Air Force Depot Maintenance: Management Improvements Needed for Backlog of Funded Contract Maintenance Work
Published: 2002-06-20T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: The Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001 requires GAO to review various aspects of the Department of Defense (DOD) policy that allows Defense Working Capital Fund activities to carry over a 3-month level of work from one fiscal year to the next. The DOD 3-month carryover standard applies to all DOD activity groups except for the contract portion of the Air Force depot maintenance activity group, for which DOD established a 4.5-month carryover standard because of the additional administrative functions associated with awarding contracts. Reported carryover balances for fiscal years 2000 and 2001 were inaccurate and, therefore, the balances were not reliable for decision-making or budget review purposes. The reported carryover balances were not accurate due to (1) faulty assumptions used in calculating work-in-process and (2) records not accurately reflecting work that was actually completed by year-end. As a result, the amount of carryover reported by the Air Force was understated by tens of millions of dollars and customers' funds were idle that could have been used for other purposes during the fiscal year. Even though the carryover was understated, Air Force reports show that the contract portion of the depot maintenance activity group exceeded the 4.5-month carryover standard at the end of fiscal year 2000 and fiscal year 2001 by $44 million and $134 million, respectively. Air Force headquarters officials stated the primary reason that they exceeded the standard for fiscal year 2001 was the receipt of a large amount of orders late in the fiscal year.

section_title: Letter
paragraphs: This is the second in a planned series of reports that discusses the Defense  Working Capital Fund fiscal year-end workload funding issue, generally  referred to as “carryover.”   Section 1051 of the National Defense  Authorization Act For Fiscal Year 2001 (Public Law 106-398) required that  we review various aspects of the Department of Defense (DOD) policy that  allows Defense Working Capital Fund activities to carry over a 3-month  level of work from one fiscal year to the next.  In May 2001, we reported  that (1) DOD did not have a sound analytical basis for its current 3-month  carryover standard, (2) military services used different methods to  calculate the number of months of carryover, and (3) some activity groups  underestimated their budgeted carryover year after year, thereby providing  decisionmakers with misleading year-end carryover information resulting  in more funding being provided than was intended.
As requested and agreed to with your office, this report assesses carryover  related to the contract portion of the Air Force depot maintenance activity  group.  The DOD 3-month carryover standard applies to all DOD activity  groups except for the contract portion of the Air Force depot maintenance  activity group, for which DOD established a 4.5-month carryover standard  because of the additional administrative functions associated with  awarding contracts.  Specifically, our objectives were to (1) determine if  the reported carryover balance accurately reflected the amount of  unfinished work on hand at the end of fiscal year 2000 and (2) identify the  causes of carryover at the end of fiscal year 2000.
In February 2002, the Air Force began to consider removing the contract  portion of the depot maintenance activity group from the working capital  fund.  In April 2002, Air Force headquarters directed the Air Force Materiel  Command to begin planning for this transition.  If the contract portion is  removed from the working capital fund, all of the issues identified in this  report will still need to be addressed except for matters dealing with  carryover under the DOD working capital fund requirements.
Our review was performed from July 2001 through May 2002 in accordance  with U. S. generally accepted government auditing standards.  The  production and financial information we used and referred to in this report  was provided by the Air Force, and we did not verify it.  We worked with  Air Force officials to validate the reliability of the information in its system  in determining the reasons for the work not being completed at the end of  fiscal year 2000.  We did not assess the work performed by the in-house  operations of the depot maintenance activity group.  Further details on our  scope and methodology can be found in appendixes I and II.  We requested  comments on a draft of this report from the Secretary of Defense or his  designee.  Written comments from the Under Secretary of Defense  (Comptroller) are reprinted in appendix III.
subsections: section_title: Background
paragraphs: The Air Force depot maintenance activity group supports combat readiness  by providing depot repair services necessary to keep Air Force units  operating worldwide.  The group generates between $5 billion to $6 billion  in annual revenue principally by repairing and overhauling a wide range of  assets including aircraft, missiles, aircraft engines, software, and  exchangeable inventory items for military services, other government  agencies, and foreign governments.  In performing these services, the  group performs the work in-house at its depots or through contracts with  private industry or other government agencies.  The group operates under  the working capital fund concept, where customers are to be charged the  anticipated actual costs of providing goods and services to them.
subsections: section_title: Contract Depot Maintenance Process and Key Controls Used to Manage Contracted Work
paragraphs: Customers place orders with the Air Force depot maintenance activity  group.  When the activity group accepts the order, the customer’s funds are  obligated.  The customer uses the activity group as its purchasing agent  when it needs a contractor to perform depot-level maintenance work.  The  activity group awards the contract and manages the work performed by the  contractor.  The contract portion of the depot maintenance activity group  generates between $2 billion and $3 billion in annual revenue.  In  accomplishing this work, the Air Force has about 5,000 contracts with  about 750 contractors that are located in the United States as well as  overseas.
The Air Force air logistics centers use the contract depot maintenance  production and cost system (known as G072D) as a means of combining  financial and production data for the management of work that is being  performed by contractors.  The Air Force has also established procedures  and internal controls for the contract portion of the depot maintenance  activity group, which are described in two Air Force Materiel Command  Instructions.  Command Instruction 21-113 discusses the contract  maintenance program for the depot maintenance activity group and  Command Instruction 21-134 discusses the end item transaction reporting  system (known as G009) and the reporting procedures for contractors.   Some of the procedures and controls in these two instructions follow.
Contracts can be awarded for a 12-month period anytime during the  year.  All the items to be repaired will be funded from the appropriation  of the initial fiscal year.  However, work must be started on at least one  item during the initial fiscal year for the entire job cost to be properly  charged to appropriated funds for that year.
At a minimum, assets planned to be sent to contractors for repair should  be reviewed quarterly.  If the assets are not received by the contractors  and will not be received within a reasonable amount of time (60 days),  the planned quantities to be repaired and related obligated dollars must  be reduced accordingly and the contract amended, if necessary.
Contractors are required to report, at least monthly, on the status of the  assets being repaired, such as when the (1) assets were received,  (2) assets were inducted for repair, and (3) work was completed on the  assets.  The production management specialists at the air logistics  centers are responsible for ensuring that the information provided by  the contractors is accurate.
A review of the contract maintenance ledger produced from the  production and cost system must be performed quarterly.  Particular  attention should be directed to (1) contractors beginning work on assets  compared to the plan and (2) contractors completing work on assets  compared to the plan.  Any questionable information must be annotated  and reviewed and corrections made prior to the next monthly  processing cycle.
subsections: section_title: What Is Carryover and Why Is It Important?
paragraphs: Carryover is the dollar value of work that has been ordered and funded  (obligated) by customers but not yet completed by working capital fund  activities at the end of the fiscal year.  Carryover consists of both the  unfinished portion of work started but not yet completed, as well as  requested work that has not yet commenced.  To manage carryover, DOD  converts the dollar amount of carryover to months of work.  This is done to  put the magnitude of the carryover in proper perspective.  For example, if  an activity group performs $100 million of work in a year and had  $100 million in carryover at year-end, it would have 12 months of carryover.   However, if another activity group performs $400 million of work in a year  and had $100 million in carryover at year-end, this group would have 3  months of carryover.
A DOD regulation allows for some carryover at fiscal year-end to allow  working capital funds to operate efficiently and effectively.  In 1996, DOD  established a 3-month carryover standard for all the working capital fund  activities except for the contract portion of the Air Force depot  maintenance activity group.  The Air Force is the only military service that  includes its contract depot maintenance operation in its working capital  fund.  To reflect this difference, DOD established a 4.5-month carryover  standard to account for the additional administrative functions associated with awarding contracts.  In May 2001, we reported that DOD did not have  a basis for its carryover standard and recommended that Defense  determine the appropriate carryover standard for the depot maintenance,  ordnance, and research and development activity groups.  DOD is in the  process of assessing its carryover standards.  Too little carryover could  result in some depot maintenance activity not having work to perform at  the beginning of the fiscal year, resulting in the inefficient use of personnel.   On the other hand, too much carryover could result in an activity group  receiving funds from customers in one fiscal year but not performing the  work until well into the next fiscal year or subsequent years.  By  minimizing the amount of the carryover, DOD can use its resources most  effectively and minimize the “banking” of funds for work and programs to  be performed in subsequent years.
section_title: Plans to Remove the Contract Portion of Depot Maintenance from the Working Capital Fund
paragraphs: In February 2002, the Air Force began to consider financing the contract  portion of the depot maintenance activity group with direct appropriations.   In an April 19, 2002, memorandum, the Air Force stated that the overall  financial health of the depot maintenance activity group has been  negatively impacted by the contract operations.  Further, without direct  control over contractor costs, the working capital fund mechanism is an  inappropriate choice for the contract operations.  The memorandum  directed the Air Force Materiel Command to begin planning for the  transition of contract depot maintenance operations out of the working  capital fund immediately.  This would be a significant change in the  financing and accounting for these contracts.  Under the plan, contracts  would be financed with direct appropriations, which is how the Army and  Navy finance contract depot maintenance work, and carryover would no  longer be associated with the work being performed by the contractor.   Instead, funds would be managed in terms of the percent of funds obligated  and expensed during a fiscal year.  Further, the Air Force plans on using  existing direct appropriation fund systems to track repairs and account for  the funds and would not use its current working capital fund systems.
section_title: Reported Carryover Exceeded DOD Standard but Is Unreliable and Understated
paragraphs: The lack of accurate carryover information results in the Congress and  DOD officials not having the information they need to oversee and manage  the repair of assets.  Air Force reports show that the contract portion of the  depot maintenance activity group exceeded the 4.5-month carryover  standard at the end of fiscal years 2000 and 2001 by about $44 million and  $134 million, respectively, thereby resulting in more funds being provided  than allowed by the DOD carryover standard.  However, we found that the  reported carryover balance did not accurately reflect the amount of  unfinished work on hand at the end of fiscal year 2000 due to (1) faulty  assumptions used in calculating work-in-process and (2) records not  accurately reflecting work that was actually completed by year-end.  As a  result, the amount of carryover reported by the Air Force was understated  by tens of millions of dollars.
Air Force reports show that the contract portion of the depot maintenance  activity group exceeded the 4.5-month carryover standard at the end of  fiscal years 2000 and 2001.   The Air Force reported that it had about $835 million, which is 4.7 months, of carryover at the end of fiscal year  2000, and about $1.1 billion, which is 5.1 months, at the end of fiscal year  2001.  In the past, the Office of the Under Secretary of Defense  (Comptroller) and/or the congressional defense committees used carryover  information to determine whether the working capital fund activity groups  had too much carryover.  For example, the Congress reduced the Army’s  and Air Force’s fiscal year 2001 Operation and Maintenance appropriations  by $40.5 million and $52.2 million, respectively, because the depot  maintenance operations in their working capital funds had too much  carryover.  Similarly, in 2001, the Under Secretary of Defense (Comptroller)  reduced the Air Force’s fiscal year 2003 customers’ budget requests by $185  million because the contract portion of the depot maintenance activity  group would have too much carryover at the end of fiscal year 2003.
subsections: section_title: Work-In-Process Calculation Is Based on Faulty Assumptions
paragraphs: As stated previously, carryover is the amount of unfilled orders less the  amount of work-in-process.  We found that the Air Force does not have  actual information on the amount of work-in-process performed by  contractors and, therefore, uses a formula to estimate the amount based on  the assumption that the contractor will start and complete work as  planned.  However, the assumptions were faulty because the contractors  did not always start and/or complete the work as planned.  Using its  formula, the Air Force reduced the amount of unfilled orders due to work- in-process by about $1 billion, which is 5.6 months, and $835 million, which  is 4.1 months, in fiscal year 2000 and fiscal year 2001, respectively, to  determine the amount of carryover for these 2 years.
The amount of work-in-process recorded monthly is affected or is  determined by the nature of the work, the estimated/actual start date of the  work, and the expected time to complete the work.  For work that is  planned to be completed in less than 150 days, the Air Force assumes that  one-fifth of the work will be completed each month and records work-in- process accordingly.  The calculation for the different workload categories  is outlined below.
For workload categories involving exchangeable inventory items, other  major end items, and software, the amount of work-in-process is based  on when the work is planned to begin and assumes that the work will be  completed within 5 months.  Thus, the contractor does not have to begin  actual work, and the items to be repaired do not even have to be at the  contractors’ plant in order to record work-in-process on those specific  orders.
For workload categories involving aircraft, engines, and missiles, the  amount of work-in-process is based on when the work actually begins at  the contractor’s plant and assumes that the work will be completed  within 5 months from that point in time.
For work planned to be completed in more than 150 days, the Air Force has  a different calculation to determine the amount of work-in-process.  The  calculation for the different workload categories is outlined below.
For workload categories involving exchangeable inventory items, other  major end items, and software, the amount of work-in-process is based  on when the work is planned to begin and assumes that the work will be  completed in the estimated number of days as planned.  For example, if  the Air Force estimates that the work will be completed in 1 year, it will  record one-twelfth of the amount of the order as work-in-process each  month.  The contractor does not have to begin actual work in order to  start recording work-in-process.
For workload categories involving aircraft, engines, and missiles, the  amount of work-in-process is based on when the work actually begins at  the contractor’s plant and assumes that the work will be completed in  the estimated number of days as planned.
For fiscal years 2000 and 2001, the amount of reported work-in-process had  a significant impact on the amount of carryover, reducing each fiscal year’s  carryover by at least $835 million.  Table 1 shows the actual reported year- end unfilled orders, work-in process, and carryover, in dollars and months  for fiscal year 2000 and fiscal year 2001.  It also shows the amount of  carryover in excess of the 4.5-month standard.
According to Air Force Materiel Command officials, the primary reason  that they exceeded the 4.5-month standard for fiscal year 2001 was the  receipt of a large amount of orders late in the fiscal year.  Specifically,  actual customer orders exceeded planned customer orders by $311 million  for fiscal year 2001, with $292 million of that amount received in August  2001.  Large quantities of orders placed late in the fiscal year provide the  Air Force limited opportunity to perform the work by the end of the fiscal  year.
Air Force officials also stated that the current systems used by contract  depot maintenance cannot produce a reliable work-in-process amount.   They further stated that the assumptions used for calculating work-in- process do not provide an accurate work-in-process amount, particularly  the assumption that the work will begin as planned.  Air Force officials told  us, and we agree, that a more accurate way to calculate work-in-process  would be to eliminate the assumption that the contractor will start work as  planned and base all work-in-process calculations on when the contractor  actually starts work.  The officials said making such a change to the  calculation would provide a financial incentive for contract depot  maintenance to ensure that data on when the work actually started is  entered into the system in a timely manner.  The incentive to do so stems  from the fact that contract depot maintenance bills customers based on the  work-in-process amount that is recorded in the production and cost  system.  If work-in-process is based on when the contractor actually starts  work, the depot maintenance activity group cannot bill customers until the  date that the work actually started is recorded in the system.
section_title: Unfilled Order Data in the Production and Cost System Are Unreliable
paragraphs: As previously discussed, because the air logistics centers use the  production and cost system to manage the work performed by contractors,  it is critical that the unfilled order data be entered into the system in an  accurate and timely manner.  The data in this system are also used in the  Air Force’s budget process and are the basis for determining the amount of  carryover, which is reported to the Congress each fiscal year.  However, we  found that much of the unfilled order data in the system was inaccurate or  incomplete because the production management specialists, who are  primarily responsible for data accuracy, did not always (1) ensure that  contractor production data in the system were correct or (2) enter contract  information for new customer orders into the production and cost system  in a timely manner, as the following two examples illustrate.
Based on our analysis of a stratified random sample of unfilled  maintenance requirements at the end of fiscal year 2000, we estimate  that $256 million of the work was actually completed but not reflected  in the system because the production management specialists did not  ensure that the data were correct.
When contract depot maintenance receives a customer order for work,  it enters into a contractual relationship for the performance of the work  and then records information on the contract in the production and cost  system.  Any customer order for which there is no contractual  information in the system is referred to as “unscheduled” work.  We  found that as of September 30, 2000, contract depot maintenance had at  least $59.9 million of unscheduled work for which the contracts were  awarded but the contract information was not recorded in the system.   Our analysis of the $59.9 million showed that $8.6 million was not  entered into the system for at least 3 months to 5 months after the  contracts were awarded, while about $15 million was not entered for at  least 6 months or longer.  For example, in one case, an order for  $3.6 million was not entered in the system for 7 months after the  contract was awarded.  In another case, an order for $802,000 was not  entered into the system for 20 months after the contract was awarded.   In both cases, the lack of production management specialist oversight  due to either heavy workload or inexperience was cited as the reason  for not entering the data in a timely manner.  Without the contract data  in the system, there was no information in the system for managing  repair actions and monitoring the status of the contracts.
We found that (1) in some cases, the production management specialists  were not following the regulations regarding data accuracy, (2) in other  cases, the production management specialists did not know the correct  treatment for recording data accurately, and (3) standard operating  procedures for use by the production management specialists did not exist  to provide detailed instructions on their responsibilities for data accuracy.   Air logistics center officials also told us that production management  specialists need training that is specific to their day-to-day responsibilities  and that such training would enhance the production management  specialists’ awareness of the importance of data accuracy.
Air Force Materiel Command officials stated there is a data discipline  problem that centered around the production management specialists not  ensuring that the data in the production and cost system are correct and up  to date.  The officials attributed this problem, in part, to the lack of clear  guidance and detailed operating procedures related to how the production  management specialists should go about performing their day-to-day  responsibilities.  The officials further told us that there is a lack of internal  controls or processes to ensure data accuracy, such as the use of metrics  that could act as “red flags” to alert management to possible data problems.   In discussing the data accuracy problem with Air Force headquarter  officials, they told us that a contributing factor was the disruption to  operations when the Air Force hired about 150 new production  management specialists in fiscal year 2000 because of the closing of two air  logistics centers and transferring the oversight of their contracts to the  remaining centers.
section_title: New System Effort Terminated
paragraphs: Since 1996, the Air Force has recognized the need to improve the reliability  of the data in the production and cost system and, until February 2002, was  developing a new system, the Contract Maintenance Accounting and  Production System—known as G501—to accomplish this.  According to Air  Force officials, implementing the new system would have helped alleviate  the type of data problems we found because it was to be a single, fully  integrated real-time web-based system, which, among other things, would  have streamlined contractor reporting of production data.  The Air Force  had planned to implement the new system at the three air logistics centers  and at approximately 900 contractor facilities.  The development of the  new system initially started in 1996 as an effort to redesign the existing  production and cost system.  It was later decided that this system and two  other legacy systems that currently perform production and accounting  functions for the contract portion of the depot maintenance activity group  needed to be replaced since they interacted with each other.  Thus, in  September 1999, a contract was awarded for the development project with  an estimated completion date of December 2001, which was later revised to  fiscal year 2005.
In February 2002, the Air Force began to consider stopping its financing of  the contract portion of the depot maintenance activity group in the working  capital fund.  As a result, the Air Force has stopped working on developing  the new system after spending about $7.8 million.  The Air Force plans to  use other systems to perform the production and accounting functions.
section_title: Causes of Reported Carryover
paragraphs: Our analysis of about $1.6 billion of reported unfilled orders showed that a  substantial amount of the work that the activity group carried over into  fiscal year 2001 was work that it had planned to complete prior to the end  of fiscal year 2000 but did not due to logistical and production problems.   Specifically, we estimated that about $530 million of work was not  completed for two key reasons.  First, repairs took longer than planned  primarily because (1) parts needed to perform the repairs were not  available from DOD, (2) more work was needed to repair the assets than  originally planned by the Air Force, and (3) contractors had capacity  constraints related to personnel, facilities, and equipment.  Second, work  on some assets was not started as planned because of the delayed  induction of items into production at contractors’ facilities.  Further, we  could not determine the causes for an estimated $191 million of work not  being done primarily because Air Force officials could not provide reliable  information on the status of contracts that were previously managed by the  two air logistics centers that were closed in fiscal year 2001.
In addition, we estimated that about $657 million of the unfilled orders  that the activity group carried over into fiscal year 2001 was for work that  was planned to be completed in fiscal year 2001.  Since this work was  expected to be carried over, we classified it as normal carryover.  The  results of our analysis are summarized in table 2 and discussed in greater  detail in the following sections.
subsections: section_title: Repair Problems Are a Major Cause of Carryover
paragraphs: As shown in table 2, we estimated that about $322 million of the activity  group’s unfilled orders as of September 30, 2000, were for work that was  scheduled to be completed prior to September 30, but was not completed  by then because of longer than expected repair times.  As the following  examples illustrate, our work showed that the primary causes of these  longer than expected repair times were (1) shortages of component parts,  (2) unanticipated problems, and (3) contractor capacity constraints.
subsections: section_title: Shortages of Component Parts
paragraphs: For the exchangeable and engine workload categories, a shortage of  component parts was a major cause of untimely repairs.  For example, a  requirement for the repair of a leading-edge aircraft part was placed on a  contract in December 1999 for a unit sales price of $39,268 and with an  expected completion date of June 2000.  In January 2000, the contractor  inspected the item and determined that defective seals would have to be  replaced.  Because the seals were government-furnished material, the  contractor submitted a requisition to the Defense Logistics Agency.  When  the seals had not arrived by the expected delivery date (May 2000), the  contractor requisitioned them again and, when the Defense Logistics  Agency subsequently advised the contractor that the seals were not  available, the contractor requested and was granted permission to  manufacture them.  As of November 2001, the projected completion date  for the manufacture of the seals was March 2002, and the leading-edge  aircraft part was expected to be repaired and available for shipment to the  customer almost immediately after that—about 21 months longer than  expected.
The Air Force Materiel Command recently completed a study of this long- standing and well-documented problem that the Air Force refers to as  “awaiting parts.”  Additionally, it developed an action plan to correct some  of the underlying causes of the awaiting parts problem that were identified  in the study.  The scope of both the study and the action plan was limited to  depot maintenance work that is performed in-house at the three air  logistics centers and did not cover the contract portion of the activity  group.
Air Force Materiel Command officials have acknowledged that contract  depot maintenance has unique awaiting parts problems because the  contract portion of this activity group uses different systems than the in- house portion of the group.  They indicated that the plan to remove  contract depot maintenance operations from the Air Force Working Capital  Fund and to discontinue, as previously discussed, the development of the  new production and cost system have caused them to put virtually all  contract depot maintenance initiatives on hold.
section_title: Unanticipated Problems
paragraphs: Unanticipated problems were another major cause of repairs not being  performed as planned, especially for the aircraft workload category.  For  example, for the last several years, the contract repair of KC-135 aircraft,  which have an average age of about 40 years, has been a large and  problematic workload.  Specifically, due primarily to unanticipated  problems, such as the need for major structural repairs, work on these  aircraft has taken much longer than expected to complete.  According to  data in the production and cost system, as of September 30, 2000, a  contractor had not completed work on 11 KC-135 aircraft that were  originally scheduled to be completed during fiscal year 2000 and two  aircraft that were originally scheduled to be completed during fiscal years  1997 and 1999, respectively.  Additionally, as of September 30, 2000, another  contractor had not completed work on 16 KC-135 aircraft that were  originally scheduled to be completed during fiscal years 1999 and 2000.
The magnitude of this problem is illustrated in table 3, which compares the  initial and actual repair times for KC-135 aircraft at the second contractor’s  facilities during fiscal years 1999 and 2000.
Altogether, the 29 KC-135 aircraft that were scheduled to be completed  prior to the end of fiscal year 2000, but were not, had an unfilled order  value of about $86.6 million.
section_title: Contractor Capacity Constraints
paragraphs: Contractor capacity constraints are a third cause of repair problems.  For  example, one of the items in the sample was a $1.4 million requirement to  repair 15 power supply units at a unit sales price of $94,879 and with an  estimated repair time of 45 days.  All work on this item, which is a  component of an electronic warfare system, was scheduled to be  completed by June 30, 2000.   However, as of September 30, 2000, only eight  items had been repaired and, as of September 30, 2001, one item had still  not been repaired.  The prime contractor attributed the delayed repairs to  personnel constraints.  Specifically, at one time, there was a steady repair  workload for this item, and a subcontractor employed three to four people  to work on nothing but this requirement.  When the workload declined, the  subcontractor released all but one of the employees trained to make the  repairs.  According to the prime contractor, when an order was received in  late 1999, the subcontractor had difficulty finding qualified people to do the  work.  However, the prime contractor also indicated that the subcontractor  has gradually redeveloped a repair capability in this area, is now repairing  two items a month, and expects to build up his capability to three a month  in the near future.
section_title: Delayed Induction of Assets Is Another Major Cause of Carryover
paragraphs: As shown in table 2, we estimated that about $208 million of the activity  group’s unfilled orders as of September 30, 2000, were for work that was  scheduled to be completed prior to September 30, but was not completed  by then because work on the items was not started as planned at  contractors’ facilities.  A $9.8 million order to repair 24 exchangeable  inventory items is an example of a requirement that we placed in the  delayed induction category.  In this case, the estimated repair time was 90  days, and data in the production and cost system indicated that the  contractor was expected to complete work on all 24 items by the end of  fiscal year 1999.  However, as of the end of fiscal year 2000, the contractor  had received only 19 of the inventory items.  The remaining five inventory  items—which had an unfilled customer order value of about $2 million— were not received by the contractor until the third quarter of fiscal year  2001 and we, therefore, included $2 million in the delayed induction  category.
One of the underlying causes of the activity group’s induction problem is  that the Air Force Materiel Command has not established effective internal  control procedures to ensure that production management specialists are  complying with its policy guidance.  For example, Air Force Materiel  Command Instruction 21-113 states that, at a minimum, “review of asset  generation should be done on a quarterly basis and, if assets will not  generate within a reasonable period of time (60 days), the scheduled input  quantities and obligated dollars must be reduced accordingly.”  However,  our analysis showed and the Air Force Materiel Command agreed that  there is no systematic process or effective internal controls to ensure that  the production management specialists are complying with this guidance.   A second cause is that some of the guidance is inconsistent.  For example,  Air Force Materiel Command Instruction 21-113, “Contract Maintenance  Program for Depot Maintenance Activity Group (DMAG),” states that work  must be started on at least one asset during the fiscal year that an order is  placed.  However, the Air Force Logistics Command supplement to Air  Force Regulation 170-8 states that the contract depot maintenance activity  group has until December 31 to get a customer’s requirement in a contract  (January 31 for some requirements).  Accordingly, one regulation requires  work to be started on an asset before the fiscal year-end, but another  regulation does not even require that the contract be awarded until the end  of the calendar year.
section_title: The Activity Group Is Not Managing a Major Portion of Its Contract Workload
paragraphs: As shown in table 2, we could not determine the cause of the problem for  about $191 million of unfilled orders that were scheduled to be completed  prior to September 30, 2000, but were not.  We could not make this  determination because production management specialists did not have  documentation on the status of the repairs needed to make this  determination.  The two primary reasons that information was not  available were that production management specialists (1) did not have  required documentation for many of the contracts that were transferred  from the Sacramento and San Antonio Air Logistics Centers to two of the  three remaining centers in October 2000 and (2) did not maintain  information on the status of software projects.
subsections: section_title: Inadequate Documentation on Transferred Contracts Prevents Effective Management
paragraphs: In October 2000, the Sacramento and San Antonio Air Logistics Centers  discontinued their contract depot maintenance operations and  transferred management responsibility for their contracts to the three  remaining centers (Warner Robins, Oklahoma City, and Ogden).  As part of  this management transfer, the Sacramento and San Antonio centers  shipped contract files and related customer order files to the three centers  that assumed responsibility for the work.  However, in many instances, two  of the centers that assumed responsibility for the work either did not  receive the required files or received incomplete files.  Additionally, for the  files they did receive, they found numerous and significant discrepancies  between the information in the contract files and related customer files.   Discrepancies were also found between these manual records and the data  in the production and cost system.  As a result of these problems, two of  the three remaining centers have had to reconstruct many of the files and  reconcile numerous discrepancies.  Because the Air Force does not know  the status of these contracts, (1) it is potentially vulnerable to paying for  goods and services not received or performed and is subject to fraud,  waste, and abuse, (2) work may have been accomplished but not recorded  in the system, or (3) the Air Force may not be taking prompt and  appropriate action to resolve problems that are delaying the completion of  the work.
A contract depot maintenance manager at one of the remaining centers  characterized this records reconstruction and reconciliation effort as  “overwhelming.”  Specifically, he noted that his center had assumed  responsibility for 627 contracts (about 20 percent of its total workload),  and pointed out that the contracts went back to 1981 and each contract  could have as many as 800 line items.  The manager also stated that, as of  October 2001 (1 year after the transfer), center staff had not even looked at  many of the contracts and had unreconciled problems with many of the  contracts that they had reviewed.  To further illustrate the magnitude of the  reconciliation problem, he pointed out that their research thus far had  determined that (1) they did not have contracts for $41 million of work that  was recorded in the production and cost system and about $3 million in  contractor payments, (2) the production and cost system contained no  information on 74 contracts with a total contract amount of $12.6 million,  and (3) contractors were providing automated production data for less  than 15 percent of the transferred contracts.
The lack of documentation for contracts that were transferred from a  closing facility had resulted in the lack of management oversight.  For  example, 10 of the sample items, with a total unfilled order value of  $4.5 million as of September 30, 2000, were requirements for work on hush  houses that were contracted for by one of the closing air logistics centers.   Work on several of these hush houses was supposed to be completed prior  to the end of fiscal year 2000, and work on all of them was supposed to be  completed prior to the end of fiscal year 2001.  However, as of December  2001, the air logistics center that assumed management responsibility for  the contracts was still trying to determine the status of the work since it  had not received the required documentation from the closing center.
The two centers that have a significant problem in this area have recently  dedicated several personnel to the resolution of problems related to the  transferred contracts.  However, this work is a time-consuming and labor- intensive process, and the Air Force Materiel Command has not established  either a milestone for completing the work or a methodology for  monitoring progress.  Consequently, it is uncertain when the centers will  have all of the information they need to manage these transferred  contracts.
section_title: Lack of Actual Production Data Makes Software Unfilled Order Data Highly Questionable
paragraphs: We estimate that $68 million of the unfilled orders in the software  workload category of the sample was for work that was scheduled to be  completed prior to September 30, 2000, but was not completed as of that  date.  However, we were unable to determine why the completion of this  work was delayed because production management specialists are not  required to monitor the status of software projects and did not have the  documentation needed to identify problems and determine their underlying  causes.
For most nonsoftware workloads, the requirement is to repair a specific  quantity of items within a specified period of time, and contractors are  required to submit automated production reports that show when they (1) receive the items that are to be repaired, (2) started work on the items,  (3) complete the repairs, and (4) ship repaired items to customers.   Additionally, production management specialists are required to develop  schedules that show when work on the items is scheduled to start and  when repairs are expected to be completed.  If done properly, this  approach ensures that production management specialists have the  information they need to (1) monitor the status of the work, (2) identify  problems, and (3) take prompt corrective action, when appropriate.
However, for software workloads, the requirement is not to repair a certain  number of items, but rather to accomplish certain tasks.  For example, the  task could be to (1) attend and support any lab, ground, and flight tests  performed on a weapon system, (2) analyze test data, or (3) revise weapon  system software that does not perform as intended, such as an electronic  warfare system that does not perform effectively in high electro-static  environments.  As a result, most software workloads are expressed as a  level of effort, such as in number of hours or months to be worked.
Because production management specialists do not have reliable data on  the status of software projects, the “actual” production data that they enter  into the production and cost system are estimates that are based on the  frequently erroneous assumption that work will begin and be accomplished  as planned.  This problem, which is similar to the previously discussed  problem with the activity group’s work-in-process data, makes the reported  value of software unfilled orders highly questionable.  Further, because the  reported value of software carryover is based on highly questionable  estimates for both work-in-process and undelivered orders, it cannot be  relied on.
section_title: Conclusions
paragraphs: The Air Force does not have reliable information on the dollar amount of  carryover for its contract depot maintenance operation due to faulty  assumptions used in calculating work-in-process and records not  accurately reflecting work done at year-end.  Until the problems are  corrected, congressional and Defense decisionmakers will be forced to  make key budget decisions, such as whether or not to enhance or reduce  customer budgets, based on unreliable information.  In addition, due to  logistical and production problems, hundreds of millions of dollars of work  was not done as planned and was carried over into the next fiscal year.   These problems resulted in idle funds that could have been used for near- term readiness or other priorities.  For the contract portion of this activity  group to operate more effectively, managers at the Air Force Materiel  Command and the air logistics centers must be held accountable for (1) the  accuracy and timeliness of the production and financial management  information used for decision-making and (2) ensuring that the work is  completed as planned.  Until these weaknesses are resolved, concerns will  continue to be raised about the amount of carryover related to the contract  portion of this activity group.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of the Air Force direct the Commander,  Air Force Materiel Command, to do the following.
Use the date contractors actually start work, rather than the planned  start date, to calculate work-in-process for all workload categories as  long as the contract portion of the activity group remains in the working  capital fund.
Improve the accuracy of the data in its systems that track repair actions  and account for costs by (1) holding managers accountable for ensuring  the accuracy of the data, (2) developing standard operating procedures  that provide detailed guidance on production management specialists’  day-to-day responsibilities, particularly in the area of ensuring data  accuracy, (3) providing additional training to production management  specialists on these procedures, and (4) developing metrics that act as  “red flags” to alert management of possible data problems.  At a  minimum, the systems should provide timely and accurate information  on when contractors receive broken items for repair, repair work starts  on the items, repairs are completed, and repaired items are returned to  customers.
Develop accurate and complete information on contracts that were  awarded by the San Antonio and Sacramento Air Logistics Centers and  subsequently transferred to the three remaining centers to avoid loss of  control that may result in fraud, waste, and abuse.  This will require, at a  minimum, (1) establishing milestones for completing both the review of  transferred contracts and resolving data problems identified during the  reviews, (2) using metrics to monitor progress, and (3) ensuring that  sufficient resources are dedicated to the resolution of the problem.
Identify the underlying causes of the contract depot maintenance  “awaiting parts” problem.
Develop an action plan to address the underlying causes for the  “awaiting parts” problems similar to the plan that was recently  developed to address the “awaiting parts” problems for the air logistics  centers’ in-house depot maintenance operations.
Provide clear and consistent guidance on how, when, and by whom the  induction of assets should be monitored.
Establish internal control procedures to ensure that the guidance on the  induction of assets is followed.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD provided written comments on a draft of this report.  DOD concurred  with our seven recommendations and identified actions it was taking to  correct the identified deficiencies.  For example, to improve the accuracy  of the data in its systems that track repair actions and account for costs,  the Air Force is in the process of developing and providing training courses  to the production management specialists.  DOD’s comments are reprinted  in appendix III.
We are sending copies of this report to the Secretary of Defense; the  Secretary of the Air Force; the Chairmen and Ranking Minority Members of  the Senate Committee on Armed Services; the Subcommittee on Readiness  and Management Support, Senate Committee on Armed Services; the  Subcommittee on Defense, Senate Committee on Appropriations; the  House Committee on Armed Services; the Subcommittee on Military  Readiness, House Committee on Armed Services; the Ranking Minority  Member, Subcommittee on Defense, House Committee on Appropriations;  and other interested parties.  Copies will be made available to others upon  request.  Please contact Greg Pugnetti, Assistant Director, at (703) 695-6922  if you or your staff have any questions concerning this report.  Other key  contributors to this report are listed in appendix IV.
section_title: Scope and Methodology
paragraphs: To determine if the reported carryover balances accurately reflected the  amount of unfinished work on hand at the end of fiscal year 2000, we  obtained and analyzed the air logistics centers’ logistical and financial  reports that provided information on unfilled orders.  We also reviewed the  computation that the Air Force uses to determine the dollar amount and  number of months of carryover.  This computation is the dollar amount of  unfilled orders at fiscal year-end less the dollar amount of work-in-process  which equates to the amount of funds that carryover to the next fiscal year.   We reviewed the two factors (unfilled orders and work-in-process) that are  used in the computation and obtained documentation that supported the  information.  Since the work-in-process amount is a calculated figure and is  not based on actual work performed by the contractors, we obtained and  analyzed the methodology used by the Air Force Materiel Command and  the air logistics centers to compute the amount of work-in-process.  In  addition, to determine if any of the work had actually been completed, we  selected and reviewed a stratified random sample of unfilled orders.
To identify the primary causes of contract depot maintenance carryover,  we reviewed a stratified random sample of 369 contract depot maintenance  requirements that, according to the group’s production and cost system,  had been funded by customers, but not yet completed by contractors as of  September 30, 2000.  These 369 depot maintenance requirements were  selected from five major workload categories (aircraft, engines,  exchangeable inventory items, missiles and other major end items, and  software).  They accounted for $744.1 million, about 41.2 percent, of the  $1.806 billion of unfilled orders that the activity group reported at the end  of fiscal year 2000.  Of the $1.806 billion, about $124 million of the  September 30, 2000, unfilled orders were customer requirements that,  according to the production and cost system, had not yet been placed on  contract.  These requirements and an additional $48 million of relatively  small orders were excluded from our analysis.  The remaining $1.634 billion  represents total unfilled orders.  The confidence level used for estimating  the value of completed and uncompleted work was 95 percent and the  expected tolerable amount in error (test materiality) was $163,392,642.  See  appendix II for the Sample Element Disposition Table.  Table 4 discloses  the estimates and confidence intervals in total and individually for normal  carryover, total problem carryover, and each of the carryover problems for  the carryover balances as of September 30, 2000.
We obtained information on the contractor performing the work, financial  data, and production data for each item in the sample from the production  and cost system.  This information follows: (1) contract number,  (2) contract line item number, (3) end item identity, (4) fiscal year of order  financing the work, (5) production management specialist office  responsible for overseeing the work, (6) unit sales price for the work,  (7) quantities of items planned to be repaired and when, (8) quantities of  items repaired as of September 30, 2000, and September 30, 2001, and  (9) dollar amount of unfilled orders as of September 30, 2000.  We analyzed  the above information to determine if the work was accomplished in fiscal  year 2000 as planned and, if not, we obtained explanations from the air  logistics centers about why the work was not completed.
We performed our review at the headquarters offices of the Under  Secretary of Defense (Comptroller) and the Secretary of the Air Force,  Washington, D.C.; Air Force Materiel Command, Wright-Patterson Air  Force Base, Ohio; the Oklahoma City Air Logistics Center, Tinker Air Force  Base, Oklahoma; the Ogden Air Logistics Center, Hill Air Force Base, Utah;  and the Warner Robins Air Logistics Center, Robins Air Force Base,  Georgia.  Our review was performed from July 2001 through May 2002 in  accordance with U. S. generally accepted government auditing standards.   The production and financial information referred to in this report was  provided by the Air Force.  We worked with Air Force officials to validate  the reliability of the information in the system to determine the reasons for  the work not being completed at the end of fiscal year 2000.   We requested  comments on a draft of this report from the Secretary of Defense or his  designee.  DOD provided written comments and these comments are  presented in the “Agency Comments and Our Evaluation” section of this  report and are reprinted in appendix III.
section_title: Sample Element Disposition Table
section_title: Comments from the Department of Defense
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: Staff who made key contributions to this report were Sharon Byrd,  Francine DelVecchio, Karl Gustafson, William Hill, Ron Tobias, and Eddie  Uyekawa.
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