beneficial, but Quantifying Savings Is

Difficult

NADEPs won the competition with a bid substantially lower than the next

closest private sector bid. The first F-14 airframes under the program

began overhaul near the end of fiscal year 1988. Not all planned F-14

overhauls were included in the competition package because the Navy

wanted to ensure that the NADEPs would retain a core capability for

repairing F-14s in support of military contingencies even if they lost the

competition work. As part of its December 1990 plan to reduce depot

costs, the Navy decided to perform all F-14 overhaul work at the Norfolk

NADEP. The last F-14 overhauled under the competition award was

completed in November 1994. From fiscal year 1987, the year before the

competition program, through fiscal year 1994, the Norfolk and North

Island NADEPs completed 83 F-14 competition overhauls and 244

noncompetition overhauls.

After the start of the competition program, our analysis of F-14 overhauls

showed that, after adjusting for inflation, the average overhaul cost was

substantially lower for the 5 years covered in the competition

package—1988 through 1992. Before the competition in fiscal year 1987,

the average F-14 overhaul cost was $1.69 million. In fiscal year 1988, the

average overhaul cost had dropped to $1.29 million, a decrease of about

24 percent. Even as the workload began to decline and aircraft aged from

1988 through 1992, the inflation-adjusted cost remained significantly lower

than the fiscal year 1987 noncompetitive cost. In 1993 and 1994, the

number of F-14 overhauls dropped substantially and the average cost

increased above the 1987 precompetition level. Table 3.1 summarizes our

F-14 overhaul analysis. The analysis includes both competition and

noncompetition overhauls and excludes the costs of airframe

modifications, which vary from airframe to airframe. Costs have been

adjusted to constant fiscal year 1987 dollars to account for inflation.

Page 25 GAO/NSIAD-96-30 Navy Maintenance
Chapter 3 

Competition Program Considered

Beneficial, but Quantifying Savings Is

Difficult

Table 3.1: F-14 Overhaul Costs Before

and After Competition Dollars in thousands

Fiscal year

Overhauls

completeda Average cost

Percent change

from fiscal year

1987

1987 60 $1,690 0

1988 66 1,292 –24

1989 57 1,392 –18

1990 46 1,173 –31

1991 26 1,314 –22

1992 33 1,591 –6

1993 23 2,051 21

1994 14 2,040 21

aExcludes two overhauls for which final cost data was not available at the time of our review.

Norfolk NADEP officials attribute the decline in F-14 costs to the cost saving

measures adopted as a result of the public-private competition program.

Although the savings were substantial, several factors limited the amount

of savings. For example, they stated that as the F-14s aged, several

maintenance problems developed that required more work to correct

during the overhaul process than had been previously experienced. At the

same time, many F-14 components had to be repaired concurrently with

each overhaul rather than simply replaced because the components were

not available in the Navy supply system. In addition, total workload

assigned to the NADEP decreased sharply after 1990 resulting in an increase

in the overhead costs charged to each overhaul. Finally, depot officials

acknowledged that worker efficiency declined after the 1993 decision to

close the Norfolk NADEP. As discussed in a recent report, this efficiency

loss also occurred at other closing depots.2

F/A-18 Maintenance Costs

Declined

In 1993, NAVAIR subjected the F/A-18 depot maintenance to public-private

competition. The competed workload, called the F/A-18 maintenance,

corrosion, and paint program, is similar to an overhaul of the airframe and

is referred to as an overhaul in this report. The North Island NADEP always

performed this work before the competition. Similar to the F-14 case, not

all planned F/A-18 overhauls were included in the competition package

because the Navy wanted to ensure that the NADEP would retain a core

2

Closing Maintenance Depots: Savings, Personnel, and Workload Redistribution Issues

(GAO/NSIAD-96-29, draft report submitted to DOD for comment Sept. 1995).

Page 26 GAO/NSIAD-96-30 Navy Maintenance
Chapter 3 

Competition Program Considered

Beneficial, but Quantifying Savings Is

Difficult

capability for repairing F/A-18s in support of military contingencies even if

they lost the competition.

The Air Force’s Ogden Air Logistics Center depot submitted the lowest bid

for the competed workload and was awarded the contract. At the time of

our review, the Air Force depot had completed 13 of the 36 F/A-18s

included in the competition award. We analyzed the Navy’s F/A-18 costs at

the North Island NADEP before and after the competition effort. At the time

of our review in February 1995, North Island had completed eight F/A-18s

from the core workload that were not competed using the new process

improvements adopted as a result of the competition. Our analysis showed

that the average cost of an F/A-18 overhaul at the North Island NADEP was

37 percent lower than the average cost before the competition.

We are separately reporting in more detail on the Air Force’s F/A-18 costs

and contract performance along with the Navy’s decision not to exercise

contract options with the Air Force.3

J-52 Engine Repair Costs For the past several years, the Jacksonville NADEP has performed required

depot maintenance on the J-52 engine, which powers the A-6 aircraft.

Depending on the extent of maintenance required, the depot repair of each

J-52 engine is classified as a minor repair, a major repair, or a major repair

with conversion.

The J-52 competition package consisted of a base period and options for

work in 4 subsequent years. Estimated workload for the base period

included 12 minor repairs, 95 major repairs, and 60 major repairs with

conversion. In fiscal year 1993, the year before the competition program,

Jacksonville completed 8 J-52 minor repairs, 100 J-52 major repairs, and

125 J-52 major repairs with conversion.

The Jacksonville NADEP won the competition in July 1993 with a bid

significantly below other bids. The first J-52 engine work under the award

began in January 1994. Since the competition, all J-52 engines are being

repaired under terms of the competition award. At the time of our visit to

Jacksonville in September 1994, the NADEP had completed 28 engines

consisting of 11 major repairs and 17 major repairs with conversion.

3

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

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

Page 27 GAO/NSIAD-96-30 Navy Maintenance
Chapter 3 

Competition Program Considered

Beneficial, but Quantifying Savings Is

Difficult

We compared the average costs of J-52 engine major repairs and major

repairs with conversions for fiscal year 1993 to the average costs of

engines completed thus far under the competition program. The analysis

showed that, with inflation included, the average cost of J-52 major repairs

decreased by 2 percent and major repairs with conversions increased

4 percent, from the averages before competition.

Jacksonville officials stated that factors outside of their control, such as

declining workload and problems with material availability, caused J-52

costs to be higher than they would have been otherwise. They stated that

without competition, J-52 costs would have been even higher.

SH-2F Costs Increased The SH-2F public-private competition involved standard depot-level

maintenance, or overhaul, of an estimated 54 helicopter airframes over a

4-1/2 year period. The same private contractor that had performed this

work before the competition won the competition award in 1990. Under

the contract prior to the competition, the contractor had overhauled 

75 SH-2F airframes. Under the competition contract, only 14 airframes

were actually overhauled because of declining workload requirements.

We compared the average contract cost for the 75 SH-2F airframe

overhauls before competition to the average contract cost of the 14 SH-2F

airframe overhauls completed under the competition award. Because the

cost of government-furnished material was excluded from the prior

contract but included in the competition award, we made an adjustment

using Navy estimates to make the costs comparable.

The analysis showed that the average SH-2F airframe overhaul cost was

60 percent higher after the public-private competition. NAVAIR officials

attributed the cost increase to inflation and to differences in the work

required by the two contracts. The officials stated that some additional

repair work was required by the public-private competition contract that

was not required by the previous contract.

ASO Component Costs All of ASO’s 33 public-private competitions for component repairs involved

work that had been previously performed by either a depot, a private

contractor, or both. We compared the average cost of each of these

component repairs before the competition to the average price included in

the competition award. Table 3.2 summarizes the changes in component

repair costs after the public-private competition.

Page 28 GAO/NSIAD-96-30 Navy Maintenance
Chapter 3 

Competition Program Considered

Beneficial, but Quantifying Savings Is

Difficult

Table 3.2: Changes in Component

Repair Costs After Competition Type of change

in costs

Number of

cases

Percentage

of cases

Average change

in costs

Decrease 25 76 –41

Increase 8 24 37

Total 33 100 –24

As shown in table 3.2, the average repair costs decreased in 25 of the 

33 cases after competition. Of these 25 cases, the work continued to be

performed in the same sector after the competition in 15, or 60 percent, of

the cases. Of the remaining cases, work shifted from the public sector to

the private sector in seven cases, from the private sector to the public

sector in two cases, and from both sectors to the private sector in one

case. For example, depot maintenance for a generator component used on

the P-3C aircraft had been performed by the Alameda NADEP before the

competition. After the competition, the work was shifted to a private

company that had bid 70 percent less than the average amount previously

paid to the NADEP for the work. In another case, the Norfolk NADEP won the

competition for repair of a fire control set component used on the F-14

aircraft. The NADEP had bid 85 percent less than the average amount paid

to a private contractor that had performed the work before the

competition.

Table 3.2 also shows that average repair costs of competed components

increased after competition in eight cases. For example, the repair of a

turbine stator component used in a J-52 engine was performed by a private

contractor before the competition. During the public-private competition

for the work, the same contractor and one NADEP submitted bids. The

contractor bid less and won the work although the bid was 54 percent

higher than the amount paid for the work before the competition.

Conclusions Available data indicates that maintenance savings have generally been

achieved as a result of the Navy aviation public-private competition

program. However, quantifying the precise savings is not possible.

Quantitative evaluation is limited not only by the small number of

competitions that have been conducted, but also by the many variables

other than competition that affect maintenance costs. Nonetheless,

available information indicates that competition generally resulted in

lower costs, particularly when inflation and workload changes are

considered. Further, maintenance officials involved in performing this

work believe that the complete program was cost beneficial.

Page 29 GAO/NSIAD-96-30 Navy Maintenance
Chapter 4 

Future Use of Public-Private Competition

Appears Advantageous

Although it appears the Navy’s aviation public-private competitions

resulted in benefits and DOD plans to privatize more of its depot work, DOD

is not allowing the use of public-private competitions. Further, the

consensus of Navy officials we interviewed is that several factors, such as

declining workload and implementation of depot closure decisions may

restrict the program’s potential use. However, a current legislative

requirement directs that public-private competition be used before depot

maintenance workloads of $3 million or more can be shifted to the private

sector. Also, while DOD maintains it cannot effectively implement

public-private competitions largely because of accounting system

weaknesses, we believe actions can be taken to work around these

problems.

Current Environment

Calls for

Public-Private

Competitions

DOD is currently formulating plans to implement the Roles and Missions

Commission’s recommendation to privatize much of DOD’s depot

maintenance workload.1

 The Commission report recommended that the

DOD transition to a depot maintenance system relying mostly on the private

sector. In an August 24, 1995, letter to the Chairman of the Senate Armed

Services Committee, the Secretary of Defense stated that DOD agrees with

the Commission’s recommendation to outsource a significant portion of

the DOD’s depot maintenance work.

However, current law precludes transitioning depot maintenance

workloads valued at $3 million or more to the private sector without

allowing public depots to compete. Title 10 U.S.C. 2469 provides that the

performance of a depot-level maintenance workload that has a threshold

value of $3 million or more being performed by a depot-level activity of

DOD may not be changed to the private sector without using competitive

procedures that include both public and private entities. This provision is

intended to assure that the work will be awarded based upon where it can

be accomplished more cost-effectively.

Following DOD’s 1994 decision to terminate the public-private depot

competition program, the fiscal year 1995 defense appropriations

conference report directed DOD to reinstitute public-private competition

and to report its policy regarding public versus private competition for

depot maintenance workloads. In a report responding to the Committee’s

direction to reinstitute the program, DOD stated that the financial systems

and data bases within DOD are not capable of supporting the determination

of actual cost of specific workloads. The report concluded that DOD cannot

1

Report of the Commission on Roles and Missions of the Armed Forces, May 24, 1995.

Page 30 GAO/NSIAD-96-30 Navy Maintenance
Chapter 4 

Future Use of Public-Private Competition

Appears Advantageous

reinstate public-private competition until cost accounting and data

systems are in place to conduct fair and open competitions. The Congress

continued to support the public-private competition program in

considering the fiscal year 1996 appropriation and authorization bills.

Factors That Might

Limit the Future of

the Program

We interviewed 14 officials at NAVAIR, ASO, the Naval Aviation Depot

Operations Center, the Norfolk NADEP, and the Jacksonville NADEP to obtain

opinions regarding the future use of public-private competition for

aviation maintenance. Each official had detailed experience with the

program.

All of the officials stated that barriers exist that limit the future use of the

competition program. For example, the officials stated that the NADEPs are

required to maintain the ability to perform depot repairs on front line

weapon systems. To meet this requirement, the NADEPs must perform a

defined minimum quantity of work, called core workload, on front line

weapon systems. Thus, only workload requirements above the level

defined as core are considered potentially available for public-private

competition. Because of defense downsizing, funding for airframe and

engine depot maintenance decreased about 30 percent between fiscal

years 1991 and 1994 and further reductions are expected. As depot

workload decreases, the above-core workload also decreases making less

work potentially available for competition. However, we noted that

findings of the Report of the Commission on Roles and Missions

challenged the validity of the core concept. Likewise, the Secretary of

Defense’s comments to the Senate Armed Services Committee regarding

this report noted that DOD agrees with the Commission’s recommendation

to outsource a significant portion of DOD’s depot maintenance work. The

Secretary’s letter also noted that DOD believes it must retain a limited

organic core to meet essential wartime surge demands, promote

competition, and sustain institutional expertise.

With smaller workloads to compete, officials stated that potential savings

from public-private competitions are reduced. In addition, the reduced

potential savings may be offset by the high cost to perform public-private

competitions. These costs include the costs to prepare the request for

proposal, evaluate proposals, make selections, and perform contract

administration. Further, some officials also stated that additional savings

from recompeting work previously subjected to public-private competition

would be progressively smaller. We noted that the factors cited as costs of

competition are also relevant for competitions conducted solely among

Page 31 GAO/NSIAD-96-30 Navy Maintenance
Chapter 4 

Future Use of Public-Private Competition

Appears Advantageous

private sector contractors; that is, in order to save money, it is necessary

to spend money.

Another potential barrier to public-private competition for aviation

maintenance work is implementation of the Base Closure and Realignment

Commission decisions. In 1993, decisions were made to close three of the

six Navy NADEPs. Implementing these decisions involves much planning,

management attention, and disruption to normal operations as

maintenance capabilities and workload are shifted from the closing depots

to other facilities. As a result, NAVAIR and NADEP managers say they have

less time to manage the technical and administrative details of

public-private competitions. Additional uncertainties over the future

structure of DOD’s aviation maintenance depots will continue to exist until

the 1995 round of base closing decisions are implemented. A related

concern is the potential socio-economic impacts of traditional

maintenance organizations losing all or substantial work resulting from

competitions.

The officials interviewed noted additional concerns about the

public-private competition program. For example, concerns exist in both

the public and private sector over the fairness of competitions and the

ability of DOD to create a level playing field. Several officials stated that

while progress has been made in making competitions fair, problems

remain. Also, some officials noted that NADEPs are required to maintain

certain facilities, equipment, and skills to support national defense

requirements. This requirement, particularly as total workload declines,

increases depot overhead costs and makes NADEPs less competitive in

comparison to the private sector.

The officials further commented about problems with the NADEPs’ cost

accounting and work control systems in a competitive environment. The

NADEPs’ systems were designed to support budgetary, accounting, and

work processing needs for Navy industrial activities where work is

directly assigned. The systems have been certified by the Navy comptroller

as meeting DOD principles and standards. However, the systems were not

designed to support bid preparation and contract execution as required by

the public-private competition program. As a result, NADEPs often use

additional, costly manual efforts and processes to prepare competition

bids and comply with contract administration procedures for competition

awards.

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Further, DOD perceives that competitions involving the organic depots

have had disruptive and divisive effects on the services, particularly the

depot maintenance community. Last, given that DOD is moving to size its

organic capabilities consistent with its core depot maintenance policy, DOD

officials stated that it is questionable whether additional capacity and

resources should be retained in order to compete.

Possible

Improvements to the

Program

We asked Navy officials whether any additional changes were needed to

improve the public-private competition program. Several officials stated

that the program could be improved if it were recognized that the depots

exist to support national defense requirements, and as such, cannot be

operated entirely like a private business. For example, although the

government cannot contract with itself, NAVAIR treats a competition award

to a NADEP like a contract by establishing a separate contract

administration function and requiring the NADEP to comply with private

sector contract administration procedures. The officials interviewed stated

that these procedures duplicate normal NADEP funding and work control

processes and cause the NADEP to incur unnecessary costs in trying to

execute competition awards like a private business.

At other times, several officials stated that NADEPs are not expected to

operate like a private business. For example, some NADEPs have

experienced frustration when military command decisions occasionally

shift NADEP work priorities or present other demands that conflict with the

best execution of competition work from a contractual perspective. NADEP

managers believe their primary mission is to support the fleet. Thus, they

have tried to be responsive to what they believe are the needs of the

customer, even though this may not be in the NADEP’s best interest from a

contractual perspective.

The substantial contractual cost overrun on the F-14 overhaul competition

shows the adjustments depots must make to operate in a competitive

contractual environment. The actual costs incurred by the Norfolk and the

North Island NADEPs in overhauling the F-14 will exceed the amounts the

contract administrator approved for payment. Overall the potential

overrun is about $59 million, or an average of about $700,000 for each of

the 84 overhauls. Under precompetitive, noncontractual conditions the

depot is paid a fixed price for the work performed, including work that is

in addition to the original work order. Under the competitive environment,

the NADEPs sometimes performed work that was over and above the

contractual requirement without always getting approval from the contract

Page 33 GAO/NSIAD-96-30 Navy Maintenance
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administrator and thereby incurring overruns. A private contractor does

not get paid for any work or costs that are over and above the contract

requirements unless approved by the contract administrator.

To address these concerns and reduce administration costs for

competitions awarded to NADEPs, several officials suggested that NAVAIR

(1) to the extent possible establish fixed prices for competed work based

on the bid amounts, (2) execute the work like normal workload using

existing control systems with no separate contract administration, (3) use

independent auditors to validate depot performance after the work is

completed, and (4) assess penalties for cost overruns to make the depot

less competitive on future competitions.

If no changes are made in the administration of competition awards to

NADEPs, the officials interviewed suggested other improvements to the

competition program. For example, several officials stated that NAVAIR

maximize use of fixed prices to reduce the time and cost of negotiations

for over and above work. Several officials also suggested that NAVAIR

develop systems that will aid NADEPs in developing bid proposals and in

interfacing with the contract administrator.

Other Actions Taken and

Needed to Improve

Public-Private

Competitions and Ensure

Their Fairness

DOD has already taken numerous actions to enhance the credibility and

fairness of public-private competitions when the Deputy Secretary of

Defense canceled the competition program in May 1994. In addition, there

are other actions that can be taken to further enhance the fairness and

credibility of future competitions, should DOD reinstitute the program.

Many of the actions that DOD took to improve public-private competitions

were summarized in our September 30, 1993, correspondence to the

Chairman, Subcommittee on Defense, Senate Committee on

Appropriations.2

 For example, we noted that actions taken to improve the

process included (1) the development of a Cost Comparability Handbook

that, among other things, identified adjustments that should be made to

public depots’ bids as a result of differences in the military services’

accounting systems and (2) the Defense Contract Audit Agency certifying

that successful bids included comparable estimates of all direct and

indirect costs. However, we noted that after DOD’s termination of the

public-private competition program, depot officials lost the incentive to

continue with some of the improvement initiatives previously undertaken.

2

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

Page 34 GAO/NSIAD-96-30 Navy Maintenance
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Our 1993 correspondence also identified additional actions that could be

taken to further improve the competition program. These included

(1) ensuring that the Defense Contract Audit Agency auditors receive the

technical support they need to properly evaluate depots’ bids and

(2) requiring the Defense Contract Audit Agency to conduct an incurred

cost audit to assess whether depots are able to perform work for the

amount they bid.

Defense Contract Audit Agency personnel pointed out that some of the

same accounting system and bid proposal problems they identified during

accounting system and bid proposal audits were identified during their

reviews of private contractors, particularly when contractors have not

previously dealt with DOD contract administration practices and

procedures. These officials noted that when multiple competition

programs required follow-on reviews at a given depot, depot bids

improved as public depots had to respond to the Defense Contract Audit

Agency accounting system audits, which identified problems that had to

be resolved and as depot officials became more familiar with required

policies and procedures.

Recognizing the need for improved internal controls throughout the DOD

depot system, the Under Secretary of Defense (Logistics) has established

an Integrated Process Team to assist in framing DOD’s efforts to implement

required improvements in financial management and internal controls.

Coopers and Lybrand is working with one depot in each of the four

military services to improve internal controls and accounting procedures.

Finally, at our suggestion, the Commander of the Ogden Air Force depot

implemented a broad-based financial management improvement program,

including the development of a Depot Maintenance Business Area Policies

and Procedures Handbook that states policy in support of maintenance

activities and gives procedures and tasks necessary to implement the

policy. This handbook was developed as a team effort crossing many

functional lines and levels of management and production. It addresses

financial management responsibility, labor, material, internal controls, and

other key areas. Further, Defense Contract Audit Agency officials

reviewed drafts of the handbook and worked with depot officials to refine

the processes and procedures and conduct follow-up reviews of the

program’s implementation. Other Air Force depot officials have expressed

an interest in implementing a similar program. These initiatives suggest

the potential for generating the kind of high-level visibility and

commitment that are needed to assure that required improvements are

implemented.

Page 35 GAO/NSIAD-96-30 Navy Maintenance
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Conclusions While the Congress has continued to support the use of public-private

competition, DOD has terminated the public-private competition program.

We share the Deputy Secretary of Defense’s concerns about the reliability

of DOD’s depot maintenance data and the adequacy of its depot

maintenance management information systems. However, we believe

these deficiencies are not insurmountable and that many of them can be

resolved at the local level if the depot commanders and senior leadership

are committed to do so. Further, if individual depots demonstrate their

ability to maintain required internal control and accounting procedures

and practices, they should be allowed to compete with the private sector

for depot maintenance work. We continue to support the use of

public-private competition, where appropriate, as a resource allocation

tool for assuring that depot maintenance requirements can be met

cost-effectively.

Recommendations We recommend that the Secretary of Defense (1) reinstitute public-private

competition as a tool for allocating depot maintenance workload as

quickly as possible; (2) develop and issue implementing guidelines

regarding the conditions, framework, policies, procedures, and milestones

for reinstating public-private competition programs; and (3) require the

Director, Defense Contract Audit Agency, to certify internal controls and

accounting policies and procedures of DOD depots to assure they are

adequate for identifying, allocating, and tracking costs of depot

maintenance programs and to ensure proper costs are identified and

considered as part of the bids by DOD depots.

Agency Comments DOD officials provided official oral comments. They generally agreed with

our presentation of facts and the analysis, which led us to conclude that

the use of public-private competitions provided an effective tool for

allocating depot maintenance workloads between the public and private

sectors. However, they noted their concern over the fairness issue, which

centers on concerns that depot prices may not reflect the cost to the

government of performing competition work, including all labor, material

and overhead. Further, they also only partially concurred with our

recommendation regarding the reinstatement of the public-private

competition program. DOD officials stated that a November 1994 Office of

the Secretary of Defense memorandum implementing section 335 of the

Fiscal Year 1995 National Defense Authorization Act reinstituted

public-private competitions and noted the conditions under which military

depots could bid on competition work. However, the officials stated that

Page 36 GAO/NSIAD-96-30 Navy Maintenance
Chapter 4 

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current DOD policy prohibits depots from competing until improvements to

their financial accounting systems have been completed and the Defense

Finance and Accounting service certifies that adequate procedures are in

place to identify and track all pertinent costs. These officials also told us

that DOD intends to request congressional relief from the provisions of 

10 U.S.C. 2469 that requires competitive procedures when changing

workloads valued at $3 million or more from public depots to the private

sector.

In practice the competition program has not been reinstituted. No

public-private competitions have been held since the program was

terminated in 1994 and depot officials in each of the services told us they

have been precluded from bidding on DOD workloads and have dismantled

their competition offices. Depot officials also noted that DOD has not

issued any guidance to clarify the specific conditions, policies, or

procedures to follow in any future public-private competitions.

Regarding DOD’s statement that its November 1994 memorandum

reinstituted public-private competitions, it does not appear that

memorandum was directed at such competitions. The memorandum

provided guidance regarding depot maintenance workloads of other

federal agencies (such as Federal Aviation Administration ground

communications equipment or Coast Guard boats) that might be made

available for repair in military depots.

DOD officials concurred with our recommendation to have the public

depots complete an assessment of internal controls and accounting

procedures; however, they said they believe the Defense Finance and

Accounting Service should perform the evaluations. We continue to

believe that the Defense Contract Audit Agency should be assigned

responsibility for the review because this agency (1) is routinely involved

in similar evaluations of private sector contractors and is uniquely

prepared to undertake this responsibility, (2) was assigned this

responsibility during the latter phases of DOD’s prior competition program,

(3) accomplished accounting system audits and bid proposal evaluations

for all military depots competing for public-private competition work, and

(4) already identified areas where improvements were needed and, in one

case, successfully worked with a depot in developing and implementing

required improvements. Further, since the Defense Finance and

Accounting Service owns the DOD accounting systems, the Defense

Contract Audit Agency would provide an independent assessment of the

ability of military depots to identify and track the cost of competition

Page 37 GAO/NSIAD-96-30 Navy Maintenance
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work. We continue to believe that the Defense Contract Audit Agency is

the preferred agency for accomplishing these tasks.

Page 38 GAO/NSIAD-96-30 Navy Maintenance
Page 39 GAO/NSIAD-96-30 Navy Maintenance
Appendix I 

Public-Private Competitions for Aviation

Component Repairs

Number of

bidders

Dollars in millions

Workload

Year

completed

Type of

work Public Private Winner

Contract

value

A-4 components 1993 Public 2 1 Public $7.7

A-4 position

indicator

1993 Public 2 1 Public 0.2

Air generator 1993 Public 2 1 Public 0.8

AJB-3B 1994 Public 1 1 Private 4.0

AN/ARR-78 1993 Private 1 1 Private 3.1

QH-7 1993 Public 1 2 Private 0.7

ARC-159 1994 Private 1 2 Private 4.3

ARC-182 1993 Private 1 2 Public 0.4

ARC-182 1993 Private 1 2 Private 0.1

ARC-182 1993 Private 1 2 Private 4.2

ASN-50 1993 Public 1 2 Public 6.8

AWG-15 fire control

set

1993 Private 1 1 Public 2.5

Displacement

gyro

1994 Public 1 3 Private 1.6

F-14 canopy 1994 Public 1 1 Public 10.8

F-404 exhaust

frame

1994 Public 1 2 Private 35.3

F/A-18 auxiliary

power unit

1992 Both 1 1 Private 7.5

Gyro ASN-50/73 1994 Public 1 2 Private 2.5

ID-1329 1993 Public 1 2 Both 4.0

J-52 turbine stator 1993 Private 1 1 Private 1.0

LAU-7 launcher 1994 Both 2 1 Both 9.7

LAU-7 power supply 1994 Public 1 1 Public 7.2

P-3 alternator

generators

1993 Public 1 2 Private 3.8

P-3 gyro 1993 Public 1 1 Public 3.9

S-3 actuator 1993 Public 1 1 Public 1.0

S-3 compress

cylinder

1994 Public 1 0 Public 0.3

S-3B constant

speed drive

1993 Public 3 0 Public 9.8

SH-60 ARC-174 1994 Both 1 1 Private 0.2

T-56 engine starter 1994 Public 1 0 Public 0.5

T-58 engine 1994 Public 1 1 Public 9.9

(continued)

Page 40 GAO/NSIAD-96-30 Navy Maintenance
Appendix I 

Public-Private Competitions for Aviation

Component Repairs

Number of

bidders

Dollars in millions

Workload

Year

completed

Type of

work Public Private Winner

Contract

value

T-700 fuel control 1994 Public 0 1 Private 3.1

T-700 fuel control 1994 Private 0 1 Private 2.1

T-700 fuel control 1994 Private 0 1 Private 0.4

T-700 rotor assembly 1994 Public 0 1 Private 46.7

Page 41 GAO/NSIAD-96-30 Navy Maintenance
Appendix I 

Public-Private Competitions for Aviation

Component Repairs

Page 42 GAO/NSIAD-96-30 Navy Maintenance
Appendix I 

Public-Private Competitions for Aviation

Component Repairs

Page 43 GAO/NSIAD-96-30 Navy Maintenance
Related GAO Reports and Testimonies

Closing Maintenance Depots: Savings, Personnel, and Workload

Redistribution Issues (GAO/NSIAD-96-29). (In draft as of Dec. 15, 1995.)

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

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

Depot Maintenance (GAO/NSIAD-94-242R, July 28, 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).

Depot Maintenance: Issues in Management and Restructuring to Support a

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

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

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

Navy Maintenance: Competing Vessel Overhauls and Repairs Between

Public and Private Shipyards (GAO/NSIAD-88-109, Mar. 25, 1988).

(709042, 709114) Page 44 GAO/NSIAD-96-30 Navy Maintenance
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