Defense Acquisitions: Further Action Needed to Improve DOD's Insight and Management of Long-term Maintenance Contracts
Published: 2012-05-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: DOD spends billions annually to maintain its weapon systems and, at times, uses long-term maintenance contracts with a potential period of performance of 5 years or more. These contracts can encourage contractors to invest in new facilities, equipment, and processes, but may hinder DODs ability to incentivize contractors performance and control costs, especially in the absence of a competitive environment or if DOD does not acquire access to technical data that can enable DOD to select an alternative maintenance provider.
GAO was asked to evaluate (1) the extent to which DOD uses long-term maintenance contracts, (2) DODs ability to select alternative maintenance providers, and (3) how these contracts have been structured to incentivize performance and manage cost. GAO reviewed a nongeneralizable sample of 10 long-term contracts to illustrate different maintenance approaches. GAO interviewed program officials and reviewed contract documentation. GAO also reviewed information on eight programs recently reviewed by DOD to determine how these programs addressed technical data needs.
section_title: What GAO Found
paragraphs: At the departmental level, neither the Department of Defense (DOD) nor the individual military departments know the extent to which weapon system programs rely on long-term maintenance contracts. DOD policy requires DOD and the military departments to approve acquisition strategies and lifecycle sustainment plans, which include information on contractor support, but DOD officials reported that they do not collect information on the use of long-term contracts. DODs limited visibility over long-term maintenance contracts reflects broader DOD challenges with managing services acquisition. GAOs past work has identified the need for DOD to obtain better data on its contracted services to enable it to make more strategic decisions. DOD is considering a number of policy- and data-related initiatives that could improve its knowledge of these contracts, but these efforts are in the early stages of development.
Decisions made early in the acquisition process can limit DODs ability to select alternative maintenance providers over the life cycle of a weapon system program. Program officials believed that DOD had the ability to select alternative service providers for half of the contracts GAO reviewed, as DOD either had sufficient technical data or there was an existing competitive environment. DOD officials believed the lack of technical data, funding, or expertise would hinder them from selecting alternative service providers on the other contracts GAO reviewed. Recent legislation and DODs 2010 efficiency initiatives emphasize the importance of technical data considerations. GAO found that eight weapon systems that underwent DOD acquisition-related reviews between October 2010 and October 2011 considered technical data issues, but not all have determined the extent to which they will acquire these data or the cost to do so.
Once the decision is made to use long-term contracts, DOD faces choices on how to best incentivize contractor performance and manage costs. GAO found that the 10 long-term maintenance contracts reviewed varied in terms of the incentives employed and tools used to gain insight into contractor costs. For example, GAO found that all 5 contracts with the longest durations, potentially ranging from 9 to 22 years, used monetary incentives such as award or incentive fees, or contract term incentives that can extend the life of the contract by several years. However, DOD and program officials expressed some concerns about the lack of insight on contractors costs. In two cases, program offices established fixed prices for the entire potential length of the 9- and 15-year contracts without the ability to renegotiate prices or obtain incurred cost data. In comparison to the contracts with the longest durations, the five contracts GAO reviewed with maximum lengths of 5 years made less use of incentives or cost-control tools and generally did not have the ability to renegotiate contract prices, but program officials believed that the shorter-term nature of the contracts mitigated some of their risks. DOD does not collect information concerning the effectiveness of the various incentives or cost control tools used on long-term maintenance contracts, but it has identified efforts made by individual programs to improve acquisition of maintenance services. Developing lessons learned on what incentives and cost-control tools work best would help inform future acquisition strategies and reduce risk.
section_title: What GAO Recommends
paragraphs: GAO recommends that DOD collect information on the extent to which DOD uses long-term maintenance contracts and develop lessons learned regarding the use of incentives and cost-control tools. DOD concurred with each of the recommendations and indicated that it would develop methodologies to implement them.

section_title: Letter
paragraphs: The Department of Defense (DOD) spends billions of dollars each year  on operating and support costs for weapon systems, including for  maintenance, engineering support, and personnel. Such costs historically  account for approximately 70 percent of a weapon system’s total life-cycle   Among such expenses are those associated with depot-level repair  cost.of weapon systems, which includes overhaul, upgrades, and rebuilding of  parts and assemblies. According to a recent DOD report, the department  spent approximately $33 billion in fiscal year 2010 to maintain its weapon  systems through both government and commercial providers. In some  instances, DOD may determine that depot-level maintenance will be  performed through a contractor using long-term contracts for  maintenance services that can span more than a decade. DOD officials  note that a long-term contract can encourage contractors to invest in new  facilities, equipment, and processes, but may also hinder the  government’s ability to appropriately incentivize the contractor’s  performance and control costs, especially in the absence of a competitive  environment or if the government does not acquire access to the  technical data needed to maintain the weapon system.
In May 2011, GAO reported that DOD continues to face challenges that  could undermine competition of maintenance contracts, including  shortcomings in how programs’ technical data rights requirements  necessary for competition are determined.  Additionally, GAO has  previously reported on DOD’s increased reliance on contractors for  maintenance and other logistics support for its weapon systems,  management challenges associated with the acquisition of major weapon  systems, and the department’s lack of insight into costs associated with  depot maintenance and other weapon support contracts.given these issues and the long-term nature of certain maintenance  contracts, you requested that we review various aspects of DOD’s use of  long-term contracts for maintaining its weapon systems. To address this  request, we evaluated (1) the extent to which DOD uses long-term  maintenance contracts to support major weapon system programs, (2)  DOD’s ability to select alternative maintenance services providers for its  major weapon system programs, and (3) how long-term maintenance  contracts have been structured to incentivize contractors’ performance  and manage contractor costs.
For the purposes of this report, we defined long-term maintenance  contracts as those with a potential period of performance of five years or  more that provide depot-level maintenance services or support  performance of maintenance functions. Further, this report focuses on the  policies and practices that pertain to major defense acquisition  programs. To determine the extent to which DOD uses long-term  maintenance contracts, GAO discussed with DOD and military  department officials the data DOD collects on maintenance approaches  and related contract information and reviewed various reports, including  Distribution of DOD Depot Maintenance Workload, as well as DOD’s  analysis of Federal Procurement Data System-Next Generation (FPDS- NG) data related to maintenance services.wide data concerning the use of such contracts was unavailable, we  worked with military department officials to identify long-term  maintenance contracts used by major weapon system programs. Based  on these discussions, we reviewed 10 long-term contracts supporting  seven major defense acquisition programs. We selected these contracts  to represent each of the three military departments and to illustrate  different maintenance approaches.
To determine the extent to which major weapon system programs could  select alternate maintenance services providers, we reviewed acquisition  plans and interviewed program officials to obtain their insight on the  factors that would hinder or facilitate the department’s ability to do so. We  also interviewed program officials and reviewed documents on eight  major defense acquisition programs identified by the Office of the Under  Secretary of Defense for Acquisition, Technology, and Logistics  (USD(AT&L)) as having a major acquisition review between October 2010  and October 2011 to determine whether program officials had considered  technical data rights in their acquisition strategies or life-cycle  sustainment plans submitted as part of these reviews.
To determine how long-term maintenance contracts were structured to  incentivize performance and provide insight into costs, we reviewed  available acquisition plans, contractual information such as pricing data  and price negotiation memoranda, incentive plans, and performance data  and interviewed cognizant program officials for the long-term contracts we  reviewed. As part of this effort, we reviewed the program offices’ use of  monetary incentives such as award and incentive fees, performance  bonuses, and downward price adjustments, as well as their use of  contract term incentives, including award terms and incentive options,  which can extend the contract’s period of performance. Further, to  determine the extent to which programs gained insight into contractor  costs, we identified whether they had the ability to renegotiate contract  prices, obtained incurred cost data, or used cost-based incentive metrics.  Appendix I provides more detailed information on our scope and  methodology.
We conducted this performance audit from February 2011 through  May 2012 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: DOD spends billions of dollars annually to maintain complex weapon  systems including aircraft, ships, ground-based systems, missiles,  communications equipment, and other types of electronic equipment that  require regular and emergency maintenance to support national security  goals. Maintenance of this equipment is divided into three levels  corresponding to the extent and complexity of these repairs—depot-level,  intermediate, and organizational. DOD defines depot maintenance as the  highest level of maintenance and it generally refers to major maintenance  and repairs, such as overhauling, upgrading, or rebuilding parts,  assemblies, or subassemblies. This level of maintenance can consist of  repair to entire weapon systems, major assemblies that comprise a  system, or the components that make up those assemblies. Depot  maintenance also includes installation of system modifications that extend  the operational life of weapon systems. Such repairs and overhauls have  long been provided by DOD maintenance personnel, private contractors,  or a mixture of the two through public-private partnerships performed at  government-owned and private facilities. Intermediate maintenance  consists of repair capabilities possessed by operating units and in-theater  sustainment organizations that include remove-and-replace operations for  subcomponents, local manufacture, and other repair capabilities.
Organizational maintenance consists of the tasks necessary for day-to- day operation including inspection and servicing.
subsections: section_title: Several Policies Guide Decisions on Maintenance Approaches
paragraphs: The department’s overarching acquisition guidance, DOD Directive  5000.01, states that the program manager shall be the single point of  accountability for accomplishing program objectives for total life-cycle  systems management, including sustainment. DOD Instruction 5000.02,  which provides additional DOD guidance for managing and overseeing  defense acquisition programs, requires that program managers perform a  core logistics analysis to support major acquisition milestone reviews after  the technology or system development phase. Such logistics  considerations, to include those related to maintenance, are contained  within the life-cycle sustainment plan that was, until recently, reviewed as  part of the acquisition strategy for major weapon system programs. In  April 2011, DOD directed that the life-cycle sustainment plan be reviewed  separately from the acquisition strategy and, in September 2011, directed  that those sustainment plans associated with certain major weapon  systems be approved by the Assistant Secretary of Defense for Logistics  and Materiel Readiness at all milestone decision points during weapon  system development and at the full-rate production decision.DOD has established a new template for the plans’ content to include the  extent to which contractor services will support maintenance.
DOD has issued instructions that provide guidance to the military  departments and program offices on defining maintenance requirements  and approaches. For example, DOD Directive 4151.18 requires that the  source of depot-level repair for major weapon systems be determined  during the weapon system’s development. It also provides instruction on determining if depot-level maintenance for a weapon system will be  performed at a government-owned and government-operated (hereinafter  referred to as “organic”) depot, by a private-sector contractor, or some  combination of the two. Section 2466 of Title 10 of the U.S. Code places  limitations, however, on contracted depot-level maintenance of materiel.  The statute provides that not more than 50 percent of funds made  available in a fiscal year for depot-level maintenance and repair may be  used for contracted services. This is known as the 50/50 requirement.  DOD is also required to report annually on past and projected workload  allocations. DOD Directive 4151.18 requires that USD(AT&L) monitor  compliance with the directive and review the adequacy of DOD  maintenance programs and resources. Additionally, it requires DOD  components develop tools and management procedures to implement the  content of the directive.
Additionally, DOD Instruction 4151.20 provides instruction for determining  “core” maintenance requirements as defined in Section 2464 of Title 10 of  the U.S. Code. the national defense and require that DOD maintain a logistics capability  that is government-owned and government-operated to ensure DOD can  effectively respond to a mobilization, national defense contingency  situations, and other emergency requirements in a timely manner. To  ensure that life-cycle sustainment planning is done early in a weapon  system’s development phase, the National Defense Authorization Act for  fiscal year 2012 revised the assessment of core maintenance  requirements and directed DOD to identify such requirements at  acquisition milestones.
section_title: Recent Legislative and DOD Efforts to Enhance Competition
paragraphs: Department of Defense Instruction 4151.20, Depot Maintenance Core Capabilities  Determination Process, January 5, 2007. example, Congress passed the Weapon System Acquisition Reform Act  of 2009, requiring DOD to ensure competition or the option of competition  throughout a weapon system program’s life cycle, in part, by requiring  DOD to consider purchase of complete technical data packages when  cost-effective. In May 2011, however, we reported that DOD continues  to face challenges that could undermine competition of maintenance  contracts, including shortcomings in how programs’ technical data rights  requirements that are necessary for competition are determined. We  recommended, and DOD agreed, that the department should update its  acquisition and procurement policies to clarify requirements for  documenting technical data requirements and to issue instructions for  program managers to use when conducting analyses used to determine  technical data rights needs for a weapon program.
Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics,  Better Buying Power: Guidance for Obtaining Greater Efficiency and Productivity in  Defense Spending, September 14, 2010. to (1) conduct a business-case analysis that outlines the technical data  rights the government will pursue to ensure competition and (2) include  the results of this analysis in acquisition strategies at a program’s  entrance into the engineering and manufacturing development phase of  the acquisition.
section_title: DOD Does Not Know the Extent to Which It Relies on Long-term Maintenance Contracts
paragraphs: At the departmental level, neither DOD nor the individual military  departments know the extent to which weapon system programs rely on  long-term maintenance contracts. This includes the most basic  information—how many of such contracts are currently in use. DOD does  not collect or maintain such information during its reviews of acquisition  strategies or life-cycle sustainment plans, nor do existing data collection  systems provide the type of information needed to do so. Consequently,  we worked with the military departments to identify a number of long-term  maintenance contracts and selected 10 contracts supporting seven major  weapon systems for detailed review. We found that these contracts varied  widely in terms of breadth of requirements, potential period of  performance, and value. For example, our work found that these  contracts could extend up to 22 years if the contractor meets performance  criteria and earns award terms. These contracts also constituted a  significant investment for the government. Program offices reported  obligations of over $18.4 billion on these 10 contracts through the end of  fiscal year 2011. In that fiscal year alone, programs obligated nearly  $1.7 billion on the 10 contracts we reviewed.
subsections: section_title: Lack of Data on Long-Term Maintenance Contracts Reflect Broader DOD Challenges with Managing Services Acquisition
paragraphs: DOD was unable to provide us a list of ongoing long-term maintenance  contracts. Further, DOD officials noted that existing reports and data  collection systems do not provide the department information on the use  of long-term maintenance contracts. For example, USD(AT&L) reports to  Congress annually on the percentage of funds expended during the  preceding fiscal year for public and private maintenance and repair  activities, and project funding requirements for the current and ensuing  fiscal year.on the distribution of these contracts among the department’s weapon  system programs, the total number of contracts used, or the length of  performance of these contracts in these reports. Similarly, USD(AT&L)  officials noted that while they have used FPDS-NG to perform contract  spend analysis for various categories of services, including maintenance  services, FPDS-NG does not record the potential period of performance  for all contracts, including those that use incentives that may extend the  life of the contract. Additionally, while some contract actions associated  with maintenance are coded as such in FPDS-NG, our analysis found that  other maintenance-related activities may be reported as management  support, logistics support, and system engineering services. Further, we  found that the Defense Acquisition Management Information Retrieval  System, DOD’s web-based data system that tracks programmatic  information on major defense acquisition programs, did not contain  accurate information on what major weapon systems were currently  fielded and are being maintained.
However, USD(AT&L) is not required to include information  DOD’s limited visibility over long-term maintenance contracts reflects  broader DOD challenges with managing services acquisition. Over the  past decade, our work has identified the need for DOD to obtain better  data on its contracted services to enable it to make more strategic  decisions. For example, in 2006, we reported that DOD’s approach to  managing services acquisition tended to be reactive and had not fully  addressed the key factors for success at either a strategic or transactional   The strategic level is where the enterprise sets a direction for what  level. it needs, captures knowledge to make informed management decisions,  ensures departmentwide goals and objectives are achieved, and  assesses the resources it has to achieve desired outcomes. The strategic  level sets the context for the transactional level, where the focus is on  making sound decisions on individual service acquisition using valid and  well-defined requirements, appropriate business arrangements, and  adequate management of contractor performance.
GAO, Defense Acquisitions: Tailored Approach Needed to Improve Service Acquisition  Outcomes, GAO-07-20 (Washington, D.C.: Nov. 9, 2006).
Our prior work has shown, however, that while DOD obtains insight into  individual programs through various program reviews, DOD does not  collect or maintain that information to inform strategic decisions. For  example:  In response to congressional direction, DOD and the military  departments have established procedures for reviewing, approving  and monitoring services acquisitions, including those for maintenance.  Further, since 2006, all proposed services acquisitions with a value  estimated at more than $1 billion or designated as “special interest”  are reviewed by USD(AT&L), while military department or other  defense component officials review acquisition strategies for those  below this threshold. Contract requirements, risks, and business  arrangements are among the items included in reviewed acquisition  strategies. Though these reviews take place, DOD does not collect or  aggregate the information they produce to provide department-wide  insight into the use of long-term maintenance contracts.
Additionally, to improve DOD’s services acquisition process,  USD(AT&L) implemented an independent management review, or  peer review, process for its service contracts in 2008. Occurring  after approval of the acquisition strategy, these peer reviews are  conducted prior to and after award of services contracts, and are  published to facilitate cross-sharing of best practices and lessons  learned on various contracting issues, including the use of  competition, contract structure and type, definition of contract  requirements, and cost or pricing methods. Each of these reviews  provides for the discussion of issues related to contracting strategy,  but DOD officials noted that they do not collect or maintain information  on what type of contracting approach was used to acquire all services  that support DOD weapon systems. Further, while DOD collects and  makes available lessons learned from these reviews in areas such as  source selection and use of incentives, DOD officials stated that the  process has not resulted in lessons learned or best practices specific  to the use of long-term maintenance contracts.
Similarly, DOD policy and guidance require USD(AT&L) and military  department senior acquisition executives approve acquisition  strategies and life-cycle sustainment plans during program milestone  reviews. Each of these documents is to include information on the  proposed acquisition approach, including the use of contractor  support. Our discussions with USD(AT&L) and representatives from  the military department offices responsible for reviewing these plans  found these offices do not maintain information on the extent to which  long-term maintenance contracts are used by weapon system  programs.
section_title: Long-term Maintenance Contracts GAO Reviewed Had Widely Varied Characteristics
paragraphs: In the absence of department-wide data on the use of long-term  maintenance contracts, we selected 10 long-term maintenance contracts  that supported seven major weapon systems. We found that these  contracts varied widely in terms of breadth of requirements, potential  period of performance, and value. For example, the contracts we  reviewed included those that supported maintenance of an entire weapon  system platform such the Air Force’s Joint Surveillance Target Attack  Radar System (JSTARS) to more specific depot-level maintenance  support activities for system components, such as the Navy’s T-45 engine  contract. Table 1 shows selected characteristics of the 10 contracts we  reviewed.
In addition to maintenance activities, the contracts we reviewed also  provide supply chain management, technical data management, training,  equipment configuration management, and engineering support, among  other requirements. Further, we found that long-term maintenance  contracts could extend up to 22 years if the contractor meets performance  criteria and earns award terms. Lastly, we found that these contracts  constituted a significant investment for the government, as program  offices reported obligations of over $18.4 billion on these contracts  through the end of fiscal year 2011. In that fiscal year alone, programs  obligated nearly $1.7 billion on the 10 contracts we reviewed.
DOD officials noted that although long-term contracts can encourage  contractors to invest in new facilities, equipment, and processes to  support depot-level maintenance, such contracts may hinder the  government’s ability to appropriately incentivize the contractor’s  performance and control costs. DOD officials noted that the department is  pursuing a number of initiatives that could potentially improve DOD’s  insight into long-term maintenance contracts and their management. For  example, USD(AT&L) officials pointed out that the department is creating  a standalone instruction for service acquisitions, based on DOD  Instruction 5000.02. Although the instruction is in the early stages of  development, USD(AT&L) officials said that it will provide more detailed  guidance for the acquisition of specific services and reflect issues such as  duration that have been raised in recent DOD guidance. USD(AT&L)  officials said that the department is currently considering expanding or  updating the Defense Acquisition Management Information Retrieval  system to retain contract information for major service contracts, such as  contractors’ performance histories, contract lengths, contract types, and  incentives used for these services.
section_title: Early Acquisition Decisions Limit DOD’s Ability to Select Alternative Maintenance Providers
paragraphs: Decisions made early in the acquisition process can limit DOD’s ability to  select alternative maintenance providers over the life cycle of a weapon  system program. Program officials believed they could select an  alternative service provider in the future for 5 of the 10 contracts we  reviewed, but the degree to which the government obtained access to  technical data would be an obstacle in doing so for the other half. DOD  has updated its policies to emphasize determining technical data needs  earlier in the acquisition life cycle. Information we collected on eight  weapon system programs in development or early stages of production  that were reviewed by USD(AT&L) between October 2010 and October  2011 indicated that at least half have acquired or plan to acquire sufficient  technical data to compete maintenance services or to perform  maintenance with organic depot personnel should the need arise. The  programs, however, had yet to determine the extent to which they will  acquire these data or the cost to do so.
subsections: section_title: Some Major Weapon System Programs Could Select an Alternative Maintenance Service Provider but Others Faced Obstacles
paragraphs: DOD program officials said that decisions made early in the acquisition  cycle, especially with regard to acquiring technical data, may hinder the  department’s ability to change maintenance service providers for depot- level activities. As we reported in May 2011, technical data can enable  the government to complete maintenance work in-house, as well as to  competitively award contracts for the acquisition and sustainment of a  weapon system. More recently, we reported that for contracts pertaining  to DOD weapon programs, which can involve products as well as support  services, the lack of access to proprietary technical data and a heavy  reliance on specific contractors for expertise limits or even precludes the  possibility of competition. Even when access to technical data is not an  issue, the government may have little choice other than to rely on the  contractors that were the original equipment manufacturers, and that, in   Of the ten  some cases, designed and developed the weapon system.contracts we reviewed only three were competitively awarded. Table 2  summarizes the impact of technical data access on DOD programs’ ability  to select alternate services providers for maintenance on the contracts we  reviewed.
DOD acquired technical data sufficient to potentially select an alternative  service provider—either by transitioning contracted maintenance work to  an organic depot or recompeting maintenance contracts—for 5 of the 10  maintenance contracts we reviewed. Three of these programs had  sufficient access to technical data to perform maintenance services  organically. For example,
Depot maintenance for the AH-64 and CH-47 helicopter airframe  components was already performed organically at the Corpus Christi  Army Depot prior to the use of contractor support. However, the  program determined that contractor support could improve its  maintenance practices and the availability of components. While  government personnel continue to do all maintenance work on  airframe components, since 2004 the Army has used a contractor to  provide parts integration, technical engineering and logistics support  which has significantly increased system availability.
As a result of a 1995 Base Realignment and Closure decision, the  military depot that maintained the T56 engines for the C-130 program  was closed. To mitigate the impact of the closing on the local  community and employees, the maintenance workload was performed  by the private sector at the same location. The Air Force used a  public-private competition—an opportunity for the public and private  offerors to compete for the work—to determine the most cost-effective  source of repair, and the T56 engine maintenance is now provided by  a contractor.
Two other programs reported they are able to recompete maintenance  services contracts even though neither program purchased complete  technical data associated with the weapon system. According to program  officials, they could compete contracts for maintenance services either  because they acquired sufficient technical data for specific portions of the  aircraft or because there was a competitive environment for maintenance  services for commercially-derived systems. The latter are weapon  systems that were adapted for military use from a commercial item as  opposed to weapon systems developed for the military. For example,
The Navy’s T-45 trainer aircraft program was designated to be  maintained by contractors for the life of the program, as it is not a core  asset and there was a competitive environment with multiple vendors  to provide maintenance support for this commercially available  aircraft. During development, the Navy purchased technical data for  DOD-specific aspects of the plane’s airframe design, allowing the  program office to recompete maintenance contracts throughout the  life cycle of the system. Specifically, after the program split its system- level maintenance contract into separate engine and airframe  contracts, it was able to leverage its access to technical data to  competitively award the airframe contract. When the airframe contract  was recompeted in 2007, five vendors submitted capability  statements. Program officials told us that they expect a similar  industry response when the contract is recompeted again this year.
Similarly, for the KC-10 aircraft, the aircraft is based on a commercial  design and uses contractor logistics support for maintenance  services. The Air Force has competitively awarded five maintenance  contracts since the KC-10 was acquired in 1978. The last competition  occurred in 2010 and there were two proposals which resulted in the  selection of a new contractor.
For 5 of the 10 contracts, however, programs reported they could neither  transition contracted maintenance services to an organic depot nor  recompete the contract due to insufficient access to technical data as well  as factors such as insufficient funding, staffing, and expertise in some  cases. For example,
According to JSTARS program officials, the Air Force currently cannot  convert contracted maintenance work to an organic depot or  recompete the work because it has insufficient access to technical  data for the aircraft’s unique systems and equipment. Prior to  awarding the current contract, the JSTARS program utilized 17  sustainment contracts with the government managing these contracts  and performing some portions of maintenance organically. However,  in September 2000, the Air Force noncompetitively awarded a  contract so that a single contractor would be responsible for  sustainment activities that were previously performed under contracts  or by government personnel. Program officials said that when the Air  Force took on the more limited role of oversight of the prime  contractor, program staffing and expertise were reduced significantly.  They added that, as a result, the program office currently lacks the  engineers, equipment specialists, inventory managers, and other staff  and skills needed to manage all sustainment activities if the  requirements included in the current contract were to be performed by  multiple service providers.
Though previous models of the Air Force’s C-130 fleet are maintained  organically, contractors developed the C-130J model (both the  airframe and engine) as a commercial item and it was acquired by the  Air Force without related technical data. As a result, the program  office must acquire maintenance services for all components unique  to this model of the aircraft from the original equipment manufacturers  through contracts. Program officials noted that there is a requirement  to eventually bring the aircraft maintenance to organic depots, but  noted that even if it were able to acquire the necessary technical data,  the program office would need substantial funding to develop  capabilities at the organic depots.
section_title: Technical Data Rights Need to Be Considered Early in the Acquisition Process
paragraphs: Recent acquisition reforms such as the Weapon System Acquisition  Reform Act of 2009 and DOD’s recent initiatives seeking greater  efficiency and cost savings in acquisitions have put greater emphasis on  obtaining technical data rights and on maintaining competition throughout  the life cycle of weapon systems. For example, Congress has required  that DOD issue comprehensive guidance on life-cycle management,  develop and implement product support strategies, and appoint product  support managers for major weapon systems, while DOD’s September  2010 efficiency initiatives memorandum includes a requirement that each  military department set rules for acquisition of technical data rights as part  of a plan to improve competition. DOD has taken a number of actions,  including revising its acquisition policy to ensure that technical data  requirements are considered during the acquisition process at key  milestones. More recently, DOD has drafted guidance for developing  open systems architecture contracts. This guidance will provide additional  information to program managers regarding purchase of technical data  and planning for an open systems architecture that may allow for  increased flexibility in maintenance and purchase of such data.
Data we collected on eight DOD weapon systems currently in  development or early stages of production that were reviewed by  USD(AT&L) between October 2010 and October 2011 as part of an  acquisition review indicates that the programs have considered  maintenance and other sustainment issues when making decisions  regarding technical data needs. Table 3 summarizes these eight  programs’ plans to acquire access to technical data rights.
For the eight programs we reviewed, at least four have acquired or plan  to acquire sufficient data to compete maintenance services or to perform  maintenance with organic depot personnel while others had yet to  determine the extent to which they will acquire these data or the cost to  do so. For example:
The Navy acquired government purpose rights and unlimited technical  data rights for over 95 percent of major components for the Littoral  Combat Ship, according to program officials.
They said that most of  the depot-level maintenance on the Littoral Combat Ship is expected  to be performed by the private sector, and the Navy reports that  competitive environment should enhance the ability of the Navy to  control life-cycle sustainment costs.
The Air Force has begun to analyze components on the MQ-9 aircraft  and to determine what technical data is required to maintain the  aircraft, according to program officials. They told us they are  performing a business case analysis that will determine if technical  data should be acquired for approximately 600 aircraft parts and  major air frame components, but only a small percentage of these  components have been assessed through this process to date.
The Army will assess the technical data needs to maintain specific  system components for components of the MQ-1C Gray Eagle as a  means of retaining flexibility of maintenance options during  sustainment. According to Army officials, the sustainment plan calls  for the current contracting arrangement to transition to a public-private  partnership in the future.
We previously reported that DOD program managers often opt to spend  limited acquisition dollars on increased weapon system capability rather  than on acquiring the rights to technical data, thus limiting their flexibility  to perform maintenance work in house or to support the development of  an alternative source should contractual arrangements fail.assesses and secures its rights for the use of technical data early in the  weapon system acquisition process when it has the greatest leverage to  negotiate, DOD may face later challenges in developing sustainment  plans or changing these plans as necessary over the life cycle of its  weapon systems. Delaying action in acquiring technical data rights can  make these data cost-prohibitive or difficult to obtain later in a weapon  system’s life cycle.
section_title: Programs Use Different Approaches to Incentivize Performance and Obtain Insights into Contractor Costs
paragraphs: Once the decision is made to use long-term contracts, DOD faces  choices on how to best incentivize contractor performance and manage  costs. Of the 10 contacts we reviewed, we found that DOD programs that  used contracts extending longer than 5 years made frequent use of  incentives to motivate performance and tools that provide insight into and  control of costs. Program officials acknowledged, however, that in some  instances incentive structures needed to be periodically revised to better  incentivize contractor performance and they may not have sufficient  insight on contractor costs. Program offices using contracts lasting 5  years, on the other hand, made less use of incentives and generally did  not have the ability to renegotiate contract prices, but believed that the  shorter-term nature of the contracts mitigated some of their risks. Further,  program offices now obtain incurred cost data for two contracts, which  they expect will help in the negotiation of better contract prices. The  various contract lengths, incentives and cost-control tools across the  programs we reviewed reflects the differences of each acquisition and the  mission-specific maintenance approaches taken to support each weapon  system, but the department has not collected information on their  effectiveness on long-term maintenance contracts.
subsections: section_title: Programs with Longer- term Contracts Used Different Incentives and Tools to Provide Visibility on Costs
paragraphs: Of the programs we reviewed, we found that the Air Force awarded five  relatively longer-term contracts—between 9 and 22 years—that  incentivized contractor performance and attempted to gain insight into  and control costs in various ways. All five of these contracts used some  combination of monetary or contract term incentives to encourage  contractor performance. These programs varied, however, in terms of the  approaches used to gain insights into the contractors’ costs. For example,  the JSTARS program used cost-based incentive metrics, scheduled  specific opportunities to renegotiate the contract’s price, and received  incurred cost data. In contrast, the contract to maintain the C-130’s T56  engine did not use any of these approaches to gain cost insight. Table 4  summarizes the incentives and tools used to gain cost insight and cost  control.
Program offices can use incentives to motivate contractors to provide  exceptional levels of contract performance. Three longer-term contracts  we reviewed include monetary incentives in the form of an award fee or  an incentive fee, while three contracts use contract term incentives where  a point system is used to award additional contract years. Program  officials acknowledged that the incentives needed to be adjusted at times.  For example, the JSTARS program uses an award fee incentive to  motivate short-term contractor performance and an award term incentive  to motivate the contractor’s long-term performance. Over the course of  the JSTARS contract, the contractor has earned nearly all the available  award fee and award term years despite some serious performance  issues in 2009. In this case, the Air Force identified several serious  maintenance failures, including the presence of foreign objects in engine  filters and aircraft structural damage resulting from maintenance errors,  that were caused by the JSTARS contractor and which could have  resulted in serious personal injury and loss of aircraft. Because the  incentive structure encompasses the broad range of responsibilities  assigned to the contractor, the contractor still earned most of that  evaluation period’s available fee and enough award term points to earn  another year of contractor performance. The fee-determining official  noted that if it were possible, he would have given the contractor a much  lower award fee and rating. While the failures were reflected in the award  fee evaluation under three performance metrics, the contractor’s  aggregate performance against the remaining metrics allowed it to earn  90 percent of the eligible fee for this 2009 evaluation period. The JSTARS  program subsequently amended its award fee plan to make the contractor  ineligible for 40 percent of the award fee if its performance caused or  contributed to a major accident. The contractor has earned at least 95  percent of the available award fee for every other evaluation period since  the contract was awarded in 2000.
Program offices structured contract term incentives differently, which  provided DOD different degrees of flexibility to award additional years of  performance. For example, the award term plans for the JSTARS and  C-130 T56 engine contracts we reviewed guarantee additional years of  work if contractors meet or exceed incentive metrics. Both the JSTARS  and C-130 T56 engine contractors have earned the maximum number of  possible award term years. Conversely, the current incentive option  offered by the KC-10 program differs from the award terms used by the  JSTARS or C-130 T56 contracts in key respects. The KC-10 program’s  incentive includes “must-meet” metrics and a high degree of government  discretion in awarding the additional incentive year. For example, even if  the contractor meets all incentive metrics and earns the maximum  available number of points needed to be considered for an additional  incentive year, the program office can still decline to award the additional  year. Additionally, if the contractor does not meet the standard set for any  “must-meet” metric, it will not receive an incentive year. By structuring the  incentive in this way, the program office mitigates the risk of the  contractor earning incentives despite unsatisfactory performance, as in  the previous JSTARS example. According to KC-10 officials, the  contactor would not earn its first available incentive year with an  approximate contract value of $450 million because it failed to provide  continuous support for the initiation of global tanker support activities, a  “must-meet” metric, among other performance shortcomings.
Some of the programs that use longer-term contracts adjusted incentive  metrics to influence contractor performance in areas needing  improvement. For example, C-130J program officials said that since  awarding the airframe maintenance contract in 2006, they gradually  added more incentive metrics to the airframe contract’s award fee plan to  incentivize contractor performance in other areas. After the contractor  improved performance in providing engineering services, the program  office added an incentive metric to improve the contractor’s performance  for supply chain management.
The programs using the five longer-term contracts we reviewed also use  to varying degrees different tools to gain insight into and control costs  over the term of the contracts, as illustrated by the following examples.
The JSTARS cost-type contract was awarded on a non-competitive  basis to the system’s original equipment manufacturer and the  contractor bears little risk under this long-term arrangement, but the  program office has taken measures to obtain insights into and control  the contractor’s costs. The program office used the incurred cost data  it receives under the cost-type contract to help renegotiate contract  prices during triennial reviews. Additionally, the program uses cost- based incentive metrics to evaluate performance for award fee and  award term determinations. For example, under the terms of the  program’s January 2012 award fee plan, 10 percent of the  contractor’s award fee is determined by tracking cost performance  against contract estimates. This same metric is used to represent 10  percent of award term determinations. In addition, cost containment is  also evaluated as part of a weapon system improvement metric that  accounts for 37 percent of award term determinations.
The C-130J program structured its potentially 10-year airframe and 9- year engine maintenance firm-fixed price contracts so that prices  would be renegotiated at certain points during the contracts’  durations. For example, the program office receives incurred cost data  for the airframe contract, and has renegotiated prices three times  since the contract was awarded in 2006, with another renegotiation  scheduled for January 2014. Program officials said that receiving  incurred cost data helped them negotiate a 13 percent reduction in  total contract costs during the last scheduled price renegotiation in  January 2012. Program officials told us they can also gain insight into  cost baselines through regular contractor performance monitoring and  evaluation. For example, according to officials, the contractor  supporting airframe maintenance used a new system to track parts  that allowed for better utilization of spare parts and led to a decrease  in hours needed to perform the contract requirement. Program  officials were able to negotiate a lower price for that contract  requirement during the next scheduled price negotiation.
In contrast, neither the C-130 T56 engine contract nor the KC-10  program scheduled price renegotiations despite establishing firm-fixed  prices for the entire potential length of the 15- and 9-year life of the  respective contracts. For example, the C-130 T56 engine contract has  prices fixed for the entire 15-year potential term of the contract with  adjustments made for changes in best estimated quantities and for  economic adjustments. Program officials expressed concern over  their lack of insight into the contractor’s incurred costs and added that  having such information, along with scheduled price renegotiations at  the 5-year and 10-year points in the contract, would likely have been  helpful in controlling maintenance costs. While KC-10 program  officials cited the benefit of competition to drive down prices for  maintenance services, USD(AT&L) officials indicated that proposed  contracts reflecting a similar approach, where prices for the entire  duration of a long-term contract are priced at award, would be  reviewed carefully to ensure that the government’s interests were  adequately protected.
section_title: Programs with Shorter- term Contracts Tended Not to Use Incentives or Price Renegotiation Techniques
paragraphs: The Army and Navy programs we reviewed used contracts with a  maximum length of five years and generally did not make as frequent use  of incentives or cost-control tools as programs using longer contracts.  Army and Navy program officials indicated that they would prefer to use  longer contracts in the future to enable contractors to invest in support  infrastructure and improvements. Table summarizes the incentives and  tools used for cost insight and cost control.
Across the five contracts with a maximum length of five years, three used  monetary incentives and none used incentives that lengthen the  contract’s term. The T-45 program office uses a performance bonus  incentive, which allows the program to withhold monthly performance  bonuses for contractor performance that did not meet or exceed  thresholds on both incentive metrics. The program measures ready-for- training availability and the maintenance cancellation rate. The contractor  must meet or exceed performance thresholds for these metrics at all  three locations where the aircraft are based to receive an overall bonus.  As a result, the contractor could lose as much as 65 percent of the  available bonus by not meeting requirements at a single location.  According to program officials, this incentivizes the contractor to perform  optimally at all three locations. Performance records show that the  contractor has earned most of the available bonus since the contract was  awarded in 2008. Similarly, the contract for CH-47 engine maintenance  support includes a clause which allows the contractor to earn an incentive  fee for reducing engine repair turn-around time. Since the contract began  in 2011, there has been one evaluation period; the contractor did not  meet the incentive metric and did not earn any incentive fee. On the other  hand, MH-60 program officials told us that incentives in the form of  additional payments are not necessary for their program’s maintenance  support contract. They added that the contractor is self-incentivized to  maximize its profit in this firm-fixed price contracting arrangement, which  can be achieved through realizing efficiencies. Furthermore, they  questioned the value of paying a contractor to provide services above and  beyond what the program requires. Instead, contract provisions allow  the government to reduce the contractor’s payment if the contractor’s  work does not meet minimum thresholds. MH-60 program officials  reported that they have not had to make any downward price adjustments  because the contractor is exceeding contract requirements.
Programs are now receiving incurred cost data to control maintenance  costs for two five-year, firm-fixed price contracts, though this approach  was not used in previous contracts for the same services. Since 2009, the  MH-60 program office has required the contractor to submit incurred cost  data semiannually. Program officials said that they were directed by the  Office of the Assistant Secretary of the Navy to request the contractor’s  incurred cost data and were supported by USD(AT&L) in negotiating for it.  By comparing incurred costs and contract prices, program officials said  that they were able to negotiate more favorable prices for the 2011 follow- on maintenance support contract. During the previous contract, the  contractor was able to realize efficiencies that drove down its incurred  costs. With access to this information, the MH-60 program was able to re- baseline contract costs and negotiate lower prices to reflect these  efficiencies. The AH-64 and CH-47 programs also receive incurred cost  data. A May 2011 DOD Inspector General audit found that the AH-64 and  CH-47 programs were paying above fair and reasonable prices for parts  supplied through their 5-year maintenance support contract. The  Inspector General reviewed costs for 24 high-dollar parts and calculated  that the contractor charged the Army about $13 million more than the fair  and reasonable prices for 18 of the parts. Based on this finding, these  programs began reviewing incurred costs for the highest-value parts  supplied through this contract. The incurred cost review is being  performed in parallel with a major update of total parts pricing on the  contract, and program officials expect that there will be many downward  price changes as a result. The program office plans to perform this review  annually over the term of the contract.
DOD has not collected information concerning the effectiveness of the  various incentives or cost-control tools used on long-term maintenance  contracts, but it has recognized efforts made by individual programs to  improve acquisitions of such services. For example, during a December  2010 peer review of the MH-60 airframe contract, USD(AT&L) officials  noted that the use of incurred cost data allowed the program to negotiate  lower prices for certain services. Program officials told us that it was  difficult to negotiate for incurred cost data for fixed-priced contracts as  contractors are generally reluctant to share their actual costs and seek to  protect business-sensitive information. USD(AT&L) and military  department officials told us that they are encouraging program officials to  be more aggressive when asking for incurred costs, especially in  situations where the government does not have the benefit of leveraging  competition.
section_title: Conclusions
paragraphs: DOD does not collect data on the extent to which long-term contracts are  currently used and managed, but our assessment of 10 contracts shows  the value of having such information. Decisions made early in the  acquisition cycle, and in particular, whether DOD will buy the rights to  technical data are critical to availing itself of choices later in a program’s  life cycle. However, in the early stages, programs are often confronted  with the choice between allocating scarce resources to enhance  capability or maintaining future flexibility in terms of maintaining the  system. Once the decision to forgo buying technical data is made, DOD’s  leverage in terms of being able to compete maintenance support or to  provide it in house is largely lost. Programs must then rely on other, less  powerful tools to assure good performance and good prices. The data we  collected on eight programs that are in the process of making decisions  related to securing access to technical data indicate that DOD is  considering its future needs, but final decisions have yet to be made in  several cases. The department also does not have information on the  approaches used by various programs with long-term maintenance  contracts to incentivize contractor performance and gain insight into  contractor costs to help ensure that the government is getting the best  value for its investment. DOD is considering several policy and data- related initiatives that could improve its insight on these contracts, but  these efforts are in the early stages of development. Gaining insight into  the department’s use of long-term maintenance contracts as well as  identifying lessons learned on what approaches work best to incentivize  performance and control costs would help inform future acquisition  strategies and reduce risk.
section_title: Recommendations for Executive Action
paragraphs: To help inform DOD’s use of long-term maintenance contracts, we  recommend that the Secretary of Defense direct the Under Secretary of  Defense for Acquisition, Technology, and Logistics, in coordination with  cognizant offices within each of the military departments, to take the  following two actions:
Collect and analyze information on the use of long-term maintenance  contracts by major weapon system programs; and
Collect and disseminate lessons learned or best practices regarding  the use of incentives and cost-control tools that can maximize the  government’s leverage when considering the future use of such  contracts.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD provided written comments on a draft of this report, stating that it  concurred with both recommendations. DOD stated that it planned to  develop methodologies to collect the needed information and disseminate  best practices and lessons learned, but did not provide timeframes for  doing so. We recognize that weighing options will take some time, but  encourage the department to do so in a timely fashion. DOD’s written  response is reprinted in appendix II. DOD also provided technical  comments that were incorporated as appropriate.
We are sending copies of this report to the Secretary of Defense and  other interested parties. 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  Belva M. Martin at (202) 512-4841 or martinb@gao.gov or Cary Russell  at (202) 512-5431 or russellc@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 III.
section_title: Appendix I: Scope and Methodology
paragraphs: To gain insight into the how long-term maintenance contracts are  managed by the Department of Defense (DOD), we assessed (1) the  extent to which DOD uses long-term maintenance contracts to support  major weapon system programs, (2) DOD’s ability to select alternative  maintenance services providers for its major weapon system programs,  and (3) how long-term maintenance contracts have been structured to  incentivize contractors’ performance and manage contractor costs. After  consulting with DOD acquisition and logistics officials, for the purposes of  this report we defined long-term maintenance contracts as those with a  total potential period of performance of at least 5 years that provide  depot-level maintenance services or support performance of maintenance  functions. Additionally, we limited the scope of our review to include those  long-term contracts that support major defense acquisition programs.
The Federal Procurement Data System-Next Generation is the federal government’s  current system for tracking information on contracting actions. from program offices and program executive offices in each of the military  departments. However, due to data reliability issues and incomplete  responses, GAO determined that it could not use the information  collected with reasonable assurance of accuracy for department-wide  analysis of long-term maintenance contracting use and management.
Based on further discussions with military department officials, we  reviewed 10 long-term contracts supporting seven major defense  acquisition programs. We selected these contracts to represent each of  the military departments and to illustrate different maintenance  approaches. The programs we selected included the following:
C-130 Hercules transport aircraft
KC-10 Extender refueling tanker aircraft  Joint Surveillance Target Attack Radar System (JSTARS)
AH-64 Apache helicopter
CH-47 Chinook helicopter
MH-60 Seahawk helicopter
T-45 Goshawk training aircraft  To determine the extent to which DOD has the ability to select alternative  maintenance services providers for its major weapon system programs,  we reviewed DOD and military department policy and interviewed senior  officials in the Office of the Under Secretary of Defense for Acquisition,  Technology, and Logistics and military department officials to determine  how maintenance options are considered and what factors contribute to  retaining program flexibility for sourcing depot-level maintenance. For the  programs we reviewed, we examined acquisition plans to determine how  the government decided upon a contract-based approach to  maintenance. We interviewed cognizant program officials to determine  the factors that impact the government’s ability to change maintenance  providers, focusing on the ability to transition contracted maintenance  work to a government-owned and government-operated depot and the  ability to recompete maintenance contracts. We also requested a list of  major defense acquisition programs that recently went through an  acquisition review and preliminary information on provisions for acquiring  technical data rights. For the eight programs DOD identified as having  such a review between October 2010 and October 2011, we interviewed  program officials and reviewed acquisition documents, such as  acquisition strategies and life-cycle sustainment plans, which described  the rationale for the program’s plans to acquire technical data rights.
To assess how long-term maintenance contracts were structured to  incentivize contractors’ performance and manage contractor costs, we  reviewed acquisition plans, contractual information, including pricing data  and price negotiation memorandums, and interviewed cognizant  acquisition and logistics officials to understand the incentives and tools  used by program offices to motivate contractor performance and provide  visibility into contractor costs. For the 10 contracts we selected, we  reviewed programs’ use of monetary incentives such as award and  incentive fees, performance bonuses, and downward price adjustments.  Additionally, we reviewed programs’ use of contract term incentives,  specifically award terms and incentive options, which can extend a  contract’s period of performance. We analyzed incentive plans and  contractor performance data to determine how performance was  assessed, recorded, and resulted in the award of fee or additional years  of contracted work. We also interviewed program officials on the use of  incentives and compared prior versions of incentive plans to determine  how incentive metrics changed over time. For the 10 contracts we  reviewed, we identified the extent to which programs used incurred cost  data, price renegotiations, and cost-based incentive metrics as a means  to gain insight into contractor costs. We also interviewed officials from the  Office of the Under Secretary of Defense for Acquisition, Technology, and  Logistics, the military departments, and program offices on the benefits  and risks associated with long-term contracts.
We conducted this performance audit from February 2011 through  May 2012 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.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, Carleen Bennett, Assistant  Director; Timothy DiNapoli, Assistant Director; Steven Banovac; Lee  Cooper; Julia Kennon; John Krump; Wiktor Niewiadomski; Bob  Swierczek; and Tom Twambly made key contributions to this report.