a

GAO

United States General Accounting Office

Report to Congressional Committees

October 2002 INFORMATION 

TECHNOLOGY

Issues Affecting Cost 

Impact of Navy Marine 

Corps Intranet Need to 

Be Resolved

GAO-03-33
To date, NMCI has not measurably affected either IT costs at shipyards

and air depots or the rates they charge customers. This is because the

network, while originally planned to be in place at these activities in

fiscal year 2002, is now not to be implemented at them until the latter

part of fiscal year 2003.

For fiscal year 2003, budget estimates show that NMCI will represent

about 2 percent of total costs at shipyards and air depots. As a

percentage of IT costs, NMCI costs will be more significant: about 38

percent at shipyards and 31 percent at air depots. According to shipyard

and depot officials, estimated NMCI costs (which are a component of

overhead costs) will not affect the rates charged to customers in fiscal

year 2003 because they will be offset by cost reductions in other

overhead areas, such as travel, training, and real property maintenance.

Beyond fiscal year 2003, the impact of NMCI on IT costs and rates is

unclear, because several issues peculiar to shipyards and air depots are

unresolved, such as how the costs of some transition items will be

funded and whether these costs will be included in the rates. Also

uncertain is when these issues will be resolved, because no specific plans

for doing so exist, and no explicit issue management process has been

established. As a result, the shipyards’ and depots’ ability to effectively

plan and budget is being impaired.

 Impact of NMCI on IT Costs at Shipyards and Air Depots

No

measurable

impact

Estimated to

be between 31

and 38

percent of IT

costs Unclear

2002 2003 2004 2005

Source: GAO analysis based on data provided by the Department of the Navy.

INFORMATION TECHNOLOGY

Issues Affecting Cost Impact of Navy

Marine Corps Intranet Need to Be

Resolved

www.gao.gov/cgi-bin/getrpt?GAO-03-33.

To view the full report, including the scope

and methodology, click on the link above.

For more information, contact Randolph Hite,

(202) 512-3439 (hiter@gao.gov), or Gregory

Kutz, (202) 512-9095 (kutzg@gao.gov).

Highlights of GAO-03-33, a report to the

Committee on Armed Services, United

States Senate, and the Committee on

Armed Services, House of

Representatives

October 2002

Under the Navy Marine Corps

Intranet (NMCI) contract, the

Department of the Navy is

obtaining information technology

(IT) services that are to allow it to

replace thousands of independent

networks, applications, hardware,

and software with one secure

network. The National Defense

Authorization Act of 2002 directed

GAO to review the impact on IT

costs of NMCI at Navy shipyards

and air depots, which are

predominantly working capital

funded activities. Because this

funding model requires these

activities to recover all costs

through charges to customers,

GAO also reviewed NMCI’s impact

on shipyard and depot rates.

GAO is recommending that the

Navy establish a departmentwide

means for systematically capturing

and resolving NMCI

implementation issues that affect

the ability of shipyards and air

depots to plan and budget.

The Department of Defense

concurred with the report.
Page 1 GAO-03-33 Information Technology

United States General Accounting Office

Washington, D.C. 20548

A

October 31, 2002 Letr

The Honorable Carl Levin 

Chairman 

The Honorable John Warner 

Ranking Minority Member 

Committee on Armed Services 

United States Senate

The Honorable Bob Stump 

Chairman 

The Honorable Ike Skelton 

Ranking Minority Member 

Committee on Armed Services 

House of Representatives

The National Defense Authorization Act for fiscal year 2002 (Public Law 

107-107) directed us to review the impact of the Navy Marine Corps 

Intranet (NMCI) program on the information technology (IT) costs of Navy 

working capital funded industrial facilities. As agreed with your offices, our 

work focused on naval shipyards and air depots that operate under the 

Navy’s working capital fund. Because working capital funded facilities are 

required to set rates to recover all costs through charges to customers, our 

work also included NMCI’s impact on rates. 

NMCI is a multiyear program to outsource the vast majority of Navy and 

Marine Corps desktop, server, infrastructure, and communications asset 

and service needs. Through the NMCI services contract, the Navy plans to 

replace thousands of independent networks, applications, and other 

hardware and software with one secure network for all Navy and Marine 

Corps civilian and military personnel, including deployed forces. The Navy 

expects that significant benefits will accrue from NMCI over the life of the 

contract, including (1) an uninterrupted flow of information; 

(2) improvements to interoperability, security, information assurance, 

knowledge sharing, productivity, and operational performance; and 

(3) reduced costs. The Navy awarded the NMCI contract in October 2000 to 

Electronic Data Systems Corporation, for an estimated 412,000 to 416,000 
Page 2 GAO-03-33 Information Technology

workstations/seats1 and an estimated minimum value of $6.9 billion over 8 

years. 

On August 30 and September 6, 2002, we provided your offices a briefing on 

the results of this review, including our scope and methodology. This report 

transmits the briefing, which is reprinted as appendix I. 

In summary, NMCI has not to date measurably affected either IT costs at 

shipyards and air depots or the rates they charge customers, because NMCI 

implementation at these facilities has slipped from fiscal year 2002 to the 

latter part of fiscal year 2003. However, shipyard and depot officials stated 

that NMCI transition activities during fiscal year 2002, such as site 

readiness and preparation, have had a minor effect on costs. We could not 

quantify their impact on IT costs because these costs were not separately 

identified. 

For fiscal year 2003, budget estimates show that NMCI will make up about 

2 percent of total shipyard and depot costs and about 38 and 31 percent of 

shipyard and depot IT costs, respectively. Shipyard and depot officials told 

us that these NMCI cost estimates, which are a component of overhead 

costs, will not affect the rates charged to customers in fiscal year 2003 

because they plan to reduce budgeted costs in other overhead accounts, 

such as travel, training, and real property maintenance, to offset budgeted 

NMCI costs. However, if activities are not successful in implementing plans 

or in offsetting unexpected costs that may arise during the year, they could 

operate at a loss and thus be required to increase rates in subsequent fiscal 

years. 

The impact of NMCI on IT costs and rates beyond fiscal year 2003 is 

unclear because, as we reported in our briefing, several issues peculiar to 

shipyards and depots were unresolved, such as how the costs of some 

transition items would be funded and whether these costs would be 

included in the rates. Moreover, NMCI implementation plans did not 

provide for resolving them because responsibility for doing so had not been 

clearly assigned and the Navy did not have an explicit issue identification 

and resolution process. This exacerbates the uncertainty surrounding 

NMCI’s future impact on shipyard and depot costs and rates, and limits 

1

Seat management generally refers to service provision arrangements in which contractorowned desktop and other computing hardware, software, and related services are bundled 

and provided to a client (e.g., government agency) at a fixed price per unit (or seat).
Page 3 GAO-03-33 Information Technology

these activities’ ability to plan and budget. DOD subsequently told us these 

issues have been resolved, but did not provide supporting evidence and did 

not specify its process for issue identification and resolution and who is 

responsible for the process.

To ensure that existing and future issues are effectively and efficiently 

resolved, and thereby allow the shipyards and depots to make more 

informed planning and budgeting decisions, we recommend that the 

Secretary of Defense have the Secretary of the Navy direct the NMCI 

program manager, in collaboration with the Commanders of the Naval Sea 

Systems Command and the Naval Air Systems Command, to develop and 

execute an issue management process that resolves existing and future 

issues and includes

• participation by Navy shipyard and air depot officials,

• continuous identification of relevant and material NMCI implementation 

issues,

• shipyard and air depot implementation plans that include strategies for 

resolving these issues, and

• tracking of and reporting on issue resolution.

In response to a draft of this report, DOD provided what it termed “official 

oral comments” from the Acting Deputy Assistant Secretary of Defense for 

Command, Control, Communications, and Intelligence. In its comments 

DOD stated that it agreed with the report. DOD also provided updated 

information on the unresolved issues discussed in the briefing (app. I). We 

have incorporated the information as appropriate. 

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

Members of other Senate and House committees and subcommittees that 

have jurisdiction and oversight responsibilities for the Departments of 

Defense and the Navy. We are also sending copies to the Secretary of 

Defense; the Secretary of the Navy; the Commandant of the Marine Corps; 

the Assistant Secretary of Defense for Command, Control, 

Communications, and Intelligence; and the Director of the Office of 

Management and Budget. Copies will also be available at no charge on our 

Web site at www.gao.gov.
Page 4 GAO-03-33 Information Technology

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

report, please contact Randolph Hite at (202) 512-3439 or Gregory Kutz at 

(202) 512-9095. They can also be reached by E-mail at hiter@gao.gov and 

kutzg@gao.gov. Key contributors to this report were Barbara Collier,

William Hill, Greg Pugnetti, Ronnie Tobias, Carl Urie, and Robert 

Williams, Jr.

Randolph C. Hite

Director, Information Technology Architecture 

and Systems Issues

Gregory D. Kutz

Director, Financial Management and Assurance
Page 5 GAO-03-33 Information Technology

Appendix I

Briefing Presented to Subcommittees ApApenednxidexiIs

1

Impact of the Navy Marine Corps Intranet (NMCI)

on Information Technology Costs at Naval

Shipyards and Air Depots

Briefing for

Senate Armed Services Committee,

Subcommittee on Readiness and Management Support

and

House Armed Services Committee,

Subcommittee on Military Readiness

August 2002
Appendix I

Briefing Presented to Subcommittees

Page 6 GAO-03-33 Information Technology

2

Outline of Briefing

• Introduction

• Objective

• Scope and Methodology

• Results in Brief

• Background

• Results

• Near-Term Impact on Costs

• Near-Term Impact on Rates

• Longer Term Impacts on Costs and Rates

• Conclusions

• Recommendations
Appendix I

Briefing Presented to Subcommittees

Page 7 GAO-03-33 Information Technology

3

Introduction

The Navy-Marine Corps Intranet (NMCI) is a departmentwide, multiyear

information technology (IT) services contract to provide and manage the

vast majority of Navy and Marine Corps desktop, server, infrastructure, and

communications assets and services.

This type of contract is commonly referred to as “seat management” [1],

because it involves a number of distinct workstations or “seats” that will be

transitioned to a contractor (or contractors), who takes responsibility for

operating and maintaining the workstations, including applications and

supporting infrastructure, and for providing administrative and operations

support, such as help desk support.

[1] Seat management generally refers to service provision arrangements in which contractor-owned

desktop and other computing hardware, software, and related services are bundled and provided to a client

(e.g., government agency) at a fixed price per unit (or seat). See our report, Desktop Outsourcing: Positive

Results Reported, but Analyses Could Be Strengthened, GAO-02-329 (Mar. 23, 2002), for additional

information on seat management contracts.
Appendix I

Briefing Presented to Subcommittees

Page 8 GAO-03-33 Information Technology

4

Introduction (cont’d)

NMCI is to replace thousands of independent networks, applications, and

other hardware and software with one secure network for all Navy and

Marine Corps civilian and military personnel, including deployed forces.

Expected benefits include (1) an uninterrupted flow of information;

(2) improvements to interoperability, security, information assurance,

knowledge sharing, productivity, and operational performance; and

(3) reduced costs.

The Navy awarded the NMCI contract in October 2000 to Electronic Data

Systems Corporation, for an estimated 412,000 to 416,000

workstations/seats and an estimated minimum value of $6.9 billion over

8 years.
Appendix I

Briefing Presented to Subcommittees

Page 9 GAO-03-33 Information Technology

5

Objective

In the National Defense Authorization Act for Fiscal Year 2002 (Public Law

107-107), the Congress directed us to review the impact that participation

in NMCI has on IT costs of Navy working capital funded industrial facilities.

As agreed with the House and Senate Armed Services Committees, our

work focused on Navy shipyards and air depots that operate under the

Navy’s working capital fund [1]. Because working capital funded facilities

must set rates to recover all costs through charges to customers, our work

also included NMCI’s impact on rates.

[1] Three of the shipyards and all the air depots operate under the Navy Working Capital Fund; the Pearl

Harbor shipyard operates under an annual appropriation. When we refer in this briefing to the shipyards, we

do not include Pearl Harbor.
Appendix I

Briefing Presented to Subcommittees

Page 10 GAO-03-33 Information Technology

6

Scope and Methodology

We obtained and analyzed information from the following sites:

• NMCI Program Office, Arlington, Virginia [1]

• Navy Headquarters Budget Office, Arlington, Virginia [1]

• Naval Sea Systems Command, Washington, D.C. [1]

• Naval Air Systems Command, Patuxent, Maryland [1]

• Naval Air Depot, Cherry Point, North Carolina [1]

• Naval Air Depot, Jacksonville, Florida [1]

• Naval Air Depot, North Island, California

• Naval Shipyard, Portsmouth, New Hampshire [1]

• Naval Shipyard, Norfolk, Virginia

• Naval Shipyard, Puget Sound, Washington

• Office of the Assistant Secretary of Defense for Command, Control,

Communications, and Intelligence, Arlington, Virginia [1]

[1] Sites visited.
Appendix I

Briefing Presented to Subcommittees

Page 11 GAO-03-33 Information Technology

7

Scope and Methodology (cont'd)

We obtained and analyzed the following types of information:

• Budgeted information on overhead costs, IT costs, and NMCI costs for

fiscal years 2000 through 2003. At the time of our review, Navy had

not prepared its fiscal year 2004 budget estimates.

• Rates (prices that the shipyards and air depots charge their

customers) and that portion of the rates that was budgeted to cover

NMCI costs.

• Information on NMCI-like services and unresolved NMCI

implementation issues and perspectives on these issues from officials

at the shipyards and air depots and the NMCI program office.

We did not independently verify the accuracy or completeness of certain

information provided by the Navy, such as budgeted costs and rates.

We performed our work from March through August 2002 in accordance

with generally accepted government auditing standards.
Appendix I

Briefing Presented to Subcommittees

Page 12 GAO-03-33 Information Technology

8

Results in Brief

To date, NMCI has not measurably affected either IT costs at shipyards

and air depots or the rates they charge customers, because NMCI has not

been implemented at these facilities and is not expected to be in place until

the latter part of fiscal year 2003. However, shipyard and depot officials

stated that NMCI transition activities during fiscal year 2002, such as site

readiness and preparation, have had an effect on costs that cannot be

quantified because these costs were not separately identified.

For fiscal year 2003, budget estimates show that NMCI will make up about

2 percent of total shipyard and depot costs and about 38 and 31 percent of

shipyard and depot IT costs, respectively. Shipyard and depot officials told

us that these NMCI cost estimates, which are a component of overhead

costs, will not affect the rates charged to customers in fiscal year 2003

because they plan to reduce budgeted costs in other overhead accounts,

such as travel, training, and real property maintenance, to offset budgeted

NMCI costs.
Appendix I

Briefing Presented to Subcommittees

Page 13 GAO-03-33 Information Technology

9

Results in Brief (cont’d)

The impact of NMCI on IT costs and rates beyond fiscal year 2003 is

unclear because several issues peculiar to shipyards and depots are

unresolved, such as how the costs of some transition items will be funded

and whether these costs will be included in the rates. Moreover, when they

will be resolved is uncertain, because NMCI implementation plans do not

specifically provide time frames or procedures for doing so. The absence

of an explicit issue management process exacerbates the uncertainty

surrounding NMCI’s future impact on shipyard and depot costs and rates.

To reduce this uncertainty and allow the shipyards and depots to make

more informed planning and budgeting decisions, we are making

recommendations aimed at resolving these issues.

In its oral comments on a draft of this briefing, Defense officials agreed

with our findings, conclusions, and recommendations.
Appendix I

Briefing Presented to Subcommittees

Page 14 GAO-03-33 Information Technology

10

Background

NMCI is to replace thousands of independent networks, applications, and

other hardware and software with one secure network for all Navy and

Marine Corps civilian and military personnel, including deployed forces.

Expected benefits include

• uninterrupted flow of information;

• improvements to interoperability, security, information assurance,

knowledge sharing, productivity, and operational performance; and

• reduced costs.
Appendix I

Briefing Presented to Subcommittees

Page 15 GAO-03-33 Information Technology

11

Background (cont’d)

NMCI contract

NMCI is being accomplished through a multiyear IT services contract that

has a base period of 5 years plus a 3-year option period [1]. The contract is

a firm fixed-price, indefinite-delivery/indefinite-quantity contract with

performance incentives. Awarded on October 6, 2000, the contract covers

• delivery and maintenance of workstations and desktop applications;

• transmission of voice, video, and data; and

• infrastructure improvements.

[1] The contract was awarded to Electronic Data Systems (EDS) Corporation.
Appendix I

Briefing Presented to Subcommittees

Page 16 GAO-03-33 Information Technology

12

Background (cont’d)

Roles and responsibilities

Several organizations share responsibility for managing NMCI.

Organization NMCI roles and responsibilities 

Office of the Assistant Secretary 

of Defense for Command, 

Control, Communications and 

Intelligence (OASD C3I) 

Provides guidance, assesses compliance with the ClingerCohen Act, and oversees program management activities 

related to major milestone approvals for NMCI; is the 

milestone decision authority for the program. 

Navy Chief Information Officer Coordinates NMCI policy, planning, and interoperability 

issues. 

NMCI program office Manages the NMCI contract; creates and manages 

implementation of a Navywide NMCI execution plan. 

Parent commands [1] Manage implementation of NMCI at their facilities. 

Shipyards and air depots Carry out NMCI implementation, receive respective contracted 

services, and respond to customer satisfaction questionnaire 

related to services provided. 

[1] The parent command for the Naval shipyards is the Naval Sea Systems Command, and the parent command for 

Navy air depots is the Naval Air Systems Command. 
Appendix I

Briefing Presented to Subcommittees

Page 17 GAO-03-33 Information Technology

13

Background (cont’d)

Legislative requirements

Public Law 106-398 (2001 National Defense Authorization Act) and Public

Law 107-107 (2002 National Defense Authorization Act) mandated that

NMCI be implemented in phases and that NMCI program management

controls comply with the Clinger-Cohen Act and DOD acquisition

regulations.

Key features of implementation phases

Phase I:

• Beginning with contract award in October 2000, phase I covered about

15 percent or about 62,000 of the expected total of 412,000 to 416,000

seats.

• This phase excluded shipyards and air depots.
Appendix I

Briefing Presented to Subcommittees

Page 18 GAO-03-33 Information Technology

14

Background (cont’d)

Phase II:

• In phase II, tests and evaluations were required to demonstrate the

operational effectiveness of the network (whether the equipment,

operating software, and applications software performed as intended);

this phase did not require evaluations to determine whether expected

costs and benefits were being realized.

• On the basis of April 2002 test and evaluation results, which the

OASD C3I approved in May 2002, the Navy was allowed to order an

additional 100,000 seats and proceed with the remainder of the

program, subject to key improvements to management controls and

satisfaction of specific testing requirements (e.g., an updated test and

evaluation plan, a plan and schedule for migrating legacy applications

to NMCI, updates to the business case, and DOD senior-level review

of program results).

• Within phase II are 20,301 seats designated for shipyards and air

depots that operate under the Navy Working Capital Fund.
Appendix I

Briefing Presented to Subcommittees

Page 19 GAO-03-33 Information Technology

15

Background (cont’d)

Shipyards and air depots

Navy shipyards and air depots overhaul and repair ships, planes, and

engines and provide engineering, technical, and professional services on

maintenance and logistic problems to the Navy, DOD, and other federal

government customers. The locations of the Navy’s three shipyards and

three air depots are shown on the following slide.

The shipyards and depots that are under the Navy Working Capital Fund

operate similarly to commercial entities. That is, they do not receive an

annual appropriation, but receive their funding from customer orders, for

which they charge rates that must capture all costs of operations.

Rates charged customers in a given year are based on estimates of direct,

indirect (e.g., materials used for more than one project or purpose), and

overhead (e.g., IT support) costs for that year. If actual costs exceed

estimates, the shipyards and depots would operate at a loss for that year

and thus be required to increase rates in the subsequent year(s).
Appendix I

Briefing Presented to Subcommittees

Page 20 GAO-03-33 Information Technology

16

Naval Air Depot, Cherry

Point, North Carolina

Naval Shipyard,

Portsmouth, New

Hampshire

Naval Air Depot,

Jacksonville, Florida

Background

Shipyard and depot locations

Naval Shipyard, Norfolk,

Virginia

Naval Air Depot,

North Island,

California

Naval Shipyard,

Puget Sound,

Washington
Appendix I

Briefing Presented to Subcommittees

Page 21 GAO-03-33 Information Technology

17

Background (cont’d)

NMCI status/plans

Navywide:

• As of July 31, 2002, the Navy reports that EDS had assumed responsibility for

operating and maintaining 57,674 seats, and 19,536 of these seats had

reached “cutover” (the point at which the NMCI operating environment is to

function in full support of contracted service level agreements [1]).

Shipyards and air depots:

• A total of 20,301 NMCI workstations are planned for the three shipyards and

three air depots that operate using Navy working capital funds—12,336

workstations are planned for shipyards, and 7,965 workstations are planned

for depots, with cutover projected during June and July of 2003, respectively

[2]. (See table on next slide for more detailed breakout.)

[1] Service level agreements define the agency’s expectations (e.g., requirements in terms of system

performance objectives and customer satisfaction, often defined as specific agency mission outcome goals)

and are used to track and measure a contractor’s performance.

[2] According to shipyard and depot officials, the number of workstations actually implemented may be

different from what the table on the next slide indicates as they further review their workstation fiscal year

2003 requirements.
Appendix I

Briefing Presented to Subcommittees

Page 22 GAO-03-33 Information Technology

18

Background (cont’d)

NMCI status/plans (cont’d)

Shipyards Seats Start cutover 

Portsmouth 2,526 June 2003

Norfolk 4,610 June 2003

Puget Sound 5,200 June 2003

Subtotal 12,336

Air depots 

Cherry Point 2,630 July 2003

Jacksonville 2,935 July 2003

North Island 2,400 July 2003

Subtotal 7,965 

Total 20,301
Appendix I

Briefing Presented to Subcommittees

Page 23 GAO-03-33 Information Technology

19

Results: Near-Term Impact on Costs

No measurable impact to date

NMCI is not scheduled to be implemented at the shipyards and air depots

until the latter part of fiscal year 2003. Thus, through fiscal year 2002,

NMCI has had no quantifiable impact on IT costs or the rates that these

activities charged customers.

Unquantifiable impact may have occurred

According to shipyard and depot officials, delays in implementing NMCI

have resulted in shipyards and air depots performing activities multiple

times, resulting in increases in IT overhead costs in fiscal years 2001 and

2002.
Appendix I

Briefing Presented to Subcommittees

Page 24 GAO-03-33 Information Technology

20

Results: Near-Term Impact on Costs (cont’d)

Examples of activities that were performed multiple times include

• temporarily extending existing IT services contracts that NMCI is to

eventually supplant,

• revising the numbers and types of NMCI workstations to be ordered in

response to contractor updates of hardware and software available

since contract award,

• identifying legacy hardware and software applications that NMCI

cannot currently support, and

• inventorying existing IT assets in response to multiple program office

“data calls,” each governed by different rules and formats.
Appendix I

Briefing Presented to Subcommittees

Page 25 GAO-03-33 Information Technology

21

Results: Near-Term Impact on Costs (cont’d)

Our analysis of available documentation, such as the NMCI demand

models for the shipyards and depots, budget reports, NMCI-related

planning documents, and project team meetings, confirmed that these

activities have been performed. However, because the shipyards and

depots have not separately accounted for these costs, we could not

quantify their impact on IT costs. Shipyard and depot officials stated that

these costs were minimal.
Appendix I

Briefing Presented to Subcommittees

Page 26 GAO-03-33 Information Technology

22

Results: Near-Term Impact on Costs (cont’d)

Estimated impact on 2003 costs

The following charts show budget estimates developed by the shipyards and air

depots for fiscal years 2000 through 2003, assuming NMCI implementation in fiscal

year 2002. These estimates can be viewed as indicators of NMCI’s quantifiable

cost impact, with one key qualification:

Qualification: The shipyards’ and depots’ respective parent commands decided that NMCI’s

implementation at shipyards and depots in fiscal year 2002 and 2003 should not impact the rates

charged customers during this time. These budget estimates do not reflect the adjustments that would

have to be made to other overhead accounts, such as other IT costs, indirect labor, real property

maintenance, travel, and training, to offset the costs associated with NMCI and thereby not affect rates.

Based on the estimates and assuming that NMCI is implemented in fiscal year

2003, NMCI does not represent a significant portion of estimated total shipyard and

depot costs (1.8 percent for shipyards and 1.6 percent for depots), but it does

represent 38 percent and 31 percent of shipyard and depot IT costs, respectively

[1].

[1] The costs and resultant percentages shown on all the charts in this briefing are rounded amounts.
Appendix I

Briefing Presented to Subcommittees

Page 27 GAO-03-33 Information Technology

23

Results: Near-Term Impact on Costs (cont’d)

Cost estimates for shipyards (millions of dollars)

$1,996

$2,202

$2,299

$747

$773

$823

$861

$68

$69

$73

$106

$0

$0

$7

$40

$1,888

2000

2001

2002

2003

Total

Overhead

IT

NMCI

(100%)

(100%)

(100%)

(100%)

(40%)

(4%)

(0%)

(39%)

(3%)

(37%)

(3%)

(1.8%)

(5%)

(37%)

(0%)

(0.3%)

Fiscal

year

Note: Fiscal year 2002 estimates were developed in fiscal year 2001, assuming implementation in fiscal year 2002.

Fiscal year 2003 estimates were developed in fiscal year 2002, assuming implementation in fiscal year 2003.

Source: GAO analysis based on Navy data.
Appendix I

Briefing Presented to Subcommittees

Page 28 GAO-03-33 Information Technology

24

Note: Fiscal year 2002 estimates were developed in fiscal year 2001, assuming implementation in fiscal year 2002.

Fiscal year 2003 estimates were developed in fiscal year 2002, assuming implementation in fiscal year 2003.

Source: GAO analysis based on Navy data.

Results: Near-Term Impact on Costs (cont’d)

NMCI and IT cost estimates for shipyards (millions of dollars)

$68

$69

$73

$106

$0

$0

$7

$40

$0 $20 $40 $60 $80 $100 $120

2000

2001

2002

2003

IT

NMCI

(100%)

(100%)

(100%)

(100%)

(0%)

(0%)

(9%)

(38%)

Fiscal

year
Appendix I

Briefing Presented to Subcommittees

Page 29 GAO-03-33 Information Technology

25

Note: Fiscal year 2002 estimates were developed in fiscal year 2001, assuming implementation in fiscal year 2002.

Fiscal year 2003 estimates were developed in fiscal year 2002, assuming implementation in fiscal year 2003.

Source: GAO analysis based on Navy data.

Results: Near-Term Impact on Costs (cont’d)

Cost estimates for air depots (millions of dollars)

$1,607

$1,691

$1,820

$1,911

$571

$582

$620

$626

$57

$77

$94

$102

$0

$0

$28

$32

2000

2001

2002

2003

Total

Overhead

IT

NMCI

(100%)

(100%)

(100%)

(100%)

(36%)

(4%)

(0%)

(34%)

(5%)

(34%)

(5%)

(1.6%)

(5%)

(33%)

(0%)

(1.6%)

Fiscal

year
Appendix I

Briefing Presented to Subcommittees

Page 30 GAO-03-33 Information Technology

26

Note: Fiscal year 2002 estimates were developed in fiscal year 2001, assuming implementation in fiscal year 2002.

Fiscal year 2003 estimates were developed in fiscal year 2002, assuming implementation in fiscal year 2003.

Source: GAO analysis based on Navy data.

Results: Near-Term Impact on Costs (cont’d)

NMCI and IT cost estimates for air depots (millions of dollars)

$57

$77

$94

$102

$0

$0

$28

$32

$0 $20 $40 $60 $80 $100 $120

2000

2001

2002

2003

IT

NMCI

(100%)

(100%)

(100%)

(100%)

(0%)

(0%)

(30%)

(31%)

Fiscal

year
Appendix I

Briefing Presented to Subcommittees

Page 31 GAO-03-33 Information Technology

27

Results: Near-Term Impact on Rates

NCMI costs have not affected the total rate charged customers, but

they have affected the content of the overhead portion of the rate.

Both shipyards and air depots included estimated NMCI costs in the rates

they charge customers in fiscal years 2002 and 2003. However, as

previously mentioned, their respective parent commands directed that any

increase in budgeted IT costs caused by NMCI be offset by reductions in

other budgeted overhead accounts.

The following two charts show the allocation of budgeted costs within the

hourly rate structure for fiscal years 2000 to 2003. The budgeted costs of

the overhead accounts for fiscal years 2002 and 2003 were adjusted for

NMCI cost impact (i.e., NMCI costs are shown with the planned offset

adjustments in other overhead accounts).

Note: Activities have plans for reducing actual overhead costs during fiscal year 2003. If

activities are not successful in implementing plans or in offsetting unexpected costs that may

arise during the year, they could operate at a loss and thus be required to increase rates in

subsequent fiscal years.
Appendix I

Briefing Presented to Subcommittees

Page 32 GAO-03-33 Information Technology

28

Note: Fiscal year 2002 estimates were developed in fiscal year 2001, assuming implementation in fiscal year 2002.

Fiscal year 2003 estimates were developed in fiscal year 2002, assuming implementation in fiscal year 2003.

Source: GAO analysis based on Navy data.

Results: Near-Term Impact on Rates (cont’d)

Hourly rate data for shipyards

$70.22

$70.92

$72.01

$74.08

$36.95

$36.68

$36.27

$36.72

$3.36

$3.40

$3.18

$4.71

$0.00

$0.00

$0.34

$1.84

$0 $10 $20 $30 $40 $50 $60 $70 $80

2000

2001

2002

2003

Total hourly rate

Overhead portion

IT portion

NMCI portion

(100%)

(100%)

(100%)

(100%)

(53%)

(4.8%)

(0%)

(52%)

(4.8%)

(50%)

(4.4%)

(2.5%)

(6.4%)

(49%)

(0%)

(0.5%)

Fiscal

year
Appendix I

Briefing Presented to Subcommittees

Page 33 GAO-03-33 Information Technology

29

Note: Fiscal year 2002 estimates were developed in fiscal year 2001, assuming implementation in fiscal year 2002.

Fiscal year 2003 estimates were developed in fiscal year 2002, assuming implementation in fiscal year 2003.

Source: GAO analysis based on Navy data.

Results: Near-Term Impact on Rates (cont’d)

Hourly rate data for air depots

$128.49

$146.92

$151.61

$164.98

$45.64

$50.52

$51.63

$54.04

$4.59

$6.72

$7.82

$8.81

$0.00

$0.00

$2.37

$2.72

$0 $20 $40 $60 $80 $100 $120 $140 $160 $180

2000

2001

2002

2003

Total hourly rate 

Overhead portion

IT portion

NMCI portion

(100%)

(100%)

(100%)

(100%)

(36%)

(3.6%)

(0%)

(34%)

(4.6%)

(33%)

(5.2%)

(1.6%)

(5.3%)

(33%)

(0%)

(1.6%)

Fiscal

year
Appendix I

Briefing Presented to Subcommittees

Page 34 GAO-03-33 Information Technology

30

Results: Longer Term Impacts on Costs and Rates

Navy is not taking steps to resolve uncertainties surrounding NMCI

implementation at shipyards and air depots.

Working capital fund management policy advocates taking adequate steps

to avoid disruptive cost fluctuations and unforeseen cost changes [1]. This

policy recognizes that such steps allow for more accurate planning and

budgeting and more effective use of resources. One way to implement this

policy is to have a process for identifying those issues that could contribute

to cost fluctuations and changes and systematically plan for resolving

them.

[1] DOD Financial Management Regulation 7000.14R, Chapter 50, Defense Working Capital Fund General

Policies and Requirements, page 50-2, paragraph h.
Appendix I

Briefing Presented to Subcommittees

Page 35 GAO-03-33 Information Technology

31

Results: Longer Term Impacts on Costs and Rates

Beyond fiscal year 2003, shipyards and depots face potential cost

fluctuations and changes because important issues concerning NMCI’s

implementation have not been resolved.

• The NMCI program office has designated the time frame for

implementing NMCI at shipyards and air depots as “targeted” and

“proposed,” and program officials characterized the time frame as

tentative. Further, shipyard and depot officials told us that they

expect further delays in NMCI’s implementation.
Appendix I

Briefing Presented to Subcommittees

Page 36 GAO-03-33 Information Technology

32

Results: Longer Term Impacts on Costs and Rates

(cont’d)

• The NMCI program office has not decided who will pay for unique

requirements of shipyard and depot operations that may require

changes to the NMCI contract. Such requirements include

• arranging for workstations to accompany personnel as they

change locations (e.g., as ships move from dry dock to pier);

• securing unclassified naval nuclear propulsion information; and

• establishing and maintaining connections between NMCI and

existing networks (including classified networks) and certain

legacy applications and databases.
Appendix I

Briefing Presented to Subcommittees

Page 37 GAO-03-33 Information Technology

33

Results: Longer Term Impacts on Costs and Rates

(cont’d)

• The NMCI program office has not decided who will pay newly

identified and increased NMCI transition costs, such as the increased

costs associated with short-term contract actions to maintain existing

services until NMCI is implemented.
Appendix I

Briefing Presented to Subcommittees

Page 38 GAO-03-33 Information Technology

34

Results: Longer Term Impacts on Costs and Rates

(cont’d)

According to the NMCI program officials, these issues have not been resolved but

are being addressed in coordination with the Navy commands as they implement

NMCI.

Additionally, program officials said they have undertaken other actions to mitigate

NMCI’s impact such as

• using appropriated funds to pay for certain NMCI contract costs, such as fees

awarded the contractor for meeting performance incentives, facility support

costs (e.g., equipment to facilitate transition to NMCI), and physical space

costs;

• waiving the requirement for shipyards and depots to expense prior

investments, such as recently purchased computer equipment and other

capital assets that will be transferred to the contractor when NMCI is

implemented [1];

• working with the contractor to develop lower cost workstation (i.e., seat)

alternatives; and

• not distributing network connection and telecommunications costs to activities

like shipyards and air depots.

[1] We did not determine if the planned approach for accomplishing this was consistent with relevant

accounting principles.
Appendix I

Briefing Presented to Subcommittees

Page 39 GAO-03-33 Information Technology

35

Results: Longer Term Impacts on Costs and Rates

(cont’d)

These plans do not provide shipyard- and depot-specific actions and time

frames for addressing each of the issues raised by shipyards and depots.

Moreover, issues facing shipyards and depots in implementing NMCI are

not governed by an explicit Navywide process that would identify,

document, and track resolution of these issues. According to shipyard and

depot officials, the lack of a process is due to uncertainty surrounding roles

and responsibilities for resolving these issues.
Appendix I

Briefing Presented to Subcommittees

Page 40 GAO-03-33 Information Technology

36

Conclusions

NMCI has yet to impact costs at shipyards and air depots or the rates they

charge customers in any quantifiable way. Looking toward fiscal year 2003,

NMCI costs will likely have a minor impact on the allocation of shipyard

and depot overhead costs and the rates each activity charges, but total

costs and hourly rates should not change as a result of NMCI, because

these activities’ parent commands have decided to offset NMCI costs with

reductions in other overhead costs [1].

Looking beyond fiscal year 2003, NMCI’s impact on costs and rates is less

clear, because important implementation issues have not been resolved,

and the Navy is not systematically providing for their resolution. Such

uncertainty surrounding NMCI, and thus the costs that shipyards and

depots will incur, hampers these activities’ ability to effectively and

efficiently plan, budget, and use resources. Thus, it is important that the

Navy systematically plan for and resolve these issues.

[1] Activities have plans for reducing actual overhead costs during the year of execution—fiscal year 2003. If

they are not successful in implementing these plans or in offsetting unexpected costs that may arise during

the year, they could operate at a loss and thus be required to increase rates in subsequent fiscal years.
Appendix I

Briefing Presented to Subcommittees

Page 41 GAO-03-33 Information Technology

37

Recommendations for Executive Action

To assist Navy shipyards and air depots in preparing for NMCI’s impact on

their respective costs and rates, we recommend that the Secretary of

Defense have the Secretary of the Navy direct the NMCI program

manager, in collaboration with the Commanders of the Naval Sea Systems

Command and the Naval Air Systems Command, to systematically and

expeditiously resolve NMCI implementation issues that affect the ability of

shipyards and depots to plan and budget. In particular, we recommend that

the NMCI program manager work with these commanders to develop and

execute an issue management process that resolves each of the issues

discussed in this briefing and includes

• participation by Navy shipyard and air depot officials,

• continuous identification of relevant and material NMCI

implementation issues,

• shipyard and air depot implementation plans that include strategies for

resolving these issues, and

• tracking of and reporting on issue resolution.
Appendix I

Briefing Presented to Subcommittees

Page 42 GAO-03-33 Information Technology

38

Agency Comments and Our Evaluation

In the department’s oral comments on a draft of this briefing, officials from

the OASD(C3I), Office of the Navy Chief Information Officer, Naval Air

Systems Command, and Naval Sea Systems Command agreed with our

findings, conclusions, and recommendations. They also provided updated

and clarifying information, which we have incorporated as appropriate in

the briefing.

In addition to obtaining the department’s oral comments on a draft of this

briefing, we shared the contents of the briefing with NMCI program

officials, including the deputy program manager, when we completed our

audit work. These officials also agreed with our findings and conclusions,

but stated that our recommendations should be directed to the shipyard

and depot parent commands, rather than the NMCI program office.

According to the officials, the parent commands, along with the Comptroller

of the Navy, have all the information and authority necessary to resolve the

issues discussed in this briefing.
Appendix I

Briefing Presented to Subcommittees

Page 43 GAO-03-33 Information Technology

39

Agency Comments and Our Evaluation

The difference of opinion within the department on who the

recommendations should be directed to points to the need for the various

NMCI players to work collaboratively to resolve key issues and for one

entity to take the lead in doing so, as noted in our recommendations. Given

the program office’s defined role under the NMCI governance structure, as

well as the fact that resolving some of these issues requires interpretations

of NMCI contract provisions and interactions with the contractor (which

only the program office is positioned to do), our recommendations provide

for the program office, rather than the parent commands, to take this lead

role.

(310247)
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