United States General Accounting Office

GAO Report to Congressional Committees

May 1996 DEFENSE DEPOT

MAINTENANCE

DOD’s Policy Report

Leaves Future Role of

Depot System

Uncertain

G O A

years

1921 - 1996

GAO/NSIAD-96-165

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-272042 

May 21, 1996

The Honorable Strom Thurmond

Chairman

The Honorable Sam Nunn

Ranking Minority Member

Committee on Armed Services

United States Senate

The Honorable Floyd Spence

Chairman

The Honorable Ronald Dellums

Ranking Minority Member

Committee on National Security

House of Representatives

As required by section 311 of the National Defense Authorization Act for

Fiscal Year 1996, this report provides our analysis of the Department of

Defense’s (DOD) report, Policy Regarding Performance of Depot-Level

Maintenance and Repair, which was submitted to Congress April 4, 1996.

Specifically, our analysis of the policy report addresses (1) the likely

future role of defense depots, (2) the adequacy of the depot maintenance

policy’s content, and (3) the inconsistency of DOD’s policy with current

statute and congressional direction in section 311 regarding the use of

public-private competitions. Our recent depot maintenance testimonies

discussed our preliminary findings on the policy report; this report

provides our overall analysis.1

Background DOD annually spends about $15 billion on depot maintenance activities at

29 major defense depots and at about 1,300 private contractors. Depot

maintenance involves repairing, overhauling, modifying, and upgrading

defense systems and equipment. It also includes limited manufacture of

parts, technical support, modifications, testing, and reclamation as well as

software maintenance. The primary depot maintenance workloads

assigned to DOD depots are those required to sustain core maintenance

capabilities. Core maintenance capability is the skilled personnel,

facilities, and equipment maintained at organic defense depots to meet the

readiness and sustainability requirements of the weapon systems that

support the Joint Chiefs of Staff contingency scenarios. Core maintenance

1

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

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

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capability exists to minimize operational risks, guarantee readiness of

weapon systems in war or contingency situations, and ensure a ready and

controlled source of technical competence.

A combination of factors has created extensive excess capacity in the DOD

depot system. These include (1) the downsizing of the armed forces due to

the end of the Cold War; (2) efforts by some DOD components to conduct

more repairs in field-level maintenance activities; (3) contracting out more

depot work to the private sector; and (4) the increased reliability,

maintainability, and durability of most military systems and equipment.

While depot maintenance personnel in DOD depots have been reduced by

43 percent since 1987, similar depot infrastructure reductions have not

been made. As of 1996, excess capacity in the DOD depot system is

projected to be about 40 percent, using an analysis of maximum potential

capacity and programmed workload as the basis for comparison and

assuming a 5-day week, one 8-hour-per-day shift operation. The excess

capacity varies in each service from a low of 33 percent in naval aviation,

to 35 percent for naval shipyards, 42 percent for the Army, and a high of

45 percent for the Air Force.

Some initiatives—namely consolidating workloads, implementing

competition between government depots and the private sector,

mothballing depot plant equipment, and tearing down unused buildings or

converting them to other military uses—have been used to reduce some of

the excess capacity. However, depot downsizing has largely occurred

through the Base Realignment and Closure (BRAC) process. Fifteen depots

have closed or are in the process of being closed as a result of BRAC

decisions.2 While this will eliminate some excess capacity,

privatization-in-place rather than closure and consolidation of workload in

remaining depots has been proposed for seven depots recommended for

closure or realignment. Privatization-in-place will result in privatizing

excess capacity rather than eliminating it.

Various statutes affect the mix of depot maintenance workload between

the public and private sectors. Title 10 U.S.C. 2464 requires the Secretary

of Defense to identify core logistics activities and to maintain them within

DOD depots unless the Secretary specifically waives that requirement. Title

10 U.S.C. 2466—referred to as the “60/40” rule—states that no more than

40 percent of the depot maintenance funds made available in a given fiscal

year may be spent for depot maintenance conducted by nonfederal

2

Additionally, the Red River Army Depot, which is being realigned rather than closed is not included in

this number.

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personnel. Title 10 U.S.C. 2469 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 private and public sector entities. DOD has requested relief from the

last two provisions and from other statutes affecting competition and

privatization. For example, the Department provided Congress a list of

statutory encumbrances to privatization, including:

• 10 U.S.C. 2461, which requires studies and reports before conversion to

contractor performance;

• 10 U.S.C. 2465, which prohibits contracts for performance of firefighting

or security guard functions;

• section 8050 of the DOD Appropriations Act for Fiscal Year 1996, which

permits public-private competition, but requires certification that bids

include comparable estimates of costs from public and private sector

bidders;

• section 317 of the National Defense Authorization Act for Fiscal Year 1987,

Public Law 99-661, which prohibits the Secretary of Defense from

contracting for the functions performed at Crane Army Ammunition

Activity or McAlester Army Ammunition Plant;

• 10 U.S.C. 4532, which requires that the Army shall have supplies made by

factories and arsenals if it can do so on an economical basis; and

• 10 U.S.C. 2305 (a) (1), which specifies that in preparing for the

procurement of property or services to be acquired, the Secretary of

Defense shall specify the agency’s needs and solicit bids or proposals in a

manner designed to achieve full and open competition.

In May 1996, DOD proposed a provision that would allow the Secretary of

Defense to acquire by contract from the private sector or any nonfederal

government entities those commercial or industrial type supplies and

services necessary or beneficial to the accomplishment of DOD’s authorized

functions, notwithstanding any provision of title 10 or any statute

authorizing appropriation for or making DOD appropriations.

Section 311 of the National Defense Authorization Act for Fiscal Year 1996

provides an indication of congressional intent regarding the continued

need for DOD depots:

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“It is the sense of Congress that there is a compelling need for the Department of Defense

to articulate known and anticipated core maintenance and repair requirements, to organize

the resources of the Department of Defense to meet those requirements economically and

efficiently, and to determine what work should be performed by the private sector and how

such work should be managed.”

Section 311 also directed the Secretary of Defense to develop a

comprehensive policy on the performance of depot-level maintenance and

repair for DOD that maintains the core capability described in 10 U.S.C.

2464 and to report to the Senate Committee on Armed Services and House

Committee on National Security. The section further directed that in

developing the policy, the Secretary should include certain elements, such

as providing for public-private competitions and performance of new

workloads defined as core in DOD depots. Congress wanted assurance from

DOD that essential organic core requirements would be sustained before it

would consider the repeal of 10 U.S.C. 2466 and 2469.

The DOD report, Policy Regarding Performance of Depot-Level

Maintenance and Repair, was submitted to your committees on April 4,

1996. We were required to report our analysis to Congress 45 days after the

DOD report was submitted. Our analysis of DOD’s depot maintenance

workload distribution report is provided separately in a companion report.3

Results in Brief The DOD depot maintenance policy report to a certain extent addressed

each of the elements required by section 311 of the 1996 DOD Authorization

Act and the report also provided some information not requested.

However, the policy is only a framework, is vague in several areas, and

provides wide latitude regarding how certain policies and concepts will be

implemented. Consequently, a precise analysis in all areas is not possible.

Notwithstanding the report’s limitations, our review shows the following

key points:

• The policy calls for a clear shift to a greater reliance on private sector

maintenance capabilities than exists today. For example, DOD’s future

public-private workload mix projections call for about a 50-percent split

by fiscal year 2001. Given the uncertainty of how the workloads will be

assigned under the policy and concerns we have about how DOD evaluates

3

Defense Depot Maintenance: More Comprehensive and Consistent Workload Data Needed for

Decisionmakers (GAO/NSIAD-96-166, May 21, 1996).

Page 4 GAO/NSIAD-96-165 Defense Depot Maintenance
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this data, it is likely the private sector percentage will be higher than

50 percent.4

• The policy is vague or provides wide implementation latitude in a number

of key areas, leading to questions as to what the practical effects it could

have once implemented. For example, the policy incorporates a new

process for performing risk assessments to determine which mission

essential maintenance requirements should be privatized. However,

guidance and criteria have not been provided for making the assessments.

Consequently, each service is now independently developing its own

methodologies for doing these assessments. Until this is done, or

preferably a single DOD methodology is adopted, and these assessments are

conducted, it is impossible to estimate with any precision the future

public-private depot maintenance workload mix.

The policy for determining the source of repair for new systems being

brought into the DOD inventory also is vague and provides wide

implementation latitude. The DOD policy provides a preference for

maintaining new systems in the private sector. While the policy recognizes

that some core capability will be maintained in the DOD depot system, it is

uncertain what these capabilities will represent in terms of workloads and

facilities. The policy establishes total life-cycle contractor logistics support

as the preferred future model for maintaining new systems that are not

identified as core. Contractor logistics support, which generally involves

long-term, sole-source contracting with the original equipment

manufacturer, has historically been used for military systems that are the

same as or derivatives of commercial systems. For these systems, the

existence of extensive supply and maintenance capability in the private

sector increases the probability that long-term support in the private

sector would be more cost-effective than transitioning the system to DOD

depots for support. However, it is unclear that this will be the most

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

Other areas, such as the acquisition of technical data and other resources

to support a competitive environment, use of interservicing, and

environmental liability, are similarly vague or also provide wide latitude

for implementation.

• The policy is inconsistent with congressional direction calling for

competition between public-private entities for noncore work. Section 311

directs that DOD’s policy should provide for competition between public

and private entities for noncore workloads when there is a sufficient

potential for realizing cost savings based on adequate private-sector

4

This issue is discussed further in our companion report.

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competition and technical capabilities. Instead, DOD’s policy is to exclude

DOD depots from competing except when there is not adequate private

sector competition. Under this policy, DOD depots would not be allowed to

compete for noncore workloads when there is adequate private sector

competition, even though they may offer the most cost-effective source of

repair.

Given the uncertainties associated with the implementation of DOD’s depot

maintenance policy, its precise effects on such factors as the

public-private mix of work, cost-effectiveness of operations, and excess

capacity in the existing DOD depot system are uncertain. However, a

possible result is a less cost-effective public depot system than exists

today. Central to avoiding this situation is developing an approach that

allows for excess capacity reduction and vigorous public-private

competition between the remaining DOD depots and commercial firms.

Also, it will be important to increase the competitiveness of the private

sector market. Our report contains matters for congressional

consideration and recommendations to DOD.

DOD Depots Will

Have a Future Role,

but Will Be Smaller

Than Before

DOD and Congress are defining the role of DOD depots in the post Cold-War

era. The new model for managing depot maintenance has not yet emerged.

However, given DOD’s depot maintenance policy report, the model

apparently will be a mix of public-private sector capabilities, but with a

clear shift toward greater reliance on the private sector. This shift is

reflected in DOD policy provisions that (1) call for a minimum core

requirement, (2) redefine core to allow for privatizing mission essential

requirements previously defined as core, (3) limit public depots from

competing with the private sector for noncore workloads, (4) provide a

preference for privatizing depot maintenance and repair for new systems,

and (5) provide disincentives for depots to compete. DOD’s Depot-Level

Maintenance and Repair Workload Report, submitted to Congress April 4,

1996, projected a 40-percent increase in the depot work that will be

privatized between fiscal years 1997 and 2001. However, since the services

have not completed their reassessments of core workload requirements, it

is not known how much more of their current and future depot

maintenance work will ultimately be determined to be noncore and

privatized. Unless effectively managed, including downsizing of remaining

depot infrastructure, a major shift in depot workloads to the private sector

could exacerbate existing excess capacity in the DOD depot maintenance

system and be more costly than the current system.

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Historically, depot maintenance on wartime critical DOD systems has been

largely performed in DOD depots. Based on both cost and risk factors, the

general DOD policy was to rely on DOD depots to provide a cost-effective,

reliable source of support for wartime readiness and sustainability. With

some exceptions, peacetime maintenance of weapon systems with

wartime taskings was performed in DOD depots. This peacetime workload

constituted the depot maintenance core. The core was determined by

quantifying the depot work that would be generated under war scenarios

and then computing the amount of peacetime work needed to employ the

number of people and skills necessary to support the anticipated wartime

surge. Peacetime workload was composed of a mix of high- and low-surge

items, which allowed employees to transfer from low-surge workload to

high-surge workload during war. While there were always a number of

potential war scenarios, the depots were sized to support a sustained

global war.

During the Cold War, there was not much pressure to move work from DOD

depots to the private sector. Military leaders expressed a clear preference

for retaining much of their work in DOD depots, which were highly flexible

and responsive to changing military requirements and priorities. The

quality of the DOD depots was high and users were generally well-satisfied

with the work. Further, the threat of a global war and the resulting stress

on the logistics system were constant reminders of the need to maintain

the flexibility and responsiveness the depot system provided.

Historically, DOD has reported that about 70 percent of its depot

maintenance work was performed in its depots. In a 1994 testimony, we

stated that our work showed that the private sector more likely received

about 50 percent of the DOD depot maintenance budget. We noted that a

portion of the funds expended on the maintenance workload assigned to

the public sector ultimately was used for private sector contracts for parts

and material, maintenance and engineering services, and other goods and

services. Additionally, some types of depot maintenance activities, such as

interim contractor support and contractor logistics support, were not

included in previously reported statistics.5

With the end of the Cold War and the subsequent declines in defense

spending, there are increased pressures to privatize more depot

maintenance work. Those declines affected force structure and the public

and private activities supporting force structure. As acquisition programs

5

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

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

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began to decline, a growing concern arose over the impact on the defense

industrial base. Particular concern focused on how that industrial base

could be maintained without the large development and production

programs of the past, and attention began to shift to DOD depot workloads

as a potential source of work to keep the industrial base viable.

Advocates of more private sector involvement argue that a shift toward

the private sector would not only help keep the private sector production

base healthy during a period of reduced weapon procurement but also

could lower costs, since the private sector could provide depot

maintenance for less than the public sector. Proponents of the DOD depot

system believe DOD depots have provided a quality, responsive, and

economical source of repair. They note that the DOD maintenance policy

for many years has supported the outsourcing of depot maintenance work

when it was determined to be cost-effective to do so. Further, they

contend there are substantial differences between developing and

producing new systems and maintaining fielded ones and that the dollars

spent on maintenance, while not small, cannot fill the void created by

declining production dollars.

Policy Provides

General Framework,

but Many Areas Are

Vague or Provide

Wide Implementation

Latitude

DOD’s new depot maintenance policy clearly states that, consistent with its

core policy, the Department has a preference for privatizing depot

maintenance support for new systems and for privatizing existing noncore

workload. This represents a fundamental shift in the historical policy of

relying on DOD depots to provide for the readiness and sustainment of

wartime tasked weapon systems. Although the precise effects of its

implementation are unknown at this time, it is likely the DOD depots will

have significantly less work than in the past. While the policy recognizes

the need to maintain a limited core capability in the DOD depot system, it

provides wide implementation latitude that could result in the DOD depot

system becoming greatly underutilized and thereby becoming very

inefficient and costly. The policy does not address how DOD intends to

further downsize its depot maintenance capacity and improve the

efficiency and cost-effectiveness of remaining DOD depot maintenance

infrastructure.

DOD’s report, Policy Regarding Performance of Depot-Level Maintenance

and Repair, provides an overall, but limited, framework for managing

depot maintenance activities. The policy reiterates some past policies;

identifies some new plans and initiatives; references and incorporates a

number of other directives, publications, memorandums, and decisions;

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B-272042 

and notes that DOD later plans to develop an updated single publication

with applicable maintenance policy guidance. The policy and its

supporting documentation contain information relating to each of the nine

content elements required by Congress, but in varying levels of

completeness and detail.

Risk Assessment Policy

Could Significantly Reduce

Existing DOD Depot

Workloads

The policy report does not contain specific direction and criteria for

implementing key provisions critical to articulating core requirements and

allocating resources between the public and private sectors. This is

particularly the case for the core methodology model, which the services

are to use to determine core capability requirements and the workloads

necessary to sustain these capabilities. While the policy describes the

model and provides an overview of its procedures, it does not provide

guidance and performance criteria for assessing private sector

capabilities, establishing risk thresholds, and making best value

determinations. Such guidance is critical to both implementing the model

and determining whether mission essential workloads previously

determined to be core and performed in public depots can be outsourced

at acceptable levels of risk. Until this guidance and criteria are established

and implemented, the core requirements that will result from the new

policy cannot be predicted with any precision.

Moreover, in the absence of clear “how-to” guidance and criteria, each

service is developing its own approaches and methods for implementing

the model. Each is independently planning and developing a process for

assessing private sector capabilities, determining levels of risk and

prudent risk thresholds, and making economy of scale and best value

adjustments. Several independent efforts are already under contract. This

duplication of effort among the services is costly and will likely result in

inconsistent implementation of the methodology. Office of the Secretary of

Defense (OSD) officials acknowledged the need to develop and publish

standard risk assessments, best value criteria, and other implementing

guidance and criteria. However, specific plans and milestones for doing

this have not yet been established.

As an indication of how the policy might affect workload allocations, we

noted that DOD has recently taken several existing workloads previously

defined as core and redesignated them noncore. For example, at the

Aerospace Guidance and Metrology Center, the Air Force is privatizing

depot maintenance operations involving 627,000 million direct labor hours

of work—100 percent of which had been previously defined as

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B-272042 

core—stating that because the workload is being privatized in place, the

risk is manageable. It is unclear how risky that privatization may turn out

to be in light of the contractor’s interest in divesting itself of its defense

business and the fact that the contractor is not contractually obligated to

perform the maintenance work at the privatized facility. A similar rationale

is being used to support other in-place privatizations. In addition, the Air

Force’s selection of five prototype workloads for possible privatization

includes work previously classified as core and performed at public

depots. For example, 100 percent of the peacetime hydraulics workload at

Sacramento Air Logistics Center and 100 percent of the peacetime fuel

accessories workload at San Antonio Air Logistics Center are considered

core based on military surge requirements to support contingency

operations. Core depot maintenance workload at other depot maintenance

activities are also being privatized-in-place.6

Implementation of Risk

Assessment Policy Could

Significantly Reduce Core

Requirements for New

Systems

Section 311 directed that DOD’s depot maintenance policy should provide

for the performance of maintenance and repair of any new systems

defined as core under 10 U.S.C. 2464 in facilities owned and operated by

the federal government. Because of the Department’s expressed

preference for privatizing depot maintenance for future systems and the

wide latitude for defining core requirements for new systems, future core

requirements for new systems are likely to be far less than in the past.

While DOD recognizes the need to retain a limited core capability, it is

uncertain whether new systems with wartime taskings will be identified as

core after DOD considers privatization through its risk assessment process.

As an example of the change in the Department’s concept of core, DOD’s

workload report stated that the Air Force core would represent the

capabilities needed to ensure competence in overseeing depot

maintenance production that has both public and private sector elements.

Further, DOD’s 1996 report to Congress, Improving the Edge Through

Outsourcing, stated that DOD will consider privatizing other maintenance

activities essential for meeting wartime taskings and previously identified

as core, such as intermediate maintenance conducted at field operating

locations. With such wide latitude for defining core, it is uncertain the

extent to which the Department will continue to support wartime mission

taskings with DOD core maintenance capability.

6

We are reporting separately on privatization-in-place plans for these two centers and at Army and

Navy Depots.

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Most New Systems to Be

Maintained by the Private

Sector but Implementation

Questions Exist

Directions for Defense, the May 1995 report of the Commission on Roles

and Missions of the Armed Forces recommended that DOD privatize most

existing depot maintenance work and all support for new and future

weapon systems. In his August 24, 1995, letter to Congress, the Secretary

of Defense agreed with the Commission’s recommendations but expressed

a need for DOD to retain a limited organic core capability to meet essential

wartime surge demands, promote competition, and sustain institutional

expertise. DOD established joint teams and working groups to plan and

direct efforts aimed at increasing privatization and outsourcing. DOD’s

January 1996 report, Plan for Increasing Depot Maintenance Privatization

and Outsourcing, provides for substantially increasing reliance on the

private sector for depot maintenance. It noted that DOD planned to freeze

the transition of workloads from the private sector to DOD depots. DOD’s

March 15, 1996, Instruction 5000.2 stated the following regarding depot

maintenance for new systems.

“It is DOD policy to retain limited organic core depot maintenance capability to meet

essential wartime surge demands, promote competition, and sustain institutional expertise.

Support concepts for new and modified systems shall maximize the use of contractor

provided, long-term total life-cycle logistics support that combines depot-level maintenance

along with wholesale and selected retail materiel management functions. Life-cycle costs

and use of existing capabilities, particularly while the system is in production, shall play a

key role in the overall selection process. Other than stated above, and with an appropriate

waiver, DOD organizations may be used as substitutes for contractor-provided logistics

support, such as when contractors are unwilling to perform support, or where there is a

clear, well-documented cost advantage.”

The policy and DOD Instruction 5000.2 also change the decision-making

chain over workload assignments, the factors considered, and related

impacts on core. Previously, the service logistics chiefs, working in

conjunction with functional organic depot maintenance and business

managers, would make overall core assessments and provide input to

source-of-repair decisions on new weapon systems to ensure that overall

core capabilities were maintained. The services used a merit-based

decision tree to determine source-of-repair assignments based on cost,

military risks, and core requirements. DOD’s new policies place these

fundamental life-cycle support decisions under the service acquisition

representatives responsible for the weapon system. It is also unclear how

acquisition managers will evaluate whether or not a new system or

technology must be sustained organically to support future competition

and future depot maintenance core requirements, including retention of

required institutional skills. The acquisition community has not been given

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a solid framework for making these decisions and there does not seem to

be any provision for involving the functional depot maintenance

community in the process. Thus, a source-of-repair decision on an

individual weapon system may be suboptimal to the entire logistics system

and not provide in the aggregate needed core capability.

Cost-Effectiveness of DOD

Policy Preference for

Contractor Logistics

Support Questionable

The policy further establishes contractor logistics support as the preferred

management model for new and future systems that are not considered

core. Contractor logistics support provides for lifetime support in the

private sector, to include depot-level maintenance and repair and,

sometimes, supply operations and materiel management functions at retail

and wholesale levels. Air Force managers have found this approach to be a

cost-effective tool when the system is a commercial derivative, where

there is meaningful competition in the private sector for production and

repair of the system, and where a logistics infrastructure is already

established in the private sector. These conditions are not present for

those weapon systems that are military unique and which often represent

the cutting edge of technology.

Cost is also a concern when relying on lifetime support arrangements.

Under contractor logistics support, the original equipment manufacturer

usually receives the contractor logistics support contract, at least for a

period of time when the system is first fielded. The manufacturer is usually

the only contractor initially capable of producing, modifying, and

maintaining the system. Our work has demonstrated how often depot

work is sole sourced, often to the original equipment manufacturer, and

the implications of sole-source contracting on costs and future

competition potential.7

 For example, the Air Force is achieving significant

savings as a result of interservicing its F404 engine to a Navy depot rather

than continuing to contract on a sole-source basis with the equipment

manufacturer as it had done in the past. Also, the Air Force has reported

large contract savings after recompeting some contractor logistics support

contracts, often moving the work from the manufacturer to other

commercial firms.

Another issue regarding the privatization of new workloads using the

contractor logistics support concept is the long-term impact on the depots’

ability to provide a credible competitive source and maintain technical

competence on new systems, leading edge technologies, and critical repair

7

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

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

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processes. One stated reason for maintaining core is to sustain in-house

technical competence—skilled maintenance workers, engineers,

contracting officials, and program managers—to minimize technological

risks. Without new work, as older systems are phased out of the inventory,

the DOD depots could not remain viable, as they would become obsolete

and increasingly inefficient as older workloads dwindled. As the depot

technologies aged, it would also be more difficult for management

personnel to maintain engineering and technical experience on new

technologies performed exclusively in the private sector. DOD officials

consider these skills essential for proper management of depot

maintenance workload, whether in the public or private sector.

Other Key Policy Areas Are

Vague or Provide Wide

Implementation Latitude

While DOD’s policy report covered to some degree all the elements

Congress required, we found some elements to be vague or subject to wide

latitude in its implementation. For example:

• Congress required that the DOD policy provide for meeting core depot

maintenance requirements economically and efficiently and specified that

the depots be assigned sufficient workloads to ensure cost-efficiency

during peacetime. DOD’s policy states the Department’s intention to

provide for cost-efficiency, sufficient workload, and technical proficiency

in its depots, but does not provide specific plans and processes to do so.

On the contrary, the policy’s preference for outsourcing new and

established workloads and its limitations on doing noncore workloads in

public depots would seem, in the long term, to decrease utilization,

increase excess capacity, and make depots increasingly inefficient. The

policy does not provide for reorganizing, consolidating, or closing

additional facilities to deal with the resulting excess capacity and

inefficiency. Without such a plan, it is not clear how DOD intends to

significantly increase the amount of depot maintenance workload in the

private sector while economically and efficiently utilizing its depot

capability.

• Congress required that DOD identify depot-level maintenance and repair

activities that are necessary to ensure the depot-level maintenance repair

capability required by 10 U.S.C. 2464. The DOD report listed current DOD

maintenance facilities where core workload is performed, but did not

identify information on weapon system workloads and key technology

areas that are needed to maintain core capabilities. Further, without

having more complete information regarding how repair base and risk

assessments are to be conducted, DOD cannot identify what specific

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maintenance workloads will be retained in DOD depots as core under its

new core methodology.

• In section 311, Congress required that the DOD policy provide for the

transfer from one military department to another using merit-based

selection processes workloads that supports core depot-level maintenance

and repair capabilities. The policy report restates existing policies and

procedures and identifies the organizations involved in interservicing

decisions. However, it provides no new plans or initiatives. We and others

have reported in the past on redundancies and underutilization in DOD’s

depot maintenance operations and have recommended increased

integration of the services’ depot maintenance operations. Most recently,

we reported that because DOD has made limited progress over the past 

20 years in interservicing workloads, it appears unlikely that this

cost-reduction tool will be used on a widespread basis. We noted that the

continued emphasis on a servicewide core rather than DOD-wide core

inhibits interservicing opportunities.8

 It is unclear how DOD can support

interservicing while increasing the number of workloads being privatized.

For example, we noted that interserviced workloads have been among the

first to be offered for privatization as a result of recent privatization

initiatives.

• The policy stresses the importance of acquiring adequate technical data to

support competitive procurements and references revised acquisition

guidance relative to new systems and modifications. It also discusses at

some length new information technology that can improve access to data

and its management. It does not discuss or prescribe specific management

actions and guidance for resolving data issues on established workloads.

An example would be the releasibility and transfer of proprietary data on

work previously done by the depots but is now outsourced or to be

accomplished at privatized-in-place facilities. Our work shows that

proprietary data issues are important factors in limiting competitions for

depot maintenance contracts.9

• Congress provided that the depot maintenance policy address

environmental liability, an important issue given the extent of pollution at

public depots and plans to close bases and privatize work in place. The

policy expresses DOD’s intent to use sound management practices to limit

and control pollutants and also references Superfund legislation, which

makes DOD responsible for cleaning up its facilities and prohibits transfer

8

Closing Maintenance Depots: Savings, Workload, and Redistribution Issues (GAO/NSIAD-96-29,

March 4, 1996).

9

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

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

Page 14 GAO/NSIAD-96-165 Defense Depot Maintenance
B-272042 

of property to nonfederal ownership until cleanup is completed or a

remedial plan is approved. We have previously reported on increased

costs, delayed cleanup, indemnification and sharing of costs with

contractors, and other legal issues associated with Superfund and DOD’s

environmental liability.10 One of the key issues is how environmental

liability will be handled at closing industrial facilities. The report stated

that environmental restoration liability must be addressed when DOD

closes, sells, donates, or operates as a government-owned,

contractor-operated facility, but it did not provide any specifics. Further,

the policy does not address the environmental liability for private

contractors performing depot maintenance work.

Effective Implementation

Requires Excess Capacity

Reduction and a

Competitive Environment

The policy’s determination to (1) size depots to a minimum core workload,

(2) limit public-private competitions to relatively minor and obsolete

workloads, (3) reduce other depot work by the amount won during

competitions, (4) restrict the depot’s ability to obtain new workloads, and

(5) apply best value concepts only for last-source workloads and other

work the private sector cannot or will not provide will decrease the

maintenance workloads assigned to DOD depots. The combination of these

conditions—if not effectively managed to include further reductions in

infrastructure and development of competitive markets—would likely

result, over the long term, in DOD depots becoming an economic liability

rather than a cost-effective partner in the total DOD industrial base. The

DOD policy report states that the Department will provide for

cost-efficiency, sufficient workload, and technical proficiency in its

depots. However, accomplishing this objective will be difficult because the

depots already are underutilized and the policy providing for additional

outsourcing would exacerbate that situation, unless there are additional

depot closures. Further, the report does not provide a clear indication,

aside from recognizing ongoing base closure and realignment decision

actions, about how the Department intends to downsize to minimum core.

10Military Bases: Environmental Impact at Closing Installations (GAO/NSIAD-95-70, Feb. 23, 1995).

Page 15 GAO/NSIAD-96-165 Defense Depot Maintenance
B-272042 

DOD Policy Is

Inconsistent With

Congressional

Guidance With

Respect to Competing

Noncore Workloads

Maintained in DOD

Depots

Section 311(d)(5) of the act provides that for depot maintenance

workloads in excess of that required to be performed by DOD depots, 

(i.e., noncore workloads), DOD’s policy should provide for competition

“between public and private entities when there is sufficient potential for

realizing cost savings based upon adequate private-sector competition and

technical capabilities.” DOD’s policy is inconsistent with this instruction.

According to DOD, it will engage in public-private competition for

workloads in excess of core only when it determines “there is not

adequate competition from private sector firms alone.” The report did not

clarify what would constitute adequate competition. Under this policy, DOD

depots would be used sparingly for public-private competitions and DOD

depots cannot compete for all noncore workloads where “adequate private

sector competition” exists, even though they may offer the most

cost-effective source of repair. Also, if a competition were conducted and

a DOD depot won, the current DOD policy provides for reviewing the depot’s

other existing workloads for possible outsourcing or interservicing. This

workload displacement provision, in effect, creates a disincentive for DOD

depots to compete.

Closely related to competition issues is the concept and application of best

value. The policy mentions best value many times, but usually in reference

to private-private competitions. The policy excludes DOD depots from a

best value analysis for workloads judged to have sufficient private sector

competition. The policy does provide for including DOD depots for best

value assessments in situations where there is limited competition, the

government is the last source of repair, or the private sector cannot or will

not compete.

We have reported that public-private competition can be a beneficial tool

for determining the optimum cost-effective source of repair for noncore

workloads. As noted in our recent reports on the Navy’s depot

maintenance public-private competition programs for ships and aviation,

we found that these competitions generally resulted in savings and

benefits and provided incentives for DOD depot officials to reengineer

maintenance processes and procedures, to develop more cost-effective

in-house capability, and to ensure that potential outsourcing to the private

sector is more cost-effective than performing the work in DOD depots.11

We recognize the public-private competition concerns about the reliability

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

11Navy Maintenance: Assessment of the Public-Private Competition Program for Aviation Maintenance

(GAO/NSIAD-96-30, Jan. 22, 1996) and Navy Maintenance: Assessment of the Public and Private

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

Page 16 GAO/NSIAD-96-165 Defense Depot Maintenance
B-272042 

maintenance management information systems. However, these

deficiencies are not insurmountable. As we discussed in our prior reports

on the public-private competition program, many of the problems were

internal control deficiencies that can be addressed with adequate top-level

management attention. Further, we noted that some corrective actions

have already been undertaken and additional improvements can be made.

We recommended that the Defense Contract Audit Agency be used to

certify internal controls and accounting policies and procedures of DOD

depots to ensure they are adequate for identifying, allocating, and tracking

costs of depot maintenance programs and to ensure proper costs are

identified and considered as part of the offers by DOD depots. DOD has

stated that it plans to use the Defense Finance and Accounting Service to

review and certify the accounting systems of DOD depots.

Matters for

Congressional

Consideration

Since DOD’s policy report did not provide for public-private competition

consistent with the direction of section 311 of the 1996 Defense

Authorization Act, Congress may wish to consider providing new direction

regarding DOD’s use of public-private competition and the manner in which

those competitions should be conducted.

Recommendations We recommend that the Secretary of Defense:

• Direct the military services to work with OSD to jointly develop consistent

policies and methodologies for assessing private sector repair capabilities

and determining prudent risk thresholds for assigning mission essential

workloads to the private sector. The methodology should, at a minimum,

identify specific qualitative and quantitative factors to be evaluated in this

process.

• Establish specific milestones for completing the new depot maintenance

policy and individual guidance and criteria necessary to the

implementation of the policy’s various components.

• Develop a set of measurable goals to determine if DOD’s depot maintenance

policy is achieving the desired objectives, such as eliminating excess depot

maintenance capacity, restructuring remaining depots to improve their

efficiency and capacity utilization, decreasing depot maintenance costs,

and improving readiness.

Page 17 GAO/NSIAD-96-165 Defense Depot Maintenance
B-272042 

Agency Comments DOD officials commented orally on a draft of this report. These officials

stated that DOD only had a short time to develop the policy and workload

reports. However, they believe the reports were comprehensive and

provided more than was required by the 1996 Defense Authorization Act.

Nonetheless, the officials generally concurred with the findings and

recommendations in this report. We have made technical corrections in

several areas to address their comments.

Scope and

Methodology

We reviewed DOD’s report, Policy Regarding Performance of Depot-Level

Maintenance and Repair, which was submitted to Congress April 4, 1996.

We compared the report’s provisions against the congressional content

requirements and other considerations in section 311 of the National

Defense Authorization Act for Fiscal Year 1996. We identified areas of

compliance and areas where the policy was inconsistent or had potential

adverse impacts or significant management challenges. From each military

service, we obtained back-up data, comments on the policy, and report

inputs. We evaluated related events and management actions, including

OSD and service privatization and outsourcing plans, revised acquisition

policy guidance, and results from recent source-of-repair assignment

decisions and interservicing. We drew extensively from information

gathered in our related reviews of depot maintenance, including

privatization-in-place, closing depots, public-private competitions, and

depot maintenance contracting.

We interviewed officials and examined documents at OSD and Army, Navy,

Marine Corps, and Air Force headquarters, Washington, D.C.; Army

Materiel Command, Alexandria, Virginia; Naval Air Systems Command,

Arlington, Virginia; Naval Sea Systems Command, Arlington, Virginia;

Marine Corps’ Logistics Plan and Strategic Mobility Division, Arlington,

Virginia; Air Force Materiel Command, Wright-Patterson Air Force Base,

Ohio; Naval Aviation Depot, Jacksonville, Florida; Ogden Air Logistics

Center, Ogden, Utah; Oklahoma City Air Logistics Center, Oklahoma City,

Oklahoma; and Warner Robins Air Logistics Center, Warner Robins,

Georgia.

We conducted our review from February to May 1996 in accordance with

generally accepted government auditing standards.

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

Minority Members, House and Senate Committees on Appropriations, the

Page 18 GAO/NSIAD-96-165 Defense Depot Maintenance
B-272042 

Senate Committee on Governmental Affairs and the House Committee on

Government Reform and Oversight; the Secretaries of Defense, the Army,

the Navy, and the Air Force; and the Director, Office of Management and

Budget.

Please contact me at (202) 512-8412 if you or your staff have any questions.

The major contributors to this report are listed in appendix I.

David R. Warren

Director, Defense Management Issues

Page 19 GAO/NSIAD-96-165 Defense Depot Maintenance
Appendix I 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

James Wiggins, Associate Director

Julia Denman, Assistant Director

Marilyn Wasleski, Senior Evaluator

Glenn Knoepfle, Senior Evaluator

Gregory Harmon, Evaluator

Paul Newton, Evaluator

Office of General

Counsel, Washington,

D.C.

John Brosnan, Assistant General Counsel

Chicago Field Office Bruce Fairbairn, Evaluator-in-Charge

Los Angeles Field

Office

Dennis DeHart, Senior Evaluator

Jean Orland, Evaluator

(709185) Page 20 GAO/NSIAD-96-165 Defense Depot Maintenance
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