United States General Accounting Office

GAO Testimony

Before the Subcommittee on Military Readiness,

Committee on National Security, House of Representatives

For Release on Delivery

Expected at

10:00 a.m., EDT

Tuesday,

March 18, 1997

DEFENSE DEPOT

MAINTENANCE

Uncertainties and

Challenges DOD Faces in

Restructuring Its Depot

Maintenance Program

Statement of David R. Warren, Director, Defense

Management Issues, National Security and International

Affairs Division

GAO/T-NSIAD-97-111

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss the Department of Defense’s

(DOD) (1) plans for eliminating costly depot maintenance excess capacity,

(2) progress in finalizing a new depot workload allocation policy,

(3) current approach for allocating maintenance workloads for new and

existing systems, and (4) estimates that billions can be saved by

outsourcing depot maintenance. Before getting into the details of my

statement I would like to provide a brief summary of the major points

covered in my testimony.

Results in Brief It is important to note that the waste and inefficiency in DOD’s logistics

system, including the management of its $13 billion depot maintenance

program, is one of the key reasons we identified DOD’s infrastructure

activities as 1 of 24 high-risk areas within the federal government.1

 There

is excess capacity in the industrial repair and overhaul facilities of the

public and private sectors, which contributes significantly to their

inefficiency. Consequently, how maintenance workloads are ultimately

allocated to the two systems is a topic of great interest to the Congress,

DOD, and the affected public and private sector activities.

Costly excess capacity totaling about 50 percent remains in the DOD depot

system, which actually comprises four systems.2

 As the services seek to

privatize a greater share of their depot maintenance, the cost of

maintaining excess capacity will increase unless additional capacity

reductions are made. The Navy has made the greatest progress in dealing

with this through consolidation and expedited closures of facilities

affected by the base realignment and closure (BRAC) process. The Army,

and even more so the Air Force have been less successful. However, all

three military departments to some extent are implementing actions that

will privatize-in-place costly excess capacity. Our work shows the

following:

1

Defense Infrastructure:(GAO/HR-97-7, Feb. 1997). In 1990, GAO began a special effort to review and

report on the federal program areas its work identified as high risk because of vulnerabilities to waste,

fraud, abuse, and mismanagement.

2

DOD Directive 5100.1,”Functions of the Department of Defense and Its Major Components,” assigns

the Army, Navy, Air Force, and Marine Corps, under their respective Secretaries, the responsibility for

“providing logistics support for service forces, including procurement, distribution, supply, equipment

and maintenance, unless otherwise directed by the Secretary of Defense.” To meet the responsibility to

maintain its equipment, each service operates a depot maintenance system, with the Navy system

including three different types, and the Marine Corps having its own system.

Page 1 GAO/T-NSIAD-97-111
• Privatization-in-place at the Sacramento and San Antonio Air Force depots

will privatize rather than eliminate excess capacity and could be about

$182 million per year more expensive than redistributing that workload to

other underutilized Air Force depots. We estimate the annual savings from

transferring the work would offset the one-time transfer costs in about

2 years.

• The cost of operating the recently privatized-in-place Aerospace Guidance

and Metrology Center in Newark, Ohio, now called the Boeing Guidance

Repair Center (BGRC), will likely cost $13 million to $23 million more

annually to operate than before privatization—an 18- to 31-percent

increase.

• As a result of the Navy’s decisions to privatize-in-place the Naval Surface

Warfare Center workloads at Louisville, Kentucky, operational costs will

be about $59 million more annually than redistributing the workloads to

other underutilized Navy industrial facilities. We estimate the annual

savings from transferring the work would offset the one-time transfer

costs in about 4 years.

Moving next to DOD’s plans for outsourcing depot maintenance, our work

shows the plans and policies are still evolving. Last year, the Congress

received and ultimately rejected DOD’s proposed policy regarding

depot-level maintenance and repair. Provisions in the policy were

predicated on relief from the existing statutes that influence depot

workload allocations between the public and private sectors. These

provisions include 10 U.S.C. 2464, which prohibits the use of more than 

40 percent of the funds made available in a given year for depot-level

maintenance for private sector performance and 10 U.S.C. 2469, which

provides that DOD-performed depot maintenance and repair workloads

valued at not less than $3 million cannot be changed to performance by

contractors without the use of competitive procedures among public and

private sector entities. Some changes have been made based on

congressional concerns about certain aspects of the policy report, but DOD

has not finalized its new policy to address all of these concerns. For

example, DOD has reinstituted its public-private competition program and

states that it intends to use competitive procedures before outsourcing

depot maintenance workloads valued at $3 million or more. However, core

capability3

 requirements have not yet been quantified. Moreover, no time

frame has been established for finalizing key draft depot maintenance

policy letters issued in December 1996 and January 1997.

3

Core depot maintenance capabilities are to be established to meet essential wartime demands,

promote competition, and sustain institutional expertise. These capability requirements shape the

minimum amount of organic depot facilities, equipment, and personnel needed to maintain a ready and

controlled source of technical competence.

Page 2 GAO/T-NSIAD-97-111
Even though a new depot maintenance policy has not been finalized,

operational decisions soon have to be made regarding whether new and

existing systems will be maintained in the public or private sectors. Our

ongoing work shows that for both existing and new systems, assessments

are being made to determine what portion of the current workload could

be outsourced with acceptable risk. The absence of clear policy on how to

proceed in this area has caused some delays in choosing the maintenance

sources and raised some concerns about whether the most cost-effective

strategies are being selected. For example:

• Air Force workload and personnel moves associated with the Sacramento

and San Antonio depots are undecided. If there is no relief from the

legislative requirement to have 60 percent of the depot maintenance work

done in the public sector, the Air Force will not be able to

privatize-in-place all of the depot maintenance workload in these facilities,

which were recommended for closure during the 1995 BRAC process. The

Air Force believes it can privatize all the Sacramento workloads and the

San Antonio C5 cargo aircraft workload, but not all of San Antonio’s

engine workload, unless it makes other adjustments to its current depot

maintenance workload mix.

• Program officials for the C-17, F-22, and F/A-18 E/F aircraft told us that

they are delaying final support decisions partially because of the uncertain

status of internal DOD core policies and the potential for obtaining relief

from legislation regarding the workload mix between the public and

private sectors.

The last area I will comment on relates to our views on the accuracy of

savings estimates tied to the outsourcing of depot maintenance. DOD is

facing large shortfalls in its modernization accounts and plans to reduce

costs and generate savings for modernization through the outsourcing of

support activities, such as depot maintenance. DOD’s projected savings are

based on estimates cited by the Commission on Roles and Missions (CORM)

and the Defense Science Board (DSB). The CORM and DSB maintain that

through competition in the private sector, depot maintenance costs can be

reduced by 20 to 40 percent. We believe that in some cases outsourcing

can reduce maintenance costs, but not to the extent being estimated by

the CORM and DSB. Our past and present work in this area has demonstrated

that:

• The assumptions were based on projected savings for competitions

involving base operations support activities such as stocking shelves,

operating motor pools, and cutting grass—activities which require low

Page 3 GAO/T-NSIAD-97-111
skill levels and little capital investment and involve simple tasks that

should be readily characterized in a statement of work where performance

is easily measurable. Further, large capital investments and highly skilled

personnel are required to do depot maintenance work and cost control

performance monitoring is complex—characteristics that generally

increase the risk of contracting out.

• Savings projections were rarely validated and when they were audited

generally were less than projected.

• The commercial activities on which competition savings were projected,

were conducted in a highly competitive environment, while 91 percent of

the nonship depot maintenance contracts awarded in fiscal years 1996 and

early 1997 were awarded noncompetitively.

In conclusion, the inefficient operation of depot maintenance activities

results in a reduction of the military services’ purchasing power through

their operations and maintenance. Stated another way, more operations

and maintenance funds will be required to perform the same level of

maintenance. This situation makes deciding the future of the DOD depot

maintenance system more difficult. Depot maintenance privatization

should be approached carefully, allowing for evaluation of economic,

readiness, and statutory requirements that surround individual workloads.

If not effectively managed, privatizing depot maintenance activities,

including the downsizing of the remaining DOD depot infrastructure, could

exacerbate existing capacity problems and the inefficiencies inherent in

underutilization of depot maintenance capacity. DOD needs to provide the

Congress with a plan that clearly defines how it will deal with this set of

complex issues.

Background Depot maintenance is a key part of the total DOD logistics system that

supports millions of equipment items, over 52,000 combat vehicles, 351

ships, and over 17,000 aircraft. Depot maintenance is a vast undertaking

that requires extensive shop facilities, specialized equipment, and highly

skilled technical and engineering personnel to perform major overhauls of

weapon systems and equipment, to completely rebuild parts and end

items, to modify systems and equipment by applying new or improved

components, to manufacture parts unavailable from the private sector, and

to program the software that is an integral part of today’s complex weapon

systems. This work is done in both military depots and the private sector.

DOD facilities and equipment are valued at over $50 billion. A large but

unknown amount of government-owned depot plant equipment is used by

private contractors—many of them original equipment manufacturers of

Page 4 GAO/T-NSIAD-97-111
weapons or major systems and components. Appendix I contains the

history of the DOD depot maintenance system. Appendix II provides

summary information on our recent prior reports regarding DOD’s depot

maintenance program.

DOD spends about $13 billion—5 percent of its $250 billion fiscal year 1997

budget—on depot maintenance activities. Over $1 billion of this amount is

procurement funding (rather than operation and maintenance funding) for

contractor logistics support, interim contractor support, and some

software maintenance.

Workload and Personnel

Reduced Since the Cold

War Ended

With the end of the Cold War and reduction in new defense procurement,

commercial contractors would like more of the depot maintenance

business. Other factors contribute toward a declining workload base,

which must be shared among all potential sources of repair—both public

and private. These factors include: (1) a reduction in the number of

systems and equipment that need to be repaired and overhauled;

(2) efforts by some components to do more repairs in field-level

maintenance activities; and (3) the increased reliability, maintainability,

and durability of some systems and equipment. Further, the already

controversial debate is heating up over how various depot maintenance

workloads should be allocated among the military depots, original

equipment manufacturers seeking life-cycle management support to

increase their shrinking workload base, and third-party repair vendors

who would also like a larger share of this multibillion dollar business. In

combination with these factors, the debate has been fanned by the

implementation of base realignment and closure recommendations,

proposals to privatize work in place, and by news of the success achieved

by many private sector commercial activities in reducing their operations

and support costs through outsourcing noncore activities.4

DOD’s depot system employs about 76,000 DOD civilian personnel, including

laborers, highly trained technicians, engineers and top-level managers. As

shown on figure 1, the number of depot maintenance personnel has been

reduced by about 71,000 personnel—a 48-percent reduction since 1990.

Over the same period of time, the organic depot maintenance workload

had a similar decline of about 43 percent, while the total depot

maintenance budget declined by a margin of only 12 percent. Appendix III

shows the reduction of DOD personnel by service.

4

DOD defines outsourcing as the transfer of a function previously performed in-house to an outside

provider. Privatization is a subset of outsourcing which involves the transfer or sale of government

assets to the private sector.

Page 5 GAO/T-NSIAD-97-111
Figure 1: Reductions in DOD’s Depot Maintenance Budget, Depot Maintenance Personnel, and Direct Labor Hours

FY90 FY91 FY92 FY93 FY94 FY95 FY96 FY97

60

80

100

120

140

160

0

2

4

6

8

10

12

14

Personnel (in thousands) /Hours (in millions) Budget (in billions of dollars)

Depot maintenance budget Depot maintenance personnel Direct labor hours

Excess Capacity Exists in

the Public and Private

Sectors

While DOD has substantially reduced depot maintenance requirements, and

the number of depot maintenance personnel has been similarly reduced,

DOD has not completed complementary reductions in its depot

maintenance infrastructure—despite four rounds of base closures. As a

result, DOD has extensive excess capacity in the form of large numbers of

Page 6 GAO/T-NSIAD-97-111
under utilized buildings and equipment. Additionally, the private sector

has seen its production workload for new systems and equipment decline

and has significant excess production capacity.

We refer to excess capacity that is derived by determining what is the

potential for doing more work after the programmed workload is

accomplished, assuming that the production capability will be used to the

maximum extent, which would require the availability of additional

trained personnel. This same measure was used in the BRAC process to

identify the potential for consolidating like workloads to improve capacity

utilization and reduce redundancies. However, DOD normally measures

excess capacity by an analysis that constrains facility and equipment

availability by the availability of trained personnel and the organization of

work stations, assuming an 8-hour workday, for 5 days a week. A

maximum potential capacity utilization between 75 and 85 percent is

generally considered an efficient operating level. Using maximum

potential capacity measurements, DOD is predicted to have excess capacity

in fiscal year 1999 of about 50 percent. Figure 2 shows excess capacity

using both the maximum potential capacity and constrained

measurements. The Air Force has the most extensive excess capacity.

Appendix IV shows excess capacity in each of the DOD depots using both

the maximum potential capacity and constrained measurements.

Page 7 GAO/T-NSIAD-97-111
Figure 2: Comparison of Depot Capacity and Workload

Army NAVAIR NAVSEA Navy other Air Force

0

10,000

20,000

30,000

40,000

50,000

60,000

Direct Labor Hours (000s)

Maximum Capacity Available Capacity Workload

Navy Has Been More

Successful Than the

Other Services in

Reducing Costly

Excess Capacity

Even after four BRAC rounds, the four services have costly excess capacity

within their depot maintenance systems. With the exception of the Navy

privatization-in-place efforts, our work shows that the Navy has been the

most successful at addressing this issue. However, the Army and the Air

Force have not succeeded in making significant reductions in their excess

capacity. Further, DOD’s privatization of depots and the Air Force’s plans to

implement BRAC decisions have contributed to the excess capacity

problem and ultimately will drive up depot maintenance costs. Such cost

increases mean that military service customers can buy less depot

maintenance with available operation and maintenance dollars.

Page 8 GAO/T-NSIAD-97-111
Navy Is Saving by

Expeditiously Closing

Aviation Depots and

Shipyards but Is Missing

Savings Opportunities by

Privatizing the Louisville

Depot

The Navy has closed three of its six aviation depots, consolidating

workloads from the closing depots to improve capacity utilization and

reduce excess capacity. These actions will significantly increase utilization

and reduce excess capacity in the remaining three naval aviation depots.

The 1993 BRAC Commission approved the Navy’s recommendation to close

aviation depots located in Pensacola, Florida; Alameda, California; and

Norfolk, Virginia. The Navy completed the closures in about 3 years versus

the 6-year period allowed under the BRAC legislation. And through a

combination of workload consolidations, interservicing actions, and

outsourcing noncore workloads, the Navy reduced its projected operating

rate by about $10 per hour. Based on a forecast of 13 million direct labor

hours for fiscal year 1999, this is expected to produce a savings of about

$130 million.

Capacity Reduction and

Expedited Closures

Our work shows that based on maximum potential capacity and fiscal 

year 1999 workload forecasts, the three remaining naval aviation depots

will have an average excess capacity of 37 percent, substantially lower

than the other services. Because the Navy reallocated workloads and

specialties among its aviation depots, and reengineered work spaces in the

process, Navy officials state that given the availability of depot

maintenance personnel, capacity utilization will be about 95 percent. This

represents an increase of 36 percent after the workload transition is

completed.

The Navy has also expeditiously closed four of its eight naval shipyards.

The 1991 BRAC Commission recommended closure of the Philadelphia

Naval Shipyard, and repair work was terminated in 1995. The 1993 BRAC

Commission recommended closure of the Charleston and Mare Island

Naval Shipyards, and repair work was terminated in 1995. The 1995 BRAC

Commission recommended closure of the Long Beach Naval Shipyard, and

repair work was terminated in 1996. As a result, from September 30, 1991,

through September 30, 1996, the Navy shipyard production had decreased

in direct labor hours by 50 percent, while employees were reduced by

about 63 percent. Table 1 shows other measures of the shipyard

downsizing over this period.

Page 9 GAO/T-NSIAD-97-111
Table 1: Comparison of Public Shipyards for Fiscal Years 1991 and 1996

Dollars in millions

Fiscal year

Number of

shipyards

Number of

employees

Number of

drydocks

Feet of

piers

Fixed assets less

depreciation

1991 8 61,647 35 67,358 $1,630.7

1996 4 23,110 16 21,075 821.6

Reduction 4 38,537 19 46,283 809.1

Percent of reduction 50 63 54 69 50

The Navy’s

Privatization-in-Place of

Louisville Depot Is Not

Cost-Effective

The Navy’s privatization of its Louisville depot was not the most

cost-effective choice; the Navy could have saved more through

consolidation of workloads and improved use of capacity in remaining

industrial activities.5

 The Louisville, Kentucky, Detachment of the Naval

Surface Warfare Center, Crane Division, a depot recommended for closure

by the 1995 BRAC Commission, supported the overhaul and remanufacture

for naval surface ship gun and missile systems. In analyzing the cost of

privatizing the Louisville workload in place versus transferring it to

another depot, the Navy estimated that the contract alternative would cost

more on an annual recurring basis and the one-time cost of transferring

the workload to another depot would be prohibitive. However, we found

the Navy’s analyses understated the annual savings of transferring the

workloads to other underused facilities and overstated the one-time

transfer costs.

Our analysis shows a one-time cost of $243 million and an annual savings

of $59 million by transferring the workload. The annual savings would

offset the one-time cost in about 4 years. The Navy’s annual savings

estimate recognized that transferring the workloads to underused facilities

would reduce the overhead cost for those production units being

considered for transfer. However, the per-unit savings were applied only

to the workloads transferred and not to existing workloads at receiving

locations.

Privatization Plans Without

Further Downsizing Will

Increase Excess Capacity

at Army Depots

As a result of BRAC decisions during the 1988, 1991, and 1993 BRAC rounds,

the Army terminated work at three of its eight maintenance

depots—Lexington-Blue Grass, Kentucky; Sacramento, California; and

Tooele, Utah. The Secretary’s recommendations to the 1995 BRAC

Commission proposed realignment and termination of work at two

5

Navy Depot Maintenance: Cost and Savings Issues Related to Privatizing-in-Place at the Louisville,

Kentucky, Depot (GAO/NSIAD-96-202, Sept. 18, 1996).

Page 10 GAO/T-NSIAD-97-111
additional depots—Letterkenny in Pennsylvania and Red River in Texas,

but the Commission recommended that parts of each depot remain open.

Plans for implementing the 1995 BRAC recommendations are still evolving.

Nonetheless, based on the actions taken thus far, the Army is not

effectively downsizing its depot maintenance infrastructure to reduce

costly excess capacity. We reported in September 19966

 that tentative

plans for allocating some workloads from realigned depots to remaining

depots will likely achieve some reduction in excess capacity and savings at

two remaining depots. However, tentative plans to privatize workloads in

place or retain workloads in facilities that were to be downsized or closed

will increase excess capacity in the Army depots, from 42 to 46 percent

over the next 3 years.

This increase is caused by several factors including: (1) a forecasted

decrease in future year depot-level workload; (2) the Army’s tentative

decision to establish a government-owned, contractor-operated facility at

Letterkenny for maintenance of the Paladin combat vehicle and tactical

missile; and (3) the Defense Depot Maintenance Council’s decision

supporting the Air Force plan to delay the transfer of the ground

communications-electronics workload from the Sacramento depot to the

Tobyhanna depot. We recommended that DOD reassess this delay, which is

costing the Army about $24 million annually.

On March 13, 1997, the Council approved the Air Force’s proposal for a

3-year workload transfer beginning in 1998 with the transfer of 20 percent

of the workload in the first year, and 40 percent in each of the next 2 years

with full operational capability at the Tobyhanna Depot in 2001. This

transfer schedule will increase the total cost of the transfer and delay

potential consolidation savings. Additionally, the BRAC recommendation to

downsize rather than close Red River depot, although based on readiness

concerns, adds to the excess capacity in the Army system.

Excess Capacity Will

Remain at Air Force

Depots After Privatization

The Air Force has the most serious excess capacity problem. Although

three of the six depots in the Air Force depot system were recommended

for closure, the Air Force opted to privatize the workloads in place at all

three. Despite major force structure reductions and significant excess

capacity in the Air Force depot maintenance system, none of the Air

Force’s five large, multicommodity logistics centers or their maintenance

6

Army Depot Maintenance: Privatization Without Further Downsizing Increases Costly Excess

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

Page 11 GAO/T-NSIAD-97-111
depots were recommended for closure during the first three BRAC rounds.

These five depots have about 57 million direct labor hours of capacity to

accomplish about 32 million direct labor hours of work, leaving about

26 million hours of excess capacity—or about 45 percent. Additionally, the

Air Force military depots’ workloads are projected to decline to about

20 million direct labor hours of work in 1999. At this workload level, the

Air Force depots would have about 65 percent unused capacity. Although

depots at the Sacramento and San Antonio centers were identified for

closure during the 1995 BRAC process, the executive branch, citing

readiness, up-front costs, and potential effects on the local community,

indicated that these workloads should be privatized-in-place or in the local

communities.

In December 1996, we reported that if the remaining depots do not receive

additional workloads they are likely to continue to operate with significant

excess capacity and to become more inefficient and expensive as

workloads continue to dwindle due to downsizing and privatization

initiatives.7

 Our analysis indicates that redistributing 8.2 million direct

labor hours of work from the closing Air Force depots to the three

remaining depots would (1) reduce the projected excess capacity in 1999

from about 65 percent to about 27 percent, (2) lower the hourly rates by an

average of $6 at receiving locations by spreading fixed cost over a larger

workload, and (3) save as much as $182 million annually as a result of

economies of scale and other efficiencies. This estimate was based on a

workload redistribution plan that would relocate only 78 percent of the

available hours to Air Force depots. Table 2 provides an overview of the

savings achievable through consolidation and increased use of capacity in

the remaining three Air Force depots.

7

Air Force Depot Maintenance: Privatization-in-Place Plans Are Costly While Excess Capacity Exists 

(GAO/NSIAD-97-13, Dec. 31, 1996).

Page 12 GAO/T-NSIAD-97-111
Table 2: Potential Savings From Air Force Depot Consolidation

Depot location Direct labor hours

Labor/overhead

rates Cost Total cost

Before consolidation

Oklahoma City 7,122,421 $59.11 $421,006,305

Ogden 4,939,623 $65.47 $323,397,118

Warner Robins 6,763,218 $59.55 $402,749,632

Sacramento 3,222,409 $63.81 $205,621,918

San Antonio 5,000,190 $58.24 $291,211,066

$1,643,986,039

After consolidation

Oklahoma City 12,214,902 $50.22 $613,432,378

Ogden 6,626,348 $59.68 $395,460,449

Warner Robins 8,206,611 $55.17 $452,758,729

$1,461,651,556

Total potential savings $182, 334, 483

According to management officials at the three remaining centers, it would

cost about $475 million to absorb all of the Sacramento and San Antonio

workload. Using our estimate of $182 million in projected annual

consolidation savings, net savings would occur within 2.6 years of the

consolidation.8

Air Force Efforts to

Privatize San Antonio and

Sacramento Depots

The Air Force is currently conducting a public-private competition for the

Sacramento and San Antonio depot workloads and plans to award

contracts for three work packages and complete the transition by 2001.

Initially, the Air Force pursued a prototype approach to privatization with

three Sacramento workloads, hydraulics, electric accessories, and

software, and two San Antonio workloads, C-5 aircraft paint/depaint and

fuel accessories. However, shortly after the Defense Depot Maintenance

Council approved the prototypes on February 1, 1996, DOD began to

question this approach because of industry and community group desires

to have larger segments of work competed.

Consequently, on August 16, 1996, the Air Force Materiel Command

announced it had revised its plans and created larger packages of work for

8

In addition, the Army estimates that the BRAC Commission mandated transfer of about 1.2 million

hours of ground communications workload from the Sacramento depot to the Tobyhanna Army Depot

will save an additional $24 million annually.

Page 13 GAO/T-NSIAD-97-111
competition. The Command’s planners project that with the current 60-40

limitation, about $600 million of the two centers’ $1.6 billion workload will

be available to transfer to the private sector. Within this constraint, the

Command believes it can privatize all of the Sacramento workload as a

single package and San Antonio’s C-5 workload as a separate package. The

Air Force’s current approach is to hold a public-private competition for the

C-5 package first and then compete the Sacramento workload, excluding

the BRAC-directed transfer of ground communication-electronics workload

to Tobyhanna Army Depot. The San Antonio Air Logistics Center

anticipates a later public-private competition for $240 million of the

$700 million San Antonio engine workload. The Command is studying

other San Antonio workloads for public-private competitions, if the 60-40

limitation is raised or eliminated. If there is no relief from 60-40 legislation,

the Air Force in 1998 must begin moving large workloads and workers to

other DOD depots. By 2001, this move would involve 5.6 million labor hours

and more than 4,000 people making it comparable to one Air Force depot.

Title 10 U.S.C. 2469 requires a public-private competition when

outsourcing depot-level workloads valued at over $3 million. In structuring

the competition, the Air Force responded to industry concerns that

previous public-private competitions had favored the public depots. We

have previously reported that private sector firms won about 57 percent of

the public-private competitions between 1985 and 1993. These awards

amount to about 44 percent of the total competitive award dollars in the

competitions.9

In the interest of addressing concerns from both industry and public

competitors, the Air Force held joint industry-depot conferences to solicit

and discuss competition issues. The Air Force considered these issues and

structured its competition procedures and evaluation criteria to reflect

these concerns. For example, the Air Force’s C-5 request for proposal

requires the public offeror to depreciate any newly acquired capital assets

over the life of the contract. Private sector offerors, on the other hand, are

allowed to choose the method of depreciation they will use. Also, the Air

Force has precluded the public competitors from partnering with the

private sector. The solicitation provides for the selection of the public or

private sector entity that offers the lowest total evaluated cost. This is to

be calculated based upon a cost realism assessment of each proposal,

various cost adjustments to attempt to equalize the private and public

9

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

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

Page 14 GAO/T-NSIAD-97-111
sector proposals, and a quantified analysis of the dollar value of the

technical merits of the respective proposals.

Previous Air Force

Privatization-in-Place

Initiative Resulted in

Increased Costs

We estimate that the cost of performing aviation and missile guidance

repair at BGRC, Newark, Ohio, is from $13.3 million to $23.3 million higher

than what the organic depot would have cost to perform the same work.

This represents an increase of between 18 to 31 percent.

Prior to its closure, the Aerospace Guidance and Metrology Center,

located on Newark Air Force Base, Ohio, primarily supported three key

workloads—repair and overhaul of missile and aircraft guidance systems

and management of the Air Force’s metrology and calibration program.

Recommended for closure by the 1993 BRAC Commission, the Air Force

decided to privatize the workload in place. In December 1995, the Air

Force awarded a contract for the repair and overhaul work to Rockwell

International Corporation, Autonetics Electronic Systems Division,

Anaheim, California, which was subsequently purchased by The Boeing

Company in August 1996. The facility and workload were in transition

between January and August 1996. A local reuse authority assumed

control of the Newark facility when it closed, and has been in negotiation

with the contractor over the terms of a lease agreement.

After the transition period and 3 months of contractor performance during

fiscal year 1997, the system program managers at the Ogden and

Oklahoma City Air Logistics Centers noted that program funds were being

expended faster than anticipated and the most significant contributing

factor appeared to be the excessive amount of material ordered. Ogden

and Oklahoma City system managers were investigating this condition at

the same time we initiated a follow-up to determine the cost impact of the

Newark privatization. After reviewing the Ogden and Oklahoma City

information, we requested that the centers prepare an estimate of organic

versus contractor costs for the fiscal year 1997 workload.

Contract Cost Analysis Shows

Increased Costs

On March 16, 1997, the Air Force Materiel Command released the

completed cost analysis of the items managed by Ogden and repaired at

BGRC. The analysis estimated that privatizing-in-place will result in a

$3.4 million to $13.2 million higher total cost to the government in fiscal

year 1997, an increase of from 8.5 to 33 percent over the organic depot

alternative. The report estimates that the most probable increase will be

close to $6.7 million—a 17 percent higher cost. We reviewed the Air Force

analysis and found that this figure does not reflect increased material

Page 15 GAO/T-NSIAD-97-111
usage by the contractor. The contractor has ordered significantly higher

quantities of material than were used by the organic depot for comparable

workloads. While the contractor’s material usage report does not clearly

indicate whether actual consumption has increased along with increased

material orders, we observed that the increased material orders are

consistent with increased usage of government-furnished material

experienced with other contracts of a similar type.10 Further, a lack of

accountability over government-furnished material has hindered attempts

to reconcile actual material consumption, and is a condition we identified

in our review of other depot maintenance contracts. Given the evidence of

increased material orders, we believe the $6.7 million Air Force Materiel

Command estimate is more likely to represent the low end of the cost

range.

The Oklahoma City Air Logistics Center analysis is not yet completed. We

collected cost data from Oklahoma Air Logistics Center and Headquarters

Air Force Materiel Command to compute an estimate of fiscal year 1997

organic and contract costs to repair the aircraft guidance workload

currently on contract at BGRC. Based on that data, we estimate that the

cost for repairing Oklahoma City managed aircraft guidance items will

likely be between $6.5 million to $10 million more for fiscal year 1997 than

the organic depot alternative. This represents an increase of from 19 to

29 percent more than the organic alternative. Similarly to the Ogden

analysis, our low range does not include increased contractor usage of

material. There are similar indications of increased government-furnished

material orders.

Depot Privatization

Policy Still Evolving

Workload allocation between the public and private sector has a long

history of congressional interest and is affected by various statutes. With

the downsizing of the military and associated reductions in the depot

maintenance workload, DOD, the Congress, and the defense industry have a

heightened interest in the issue. In fiscal year 1996, the Congress directed

DOD to develop policies with a goal of eliminating legislation related to

depot maintenance workload allocations. While DOD developed policy

proposals, the Congress did not agree with them, and no legislative

changes were made. Key concerns raised by congressional committees

involved the need to allow public depots to compete for noncore

workloads and the imprecise definition of core workloads. Consequently,

DOD’s policy is still evolving.

10The Air Force is using a cost-plus-award-fee contract for the Newark workload. The contractor’s fee

is primarily based on his performance in reducing the cost of labor.

Page 16 GAO/T-NSIAD-97-111
Current Statutes and

Directives

Statutes and regulations influence the mix of maintenance work done by

the public and private sectors. As early as 1974, legislation prescribed a

specific dollar-value mix for the public and private sectors’ alteration,

overhaul, and repair work for naval vessels. Since then, workload

allocation decisions have been influenced by percentage goals found in

DOD policy and legislation. In recent years DOD has sought relief from these

statutes. The following are key documents and statutes:

DOD Directive 4151.18, “Maintenance of Military Materiel,” (Aug. 12, 1992) establishes policy

and assigns responsibility for DOD maintenance at all levels. It establishes a source-of-repair

process, requires the maintenance of core capabilities within military depots to meet

contingency requirements, and provides for competition between public and private

sources to achieve economies and efficiencies.

Section 2464 of title 10 requires that a “core” logistics capability be identified by the

Secretary of Defense and maintained by DOD unless the Secretary waives DOD performance

as not required for national defense. Core is defined as the capability, including personnel,

equipment, and facilities, to ensure timely response to a mobilization, national contingency,

or other emergency requirement. The composition and size of this core capability are at the

heart of the depot maintenance public-private mix debate.

Section 2466 of title 10 prohibits the use of more than 40 percent of the funds made

available in a fiscal year for depot-level maintenance or repair for private sector

performance and is often referred to as the 60-40 rule.

Section 2469 of title 10 provides that DOD-performed depot maintenance and repair

workloads valued at not less than $3 million cannot be changed to performance by another

DOD activity without the use of merit-based selection procedures for competitions among

all DOD depots and that such workloads cannot be changed to contractor performance

without the use of competitive procedures for competitions among public and private

sector entities.

Congressional

Requirements for Clear

Policy and DOD’s

Response

The Congress has over the years consistently supported the need for

public depots and the retention of core capability requirements as

essential to national security. Section 311 of the National Defense

Authorization Act for Fiscal Year 1996 reiterated that support and required

DOD to articulate known and anticipated core requirements, to organize its

resources to meet those requirements economically and efficiently, and to

determine what work should be done in the private sector and how it

should be managed. Section 311 directed the Secretary of Defense to

develop a comprehensive depot maintenance policy that, among other

Page 17 GAO/T-NSIAD-97-111
things, should (1) provide for core capabilities properly sized to meet

security requirements and assign sufficient workloads for cost efficiency

and technical proficiency, (2) provide for public-private competitions for

noncore workloads, (3) address technical data issues, and (4) provide for

the organic performance of maintenance and repair for any new weapon

systems defined as core.

DOD Policy Proposal States a

Preference for Private Sector

Depot Maintenance

DOD submitted its report Policy Regarding Performance of Depot-Level

Maintenance and Repair to the Congress in April 1996. The report

discussed DOD’s revised methodology for determining core capability

requirements and the workloads necessary to sustain them. The new

methodology included an assessment of private sector capability to

determine whether mission-essential workloads could be outsourced at

acceptable risk and a best-value assessment (generally through

competition within the private sector) of noncore workloads. The report

also stated DOD’s intent to size the organic sector to minimum core

requirements plus additional workloads for which the public depots were

the last source of repair and where private industry costs were clearly

prohibitive. The report limited public-private competitions to noncore

workloads where there was inadequate competition in the private sector.

The report also affirmed DOD’s plans to support new or developing weapon

systems in the private sector based on its revised acquisition policy (DOD

Directive 5000.2-R, para. 3.3.7).11 The directive requires that support

concepts for new and modified systems maximize the use of long-term

total life-cycle contractor logistics support that combines depot-level

maintenance with wholesale and selected retail materiel management

functions.

Congressional Committees

Disagreed With the Proposal

We evaluated DOD’s policy report and its report Depot Maintenance and

Repair Workload, as required by section 311 of the National Defense

Authorization Act for Fiscal Year 1996, and had concerns in several areas.

The policy report provided a framework that was vague in several

areas—including core determinations and support for new systems—and

was inconsistent with congressional direction calling for public-private

competition for noncore workloads. The stated policies provided wide

latitude regarding implementation, which made it difficult to assess its

impact and expected results. Also the data in the workload report was not

11This directive “Mandatory Procedures for Major Defense Acquisition Programs (MDAPs) and Major

Automated Information System Acquisition Programs,” (MAISAPs), Mar. 15, 1996, established the

management framework for acquiring DOD systems and equipment, including their life-cycle

management.

Page 18 GAO/T-NSIAD-97-111
comprehensive and projections of future workloads were not consistent or

comparable with the reported historical figures.

Congressional committees also criticized DOD’s policy report and revised

acquisition guidance. The House National Security Committee found the

policy report to be “seriously deficient and nonresponsive in a number of

areas,” particularly in providing for core capabilities, identifying specific

weapon systems and equipment supporting national military strategy,

sufficiently workloading public depots, providing for public-private

competitions, addressing technical data issues, and providing for organic

support of new weapon systems defined as core. The Committee also

found that the companion workload report did not provide all the

mandated data and appeared to skew comparisons of past and future

workload allocations by its treatment of costs for contractor logistics

support and interim contractor support.

The Senate Armed Services Committee had many of the same concerns

and found the policy report “not well thought out in general and not

responsive to Congressional guidance on several important issues, such as

the requirement to provide for full and open competition for all non-core

workloads”. This Committee also found DOD’s revised source of support

policy as inconsistent with current law and congressional direction in

section 311 and possibly inconsistent with national security interests.

Depot Workload Allocation

Policies Still Evolving

For several years, the Congress has asked DOD to better define core

capability requirements and specifically identify the workloads and

weapon systems that must be maintained in DOD depots to satisfy core

requirements. Establishing and justifying firm core requirements is a

fundamental prerequisite for determining minimum depot workloads and

supporting outsourcing decisions. DOD’s response to the Congress in its

policy report again failed to meet congressional expectations. DOD has yet

to firmly define and establish minimum core capability requirements.

However, some policy changes have been made in response to concerns

about the policy proposal.

Some Changes Have Been

Made

Since the issuance of the policy and workload reports, an interservice

team has further refined and improved the core methodology to permit

best-value comparisons of both public and private sources in determining

allocation of noncore workloads. In response to our recommendation, DOD

also developed a standard set of evaluative factors that the services are to

consider in their private sector risk assessments. However, each service

Page 19 GAO/T-NSIAD-97-111
can add individual factors, establish factor weights, and develop the

specific evaluative process for its risk assessments.

In reviewing the quantification of core requirements in the services, we

noted that each service applies the methodology differently based on its

operating requirements and support concepts. For example, the Air Force

views core as a capability to manage and oversee a particular commodity

class or type of repair rather than a specific weapon system or component.

The Air Force risk assessment assigns a low weight to the risk from

sole-source contracts and allows an item to be outsourced to a sole-source

provider, given an acceptable total risk score. The Navy, on the other

hand, relates core capabilities to specific peacetime workloads on

mission-essential systems and plans to maintain some organic workload

for each weapon system as tasked by the Joint Chiefs of Staff scenario.

According to a Navy official, completely supporting a tasked workload on

a sole-source contract is considered an unacceptable risk to the Navy.

DOD revised Directive 5000.2-R to better reflect core considerations and to

eliminate the need for a waiver to justify selection of an organic source of

support. However, some program offices tell us they believe that

outsourcing depot maintenance for new systems is still the preferred

option. They noted that informal guidance from senior Air Force

acquisition leadership emphasizes that life-cycle management by the

original equipment manufacturer be used.

Key Policy Proposals Are Still

in Draft

Additionally, although two draft depot maintenance policy letters were

distributed in December 1996 and January 1997, it is uncertain when, or if,

these policy statements will be issued. The first memorandum, from the

Office of the Deputy Under Secretary of Defense Logistics, discussed DOD’s

current positions on principal policy issues. Among other things, it

(1) stated DOD’s commitment to maintain a robust organic depot

maintenance capability sized to support core requirements; (2) directed

the services to submit public-private workload allocations through fiscal

year 2002, but not to include interim contractor support and contractor

logistics support costs in estimating compliance with the 60-40 statute;

(3) established service goals to achieve a minimum of 75-percent capacity

use in each remaining depot upon completion of BRAC actions;

(4) identified downsizing through divestiture, mothballing, and demolition

as the preferred approach to increasing capacity use; (5) directed

improvements in cost accounting and internal controls; (6) revised

public-private competition policy to provide for competitions involving

repair workloads valued at more than $3 million; and (7) provided for

Page 20 GAO/T-NSIAD-97-111
maximum use of total contractor logistics support arrangements for new

and modified systems that are determined to be noncore.

The second memorandum, from the Deputy Under Secretary of Defense

(Industrial Affairs and Installations), provided the draft guidance on depot

maintenance public-private competitions in the following key areas:

• Workload determination. Only noncore-related depot-level maintenance

and repair workload will be available for competition. However, workload

previously defined as core may be determined to be noncore as a result of

the redetermination process. Eligible new workloads will be evaluated to

determine if viable potential public and private sector sources exist, and a

formal public-private competition will be conducted for any package

valued at $3 million or more.

• Competition formulation. For each work package under consideration, the

applicable DOD component will determine which government candidate

would compete, and the Defense Depot Maintenance Council will make

the final determination regarding which depot can compete.

• Proposal evaluation and source selection. Best-value principles will be

used when evaluating proposals and selecting a source of repair. Appeals

by military depots will be resolved internally within the DOD rather than by

GAO. DOD’s “Cost Comparability Handbook” will be modified to adjust

military depot offers by federal income taxes, cost of facilities capital, and

liability insurance.

• Cost estimation and accounting. The Defense Contract Audit Agency will

(1) review each public depot maintenance activity to determine if it has

well-documented procedures for handling direct and indirect costs,

(2) audit the cost-estimating systems of the public depot offerors,

(3) ensure that each military department’s depot cost-estimating and

accounting systems are in compliance in a timely manner, and (4) assess

the accuracy and completeness of incurred costs on depot awards. The

guidance provides for no comparable scrutiny for a private sector offeror.

Both the private sector and some depot supporters in the Congress have

raised concerns regarding aspects of these documents. It is uncertain

whether these letters will ultimately become DOD policy. Since there is no

approved DOD competition guidance, the Air Force is conducting the

competitions at Sacramento and San Antonio using its own guidance.

Page 21 GAO/T-NSIAD-97-111
Current Actions Point

to Greater Use of the

Private Sector to

Perform Depot

Maintenance

In response to our reports, DOD has consistently stated that it intends to

comply with existing statutes relating to depot maintenance workload

allocations. As we look at the services’ current actions related to

(1) privatization-in-place, (2) assessments of existing organic workloads,

and (3) assessments of where to perform new weapon system depot

maintenance, we see significant movement of depot maintenance

workload to the private sector. While we are continuing work in this area,

we are concerned that, due to a lack of clear policy and direction, some

maintenance strategies are being delayed and others are being selected

that may not be the most cost-effective.

Privatization-in-Place As previously discussed, privatizing organic workloads at closing depots

rather than transferring and consolidating work at remaining depots

further exacerbates DOD’s excess depot capacity problem and increases

depot maintenance costs.

Assessments of Organic

Workloads

DOD officials are examining workloads now at organic depots with a view

to increase outsourcing. Service officials are utilizing the new core

methodology12 and risk assessment process to review mission-essential

workloads and reclassify existing organic core work as noncore for

outsourcing. The Air Force has assessed seven workloads to date and

determined that the risks from outsourcing were acceptable; that is,

adequate DOD capability remains, and available commercial sources can

capably do the work. The Air Force plans to assess its entire workload to

determine minimum core capabilities and identify outsourcing candidates.

The Army and the Navy are also beginning to reassess their current

workloads to identify core.

The hydraulics workload at the Air Force’s Sacramento Center illustrates

the impact the new risk assessment process will have on DOD core

capabilities. The Air Force determined that all of this large

workload—currently about 420,000 hours per year—was required to

support a core capability based on its necessity to support mission aircraft

during contingencies. This was a key factor used by the Air Force to

support its position that Sacramento should not be closed during the 1995

BRAC process. A recent risk assessment subsequently determined that the

entire workload could be outsourced and would no longer be classified as

12The core methodology being used is the one contained in DOD’s April 1996 policy report submitted to

the Congress.

Page 22 GAO/T-NSIAD-97-111
core. The Defense Depot Maintenance Council agreed with the Air Force

recommendation.

A critical assumption, however, is that current Army and Navy hydraulic

workloads must continue to be maintained in military depots in the future

to provide the minimum DOD organic core capability requirement.

Additionally, there is some question regarding whether the Navy and the

Army could support Air Force workloads. If future hydraulic workloads

increase or decrease, or if the Army and the Navy desire to outsource their

workloads, the retention of minimum core could be jeopardized. In

concept, the Council would be the arbitrator and determine whether the

additional risk would be acceptable.

DOD is also looking to expand the use of private contractors to assume

total contractor logistics support of fielded weapon systems. In what is

viewed as a model for other systems, the Air Force plans to reduce the

F-117 program office from 226 to 20 employees and greatly expand the

prime contractor’s role in logistics support of the F-117 fleet, to include

materiel management, systems integration, modifications, and

subcontractor management, as well as continuing depot repairs and

systems engineering responsibilities. The Air Force is also considering

contractor-provided, integrated systems management for its specialized

C-130 fleet and some strategic missiles, while the Army expects to issue an

integrated fleet management contract for the Paladin.

Assessments of Where to

Outsource New Systems

DOD’s revised acquisition policies and privatization plans establish a clear

preference for contractor support of new weapon systems and upgrades.

Citing in particular the guidance to maximize contractor-provided, total

life-cycle logistics support, acquisition program officials from all services

are actively planning or strongly considering contractor logistics support

of both depot maintenance and materiel management functions, much

more so than in the past.

Of the programs we have reviewed thus far, few have made final formal

decisions on the source of repair. However, of those systems offices that

have decided or are nearing a decision, most are planning to outsource.

The decisions on many systems, especially the largest dollar ones, have

been delayed and the programs will rely on contractor support for a

number of years as options are evaluated. Officials cited several reasons

for delaying decisions, including uncertainties about DOD core policies, the

status of efforts to lift statutory workload restrictions, and the time needed

Page 23 GAO/T-NSIAD-97-111
to obtain better cost and performance data. Only the Black Hawk will

continue organic support like that used for its predecessor models.

Officials plan on a fairly even split of the AC-130U gunship workloads to

public and private sources but have not yet determined plans for airframe

maintenance, the gunship’s largest workload. Table 3 summarizes the

projected source of repair plans on systems we have reviewed. As

indicated, for many programs, including the largest systems in terms of

acquisition costs, the final support decisions have not yet been made.

Table 3: New Systems Tentative Depot Support Plans

System Leaning to organic Undecided/deferred Leaning to contract

Army

Apache Longbow √

Black Hawk √

Javelin √

JSTARS GSM √

Paladin √

Navy

F/A-18E/F √

Seawolf √

T406 engine √

V-22 Osprey √

Air Force

AC-130U gunship √

B-1B CMUP √

C-17 √

F-117 engine √

F-22 √

JASSM √

At the request of higher headquarters, several programs reconsidered and,

in at least one case, reversed earlier decisions to rely on organic support.

The Office of the Secretary of Defense tasked the C-17 program office to

reevaluate its organic depot support strategy when the fleet size

decreased, and the Air Force Chief of Staff directed the F-22 program

office to consider privatizing logistics support as a means to cut costs. The

F/A-18E/F system office decided to revisit its plans for organic support

when the program was restructured as a major acquisition.

Page 24 GAO/T-NSIAD-97-111
In 1995, the Under Secretary of Defense for Acquisition and Technology

reversed organic support plans for the B-2 aircraft. Air Force cost analyses

and core assessments showed that a relatively equal mix of public and

private support was most cost-effective and would maintain core

capabilities for the stealth technologies. Based on a consultant study, the

Under Secretary directed that most work be instead outsourced to the

manufacturer, citing as reasons, a high level of complexity and the B-2’s

still maturing design.

Preliminary Observations on

New Systems Maintenance

Decisions

Our new systems work is continuing. We have some preliminary

observations based on our work to date.

• Guidance on making source-of-repair decisions is still evolving, and

program officials are unsure how or whether to address noncost factors,

particularly core requirements. Some programs are moving ahead with

support plans without establishing a solid, comprehensive business case

to justify the decision.

• Cost benefit analyses comparing public and private options often do not

indicate a clear cost advantage for either sector. In the past, this would

have usually justified selecting an organic depot based on core

requirements and the perceived lower risk in using the public depots as a

ready and controlled source. Today, the same inconclusive analyses are

being used to justify delays in making final decisions.

• Programs delaying final support decisions will rely on interim contractor

support and similar arrangements to provide logistics support for 3 to 10

years.

• Past experience on the B-1B and other programs shows that interim

contractor support can be an expensive, extended support method and

that unreasonable delays in finalizing support decisions can increase costs

and degrade readiness.

• DOD policy establishes total contractor logistics support as the preferred

model for new systems, but this may not be appropriate for most systems.

Air Force managers have found contractor logistics support to be

cost-effective for commercially derived systems with established

competitive repair sources. These conditions are not often present for

military-unique systems and cutting edge technologies. Privatizing total

support on new and future weapon systems can also make it difficult for

the organic depots to acquire and sustain technical competence on new

systems, leading edge technologies, and critical repair processes. This is

necessary to maintain future core capabilities and provide a credible

competitive repair source.

Page 25 GAO/T-NSIAD-97-111
• The services and the Defense Logistics Agency are also testing and

implementing innovative, alternative contractor-provided support

arrangements—including repair warranties, partnering, modernizing

through spares, and prime vendor programs—that are expected to

decrease organic workloads. We are continuing to evaluate these concepts

and impacts on DOD depots.

Projections for

Achieving Billions by

Privatizing Depot

Maintenance Are Not

Well Supported

Facing large shortfalls in its modernization accounts, DOD plans to reduce

costs and generate savings for modernization through the outsourcing of

support activities, including depot maintenance. DOD’s projected savings

level is based on estimates made through studies by the CORM and the DSB.

The CORM and DSB studies maintain that through competition in the private

sector, depot maintenance costs can be reduced by 20 to 40 percent. While

we believe some savings may be achieved from outsourcing some depot

maintenance workloads, our work shows that savings estimates of this

magnitude are questionable for several key reasons. As already discussed,

they assume that existing legislation relating to depot maintenance

workload allocation will be repealed. In addition, the highly competitive

environment assumed in the studies does not exist in the depot

maintenance market place.

Savings Assumptions Are

Not Based on Depot

Maintenance Activities

As the basis for its outsourcing savings assumption, DOD cites data from

the CORM’s report, Directions for Defense (May 24, 1995), which claimed

that 20-percent savings could be achieved through outsourcing. The report

rejected the idea of core requirements and recommended that DOD

(1) outsource all new support requirements, particularly the depot-level

logistics support of new and future weapon systems and (2) establish a

time-phased plan to transfer essentially all depot maintenance to the

private sector. DOD agreed with the report’s recommendation to outsource

a significant portion of its depot maintenance work, but believed that it

should retain a limited capability to meet essential wartime surge

demands, promote competition, and sustain institutional expertise. Based

on our prior work in the area of savings from outsourcing, we question

whether DOD can achieve the level of savings it is claiming.

We initially questioned the data cited by DOD to support its savings

assumptions in April 1996 testimony before this Subcommittee.13 We

stated that the CORM’s assumptions on savings were generally based on

13Defense Depot Maintenance: Privatization and the Debate Over the Public-Private Mix,

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

Page 26 GAO/T-NSIAD-97-111
reports of projected savings from public-private competitions for various

commercial activities as part of the implementation of Office of

Management and Budget Circular A-76. In reviewing the A-76 competitions

and DOD’s public-private competitions for depot maintenance, we found

that the conditions under which A-76 competitions resulted in lower

private sector prices often were not present or applicable to depot

maintenance. The weaknesses in extrapolating the results of these

reported savings to depot maintenance included the following:

• The support functions used for the A-76 studies were dissimilar to the

depot maintenance function.

• Substantial savings occurred when competition was introduced into the

noncompetitive environment; however, the reported savings were based

on the difference between precompetition costs and the prices proposed

and did not reflect the subsequent cost overruns, modifications, or

add-ons.

• Public activities were allowed to compete for workloads and won about

half of the competitions by reengineerng their operations to provide the

work cheaper.

• The A-76 competitions were conducted in a highly competitive private

sector market.

Further analysis of the CORM savings assumptions in our July 1996 report

showed that projected savings were often not achieved due to cost growth

and other factors.14 We concluded that outsourcing essentially all depot

maintenance under current conditions would not likely achieve expected

savings and, according to the military services, would result in

unacceptable readiness and sustainability risks.

As additional support for outsourcing, DOD cites data from the DSB’s

November 1996 report, Achieving an Innovative Support Structure for 21st

Century Military Superiority. DSB claimed savings up to 40 percent through

outsourcing of DOD support activities, including depot maintenance, and

recommended that DOD use the private sector for logistics and

maintenance in the continental United States. From a preliminary analysis

of DSB’s report, we determined that the savings projections were based on

primarily the same assumptions as those used by the CORM—although DSB’s

study expanded the functions and activities that it recommended for

outsourcing and claimed savings up to 40 percent. Our March 1997

14Defense Depot Maintenance: Commission on Roles and Mission’s Privatization Assumptions Are

Questionable (GAO/NSIAD-96-161, July 15, 1996).

Page 27 GAO/T-NSIAD-97-111
testimony15 before the Subcommittee showed that, while we agreed that

outsourcing can sometimes provide savings, we questioned whether the

magnitude of savings anticipated by DSB is attainable within the current

strategy and force structure.

Many Current Depot

Maintenance Contracts Are

Sole Source

Our April 1996 testimony and July 1996 CORM report noted that much of the

depot work contracted to the private sector was awarded sole source and

that obtaining competition for remaining noncore workloads may be

difficult and costly.16 For example, to test for the extent of competition,

we sampled 240 contracts, totaling $4.3 billion, that 12 DOD buying

commands had open during 1995. Of these 240 contracts, 182, about

76 percent, were awarded on a sole-source basis—about 45 percent of the

total dollar value.

Recently, we asked the DOD buying commands to classify as competitive or

sole source all the new contracts awarded from the beginning of fiscal

year 1996 to date. As shown in table 4, of the 15,346 contracts totaling

$2.2 billion, 13,930—about 91 percent—were awarded sole source. The

sole-source contracts totaled about $1.5 billion, or about 68 percent of the

total dollars awarded.

Table 4: DOD Depot Maintenance Contracts Awarded From Fiscal Year 1996 to Date

Competitive Sole source Total

Dollars in millions

Command Number Value Number Value Number Value

Army 2 $1 40 $540 42 $541

Air Force 1,263 443 1,268 336 2,531 779

Navy 151 253 12,622 638 12,773 891

Total 1,416 $697 13,930 $1,514 15,346 $2,211

Table 5 compares the services’ use of competition for contracts we

sampled in 1995 with that used in contracts awarded since the beginning

of fiscal year 1996. The Air Force had the greatest percent of competitive

contracts in 1995 and 1996. The Army’s use of competition decreased, and

the Navy’s use was low for both periods.

15Defense Outsourcing: Challenges Facing DOD as It Attempts to Save Billions in Infrastructure Costs

(GAO/T-NSIAD-97-110, Mar. 12, 1997).

16Defense Depot Maintenance: Privatization and the Debate Over the Public-Private Mix 

(GAO/NSIAD-96-148, Apr. 17, 1996) and Defense Depot Maintenance: Commission on Roles and

Mission’s Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July 15, 1996).

Page 28 GAO/T-NSIAD-97-111
Table 5: DOD’s Use of Competition for Depot Maintenance Work

Competitive contracts open in

1995

Competitive contracts awarded

from FY 1996 to date

Service

Percent of

total number

Percent of

total value

Percent of

total number

Percent of

total value

Army 23 53 5 .2

Air Force 39 62 50 57

Navy 8 39 1 28

Reason Cited for

Sole-Source Awards

Our work also showed that, for existing weapon systems, obtaining a

competitive market may be costly for DOD because it has not acquired the

technical data rights for many of its weapon systems. In examining the

reasons for sole-source contracting, we observed that the justification

most often cited was that competition was not possible because DOD did

not own the technical data rights for the items to be repaired. Command

officials told us that DOD would have to make costly investments in order

to promote full and open competition for many of its weapon systems.

Also, we have found that savings through competition may be adversely

affected by private businesses that choose not to bid for maintenance

workloads that have (1) small volumes, (2) obsolete technology,

(3) irregular requirements, and (4) unstable funding. DOD may be able to

encourage more competitive bidding through bundling common work and

offering contracts with terms and conditions such as multiple options and

multiyear performance periods.

Conclusion In conclusion, the inefficient operation of depot maintenance activities

results in a reduction in the military services purchasing power through its

operations and maintenance funds. DOD faces difficult decisions in

outsourcing depot maintenance workloads to create a balanced,

cost-effective system. Depot maintenance privatization should be

approached carefully, allowing for evaluation of the economic, readiness,

and statutory requirements that surround individual workloads. If not

effectively managed, the privatization of workloads, including the

downsizing of remaining DOD depot infrastructure, could exacerbate

existing excess capacity problems and the inefficiencies inherent in

underused depot capacity. We believe DOD needs to develop an overall

plan for addressing its key management issues, including its proposed

management structure for depot maintenance, for review by the Congress

and other affected parties.

Page 29 GAO/T-NSIAD-97-111
Appendix I 

History of the Services’ Depot Systems

The services’ maintenance depots have primary responsibility for

maintaining, overhauling, and repairing most major systems and system

components, including aircraft, helicopters, ships, tanks, artillery, support

vehicles, missiles, and ammunition. The maintenance depots are a

controlled source of technical capability for repairing and manufacturing

mission-essential equipment and components that support peacetime

operations or a surge capability in the event of total mobilization or some

other national defense contingency. The depots also provide engineering

services for the production and development of hardware design changes,

and develop and maintain computer software. Furthermore, they furnish

technical teams to provide field maintenance of equipment in emergencies,

as needed.

Army Depots From the Revolution until World War II, the Army’s equipment

maintenance needs were mostly contracted out. During the 19th century,

in-house maintenance work, consisting mostly of rifle and other gun repair

and carriage repair, was done in the Army’s arsenals—which also

manufactured guns. The number of arsenals tended to rise and fall

according to the various wars and other military actions that occurred in

the 19th and early 20th centuries.

About the time of World War I, the Army began to acquire larger

equipment, such as trucks and tanks, which typically require more

maintenance than rifles, guns, and carriages. Still, most maintenance work

between World War I and II continued to be contracted out. Finally, during

and after World War II, large-scale, in-house equipment maintenance

began in earnest when the Army acquired massive quantities of new,

modern equipment.

By the 1970s, the Army’s depot maintenance work was centralized at a

limited number of depots compared to previous years. In 1976, 10 depots

performed maintenance work in the continental United States and 2 in

Europe. Between 1983 and 1985, Army depot maintenance personnel

strengths increased to over 20,000, their highest level ever. At that time,

the organic program represented approximately 67 percent of the total

Army direct depot maintenance program funding. During the mid-1980s,

the Army lost some of its organic depot maintenance workload, staffing,

and capacity. By 1988, only eight depots were still performing

maintenance work in the United States and only one in Europe. Sierra and

New Cumberland depots had stopped maintenance work in the United

States and in Europe, the Mainz Depot was closed. However, as its

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Appendix I 

History of the Services’ Depot Systems

in-house maintenance capability was declining, the Army increased its

reliance on commercial sources, reversing a long trend.

Although DOD’s input to the 1995 the base realignment and closure (BRAC)

recommended closing the Red River Army Depot and transferring the light

combat vehicle maintenance mission to Anniston Army Depot, the BRAC

Commission disagreed. The Commission found that while Anniston had

the capacity to accept ground combat vehicle depot maintenance

workload from Red River, closing Red River would place too much risk on

readiness. It recommended realigning Red River Army Depot by moving all

maintenance missions, except for those related to the Bradley fighting

vehicle series, to other depot maintenance activities, including the private

sector.

In addition, the 1995 BRAC Commission agreed with the Secretary of

Defense’s recommendation to realign depot-level maintenance at the

Letterkenny depot to other depots or the private sector. It recommended

the (1) transfer of towed and self-propelled combat vehicle maintenance

workloads to the Anniston depot and missile guidance system

maintenance workload to the Tobyhanna depot or the private sector and

(2) retention of an enclave for conventional ammunition storage and

tactical missile disassembly and storage at Letterkenny.

Navy Shipyards In 1799, the Congress authorized five naval shipyards to be located at

Portsmouth, New Hampshire; Boston, Massachusetts; New York, New

York; Philadelphia, Pennsylvania; and Norfolk, Virginia. The Mare Island

and Puget Sound shipyards were authorized in 1852 and 1891, respectively.

The last four naval shipyards were authorized in this century: Charleston,

in 1901; Pearl Harbor, in 1908; San Francisco (Hunters Point), in 1919; and

Long Beach, in 1940.

From the earliest years through World War I, naval shipyards were the

principal logistics support element in the Navy’s shore establishment. In

addition to building and repairing ships, naval shipyards provided many

support activities, such as supply support, medical and dental care, and

training facilities. During the period between the World Wars, additional

shore facilities were established to support the fleet and provide a wide

range of support services. Naval shipyards were thus able to focus on their

industrial mission of building, maintaining, and modernizing Navy ships.

Employment peaked at over 380,000 personnel during World War II.

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History of the Services’ Depot Systems

In 1968, naval shipyards stopped building ships in order to concentrate on

repairing an increasingly complex fleet. This enabled the private sector to

focus more on new construction. From the mid-1960s to the mid-1970s, the

Navy closed three nonnuclear shipyards—New York, Boston, and Hunters

Point—leaving six nuclear capable and two nonnuclear naval shipyards.

These closure decisions were made after careful studies indicated that

there was excess capacity for the foreseeable peacetime and mobilization

workloads.

During the post-Vietnam years, naval shipyards’ employment peaked at

80,000 in 1983. Since then, naval shipyard employment levels have

declined due to improved ship design techniques, reduced force levels,

changes in maintenance philosophy, and austere budgets. As a result, the

Philadelphia Naval Shipyard was selected for closure by the 1991 BRAC

Commission and the Mare Island and Charleston naval shipyards were

selected for closure by the 1993 BRAC Commission. All three shipyards

were closed in 1996.

The 1995 BRAC Commission recommended closing the Long Beach Naval

Shipyard, and retaining the sonar dome government-owned,

contractor-operated facility and family housing units needed to fulfill Navy

requirements. The shipyard ceased operations in July 1996 and will close

in September 1997. The employment level of the remaining four naval

shipyards is projected at 22,771 by the end of fiscal year 1997.

Navy Aviation Depots The first naval aviation maintenance depot was established in 1917 at

Norfolk, Virginia, and was named the Construction and Repair

Department. In 1923, this unit and two others formed by then—one at

North Island and one at Pensacola—were redesignated as Assembly and

Repair Departments. In 1948, their names were changed to Overhaul and

Repair Departments. Prior to 1967, the aviation depots were under the

cognizance of their respective air stations. The status of Overhaul and

Repair Departments at the six Navy and one Marine Corps Air Stations

was changed in 1967 to that of separate commands, each called a Naval Air

Rework Facility and directed to report to the Commander of the Naval Air

Systems Command instead of the air station commanding officer. In 1987,

the name Naval Aviation Depot replaced the name Naval Air Rework

Facility to more accurately reflect the range of its activities.

In 1973, the Naval Air Rework Facility, Quonset Point, Rhode Island, was

closed under the Navy Shore Establishment Realignment Program. This

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Appendix I 

History of the Services’ Depot Systems

was the first naval aviation depot to close in recent history. The 1993 BRAC

Commission called for closing three more naval aviation depots—those

located in Norfolk, Virginia; Pensacola, Florida; and Alameda, California.

The depots remaining open are located at the Marine Corps Air Station at

Cherry Point, North Carolina; the Naval Air Station at North Island, San

Diego, California; and the Naval Air Station at Jacksonville, Florida.

The naval aviation depots went from a high of 35,690 employees in 1967 to

14,797 employees in 1995. Further planned reductions from closures and

downsizing are projected to reduce the number of employees to 10,543 by

1999. The Department of Defense (DOD) did not recommend additional

aviation depot closures as a result of the 1995 BRAC process.

Marine Corps Depots The two Marine Corps maintenance depots are now called

multicommodity maintenance centers. The oldest, in Albany, Georgia, was

established as the Repair Branch of the Marine Corps Supply Center in

1954. The other, located in Barstow, California, was established in 1961 as

the Yermo Complex. The facilities have grown over the years as a result of

additional mission responsibilities and the expansion of their industrial

production capabilities. Today, each facility has just under 1,000 civilian

employees and 10 military personnel. Each generally supports the same

systems and commodities, except that Albany also supports the Marine

Corps Maritime Prepositioning Forces Program. Both Albany and Barstow

perform a combination of intermediate and depot maintenance activities.

Air Force Depots From 1918 to 1939, the Army Air Corps, from which the Air Force was

created after World War II, operated four air depots. With the threat of

global conflict in 1939, two additional depots were constructed. During

World War II, the number of depots increased to 12. After the war, three

depots were deactivated. In the early 1950s, during the Korean Conflict,

the Air Force invested $1.8 billion to upgrade the remaining nine depots,

which became part of the Air Materiel Command. A 10th depot was

activated in 1961 to house laboratories and management activities for the

Air Force’s metrology and calibration program and depot repair of inertial

navigation systems for intercontinental missile systems and aircraft. The

Air Force entered the 1960s with over 145,000 personnel at 10 logistics

centers, including 62,000 depot maintenance personnel. In 1963 and 1964,

4 of the 10 depots were closed. The remaining six became the base of the

Air Force Logistics Command in support of the Vietnam Conflict. Five of

the six were located on multifunction logistics bases called air materiel

Page 33 GAO/T-NSIAD-97-111
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History of the Services’ Depot Systems

areas, which were responsible for both wholesale supply and depot

maintenance activities for Air Force weapon systems and equipment. By

the end of the 1960s, the Air Force Logistics Command had been reduced

to 112,000 employees, including 50,000 depot maintenance personnel.

During the 1970s, the Air Force consolidated individual repair activities at

its 6 depots, reducing the number from 52 to 20. This realignment

eliminated duplicate repair sources for many commodity items. During the

early 1980s, Air Force logistics operations grew as U.S. military forces

were increased. The Air Force undertook a major capitalization

improvement program to modernize the depot industrial base with modern

plant equipment and technological advancements. The Air Force Logistics

Command employed 40,800 depot maintenance personnel in 1986. In the

1990s, downsizing, consolidations, and cuts were made to the Air Force

depot system, and the Air Force Logistics Command merged with the Air

Force Systems Command to form the Air Force Materiel Command. Depot

maintenance manning was reduced by 17 percent between 1990 and 1991.

In 1995, the Air Force Materiel Command had 29,004 depot maintenance

personnel.

The type of depot maintenance work done at each of the Air Force depots

includes the following: (1) Ogden Air Logistics Center— strategic missiles,

aircraft, air munitions, photo/reconnaissance, and landing gear;

(2) Oklahoma City Air Logistics Center— aircraft, engines, and oxygen

equipment; (3) Sacramento Air Logistics Center— space/ground

communications-electronics, aircraft, hydraulics, and instruments; (4) San

Antonio Air Logistics Center— aircraft, engines, nuclear equipment; and

(5) Warner Robins Air Logistics Center— aircraft, avionics, propellers, and

life support systems.

The 1993 BRAC Commission recommended closing the Aerospace Guidance

and Metrology Center, Newark, Ohio, which has been privatized-in=place.

This privatized facility, which is currently known as the Boeing Guidance

Repair Center (BGRC), does repairs, overhauls, and upgrades for inertial

guidance and navigation systems and components and displacement

gyroscopes for intercontinental missiles and most Air Force aircraft. It

also houses the management of the Air Force’s metrology and calibration

program. Although DOD did not recommend any additional depots for

closure in 1995, the BRAC Commission recommended closing the San

Antonio and Sacramento Air Logistics Centers, which the Air Force also

plans to privatize-in-place using competitive procedures that include a

military depot. The Air Force also has one depot-level activity in Colorado

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Appendix I 

History of the Services’ Depot Systems

Springs, Colorado, which maintains the software on Air Force space

systems. This activity is not funded using depot maintenance funds and is

not officially categorized as a depot. It is staffed with a combination of

government and contractor personnel.

Other Depot Facilities

Naval Weapons Stations The five existing naval weapons stations are descendants of the naval

ammunition depots of World War II. However, these depots are no longer

the major providers and maintainers of naval ordnance that they were in

the past. In the 1970s, the Army, under the single manager concept, was

assigned responsibility for producing and maintaining most of the Navy’s

high-volume conventional munitions and missiles. The naval weapons

stations now maintain only small volume, miscellaneous items.

Naval Surface Warfare

Center

The Naval Surface Warfare Center, Crane Division, supports the

development, production, evaluation, and maintenance of electronic and

mechanical products integral to combat weapon systems. The Crane

Division employs about 470 depot maintenance personnel as of fiscal 

year 1997. Commissioned in 1941 as a naval ammunition depot, Crane was

one of four inland activities constructed to load, store, and issue

ammunition to the fleet. Today, the Center serves as a modern

sophisticated leader in diverse and highly technical product lines such as

microwave devices, acoustic sensors, and microelectronic technology.

The Louisville, Kentucky, site of the Crane Division was commissioned by

the Navy in 1941 to produce ordnance material and munitions for World

War II. Louisville employed 4,480 personnel at its peak during World 

War II. The 1995 BRAC Commission urged the Navy to allow privatization of

the facility, which occurred in August 1996. At the time of the BRAC

recommendation, the depot employed 1,600 civilian personnel. It provides

overhaul and engineering support for naval gun and missile launching

systems, and produces small weapon system parts using flexible

computer-integrated manufacturing technologies and methods.

Naval Undersea Warfare

Center

The Navy’s undersea warfare munitions capability was originally

established in 1914. In recent years, depot maintenance for undersea

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Appendix I 

History of the Services’ Depot Systems

warfare systems has been consolidated at the Naval Undersea Warfare

Center, Keyport, Washington. The consolidation was done to recognize the

inherent efficiencies of having a single national depot maintenance center

for the Navy’s family of torpedoes. Among the Center’s assigned duties, is

the maintenance and repair of undersea weapons and systems, underwater

targets, and countermeasure devices.

Since the end of the Cold War, workload at the Center has followed a

downward trend. Direct workload has declined from a peak of 821 work

years in the late 1980s to 417 work years in fiscal year 1997, representing a

51-percent decline.

Page 36 GAO/T-NSIAD-97-111
Appendix II 

Abstracts From Related GAO Products

High-Risk Series: Defense

Infrastructure

(GAO/HR-97-7, Feb. 1997)

This report addresses the difficult process of reducing the Department of

Defense’s (DOD) infrastructure. It focuses on the need for infrastructure

reductions and obstacles that have hindered DOD’s ability to achieve

significant cost savings in this area. It describes DOD’s future years funding

plan for infrastructure and discusses areas in which we have identified

opportunities for reductions. It also discusses the need for DOD to give

greater structure to its reduction efforts by developing a strategic plan and

involving the Congress.

Air Force Depot

Maintenance:

Privatization-in-Place Plans

Are Costly While Excess

Capacity Exists

(GAO/NSIAD-97-13,

Dec. 31, 1996)

Deciding the future of Department of Defense’s (DOD) depot system is

difficult. Depot maintenance privatization should be approached carefully,

allowing for evaluation of the economic, readiness, and statutory

requirements that surround individual workloads. Privatizing workloads in

place at two closing Air Force depots does not reduce the excess capacity

in the remaining depots or the private sector and consequently is not a

cost-effective approach to reducing depot infrastructure. Private industry

representatives generally agree with this statement.

Although the Air Force’s privatization initiative for the Sacramento and

San Antonio depots has not progressed far enough for us to estimate

precise costs and savings, consolidating depot maintenance workloads at

remaining underused depots could result in a net savings in 2 years or less.

Transferring the workloads to other depots could yield additional

economy and efficiency savings of over $200 million annually, in addition

to the $268 million annual savings the BRAC Commission estimated.

Moreover, if the workload consolidation does not occur, the remaining Air

Force depots are likely to become more inefficient and more costly. Plans

to delay many closure-related actions until 2001 will substantially reduce

future savings envisioned by the BRAC Commission.

Navy Depot Maintenance:

Cost and Savings Issues

Related to

Privatizing-In-Place at the

Louisville, Kentucky, Depot

(GAO/NSIAD-96-202, 

Sept. 18, 1996)

We found that the Navy’s plan for privatizing the workloads in place at the

Louisville depot will not reduce excess capacity in the remaining public

depots or the private sector, may prove more costly than transferring the

work to other depots, and does not appear to be consistent with an

existing requirement for public-private competitions. The Navy’s

preliminary cost analysis that privatization-in-place is cost-effective is

based on limited cost data that overstates the cost of relocating the

workloads by at least $66 million and on the general assumption that

privatizing workloads will save 20 percent. The projection was based on

conditions that are not relevant for most of the depot maintenance

Page 37 GAO/T-NSIAD-97-111
Appendix II 

Abstracts From Related GAO Products

workloads and does not reflect the cost of excess capacity in the public

sector. The goal of reaching 20 percent savings is not likely to be reached.

Furthermore, we were unable to find any element of the Navy’s plan for

privatization of the Louisville depot that addresses 10 U.S.C. 2469, which

requires competition between the public and private sectors before

privatizing DOD workloads valued at not less than $3 million.

Army Depot Maintenance:

Privatization Without

Further Downsizing

Increases Costly Excess

Capacity

(GAO/NSIAD-96-201, 

Sept. 18, 1996)

If not effectively managed, the privatization of depot maintenance

activities, could exacerbate existing capacity problems and the

inefficiencies inherent in underuse of depot maintenance capacity.

Tentative plans to transfer some workloads from realigned depots to

remaining depots should improve capacity use and lower operating costs

to some extent, but they will not resolve the Army’s extensive excess

depot capacity problems. Since the Army is not effectively downsizing its

remaining depot maintenance infrastructure, privatization initiatives

outlined in DOD’s March 1996 workload analysis report to Congress will

increase excess capacity in Army depots and increase Army depot

maintenance costs. Privatizing workloads in place will also aggravate

excess capacity conditions in the private sector.

In the absence of further downsizing, the Army can significantly reduce

depot maintenance costs by transferring, rather than privatizing-in-place,

workloads from closing and downsizing depots.

Defense Depot

Maintenance: Commission

on Roles and Mission’s

Privatization Assumptions

Are Questionable

(GAO/NSIAD-96-161,

July 15, 1996)

Pursuant to a congressional request, we examined the Commission on

Roles and Missions (CORM) privatization assumptions to determine

whether privatization would adversely affect military readiness and

sustainability.

The CORM’s depot privatization savings and readiness assumptions are

based on conditions that do not currently exist for many depot workloads.

Privatizing essentially all depot maintenance under current conditions

would not likely achieve expected savings and, according to the military

services, would result in unacceptable readiness and sustainability risks.

The extent to which DOD’s long-term privatization plans and market forces

will effectively create more favorable conditions for outsourcing is

uncertain.

The CORM assumed a highly competitive and capable private market exists

or would develop for most depot workloads. However, we found that most

Page 38 GAO/T-NSIAD-97-111
Appendix II 

Abstracts From Related GAO Products

of the depot workloads contracted to the private sector are awarded

non-competitively. Further, the CORM’s privatization savings do not reflect

the cost impact of excess capacity in the public depots. The CORM’s

privatization assumptions are based primarily on reported savings from

public-private competitions for commercial activities. These activities

were generally dissimilar to depot maintenance activities because they

involved relatively simple, routine, and repetitive tasks that did not

generally require large capital investments or highly skilled and trained

personnel. The CORM report stated that the services’ organic depot

maintenance requirements exceed the real needs of the national military

strategy and that private contractors could provide essentially all of the

depot maintenance services. The CORM assumed that public-private

competitions would be used only in the absence of private sector

competition and would be limited to only a few cases. We found that

public-private competitions have resulted in savings and benefits and can

provide a cost-effective way of making depot workload allocation

decisions for certain workloads.

Our analysis of depot maintenance workloads currently contracted to the

private sector shows, for the most part, that contractors were responsive

to their requirements for delivery and performance. Historically, the

services have determined that the risks of privatizing most workloads are

too high and have retained them in the public depots. We found that DOD’s

risk assessment methodology does not include guidance or criteria for the

services to use in making such assessments and involves subjective

judgments. The services are reassessing their previously designated core

workloads with a view toward privatization.

Defense Depot

Maintenance: More

Comprehensive and

Consistent Workload Data

Needed for

Decisionmakers

(GAO/NSIAD-96-166,

May 21, 1996)

Our analysis of DOD’s workload report shows that the use of more

comprehensive and consistent data would provide Congress and DOD

decisionmakers a more accurate picture of historical and future

projections of depot maintenance workload allocations between the

public and private sectors. Without such data, the reports are of limited

use to Congress and defense decisionmaker when considering public and

private sector workload allocation policy. Although DOD’s workload report

primarily justifies eliminating the 60-40 rule, our work shows that, with

few exceptions, the rule has not affected past public-private workload

allocation decisions. However, if not repealed, the 60-40 rule would

restrict DOD’s plans for large-scale privatization.

Page 39 GAO/T-NSIAD-97-111
Appendix II 

Abstracts From Related GAO Products

The workload report’s projections of public-private depot workloads for

fiscal years 1997-2001 are not consistent and comparable to historical data.

The future data does not include certain types of private sector depot

maintenance costs, including interim contractor support and contractor

logistics support. We include a matter for congressional consideration for

improving the methodology and process DOD uses to collect, analyze, and

report depot maintenance workload data for the public and private

sectors.

Defense Depot

Maintenance: DOD’s Policy

Report Leaves Future Role

of Depot System Uncertain

(GAO/NSIAD-96-165,

May 21, 1996)

The DOD policy report calls for a greater reliance on private sector

maintenance capabilities than the current projection. The policy provides

wide latitude regarding how certain policies and concepts will be

implemented. For example, each service is implementing differently the

policy’s new process for risk assessments to determine which

mission-essential maintenance requirements should be privatized. Thus, it

may be impossible to estimate the future depot maintenance workload

mix. The DOD policy also shows a preference for maintaining new systems

in the private sector. However, it is unclear that this is the most

cost-effective long-term approach for military-unique defense systems. In

addition, the policy excludes DOD depots from competing for non-core

work except when private sector competition is inadequate. This is

inconsistent with congressional direction for competition between

public-private entities.

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)

Responding to a congressional request, we testified on the privatization of

defense depot maintenance activities. We noted that (1) the DOD’s evolving

depot maintenance policy includes a public-private mix and shifts work to

the private sector where feasible; (2) depot privatization could worsen

excess maintenance capacity and inefficiencies if not carefully managed;

(3) the DOD policy report provides an overall framework for managing

depot maintenance activities and substantial implementation flexibility,

but the policy is not consistent with congressional guidance on

public-private competition for noncore workloads; (4) privatizing depot

maintenance is not likely to achieve the 20-percent savings DOD projects,

since most savings have come from competition rather than privatization;

(5) about half of depot maintenance private-public competitions have been

won by the public sector; and (6) DOD plans to privatize-in-place and delay

downsizing and closure of two Air Logistics Centers will probably cost

more than closing them and relocating their workloads to underutilized

defense or private facilities.

Page 40 GAO/T-NSIAD-97-111
Appendix II 

Abstracts From Related GAO Products

Military Bases: Closure and

Realignment Savings Are

Significant, but Not Easily

Quantified

(GAO/NSIAD-96-67, Apr. 8,

1996)

Our analysis of base support costs in the future year defense plan and at

nine closing installations indicates that BRAC savings should be substantial.

However, DOD’s systems do not provide information on actual BRAC

savings. Therefore, the total amount of actual savings is uncertain. If DOD

does not fully achieve estimated BRAC savings, DOD’s ability to fund future

programs at planned levels will be affected. DOD has complied with the

legislative requirement for submitting annual cost and savings estimates,

but there are limitations to the submissions’ usefulness. Consequently, the

Congress does not have an accurate picture of the savings achieved by the

BRAC process.

Depot Maintenance:

Opportunities to Privatize

Repair of Military Engines

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

1996)

The rationale and requirement for maintaining some capability in the

public depot system derive both from statutory requirements and from the

recognition that some public depot capability is needed to mitigate cost

and readiness risks where private sector capabilities are limited or

inadequate. Private sector capabilities generally make commercial

counterpart engines ideal candidates for privatization. However, DOD has

about 45 percent excess capacity for engine depot maintenance.

Additional privatizations of commercial counterpart engines at a time of

decreasing depot workload—without first decreasing the excess capacity

in DOD’s depots—would increase the per-unit repair cost of work

remaining in DOD’s depot system.

It is not yet known how DOD plans to implement its privatization initiatives

or how it will address statutory provisions such as 10 U.S.C. 2469—which

require competitions that include public depots before privatizing depot

maintenance workload valued at $3 million or more.

Closing Maintenance

Depots: Savings, Workload,

and Redistribution Issues

(GAO/NSIAD-96-29, Mar. 4,

1996)

DOD has substantially reduced its initial estimates of net savings resulting

from depot closures during the 6-year implementation period allowed by

law and, to a lesser extent, of the annual savings after the implementation

period has been completed. Although DOD believes its new estimates are

more accurate, they still do not accurately reflect potential savings

because (1) some closure-related costs are not included and (2) some

estimates have not been updated to reflect major changes in such areas as

the expected cost of doing work after it is transferred to new sources of

repair. As a result, the magnitude of the savings is uncertain.

Page 41 GAO/T-NSIAD-97-111
Appendix II 

Abstracts From Related GAO Products

DOD is offering displaced employees a comprehensive and costly

outplacement program that provides assistance, benefits, and separation

incentives, thus limiting the number of employees involuntarily separated.

Military services can increase savings by (1) conducting public-public and

public-private competitions for the work or (2) analyzing the

cost-effectiveness of moving the work to other service depots. In addition,

they can improve operations through reengineering. However, DOD has not

taken action to maximize these savings. Instead, the services have

(1) discontinued public-public and public-private competition programs in

May 1994, (2) implemented a privatization-in-place plan that will likely

increase maintenance costs, (3) rarely considered interservicing

alternatives, and (4) not required the depots to reengineer transferred

workloads.

Navy Maintenance:

Assessment of the

Public-Private Competition

Program for Aviation

Maintenance

(GAO/NSIAD-96-30, Jan. 22,

1996)

Navy public-private competitions generally resulted in savings and

benefits, although precise quantification of such savings is not possible.

Due to the time and cost of performing such competitions, a rapidly

declining depot maintenance workload, and a private sector concern

about fairness, much less maintenance work was subjected to

public-private competition than had been projected. The issue of fairness

centers on private sector concerns that military depot prices have not

reflected 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’s reexamining

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

sector. 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 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 ensure their future usefulness in

identifying the most cost-effective source of repair for depot maintenance

workloads.

Page 42 GAO/T-NSIAD-97-111
Appendix II 

Abstracts From Related GAO Products

Depot Maintenance: the

Navy’s Decision to Stop

F/A-18 Repairs at Ogden

Air Logistics Center

(GAO/NSIAD-96-31,

Dec. 15, 1995)

Comparing F/A-18 Modification, Corrosion, and Paint Program cost and

performance at the North Island and Ogden depots was complicated

because a number of data judgments and adjustments were required. The

Navy’s analysis did not always use the most current and complete

information available and did not make adjustments for all known

differences in work completed at each depot. Our analysis, using more

current and complete information, showed that Ogden’s costs were

slightly lower. Nevertheless, given DOD’s decision to retain F/A-18 repair

capability at the Navy’s North Island facility, it appears consolidation of

the workload at that location is the most cost-effective approach. There is

no clear statutory or DOD guidance that defines the steps, processes,

analyses, and validation procedures required for a merit-based selection

process. Such guidance is needed if DOD intends to base future depot

maintenance workload allocation decisions on merit-based analyses.

Depot Maintenance: Issues

in Allocating Workload

Between the Public and

Private Sectors

(GAO/T-NSIAD-94-161,

Apr. 12, 1994)

The DOD annually spends about $15 billion for depot maintenance,

modifications, and upgrades to support aircraft, combat vehicles, wheeled

vehicles, ships, and other equipment. DOD is downsizing and must consider

how to cost-effectively acquire needed depot maintenance activities while

supporting industrial base needs in both the public and private sectors. We

discussed (1) the share of DOD’s depot maintenance program spent in the

public and private sectors; (2) the use of public-private competition as a

tool for allocating the depot maintenance workload; (3) observations on

the Defense Science Board Depot Maintenance Task Force findings and

recommendations; and (4) DOD’s transfer of employees, workload,

equipment, and facilities at closing maintenance depots.

We have concerns about the implementation of the public-private

competition, and the amount of savings is hard to quantify. Nevertheless,

we believe that the depot maintenance costs can be cut. We support many

of the task force’s findings and recommendations but disagree on some

issues. For example, we agree that a rational maintenance core policy

needs to be identified but believe that this should be done throughout DOD

rather than on a service-specific basis. None of the maintenance depots

targeted for closure have shut down yet. DOD appears to have an effective

program to help employees find new jobs, although some workers may

have to settle for lower-paying positions. Concerns have also been raised

about other aspects of the depot closures.

Page 43 GAO/T-NSIAD-97-111
Appendix II 

Abstracts From Related GAO Products

Depot Maintenance: Issues

in Management and

Restructuring to Support a

Downsized Military

(GAO/T-NSIAD-93-13,

May 6, 1993)

We were asked to determine (1) the extent to which the current DOD depot

maintenance system has excess capacity, (2) the basis for current DOD

allocations of depot work between the public and private sectors,

(3) whether the private sector’s role in the performance of depot

maintenance activities is changing, (4) the status of the public-private

competition initiative, and (5) the action needed to ensure that future

defense maintenance requirements can be managed more cost-effectively.

We testified that substantial excess capacity exists within DOD’s depot

maintenance system. Conservative estimates put excess capacity at 25 to

50 percent. Because depot maintenance costs are significantly influenced

by overhead, elimination of this excess capacity will be critical to reducing

future depot maintenance costs. DOD needs to closely review its capital

equipment acquisitions before acquiring new or replacement capability for

workload that may be allocated to the private sector. Cost-effective future

management of the defense depot maintenance system is first dependent

on determining what workload capability must be retained within

DOD—commonly referred to as core requirements—and what can or

should be contracted out to the private sector. In addition, the services

have not defined their minimum essential core requirements.

In the past, the private sector’s role in depot maintenance remained

relatively consistent at about 33 percent of the annual depot maintenance

budget and is aggressively seeking additional workload. However, DOD

does not have a comprehensive strategy for determining what depot

maintenance work should be done by the private sector. Public-private

competitions have been implemented to varying degrees among the

services. The current DOD depot management structure does not appear to

be conducive to making interservice decisions that are essential to

developing a more effective and efficient depot maintenance system.

Page 44 GAO/T-NSIAD-97-111
Appendix III 

DOD Depot Employment Levels by Service

FY 87 FY 92 FY 93 FY 94 FY 95 FY 96 FY 97

0

20,000

40,000

60,000

80,000

Number of Employees

ARMY NAVAIR NAVSEA NAVY OTHER AIR FORCE MARINE CORPS

Page 45 GAO/T-NSIAD-97-111
Appendix IV 

Capacity and Workload Forecasts for

Remaining Depots for Fiscal Year 1999

Direct labor hours in thousands

Depot

Maximum

potential

capacity

Available

capacity Workload

Maximum

capacity

excess

Available

capacity

excess

Percentage

excess of

maximum

capacity

Percentage

excess of

available

capacity

Naval aviation

Cherry Point 5,735 3,797 3,620 2,115 177 37 5

Jacksonville 7,158 5,572 5,355 1,803 217 25 4

North Island 7,772 4,318 4,027 3,745 291 48 7

Subtotal 20,665 13,687 13,002 7,663 685 37 5

Naval shipyard

Norfolk 15,851 12,000 8,723 7,128 3,277 45 27

Pearl Harbor 8,032 5,320 3,739 4,293 1,581 53 30

Portsmouth 7,996 7,028 3,209 4,787 3,819 60 54

Puget Sound 14,919 14,000 11,717 3,202 2,283 21 16

Subtotal 46,798 38,348 27,388 19,410 10,960 41 29

Other Navy

Albany 1,883 1,215 1,089 794 126 42 10

Barstow 1,563 1,037 928 635 109 41 11

Crane 2,451 974 583 1,868 391 76 40

Keyport NUWC 1,141 672 555 586 117 51 17

Subtotal 7,038 3,898 3,155 3,883 743 55 19

Air Force

Oklahoma City 12,863 7,881 7,624 5,239 257 41 3

Ogden 9,005 8,371 4,596 4,409 3,775 49 45

San Antonio 15,220 1,575 1,606 13,614 (31) 89 –2

Sacramento 10,291 1,724 989 9,302 735 90 43

Warner Robins 9,913 7,605 5,508 4,405 2,097 44 28

Subtotal 57,291 27,156 20,323 36,968 6,833 65 25

Army

Anniston 4,512 3,192 2,614 1,898 578 42 18

Corpus Christi 4,714 4,009 3,338 1,376 671 29 17

Letterkenny 3,707 213 164 3,543 49 96 23

Red River 4,684 1,534 898 3,786 636 81 41

Tobyhanna 7,606 5,091 2,736 4,870 2,355 64 46

Subtotal 25,223 14,040 9,750 15,473 4,290 61 31

Total 157,016 97,129 73,618 83,398 23,511 53 24

(709246) Page 46 GAO/T-NSIAD-97-111
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