Force Structure: Actions Needed to Improve Estimates and Oversight of Costs for Transforming Army to a Modular Force
Published: 2005-09-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2004, the Army began transforming its force into modular brigade-based units, thus expanding the number of units available for deployment and creating new command and support units. The Army is transforming while engaged in the Global War on Terrorism and developing other high-cost capabilities. This prompted congressional concern about the affordability of Army plans. Thus, under the Comptroller General's statutory authority, GAO examined the Army's restructuring. This report addresses (1) the extent of change in costs and areas of uncertainty that could affect those costs, (2) the Army's plan for funding modularity and factors that may affect affordability, and (3) whether the Army has an adequate approach to track modularity obligations.
section_title: What GAO Found
paragraphs: The Army's cost estimates for its modular force are evolving and have increased substantially, and uncertainty exists that will likely increase costs further. In March 2005, the Army estimated it will need $48 billion to fund modularity through 2011, a 71 percent increase from its 2004 estimate of $28 billion. However, this latest estimate does not include $27.5 billion in personnel and construction costs the Army and GAO identified, bringing potential known costs to $75.5 billion. Uncertainties remain in this estimate related to force design, equipment, facilities, and personnel, which could increase costs or require the Army to reduce capabilities. Until the Army provides a more reliable estimate of its modularity costs, DOD and Congress will not be well positioned to weigh competing requests for funding. The Army's funding plan, which it uses as the basis for developing funding requests, relies on annual and supplemental appropriations and may present future affordability challenges. Uncertainty in cost estimates noted above, reliance on business engineering efficiencies that historically have been difficult for DOD to achieve, and likely cost growth from another high-cost program--Future Combat Systems--collectively pose the risk of making this plan unaffordable. Also, the Army will be creating most of the modular units before it has the funding to support them While the Army can generally identify overall equipment purchases, it lacks an approach for tracking most modularity obligations and thus cannot provide a reliable picture of past spending or future funding needs. Army officials said they had not established a framework to track personnel and equipment obligations in part due to the difficulty of defining whether such expenses were incurred specifically for modularity or to support the force in general. However, we note the Army has made such distinctions in its past funding requests, including identifying specific amounts needed for equipment, and will require such data to develop and justify future requests.

section_title: Letter
paragraphs: The Army considers its transformation into a modular force to be the most  extensive reorganization of its force since World War II, requiring large  investments in personnel and equipment to restructure a force now  organized in divisions to a modular brigade-based force. By the end of  fiscal year 2006, the Army plans to reorganize its 10 active duty divisions,  expanding from 33 brigades to 43 modular brigade combat teams, and by  fiscal year 2010, create new types of command and support units. At the  same time, the Army is fighting the Global War on Terrorism and  developing other new capabilities such as the Future Combat Systems  (FCS). As the Department of Defense (DOD) requests funds to support  these Army initiatives, it is incumbent on DOD to provide the best  available data to justify its resource needs.
Because of the magnitude of the Army’s transformation plans and growing  congressional concerns about their affordability, we are examining both  the force structure and cost implications of the Army’s transformation into  a modular force under the Comptroller General’s statutory authority.   We  presented our preliminary observations on the Army’s plan in a March  2005 hearing before the Subcommittee on Tactical Air and Land Forces,  House Committee on Armed Services. This report focuses on the cost of  the modular force, with an emphasis on assumptions related to the active  component because these plans were the most mature at the time of our  review.  Because of your oversight responsibilities, we are sending this  report to you.  Specifically, we (1) determined the extent of change in the  Army’s cost estimate for transforming to a modular force and the potential  areas of uncertainty that could affect those costs, (2) examined the Army’s  plan for funding these costs and factors that may affect its ability to afford  modularity, and (3) determined whether the Army has an adequate  approach to track modularity obligations. We will be providing a separate  report on force structure implications of the modular transformation at a  later date.
Overall, our assessment of the cost estimate, funding plan, and the  approach for tracking obligations associated with the modular force  transformation focused on the assumptions underlying cost projections  for equipment, personnel, and facilities as they related to the modular  force proposed by the Army. We examined the processes for developing  them and assessed the estimates against analyses from officials  knowledgeable about each of the cost categories. We found this  information sufficiently reliable for analyzing the assumptions underlying  costs of the modular force and funding plans. Specifically, to assess  change and uncertainty in the cost estimate, we compared the Army’s  original rough order of magnitude estimate with updated estimates and  discussed reasons for the changes with Army budget and programming  officials. We also discussed areas of uncertainties with Army officials  responsible for equipment procurement, personnel, and facilities,  including both headquarters and command officials. To assess the  affordability of the funding plan, we examined the plan in light of our  ongoing and previously issued reviews examining Army assumptions  about other high-cost programs and projected efficiencies expected in the  Army’s budget. To assess the Army’s approach for tracking modular force  costs, we discussed processes used to track these funds at the command  and headquarters levels, and discussed the Army’s existing processes for  tracking costs in general with headquarters officials. We conducted our  review from May 2004 through June 2005 in accordance with generally  accepted government auditing standards. Further information on our  scope and methodology and data reliability assessment appears in  appendix I.
subsections: section_title: Background
paragraphs: The Army’s modular force transformation, which has been referred to as  the largest Army reorganization in 50 years, encompasses the Army’s total  force—active Army, Army National Guard, and U.S. Army Reserve—and  directly affects not only the Army’s combat units, but related support and  command and control. Restructuring these units is a major undertaking  because it requires more than just the movement of personnel or  equipment from one unit to another. The Army’s new units are designed,  equipped, and staffed differently than the units they replace, therefore  successful implementation of this initiative will require many changes,  such as new equipment and facilities; a different mix of skills and  occupational specialties among Army personnel; and significant changes  to training and doctrine.
The foundation of the modular force is the creation of brigade combat  teams—brigade-size units that will have a common organizational design  and will increase the pool of available units for deployment. The Army  believes a brigade-based force will make it more agile and deployable and  better able to meet combatant commander requirements. Not only does  the Army expect to produce more combat brigades after its restructuring,  it believes the brigades will be capable of independent action by the  introduction of key enablers, such as enhanced military intelligence  capability and communications, and by embedding various combat  support units in the brigade itself instead of at a higher echelon of  command. The Army’s objective is for each new modularized brigade  combat team, which will include about 3,000 to 4,000 personnel, to have at  least the same combat capability as a brigade under the current division- based force, which ranged from 3,000 to 5,000 personnel. Since there will  be more combat brigades in the force, the Army believes its overall  combat capability will be increased as a result of the restructuring,  providing added value to combatant commanders.
Although somewhat smaller in size, the new modular brigades are  expected to be as capable as the Army’s existing brigades because they  will have different equipment, such as advanced communications and  surveillance equipment, and a different mix of personnel and support  assets. The Army’s organizational designs for the brigade combat teams  have been tested by its Training and Doctrine Command’s Analysis Center  at Fort Leavenworth against a variety of scenarios, and the Army has  found the new designs to be as effective as the existing brigades in  modeling and simulation.
By 2011, the Army plans to have reconfigured its total force—to include  active and reserve components, and headquarters, combat, and support  units—into the modular design. The plan includes expanding the existing  33 brigades in the active component division structure into 43 modular,  standardized brigade combat teams by fiscal year 2006. Table 1 shows the  Army’s schedule for transforming to the modular design.
Supporting DOD’s goals for transformation while undertaking current  operations is a complex undertaking. In addition to the sheer magnitude of  force structure changes the Army is implementing, the Army’s  transformation to a modular force is occurring as the Army is rotating over  160,000 troops annually into combat theaters to fight the Global War on  Terrorism. As an indication of the progress already made, the Army  reports it has built 5 new brigade combat teams, converted 16 brigade  combat teams, and created 16 modular support brigades. In addition, the  Army reports it has made “rebalancing” decisions affecting over 100,000  military positions in order to make the best use of its available personnel.  This involves creating more units of the types needed most and eliminating  from the force units of lesser priority.
Legislation has increased the Army’s end strength in part to support the  modular reorganization. In the Ronald W. Reagan National Defense  Authorization Act for Fiscal Year 2005, the Army was authorized an end  strength of 502,400 soldiers—a 20,000 soldier increase of the fiscal year  2004 end strength of 482,400. The 2005 act also authorized the Secretary  of Defense to increase the Army’s end strength as high as 512,400 during  fiscal years 2005 through 2009 to support the operational mission of the  Army in Iraq and Afghanistan and to achieve transformational  reorganization objectives of the Army.
section_title: Modular Transformation Cost Estimate Has Increased, and Uncertainties Surrounding Pending Decisions May Increase Costs Further
paragraphs: Since the summer of 2004, the Army’s cost estimate for transforming its  force through fiscal year 2011 increased from $28 billion to $48 billion in  its spring 2005 estimate. While this latest estimate addressed some of the  shortcomings of the initial estimate, and includes lessons learned  developed from operations in Iraq, this estimate excludes some known  costs and includes uncertainties that may increase the cost estimate  further. The Army did not include personnel costs, which we estimate to  total $23 billion over the same time frame, and also did not include $4.5  billion in construction costs the Army plans to achieve through  efficiencies. When added to the most recent estimate, the total known  costs increase from $48 billion to $75.5 billion. Uncertainties in the  estimate could cause costs to increase higher. Pending decisions about the  number and design of modular units, and uncertainties surrounding  equipment, personnel, and facilities costs, may require the Army to request  additional funding beyond $75.5 billion or accept reduced capabilities  among some or all of its units. Without a clearer picture of the Army’s  resource requirements, DOD will have difficulty weighing competing  funding priorities, and the Secretary of Defense and Congress will not  have information they need to evaluate funding requests.
subsections: section_title: Cost Estimate for the Modular Force Has Increased
paragraphs: The Army’s current cost estimate for the modular force transformation is  $48 billion, a 71 percent increase from its initial rough order of magnitude  estimate of $28 billion made in the summer of 2004. There were several  weaknesses in the initial $28 billion estimate. Because the modular force  designs had not been finalized, earlier estimates reflected costs based  mainly on the existing division-based design. Further, in constructing the  active component portion of the estimate the Army (1) assumed the costs  of adding 15 light infantry, division-based brigades but did not include  costs of restructuring the existing combat brigades in the force structure;  (2) did not include restructuring of command and support units; and (3)  made no allowances for permanent construction to house and support  these units, funding instead temporary facilities reflecting the Army’s  assumption that end strength increases would be temporary as well.
In March 2005, the Army increased its estimate for transforming to a  modular force to $48 billion from fiscal year 2005 through 2011.  According to Army officials, this most recent estimate addressed  shortcomings of the initial estimate in that it included funding to (1) both  create new units and restructure existing ones, (2) build permanent  facilities to house and sustain the new force structure, and (3) used the  modular design where available as the basis for estimating costs.  Moreover, officials told us that the modular design had been updated to  reflect lessons learned about equipping and employing the force from  ongoing operations in Iraq.
This estimate, however, did not include personnel costs and some  construction costs. The Army reported that increases in end strength  above the appropriated end strength of 482,400 soldiers were assumed to  cost $3 billion per year, but were not tallied as part of the estimate.  According to Army officials, these personnel costs were excluded because  officials from the Office of Management and Budget and in the Office of  the Secretary of Defense provided guidance that modular transformation  was largely equipment related, and thus the Army should not include such  costs. Further, Army officials cited the difficulty in segregating end  strength cost increases due to modularity versus those due to ongoing  operations. For example, units preparing for deployment to Operation  Iraqi Freedom are being reorganized into a modular organization prior to  deployment. While we acknowledge that it may be difficult to clearly state  whether end strength increases associated with a deploying unit were due  to modular transformation or operational requirements, we believe  including these costs in their entirety is appropriate because (1) the Army  has stated it requires an increase in end strength to accommodate the  modular force, (2) it assumes that its tempo of operations will continue at  the same pace through 2011, and (3) excluding personnel costs would  significantly understate the cost of the modular force. The Army’s $3  billion estimate multiplied over the 7-year period from 2005 through 2011  and including estimates for inflation totals $23 billion, based on GAO’s  calculations. In addition to these personnel costs, the Army did not include  an additional $4.5 billion in efficiencies it planned to apply to construction  costs related to the modular force. This assumption is discussed in more  detail in the next section. Adding these known costs for construction and  personnel to the Army’s official estimate brings the total potential known  costs to $75.5 billion.
According to Army data and our projection of personnel costs, equipment  accounts for 54 percent of the costs, personnel for 30 percent, military  construction and facilities for 8 percent, and sustainment and training for  8 percent as well. These figures along with the annual totals are presented  in table 2.
section_title: Uncertainty Surrounding Assumptions Could Result in Further Cost Increase
paragraphs: While the Army’s latest cost estimate addressed several of the shortfalls in  its initial rough order of magnitude estimate, uncertainties in its latest  estimate are likely to cause costs to increase. We identified the following  factors that could affect equipment, personnel, and facilities costs.
subsections: section_title: Future Decisions on Design of Combat, Support, and Command Units Could Affect Costs
paragraphs: The Army’s Campaign Plan calls for a decision by fiscal year 2006 on  whether to create five additional modular brigade combat teams—a  decision that could affect the size and composition of the modular force as  well as its cost. Adding five brigades would provide additional capability  to execute the defense strategy but would require additional restructuring  of people and equipment. If the Secretary of Defense decides to add five  brigade combat teams to the current plan, the cost for modularity will  increase significantly. For example, each modular brigade combat team  under the current design would require 3,300 to 3,700 soldiers, for a  potential total of up to 18,500 soldiers. It is not clear whether the Army  would have to add this entire amount to its end strength, however. The  Army has begun initiatives to rebalance the force by converting military  positions to civilian positions, thus allowing soldiers currently in the  institutional force to be moved to the operational force, and by  rebalancing the active and reserve components in the force. To the extent  the Army is successful in reallocating positions under these initiatives, it  may be able to offset some of these requirements of the additional  brigades. In addition to personnel requirements, adding these brigades to  the force structure would add costs for equipment, facilities, and training.
At the time the cost estimates were set, the Army had not finished the  designs for all support units and command and control echelons.  Refinement of these designs could increase costs if, as the Army fields  these designs, it finds that additional personnel and equipment are needed  to ensure sufficient capabilities. Some Army officials we spoke with have  already expressed concern that command echelon designs do not have  sufficient staff to manage all required tasks. For example, at one division  we visited, officials thought that the command design was short staffed  given their expanded set of responsibilities. As a result, command staff  would have to prioritize the management of daily tasks and activities such  as trend analysis, statistical tracking, and oversight, while leveraging of  historical data to produce lessons learned and program improvement  would have to be performed by contractors or other civilian staff. In both  cases, if the Army finds that staffing levels in current command designs  are not sufficient, it will have to choose between decreased capabilities or  increased personnel expenses stemming from higher end strength  requirements or hiring civilians or contractors to perform some of these  functions.
section_title: Equipping Brigade Combat Teams Poses Cost Uncertainties
paragraphs: Equipping brigade combat teams poses cost uncertainties because the  Army did not use the equipment quantities in the tested design as the basis  for determining equipment costs. Instead, the amount estimated for  equipment reflects costs based upon a lesser modified amount of  equipment that does not necessarily meet the capabilities of the tested  design.  The Army determined it could expect to provide this modified  equipment level to units undergoing conversion based on the limitations of  its current inventory of equipment, planned procurement pipelines, and  expected funding.
Further, in estimating its equipment costs for the modular force, the Army  assumed that some equipment from ongoing operations would remain in  operational condition for redistribution to new and restructured modular  units. To the extent equipment is not returned from operations at assumed  levels, it is not clear whether costs of replenishing this equipment would  be considered modularity costs or costs of ongoing operations. Currently,  equipment is wearing out and being consumed at higher-than-expected  rates due to significant usage in current operational commitments  overseas. For example, a Congressional Budget Office (CBO) assessment  indicates that trucks in Iraq and Afghanistan are being driven roughly 10  times more miles per year than the average over the past several years. An  internal Army assessment also found that tactical vehicles in Iraq are being  utilized 6 to 10 times the normal operating tempo, dramatically reducing  expected service life and creating significant repair expenses. In addition,  the Army’s prepositioned stocks will have to be reconstituted due to their  heavy use in Operation Iraqi Freedom. We recently reported that  according to Army officials, the Army is nearing completion on a new  strategy for its prepositioning programs. They told us that prepositioning  will continue to be important in the future and that the prepositioned sets  would be converted to the modular configuration by 2012 or sooner.  However, until the strategy is finalized, costs for converting this equipment  remain unclear.
section_title: Facilities Cost Estimates Remain Uncertain
paragraphs: Potential increases in the number of brigades and pending decisions  related to base realignment and closure (BRAC) and restationing of forces  from overseas present considerable uncertainty in facilities cost estimates.  As previously noted, the current estimate does not include the cost of  funding to cover five additional brigades that may be added if approved by  the Secretary of Defense in fiscal year 2006. A decision to add these  brigades would add significantly to the modular force facilities’ funding  requirements. Without knowing where these brigades would be stationed,  it is difficult to evaluate funding requirements for facilities because each  base will likely have a different inventory of facilities in place to house and  support such units. However, according to Army facility planning  estimates, each new brigade combat team would require approximately  $300 million dollars in permanent facilities if there are no existing  facilities, such as barracks and vehicle maintenance facilities, at the  proposed site. This planning estimate does not include facilities  requirements for higher headquarters and support units, which can be  substantial. For example, at Fort Campbell, the facility requirements for  support and headquarters units accounted for $156 million, or 28 percent,  of the $553 million dollar permanent construction requirements for the  installation. None of these costs have been incorporated into the current  estimate.
The impact of decisions related to the BRAC process and DOD’s overseas  forces restationing strategy present further uncertainties in the Army’s  facility cost estimate. Although recent cost data on BRAC have been  reported, the Army’s current modularity facilities cost estimate predates  the availability of the data and the Army has not updated its estimates  accordingly.  Both BRAC and the overseas restationing strategy have the  potential to limit the Army’s ability to construct new permanent facilities  to support its modularity requirements. The BRAC commission’s decision  to close, realign, or reduce the size of military installations may constrain  the construction funding available for the Army’s modular forces, thereby  serving to delay the Army’s ability to construct sufficient permanent  facilities for its modular force structure. The overseas restationing strategy  aims to determine the optimum level of overseas stationing of U.S. military  personnel and equipment in order to meet defense strategies. According to  the Army, decisions related to the plan could return approximately 47,000  Army soldiers to the United States. This would greatly add to the  requirements for facilities as entire units are relocated back to bases in the  United States and soldiers from disestablished overseas units are  transferred to fill the new modular units. The Army will face severe  facilities shortages due to the increased populations within its continental  U.S. installations resulting simultaneously from the BRAC decisions,  overseas restationing strategy, and modular force restructuring. This  increased demand for facilities may force the Army to make trade-offs in  its permanent facility construction plans and may delay the construction  of permanent facilities for its new modular and restructured units.
section_title: End Strength Requirements Are Uncertain and Could Increase Personnel Related Costs
paragraphs: Although the Army has estimated that it will require about $3 billion per  year for the 30,000 soldiers it has attributed to meeting the requirements of  transforming to a modular force while conducting operations related to  the Global War on Terrorism, uncertainty about the need for additional  end strength could produce cost growth in personnel-related expenses.  This uncertainty about the total end strength required for the modular  force has been reflected in our discussions with Army officials, in recent  deliberations by Congress, and in analyses by other research  organizations.
Officials from the Deputy Chiefs of Staff for Personnel told us in April and  June 2005 briefings that the current authorized end strength of 512,400  active duty soldiers may not be enough to meet modular force personnel  requirements, especially during the transformation process. In these  briefings, officials told us the Army would likely need 522,400 soldiers and  possibly more to staff the modular force structure.
As a part of deliberations on the National Defense Authorization Act for  Fiscal Year 2006, both houses of Congress have proposed increases in end  strength in part to support the Army’s restructuring. The pending House  Defense Authorization Bill increases the Army’s end strength to 512,400,  with the option, as necessary, for the Secretary of Defense to increase the  end strength as high as 532,400 for fiscal years 2007 through 2009. The  Senate version of the bill authorizes increasing the size of the force to  522,400 in fiscal year 2006.
Finally, an analysis by the CBO reported that the Army may need as much  as 542,400. This end strength assumes that the Army will add the 5  brigades to make a 48-brigade force and that it will be unsuccessful in  reassigning 30,000 soldiers from the institutional to the operational force  as planned.
Increasing end strength has significant cost implications. Using the Army’s  suggested estimate of $70,000 per additional soldier, increasing the end  strength by 10,000 soldiers for a total of 522,400 from 2006 to 2011 would  add $4.7 billion to the $23 billion cost estimate. However, this estimate is  conservative, based primarily on personnel salaries but few other  personnel-related expenses. The Army’s current estimate of about $3  billion per year for 30,000 soldiers—a more comprehensive estimate that  includes expenses for institutional and unit training, relocation, base  support, and other items—translates to about $100,000 per soldier. Using  this more inclusive per-soldier estimate, we estimate that it would cost an  additional $6.7 billion if the Army were required to increase its end  strength to 522,400.
In written comments on a draft of this report, DOD stated that the end  strength increase was temporary and related solely to current operations.   As discussed in the section of this report on agency comments and our  evaluation, we disagree with DOD’s comments on end strength.  We note  that the Army’s own documents justified the end strength increase for the  dual purpose of transforming and conducting operations.  For example,  the Army’s approved 2005 Modernization Plan states that a  30,000  temporary increase in the Army’s end strength enabled the beginning of  the modular conversion of active component combat units.  This view is  consistent with Army briefings provided throughout our review that link  the end strength increase with the Army’s modularity initiative.
section_title: The Army’s Funding Plan Poses Funding Risks That May Cause Affordability Challenges in the Future
paragraphs: The Army’s funding plan for its modular force anticipates a combination of  supplemental and annual appropriations, but risks borne of the fast pace  of transformation, cost growth for the modular transformation, not  achieving efficiencies as planned, and likely cost growth from FCS could  pose affordability challenges in the future. The plan indicates that the  transformation will be paid for with $10 billion in supplemental  appropriations in fiscal years 2005 and 2006, and a total of $42.5 billion in  its regular appropriations from 2005 through 2011. In addition, the Army  anticipates receiving personnel funding to pay for increased end strength  through either supplemental appropriations or an increase to the Army’s  base budget. As noted earlier, we project these costs to total $23 billion,  including inflation. Table 3 displays the annual totals for these funds.
The Army intends to use this funding plan in developing funding requests  for funds provided through both regular and supplemental appropriations.
We note that the total costs reflected in the Army’s funding plan are not  specifically identified in the Future Years Defense Program (FYDP)— DOD’s centralized report for providing DOD and Congress data on current  and planned resource allocations.  According to Army officials, the fiscal  year 2006 FYDP, which projects funding requests from fiscal years 2006  through 2011, included only $42.5 billion of the $67.5 billion the Army  plans to request over those years. Of that, only $25 billion was specifically  designated in the FYDP for this purpose. The FYDP also included $17.5  billion that the Army planned to use for modularity over that period  according to Army officials, but these amounts were not specifically  identified in the FYDP.  Because the FYDP does not include anticipated  requests for supplemental appropriations, the 2006 FYDP did not reflect  either the $5 billion the Army plans to request in fiscal year 2006 or the $20  billion we project the Army will request from fiscal years 2006 through  2011 to support increases in end strength.
Notwithstanding the potential for increases in the cost of modular force  transformation noted above, this funding plan poses several risks that may  raise difficult affordability questions in the future. First, when compared to  the Army’s unit creation schedule, the plan indicates that the Army will be  creating units before it has the funding available to resource them, as  shown in figure 1.
While the Army anticipates that 96 percent of its 194 active and reserve  units will be created by 2008, it will have received only 51 percent of its  anticipated funding required to restructure these units by that time. Army  officials told us that while it was necessary to create these modular units  to support ongoing operations, and that units deploying were being  supplied with equipment required to execute ongoing operations, the  Army could not afford to equip the modular units according to its planned  equipping levels for the modular force at the time the units were created.  Therefore, to avoid canceling or restructuring other programs, funding  was flattened out over time to meet the constraints of the funds available.   In written comments on a draft of this report, DOD acknowledged that  some units will face equipment shortages in the early years of  transformation but the Army will manage these shortfalls through  preplanned processes and stringent management controls.
Also, the funding plan assumes that the Army will achieve a total of  $4.5 billion in business process reengineering efficiencies, and that the  savings associated with these efficiencies will be available to fund the  modular force as part of the Army’s regular appropriations. In December  2004 budget guidance from the Deputy Secretary of Defense, the Army was  instructed to assume that $1.5 billion in business process reform  efficiencies would be available for the modular force in each of fiscal  years 2009, 2010, and 2011.  In written comments on a draft of this report,  DOD stated that it had identified programmatic offsets for these  efficiencies and intended to include them as part of its fiscal year 2007  President’s budget request.  However, Army officials told us that details of  their plan were not yet finalized and available for review.  As a result, we  are unable to comment on the specific plan the Army has for achieving  these efficiencies. However, we noted in our most recently issued High- Risk Series that for years we have reported on inefficiencies and the lack  of transparency and appropriate accountability across DOD’s major  business areas. Further, despite commitment and attention from senior  DOD leaders, we found little tangible evidence of actual improvement in  DOD’s business operations to date. Given this track record and the lack of  data available for us to review, we are not confident that the Army can  achieve these efficiencies as planned.
Finally, as we testified in March 2005, the Army’s $108 billion FCS program  is at significant risk for not delivering required capability within budgeted  resources. Although the bulk of the funding for this high-priority program  is planned for after 2011 when the Army plans to have completed its  modular transformation, $23 billion is projected to be spent from fiscal  years 2005 through 2011 on research and development costs. Given the  scope of the program, our assessment that FCS is likely to encounter  problems late in development when they are very costly to correct, and  historical cost growth in weapons systems, we reported that cost growth  associated with FCS could have dire consequences on the affordability of  the Army’s programs, especially in light of a constrained discretionary  budget.
In comments to our report DOD stated that the FCS program is on track  and stated that the Army uses a different standard for assessing  technology maturity than GAO. Further, DOD stated that there is sufficient  flexibility in its investment accounts that if financial risks arise, these risks  can be addressed through extended planning period adjustments in future  programming cycles. The fact remains that the program’s level of  knowledge—a key indicator of budgetary risk—is far below that suggested  by best practices or DOD policy:  nearly 2 years after program launch and  with $4.6 billion invested, requirements were not firm and only 1 of over 50  technologies was mature as of our March 2005 testimony. Even using the  Army’s standard for assessing technology maturity, less than 40 percent of  the FCS technologies would be mature. Further, we note that while  extended planning periods may make the program more affordable in a  given year, we have reported that such extensions are costly.
section_title: Lack of an Approach to Track Funds Obligated for the Modular Force Limits the Transparency of Funds Used
paragraphs: While the Army can generally track funds associated with individual  programs, it has not established an approach for tracking funds obligated  for its modular force transformation. As a result, the Army, DOD, and  Congress will have limited visibility over whether funds are being  expended as intended to achieve transformation goals, and will not have  key data available to determine whether course corrections in the program  are needed. Standards for internal control in the federal government state  that internal controls should provide reasonable assurance that the  objectives of the agency are being achieved. One of the categories of  internal controls is reliability of financial reporting, including reports on  budget execution.
The Army’s inability to track obligations related to its modular  transformation is most clearly illustrated by the lack of data from fiscal  year 2004. In that year, the Army created or transformed a total of 22 units.  However, the Army has been unable to determine how much money it  obligated to do so. For example, officials from the Army Budget Office told  us that they track obligations of the overall Army related to equipment and  personnel, but cannot discern how much of the funds obligated were  related to the modular force transformation versus other programs, such  as repairing or replacing equipment from operations in Iraq and  Afghanistan. In early cost projections, the Army had estimated that it  would need $400 million to procure equipment and $96 million in  personnel expenditures to support the modular transformation in fiscal  year 2004. Although Army officials told us that the majority of equipment  requirements were satisfied with equipment transfers from other units that  were not scheduled to deploy to operations in the near future, they were  not able to tell us how much of the $400 million was offset by these  transfers. Similarly, the Army was not able to distinguish how much of the  amount of expenditures on personnel was attributable to the modular  force transformation versus personnel cost increases associated with  activating reservists for ongoing operations, and stop-loss policies  designed to retain servicemembers for the operations beyond their service  obligations. The Army did report that it obligated $133 million related to  operations and maintenance for the modular force in fiscal year 2004  through a database it employs to track obligations related to supplemental  appropriations for the Global War on Terrorism. However, in our report on  cost data related to the Global War on Terrorism to be issued later this  month, GAO found numerous problems in DOD’s processes for recording  and reporting costs for the Global War on Terrorism, raising significant  concerns about the overall reliability of DOD’s reported cost data.
Army officials acknowledged the need to closely monitor resources  required and applied to the modular force transformation, and noted that  this monitoring occurs as part of weekly, high-level meetings with the  Army Chief of Staff. These meetings focus on tracking equipment needs of  transforming units and making sure that these needs are met. Equipment  shortages can be filled with new equipment, transfers from other units, or  by the unit falling in on equipment left in Iraq. There are also controls to  track how many and what pieces of equipment have been purchased and  distributed, according to these officials. However, because ongoing  missions continually change the status and availability of equipment, it is  difficult for Army officials to define whether new equipment meets the  requirements of modular transformation or ongoing operational needs.   Indeed, sometimes the equipment may serve to meet both purposes. Also  the Army’s financial system has limitations and lacks the functionality  required to split out modular components within each line of equipment.   Army leadership, therefore, has made the decision that it is more  important to account for the total equipment purchased; dollars spent; and  operational issues, such as ensuring that equipment gets to the units that  need it, rather than labeling a particular piece of equipment as dedicated  to modular transformation or not.
While we recognize the challenges of monitoring resource expenditures in  the context of ongoing operations, we also note that in its estimates and  requests for appropriations, the Army has been able to distinguish  between funding requirements for its modular transformation and other  priorities. For example, in documentation supporting the fiscal year 2005  supplemental appropriation request, the Army stated that it required $4.6  billion for modularity largely to fund equipment, vehicles, and facilities,  and $3.1 billion to reset and recapitalize tanks and other battle losses.  While the Army appears to have established parameters for estimating  modularity costs, it cannot apply them for tracking purposes.
section_title: Conclusions
paragraphs: Despite a significant increase in its estimate to fund the modular  transformation from its original estimate, the Army’s ultimate costs of the  modular force will likely be higher than currently estimated due to  uncertainties and pending decisions, which may drive costs even higher.  Until the Army develops a detailed plan estimating the total costs of the  modular force as designed and tested and starts submitting this plan to  Congress each year, Congress cannot be assured that it is receiving an  accurate reflection of all costs associated with this restructuring and the  risks associated with any funding shortfalls, given the uncertainties of the  current estimate. Moreover, it will be difficult for the Secretary of Defense  to make informed decisions weighing the relative merits of programs  departmentwide in terms of making trade-off decisions when faced with  likely affordability challenges in the future.
Further complicating its ability to project resource needs, the Army is not  tracking and reporting obligations related to this effort by fiscal year. As a  result, decision makers, including DOD and Army leadership and  Congress, will not be able to assess whether funds appropriated for  modularity have been utilized for the purposes intended nor will they have  historical information useful in considering future funding needs.
section_title: Recommendations for Executive Action
paragraphs: To improve information available to decision makers on the cost of the  Army’s plan for modularity, we are making to recommendations to the  Secretary of Defense.
We recommend that the Secretary of Defense direct the Secretary of the  Army to provide Congress a detailed plan estimating the costs of  modularity sufficient to provide Congress reasonable assurance that  estimated costs reflect total costs of modularity as designed and tested.  Such a plan should be prepared annually and submitted as part of  justification material supporting DOD’s budget request, until the modular  force is fully implemented. It should include    a clear definition of what costs the Army does and does not consider to be  related to the modular transformation;    estimates for equipment, facilities and personnel;  identification of uncertainties in the plan due to pending force structure  design decisions or other decisions that may affect costs, and updates to  the plan as these decisions are made;   a report on obligations related to the modular force made the previous    divergences from the plan as stated in the prior year’s report, and  contributing factors.
To facilitate his oversight of the program and collecting the data for  Congress mentioned above, we also recommend that the Secretary of  Defense direct the Secretary of the Army in coordination with the  Undersecretary of Defense (Comptroller) to develop a plan for overseeing  the costs related to the Army’s transformation to a modular force. This  plan should include an approach for tracking modular transformation  costs that clearly identifies obligations for the modular force.
section_title: Matter for Congressional Consideration
paragraphs: The Congress should consider requiring the Secretary of Defense to  provide a plan for overseeing spending of funds provided for modularity.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report provided by the Army on  behalf of DOD, the department strongly disagreed with our findings  related to the cost estimate for the modular force and the uncertainties  cited.  DOD stated that the Army’s $48 billion cost estimate is solid and  does not include uncertainties.  For example, although DOD expects the  modular force design to change, it does not believe these changes will  substantially change the Army’s cost estimate.  Also, DOD objected to our  inclusion of personnel costs in our estimate because it believes the end  strength increase is temporary and entirely related to the Global War on  Terrorism. DOD noted that an end strength increase would not have been  necessary in a peacetime environment. DOD also stated that our report  includes costs related to resetting the force, BRAC, overseas restationing  of service members, and FCS. The department noted that these costs were  not included in its estimate for the modular force, nor should they be.  Despite these concerns, DOD partially concurred with our  recommendations.
We do not agree that DOD is in a position to state that the Army’s cost  estimate is solid and continue to believe that our findings fairly reflect the  potential costs and uncertainties associated with the Army’s modular  transformation. As we state in our report, at the time the estimates were  set, the Army had not finished the designs for support units and command  and control echelons. In addition, we note that the Army has not included  the equipment quantities in the tested design as the basis for determining  equipment costs. If subsequent testing or lessons learned demonstrate any  weaknesses in the current design, the Army may decide to modify  equipment levels or force structure, which could affect costs. We  recognize that some of these uncertainties, such as those related to  facilities costs and force design, are a reflection of preparing an estimate  for a very complicated undertaking where there are many moving parts.  Given the complexity of this undertaking and two decades of GAO reports  delineating DOD’s overly optimistic planning assumptions in budget  formulation, which often lead to program instability or costly program  stretch outs, we believe these uncertainties should be explicitly  acknowledged so that decision makers can make informed decisions.
Regarding the inclusion of personnel costs related to the end strength  increase, we note that the Army’s own documents justified the end  strength increase for the dual purposes of transforming and conducting  operations.  For example, the Army’s 2005 Modernization Plan states that a  30,000 temporary increase in the Army’s end strength enabled the  beginning of the modular conversion of active component combat units.  Moreover, the Army’s initial 2004 estimate included personnel costs due to  increases in end strength. Finally, it is not clear how the Army would be  able to add 10 combat brigades to the active component without affecting  end strength in some manner.  For these reasons we continue to believe  that the Army needs to recognize these costs in its estimate.
DOD also suggests that costs associated with resetting the force, BRAC,  overseas restationing of forces, and FCS are included in our estimate of  $75.5 billion. While we cite these issues as either pending decisions or  related programs that could affect the scope or affordability of the  modular transformation, we do not include the costs of these programs in  the estimate itself.
DOD partially concurred with our recommendation that the Secretary of  Defense direct the Secretary of the Army to provide improved cost  estimates to reflect the total cost of the modular transformation as  designed and tested, and recognized the need for periodic reporting on the  modular force. DOD also cited forthcoming reports that it believed would  provide official, comprehensive oversight of the modular force initiative.  Specifically, DOD cited a report due to Congress in September 2005 on the  long-range plan for executing and funding the modular force initiative that  includes related budget projections for fiscal years 2007 through 2011,  funding challenges, equipment requirements, and program management  oversight practices. In addition, according to the comments, the Army was  directed to provide the Office of Management and Budget, through the  Office of the Secretary of Defense, an annual report for the Army modular  force. We agree with DOD that additional reporting on this initiative is  needed, and note that the reporting requirements from both Congress and  the Office of Management and Budget also indicate a need for improved  information. Our recommendation does not seek to create redundant and  unnecessary additional reporting requirements, as was indicated in DOD’s  comments. Indeed, our recommendation allows DOD wide latitude in how  it provides the information we believe Congress needs for oversight to  avoid such redundancy. However, we also note that the reports DOD cited  have not yet been finalized, and we are unable to determine from DOD’s  description whether these reports would address our recommendations. If  these reports adequately address the reporting requirements we  recommend, there would be no need for additional reporting on DOD’s  part.
DOD also partially concurred with our recommendation that the Secretary  of Defense direct the development of a plan for overseeing the costs  related to the Army’s transformation to a modular force. DOD noted that  the Undersecretary of Defense (Comptroller) will closely monitor the  funding and execution of projects and programs associated with  transformational efforts as part of its oversight responsibilities. However,  DOD also noted that there were no plans to establish an encompassing  framework, grouping Army projects together under “modularity.” It stated  that such a framework would dramatically expand the billing process,  increase administrative costs, and more importantly complicate  distribution of material in a wartime environment. We continue to believe  that the Army will need a framework or approach to oversee expenditures  for modularity in order to provide DOD and Congress the information  needed for effective oversight. We note that the recommendation provides  DOD wide latitude to establish an approach for tracking modular  transformation costs, and we do not advocate a framework that would  require a separate billing system or complicate distribution of material in a  wartime environment (or any environment). As we noted in the report, in  preparing its budget estimate and request for funding, the Army has  already grouped projects together under the modularity umbrella and has  identified specific funding needs for modularity.  DOD is asking Congress  to allocate $48 billion to this modular transformation (over $75 billion  when personnel and some other costs are included). As with any initiative  of this magnitude, the Secretary of Defense and Congress require the best  data available to weigh competing resource requirements so that they can  make appropriate trade-off decisions. Information on how the Army has  spent funds provided for modularity should be considered in formulating  future funding requests.  Therefore, our recommendation is intended to  provide assurance that future such requests consider the obligations made  thus far so that Congress has a sound basis on which to determine  whether funds allocated to the modular force are being obligated as  intended.  Because DOD stated it has no plans to establish a framework to  track these obligations, and given the magnitude and significance of the  effort as well as the fact that DOD has requested funds from Congress  specifically for modularity, we continue to believe oversight of  expenditures is needed.  Therefore, we have included a matter for  congressional consideration.  Specifically, Congress should consider  requiring the Secretary of Defense to provide a plan for overseeing  spending of funds provided for modularity.
DOD’s comments are reprinted in appendix II and addressed as  appropriate in the body of the report. Annotated evaluations of DOD’s  comments are also included in appendix II.
We are sending copies of this report to the Secretary of Defense, the  Undersecretary of Defense (Comptroller), and the Secretary of the Army.  We will also make copies available to others upon request. In addition, this  report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-9619 or pickups@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: Overall, our analysis of the Army’s cost estimate, funding plan, and  approach for tracking obligations pertaining to its modular transformation  was limited to an examination of data presented in broad spending  categories, such as equipment, facilities, and personnel costs by year. We  interviewed and examined documents from knowledgeable Army officials  about assumptions underlying each of these funding categories. Further, at  headquarters and command levels, we examined the processes in place to  monitor obligations related to the modular force. We found this  information sufficiently reliable to analyze the assumptions underlying  costs of the modular force and funding plans. Because of the uncertainties  in the cost estimates and weaknesses in its approach to monitor  obligations related to the modular force, we made recommendations to  address each of these areas in order to improve data available for decision  makers. Our specific methodology for each reporting objective follows.
To determine the extent to which Army reflected expected costs and  identify areas of uncertainty in the estimate, we obtained overall cost  estimates from the offices of the Deputy Chief of Staff G-8 and the Deputy  Assistant Secretary of the Army for Budget. We also examined justification  materials supporting the fiscal year 2006 budget request, as well as the  fiscal year 2005 request for supplemental appropriations, and monitored  the development of the strategy, scope, schedule, and status of Army  restructuring by examining key planning documents, such as the Army  Campaign Plan, the 2004 Army Transformation Roadmap, and the Army  Modernization Plan. To examine areas of cost uncertainty likely to be  produced by transforming to a modular force, we discussed assumptions  underlying these estimates and obtained corroborating documentation in  interviews with officials from the Department of the Army Deputy Chiefs  of Staff for Personnel (G1), Intelligence (G2), and Operations and Training  (G3), and the Assistant Chief of Staff for Installation Management. We  further discussed assumptions and areas of uncertainty with these offices’  organizational counterparts at Forces Command in Fort McPherson,  Georgia; the 3rd Infantry Division, in Fort Stewart, Georgia; the 101st  Airborne Division in Fort Campbell, Kentucky; and the 4th Infantry  Division, in Fort Hood, Texas. We also reviewed reports by non- Department of Defense entities such as the Congressional Budget Office,  and our own reviews related to Army personnel. We compared these  sources against the Army’s cost assumptions to determine if they  comprehensively accounted for expenses stemming from the strategy,  scope, and schedule for transforming to a modular force.
To determine the Army’s plan for funding these costs and factors that may  affect its ability to fund the modular force, we considered the cost  estimates in the context of the larger Army budget, particularly the Army’s  reliance on supplemental appropriations and how funding the modular  force fit into other programs and initiatives. Specifically, we examined  justification materials for the 2006 presidential budget, the 2005  supplemental appropriation request, and budget guidance from the Office  of the Deputy Secretary of Defense. To identify factors that could affect  the Army’s ability to fund modularity, we questioned Deputy Chief of Staff  G-8 officials about the Army’s plan to garner efficiencies to apply to costs  of the modular force to determine the status of these plans. We also relied  on ongoing and previous GAO reviews of business process reengineering  to evaluate Army efficiency claims. In addition, we considered the impact  other priorities might have on the implementation of the Army’s  modularity plan, including current operations, the Future Combat  Systems, Base Realignment and Closure decisions, and decisions to  restation soldiers from overseas.
Applying federal internal control standards, we determined whether the  Army has an adequate approach in place to track obligations related to the  modular force. In that regard, we interviewed officials from the Office of  the Deputy Assistant Secretary of the Army for Budget and the Resource  Management Office at Forces Command, and resource management  officials at the 3rd Infantry Division, the 101st Airborne Division, and the  4th Infantry Division to determine how these entities tracked funds  earmarked for the modular force. We reviewed documents establishing  guidance from Army headquarters and discussed and documented how  this guidance was implemented at lower command levels. In addition, we  relied on the results of GAO’s analyses of funds used to support the Global  War on Terrorism, to the extent that these funds were used to support the  modular force.
Our review was conducted from May 2004 through June 2005 in  accordance with generally accepted government auditing standards.
section_title: Appendix II: Comments from the Department of Defense
paragraphs: The following are GAO’s comments on the Department of the Defense's  letter dated September 7, 2005.
subsections: section_title: GAO’s Comments
paragraphs: 1. We did not state that the Army would be unable to achieve efficiencies.   Rather we noted the Army’s ability to realize savings is uncertain because  DOD has historically had difficulty achieving expected efficiencies.    2. We did not state that the costs of an additional five brigade combat  teams should be included in the estimate.  Rather, as with other  uncertainties cited in this section, we noted that pending future decisions,  including whether to add five brigade combat teams, could impact the cost  of the modular transformation.    3. We revised the text to reflect DOD’s comments that Army  transformation supports DOD’s goals and that the Army has taken steps to  design, schedule, build, and convert brigade combat teams and support  brigades.  We did not include the comments that these actions were  completed within estimated costs because, as our report states,  uncertainties remain about the Army’s cost estimates and the Army does  not have a system for tracking modularity costs.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Gwendolyn Jaffe, Assistant  Director; Margaret Best; J. Andrew Walker; and Joah Iannotta made major  contributions to this report.