DOD Service Acquisition: Improved Use of Available Data Needed to Better Manage and Forecast Service Contract Requirements
Published: 2016-02-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2014, DOD obligated over $156 billion to contractors that provide services, such as for engineering support, to meet needs. These contracted services constituted more than half of DOD's total contract spending. House Report 113-446 contained a provision for GAO to evaluate DOD's management of contracted services. This report assesses (1) trends in DOD spending on contracted services, (2) DOD's insight into its requirements for contracted services, and (3) how DOD reports on contracted services in its budget requests to Congress. GAO analyzed the most recent data available on DOD service contract spending from fiscal years 2010 through 2014, reviewed programming guidance and budget documents as well as a non-generalizable selection of six program office inputs to the budget and planning process for three military commands that spent the most on services in 2013, and interviewed DOD officials.
section_title: What GAO Found
paragraphs: Over the last 5 years, the Department of Defense (DOD) consistently obligated more on services than products. These obligations are significant. For example, in 2014 alone, DOD obligated $85 billion on its three largest types of services—knowledge-based, research and development, and facility-related services. This amount was more than double the amount DOD obligated for aircraft, land vehicles and ships, the three largest product categories DOD acquired.
Program offices within each of the military departments that GAO met with maintained data on current and estimated future spending needs for contracted service requirements, but they did not identify service contract spending needs beyond the next year, as there was no requirement to do so. As a result, DOD leadership's insight into future spending on contracted services is limited. DOD programming policy requires the military departments and defense agencies to develop a program objective memorandum (POM) that identifies and prioritizes requirements and total funding needs for the current budget year and then four additional years into the future. This policy and the military departments' supplemental POM guidance, however, do not address contracted services. The military departments have started efforts to collect data on contract services requirements beyond the budget year but these efforts could result in the collection of disparate data. For example, the Army plans to request data from program offices on all service contracts to be awarded over the next 5 years. In contrast, the Air Force plans to continue to collect data only for service contracts using operations and maintenance funds beyond the budget year. Unless DOD establishes a mechanism to coordinate efforts—a key internal control standard—it risks collecting different data leading to inconsistency across the department.
DOD's budget exhibits on contract services provide limited visibility to Congress on planned spending, and the primary exhibit for contracted services does not meet statutory reporting requirements. In 2009, Congress required DOD to develop an exhibit to summarize its service contract spending, in part, to improve oversight by DOD and Congress of DOD's contracted services. In its fiscal year 2014 exhibit, however, DOD excluded up to $100 billion—almost two-thirds—of its estimated spending on contracted services, including those for contingency operations and for medical care, on which it was statutorily required to report. Unlike DOD budget exhibits for weapon systems, DOD's other budget exhibits that contain limited information on contracted services do not include data on projected spending beyond the current budget year. Without a roadmap of future service contract spending needs, Congress has limited visibility into an area that constitutes more than half of DOD's annual contract spending.
section_title: What GAO Recommends
paragraphs: Congress should consider amending reporting requirements to include estimated spending on services beyond the budget year. GAO recommends that the Secretary of Defense and military departments revise POM guidance, coordinate efforts to forecast services, and fully comply with budget reporting. DOD concurred with the budget reporting recommendation and partially concurred with the two others, citing challenges with estimating future spending, but did not address revised guidance or coordination. GAO believes such actions are needed.

section_title: Letter
paragraphs: In 2014, the Department of Defense (DOD) obligated over $156 billion on  contracted services, constituting more than half of DOD’s total contract  spending. Contractors perform a wide array of critical functions such as  supporting DOD weapons programs, maintaining defense facilities, or  maintaining equipment. Given the magnitude of spending, effective  management of DOD contracted services is imperative and DOD has set  a goal of improving its management of service contracts through efforts  like the Better Buying Power initiatives. In response to these initiatives,  as well as congressional mandates, DOD has taken several actions since  2010 intended to improve its management of the broad range of services  it acquires. These actions include categorizing service acquisitions by  portfolio groups, such as research and development and knowledge- based services; appointing senior leaders within the military departments  to coordinate the acquisition of these services; and better integrating  contracting and financial management information. Despite these efforts,  our prior work has shown that DOD continues to face several challenges  related to services acquisition, such as having adequate data on the  current state of service acquisitions, which contributed to the inclusion of  DOD contract management to our high-risk list.
The House Armed Services Committee report 113-446 contained a  provision for us to assess the processes and procedures DOD employs to  acquire services. This report assesses DOD’s processes for developing  requirements and budgeting for contracted services. Specifically, this  report (1) examines trends in DOD spending on contracted services, (2)  assesses the extent to which DOD has insight into the use of contracted  services to fulfill current and future requirements, and (3) assesses how  DOD reports on contracted services in its annual budget request to  Congress.
To examine trends in DOD spending on contracted services, we analyzed  the five most recent years of Federal Procurement Data System-Next  Generation (FPDS-NG) data, fiscal years 2010 through 2014, and  grouped this data using DOD-defined categories of services, referred to  as portfolio groups. We also compared DOD spending trends on  products to services over the same 5-year period. To corroborate the  FPDS-NG data, we compared it to DOD financial data on obligations to  contracted services as reported by the DOD Comptroller. We determined  the FPDS-NG data to be sufficiently reliable for examining trends in DOD  spending on contracted services.
To assess the extent to which DOD has insight into the use of contracted  services to fulfill current and future requirements, we reviewed DOD  Directive 7045.14, “The Planning, Programming, Budgeting, and  Execution (PPBE) Process” and supplemental guidance issued by the  military departments. To determine how these processes were  implemented by each military department, we selected three military  commands that had among the most obligations on contracted services  during fiscal year 2013 based on data from FPDS-NG. These commands  included the Army Materiel Command, Air Force Materiel Command, and  Naval Sea Systems Command. For each military department and  selected commands, we collected and reviewed the applicable military  department and command-specific guidance governing programming,  including the formulation of the Program Objective Memorandum  (POM)—DOD’s 5-year funding plan for current and future requirements— to determine the extent to which contracted services were required to be  documented. We also reviewed programming documentation, including  inputs to the POM, and underlying supporting documents provided by  program offices at the three military commands. To select program  offices, we cross-referenced FPDS-NG data with DOD’s fiscal year 2013  inventory of contracted services, the most complete year at the time of  our review, to identify those offices that obligated the most to knowledge- based services—the largest group of services DOD acquires annually— within each of those commands. We selected a total of six program  offices, including at least two from each command, based on such factors  as the amount of obligations on contracted services, the types of services  acquired, and the program office’s location. For each program office, we  reviewed its input to the POM and underlying support. We also identified  how contracted services were documented and reported to determine  what information program offices maintained on estimated future service  contract spending. We selected a small sample of program offices at  each military department because this approach allowed us to obtain  more in-depth information for each office. Given the size of our sample,  our findings cannot be generalizable to all DOD program offices, but the  information gathered provides illustrative examples of the level of  contracted services data available.
Because each military department uses a different approach to  developing and approving the POM, we interviewed officials within each  military department to collect information on how contracted services are  included in the POM. These officials included the program officials  responsible for planning for the requirement as well as the programming  officials within the command or military department offices responsible for  issuing POM guidance and approving requirements and funding. We also  interviewed military department budgeting officials on how programming  and budget data is collected, stored, and used within each military  department, the extent to which their budget databases include  information on service contracts, and the steps, if any, that DOD plans to  take to improve programming, budgeting, and forecasting of contracted  services. In addition, we reviewed DOD services acquisition policies and  interviewed senior officials from the Office of the Under Secretary of  Defense for Acquisition, Technology, and Logistics (USD(AT&L)),  including those within Defense Procurement and Acquisition Policy, and  the senior service managers from each military department concerning  their use of contracted services data to carry out their management and  oversight responsibilities. We also interviewed officials within the Office of  the Under Secretary of Defense (Comptroller) office on the type of data  the department collects and maintains on future service contract  spending.
To assess how DOD reports on the procurement of contracted services in  its annual budget request to Congress, we reviewed the statutory  requirements found in section 235, title 10 United States Code, DOD’s  financial management regulation, and selected budget exhibits.  Specifically, we analyzed DOD’s contract services budget exhibit required  by section 235 of title 10, United States Code in its fiscal year 2014  Operation and Maintenance Overview, the most complete year at the  time of our review, to determine compliance with section 235. We also  reviewed selected budget exhibits accompanying the fiscal year 2014 and  2015 President’s budget that could contain contracted service information  based on our review of DOD’s financial management regulation, including  the PB-15, Advisory and Assistance Services, and OP-32, Summary of  Price and Program Changes exhibits. We also compared the reporting  requirements for contracted services to those for DOD weapon system  programs to determine differences in the number of out-year spending  projections included in the exhibits.
We conducted this performance audit from November 2014 to February  2016 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Each year, DOD relies on the private sector to provide a wide range of  services, including consulting and administrative support, information  technology services, and weapon system and base operations support to  fulfill the requirements needed to deliver important defense capabilities. In  fiscal year 2014, DOD obligated over $156 billion on contracted services,  which constituted more than half of DOD’s total contract spending.  Service contracts directly engage the time and effort of a contractor  whose primary purpose is to perform an identifiable task rather than to  furnish an end item of supply. For example, a service contract can be  used to obtain systems engineering support for a major weapons  program. Fulfillment of these contract requirements, in turn, enables DOD  to provide specific capabilities to meet mission needs.
subsections: section_title: DOD Efforts to Improve Management and Oversight of Service Acquisition
paragraphs: Since 2001, Congress has required and our past work has recommended  that DOD take several steps to improve, among other things, service  acquisition planning, tracking, and oversight. Specifically, section 2330 of  title 10, United States Code, enacted in 2001 and amended in 2006,  requires USD(AT&L) and the military departments to establish a  management structure for the acquisition of services. USD(AT&L) and the  military departments established an initial management structure for the  review and approval of service acquisitions in 2002. Similarly, in 2003 and  2006, we made a number of recommendations to DOD, including that it  take a more strategic approach to its acquisition and management of  services. In 2006, for example, we recommended, among other things,  that DOD establish a normative position of how and where service acquisition  dollars are currently and will be spent (including volume, type, and  trends); and determine areas of specific risk that are inherent in acquiring services  and that should be managed with greater attention (including those  areas considered sensitive or undesirable in terms of quantity or  performance).
DOD agreed that a more coordinated, integrated and strategic approach  for acquiring services was needed. In particular, DOD noted that it would  reassess its strategic approach to acquiring services, including examining  the types and kinds of services it acquires and developing an integrated  assessment of how best to acquire such services. Since then,  USD(AT&L) has taken several actions intended to improve its  management of services. For example, in September 2010, USD(AT&L)  issued the first of three Better Buying Power memoranda that included  steps to improve service acquisitions. In the November 2010  memorandum that followed it, USD(AT&L) directed that each military  department establish the position of a Senior Services Manager,  responsible for planning, executing, strategically sourcing, and managing  service contracts for their military departments, and to serve as the  approval authority for service acquisitions valued at less than  $250 million.
Additionally, in November 2010, the Director of Defense Procurement and  Acquisition Policy directed the military departments to organize services  spending data into six portfolio groups, later increased to nine, to  enhance its ability to analyze service contract spending. In its April 2013  Better Buying Power initiative memorandum, USD(AT&L) also identified  that by managing service acquisition by portfolio group, the senior  services managers should be able to work with requiring activities to  forecast future services requirements. (see table 1 for examples of  services within each portfolio group).
In June 2013, we found that USD(AT&L) and military department  leadership had demonstrated a commitment to improving management of  service acquisition, but that it faced challenges in developing goals and  metrics to assess outcomes due to limitations with corroborating data  between its contracting and financial data systems. DOD concurred with  our recommendation in the June 2013 report to identify baseline data on  service acquisitions, in part, by using budget and spending data to gauge  the effects of improvements. In that report, we also found that DOD was  already taking some steps to improve insight into DOD’s contracted  services. For example, USD (AT&L) initiated efforts to link contracting  system data to financial system data through a January 2013  memorandum that directed all DOD components to assign product and  service codes at a contract line item level of detail. According to the  memorandum, capturing product service codes at a contract line item  level of detail in DOD’s contracting systems will minimize data errors in  FPDS-NG and enable linkage of contracting and financial data systems.  USD(AT&L) officials stated that improving and linking data within its  contract and financial systems could help enable DOD to determine what it planned to spend on a particular service, what it actually spent for that service, and which organizations bought the service.
section_title: DOD’s Process for Planning, Programing, Budgeting, and Execution
paragraphs: Each year DOD uses the PPBE process to determine and prioritize  requirements and allocate resources and funding to the military  departments and defense agencies. This process, which is governed by  DOD Directive 7045.14 and supplemented by military department  guidance, is conducted under four phases (see figure 1).
The process includes constructing a 5-year funding plan called the Future  Years Defense Program (FYDP). The FYDP provides DOD and Congress  a tool for looking at future funding needs beyond immediate budget  priorities. The FYDP, which is submitted to Congress, is a DOD database  and internal accounting system that contains and summarizes information  on DOD’s forces, resources, and equipment that are part of all DOD  programs approved by the Secretary of Defense. In 1987, Congress  directed the Secretary of Defense to submit the 5-year defense program,  in part, to establish a mechanism to help inform DOD and the Congress  on current and planned resources as decisions are made. The FYDP  reflects decisions made in the DOD PPBE process and represents  estimated appropriation needs for the budget year for which funds are  being requested from Congress and at least the 4 years following it.
Each phase of the PPBE process is dependent on the preceding phase  and DOD is always working through multiple phases of the PPBE process  for multiple fiscal years at any given time during a calendar year. For  example, at the beginning of calendar year 2015, the planning phase  began with the development of the Defense Planning guidance for the  fiscal year 2018-2022 POM, while DOD was also in the programming and  budgeting phases to develop the fiscal year 2017-2021 POM and 2017  budget submission, which all occurred as DOD was in the execution  phase of the fiscal year 2015 budget (see figure 2).
The planning phase is the first step of the PPBE process and occurs near  the beginning of each calendar year. In this phase, DOD is to determine  what capabilities are needed in the future. At the end of the planning  phase, the Office of the Under Secretary of Defense for Policy is to issue  the Defense Planning Guidance to DOD components. This guidance  includes major DOD planning objectives and scenarios, strategic factors,  and fiscal limitations. The Defense Planning Guidance is then to be  factored into the development of component POMs. POMs are to be  established by each DOD component for their programs and are 5-year  funding plans for the specific capabilities needed to meet planning  guidance objectives, and are to be submitted to DOD senior leaders for  review.
The programming phase follows the planning phase and begins in the  April to May time frame. Its purpose includes prioritizing the programs  which best meet the military strategy needs, as documented in the  Defense Planning Guidance. More specifically, it is when the DOD  components, with input from their DOD commands and program offices,  are to determine the requirements needed to provide capabilities for  national security. This information is then to be presented in the POM.  The POM is completed at least two years before the estimated funds will  be spent and documents funding needs for 5 years into the future. For  example, the fiscal year 2017-2021 POM is to be completed in fiscal year  2015 and document the requirements and resources needed for fiscal  years 2017 through 2021.
In preparation for this phase, each military department is to issue annual  POM guidance to inform commands and program offices of the types of  information that should be included in POM submissions, the format, and  time frames for completion. Organizations responsible for issuing this  guidance are within the programming community and include
Army’s G-8, Program Analysis and Evaluation
Office of the Chief of Naval Operations
Secretary of Air Force Financial Management  Other organizations, such a major commands or program executive  offices, may issue supplemental guidance based on that organization’s  needs.
Generally, commands and program offices determine and document  requirements, priorities, and funding needs that are used to support their  respective command’s POM in the fall. Consolidated POM estimates are  to be submitted to the DOD Components in early spring and then to  Office of the Secretary of Defense (OSD) in July or August.
Before submitting the POM to OSD in July, the Office of the Secretary of  Defense, Cost Assessment and Program Evaluation, and other DOD  senior leaders, including those in the financial management and  programming community, are to review POM documents to validate and  prioritize requirements and make department wide resource allocation  decisions.
The budgeting phase of the PPBE process happens at the same time as  the programming phase and its purpose is to decide how much  prospective funding to allocate to each of the DOD programs for the next  fiscal year. DOD program offices are to convert their requirements in the  first year of the POM into the congressional appropriation format, known  as the budget estimate submission (BES). The BES and the POM  submissions are to be used by each DOD component financial  management office and DOD Comptroller to formulate the President’s  budget request. The DOD Comptroller and the OMB review the  submissions to ensure that program funding aligns with current policy and  is justified to Congress. The President’s budget is required to be  submitted to Congress no later than the first Monday of February. In the  President’s budget, contracted services are identified by eight spending  categories, known as object class codes, as shown in table 2.
Services within these codes may be associated with more than one of  DOD’s portfolio groups. For example, object class code 25.1, advisory  and assistance services, may be associated with both the knowledge- based and the research and development portfolios. Object class code  data is presented for each military department appropriation. In the fiscal  year 2015 President’s budget, contracted services for the military  departments were included in 38 different appropriations and 192  separate lines in the budget.
Each military department has a different approach to developing its  budget request. Both the Air Force and the Navy have data systems to  collect program office object class code data on budget year spending  estimates for contracted services, which inform the first year of the POM.  The Army, however, does not utilize program office data to develop its  budget request and does not have a data system or process to collect  such information from program offices. Instead, the Army Budget Office  uses historical budget execution data to develop its budget request.
The execution phase occurs at the same time as the programming and  budgeting phases. As part of the execution phase, the Comptroller and  DOD senior leaders within each military department’s financial  management community are to determine how to allocate funds. Also  during this phase, DOD components execute programs and budgets of  funded POM requirements.
section_title: Over the Last 5 Years, DOD Consistently Obligated the Majority of Its Contract Dollars for Services, Predominantly in Three Categories
paragraphs: Despite an overall reduction in product and service contract obligations  since 2010, the percentage that service contracting accounted for relative  to DOD’s total contract obligations remained relatively stable. For  example, DOD’s obligations on service contracts decreased from  $218 billion in fiscal year 2010 to $156 billion in fiscal year 2014, but  accounted for 51 to 55 percent of DOD total contract obligations (see  figure 3).
Further, DOD obligated more than half of contracted service dollars to  three service portfolio groups—knowledge-based, research and  development, and facility-related services. In fiscal year 2014, DOD  obligated more to these three portfolio groups than it did for the  procurement of guided missiles, aircraft, vehicles, ships, submarines, and  space vehicles (see figure 4).
These three service portfolios collectively have represented the majority  of DOD’s obligations on services since fiscal year 2010 (see figure 5).
Lastly, unlike a major weapon system, such as the Joint Strike Fighter,  which may award a contract valued at hundreds of millions, or even  billions of dollars, our analysis found that in fiscal year 2014 over 150,000  service contracts and orders were awarded or issued. Nearly 97 percent  of these were valued at $10 million or below and represented about 57  percent of all obligations to service contracts awarded in 2014. Figure 6  shows the distribution of contract actions for contracted services by dollar  value.
section_title: Existing Data on DOD’s Future Spending for Contracted Service Requirements Not Fully Captured by DOD’s Programming and Budgeting Processes
paragraphs: The program offices we met with generally had data on their estimated  service contract spending associated with requirements for both the  upcoming budget year and the succeeding four years. To the extent this  is true for most DOD program offices, the raw data military departments  would need to forecast spending on contract services is available. DOD’s  programming policy and supplemental military guidance, however, does  not require components to identify future spending on contracted services  beyond the budget year. As a result, DOD senior leadership has limited  insight into the extent to which contracted services will be used to help  meet requirements through the four remaining years of FYDP. Each  military department has undertaken some initial, yet different, steps to  collect data on program office service contract requirements and integrate  them into the POM. For example, the Army plans to request data from  program offices, such as product service code data, on all service  contracts to be awarded over the next 5 years. In contrast, the Air Force  plans to continue to collect object class data only for those service  contracts using operations and maintenance funds beyond the budget  year. DOD, however, lacks a mechanism to coordinate these efforts  which increases the risk of the collection of inconsistent data.
subsections: section_title: DOD Program Offices Generally Maintain Data on Future Service Contract Requirements
paragraphs: Program officials we met with generally kept track of their future service  contract needs and estimated contract costs not only for the budget year,  but also for the four additional years that are included through the FYDP.  Program officials stated that they generally know the costs associated  with recurring requirements already being fulfilled by contractors and can  generally estimate which requirements will be met by contractors for the  foreseeable future and factor such costs into their POM estimates. For  example:
Air Force Minuteman Minimum Essential Emergency Communications  Network Program Upgrade office developed cost estimates that  included details on anticipated costs through the FYDP for software,  hardware material, and the advisory and assistance services  associated with the requirement. For fiscal years 2014 through 2017,  program officials estimated $6.3 million was needed for engineering,  technical, and professional support services, approximately 15  percent of the anticipated program costs over that time.
Army’s Software Engineering Center developed detailed costs  estimates on each of the suites of software they were responsible for  sustaining. For each suite, the Center developed cost estimates for  government employees, software licensing fees, and contractor labor  through the FYDP. For one such suite of software, the Center  identified it needed $3.7 million from fiscal years 2016 through 2021  for information technology services, approximately 6 percent of the  anticipated sustainment costs. Program officials explained that this  data was used to develop the total cost estimates presented in its  POM.
The Navy’s Strategic and Attack Submarine Program Office utilized  the Naval Surface Warfare Center to help it develop and acquire a  new ship handling processing unit for the Seawolf class submarine.  The Naval Surface Warfare Center had detailed information on the  service contract costs associated with the work to be performed,  which included about $1.4 million of engineering and technical  support, approximately 72 percent of what the Center estimated it  needed to support the program office’s requirement in fiscal year  2016.
Program officials stated that, in some cases, requirements emerge in the  year of execution and therefore are neither planned for nor are their  related costs incorporated into the POM inputs they previously prepared.  They added that emergent requirements are unavoidable and that all  service contract needs cannot be planned for in advance. For example:
NAVSEA awarded a nearly $1.4 million contract in 2013 to obtain  expertise needed to help the Navy’s Virginia Class Submarine  program office prepare a cost assessment related to sub-system  material supplier quotes it was evaluating as part of a multi-billion  dollar submarine procurement. To enable timely completion of the  proposal evaluation, program officials stated that they determined  additional support was required to prepare the evaluation. As there  was not adequate in-house staff to do all the evaluations, contractor  services were obtained. Although the contract was not planned and  budgeted for through the POM process, officials stated that the  contract was funded using already available funding resources that  would minimally impact the program as a whole.
The Army Materiel Command awarded a $3.1 million contract in 2011  to develop a capability maturity model to aid in project management  executed by its Space and Terrestrial Communication Directorate.  Program officials stated that they needed additional support after a  base closure. They stated that the requirement, however, was  developed outside of their normal programming process and  associated costs were not included in their POM.
section_title: Planned Service Contract Spending Is Not Required to Be Identified in the POM Submissions Beyond the Budget Year
paragraphs: While program offices we reviewed generally maintained data on their  service contract requirements beyond the budget year, neither DOD  Directive 7045.14 or supplemental military department guidance require  program offices to identify which requirements through the FYDP will be  met through the use of service contracts in POM inputs. For example,  DOD Directive 7045.14 requires that military departments develop POMs  in accordance with planning, programming, and fiscal guidance, but does  not require that contracted services be separately identified. Similarly, our  review of supplemental Navy and Air Force guidance found that  contracted services were not addressed in this guidance. Additionally, an  official from Army Program, Analysis, and Evaluation (PAE)—responsible  for developing the Army’s POM guidance—stated that Army supplemental  guidance does not address contracted services.
The Army Materiel Command, Air Force Materiel Command, and the  Offices of the Chief of Naval Operations for Undersea and Surface  Warfare, respectively, issued supplementary guidance to program offices  to assist with fiscal year 2015 or 2016 POM preparations. This  supplemental guidance generally directed program offices to identify and  prioritize their requirements, and to include the total associated funding  needed through the FYDP. Program offices were also directed to identify  any capability gaps or unfunded requirements so decision makers can  redirect future funding if needed. This supplemental guidance, however,  did not require program offices to specifically identify what requirements  and capabilities would be achieved with the support of service contracts.  Program office representatives we met with explained that the officials  responsible for approving POM submissions could request information on  service contract requirements. For example, the 2016-2020 POM  guidance issued by the Office of the Chief of Naval Operations for  Undersea Warfare required program offices to provide an estimate for the  cumulative service contract costs and full time-equivalents that would be  used to support the program office through fiscal year 2017. An official  responsible for developing this guidance stated that this was requested,  in part, to help identify potential service contract reductions as a means of  achieving congressionally mandated spending reductions on services.
The guidance did not, however, require that the service contract portion of  each requirement be identified. An Undersea Warfare official stated that  those spending reductions were achieved and was unsure if they would  continue collecting such data.
As there was no requirement to do so, program offices did not identify in  POM inputs those requirements that would be satisfied through service  contracts beyond the budget year. The presentation and detail of  information in POM inputs we reviewed varied, but these inputs generally  included the program office’s objectives, schedule, a description of its  requirements or capabilities, and the associated funding by appropriation  that would be needed through the FYDP. For example:
The Air Force Minuteman Minimum Essential Emergency  Communications Network Program Upgrade office, which developed  its fiscal year 2015-2019 POM input in accordance with Secretary of  Air Force Financial Management guidance, identified equipment that  needed to be procured and fielded and an overall cost estimate for  related activities through fiscal year 2019. Service contracts were not  identified in the POM documentation provided. Program officials  confirmed, however, that service contracts were used in support of  meeting these requirements. In reviewing underlying information used  by the program office to formulate the POM, we found that at least  $2.6 million of the $12.3 million it requested in fiscal year 2015 was for  advisory and assistance services.
The Navy’s Strategic and Attack Submarine Program Office, which  developed its fiscal year 2016-2020 POM in accordance with Office of  the Chief of Naval Operations for Undersea Warfare guidance,  included only its total direct program support contractor costs through  fiscal year 2017, not all the estimated service contract spending  through the FYDP. It also identified steps it was taking to reduce  reliance on service contractors. It did not, however, identify what  portion of specific requirements would be satisfied through service  contracts. For example, the program manager explained that a  $32 million fiscal year 2015 requirement—in part, for lifecycle support  to Virginia Class submarine—included in its POM submission was  expected to be met through service contract support. This $32 million,  however, was not in the program’s contracted services section of it  POM input since that section only identified program office support.
Senior leaders across DOD acknowledge they have limited insight into  what requirements in the POM may be addressed through service  contracts. For example, Army PAE officials noted that the lack of a  mechanism to associate service contracts with requirements in the POM  limits their insight into how requirements will be addressed through the  FYDP. Additionally, the Navy Senior Services Manager identified several  challenges that do not allow service contracts to be managed like other  programs, including that detailed information on planned service contract  spending beyond the budget year is not captured outside of the program  office. According to the Navy Senior Services Manager, this limits the  department’s insight into future spending on capabilities that program  offices have determined will be met through long-term service contracts,  such as food services or base operating support. Similarly, the Air Force’s  Senior Services Manager and representatives from its Financial  Management office stated that the current POM and budgeting process  does not provide them adequate insight into the requirements for service  contracts over the remaining years of the FYDP.
The absence of policy or guidance requiring the military departments to  report on the extent to which contracted services will be used to address  requirements—data that is generally maintained and readily available by  the program offices we reviewed—identified in the POM increases the  risk that key information may not be considered when senior DOD  leadership approves future requirements. Federal internal control  standards require management to use quality information to both mitigate  risks and achieve agency objectives, such as better managing spending  on contracted services. Until DOD takes action to better identify and  forecast contract service requirements, the department is at continued  risk of planning and approving requirements without information on how  services, which constitute the majority of DOD contract spending, will be  used.
Additionally, by including projected service contract spending in the POM,  DOD would be better positioned to address Congressional requirements  to report on future spending that, to date, it has not been able to do.  Specifically, section 955(b) of the National Defense Authorization Act for  Fiscal Year 2013 required DOD to, among other things, report on  projected savings associated with civilian and contracted services  workforce from fiscal years 2012 through 2017, relative to the savings in  funding for basic military personnel pay achieved from reductions in  military end strengths over the same period of time. In its 2014 report to  Congress, DOD noted that it could not provide insight into projected  savings for fiscal years 2016 and 2017 because it does not forecast  service contractor requirements beyond the budget year.
section_title: Military Departments Have Taken Ad Hoc Steps to Forecast Contracted Services Requirements, but These Efforts Lack Coordination
paragraphs: Each military department has undertaken some initial steps to better  project contract services requirements beyond the budget year but these  efforts could result in the collection of different data. For example:  In 2014, the Secretary of the Navy directed that the Assistant  Secretaries of the Navy for Research, Development and Acquisition  and for Financial Management and Comptroller develop a means to  integrate contract services into the planning, programming, and  budgeting processes to better manage service contract planning and  execution in response to budgetary pressures. The Secretary of the  Navy expected that by increasing visibility and granularity of  contracted services requirements in the POM, the Navy would be  better positioned to responsibly meet budget constraints. By the 2019  POM, the Navy plans to establish an integrated Navy-wide business  intelligence tool that would enable the department to track the  identification, validation, funding, and spending related to contracted  services requirements through the FYDP in existing information  systems. The Navy’s Senior Service Manager believes that by doing  so, the department will better be able to plan requirements for service  contracts and make informed decisions about opportunities to acquire  services in a more effective manner. The Office of the Chief of Naval  Operations for Undersea Warfare has also taken steps to address the  Secretary of the Navy’s requirement by directing program offices to  include overall estimated spending by service object class code and  list all contracts that fall under those codes for the 2017-2021 POM.
Army PAE officials stated that they plan to direct Army commands to  identify all requirements and their associated service contracts in the  fiscal year 2018-2022 POM. These officials stated that they plan to  request data from program offices, such as product service code data,  on all service contracts to be awarded over the next 5 years. Army  PAE officials stated this effort is intended to resolve gaps in their  insight into future service contract requirements and to better control  spending on service contracts. Officials stated that this approach was  piloted on a limited basis at one organization within the Army Training  and Doctrine Command. Army PAE officials report that the effort was  successful, capturing estimates for 176 current or future service  contracts, but the accuracy of these estimates cannot be verified until  2019, when spending on these contracts can be tracked. Army  Training and Doctrine Command officials that developed the data  stated that the Army should consider incrementally implementing this  effort Army-wide to develop lessons learned and ensure good data is  collected, in part, because the pilot was narrowly scoped.
An Air Force financial management official stated that the Air Force  plans to continue its current process. For example, as part of the  POM, program offices provide data that is used by the Air Force  financial management office to develop service contract spending  estimates by object class code. An Air Force financial management  official stated that through its budgeting process, it can estimate  spending for the next fiscal year. Beyond that, however, their budget  systems do not fully identify estimated spending for contract services.  For example, object class code data is collected through the FYDP for  operations and maintenance related funding, but not for services  associated with weapon system development and procurement.
Additionally, DOD’s January 2016 service acquisition instruction requires  that each military department’s Senior Services Manager develop service  contract forecasting tools that will be used, in part, to aid in budgeting.  The instruction, however, does not specify how far into the future and the  level of detail the tools should provide. Defense Procurement and  Acquisition Policy officials, who developed the instruction, stated that  additional guidance will need to be developed to assist the Senior  Services Managers.
The Senior Services Managers, which traditionally have been responsible  for overseeing the execution of higher dollar service contracts, stated they  face several challenges in meeting this new forecasting requirement.  First, they noted they do not have a role in defining, validating, or funding  requirements, nor do they play a role in determining which requirements  should be contracted for or what portion of the budget will be spent on  contracted services, which is the responsibility of commands and program  offices. Further, the Navy and the Air Force senior services managers  noted they do not collect information to forecast future service contract  requirements, while the Army senior services manager collects  information on service contracts that are to be awarded in the next year  with an estimated value of over $10 million. These contracts represented  about 40 percent of the Army’s total spend on new service contracts in  fiscal year 2014. The Senior Services Managers believed that efforts to  include services in DOD’s established POM process could help address  this new forecasting requirement if they were provided with such data.
While the military departments and USD(AT&L) are attempting to improve  insight into future spending on contracted services, each is taking a  different approach and DOD has not articulated a unified or  comprehensive approach to doing so. Further, in addition to the military  departments’ programming and budgeting offices, a number of other  organizations within DOD are also involved in the process for identifying,  approving, or funding future service contract requirements, including  DOD’s Cost Assessment Program Evaluation Office and Comptroller,  which could benefit from information derived from these efforts. Given  that many of these efforts are in their initials stages, senior DOD officials  explained the department does not have a mechanism, such as a working  group, to coordinate and communicate results from these efforts. Federal  internal control standards require that management communicate the  types and quality of information needed to achieve objectives. Without  clear direction and coordination, however, through a working group or  some other mechanism, DOD increases its risk that the data being  collected will not be consistent, reliable or useful in achieving its  objectives.
section_title: DOD Budget Exhibits Submitted to Congress Provide Limited Visibility into Contracted Services Spending
paragraphs: DOD budget exhibits provide limited visibility to Congress on planned  spending for contracted services. In addition, the primary budget exhibit  for services does not meet statutory reporting requirements. In 2009,  Congress required DOD to develop an exhibit to identify amounts  requested for its service contract spending, in part, to improve oversight  by DOD and Congress of DOD’s contracted services. In implementing  this provision, however, DOD excluded up to $100 billion—almost two- thirds—on its estimated spending on contracted services for fiscal year  2014 on which it was required to report, in part to maintain consistency  with other reporting requirements. Officials acknowledged, however, that  this approach to the budget exhibit does not meet statutory requirements.  Moreover, unlike DOD budget exhibits for weapon systems and other  major acquisitions, DOD’s other budget exhibits that contain some  information on contracted services are not required to include data on  projected spending on contracted services beyond the current budget  fiscal year. Without a roadmap of future service contract spending needs,  Congress has limited visibility into an area that constitutes more than half  of DOD’s annual contract spending.
subsections: section_title: DOD Budget Exhibit Improperly Excluded the Majority of DOD’s Budget Request for Contracted Services
paragraphs: Section 235, title 10, United States Code requires DOD, in part, to clearly  and separately identify, for each budget account, the amount requested  for the procurement of contract services (excluding research and  development and services related to military construction) for each DOD  component, installation or activity in its budget justification materials  submitted to Congress. Congressional conferees noted the intent, in part,  of the single exhibit was to provide clarity on the total amounts to be  spent annually on contracted services and provide DOD and Congress  with greater oversight of the procurement of contractor services.
DOD’s contracted services budget exhibit intended to meet that statutory  reporting requirement, found in the Operation and Maintenance Overview  report, however, significantly underreports DOD’s estimated budget  request for contracted services. DOD submitted its first exhibit in  February 2011, accompanying its budget request for fiscal year 2012, and  has done so annually since then. These exhibits, however, do not fully  include DOD’s budget request for contracted services, as required by  section 235, title 10, United States Code, because it improperly excluded  projected spending for “medical contracts,” “overseas contingency  operations,” and “other government purchases.” For example, in fiscal  year 2014, the DOD Comptroller requested approximately $217 billion for  contracted services. Of this, we determined that after appropriately  excluding spending on services such as the nearly $61 billion requested  for research and development, DOD should have reported approximately  $155.7 billion in its contracted services exhibit. The fiscal year 2014  exhibit, however, only reported a total of $55.8 billion for contracted  services and improperly excluded nearly $100 billion in requested  spending for medical care, other government purchases, and overseas  contingency operations appropriations (see figure 7).
Representatives from DOD’s General Counsel acknowledged that they  could not identify any legal basis for DOD to categorically exclude  spending for these three types of services from the budget exhibit. They  stated that DOD had intended to attain consistency across multiple  contract services reporting requirements. For example, a DOD  Comptroller official stated that they used the same approach to address  the section 235 reporting requirement as was used to respond to service  contracts spending limitation requirements in section 808 of the National  Defense Authorization Act for Fiscal Year 2012, which authorized DOD to  exclude some services, such as overseas contingency operation funding.  In addition, DOD officials explained that they also sought to avoid  inclusion of spending within the medical care services and other federal  purchases categories that they may not consider to be contracted  services. For example, officials stated that they excluded the medical care  object class code in part because it includes payments to insurance  carriers which do not involve contracted services to DOD in the  conventional sense. Nevertheless, this approach has resulted in DOD not  meeting its reporting requirements on services. The DOD Comptroller is  considering including additional contracted services, such as those  funded through overseas contingency operation appropriations, in future  budget exhibits. Until DOD takes action to modify its approach for  complying with Section 235 of title 10, United States Code, it will continue  to underreport estimated spending on services and inhibit congressional  oversight. DOD subsequently reported that it plans to fully report on its  estimated service contract spending in its 2017 budget exhibit.
section_title: Other DOD Budget Exhibits Provide Only Limited Information on One Year of Future Spending Data for Service Contracts
paragraphs: Although DOD spends the majority of its contract spending on services,  requirements to forecast future year spending is limited to the next budget  year. DOD’s Financial Management Regulation, which governs the  information that accompanies the President’s budget request, does not  require DOD to develop exhibits that specifically identify contracted  services beyond the current budget year. As part of the President’s  budget request—which outlines budget year request data by object class  code for each military department appropriation—DOD’s requested  funding for a portion of contracted services are found within two budget  exhibits: PB-15, Advisory and Assistance Services, and OP-32, Summary  of Price and Program Changes. The PB-15 summarizes each military  department’s budget request for advisory and assistance services  associated with the operations and maintenance appropriation for the  current budget year. This exhibit also provides data on what Congress  appropriated and DOD spent for the prior fiscal year for these services.  The PB-15 exhibit does not, however, include data on expected spending  for advisory and assistance service contracts beyond the current budget  year (see figure 8 for an example of the Army’s fiscal year 2015 PB-15  exhibit).
Each military department also submits operations and maintenance  budget exhibit OP-32 to report on price and program changes for multiple  budget categories besides contracted services. The exhibit includes 78  separate line items, 21 of which can be cross walked to a service contract  object class code. Similar to the PB-15, this exhibit provides data on the  current budget year and the two preceding fiscal years (see figure 9 for  an excerpt from the Army’s fiscal year 2015 OP-32 exhibit).
In contrast, the Financial Management Regulation requires up to 28  budget exhibits for the procurement of weapon system programs valued  at $5 million or more, which include estimated costs through the 5-year  period of the FYDP. DOD budget exhibits for weapon systems are not  required, however, to specifically identify contracted services that may be  acquired in support of these weapon systems. For example, the Air  Force’s Exhibit P-3A for modifications to the Minuteman III system, a  land-based intercontinental ballistic missile requested $11.8 million in  procurement funding in fiscal year 2015. In this exhibit, for fiscal year  2015, the program requested $4.1 million under a line item identified as  Program Management Administration. Program officials explained that  Program Management Administration category includes costs for program  office travel and supplies, as well as for advisory and assistance services.  We found that approximately $2 million—or about half of the amount  requested under Program Management Administration—was for advisory  and assistance services.
Consequently, there is no current budget exhibit, either specific to  services or for weapon systems, that would provide the Congress insights  into service contract spending through the FYDP. Congress, however,  has expressed interest in greater oversight of DOD future year spending  on contracted services. Although DOD program offices have information  available through the FYDP for service contracts spending, there is no  requirement to provide such information to Congress. As a result, the  Congress has limited insights into DOD’s planned expenditures for  services beyond the current budget year.
section_title: Conclusions
paragraphs: DOD has taken several important steps to improve its management of  services as well as to increase its knowledge of and visibility into service  contract spending. Improving its ability to strategically manage service  acquisitions, a stated DOD objective, remains imperative as DOD  consistently spends the majority of its contract dollars on services. As we  noted almost a decade ago, critical to being more strategic is knowing  what you are spending today and what you intend to spend in the future.  In that regard, DOD programs have data on not only what they intend to  spend next year on services, but, within reason, how much they anticipate  spending beyond the budget year. Despite the availability of this data,  senior DOD leadership has limited insight on future spending because  DOD and the military departments’ guidance governing the programming  process do not require that it be provided. In other words, data on  planned spending on contracted services do not get shared beyond the  program office. As a result, DOD may be missing an opportunity to make  more strategic decisions and improve the management and oversight of  more than half its contract dollars. As the military departments’ processes  vary, determining how best to collect the data, and what data to collect, is  important. For example, each of the military department’s senior services  managers will be responsible for developing forecasts of future spending  on contracted services and each military department has efforts  underway to collect data on service contract spending, though each effort  appears to be following different paths. Without some mechanism, such  as a working group, to coordinate these efforts, DOD may be at risk of  having inconsistent data that will hinder it from moving forward on an  enterprise-wide basis.
Information on estimated service contract spending degrades further as  DOD provides it to Congress in its annual budget exhibits. DOD provides  Congress data on service contract spending in several budget exhibits,  but only for the upcoming budget year and no further. Moreover, DOD’s  principal budget exhibit developed to respond to legislative requirements  inappropriately excludes almost two thirds of its spending that is required  to be reported. Until DOD takes action to modify its approach for reporting  contracted services in its budget exhibits to fully comply with reporting  requirements, Congress will not have the statutorily required information  needed to help conduct oversight. Even when corrected, however, DOD’s  exhibits will provide visibility only as far as the current budget year, which  diminishes the Congress’s ability to consider DOD’s future service  contract spending needs. By contrast, DOD weapon system budget  exhibits include not only current spending needs but information on  estimated needs over the next 5 years. Since DOD program offices are  generally able to forecast service contract spending through the future  year defense program, Congress could augment current DOD reporting  requirements to request such information for contracted services over a  5-year period. In doing so, Congress would have data similar to what  DOD could collect and would better be better positioned to provide more  informed oversight of DOD spending.
section_title: Matter for Congressional Consideration
paragraphs: Given that the intent of section 235 of Title 10 United States Code was to  provide both DOD and Congress with increased oversight of the  procurement of services, Congress should consider revising the section  to require that DOD report on its projected spending beyond the budget  year and consistent with the time period covered by the future year  defense program.
section_title: Recommendations for Executive Action
paragraphs: To ensure that senior leadership within the Office of the Secretary of  Defense and the military departments are better positioned to make  informed decisions regarding the volume and type of services that should  be acquired over the future year defense program, we recommend that  the Secretaries of the Army, Navy, and Air Force revise their  programming guidance to collect information on how contracted services  will be used to meet requirements beyond the budget year.
To ensure the military departments’ efforts to integrate services into the  programming process and senior service managers efforts to develop  forecasts on service contract spending provide the department with  consistent data, we recommend that the Secretary of Defense establish a  mechanism, such as a working group of key stakeholders—which could  include officials from the programming, budgeting and requirements  communities as well as the senior services managers—to coordinate  these efforts.
To ensure DOD fully complies with section 235 of Title 10, United States  Code, we recommend that the Under Secretary of Defense (Comptroller)  modify its approach for reporting contracted services in its budget exhibit  to ensure that projected requirements for medical care, other federal  purchases, and other contingency operations are included.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD for comment. In written  comments, DOD concurred with one of our three recommendations and  partially concurred with two. DOD’s written comments, which are  summarized below, are reprinted in appendix I of this report. DOD also  provided technical comments, which we incorporated as appropriate.
DOD partially concurred with our first recommendation that the  Secretaries of the Army, Navy, and Air Force revise their programming  guidance to collect information on how contracted services will be used to  meet requirements beyond the budget year. In its comments, DOD noted  that while its guidance will continue to direct the efficient use of  contracted services, the volatility of requirements and each budget cycle  constrain the department’s ability to accurately quantify service contract  requirements beyond the budget year. While we agree that requirements  and budgets change over time, our work shows that the needed data  already exists. Specifically, the program offices we met with maintained  data on their future service contact requirements, beyond the budget  year, to support their inputs to the POM. This data, however, was not  captured by DOD in such a way to inform senior leadership on future  service contract spending. In addition, while DOD partially concurred with  this recommendation, it is unclear what action, if any, it plans to take to  implement it. We continue to believe that implementing this  recommendation will assist the department in gaining better insights into  contracted service requirements beyond the budget year and enable it to  make more strategic decisions about the volume and type of services it  plans to acquire.
DOD partially concurred with our second recommendation that the  Secretary of Defense establish a mechanism to coordinate ongoing  efforts to integrate contracted services into the programming process. In  its response, DOD did not indicate any actions it plans to take to  implement this recommendation, instead noting a number of efforts, such  as the establishment of Service Requirement Review Boards, which will  aid in the management and oversight of services acquisitions. These  efforts, however, do not address the need for a coordinated approach,  such as a working group, to ensure that ongoing military department  efforts collect consistent data in a manner that would better inform DOD  leadership on future service contract spending. In the absence of DOD  action to implement this recommendation, the department is at risk of the  military departments developing uncoordinated processes and  inconsistent data as they mature efforts to make more strategic decisions  about contracted service requirements.
DOD concurred with our third recommendation to modify its approach to  reporting contracted services in its budget exhibit to fully comply with  section 235 of Title 10, United States Code. DOD stated that it will include  projected data on service contract spending for medical care, other  federal purchases, and overseas contingency operations in its contracted  services budget exhibit beginning with the 2017 President’s budget.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense; the Secretaries of the Army, Air  Force, and Navy; the Under Secretary of Defense (Comptroller); the  Under Secretary of Defense for Acquisition, Technology, and Logistics;  and the Director, Office of Management of Budget. In addition the report  is available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-4841 or DiNapoliT@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 key contributions to this  report are listed in appendix II.
section_title: Appendix I: Comments from the Department of Defense
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, W. William Russell (Assistant  Director); Pete Anderson; Josie Benavidez; Justin Jaynes; Jessica  Karnis; Julia Kennon; Sylvia Schatz; Suzanne Sterling; and Ozzy Trevino  made significant contributions to this review.