Defense Budget: Trends in Operation and Maintenance Costs and Support Services Contracting
Published: 2007-05-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Defense (DOD) spent about 40 percent of the total defense budget to operate and maintain the nation's military forces in fiscal year 2005. Operation and maintenance (O&M) funding is considered one of the major components of funding for readiness. O&M appropriations fund the training, supply, and equipment maintenance of military units as well as the infrastructure of military bases. Over the past several years, DOD has increasingly used contractors, rather than uniformed or DOD civilian personnel, to provide O&M services in areas such as logistics, base operations support, information technology services, and administrative support. The House Appropriations Committee directed GAO to examine growing O&M costs and support services contracting. This GAO report (1) identifies the trends in O&M costs and services contracts and the reasons for the trends, (2) discusses whether increased services contracting has exacerbated the growth of O&M costs, and (3) provides perspectives on the benefits and concerns associated with increased contracting for support services. GAO analyzed DOD's O&M appropriations, budgets, and services contract costs over a 10-year period and developed case studies of outsourced O&M-related work at three installations. GAO is not making any recommendations. DOD made only technical comments on a draft of this report.
section_title: What GAO Found
paragraphs: DOD's O&M and services contract costs increased substantially between fiscal years 1995 and 2005, with most growth occurring since fiscal year 2001. DOD's O&M costs were almost constant between fiscal years 1995 and 2000. However, between fiscal years 2000 and 2005, DOD's O&M costs increased from $133.4 billion to $209.5 billion--an increase of $76.1 billion, or 57 percent, in constant fiscal year 2007 dollars. This growth was primarily caused by increased military operations associated with the global war on terrorism and other contingencies. In addition to increased O&M costs, DOD has increasingly relied on contractors to perform O&M-related work. Between fiscal years 2000 and 2005, DOD's services contract costs in O&M-related areas increased by 73 percent. According to DOD and service officials, several factors have contributed to the increased use of contractors for support services: (1) increased O&M requirements from the global war on terrorism and other contingencies, which DOD has met without an increase in active duty and civilian personnel, (2) federal government policy, which is to rely on the private sector for needed commercial services that are not inherently governmental in nature, and (3) DOD initiatives, such as its competitive sourcing and utility privatization programs. Sufficient data are not available to determine whether increased services contracting has caused DOD's costs to be higher than they would have been had the contracted activities been performed by uniformed or DOD civilian personnel. Because existing policy generally does not require a public/private competition for contractor performance of a new or expanded commercial requirement, in-house cost estimates have not been prepared for most of the work awarded to contractors as a result of increased O&M requirements from expanded military operations. Without this information, an overall determination cannot be made of the effect of increased services contracting on O&M cost growth. DOD does maintain data from its competitive sourcing, or A-76, program. GAO's analysis of the military services' reported information on 538 A-76 decisions during fiscal years 1995 through 2005 to contract out work formerly performed by uniformed and DOD civilian personnel showed that the decisions generally resulted in reducing the government's costs for the work. However, the number of A-76 public/private competition contracts is relatively small and the results from this program may not be representative of the results from all services contracts for new or expanded O&M work. Although DOD officials have cited certain benefits from increased use of contractors for support services, such as allowing more uniformed personnel to be available for combat missions, concerns have also been cited. For example, Congress recently required DOD to prescribe guidelines giving consideration to performing more work using government employees and GAO has noted concerns over DOD's approach to services acquisition.

section_title: Letter
paragraphs: The Department of Defense (DOD) spent about $210 billion, or 40 percent  The Department of Defense (DOD) spent about $210 billion, or 40 percent  of the total defense budget, to operate and maintain the nation’s military  of the total defense budget, to operate and maintain the nation’s military  forces in fiscal year 2005. As a major component of DOD’s funding for  forces in fiscal year 2005.
The committee further  increasing costs of operating our military forces.
Unless otherwise stated, operation and maintenance (O&M) costs in this report are total  obligation authority and are expressed in constant fiscal year 2007 dollars.
H.R. Rep. No. 109-504, at 46-47 (2006).
DOD’s adjustment factors. We discussed with DOD and service  headquarters officials the reasons for the trends and how greater reliance  on the private sector for O&M activities formerly performed in-house has  affected the overall O&M budget. We also assessed the availability of  information related to services contracts, reviewed and analyzed  information from DOD’s competitive sourcing, or A-76, program, and  visited three installations to develop case study examples of O&M-related  work that was contracted out either as a result of A-76 public/private  competitions or because the uniformed personnel who formerly  performed the work were needed to support other missions. For the case  study examples, we identified cost estimates for the work when performed  by government employees, the reasons that the work was contracted out,  the actual contract costs, and the reasons for any contract cost growth. We  did not review the actual contracts. In reviewing contract costs, we relied  on cost data provided by installation officials. We also discussed with  installation officials any consequences associated with increased  contracting out of O&M work. Additionally, we examined DOD’s response  to recent legislation requiring DOD to consider performing more work by  government employees, reviewed steps recently taken by the military  services to control support services contract costs, and summarized our  recent reports concerning DOD’s acquisition of services.
We conducted our review from August 2006 through March 2007 in  accordance with generally accepted government auditing standards. A  more detailed description of our scope and methodology is included in  appendix I.
subsections: section_title: Background
paragraphs: O&M appropriations support the training, supply, and equipment  maintenance of military units as well as the administrative and facilities  infrastructure of military bases. Along with military personnel costs, which  are funded with separate military personnel appropriations, O&M funding  is considered one of the major components of DOD’s funding for  readiness.
O&M funds provide for a diverse range of programs and activities that  include the salaries and benefits for most DOD civilian employees; depot  maintenance activities; fuel purchases; flying hours; base operations;  consumable supplies; health care for active duty service personnel and  other eligible beneficiaries; reserve component operations; and DOD-wide  support functions including several combat support agencies, four  intelligence agencies, and other agencies that provide common  information services, contract administration, contract audit, logistics, and  administrative support to the military departments.
The Congress provides O&M appropriations to 11 service-oriented O&M  accounts—the Army, Navy, Marine Corps, Air Force, Army Reserve, Navy  Reserve, Marine Corps Reserve, Air Force Reserve, Army National Guard,  Air National Guard, and defensewide—and to program accounts, such as  the defense health program. In addition to the regular annual O&M  appropriations, the Congress can make supplemental O&M appropriations  to finance the incremental costs above the peacetime budget that are  associated with contingencies, such as the GWOT.
Since late 1995, DOD has encouraged the services and the defense  agencies to conduct cost comparison studies as provided for in the Office  of Management and Budget’s Circular A-76. Under the A-76 process,  otherwise known as competitive sourcing, the military services and other  defense components conduct a public/private competition for a  commercial activity currently performed by government personnel to  determine whether it would be cost-effective to contract with the private  sector for that activity’s performance. On the other hand, a public/private  competition is not required for private sector performance of a new  requirement, private sector performance of a segregable expansion of an  existing commercial activity performed by government personnel, or  continued private sector performance of a commercial activity. However,  before government personnel may perform a new requirement, an  expansion to an existing commercial activity, or an activity performed by  the private sector, a public/private competition is required to determine  whether government personnel should perform the commercial activity.
The DOD Commercial Activities Management Information System is  DOD’s database of record established to meet reporting requirements on  the conduct of A-76 competitions and the results from implementing A-76  decisions, whether the decisions are to continue using government  employees to perform the work or to outsource the work. For contracts  awarded to the private sector, the database includes the estimated cost to  perform the work using government employees, the contract award  amount, the actual contract cost for each contract performance period,  and brief reasons for any cost growth over the performance periods. A  contract performance period is normally for 12 months, although the first  performance period may cover a shorter transition period when the work  is initially conveyed to the contractor. Contract information is to be  maintained through the end of the last performance period included in the  competition. Installation officials are responsible for reporting information  on the A-76 program for input into the DOD database.
section_title: O&M and Services Contract Costs Have Increased Significantly
paragraphs: Driven primarily by increased operations associated with GWOT and other  contingencies, DOD’s O&M costs increased substantially between fiscal  years 1995 and 2005, with the most growth occurring since fiscal year  2001. DOD’s reliance on contractors for support services also increased  substantially during this period in order to meet increased military  requirements without an increase in active duty and civilian personnel and  because federal government policy is to rely on the private sector for  needed commercial services that are not inherently governmental in  nature, which includes many of the requirements generated from the  GWOT in areas such as logistics and base operations support.
subsections: section_title: Most Growth in O&M Costs Occurred since Fiscal Year 2001
paragraphs: Although DOD’s O&M costs increased significantly between fiscal years  1995 and 2005, there was a distinct difference in the rate of growth  between the early and latter years of this 10-year period. Specifically, as  shown in figure 1, DOD’s annual O&M costs were practically constant until  2001, when the costs began to increase.
Figure 2 shows that during the first half of the 10-year period from fiscal  year 1995 to fiscal year 2000, DOD’s O&M costs increased about 1 percent.  In comparison, costs in DOD’s other major budget categories during this  period changed as follows: military personnel costs declined about 13  percent; procurement costs increased about 21 percent; research and  development costs increased about 4 percent; and other costs increased  about 1 percent. DOD total costs were almost constant between fiscal year  1995 and fiscal year 2000.
Figure 3 shows that a significant change in cost growth occurred during  the subsequent 5-year period from fiscal year 2000 to fiscal year 2005,  when DOD’s O&M costs increased about 57 percent. In the other major  budget categories during this period, military personnel costs increased  about 36 percent, procurement costs increased by about 62 percent,  research and development increased by about 62 percent, and other costs  increased about 13 percent. DOD total costs increased about 51 percent  between fiscal year 2000 and fiscal year 2005.
Trends in O&M costs at the military service level generally reflect the  overall DOD trend. As shown in figure 4, between fiscal years 1995 and  2000, little change occurred in each service’s O&M costs. However,  considerable cost growth occurred between fiscal years 2000 and 2005.  Among the services, the Army had the largest percentage of growth in  O&M costs between fiscal years 2000 and 2005. During this period, the  Army’s O&M costs increased by about 137 percent, while the Navy and  Marine Corps’ and the Air Force’s O&M costs increased by about 30  percent and 29 percent, respectively.
section_title: Increased Military Operations Were the Primary Reason for O&M Cost Growth
paragraphs: According to DOD and service officials, the primary cause for increased  O&M costs since fiscal year 2001 is the increase in military operations  associated with GWOT and other contingencies, including hurricane relief.  However, the officials also stated that other factors have contributed to  the growth in O&M costs, such as the aging of military infrastructure and  equipment; increased costs for installation security, antiterrorism force  protection, communications, information technology, transportation, and  utilities; and certain changes in acquisition approaches.
The fight against terrorism has resulted in operations and deployments  around the globe that are in addition to the usual peacetime operations.  According to DOD, the related costs have included not only the personnel  costs associated with mobilizing National Guard and reserve forces but  also the costs of supporting these forces and the increased pace of  operations. O&M-funded costs include a wide range of activities and  services supporting operations including costs related to   (1) predeployment and forward-deployed training of units and personnel;  (2) personnel support costs including travel, subsistence, reserve  component personnel activation and deactivation costs, and unit-level  morale, welfare, and recreation; (3) establishment, maintenance, and  operation of housing and dining facilities and camps in the theaters of  operation; (4) petroleum, oils and lubricants, spare parts, consumable end  items, and other items necessary to support the deployment of air, ground,  and naval units; (5) establishment, maintenance, and operation of facilities  including funds for roads, water, supply, fire protection, hazardous waste  disposal, force protection bunkers and barricades; (6) command, control,  communications, computers and intelligence within the contingency areas  of operations; (7) organization-level maintenance including repairs to  equipment and vehicles; (8) intermediate- and depot-level maintenance of  weapons and weapon system platforms requiring service after the wear  and tear of combat operations; and (9) contracts for services for logistics  and infrastructure support to deployed forces.
The additional military costs associated with GWOT and other  contingencies have been primarily funded through supplemental  appropriations. Figure 5 shows the annual amount of supplemental O&M  funds appropriated each year from fiscal year 2000 through fiscal year  2005. During this period, supplemental O&M appropriations totaled about  $210 billion and, according to the services, additional amounts were  transferred or reprogrammed from other accounts to the O&M accounts of  the military services.
Although costs associated with the GWOT and other contingencies have  been the primary reason for increased O&M costs between fiscal years  2000 and 2005, other factors also contributed to the O&M cost growth in  the military services. To illustrate, if the services’ annual O&M total  obligation authority is adjusted by removing annual supplemental O&M  appropriations and net transfers and reprogrammings into the O&M  account, the result shows that O&M costs still grew during this time  period, as illustrated in figure 6. Specifically, between fiscal years 2000 and  2005, O&M costs after the adjustment grew by about 44 percent in the  Army, 17 percent in the Navy and Marine Corps, and 2 percent in the Air  Force.
According to service officials, baseline O&M costs have increased between  fiscal years 2000 and 2005 because of many factors, such as aging of  military infrastructure and equipment, and increased costs for installation  security, antiterrorism force protection, communications, information  technology, transportation, and utilities. Navy officials particularly cited  the implementation of DOD’s utility privatization program as a factor  contributing to increased O&M costs. In a September 2006 report, we  noted that DOD’s utility costs could potentially increase by another $954  million to pay costs associated with remaining utility systems that might  be privatized. Increased O&M costs are also attributable to certain  changes in DOD’s acquisition approaches. For example, the Air Force  historically bought space launch vehicles, such as the Delta and Titan  rockets, as products paid for with procurement appropriations. Now,  under the Evolved Expendable Launch Vehicle program, the Air Force  uses O&M appropriations to purchase launch services using contractor- owned launch vehicles. The projected cost of this program is $28 billion.  Further, as we noted in our September 2006 report, the Army and the Air  Force turned to service contracts for simulator training primarily because  efforts to modernize existing simulator hardware and software had lost  out in the competition for procurement funds. As a result, the simulators  were becoming increasingly obsolete. Buying training as a service meant  that O&M funds could be used instead of procurement funds.
section_title: DOD’s Reliance on Contractors for Support Services Has Increased since Fiscal Year 2000 for Several Reasons
paragraphs: To meet military requirements during a period of increased operations  without an increase in active duty and civilian personnel, DOD has relied  not only on reserve personnel activations but also on increased use of  contractor support in areas such as management and administrative  services, information technology services, medical services, and weapon  systems and base operations support. Between fiscal years 2000 and 2005,  DOD’s service contract costs in O&M-related areas increased over $40  billion, or 73 percent. Table 1 highlights the growth in several service  contract categories.
DOD officials noted several factors that have contributed to DOD’s  increased use of contractor support. First, the GWOT and other  contingencies have significantly increased O&M requirements and DOD  has met these requirements without an increase in active duty and civilian  personnel. To do this, DOD relied not only on reserve personnel  activations, but also on increased use of contractor support.
Second, Office of Management and Budget Circular A-76 notes that the  long-standing policy of the federal government has been to rely on the  private sector for needed commercial services and that commercial  activities should be subject to the forces of competition to ensure that the  American people receive maximum value for their tax dollars. The  circular notes that a public/private competition—which can involve a  lengthy and costly process—is not required for contractor performance of  a new requirement or private sector performance of a segregable  expansion of an existing commercial activity. On the other hand, the  circular states that before government personnel may perform a new  requirement or an expansion of an existing commercial activity a  public/private competition is required to determine whether government  personnel should perform the work.
Third, DOD initiatives that have required that consideration be given to  outsourcing certain work performed by uniformed and DOD civilian  personnel have resulted in outsourcing decisions. For example, between  fiscal years 1995 and 2005, DOD’s competitive sourcing, or A-76  public/private competition, program resulted in 570 decisions to contract  out work that had been performed by over 39,000 uniformed and DOD  civilian personnel. Also, in 1997, DOD decided that privatization of military  installation utility systems was the preferred method for improving utility  systems and services because privatization would allow installations to  benefit from private sector financing and efficiencies. As of March 2006,  DOD had awarded contracts to privatize 117 systems and had an  additional 904 systems in various phases of the privatization evaluation  and solicitation process.
Fourth, service officials noted that in some instances certain personnel  issues tend to favor the use of contractor support. For example, service  officials stated that because of limitations on headquarters personnel  authorizations, the use of contractor support is often the only readily  available option to accomplish new or expanded commercial work  requirements at service headquarters. Service officials also noted that it is  generally easier to terminate or not renew a contract than to lay off  government employees in the event of reduced work requirements. For  this reason, use of contractor support is often favored when there is  uncertainty over the length of time that support services will be needed,  which is the case for some work supporting GWOT and other  contingencies.
section_title: Data Are Insufficient to Determine Whether Increased Services Contracting Has Exacerbated O&M Cost Growth
paragraphs: Sufficient data are not available to determine whether increased services  contracting has caused DOD’s costs to be higher than they would have  been had the contracted activities been performed by uniformed or DOD  civilian personnel. Although overall quantitative information was not  available, our analysis of the military services’ reported information from  its competitive sourcing program, commonly referred to as the A-76  public/private competition process, and case studies of O&M-related work  contracted out at three installations showed that outsourcing decisions  generally resulted in reducing the government’s costs for the work.  However, compared to all O&M-related contracts, the number of A-76  public/private competition contracts is small, the results from this  program may not be representative of the results from all services  contracts for new or expanded O&M work, and certain limitations exist  with the use of the A-76 data. Further, a recent DOD study found that the  Army’s use of contract security guards at domestic installations cost more  than the use of guards employed by the Army.
subsections: section_title: Information Needed to Assess the Effect of Increased Services Contracting Is Unavailable
paragraphs: To determine whether increased services contracting has exacerbated the  growth of O&M costs, information is needed that allows for a comparison  of the contract costs with the costs of performing the same work in-house  with uniformed or DOD civilian personnel. However, in most cases DOD  does not know how much contracted services work would cost if the work  were performed by government employees. DOD officials noted that  existing policy generally does not require a public/private competition for  private sector performance of a new or expanded commercial requirement  and, as a result, in-house cost estimates have not been prepared for most  of the work awarded to contractors as a result of increased O&M  requirements from GWOT and other contingencies. In the absence of such  quantitative data, information is not available to determine whether the  government’s costs are higher than they would have been had the  contracted services work been performed by uniformed or DOD civilian  personnel.
section_title: A-76 Public/Private Competition Data Indicate Outsourcing Decisions Were Cost-effective but Data Limitations Exist
paragraphs: While overall information was not available to determine whether  increased services contracting has exacerbated O&M cost growth, DOD  does maintain data on its competitive sourcing program, otherwise known  as the A-76 public/private competition process, which allows a comparison  of in-house and contract costs for some O&M related work. Specifically,  DOD’s A-76 program data include in-house and contract cost information  on contracts for work formerly performed by uniformed or DOD civilian  personnel that were awarded to the private sector as a result of a  public/private cost competition or, under certain conditions prior to May  2003, direct conversion to contractor performance. As shown in table 2, of  the 1,112 total A-76 public/private competition decisions that were made  between fiscal years 1995 and 2005, the military services decided to  outsource the work in 570, or 51 percent, of the cases. These decisions  resulted in contracting out the work formerly performed by over 39,000  uniformed and DOD civilian personnel. In the remaining cases, based on  the public/private cost comparison the military services decided to  continue performing the work in-house.
At the time of our review, the Army, Navy, Marine Corps, and Air Force  had reported detailed contract cost data on 538 of the 570 A-76 decisions  to outsource work. Our analysis of these data showed that the  public/private competition decisions generally resulted in reducing the  government’s costs for the work. Specifically, according to data reported  during the first contract performance period, the Army estimated savings  of about $33 million from 96 contracts, the Navy and Marine Corps  estimated savings of about $74 million from 88 contracts, and the Air  Force estimated savings of about $115 million from 354 contracts.  Figures 7, 8, and 9 show each service’s reported A-76 outsourcing  information for contracts resulting from both public/private competitions  and direct conversion from government to contractor performance  between fiscal years 1995 and 2005.
Although the services’ A-76 data show that decisions to outsource work  were cost-effective, several limitations are associated with the use of this  information. First, DOD officials noted that when work performed by  uniformed personnel is outsourced, the personnel generally are assigned  to other duties. Thus, while the cost to perform the outsourced work may  be less than when it was performed in-house, the overall cost to the  government may actually increase because the uniformed personnel  continue to be paid to perform different work and a contractor is now paid  to do the work formerly performed by the uniformed personnel. Also,  outsourcing of work formerly performed by uniformed personnel may also  increase O&M costs because military personnel appropriations are used to  compensate uniformed personnel and O&M appropriations are used to pay  contractors for services work.
Second, compared to all O&M-related contracts, the number of A-76  public/private competition contracts is small and the results from this  program may not be representative of the results from all services  contracts for new or expanded O&M work. For example, for the 538 A-76  outsourcing decisions for fiscal years 1995 through 2005 with reported  cost data, the total contract value for the first performance period was  about $1.2 billion. Yet, in fiscal year 2005 alone, the value of DOD’s O&M- related services contracts exceeded $95 billion.
Third, the available A-76 public/private competition information compares  the contract costs with the cost estimates for work using government  employees during the first contract performance period. Our review of  contract costs in subsequent performance periods showed that contractor  costs frequently grew and in many cases exceeded the government  employee cost estimate in subsequent periods. However, according to  DOD cost information, the cost growth was usually attributed to  requirements being added to the contract and contract wage increases,  which the government employee cost estimate did not reflect. As a result,  information is normally not available to determine whether the  outsourcing continued to be cost-effective for those contracts that  subsequently cost more than the estimate using government employees.
Fourth, the reliability of the services’ reported A-76 public/private  competition contract costs and savings appears questionable. The DOD  Inspector General reported in November 2005 that DOD had not  effectively implemented a system to track and assess costs of performance  under the A-76 program. The report stated that because system users did  not always maintain supporting documentation for key data elements and  entered inaccurate and unsupported costs, and the military services used  different methodologies to calculate baseline costs, DOD’s A-76 database  included inaccurate and unsupported costs, and as a result, reported costs  and estimated savings may be either overstated or understated. DOD  officials noted that, while the estimated savings may be either overstated  or understated, there were still savings and that DOD was in the process of  addressing the report’s recommendations for improving the tracking  system.
During our visits to Fort Hood, Naval Air Station Pensacola, and Langley  Air Force Base, we reviewed the accuracy of reported cost information on  contracts awarded as a result of A-76 public/private competitions.  According to information provided by Fort Hood officials, we found that  actual contract costs were greater than the costs reported in the DOD A-76  database for one contract. However, the difference was less than 1  percent. At Naval Air Station Pensacola, there were no differences in the  costs reported in the A-76 database and the actual costs for eight contracts  awarded as a result of A-76 competitions. At Langley Air Force Base, we  found some differences in the reported and actual costs for four contracts  awarded as a result of A-76 competitions. For the four contracts over 4  years, the actual contract costs, according to installation officials, were  about $250,000, or 5 percent, more than reported in the database.  However, even with the increased actual costs, the contracts still showed  considerable savings over the estimated costs using government  employees.
section_title: Case Studies Generally Show That Decisions to Contract Out Were Cost- effective
paragraphs: During our visits to Fort Hood, Naval Air Station Pensacola, and Langley  Air Force Base, we reviewed examples of O&M-related work that was  contracted out, or slated to be contracted out, either as a result of an A-76  public/private competition or because the uniformed personnel who  formerly performed the work were needed to support other missions.  According to installation officials, the outsourcing of work formerly  performed in-house had not resulted in any unexpected funding or other  consequences. Officials at each installation stated that their outsourcing  efforts had resulted in reduced costs for performing the work and that  they were satisfied with contractor performance. The following examples  illustrate the outsourcing results from specific cases of work formerly  performed in-house at the three installations we visited and in general  show that the outsourcing efforts appeared to be cost-effective.
In June 2000, as a result of an A-76 public/private competition, Fort Hood  contracted the operation and maintenance of the installation’s firing range.  During the A-76 competition, the cost estimate to continue performing the  work in-house was $37.1 million over the 4-year and 7-month total  performance period. The estimate was based on using 118 civilian and 11  military personnel to do the work. The work was awarded to a contractor  who bid $30.8 million to perform the work. Fort Hood officials stated that  between the time of the contract solicitation and the time the contractor  took over range operations, changes occurred in unit training events and  range operating standards which caused the work requirement to increase  far above the level included in the solicitation’s statement of work. As a  result, the officials stated that the contract was modified to provide for the  increased workload and actual contract costs totaled $38.2 million through  the end of the total performance period in December 2004. Although the  contract costs exceeded the in-house estimate by $1.1 million, or 3  percent, Fort Hood officials stated that they were confident that the  outsourcing was cost-effective because the in-house cost estimate would  have exceeded the actual contract costs if the in-house estimate had  included the cost of the workload subsequently added to the contract. The  officials also stated that they were satisfied with the contractor’s  performance.
In January 2003, Fort Hood contracted the installation’s ammunition  supply work because the uniformed personnel who formerly performed  the work at Fort Hood were needed to help support the GWOT. According  to installation officials, the work, which included the receipt, storage, and  issue of training ammunition, had historically been performed by  approximately 180 uniformed personnel, who were also responsible for  completing collateral military duties. The officials stated that the work  was converted to contractor performance by modifying an existing Fort  Hood support services contract to add the ammunition supply work for  about $1.8 million annually. According to the officials, the contractor used  between 45 and 56 people to do the work, and performance metrics, such  as inventory accuracy, improved after the contractor took over the work.  Although an analysis was not performed to compare the contract cost with  the cost to perform the work with uniformed personnel, Fort Hood  officials stated that they believe that the outsourcing was cost-effective  because the contractor was performing the work with far fewer people  compared to the number of uniformed personnel who formerly did the  work. The officials stated that a new contract for the work was awarded in  June 2006 at an annual cost of about $2.3 million. The officials attributed  the increase in contract costs to new requirements that were added to the  scope of the work.
In January 2001, as a result of an A-76 public/private competition, Naval  Air Station Pensacola contracted the installation’s receipt, storage, and  distribution of petroleum, oil, and lubrication products. The work had  previously been performed by 14 civilian personnel at an estimated annual  cost of about $700,000. During the A-76 competition, the cost estimate to  continue performing the work using government employees was $355,000  annually based on reducing the number of employees needed to do the  work to seven. Naval Air Station Pensacola officials stated that the work  was awarded to a contractor who bid $250,000 annually to do the work.
This amount was about $450,000 less than the original cost of the work  and about $105,000 less than the estimate to continue performing the work  in-house. Primarily because of added work requirements, reported data  showed that the actual contract costs increased to $315,000 by the fifth  contract performance period. Nevertheless, Naval Air Station Pensacola  officials noted that this outsourcing effort continued to cost less than the  estimated cost to perform the work in-house. The officials also stated that  they were satisfied with the contractor’s performance.
In March 2002, as a result of another A-76 public/private competition,  Naval Air Station Pensacola contracted the management of household  goods shipments for military personnel arriving and departing the  installation. The work had previously been performed by 21 civilian  personnel at an estimated cost of about $6.1 million over a 5-year period.  During the A-76 competition, the cost estimate to continue performing the  work in-house was $3.8 million over the 5-year total contract performance  period, based on streamlining the work and reducing the number of  employees needed to do the work. Naval Air Station Pensacola officials  stated that the work was awarded to a contractor who bid $2.8 million to  perform the work over the total performance period. This amount was  about $1.1 million less than the in-house estimate. Through the first 3 years  and 3 months of the contract, reported data showed that the actual  contract costs were about 13 percent higher than the contractor’s bid  amount but were still less than the estimated cost to perform the work in- house. Naval Air Station Pensacola officials stated that contract costs  were higher because of wage rate increases. The officials also stated that  they were satisfied with the contractor’s performance.
In June 2000, as a result of an A-76 public/private competition, Langley Air  Force Base contracted transient aircraft services work. During the A-76  competition, the cost estimate to continue performing the work in-house  was $1.1 million annually based on using 14 military and 7 civilian  personnel to do the work. According to Langley Air Force Base officials,  the work was awarded to a contractor who bid $365,000 to perform the  work, and the actual contract cost to perform the work during the first  performance period was about $374,000. This amount was about $726,000,  or about 66 percent, less than the estimated cost to do the work in-house.  Although reported data showed that contract costs increased by 8 percent  by the third contract performance period primarily because of wage rate  adjustments, the contract still cost less than the estimated in-house cost to  perform the work. Langley Air Force Base officials stated that they were  satisfied with the contractor’s performance and that the contract was  recompeted in 2003 and awarded at approximately the same cost.
In October 2001, as a result of another A-76 public/private competition,  Langley Air Force Base contracted certain records management services.  During the A-76 competition, the cost estimate to continue performing the  work in-house was $643,000 annually based on using 13 uniformed  personnel to do the work. According to Langley Air Force Base officials,  the work was awarded to a contractor who bid about $337,000 to perform  the work during the first annual performance period. This amount was  $306,000, or about 48 percent, less than the estimated cost to perform the  work in-house. According to the available data and Langley Air Force Base  officials, the actual contract cost during the first performance period was  the same as the bid amount. Although reported data showed that contract  costs increased to about $394,000 by the fifth contract performance period  primarily because of wage rate adjustments, the officials noted that the  cost was still less than the in-house estimate for the work. The officials  also stated that they were satisfied with the contractor’s performance.
section_title: DOD Report Noted That Contract Security Guards Cost More than Government-Employed Guards
paragraphs: A recent DOD report provides another comparison of costs for work  performed by contractors and government personnel. In this case, DOD  found that contract security guards at domestic installations cost more  than use of guards employed by the government. However, as with the  reported results from A-76 contracts, because the data used in DOD’s  report is from a relatively small number of contracts, the results may not  be representative of the results of all O&M related services contracts.
The John Warner National Defense Authorization Act for Fiscal Year 2007  required the Secretary of Defense to submit a report including an  explanation of the Army’s progress in responding to our April 2006 report  that assessed the Army’s acquisition of security guards and an assessment  of the cost-effectiveness and performance of contract security guards.  Our report noted that in the aftermath of the September 11, 2001, attacks,  DOD sent numerous active-duty, U.S.-based personnel to Afghanistan,  Iraq, and other destinations to support the GWOT. These deployments  depleted the pool of military security guards at a time when DOD was  faced with increased security requirements at its U.S. installations. To ease  this imbalance, the Congress authorized DOD to waive a prohibition  against the use of contract security guards at domestic military  installations. The Army, the first service to use the authority, had awarded  contracts worth nearly $733 million for contract guards at 57 installations  as of December 2005.
Our report also noted that the Army had relied heavily on sole-source  contracts to acquire contract security guards, despite the Army’s  recognition early on that it was paying considerably more for its sole- source contracts than for those awarded competitively. Our report made  recommendations to the Secretary of Defense to improve management  and oversight of the contract security guard program.
In early 2007, DOD issued its report, which stated that the Army concurred  with our recommendations and was in the process of resoliciting security  guard contracts to increase the use of competition. In regard to comparing  the costs of government-employed and contract security guards, DOD  reported that the contract security guards were more expensive than use  of government guards. However, the amount of the cost difference varied  widely depending on whether the contract was awarded competitively. In  cases where the contracts were awarded competitively, the contracts cost  about 5 percent more than use of government guards. However, in cases  where the contracts were not awarded competitively; the contracts cost  about 42 percent more than government guards. DOD’s report also noted  its view that the security guard contracts provided greater flexibility in this  instance to adjust the workforce level up or down when the threat level  changes and a performance test showed no difference in the effectiveness  between government and contract security guards.
section_title: Different Perspectives Exist on the Benefits and Concerns Associated with Increased Contracting for Support Services
paragraphs: DOD officials cited several benefits associated with the increased use of  contractors for support services in certain circumstances. On the other  hand, concerns over increased contracting have also been cited by the  Congress, the military services, and us.
subsections: section_title: Benefits from Increased Use of Contractor Support
paragraphs: DOD officials noted that when expanded military missions, deployments,  and other contingencies increase operational requirements, additional  personnel are needed to perform the extra work. For mission support  work, additional personnel might be obtained from several alternatives,  such as increasing the size of the active military force, mobilizing reserve  forces, hiring government employees, or contracting for services with the  private sector. In certain circumstances, the officials stated that increased  use of contractor support to help meet expanded mission support work  has certain benefits. For example, the officials noted that the use of  contractors can provide a force multiplier effect when contractor  personnel perform military support missions to allow more uniformed  personnel to be available for combat missions. Moreover, contractors can  provide support capabilities that are in short supply in the active and  reserve components, thus reducing the frequency and duration of  deployments for certain uniformed personnel. The officials also stated that  obtaining contractor support in some instances can be faster than hiring  government workers and, when there is uncertainty over the length of  time that support services will be needed, the use of contractor support  instead of government employees can be advantageous because it is  generally easier to terminate or not renew a contract than to lay off  government employees when the operations return to normal. Further, the  officials stated that they believed that contracts for new and expanded  requirements can be cost-effective when the contracts are subjected to the  forces of competition in the private sector.
section_title: Concerns from Increased Use of Contractor Support
paragraphs: Recently cited concerns associated with increased use of contractor  support have included (1) the need for DOD to consider performing more  work using government employees, (2) controlling support services  contract costs, (3) reduced operational flexibility resulting from some  outsourcing contracts, (4) the difficulty in ensuring accurate contract  statements of work and sufficient contract oversight, and (5) questions on  the adequacy of DOD’s services acquisition process.
subsections: section_title: The Congress Recently Required DOD to Consider Performing More Work In- house
paragraphs: The National Defense Authorization Act for Fiscal Year 2006 required DOD  to prescribe guidelines and procedures for ensuring that consideration is  given to performing more work using government employees. Section 343  of the Act requires the Secretary of Defense to prescribe guidelines and  procedures for ensuring that consideration is given to using government  employees for work that is currently performed or would otherwise be  performed by contractors. The guidance is to provide for special  consideration to be given to contracts that (1) have been previously  performed by federal government employees at any time on or after  October 1, 1980; (2) are associated with the performance of inherently  governmental functions; (3) were not awarded on a competitive basis; or  (4) have been determined to be poorly performed due to excessive costs  or inferior quality. In February 2007, DOD officials stated that they had  been working on developing the required guidelines and that they planned  to issue the new guidance in the near future. The officials also stated that  the use of government employees instead of contractors to meet O&M- related requirements in some circumstances might result in savings.
section_title: Military Services Have Taken Steps to Control Support Services Contract Costs
paragraphs: Each of the military services has expressed concerns over increasing  contract costs for support services. Citing the need to control costs, the  Secretaries of the Army and the Air Force have issued policy  memorandums calling for review and reduction in services contracts. For  example, the Secretary of the Army stated in a January 2007 memorandum  that he expected to see significant reductions in the number of Army  contracted services personnel during the remainder of fiscal year 2007.  Also, in a March 2006 memorandum, the Secretary of the Air Force set  targets for realizing estimated savings in Air Force contract support  services costs. Navy officials stated that although they have not issued any  new policy statements on contracted services, the issue is a concern. The  officials stated that the Navy proactively reduced its planned contractor  support budgets in both fiscal year 2007 and 2008.
section_title: Installation Officials Noted Reduced Flexibility in Some Instances and Other Concerns with Outsourcing
paragraphs: During our installation visits, local officials noted some concerns with  outsourcing of support services. For example, Fort Hood officials stated  that outsourcing of work formerly performed in-house can result in  reduced flexibility in being able to quickly respond to changing  requirements. The officials noted that in some instances when a new or  different work requirement develops, uniformed and DOD civilian  personnel can be reassigned to perform the tasks on a temporary basis or  as a collateral duty. However, before contractors perform new or different  work requirements, contract changes normally have to be negotiated,  which can result in delays before the new work is started. Installation  officials also noted concern over the difficulty in preparing accurate  contract statements of work in order to avoid contract changes. Naval Air  Station Pensacola officials stated that in some cases numerous contract  changes occurred when the original statement of work did not anticipate  or accurately define certain work situations. Further, installation officials  cited concerns over ensuring adequate contract oversight. Officials at  Naval Air Station Pensacola noted that ensuring adequate oversight  becomes increasingly difficult as the number of contracts increases.
section_title: GAO Has Noted Concerns with Services Acquisition
paragraphs: In November 2006, we reported that DOD’s approach to managing service  acquisitions has tended to be reactive and has not fully addressed the key  factors for success at either the strategic or transactional level. As a  result, the growth in service contracting over the past 10 years was, in  large part, not a managed outcome. Further, DOD’s approach did not  always take the necessary steps to ensure customer needs were translated  into well-defined contract requirements or that postcontract award  activities resulted in expected outcomes. As a result, DOD was potentially  exposed to a variety of risks, including purchasing services that did not  fully meet customer needs or that should have been provided in a different  manner or with better results. Also, in January 2007 testimony before the  Subcommittee on Readiness and Management Support, Senate Committee  on Armed Services, we noted that long-standing problems with contract  management continue to adversely affect service acquisition outcomes  even as DOD has become more reliant on contractors to provide services  for DOD’s operations. For example, the lack of sound business  practices—poorly defined requirements, inadequate competition, and  inadequate monitoring of contractor performance—exposes DOD to  unnecessary risk and wastes resources. We have found cases in which the  absence of well-defined requirements and clearly understood objectives  complicates efforts to hold DOD and contractors accountable for poor  service acquisition outcomes. Likewise, obtaining reasonable prices  depends on the benefits of a competitive environment, but we have  reported on cases in which DOD sacrificed competition for the sake of  expediency. Monitoring contractor performance to ensure DOD receives  and pays for required services is another control we have found lacking. In  the testimony, we noted DOD has taken some steps to improve its  management of services acquisition, and it is developing an integrated  assessment of how best to acquire services.
section_title: Concluding Observations
paragraphs: DOD’s O&M costs and reliance on contractors to perform O&M-related  work have increased substantially since fiscal year 2001. However,  sufficient data are not available to determine whether increased services  contracting has caused DOD’s costs to be higher than they would have  been had the contracted activities been performed by uniformed or DOD  civilian personnel. While we believe that there may be some merit in DOD  developing more information on the cost-effectiveness of its O&M services  contracts that fall outside of the A-76 public/private competition process,  at this time we are not recommending that DOD do this for several  reasons. First, performing the analyses to determine the estimated in- house costs to perform work awarded to contractors can be expensive and  time consuming. Second, according to DOD officials, contracting with the  private sector may be the only alternative to meet certain requirements in  the short term, such as when uniformed personnel must be diverted from  performing peacetime work to supporting operational missions. Third, as  long as DOD uses competition in its contract solicitations for new and  expanded requirements and provides adequate contract oversight, cost  efficiencies could be achieved through normal market forces.
section_title: Agency Comments
paragraphs: DOD made no comments on a draft of this report except for technical  comments, which we incorporated where appropriate.
We are sending copies of this report to the Secretaries of Defense, the  Army, the Navy, and the Air Force; the Commandant of the Marine Corps;  and the Director, Office of Management and Budget. We will make copies  available to others upon request. In addition, the report will be available at  no charge on GAO’s Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-4523 or by e-mail at leporeb@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the   last page of this report. The GAO staff members who made key  contributions to this report are listed in appendix II.
section_title: Appendix I: Scope and Methodology
paragraphs: To identify the trends in operations and maintenance (O&M) costs and  services contracts and the reasons for the trends, we reviewed and  analyzed the Department of Defense’s (DOD) O&M appropriations, budget  documentation, and services contract costs and identified the related  trends for fiscal years 1995 through 2005. We used costs as reflected by  total obligation authority, which includes regular O&M appropriations, any  supplemental O&M appropriations, and any funding from other  appropriation accounts transferred or reprogrammed into the O&M  account during budget execution. To consider inflation, we adjusted cost  data to constant fiscal year 2007 dollars using DOD’s adjustment factors.  We discussed with DOD and service headquarters officials the reasons for  the trends in O&M costs and how outsourcing of O&M activities formerly  performed in-house has affected the overall O&M budget. We shared the  results of our analyses with DOD and service officials and incorporated  their comments as appropriate.
To discuss whether increased services contracting has exacerbated the  growth of O&M costs, we determined the availability of information  related to services contracts including whether in-house cost estimates  were available for all contracts for new or expanded work awarded as a  result of the global war on terrorism (GWOT) and other contingencies. We  also reviewed and analyzed information from DOD’s competitive sourcing,  or A-76, program. Further, we visited three installations—Fort Hood,  Texas; Naval Air Station Pensacola, Florida; and Langley Air Force Base,  Virginia—to develop case study examples of O&M-related work that was  contracted out either as a result of A-76 public/private competitions or  because the uniformed personnel who formerly performed the work were  needed to support other missions. Fort Hood and Langley Air Force Base  were selected based on discussions with our requesters, and Naval Air  Station Pensacola was selected based on recommendations from Navy  officials who stated that the installation had a cross section of contracts  for O&M work that was formally performed in-house. At each installation,  we reviewed O&M budget information and discussed with local officials  any adverse consequences associated with contracting out O&M-related  work. For the case studies highlighting examples of work that was  outsourced to private contractors, we identified cost estimates for the  work if performed by government employees, the reasons that the work  was contracted out, the actual contract costs, and the reasons for any  contract cost growth. We relied on cost data provided by the installation  officials and did not review any actual contracts. However, we did review  the accuracy of reported information on selected contracts awarded as a  result of A-76 public/private competitions.
To provide perspectives on the benefits and concerns associated with  increased contracting for support services, we discussed this issue with  DOD officials. We also examined DOD’s response to recent legislation  requiring DOD to give consideration to performing more work using  government employees. We also discussed with DOD and service  headquarters officials the effect of increased contracting support for  support services and reviewed steps recently taken by the military services  to control service contract costs. We also discussed with installation  officials concerns associated with outsourcing O&M-related work that was  formally performed in-house. Additionally, we summarized recent GAO  reports that identified concerns with DOD’s acquisition of services.
We conducted our review from August 2006 through March 2007 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, Mark A. Little, Assistant Director;  Alissa Czyz; Kevin Keith; Harry Knobler; Gary Phillips; and Sharon Reid  made key contributions to this report.