Defense Management: Processes to Estimate and Track Equipment Reconstitution Costs Can Be Improved
Published: 2005-05-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The high pace of military operations in Iraq and elsewhere has generated a multibillion dollar equipment maintenance requirement that must be addressed after units return home. Upon returning from deployments, active, reserve, and National Guard units reconstitute, or restore, their equipment to a condition that enables them to conduct training and prepare for future deployments. The Department of Defense (DOD) uses a two-phased process to develop equipment reconstitution supplemental budget estimates. GAO reviewed this process for the fiscal year 2004 supplemental budget to determine (1) the extent to which the process produced reliable estimates of reconstitution requirements in the fiscal year 2004 supplemental budget, and (2) whether DOD is accurately tracking and reporting reconstitution costs.
section_title: What GAO Found
paragraphs: DOD's two-phased process to develop its fiscal year 2004 equipment reconstitution cost estimates contained weaknesses that produced errors, which may result in misstatements of future-year reconstitution cost requirements. The model DOD used to estimate costs in the first phase of the process generated unreliable estimates due to two main reasons. First, the model can overstate aircraft and ship reconstitution costs because these costs are covered in two different sections of the model. As a result, the model's estimate for Air Force aircraft reconstitution was overstated by over $1 billion. Second, there is uncertainty over what maintenance requirements the model covered. The Office of the Secretary of Defense (OSD) and the services developed their requirements with the understanding that the model did not calculate all maintenance requirements. GAO learned that the model may duplicate some requirements that the services manually calculated and included in their cost estimates. Consequently, DOD cannot have confidence that its equipment reconstitution budget estimate is reliable. There are also reconstitution estimating and guidance problems associated with the second phase of the process, where the services may develop alternative estimates outside of the model. For instance, the Army failed to consider funding in its baseline budget that would be available for equipment reconstitution. In another instance, the services included requirements in their reconstitution estimates that appear to go beyond equipment reconstitution as established by OSD's guidance. Nonetheless, GAO found an accumulation of unfulfilled equipment reconstitution requirements, because OSD guidance excluded the services from requesting funds for projected battle and other expected losses. The effect of losses not recognized in OSD's supplemental budget requirements have not yet been quantified and may be significant. GAO believes these problems are creating a backlog of equipment reconstitution requirements that will eventually need to be addressed in future budgets. DOD has not accurately tracked and reported its equipment reconstitution cost because the services are unable to segregate equipment reconstitution from other maintenance requirements as required. As a result, DOD cannot accurately report the cost of equipment reconstitution and, consequently, the total cost of the global war on terror. The Air Force does not break out its equipment reconstitution obligations from other global war-on-terrorism obligations in a DOD monthly cost report because it does not have a mechanism that can track the amounts obligated on equipment reconstitution and delineate such obligations from routine maintenance. Further, Army- and Navy-reported equipment reconstitution obligations are likely overstated in the monthly report because they include other maintenance costs--such as those related to equipment used in training exercises--that do not fall within DOD's description of equipment reconstitution.

section_title: Letter
paragraphs: The high pace of military operations in Iraq and elsewhere has generated a  multibillion dollar equipment maintenance requirement that must be  addressed after units return home.  Upon returning from Iraq and other  global war-on-terrorism deployments, units reconstitute—that is, restore— their equipment to a condition that enables them to conduct training  exercises, achieve required readiness levels, and prepare for future  deployments.  While the Department of Defense (DOD) has not formally  defined equipment reconstitution, its financial regulation describes  reconstitution costs as including costs to clean, inspect, maintain, replace,  and restore equipment to the required condition at the conclusion of the  contingency operation or unit deployment. Furthermore, the department  has issued additional specific guidance as to what costs should be included  as reconstitution.  Reconstitution is performed at each level of  maintenance—organizational, intermediate, and depot—depending on the  condition of returning equipment and the capacity available at each  maintenance level.  The department’s equipment reconstitution  maintenance requirement is based on the amount of repairs that need to be  performed at all maintenance levels.  As the global war on terrorism  continues, the department will be generating additional equipment  reconstitution requirements, which will have to be estimated for inclusion  in future baseline or supplemental budgets.
The department has a two-phased process in place to estimate the  incremental costs of supporting contingency operations, which includes  the determination of equipment reconstitution requirements.  During the  first phase, the Office of the Secretary of Defense (OSD) comptroller and  the services use an OSD model, developed by the Institute for Defense  Analyses (IDA), called the contingency operations support tool (COST),which covers much of what is needed to conduct contingency operations,  as well as some aspects of equipment reconstitution. Each service and OSD  input information into the model regarding the period of deployment for  units and equipment that will need reconstitution. The model generates an  estimated funding requirement. During the second phase, the services may  accept or reject the COST model’s estimates and provide alternative  estimates they developed outside the model. When the services propose an  estimate other than that derived from the COST model, they meet with the  OSD comptroller and provide support for their estimate and, in conjunction  with the comptroller, determine the requirement to be submitted.  The  services also provide estimates for some requirements that are not covered  by the model—such as depot-level maintenance and procurement for  replacement equipment. OSD then reviews these estimates and, in  conjunction with the services, determines a final estimate for inclusion in  OSD’s supplemental budget submission. However, when differences occur,  the OSD comptroller has the final say in what equipment reconstitution  requirement will be submitted in the supplemental budget.
This report focuses on DOD’s planning, budgeting, and tracking and  reporting for equipment reconstitution for military units that have returned  from Iraq and other global war-on-terrorism operations. The objectives of  this report are to examine the extent to which (1) the process DOD used to  develop its fiscal year 2004 supplemental budget equipment reconstitution  requirements produced reliable estimates and (2) the department is  accurately tracking and reporting equipment reconstitution obligations. We  performed our work on the basis of the authority of the Comptroller  General and are reporting the results to you because of your oversight  roles.
We examined OSD’s and the services’ processes for developing their fiscal  year 2004 equipment reconstitution requirements and collected data  related to OSD and service equipment reconstitution requirements.  We  held discussions at service headquarters and also visited Army and Marine  Corps units in the process of reconstituting equipment to review the  equipment reconstitution planning process at these levels, observe  implementation of these plans, and collect actual reconstitution costs. We  reviewed reported reconstitution costs for Army equipment and  determined that the reliability of these data was sufficient for our purposes.  We performed our work from September 2003 through March 2005 in  accordance with generally accepted government auditing standards. The  scope and methodology section contains more detailed information about  the work we performed.
subsections: section_title: Background
paragraphs: In preparation for the initiation of Operation Iraqi Freedom (OIF), the  United States deployed four Army divisions and their supporting reserve  component units, a Marine Expeditionary Force, and a significant portion  of the Navy’s and Air Force’s combat power to southwest Asia.  The Army’s  Third Infantry Division (mechanized) and its supporting reserve  component units were primarily equipped with Army-prepositioned  assets—consisting of over 17,000 pieces of rolling stock and almost 6,000  standard 20-foot shipping containers of supplies—drawn from  prepositioned equipment sites located in southwest Asia and offloaded  from Army prepositioned ships. The 1st Marine Expeditionary Force was  also primarily equipped with prepositioned assets offloaded from Marine  Corps prepositioned ships.  By the height of the combat portion of OIF, the  United States had deployed a significant portion of its combat power to  southwest Asia.  For example, during fiscal year 2003, the Army deployed  four divisions and numerous supporting active, reserve, and national guard  units which participated in the combat phase of OIF.  As a result, the Army  estimated that these units, with assistance from other Army maintenance  activities, would have to reconstitute over 53,000 pieces of rolling stock  when the units redeployed to their home stations.
In Iraq and Afghanistan, the U.S. military—especially the Army and Marine  Corps—are operating at a pace well in excess of their normal peacetime  level, which is driven by units’ training requirements.  This not only greatly  increases the day-to-day operational maintenance requirements, including  spare parts demands, of deployed Army and Marine Corps units, but also  generates a large post-operational maintenance requirement that must be  addressed when the units redeploy to their home station.  Upon  redeployment, the units need to bring their equipment at least back up to  fully mission-capable status in order for the units to be able to train on  their equipment and achieve their readiness levels and be prepared for  future deployments.  In addition, before leaving Iraq, redeploying units  turned in a large amount of prepositioned equipment that must undergo  maintenance and repair before the equipment can be reissued to units  deploying to or already in southwest Asia in support of OIF, or returned to  prepositioned equipment stock for future use. Figure 1 shows some  prepositioned equipment stored in Kuwait awaiting repair.
Army and Marine Corps units returning from deployments related to the  global war on terrorism have equipment that has been heavily used and is  in various degrees of disrepair.  Upon returning to home station, the units’  equipment is inspected to determine what maintenance is needed to bring  the equipment back to the condition needed to allow the unit to conduct  mission-essential training and be prepared for future deployments.  The  services use myriad repair and maintenance sources to assist units in  reconstituting their equipment.  At military installations, various  maintenance personnel—including military personnel within units,  installation personnel (including contractors) who support day-to-day  maintenance operations, contractors who have been hired to augment the  units’ and installations’ day-to-day workforces, and contractors who have  been hired to increase an installation’s maintenance capacity—are all  working in concert to reconstitute the units’ equipment in a timely manner  so that the units will be ready to again deploy.  In addition, military depots  and contractors are using their vast maintenance and repair capabilities to  help in the equipment reconstitution effort.
To fund the global war on terrorism in fiscal year 2003, Congress provided  DOD with $62 billion in the fiscal year supplemental appropriation,  primarily funding operations in Iraq.  While most of this funding was used  to cover the costs of combat operations, the DFAS monthly terrorist  report indicate that about $3.8 billion in funds were obligated for  equipment reconstitution in fiscal year 2003.
The fiscal year 2004 global war-on-terrorism supplemental budget included  a significantly larger amount for equipment reconstitution than the  previous supplemental budget.  DOD requested $65.6 billion for executing  the global war on terrorism in its fiscal year 2004 global war on terrorism  supplemental budget request, which Congress funded at $64.3 billion.  In  the budget-building process that was used for developing its fiscal year  2004 global war-on-terrorism supplemental budget request, the department  included $5.9 billion for equipment reconstitution. (See table 1.)
For the fiscal year 2004 supplemental budget process, table 1 shows the  requirements the services developed and what OSD ultimately included in  its supplemental budget submission to Congress.  The requirements are  broken down between unit-level and depot-level requirements.  Unit-level  maintenance, which consists of organizational- and intermediate-level  maintenance, includes maintenance performed by military units in motor  pools and maintenance support units, and by DOD civilians and contractor  personnel at installation maintenance organizations.  Depot-level  maintenance includes maintenance performed by DOD civilian employees  and DOD contractors at military depots or private facilities.  The fiscal year  2004 supplemental defense appropriation does not delineate the amounts  appropriated for unit- and depot-level equipment reconstitution.
section_title: DOD’s Equipment Reconstitution Estimating Process Contained Weaknesses That Produced Errors
paragraphs: The two-phased process DOD used to develop its fiscal year 2004  supplemental budget equipment reconstitution requirements contained  weaknesses that produced errors that may result in misstatements of  future-year budget estimates if not corrected. We observed two problems  with the COST model associated with the first phase of DOD’s process that  have generated unreliable estimates.  First, the COST model can overstate  reconstitution costs related to aircraft and ship costs because these costs  are covered in both the operations and reconstitution sections of the  model. Second, there is uncertainty in DOD over the maintenance  requirements covered by the model. We also noted problems with the  second phase of DOD’s process.  In one instance, the Army did not consider  funding in its baseline peacetime operation and maintenance budget that  would be available for equipment reconstitution.  The Army also  significantly overestimated the organizational- and intermediate-level  maintenance costs to reconstitute individual equipment items.  In another  instance, the services included requirements in their reconstitution  estimates that appear to be inconsistent with equipment reconstitution  activities established by OSD’s supplemental budget preparation guidance.   Also, OSD guidance only allowed the services to request funding to replace  known battle losses—excluding projected battle losses and other expected  losses—in preparing their fiscal year 2004 supplemental budget  submissions.
subsections: section_title: Duplication of Cost Requirements Overstates Reconstitution Estimate
paragraphs: The model that OSD and the services used in the first phase of the process  to calculate reconstitution requirements for fiscal year 2004 resulted in an  overstatement of about $1.2 billion.  This is because the COST model  contains an error that can result in a duplication of reconstitution cost  requirements.  The equipment reconstitution section of the COST model  provides funding for aircraft and ship reconstitution that is already funded  through the operations section of the model.
All services support their aircraft through a flying-hour program that covers  costs associated with operating aircraft, such as petroleum, oil and  lubricants, consumables (supplies), and spare parts.  As a result, all  organizational- and intermediate-level maintenance and repair  requirements are met through the flying-hour program.  Since the  operations section of the COST model already includes flying-hour  program funding, the inclusion of an equation for aircraft reconstitution in  the equipment reconstitution section of the model is redundant.  Air Force  officials told us that due to their flying-hour program, additional funding  specifically addressing organizational- and intermediate-level  reconstitution of aircraft was not needed.  However, the Air Force’s fiscal  year 2004 supplemental budget request included about $1.2 billion in the  equipment reconstitution section for aircraft maintenance that was also  covered by the operations section of the COST model.  According to Air  Force officials, they were unaware that the equipment reconstitution  section duplicated the aircraft maintenance costs that are covered in the  operations section of the COST model. In contrast, the Navy removed  funding that the COST model’s equipment reconstitution section provided  for aircraft organizational- and intermediate-level maintenance.
The equipment reconstitution section of the COST model also duplicates  organizational-level ship reconstitution that is already covered in the  operations section of the model.  However, the Navy treated this potential  duplication in the same manner as it treated the flying-hour program  duplication. Recognizing that this maintenance was already covered in the  COST model’s operations section, the Navy only included intermediate- level ship maintenance, and aircraft and ship depot-level maintenance in  the equipment reconstitution section of its requirements calculation.
The different ways that the Air Force and Navy treated aircraft  reconstitution demonstrate how this potential redundancy is a weakness in  the structure of OSD’s COST model.  In discussing these redundancies in  the model with OSD comptroller officials, they told us that OSD and IDA  officials were unaware of this potential duplication.  This lack of awareness  was demonstrated when OSD comptroller officials did not identify and  correct the Air Force’s duplication described previously.  Air Force finance  officials told us that they have taken steps when preparing their fiscal year  2005 supplemental budget to prevent this duplication from occurring again.   We observed that the fiscal year 2005 supplemental budget did not repeat  this duplication.
section_title: DOD Had Uncertainty Over Which Maintenance Requirements Were Covered by Its COST Model
paragraphs: There was uncertainty within the department regarding which maintenance  requirements were covered in the COST model. OSD and the services  developed their equipment reconstitution requirements with the  understanding that the COST model calculated organizational- and  intermediate-level maintenance only, and they thus calculated their depot- level maintenance requirements outside of the model during the second  phase of the process. However, we later learned that the model may have  calculated some depot-level maintenance requirements, which could have  resulted in the model duplicating the depot-level maintenance  requirements calculated outside the model.
We held a series of discussions with officials from OSD—the owners of the  model—and IDA—the developers of the model—to determine what types  of maintenance requirements are included in the equipment reconstitution  section of the model.  Both OSD and IDA officials provided us with  different descriptions of what was included in the model.  In addition, these  officials were unable to produce any written guidance that OSD provided  IDA regarding what maintenance requirements the model’s equipment  reconstitution section should cover.  They stated that this was determined  so long ago that the paper trail no longer exists and that in all probability  the guidance was transmitted either verbally or via e-mail, or both.
For example, in our initial meeting with OSD comptroller officials to  determine how OSD and the services developed their equipment  reconstitution estimates for the fiscal year 2004 supplemental budget, we  were told that the equipment reconstitution section of the COST model  included organizational- and intermediate-level maintenance requirements  and excluded depot-level maintenance requirements.  Officials from each  of the services corroborated this viewpoint and stated that they understood  the equipment reconstitution section of the COST model to include  organizational- and intermediate-level maintenance requirements and  exclude depot-level requirements.  Army, Navy, Air Force, and Marine  Corps finance officials also told us that they developed depot-level  maintenance estimates separate from the COST model.
Next, we met with IDA officials to better understand what levels of  reconstitution maintenance were included in the equipment reconstitution  section of the COST model.  The IDA officials said that the model included  organizational- and intermediate-levels of maintenance, and could include  some depot-level maintenance.  However, IDA could not provide us with  the documentation to support this assertion and we were therefore unable  to determine whether model calculations included or excluded depot-level  maintenance.
We shared IDA’s comments about the levels of maintenance covered in the  model with OSD comptroller officials in a follow-up meeting.  At this point,  they told us that its COST model was intended to provide organizational- level maintenance costs only, which represents a small portion of the total  equipment reconstitution requirement.  However, based on our analysis of  the COST model, we concluded that intermediate-level requirements are  indeed included in the COST model equations.  In the end, OSD comptroller  officials stated that they are now taking steps to clear up confusion  regarding the requirements for each type of maintenance and repair.
As described previously, OSD comptroller officials did not clearly establish  and communicate to IDA what levels of maintenance they expected the  COST model to estimate. Without clearly identifying what levels of  maintenance OSD expected in the COST model and subsequently clearly  communicate this information to IDA, IDA officials are not able to ensure  that the COST model generates accurate and complete organizational and  intermediate maintenance cost estimates, and does not duplicate depot  maintenance costs calculated outside of the model.  Consequently, the  department cannot have confidence in its equipment reconstitution budget  estimate.
section_title: Army’s Equipment Reconstitution Estimate Did Not Consider Baseline Peacetime Budget
paragraphs: The Army did not consider funding in its baseline peacetime operation and  maintenance budget that would be available for equipment reconstitution  when developing its own estimate outside of the COST model.  As a result,  the Army overestimated its equipment reconstitution requirements.
The Army used the COST model as a starting point for determining its  equipment reconstitution requirements for fiscal year 2004.  However,  Army officials concluded that the $1.9 billion calculated by the model was  inadequate.  As a result, the Army developed its own methodology for  calculating equipment reconstitution requirements and estimated $3.0  billion would be needed for organizational- and intermediate-level repair  and maintenance, which was about $1 billion higher than the OSD COST  model estimate.
Our analysis of the Army’s methodology for calculating equipment  reconstitution requirements revealed a major weakness in the Army  estimate.   The Army’s process for estimating its equipment reconstitution  requirements did not include steps to offset total requirements with  baseline funding.  Consequently, we estimate that the Army’s equipment  reconstitution estimate may have been overstated by between $299 million  to $497 million.
OSD’s guidance to the services for developing the supplemental budget  specifies that the services were to offset funds already contained in their  baseline budgets—peacetime maintenance costs that would not be  incurred because the unit was deployed in support of the global war on  terrorism—when estimating a contingency operation’s cost. Not  recognizing and adjusting for normal operating budgets overstates the  funding requirement and could result in the Army overstating funding  requirements for equipment reconstitution in the future if not addressed.   According to Army officials, this oversight occurred because the Army did  not establish a specific step in its supplemental estimating process to offset  the Army’s estimate with baseline budget funds.
section_title: Army Overestimated Organizational and Intermediate Maintenance Costs for Numerous Equipment Items
paragraphs: In the process of reviewing the Army’s methodology for calculating  equipment reconstitution requirements, we also found that the Army  overestimated organizational- and intermediate-level maintenance costs for  numerous equipment items.  A comparison of the actual fiscal year 2004  equipment reconstitution obligations reported by the Army with the Army’s  equipment reconstitution cost estimate showed that organizational- and  intermediate-level repair costs for individual equipment items were  significantly overestimated.  Specifically, we collected actual cost data on  38 types of equipment included in the Army’s estimate and determined that  the actual costs for reconstituting the items were lower than the Army’s  estimates for 34 of the 38 items. (See table 2.) The Army was unable to  provide us with adequate support for its estimates because it did not retain  supporting documentation. Consequently, we were not able to determine  the reasons for differences between estimated costs and reported  equipment reconstitution obligations.
section_title: Alternative Service Estimates Included Equipment Maintenance That May Exceed OSD’s Reconstitution Guidance
paragraphs: The services included costs in their reconstitution estimates calculated  outside the COST model that appear not to be equipment reconstitution as  established by OSD’s guidance. In one case, the Navy and the Air Force  included unfunded fiscal year 2004 depot-level maintenance requirements  in their supplemental funding cost estimates that did not arise from OIF  and other operations related to the global war on terrorism.
The Navy and Air Force used unfunded peacetime depot maintenance  requirements as the basis for the depot-level maintenance portion of their  fiscal year 2004 supplemental equipment reconstitution requests.  The Navy  requested funding for unfunded ship overhauls, and according to Atlantic  fleet officials, unfunded ship overhauls occur every year.  These officials  also stated that the Navy typically finds the funding needed to perform  unfunded overhauls somewhere in its baseline budget or will delay the  overhauls until the following year.  In addition, the Air Force’s fiscal year  2004 supplemental request for depot-level equipment reconstitution  consisted of funding engine and airframe overhauls that were not funded in  its fiscal year 2004 baseline budget.
These requirements may not fall within the description of equipment  reconstitution as established in OSD’s guidance, which directed the  services to request funds needed to restore forces to the same operational  level as prior to deployment and to limit requests to those costs already  incurred as a direct result of operations in support of the war on terrorism.  However, the DOD guidance also instructed the services to prepare their  supplemental budget estimates around the DOD Financial Management  Regulation, Chapter 23 Contingency Cost Breakdown Structure, which  provides a broader description of reconstitution costs. Taken as a whole,  the DOD supplemental budget preparation guidance is unclear on what the  services could and could not include in their budget submissions. In  addition, Air Force and Navy officials said that funding for these  requirements was needed to prepare their forces to be fully ready to fight  the global war on terrorism.  However, including these unfunded depot  maintenance peacetime requirements may overstate the estimated cost of  reconstituting equipment involved in operations in Iraq and Afghanistan.
section_title: OSD Guidance Excluded Estimates of Potential Equipment Losses During the Budgeting Process
paragraphs: In preparing the fiscal year 2004 global war-on-terrorism supplemental  budget, OSD only allowed the services to request funding to replace known  battle losses and excluded projected battle losses and other expected  losses.  Such expected losses include equipment that would be considered  beyond economic repair, such as crash-damaged vehicles and maintenance  washouts. However, the replacement of these excluded items ultimately  will need to be funded in future budgets to ensure that the Army and  Marine Corps have an adequate amount of equipment needed to meet  future challenges.
The equipment replacement needs being quantified by the services for  inclusion in the fiscal year 2005 global war-on-terrorism supplemental  budget will incorporate some of the expenses excluded by OSD guidance in  the fiscal year 2004 supplemental budget request. However, as of December  2004, the magnitude of this requirement is unknown.
Using the Army’s equipment reconstitution requirements analysis, we  estimated that the fiscal year 2004 equipment replacement requirement due  to maintenance washouts ranged from $259 million to $562 million.   Recognizing that not all OIF equipment losses were covered in the fiscal  year 2004 supplemental, the Army has included some unknown battle  losses, crash losses, and maintenance washouts in its Tactical Wheeled  Vehicle Study. The Army engaged this study to identify shortfalls in its  tactical wheeled vehicle fleets and also included transformation and  underfunded requirements in past baseline budgets.  This study will  identify multiyear procurement requirements and, according to Army  resource officials, it is hoped the Army will have these requirements funded  through future baseline and supplemental budgets.  As of March 2005, the  study has not been issued and the Army has been unable to provide us with  an estimate of the procurement funding requirements, including the  amount directly related to OIF equipment reconstitution requirements.
Furthermore, the Army’s and Marine Corp’s reconstitution requirements for  prepositioned equipment still being used in Iraq will also increase because  the anticipated battle and crash losses and maintenance washouts will also  continue to increase the longer the equipment remains in use.  Until OSD  allows the services to consider anticipated operational equipment losses  and maintenance washouts in their supplemental budgeting process,  equipment reconstitution requirements generated during the current fiscal  year will inevitably be pushed out for funding in upcoming years. Not doing  so could also have an impact on the ability of the services to quickly  reconstitute equipment in the current fiscal year.
section_title: DOD Not Accurately Reporting Equipment Reconstitution Costs
paragraphs: DOD has not accurately tracked and reported its equipment reconstitution  costs because the services are unable to segregate equipment  reconstitution from other maintenance requirements, as required. In part to  provide Congress with information on global war-on-terrorism costs and  provide the OSD comptroller with a means to assess variance between  obligations and the budget, DFAS compiles a monthly report to track these  obligations.  The DFAS report on funds obligated in support of the war  includes a category for tracking equipment reconstitution obligations and  the guidance associated with this report describes what reconstitution  costs can include.  Our analysis of the DFAS report showed that 1) the Air  Force is not separately reporting equipment reconstitution obligations  because it does not have a mechanism within its current accounting system  to track them, 2) the Army is including unit reconstitution obligations that  are above and beyond equipment reconstitution and other maintenance  costs, and 3) the Navy is unable to segregate regular maintenance from  reconstitution maintenance for ship overhauls.  As a result, the equipment  reconstitution obligations are being inconsistently reported by the services  and the report data are not reliable for accurately determining how much  the services are actually obligating for the reconstitution of equipment  returning from deployments in support of the global war on terrorism.  Table 3 lists the fiscal year 2004 obligations reported by the services in  DFAS’s report as of the end of September 2004 for reconstitution.
DOD reports the costs of the global war on terrorism largely in accordance  with the cost breakdown structure found in its financial management  regulation.  This internal DOD guidance describes equipment  reconstitution costs as including the cost to clean, inspect, maintain,  replace, and restore equipment to the required condition at the conclusion  of the contingency operation or unit deployment.  This guidance, which  includes a specific cost category for equipment reconstitution along with  specific budget guidance issued by the OSD comptroller’s office that  addresses incremental costs of the global war on terrorism, calls for the  services to report equipment reconstitution costs separately from other  incremental costs.  Despite this guidance, the Air Force is not separately  reporting equipment reconstitution obligations to DFAS for inclusion in its  monthly terrorism cost report owing to the way the Air Force accounting  system was designed.  Air Force officials told us that the Air Force’s  accounting system currently has no way to delineate equipment  reconstitution obligations from other global war-on-terrorism obligations  for DFAS reporting purposes.  Specifically, the Air Force does not have a  mechanism nor has it established codes that can track the dollar amounts  obligated on equipment reconstitution in fiscal years 2003 and 2004, which  the guidance does not require.  The Air Force’s accounting system has two  types of codes for classifying expenses: (1) element of expense investment  codes, which are used for tracking obligations by commodities (such as  supplies, travel, and civilian pay); and (2) emergency and special program  codes, which are used to collect costs incurred during an emergency or a  special program (such as the global war on terrorism).  Neither of these  codes, individually or in combination, equates to equipment reconstitution.   Instead, equipment reconstitution obligations are spread throughout other  categories in the DFAS terrorist cost report, as appropriate, for the type of  obligations incurred.  Thus equipment reconstitution obligations are  reported in the operations category of DFAS’s report, not the reconstitution  category of the DFAS report, and are mixed with other global war-on- terrorism obligations that are tracked by other cost categories in the DFAS  report.  According to OSD comptroller officials, having the ability to track  actual global war-on-terrorism obligations is important in that it allows  them insight into the accuracy of the supplemental budget that was  generated, in part, from the COST model.
Army and Navy equipment reconstitution obligations may also be  inaccurate in the DFAS report.  The Army and Navy track their equipment  reconstitution obligations through the use of certain codes available in  their account encoding structure and may overstate reported equipment  reconstitution obligations, because these codes are accumulating global  war-on-terrorism and other obligations that were not exclusively for  equipment reconstitution.
During our review, we found that the Army is including obligations not  directly related to equipment reconstitution requirements arising from  global war-on-terrorism deployments.  For example, units reconstituting  after returning from Iraq may be including maintenance obligations  generated during training exercises.  Army officials stated that these units  are being ordered to rapidly prepare for subsequent deployments, which  includes reconstituting equipment and engaging in training exercises  among various other tasks.  According to Army officials, training exercises  can require the use of equipment that has not yet been fully reconstituted  and the exercises generate additional maintenance requirements not  related to global war-on-terrorism equipment reconstitution.  However,  these training-related maintenance requirements are not readily separable  from the equipment reconstitution requirements, and are therefore being  included as part of the Army’s reported reconstitution obligations.  In  addition, some reconstitution obligations do not readily align with the cost  categories in the DFAS report and are thus included in existing categories,  such as equipment reconstitution. For example, Army budget officials told  us that when units return home from a deployment they incur  reconstitution expenses unrelated to their equipment.  These expenses  include training needed to reestablish a unit’s ability to perform its mission  and personnel expenses related to the movement of soldiers in and out of  the unit that occur after an extensive deployment.  The officials told us that  these obligations are being included in the equipment reconstitution  section because this was the best place to account for them.  As a result,  the Army’s equipment reconstitution amounts are likely overstated.
The Navy’s reported reconstitution obligations include some maintenance  costs that did not appear to completely result directly from global war-on- terrorism deployments.  Portions of the Navy’s reported obligations for  equipment reconstitution include major ship repairs and overhauls, called  “availabilities”, which are accomplished at specified time intervals  independent of the ship’s use during the global war on terrorism.  The  specific maintenance tasks performed during an availability depend on the  type of ship, the type of repair or overhaul being conducted, and the ship’s  condition.  According to Navy officials, they report all of the obligations  incurred in conjunction with an availability funded by the fiscal year 2004  supplemental budget as equipment reconstitution regardless of whether  the obligations are due to conditions that existed prior to a global war-on- terrorism deployment or to peacetime maintenance conducted during all  availabilities.  The Navy reports all of these obligations as equipment  reconstitution, because it does not have a process to capture what  obligations for an availability are driven by the higher level of operations  generated by global war-on-terrorism deployments versus baseline  requirements generated by a ship during deployments not related to the  global war on terrorism.  While all of the maintenance tasks associated  with availabilities that are funded by supplemental money are needed to  effectively maintain the condition of Navy ships, not all of the maintenance  performed during the availabilities resulted from the ships being deployed  in support of the global war on terrorism. Thus, some of the Navy’s  reported obligations do not appear to fit DOD’s criteria for equipment  reconstitution costs that should be reported as an incremental cost of the  global war on terrorism.
section_title: Conclusions
paragraphs: As the services, especially the Army and Marine Corps, continue to conduct  operations related to the global war on terrorism at the current high pace,  they will continue to generate equipment reconstitution requirements. OSD  and the services will continue to use the department’s two-phased process  to develop estimates of these maintenance requirements so they can be  funded through supplemental and baseline budgets.  However, DOD and  the services cannot be assured that its global war-on-terrorism  supplemental budget requirements are as reliable and complete as possible  until the OSD comptroller:  revises its contingency model to ensure that costs covered by the  model’s operating tempo cost elements are not duplicated by costs in  the model’s reconstitution cost elements;   clearly establishes what equipment reconstitution maintenance  requirements should be covered by the COST model and communicates  this information to IDA to ensure that the model calculations reflect  only these maintenance costs;   clarifies its guidance to the services on what types of maintenance  requirements should and should not be included as equipment  reconstitution when developing the supplemental budget; and  ensures that all anticipated equipment reconstitution requirements,  such as operational losses and maintenance washouts, are considered  when developing supplemental budget requests.
Overestimating these requirements could result in a misapplication of  funds, while underestimating them could require the services to draw funds  from baseline programs or result in the inability of the services to fully  reconstitute their equipment. Improving DOD’s process for estimating  equipment reconstitution maintenance and equipment replacement  requirements will aid the services in reducing the risks they face in  executing the equipment reconstitution program and help maintain a  military that is able to meet the nation’s needs.
With global war-on-terrorism operations continuing at a high pace, the  Army will be generating additional equipment reconstitution requirements  that will be funded through future supplemental budgets.  Although OSD  did not use the Army’s fiscal year 2004 equipment reconstitution estimate  for the fiscal year 2004 supplemental request, that does not preclude OSD  from using future Army estimates.  Consequently, it is important that the  Army appropriately offset its equipment reconstitution estimate with  baseline peacetime funding, which it did not do for its fiscal year 2004  estimate.  Until the Army establishes a step in its supplemental estimating  process to offset the estimate with the baseline budget, its calculation of  equipment reconstitution requirements for future supplemental budgets  will continue to be overstated. Further, if OSD uses the Army-calculated  equipment reconstitution estimate and does not adjust the estimate for  baseline funding, the Army’s equipment reconstitution requirements could  be overfunded, which could limit the funding available for other  requirements, thus potentially increasing risks in other areas.
Inconsistencies between how the services are reporting equipment  reconstitution obligations in the DFAS global war-on-terrorism cost report  mean that equipment reconstitution and other related cost categories are  being inaccurately reported. Until DOD develops comprehensive and  consistent methods for tracking and reporting equipment reconstitution  obligations—including (1) developing a mechanism within the Air Force  for identifying, accumulating, and reporting its equipment reconstitution  obligations; and (2) refining the Navy and Army processes for identifying  obligations that are incurred exclusively for equipment reconstitution—the  usefulness of the DFAS report will remain limited.  Improving the accuracy  and completeness of the report will result in a DFAS cost report that will be  more useful to OSD and Congress in their oversight of global war-on- terrorism obligations.
section_title: Recommendations for Executive Action
paragraphs: To correct the weaknesses we identified in the equipment reconstitution  cost estimating process the department used when developing its fiscal  year 2004 supplemental budget request, we recommend that the Secretary  of Defense take the following five actions:  Direct the OSD comptroller to revise its COST model to ensure that  costs covered by the model’s operating tempo cost elements are not  duplicated by costs in the model’s reconstitution cost elements;   Direct the OSD comptroller to clearly establish what equipment  maintenance requirements should be covered by the COST model and   communicate this information to IDA to ensure that the model  calculations reflect only these maintenance costs;   Direct the Secretary of the Army to establish a step in its  supplemental estimating process to offset the estimate with the  baseline budget to improve future contingency funding estimates;  Direct the OSD comptroller to clarify its supplemental budget  guidance to the services on what types of maintenance requirements  should and should not be included as equipment reconstitution when  developing the supplemental budget; and  Direct the OSD comptroller to ensure that all potential equipment  reconstitution requirements are considered when developing  supplemental budget requests by allowing the services to include  anticipated equipment losses—both operational losses and  maintenance washouts—in their supplemental budgeting process.
To ensure that Congress has a clear insight into the cost of equipment  reconstitution, we also recommend that the Secretary of Defense direct the  services, in conjunction with DFAS, to develop comprehensive and  consistent methods for tracking and reporting equipment reconstitution  obligations.  This includes (1) developing a mechanism within the Air Force  for identifying, accumulating, and reporting its equipment reconstitution  obligations; and (2) refining the Navy and Army processes for identifying  obligations that are incurred for equipment reconstitution.
section_title: Agency Comments and Our Evaluation
paragraphs: The OSD Comptroller, Director for Operations and Personnel provided oral  comments on a draft of this report for DOD and concurred with two of our  six recommendations, partially concurred with three recommendations,  and did not concur with the other recommendation.
In concurring with our recommendation that OSD clarify its supplemental  budget guidance to the services on what types of maintenance  requirements should and should not be included as equipment  reconstitution when developing the supplemental budget, the OSD director  stated that improvements are made to each iteration of the guidance.  We  confirmed that the guidance provided to the services for the fiscal year  2005 supplemental budget was much more detailed and comprehensive  than the guidance provided for developing  the fiscal years 2003 and 2004  supplemental budgets.
In concurring with our recommendation that the services, in conjunction  with DFAS, develop comprehensive and consistent methods for tracking  and reporting equipment reconstitution obligations, the OSD director  stated that they have already revised their financial management regulation  to improve reporting of equipment reconstitution.  However, until  additional actions are taken, such as improving the services’ financial  systems’ ability to track obligations, our recommendation will not be fully  implemented.
In partially concurring with our recommendation regarding the duplication  of maintenance costs in the COST model, the OSD director stated that they  have made revisions to DOD’s financial management regulations to ensure  that the cost of equipment maintenance is not being duplicated in different  COST model sections.  However, as currently written, the revised section  does not have any instructions on avoiding duplicating maintenance  requirements calculated by the model’s operations section; instead it  simply divides reconstitution into four subcategories of maintenance.  Until  further changes are made, the intent of our recommendation will not have  been met.
In partially concurring with our recommendation that the OSD comptroller  clearly establish what equipment reconstitution maintenance requirements  should be covered by the COST model, the OSD director stated that IDA,  the model’s operator, periodically receives specific guidance from the  comptroller’s office on the criteria and elements of costs to be included in  the model’s calculations.  However, as we reported, neither OSD  comptroller nor IDA officials were able to provide us with examples of this  guidance when requested.  The OSD director also told us that they have  taken action to ensure that the model calculates costs in accordance with  the DOD Financial Management Regulation and that they issue guidance to  the services on what costs will be covered by the model.  Although Volume  12, Chapter 23, Section 3.5 of the financial management regulation has been  revised to delineate equipment reconstitution into four categories— organizational-, intermediate-, and depot-level maintenance; and contractor  logistics support—the section does not state which of these categories are  covered by the COST model.  In addition, while OSD guidance to the  services for developing the fiscal year 2005 supplemental budget stated that  intermediate- and depot-level maintenance would be calculated outside the  model, the guidance provided for developing the fiscal years 2003 and 2004  supplemental budgets only specified that depot-level maintenance would  be calculated outside the model.  Until changes are made establishing what  maintenance requirements are in the COST model and clearly  communicating this to IDA, the intent of our recommendation will not have  been met.
The OSD director did not concur with our recommendation that the  Secretary of the Army be directed to establish a step in its supplemental  budget process for estimating equipment reconstitution requirements to  offset the estimate with baseline funding.  The OSD director said that the  process for developing the supplemental budget already includes a process  for excluding costs for equipment maintenance funded in the baseline  budget. As stated in this report, we acknowledge that OSD’s COST model  equations for equipment reconstitution contain a factor for reducing the  reconstitution requirements by taking baseline funding into account.  We  also acknowledge that OSD’s process for building the supplemental budget  has controls in place to help ensure that only incremental costs are  included in the supplemental budget.  However, we believe that the  services’ supplemental budget estimating processes also need to have such  assurances built in.  We made our recommendation to address the fiscal  year 2004 equipment reconstitution requirement that the Army developed  separate from the COST model during what we have described in this  report as the second phase of DOD’s process for building the supplemental  budget. When developing this requirement, the Army did not take into  account available baseline funding, because it did not have a step in its  supplemental budget estimating process to offset the estimate with  baseline funding.  If the OSD comptroller had used this Army-generated  requirement in its fiscal year 2004 supplemental budget, the potential exists  that OSD comptroller officials might miss the Army’s failure to adjust this  requirement for baseline funding.  Importantly, the very safeguards that the  OSD comptroller stated it has in place failed to offset the $1.2 billion  duplication of aircraft maintenance requirements that the Air Force  included in its fiscal year 2004 supplemental budget requirement.  Taking  action on our recommendation would provide the Army with the necessary  safeguards to submit accurate budget estimates and avoid the potential  that future supplemental budgets could provide more than incremental  funding to the Army. Therefore, we continue to believe our  recommendation has merit.
In partially concurring with our recommendation that the services be  allowed to include equipment losses in their supplemental budget  requirements, the OSD director stated that they typically address these  potential future costs through subsequent budget requests or through  reprogramming efforts.  The OSD director also told us that it is conceivable  that some factor reflecting maintenance washout trends could be  considered in future supplemental budget requests. If this action is taken, it  should satisfy the intent of our recommendation.  As we stated in our  report, until OSD allows the services to consider anticipated operational  equipment losses and maintenance washouts in their supplemental  budgeting process, equipment reconstitution requirements generated  during the current fiscal year will inevitably be pushed out for funding in  upcoming years. Not doing so could also have an impact on the ability of  the services to quickly reconstitute equipment in the current fiscal year.
We are sending copies of this report to other appropriate congressional  committees, the Secretary of Defense, the Secretary of the Army, the  Secretary of the Navy, the Secretary of the Air Force, the Commandant of  the Marine Corps, and the Director, Office of Management and Budget.  We  will also make copies available to others upon request.  In addition the  report will be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staff have any questions on the matters discussed in this  letter, please contact me at (202) 512-8412 or solisw@gao.gov or my  assistant director, Julia Denman, at (202) 512-4290 or denmanj@gao.gov.  Other major contributors to this letter were John Strong, Bob Malpass,  Andy Marek, Robert Wild, Dave Mayfield, and Charles Perdue.
section_title: Scope and Methodology
paragraphs: To determine if the process DOD used to develop its fiscal year 2004  supplemental budget equipment reconstitution requirements was accurate,  we met with officials from the OSD Under Secretary of Defense  (Comptroller); Assistant Secretary of the Army, Financial Management and  Comptroller; Assistant Secretary of the Navy, Financial Management and  Comptroller; Assistant Secretary of the Air Force, Financial Management  and Comptroller; Headquarters U.S. Marine Corps Programs and Resources  Department, and U.S. Marine Corps Deputy Commandant Installations and  Logistics.  We also collected and reviewed OSD and service equipment  reconstitution guidance to develop an understanding of the processes the  department used to develop its fiscal year 2004 equipment reconstitution  requirements.  As part of this effort we also met with officials from OSD  Under Secretary of Defense (Comptroller); Headquarters U.S. Army Deputy  Chief of Staff G-4; Headquarters U.S. Navy Deputy Chief of Naval  Operations (Logistics); Headquarters U.S. Air Force Deputy Chief of Staff  Installation and Logistics; and Headquarters U.S. Marine Corps Programs  and Resources Department to identify the methodologies used by OSD and  each of the services for determining equipment reconstitution  requirements and collected related documentation.  To gain further insight  into the accuracy of the process the Army used to develop its equipment  reconstitution requirement, we met with officials at and collected data  from the Army Materiel Systems Analysis Activity; Forts Bragg, Campbell,  Dix, Hood, Riley, and Stewart; and Camps Arifjan and Doha, Kuwait. We  collected actual equipment reconstitution cost data from these activities  and compared them to the data the Army used in developing its equipment  reconstitution requirement. To determine the reliability of the actual  reconstitution costs for Army equipment, we discussed and observed the  equipment reconstitution data collection process at four of the Army bases  we visited where we observed a consistent process for collecting and  entering equipment reconstitution data into the Army’s database.  We also  visited the AMSAA team that was managing and summarizing the Army’s  equipment reconstitution data collection effort to determine that the  personnel collecting the data and managing the data collection effort were  performing quality reviews to ensure completeness and accuracy.  Additionally, the AMSAA management team had the Army commands  review the data collected at their installations prior to passing the data to  higher commands. Based on this assessment, we concluded that the data  collection effort was sufficiently comprehensive and reliable to provide  data for this engagement. We also collected and analyzed data the services  use in developing their reconstitution requirements, which were submitted  to OSD.  Further, we collected and analyzed data OSD used to develop the  department’s overall equipment reconstitution requirement that was  included in the fiscal year 2004 global war-on-terrorism supplemental  budget request. To gain further insight into how OSD developed the  equipment reconstitution requirement, we met with IDA officials to  develop an understanding of how OSD’s COST model calculates this  requirement. We limited our examination of the COST model to the section  that calculates equipment reconstitution requirements, which consists of  only 4 of the 188 equations that comprise the COST model. To understand  the extent to which equipment reconstitution requirements generated  during fiscal year 2004 will have to be funded in upcoming budgets we met  with and obtained guidance issued by the OSD Under Secretary of Defense  (Comptroller) regarding how the services’ equipment reconstitution  requirements were restricted. To quantify the effect of these limitations we  collected Army data on potential equipment losses and estimated their  possible impact on future budgets. To assess the equipment reconstitution  requirement inputs provided to the services by their component commands  and units we met with officials of and collected data at Army Forces  Command, Naval Air Systems Command, U.S. Atlantic Fleet, Air Combat  Command, and U.S. Marine Corps Logistics Command. Using the  information and analysis described here we assessed the reasonableness  and completeness of the department’s equipment reconstitution  requirements.
To determine how accurately and completely the department is tracking  and reporting equipment reconstitution costs we met with officials of and  collected documentation from the Assistant Secretary of the Army,  Financial Management and Comptroller; Assistant Secretary of the Navy,  Financial Management and Comptroller; Assistant Secretary of the Air  Force, Financial Management and Comptroller; and Headquarters U.S.  Marine Corps Programs and Resources Department. We reviewed the  structure of how the services are accumulating and reporting obligations  associated with their equipment reconstitution efforts. We compared and  contrasted what type of obligations each service considered as equipment  reconstitution for inclusion in the Defense Financial Accounting Service’s  report that is tracking fiscal year 2004 global war-on-terrorism obligations.  We discussed the inconsistencies between the services noted during our  review with the service officials listed above to determine the reasons for  the inconsistent manner in which equipment reconstitution obligations  were reported.
We performed our work from September 2003 through March 2005 in  accordance with generally accepted government auditing standards.