Depot Maintenance: DOD's 50-50 Reporting Should Be Streamlined
Published: 2003-09-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Under 10 U.S.C. 2466, not more than 50 percent of each military department's annual depot maintenance funding can be used for work done by private-sector contractors. The Department of Defense (DOD) also must submit two reports to the Congress annually on the division of depot maintenance funding between the public and private sectors--one about the percentage of funds spent in the previous 2 fiscal years (prior-years report) and one about the current and 4 succeeding fiscal years (future-years report). As required, GAO reviewed the two DOD reports submitted in early 2003 and is, with this report, submitting its views to the Congress on whether (1) the military services met the so-called "50-50 requirement" for fiscal years 2001-2 and (2) the projections for fiscal years 2003-7 are reasonable estimates. GAO also identified opportunities to improve the reporting process.
section_title: What GAO Found
paragraphs: Continuing weaknesses in DOD's data gathering, reporting processes, and financial systems prevented GAO from determining with precision if the military services complied with the 50-50 requirement in fiscal years 2001-2. DOD data show all the services, except the Air Force in fiscal year 2001, to be below the 50-percent funding limit on private sector work. However, as before, GAO found errors in the data that, if corrected, would overall increase funding of the private sector and move each service closer to the contract limit. For example, for fiscal year 2002, the Navy did not include about $401 million in private sector maintenance work on aircraft carriers and surface ships. Correcting for these and other errors would increase the Navy's percentage of private sector depot maintenance funds for that year from the 42.6 percent reported to 46.9 percent. Such data weaknesses show that prior-years reports do not precisely measure the division of maintenance funding. At best, over time these results provide rough approximations and indicate trends that may be useful to decision makers. Because of data deficiencies and changing budget projections, the futureyears report does not provide reasonable estimates of public and private sector maintenance funding for fiscal years 2003-7 and limits its usefulness to decision makers. GAO reported this shortcoming in the past, and problems continue. For example, the Army underreported maintenance work at nondepot locations as it continues to consolidate the work and better control it at such locations. Other Army work was not reported because some commands did not receive guidance and others misapplied it. These errors would add about $200 million annually to the Army's future estimate and increase the percent of projected funding in the private sector. Opportunities still exist for improvements, including for streamlining the 50- 50 reports, continued service audit agency support, and data development. Streamlining the 50-50 reports could help address problems caused by, among other factors, inexact program estimates. Second, although DOD is concerned that recent revisions to federal audit standards could keep service auditors from further participation in the 50-50 process, GAO believes that a way can be developed to enable auditors' continued support yet ensure their independence. Third, data development could be helped by better disseminating guidance and training participating personnel.

section_title: Letter
paragraphs: Under 10 U.S.C. 2466, not more than 50 percent of annual depot  maintenance funding provided to the military departments and  defense agencies can be used for work accomplished by private-sector  contractors. Section 2466 also directs the Department of Defense (DOD)  to submit two annual reports to the Congress on the distribution of depot  maintenance funding between the public and private sectors. The first  report is to identify the percentage of funds expended by each military  department and defense agency during the preceding 2 fiscal years for the  performance of depot maintenance workloads by the public and private  sectors (the “prior-years report”). The second report is to project the same  information for the current and 4 succeeding fiscal years (the “future-years  report”). For 2003, DOD issued the prior-years report on   February 11, 2003, and the future-years report on April 7, 2003.
Section 2466 also requires us to submit our views to the Congress on  whether DOD complied with the so-called “50-50 requirement” in the  prior-years report and whether the projections in the future-years report  are reasonable. Accordingly, this report discusses whether (1) the military  departments met the 50-50 requirement for fiscal years 2001 and 2002 and  (2) the projections for fiscal years 2003 through 2007 represent reasonable  estimates. As part of our work, we also identified opportunities to improve  the reporting process. To accomplish these objectives, we analyzed the   50-50 reported data and each service’s procedures and internal  management controls for collecting, aggregating, and validating depot  maintenance information for purposes of responding to the section 2466  requirements. We limited our analysis of future-years data because initial  audit efforts identified significant continuing problem areas, similar to  those found in prior audits, that are not likely to change.
subsections: section_title: Background
subsections: section_title: Governing Legislation and Previous Reports Concerning the 50-50 Requirement
paragraphs: In addition to the 50-50 requirement in 10 U.S.C. 2466, two other title 10  provisions directly affect the reporting of workload allocations to the  public and private sectors.
Section 2460 defines depot maintenance to encompass material  maintenance or repair requiring the overhaul, upgrade, or rebuilding of  parts, assemblies, or subassemblies and the testing and reclamation of  equipment, regardless of the source of funds or the location at which  maintenance or repair is performed. Depot maintenance also  encompasses software maintenance, interim contractor support, and  contractor logistics support to the extent that work performed in these  categories is depot maintenance. The statute excludes from depot  maintenance the nuclear refueling of an aircraft carrier, the  procurement of major modifications or upgrades of weapon systems,  and the procurement of parts for safety modifications, although the  term does include the installation of parts for safety modifications.
Section 2474 directs DOD to designate public depots as Centers of  Industrial and Technical Excellence and to improve their operations so  as to serve as recognized leaders in their core competencies. Section  342 of the National Defense Authorization Act for Fiscal Year 2002   (P.L. 107-107, Dec. 28, 2001) amended this statute to exclude qualifying  public-private partnerships from the 50-percent funding limitation on  contracting in section 2466. Section 342 provides that the funds  expended for the performance of depot-level maintenance by  nonfederal government personnel located at the centers shall not be  counted when applying the 50-percent limitation if the personnel are  provided pursuant to a public-private partnership. This exclusion  initially applied to depot maintenance funding for fiscal years 2002  through 2005. Section 334 of the National Defense Authorization Act  for Fiscal Year 2003 (P.L. 107-314, Dec. 2, 2002) extended this period to  include all contracts entered into through fiscal year 2006.
The Office of the Secretary of Defense (OSD) has issued guidance to the  military departments for reporting public-private workload allocations.
The guidance is consistent with the definition of depot-level maintenance  and repair in 10 U.S.C. 2460. The military departments have also issued  internal instructions to manage the data collection and reporting process,  tailored to their individual organizations and operating environments.
Based on the congressional mandate regarding the DOD 50-50  requirement, this is the sixth year that we have reported on the prior-year  numbers and the fourth year reporting on the future-year numbers. In past  years, we have reported on continuing data errors and inconsistencies in  reporting by the military departments and problems in documenting and  independently validating 50-50 data. We have recommended increasing  management attention to and emphasis on the 50-50 reporting process,  improving guidance in specific maintenance categories, and implementing  better internal controls. We have also observed that the 50-50 process is  complex, involving numerous reporting entities and commands, and  requiring the incorporation of evolving new concepts of logistics support,  changing locations and organizations for accomplishing depot  maintenance, and changes in statutory provisions. Service officials told us  that the reporting process is somewhat burdensome and time frames for  collecting data are constrictive. Further complications in reporting result  from relatively high turnover in staff responsible for collecting and  managing data and uneven management attention and priority accorded  the 50-50 process.
Our work has historically been augmented by the efforts of the service  audit agencies, which have participated in the 50-50 processes in varying  degrees. We have recommended the continued involvement of the auditors  to review and validate reporting processes and results and to correct  substantial errors and omissions before the 50-50 data are submitted to the  Congress.
Our prior reports also recognized the limitations of DOD’s financial  systems, operations, and controls. Our audits of DOD’s financial  management operations have routinely identified pervasive weaknesses in  financial systems, operations, and internal controls that impede its ability  to provide useful, reliable, and timely financial information for day-to-day  management and decision making. In the financial management systems  area, DOD continues to struggle in its efforts to implement systems to  support managerial decision-making. As we recently reported, DOD can ill  afford to invest in systems that are not capable of providing DOD  management with more accurate, timely, and reliable information on the  results of the department’s business operations.
To date, none of the military services or major DOD components has  passed the test of an independent financial audit. A continuing inability to  capture and report the full cost of its programs represents one of the most  significant impediments facing DOD. Nonetheless, the data used to  develop the 50-50 report are the only data available and are accepted and  used for DOD decision making and for congressional oversight.
section_title: Summary of Data in DOD’s 50-50 Reports
paragraphs: Table 1 provides a consolidated summary of DOD’s 2003 prior-years and  future-years reports to the Congress on public and private sector workload  allocations for depot maintenance. The amounts shown are DOD’s record  of actual obligations incurred for depot maintenance work in fiscal years  2001 and 2002 and projected obligations for fiscal years 2003-2007 based  on the defense budget and service funding baselines. The percentages  show the relative allocations between the public and private sectors and  the exempted workloads. Adding the private and private-exempted  percentages together shows what the private-sector amount would have  been reported as, absent the recent legislation to exempt qualified  partnership workload.
section_title: Weaknesses in Data Preclude Determinations of Compliance in Prior- Years Report
paragraphs: DOD’s prior-years report for fiscal years 2001 and 2002 as submitted to the  Congress shows the Departments of the Army and Navy to be below the  50-percent funding limitation on private sector workloads for both years.  The Air Force reported itself over the limitation in 2001 and below it in  2002. (See table 1.) The net effects of correcting for the errors and  omissions we identified would increase the percentages of workload going  to the private sector and move each department closer to the contract  limit. Appendix I shows the amounts and effects of our adjustments to the  reported data submitted by the military departments for fiscal year 2002  and provides a description of the major deficiencies we found. Overall,  however, recurring weaknesses in DOD’s data gathering, reporting  processes, and financial systems prevented us from determining with  precision whether the services were in compliance with the 50-50  requirement for fiscal years 2001 and 2002.
subsections: section_title: Department of the Army
paragraphs: The Army reported its private sector funding to be below the 50-percent  limit for both fiscal years 2001 and 2002. Army 50-50 reporting involves  multiple commands with somewhat different processes for collecting,  summarizing, and validating data. Although the Army utilized a new, more  centralized financial system to collect 50-50 data that corrected some of  the transcription errors we found last year, we continued to find errors,  omissions, and inconsistencies in its data.
For example, as in past years, the Army underreported public and private  sector depot-level maintenance work at field locations as it continues  unfinished efforts to consolidate maintenance activities and better control  the proliferation of depot-level tasks at nondepot locations. Other Army  work was not reported because some commands did not receive 50-50  instructions and others misapplied the guidance. Unfamiliarity with the  guidance was caused in some instances by the large turnover from last  year in the staff responsible for collecting and summarizing data. Staff  turnover was cited by each of the military services as contributing to  increased errors and training needs. To the extent we identified them,  these specific errors would add about $228 million in total to the Army’s  public and private sector workloads in 2002; the net effect of correcting  for these errors would add 2.5 percent to the private sector percentage  allocation in 2002. (See table 2 in app. I.)
section_title: Department of the Navy, including the Marine Corps
paragraphs: The Navy reported its private sector funding to be below the 50-percent  limit for both fiscal years. Similar to the Army, the Navy’s 50-50 process  also involves multiple naval commands as well as the Marine Corps. As in  prior years, we believe this increases the complexity in managing the  process and in ensuring consistency in application of the guidance. It also  exacerbates the less than adequate data validation efforts.
We identified several problems that carried over from last year’s 50-50  efforts. The Navy did not report any depot maintenance work  accomplished along with the nuclear refueling of its aircraft carriers, citing  the exclusion of nuclear refueling from the 10 U.S.C. 2460 definition of  depot maintenance. We continue to believe that depot repairs not directly  associated with refueling tasks should be reported because these kinds of  repair actions are reported by other organizations and funding for these  tasks are identifiable in contracts and financial systems. The Navy also  continues to inconsistently report inactivation activities that involve the  servicing and preservation of systems and equipment before it is placed in  storage or in an inactive status. Officials report public sector workloads  for inactivation activities on nuclear ships but do not report such work on  nonnuclear ships, saying that the former workload is complex while the  latter is not. We think all such depot-level work should be counted since  the statute and implementing guidance does not make a distinction of  complexity. These two examples would add about $401 million to the  private sector workloads in fiscal year 2002.
We also determined that about $41 million of partnership workloads were  incorrectly exempted from reporting because the work was not  accomplished at a designated depot or was not performed by contract  employees.
The Marine Corps data are included as part of the Department of the Navy  50-50 report for compliance purposes, but the Corps exercises a separate  process for collecting data. Compared to the other services, the Marine  Corps has a small depot program but makes more relative errors and has  substantial shortcomings in its management oversight and control actions.  For example, most of the program offices in the command that is  responsible for acquiring and upgrading weapon systems did not report at  all. Our review found that this understated the private sector total for  fiscal year 2002 by about $32 million and the public sector total by almost  $7 million. We also identified other errors including a nearly $19 million  overstatement of the public sector when an official incorrectly included  obligations from fiscal year 2001 in the total for 2002.
On balance, for the Department of the Navy as a whole we found the total  dollar amount of errors affected the private sector data more than the  public sector. Correcting for the errors we found substantially increases  the private sector percentage share in fiscal year 2002 from 42.6 percent to  46.9 percent, a gain of over 4 percent. (See table 3 in app. I.)
section_title: Department of the Air Force
paragraphs: The Air Force reported that it exceeded the 50-percent funding limitation  for the private sector in 2001. As provided by law at the time, the Secretary  of the Air Force issued a waiver. The Air Force reported itself back below  the limitation for fiscal year 2002.
Most of the errors we found were the same or similar from past reviews.  For example, the Air Force continues to make a significant adjustment in  its reporting for contract administration and oversight costs. The  adjustment increases the reported public sector funding and decreases the  private sector. The total adjustment was $125 million (in absolute terms)  for fiscal year 2002. Consistent with the 50-50 guidance, which states that  costs should be associated with the end product (i.e., the repaired item),  we think these costs should instead be treated as contracting expenses.  Accordingly, we reversed this adjustment in our analysis. The Air Force  also continues to count some component repair costs twice, once when  the component is repaired and again when it is installed in an equipment  item or assembly during a periodic overhaul. Officials said these are both  reportable events, while we think this overstates the amount of actual  repair work done. Eliminating the double count would affect about $666  million in 2002—a $485 million decrease in the public sector amount and a  $181 million decrease in the private sector.
As in past years, we also identified many errors in the amounts reported  for programs supported by interim and contractor logistics support  contracts. We determined that several programs used incorrect factors and  assumptions to calculate the depot portion of total contract costs. We  found other programs that could not adequately explain or justify their  estimating methods—some had been developed years ago by officials no  longer in the program and simply applied by new staff without checking  their validity nor maintaining adequate supporting documentation to  explain and rationalize the results. Relatively high turnover of staff  responsible for collecting and managing 50-50 data tends to increase the  number and persistence of errors and omissions. In total, the net effect of  the errors we found would increase the private sector allocation in 2002 by  about 2.7 percent. (See table 4 in app. I.)
section_title: Future-Year Projections Are Not Reasonable and Not Very Useful
paragraphs: Because of the changing nature of budget projections and supporting data  deficiencies, the future-years report does not provide reasonable estimates  of public and private sector depot maintenance funding allocations for  fiscal years 2003 through 2007. Furthermore, the services tend to place  less emphasis and priority on collecting and validating future-years data.  The reported projections are based, in part, on incorrect data,  questionable assumptions and estimating factors, and some  inconsistencies with existing budgets and management plans. As with the  prior years, the net effect of the problems we found generally increases  the percentage of funding for projected private sector work. The  uncertainty and instability of budget estimates combined with the errors  and omissions we found result in a future-years report that is not very  useful to congressional and DOD decision makers.
We found many of the same problems identified in the prior-years data  were continued in the future-years projections. The Army continued to  underreport maintenance work at field locations and made other errors  similar to its prior-years presentation. While supporting documentation for  the Army’s projected data was inadequate, errors and omissions of the  same magnitude as fiscal year 2002 would add more than $200 million  annually to the totals projected for the public and private sectors in the  Army’s future-years report. Similarly, in its respective projections, the  Navy continued to not report depot maintenance accomplished with, but  not directly related to nuclear refueling; the Marine Corps underreported  work from the acquisition command; and the Air Force contract estimates  again involved some questionable estimating factors and assumptions.  Overall, we found this year as in the past that the services tend to place  less emphasis and priority on collecting and validating the future-years  data compared to efforts on the prior-years data.
Besides errors in reporting, other internal and external factors can create  large fluctuations in reported data, which in turn can provide a distorted  and misleading view to outside observers about efforts to remain  compliant with the 50-50 requirement. For example, in the current future- years report, the Air Force’s projected public-sector work financed  through the working capital fund is about $3.0 billion higher than the total  amount reported for the same 4-year time period in the future-years report  submitted in 2002. Although this would appear to indicate a large influx of  new work to the public depots, in reality the amount of work, according to  budget estimates and management reports, is expected to remain fairly  level during this reporting period in terms of production hours and size of  workforce. Most of the dollar (and percentage) increase in public-sector  work is the result of price hikes in the sales rate charged to its customers.  Price hikes were caused primarily by increases in the cost of spare and  repair parts that were used in the repair process.
The future-year estimates are not reasonable because they represent  budget and planning data that change over time, incorporate the same  errors found in prior-year data, and also have other problems. The budget  and planning data used to project the share of depot maintenance work to  be performed in the public and private sectors in the future are estimates.  At best, they provide only rough estimates of future funding allocations;  and these estimates change over time. As an illustration, our comparison  of the consistency of the 2003 reported data with that in DOD’s 50-50  reports submitted in 2002 showed that congressional and DOD decision  makers were given quite a different view this year of the public-private  sector workload mix than that presented just last year. With so many  errors and frequent changes, the future-years data may be misleading and  not very useful to congressional and DOD decision makers, particularly  the further estimates are in the future. While we have identified these  shortcomings in the past, the problems continue and show no signs of  getting better.
DOD officials agreed that the planning and budget data available for  making future projections beyond the budget year are not very useful as  predictors of the balance of future workloads between the public and  private sectors. They also noted that when the services are within a few  percentage points of the 50-50 ceiling, as they are now, the accuracy of the  conclusions drawn from the unreliable future projections does not provide  a very good basis for forecasting the future.
section_title: Opportunities Exist to Improve DOD Reporting
paragraphs: Despite prior improvements, opportunities continue to exist to make 50-50  data a more complete and accurate representation of the balance of  funding for depot maintenance work assigned to the public and private  sectors. First, streamlining the 50-50 report would offer an opportunity to  focus improvement efforts on the data where improvements are most  likely to be realized. Second, continued participation of the service audit  agencies should improve the quality of the 50-50 data, particularly if the  audit support is timely to allow for corrections to be made before the 50-50  report goes to the Congress. Finally, there are opportunities to improve  the data development process.
subsections: section_title: Streamlining the 50-50 Report
paragraphs: As previously discussed, the future-years dataparticularly that estimated  for the years beyond the current year and budget yeardo not provide a  reasonable estimate of the future balance of funding for depot  maintenance between the public and private sectors. Further, the data may  be so bad as to be misleading. Streamlining the data collected to provide  data for a shorter period of time could allow responsible officials to focus  more closely on the data that are more accurate. Additionally, if the report  date to the Congress were extended, the report could be based on more  actual costs and require fewer projections, improving the quality of the  reported data.
section_title: Participation of Service Audit Agencies
paragraphs: While we continue to believe that the service audit agencies could help the  military departments improve 50-50 reporting, their future involvement is  uncertain. As we have reported in the past, auditor involvement typically  identified and corrected substantial errors in the data before the 50-50  reports went to the Congress. However, this year the Air Force Audit  Agency did not participate; while the Army did participate, some of the  errors they identified were not corrected in the reports to the Congress;  and the Navy audit was not done in time to result in changes to the 50-50  data submitted to the Congress. A more meaningful review would be one  that was carried on when the data are being aggregated, with input to the  process in time to influence the reported data. DOD officials told us that  the audit services were not expecting to work on future 50-50 efforts.  Audit services are reconsidering their roles because of recent changes to  government auditing standards regarding auditor independence when  performing both audit and nonaudit management assistance services to  the same client.
Air Force auditors have had a positive role in the 50-50 process in past  years. Serving in an advisory capacity, they identified errors and cognizant  program officials made corrections before the Air Force input was  finalized and forwarded to the Office of the Secretary of Defense. This  year, however, Air Force auditors decided not to participate. Officials said  they were concerned about conflict of interest because auditors  participating in the management services review could also be involved in  audit service reviews of depot maintenance programs, processes, and  funds. While Army auditors participated in the process during this year’s  cycle and some of their work influenced changes in this year’s reported  data, some errors were not corrected because of time constraints imposed  by the 50-50 reporting schedule. Army officials said the Army Audit  Agency would not likely be involved in next year’s 50-50 process primarily  because of concerns about independence. Navy auditors became involved  in the process this year after we recommended their participation in prior  reports. However, the Navy Audit Service work was not done in time to  influence the Navy’s 50-50 report. According to audit service officials, their  decision to do an audit of the data after it was submitted rather than  providing advisory services to cognizant officials developing the Navy’s 50- 50 report was influenced by the before-mentioned change in audit  standards. Navy program officials said that because a post-process audit  did not improve the 50-50 data, the audit service would not be used next  year.
We recognize that recent changes in government auditing standards have  been made to better address and specify independence issues arising  when an audit organization undertakes both audit and nonaudit services  for the same client. Nonetheless, the new auditing standards do not  preclude auditors from verifying the accuracy of data; providing other  technical assistance to the 50-50 process; and accomplishing other audits  of the depot maintenance process, programs, and activities. Improved  planning, management involvement, and documentation of roles and  responsibilities may be required; but a process can be developed to ensure  independence will not be compromised. This has already been done so  that the service audit agencies can perform similar functions—evaluating  validity and consistency of data as it is being developed for subsequent  decision making—in support of the base realignment and closure process.
section_title: Improving the Data Development Process
paragraphs: Incremental improvements in data development were noticeable in the  first several years of 50-50 reporting as guidance was clarified and  expanded. However, as we reported last year, the quality of the 50-50 data  is not continuing to improve as it did in earlier years of the reporting  requirement. Overall quality and direction of DOD’s reporting seems to  have reached a plateau where further major improvements have been  limited. As we have previously discussed, one of the reasons this has  occurred is that 50-50 guidance was not always distributed to the people  who needed it. Further, significant turnover of personnel responsible for  developing the data without providing sufficient time and training to  familiarize them regarding the 50-50 requirement and process adversely  affected the quality of the 50-50 data. In short, the priority afforded this  process by management at all levels in the department is not sufficient to  ensure that the data are as accurate as possible.
section_title: Conclusions
paragraphs: Continuing errors and omissions in the data for both the prior- and future- years reports indicate that each of the service components is closer to  exceeding the limitation on percentage of work permitted to be performed  by the private sector than DOD’s reporting would indicate. At best, DOD’s  data over time should be treated as providing a rough approximation of  the allocation of depot maintenance workloads between the public and  private sectors with some indication of trends. As such, the information on  actual prior-years allocations can be useful to the Congress in its oversight  role and to DOD officials in deciding support strategies for new systems  and in evaluating depot policies and practices. On the other hand, because  it provides an increasingly less reliable estimate of projected allocations  the further it gets from the current year, the future-years report is not a  very useful tool for informing the Congress or DOD officials about likely  future compliance. This occurs because of the changing nature of  projections, a combination of errors and omissions, less emphasis by the  services on the collection and validation of future-years data, and the use  of ever-changing budgetary estimates to construct projections. These  budgetary estimates—and built-in assumptions—become more inexact  and more problematic the further into the future the projections are made  due to their very speculative and volatile natures. Indeed, tracking the 50- 50 projected data from year to year reveals wide swings in the total  amounts reported and in the relative allocations to the public and private  sectors. As a result, congressional and DOD decision makers were given  quite a different view this year of the public-private sector workload mix  than that presented just last year. We believe that these problems are  likely to continue and we question the cost-effectiveness of collecting and  aggregating data for 3 years past the current and budget years given the  problems identified with the estimates.
Furthermore, after the first several years of 50-50 reporting, the overall  quality of DOD reporting in terms of accuracy and completeness has not  improved significantly. Indeed, the overall quality and direction seem to  have reached a plateau where further major improvements to reporting  may be unachievable and where the environmental factors that complicate  reporting are not expected to change much. These complicating factors— including a burdensome collection process, tight timeframes for collecting  data, high staff turnover, uneven management attention, changing  concepts about maintenance organization and delivery—present  continued challenges to the services in their ability to make significant  improvements to their collection, documentation, and reporting processes.  Notwithstanding these constraints, opportunities still exist to improve the  reporting, including continued use of the audit services and renewed  efforts to ensure guidance is appropriately disseminated and staff trained  in its use.
section_title: Matter for Congressional Consideration
paragraphs: Given that we continue to see the same problems and complicating factors  in our current and past assessments of 50-50 reports and considering that  the volatile nature of budget estimates is not likely to change, the  Congress should consider amending 10 U.S.C. 2466 to require only one  annual 50-50 report. The single report would cover a 3-year period (prior  year, current year, and budget year) for which the data are generally more  reliable and the potential impacts more immediate. The Congress should  also consider extending the due date for the single report from February 1  of each year to April 1; this would provide more time for the military  departments to collect and validate data and allow for the incorporation of  more actual cost data for the current year estimate.
section_title: Recommendations for Executive Action
paragraphs: To enhance data verification and validation, we recommend that the  Secretary of Defense require the secretaries of the military departments to  direct the use of service audit agencies, or an agreed-upon alternate  method, for third-party review and validation of 50-50 data and to ensure  that auditor-identified errors in the data are rectified before reports are  submitted to the Congress.
To ensure consistent and complete reporting, we recommend that the  Secretary of Defense direct the secretaries of the military departments to  ensure that 50-50 reporting guidance is appropriately disseminated to  reporting organizations and individuals and that staff are properly and  timely trained in the application of the guidance.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report from the Deputy Under  Secretary of Defense for Logistics and Materiel Readiness, DOD concurred  with the report’s recommendations. However, the department did not  agree with limited portions of our analyses regarding some selected  workloads and the resulting impacts on the percentage allocation of funds  between the public and private sectors.  These workloads involve the  Navy’s nuclear carrier refueling and surface ship inactivation and the Air  Force’s adjustment for general and administrative expenses and double  counting of some reparable workloads.  DOD’s written comments, and our  evaluation of these items in question, are reprinted in appendix III.
We are sending copies of this report to congressional committees; the  Secretary of Defense; the Secretaries of the Army, the Navy, and the Air  Force; and the Director, Office of Management and Budget. We will make  copies available to others upon request. In addition, the report will be  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff has questions regarding this report, please contact me  at (202) 512-8412 or holman@gao.gov or Julia Denman, Assistant Director,  at (202) 512-4290 or denmanj@gao.gov. Other major contributors to this  report were David Epstein, Bruce Fairbairn, Jane Hunt, Larry Junek,  Robert Malpass, Andy Marek, Marjorie Pratt, John Strong, and Bobby  Worrell.
section_title: Appendix I: GAO Adjustments for Errors, Omissions, and Inconsistencies in Military Departments 50-50 Data for Fiscal Year 2002
paragraphs: Our review of the data supporting the Department of Defense’s (DOD)  prior-years report identified errors, omissions, and inconsistencies that, if  corrected, would revise the total workloads and increase the private- sector allocations for each of the military departments. Brief descriptions  of the larger and more extensive problems found follow the adjusted  figures.
subsections: section_title: Department of the Army
paragraphs: Our review of fiscal year 2002 data reported by the Army and of supporting  documentation for selected activities identified errors, omissions, and  inconsistencies that, if corrected, would result in significant adjustments  in the public and private sector percentages reported to the Congress, as  shown in table 2.
Errors we found included the following examples:    Unreported depot-level work associated with the Army’s ongoing  efforts to consolidate maintenance activities and craft a national  maintenance program. Our prior 50-50 reports have documented  continuing problems and shortcomings in accurately and consistently  reporting depot maintenance accomplished by both public and private  sector sources at nondepot locations.
Unreported one-time repair actions. These are depot repairs that are  accomplished at non-depot locations following an organization’s  request and approval to do this work on a limited basis.
Unreported work by commands that did not receive Army reporting  guidance and other misreported and understated work by some  commands that received but misapplied the guidance.
Other adjustments included (1) errors identified by the Army Audit  Agency but not corrected in the data sent to the Office of the Secretary  of Defense (OSD) for inclusion in the prior-years 50-50 report to the  Congress; and (2) depot support work identified in a contractor’s study  of the proliferation of depot work at non-depot locations.
section_title: Department of the Navy
paragraphs: Our review of fiscal year 2002 data reported by the Navy and Marine Corps  and of supporting documentation for selected activities identified errors,  omissions, and inconsistencies that, if corrected, would result in  significant adjustments in the public and private sector percentages  reported to the Congress, as shown table 3.
Errors we found included the following examples:    Unreported depot work on nuclear aircraft carriers. As reported last  year, Navy officials cite the definition in 10 U.S.C. 2460, which excludes  from depot maintenance the nuclear refueling of aircraft carriers, in  justifying why they do not report any of the depot work accomplished  at the same time as refueling. We believe that depot work that is  reportable elsewhere and separate from the refueling tasks should be  reported.
Inconsistent reporting of ship inactivations, which include depot tasks  for servicing and preserving equipment before they are placed in  storage or in an inactive status. Navy officials report for 50-50 purposes  the nuclear ship inactivation work performed in the public sector but  do not report surface ship inactivation work performed by the private  sector.
Underreporting of maintenance work by the command responsible for  acquiring and upgrading Marine Corps weapon systems. Failure to  report has several causes, including misunderstanding of what should  be reported, limited dissemination of the 50-50 guidance, and  inadequate management and oversight of the collection process to  identify and resolve reporting deficiencies.
Incorrectly exempting some private-sector activities from reporting.  The Navy exempted more work than did the other departments; but we  found some in error, including partnering work accomplished at a  contractor facility and some work actually performed by government  employees. Partnership work qualifying for the exemption must be  accomplished at designated public depots by contractor employees.
Other errors included (1) work subcontracted by the public shipyards  to the private sector reported as public sector work and (2)  misreporting by the Marine Corps of work obligated in fiscal year 2001  rather than 2002.
section_title: Department of the Air Force
paragraphs: Our review of fiscal year 2002 data reported by the Air Force and of  supporting documentation for selected activities identified errors,  omissions, and inconsistencies that, if corrected, would result in  significant adjustments in the public and private sector percentages  reported to the Congress, as shown in table 4.
Errors we found included the following examples:    As in past years, Air Force officials continue to adjust the 50-50 data for  the salaries and overhead expenses of government employees  administering depot maintenance contracts funded through the  working capital fund. Officials subtract these amounts from the  reported private sector amount—where they are accounted for within  the working capital fund—and add them to the public sector funding  for 50-50 reporting. Consistent with the 50-50 guidance that states that  costs should be associated with the end product, we think these costs  should be treated as contracting expenses.
Our review of Air Force workloads determined that funding for some  component repairs was counted twice in 50-50 data, once when the  item was repaired and the second time when it was installed into a  weapon system or major subsystem during its overhaul. This resulted  in overstating both public sector work and, by a lesser amount, private  sector work.
Errors occurred in reporting depot costs on interim contractor support  and contractor logistics support contracts. Our review of selected  programs identified numerous errors resulting in net underreporting of  depot maintenance work performed by contractors. Many problems  resulted from questionable factors and assumptions used in developing  estimating methodologies. Because interim contractor support and  contractor logistics support contracts often cover more than just depot  maintenance (including lower levels of maintenance, supply  operations, and logistics program management), the OSD guidance  allows for the use of estimating methods. This can cause complications  and introduce subjectivity into the data collection process. Newer  contract approaches under acquisition reform efforts pose particularly  challenging problems in identifying the depot portion.
Examples of errors and questionable practices we found included    not updating a methodology when contract provisions and  circumstances change, resulting in not reporting additional  maintenance work from increased operational contingencies and new  orders of materials;    assuming a straight percentage of total cost as depot work where data  exists to make a more exact accounting;    not reporting maintenance on a newly acquired modification; and    not reporting software depot maintenance.
section_title: Appendix II: Scope and Methodology
paragraphs: To determine whether the military departments met the 50-50 requirement  in the prior-years report, we analyzed each service’s procedures and  internal management controls for collecting and reporting depot  maintenance information for purposes of responding to the section 2466  requirement. We reviewed supporting details (summary records,  accounting reports, budget submissions, and contract documents) at  departmental headquarters, major commands, and selected maintenance  activities. We compared processes to determine consistency and  compliance with legislative provisions, OSD guidance, and military service  instructions. We selected certain programs and maintenance activities for  a more detailed review. We particularly examined reporting categories  that DOD personnel and we had identified as problem areas in current and  past reviews. These areas included interserviced workloads, contractor  logistics support, warranties, software maintenance, and depot  maintenance at nondepot locations. We evaluated processes for collecting  and aggregating data to ensure accurate and complete reporting and to  identify errors, omissions, and inconsistencies. We coordinated our work,  shared information, and obtained results of the Army and Air Force  service audit agencies’ data validation efforts.
To determine whether the future-year projections were based on accurate  data, valid assumptions, and existing plans and represented reasonable  estimates, we followed the same general approach and methodology used  to review the prior-years report. Although the future-years report is a  budget-based projection of obligations, the definitions, guidance,  organization, and processes used to report future data are much the same  as for the prior-years report of actual obligations. We discussed with DOD  officials the main differences between the two processes and the manner  in which the data were derived from budgets and planning requirements  and key assumptions made in the outyear data.
For reviews of both 50-50 reports, we performed certain checks and tests,  including variance analyses, to judge the consistency of this information  with data from prior years and with the future-years budgeting and  programming data used in DOD’s budget submissions and reports to the  Congress. For example, we compared each service’s 50-50 data reported in  February and April 2003 for the period 2001 through 2006 with data  reported for these same years in the 50-50 reports submitted in 2002. We  found repeated and significant changes, even though the estimates were  prepared only about 1 year apart. We used this analysis to further discuss  with officials and analyze reasons for changes in reported data and  percentage allocations between the 2002 and 2003 reports submitted to the  Congress. Variance analysis showed that congressional and DOD decision  makers were given quite a different view of the public-private sector  workload mix than that presented just last year.
Several factors concerning data validity and completeness were  considered in our methodology and approach to reviewing the prior- and  future-years reports. One key factor is the continuing deficiencies we  have noted in DOD’s financial systems and reports that preclude a clean  opinion on its financial statements and that result in limited accuracy of  budget and cost information. Another factor is that documenting depot  maintenance workload allocations between the public and private sectors  is becoming more complicated by the consolidation of maintenance  activities and the performance of depot-level maintenance at field  locations. These complicating factors (1) make it more difficult to identify  work that meets the statutory definition of depot maintenance,  (2) complicate workload reporting, and (3) result in underreporting of  depot maintenance for both the public and private sectors. In addition,  changes in business philosophy and approach can make analysis more  difficult. For example, many new contracts are performance-based and  may not discretely identify maintenance activities or account separately  for their costs. This can result in under- and overreporting of depot  maintenance work performed in the private sector. It also forces more  reliance on the contractor for providing information needed in 50-50  reporting and may result in DOD officials having to use more assumptions  and estimating methodologies in lieu of contract data.
As part of our efforts to identify areas for improvement, we reviewed  DOD’s efforts to improve the accuracy and completeness of reports. We  discussed with officials managing and coordinating the reporting process  their efforts to address known problem areas and respond to  recommendations by the audit agencies and us. We compared this year’s  sets of instructions with last year’s to identify changes and additions. We  reviewed efforts to identify reporting sources and to distribute guidance  and taskings. We asked primary data collectors to provide their opinions  on how well efforts were managed and data verified and to identify “pain  points” and ideas they had to improve reporting. We reviewed prior  recommendations and service audit agency findings to determine whether  known problem areas were being addressed and resolved. We applied this  knowledge to identify additional areas for improving the reporting process  and management controls.
We interviewed officials, examined documents, and obtained data at OSD,  Army, Navy, Marine Corps, and Air Force headquarters in the Washington,  D.C., area; Army Materiel Command in Alexandria, Virginia; Naval Sea  Systems Command in Washington, D.C.; Naval Air Systems Command in  Patuxent River, Maryland; Marine Corps Materiel Command in Albany,  Georgia; Air Force Materiel Command in Dayton, Ohio; Army Audit  Agency in Washington, D.C.; Naval Audit Service in Crystal City, Virginia;  several public depots managed by the military departments’ materiel  commands; and selected operating bases. We conducted our review from  February to July 2003 in accordance with generally accepted government  auditing standards.
section_title: Appendix III: Comments from the Department of Defense
paragraphs: The following are GAO’s comments on the Department of Defense’s letter  dated August 26, 2003.
subsections: section_title: GAO Comments
paragraphs: 1.  The department did not agree with our adjustment for nuclear aircraft  carriers. The Navy interprets the 10 U.S.C. 2460 exclusion of nuclear  refueling of aircraft carriers from the definition of depot maintenance  to mean that no work associated with the refueling complex overhaul  of nuclear carriers is reportable for 50-50 purposes.  Navy officials also  said that non-nuclear depot repairs on carriers are not severable tasks  to be split out from contracts. We continue to believe that the costs of  depot repairs and tasks not directly associated with nuclear refueling  tasks during carrier overhauls should be reported. Many maintenance  tasks performed at the same time as the nuclear refueling are not  related to the refueling; and when these and similar tasks are  performed during other maintenance activities, the Navy does report  them as depot maintenance. We found that the funding for these tasks  is clearly identifiable in the contract financial records and could be  counted just like other 50-50 work. In our view, without some nexus  between that work and refueling work, it would be inconsistent with  the plain language of section 2460 to exempt that work simply because  it was performed during a refueling complex overhaul of nuclear  carriers.  We deleted the reference to severable tasks in the body of the  report, as our intent was not to suggest that the Navy break out non- nuclear work from nuclear work onto separate contracts or work  orders, but rather that the funding for non-nuclear refueling work  accomplished on existing contracts be identified and reported.  2.  The department did not agree with our adjustment for surface ship  inactivations. DOD considers nuclear ship inactivation work to be a  relatively complex process that is equivalent to depot level  maintenance, but that conventional ship inactivation work performed  by the private sector is not as complex and is not equivalent to depot- level maintenance. In addition, the department’s written response  indicated that surface ship inactivation work accomplished by the  public sector is also not reported in the 50-50 data. We believe that  inactivation work should be reported because the relevant title 10  statutes and OSD’s 50-50 guidance do not make this distinction of  relative complexity and requires reporting of all depot maintenance,  regardless of location and source of funding.  Further, DOD’s Financial  Management Regulation 7000.14-R, vol. 6A, ch. 14 (which prescribes  depot maintenance reporting requirements) includes inactivation as a  depot maintenance activity. Although we did not review inactivation  work accomplished by public sector workers, it should also be  reported if it meets the definition of depot maintenance.  3.  The Air Force did not agree with our reversal of the 50-50 reporting  adjustment it makes for the salaries and overhead expenses of  government employees administering depot maintenance contracts.   The Air Force believes that the costs for government personnel  managing depot maintenance contracts represent public sector costs;  therefore, to report them as contract would misrepresent the public- private sector percentage allocations.  However, OSD’s 50-50 guidance  requires that all the costs associated with accomplishing a specific  depot workload—labor, material, parts, indirect, and overhead— should be counted for 50-50 purposes in the sector accomplishing the  actual maintenance. The guidance cites examples, such as counting the  contract maintenance on depot plant equipment as public sector costs  because the plant equipment is part of the costs incurred to perform  maintenance at the depot.  Similarly, we think that contract  administrative costs should be counted as part of the costs incurred to  accomplish the work in the private sector. We note that the Air Force  will stop making this adjustment after this year when financing for the  depot contracts is moved from the working capital fund to direct  appropriations. It remains to be seen, however, how the Air Force will  account for contract administrative expenses in the future.  4.  The department did not agree that counting the repair costs twice for  some components installed in higher level assemblies is inconsistent  with the statutory requirements of 10 U.S.C. 2466(e) and 10 U.S.C.  2460.  The Air Force believes that the original repair cost for a  component and its subsequent cost as material used in system or  subsystem overhaul are two distinct and separate transactions and that  both costs should be reported for 50-50 purposes.  We continue to  believe that counting some component repair costs twice when the  components are incorporated in a higher-level assembly distorts the  50-50 reports and the actual amount of work accomplished by both the  public and private sectors.  In our view, there is no reason to conclude  that the intent of title 10 requires double counting component repairs  and that a more reasonable reading is that DOD can implement those  provisions so as to allow for adjustments in reporting to more  accurately reflect the cost of depot work.  DOD adopted a similar  approach in response to a recommendation in our 2001 report.  In that  report, we found that unrealistic and outdated budget data were being  reported when there were other, more accurate information sources.   Accordingly, OSD revised its 50-50 guidance to allow for revising  budgetary estimates to better reflect known and anticipated changes in  workloads, workforce, priorities, and performance execution rates.   This resulted in the Air Force reporting additional hundreds of millions  of dollars in projected depot work based on current workload  estimates. A similar approach could be used to eliminate the effects of  double counting reparables later used in higher-level assemblies.
section_title: Related GAO Products
paragraphs: Depot Maintenance: Key Unresolved Issues Affect the Army Depot  System’s Viability. GAO-03-682. Washington, D.C.: July 7, 2003.
Department of Defense: Status of Financial Management Weaknesses  and Progress Toward Reform. GAO-03-931T. Washington, D.C.: June 25,  2003.
Depot Maintenance: Change in Reporting Practices and Requirements  Could Enhance Congressional Oversight. GAO-03-16. Washington D.C.:  October 18, 2002.
Depot Maintenance: Management Attention Needed to Further Improve  Workload Allocation Data. GAO-02-95. Washington, D.C.: November 9,  2001.
Defense Logistics: Actions Needed to Overcome Capability Gaps in the  Public Depot System. GAO-02-105. Washington, D.C.: October 12, 2001.
Defense Maintenance: Sustaining Readiness Support Capabilities  Requires a Comprehensive Plan. GAO-01-533T. Washington, D.C.:  March 23, 2001.
Depot Maintenance: Key Financial Issues for Consolidations at Pearl  Harbor and Elsewhere Are Still Unresolved. GAO-01-19. Washington, D.C.:  January 22, 2001.
Depot Maintenance: Action Needed to Avoid Exceeding Ceiling on  Contract Workloads. GAO/NSIAD-00-193. Washington, D.C.:  August 24, 2000.
Depot Maintenance: Air Force Waiver to 10 U.S.C. 2466.  GAO/NSIAD-00-152R. Washington, D.C.: May 22, 2000.
Depot Maintenance: Air Force Faces Challenges in Managing to 50-50  Ceiling. GAO/T-NSIAD-00-112. Washington, D.C.: March 3, 2000.
Depot Maintenance: Future Year Estimates of Public and Private  Workloads Are Likely to Change. GAO/NSIAD-00-69. Washington, D.C.:  March 1, 2000.
Depot Maintenance: Army Report Provides Incomplete Assessment of  Depot-type Capabilities. GAO/NSIAD-00-20. Washington, D.C.: October 15,  1999.
Depot Maintenance: Status of the Navy’s Pearl Harbor Project.  GAO/NSIAD-99-199. Washington, D.C.: September 10, 1999.
Depot Maintenance: Workload Allocation Reporting Improved, but  Lingering Problems Remain. GAO/NSIAD-99-154. Washington, D.C.:  July 13, 1999.
Navy Ship Maintenance: Allocation of Ship Maintenance Work in the  Norfolk, Virginia, Area. GAO/NSIAD-99-54. Washington, D.C.: February  24, 1999.
Defense Depot Maintenance: Public and Private Sector Workload  Distribution Reporting Can Be Further Improved. GAO/NSIAD-98-175.  Washington, D.C.: July 23, 1998.
Defense Depot Maintenance: DOD Shifting More Workload for  New Weapon Systems to the Private Sector. GAO/NSIAD-98-8.  Washington, D.C.: March 31, 1998.
Defense Depot Maintenance: Information on Public and Private Sector  Workload Allocations. GAO/NSIAD-98-41. Washington, D.C.: January 20,  1998.
Defense Depot Maintenance: Uncertainties and Challenges DOD Faces in  Restructuring Its Depot Maintenance Program. GAO/T-NSIAD-97-112.  Washington, D.C.: May 1, 1997. Also GAO/T-NSIAD-97-111. Washington,  D.C.: March 18, 1997.
Defense Depot Maintenance: DOD’s Policy Report Leaves Future Role of  Depot System Uncertain. GAO/NSIAD-96-165. Washington, D.C.: May 21,  1996.
Defense Depot Maintenance: More Comprehensive and Consistent  Workload Data Needed for Decisionmakers. GAO/NSIAD-96-166.  Washington, D.C.: May 21, 1996.
Defense Depot Maintenance: Privatization and the Debate Over the  Public-Private Mix. GAO/T-NSIAD-96-148. Washington, D.C.: April 17,  1996. Also GAO/T-NSIAD-96-146. Washington, D.C.: April 16, 1996.
Depot Maintenance: Issues in Allocating Workload Between the Public  and Private Sectors. GAO/T-NSIAD-94-161. Washington, D.C.: April 12,  1994.