Depot Maintenance: Improvements Needed to Achieve Benefits from Consolidations and Funding Changes at Naval Shipyards
Published: 2006-09-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: To improve fleet support activities, the Navy is consolidating maintenance facilities and converting its shipyards from financing under the Navy Working Capital Fund to funding through direct appropriations (direct funding). Puget Sound Naval Shipyard was converted to direct funding in 2003. The National Defense Authorization Act for Fiscal Year 2006 directed the Navy to assess the impact of converting Puget Sound to direct funding and directed that GAO review the Navy's report. The Navy submitted its report to Congress in March 2006, confirming its position that direct funding was more advantageous than working capital funding and can best satisfy fleet maintenance priorities. GAO's objectives were to evaluate the extent to which the Navy's report (1) provided data and other supporting evidence for its overall assessment of the impact of converting Puget Sound to direct funding, (2) addressed unresolved issues that had been identified in prior studies, and (3) disclosed any other issues that have affected the implementation of direct funding.
section_title: What GAO Found
paragraphs: The Navy's March 2006 report to Congress did not provide data and other supporting evidence for its overall assessment of the impact of converting Puget Sound Naval Shipyard to direct funding. While the Navy reported on the matters specified in the defense authorization act, it did not provide data needed to support the Navy's position that direct funding was more advantageous than working capital funding and can best satisfy fleet maintenance priorities. More specifically, the report did not provide evidence that direct funding had provided for a more agile workforce--the ability to more easily move workers among maintenance projects in response to fleet priorities--which was a key benefit the Navy claimed was achieved by converting to direct funding. The Navy's March 2006 report did not show data that adequately addressed two key issues--cost visibility and performance metrics--which had been identified as unresolved in prior studies by GAO and others. First, the report did not present the Navy's approach and methodology for achieving total cost visibility for specific work performed. Determining the total cost of delivering specific ship maintenance work is recommended by federal accounting standards and is a key metric for evaluating a consolidated facility's productivity and performance. Although the Navy was attempting to gather cost data to show the full costs of operations at its shipyards, GAO found that the Navy has not developed policies and procedures to routinely and systematically accumulate these total cost data. Second, with respect to performance metrics, the Navy's report did not provide data that demonstrated improved results, such as increased productivity, of consolidating ship maintenance facilities at Puget Sound and converting the shipyard to direct funding. Prior reviews have raised issues related to total cost visibility and performance metrics as unresolved issues and recommended the Navy take corrective actions. While the Department of Defense concurred, it has not yet resolved these issues. Consequently, complete and reliable cost data are lacking for making fully informed decisions related to ship maintenance activities. Further, without performance metrics to measure progress toward meeting goals and objectives, the Navy lacks data needed for evaluating the changes it has made and making fully informed decisions related to the management of consolidated ship maintenance activities. The Navy's March 2006 report did not disclose shortcomings in its information systems at Puget Sound Naval Shipyard that have hindered its ability to efficiently and reliably meet its financial and business operations reporting requirements. The information systems at the consolidated facility were not designed to provide the types of cost and operational data being requested under direct funding. As a result, the systems have required extensive changes and manual administrative efforts by shipyard personnel to support the consolidated facilities' financial and business operations reports being requested.

section_title: Letter
paragraphs: Since the 1990s, the Navy has implemented changes aimed at making its  fleet support activities more efficient and effective. These changes have  included consolidation of the management, operations, and funding of  facilities performing ship maintenance. The first facilities to be  consolidated, in 1998, were the Pearl Harbor Naval Shipyard and the Naval  Intermediate Maintenance Facility in Hawaii. In 2003, Puget Sound Naval  Shipyard in Washington State was consolidated with the Naval  Intermediate Maintenance Facility, which includes the Trident Refit  Facility Bangor and Everett Intermediate Maintenance Facility. Prior to  these consolidations the shipyards were financed through the Navy  working capital fund, while the intermediate maintenance facilities were  funded through direct appropriations that authorized the Department of  Defense (DOD) to incur obligations for designated purposes (such as ship  maintenance or modifications), sometimes referred to as direct funding or  mission funding. A working capital fund is a type of intragovernmental  revolving fund that operates as a self-supporting entity that conducts a  regular cycle of businesslike activities. Working capital funds function  from the fees charged for the services they provide consistent with their  statutory authority. With the consolidations of maintenance facilities at  Pearl Harbor and Puget Sound, the shipyards have been converted to  direct funding so that the consolidated facilities operate under a single  financial structure. The Navy set up a single financial structure for the  consolidated facilities using direct funding in the belief that direct funding  was more flexible than working capital funding and would help enable the  consolidated facilities to better achieve Navy fleet readiness goals. The  Navy plans to convert its two remaining shipyards on the East Coast— Norfolk and Portsmouth—to direct funding starting October 1, 2006.
In our prior reviews of the consolidation of maintenance facilities at Pearl  Harbor, we identified unresolved issues in financial management related  to the conversion of the shipyard to direct funding. A more recent review  of the conversion of Puget Sound Naval Shipyard to direct funding by the  DOD Office of the Inspector General (DOD-IG) identified weaknesses in  cost visibility and financial management at that facility. Also, the  Congressional Budget Office (CBO) has recently identified issues related  to reduced cost visibility and financial management in converting  shipyards from working capital funding to direct funding. Section 322(a) of  the National Defense Authorization Act for Fiscal Year 2006 prohibited the  Navy from converting its two East Coast shipyards to direct funding prior  to October 1, 2006, and Section 322(b) of the act required the Secretary of  the Navy to submit a report to the congressional defense committees by  March 1, 2006, that assessed the effects of converting Puget Sound from  the working capital fund to direct funding. The Navy report was to include  an assessment of 11 matters, including cost visibility, operational and  financial flexibility, capital improvements, buyout costs associated with  the transfer of the Navy’s two East Coast shipyards from the Navy working  capital fund to direct funding, and compliance with legislative provisions.  (The 11 specific matters in Section 322(b)(2) are listed in app. I.) The Navy  submitted its report to Congress on March 1, 2006. The report’s overall  assessment was that direct funding provides for a more agile workforce  that can best satisfy fleet maintenance priorities without sacrificing cost  visibility, performance accountability, or quality of work. According to the  Navy, direct funding, in concert with regional consolidation, enabled  maintenance activities to quickly respond to emergent fleet operational  requirements.
Section 322(b)(3) also directed our office to review the Navy’s report,  which was to include our assessment of whether the report adequately  addresses the 11 matters identified in Section 322(b)(2) of the act. Our  objectives were to evaluate the extent to which the Navy’s report (1)  provided data and other supporting evidence for its overall assessment of  the impact of converting Puget Sound to direct funding, (2) addressed  unresolved issues that had been identified in prior studies, and (3)  disclosed any other issues that have affected the implementation of direct  funding at Puget Sound Naval Shipyard. On May 18 and 19, 2006, we  briefed congressional staff on our preliminary observations. This report  expands on the information delivered in those briefings and includes  recommendations to the Secretary of Defense.
To conduct our evaluation we reviewed the information and data  presented in the Navy’s report to support its assessment of the matters  specified in Section 322(b)(2). We obtained prior reports on the  conversion of Pearl Harbor and Puget Sound naval shipyards to direct  funding and identified issues that were determined to be unresolved at the  time these studies were conducted. We discussed the Navy’s March 2006  report with officials responsible for its development and visited the  consolidated facility at Puget Sound to obtain information on the  implementation of direct funding. We also obtained and analyzed  additional supporting documentation from Navy officials regarding the  matters covered in the report. As a part of our assessment of cost  visibility, performance metrics, and information systems, we discussed  with Navy officials the quality and reliability of financial and operations  data generated for the consolidated facility. We conducted our work  between March and May 2006 in accordance with generally accepted  government auditing standards. Our scope and methodology are discussed  in more detail at the end of this letter.
subsections: section_title: Background
paragraphs: In 1999, we reported that the preliminary results of the Pearl Harbor pilot  were mixed and recommended that DOD and the Navy address unresolved  issues related to the financial management of the consolidation as the  Navy proceeded with similar consolidations in other locations. In 2001,  we updated this assessment and concluded that while the consolidation of  shipyard and intermediate maintenance activities offered benefits for  using resources more efficiently, financial management issues existed that  needed to be resolved. We highlighted problems concerned with  inadequate cost visibility and accountability, and with data used to show  compliance with applicable statutes. In December 2005, CBO issued an  interim report comparing working capital funding and direct funding for  Naval shipyards. Its preliminary findings indicated that working capital  funding and direct funding each has strengths and weaknesses as shipyard  funding systems, but did not conclude whether one system was best.  CBO’s report noted concerns that direct funding makes shipyards’ costs  and operations less visible. Also in December 2005, the DOD-IG issued a  report that raised concerns about the conversion of other shipyards to  direct funding. The report’s main findings were that Puget Sound did not  routinely accumulate financial information as they had done when  financed as a working capital fund activity, metrics and goals used to track  results of the transition were unreliable and did not address the impacts of  direct funding, and the information systems did not fully support  operations. As a result, DOD-IG was unable to determine the effectiveness  of the transition of Puget Sound to direct funding.
section_title: Navy Did Not Provide Data and Other Supporting Evidence for Its Overall Assessment
paragraphs: The Navy’s March 2006 report to Congress included sections  corresponding to each of the matters specified in Section 322(b)(2) of the  National Defense Authorization Act for Fiscal Year 2006. However,  although the report addressed the Navy’s assessment of the conversion of  Puget Sound to direct funding, it did not provide data and other supporting  evidence for the Navy’s overall assessment that direct funding was more  advantageous than working capital funding and can best satisfy fleet  maintenance priorities.
More specifically, the report did not provide evidence that direct funding  had provided for a more agile workforce—the ability to more easily move  workers among maintenance projects in response to fleet priorities— which was a key benefit the Navy claimed was achieved by converting to  direct funding. It did not provide data to support the Navy’s position that  direct funding enabled the maintenance activities to quickly respond to  emergent operational requirements by reprioritizing work, minimizing the  financial impact of unplanned maintenance, and optimizing the use of all  resources available in a region. While it said that some sharing of  production personnel had occurred prior to consolidation, this required  special actions and burdensome administrative processes, all causing  delay in accomplishing needed work, but provided no data showing  differences before and after the conversion. Regarding operational and  financial flexibility, the Navy said that while the working capital fund  allows for continued operations on a limited basis, it considered this  limited flexibility minor compared to the overall benefits of direct funding,  particularly its ability to move workers among projects as workload  priorities change, increasing the agility of the workforce and minimizing  the administrative burden. Again, no data were provided on increased  workforce agility or reduced administrative burden. Moreover, it did not  provide data to support the overall conclusion that direct funding can best  satisfy fleet maintenance priorities without sacrificing cost visibility,  performance accountability, or quality of work.
More broadly, the use of direct funding rather than working capital  funding as a financing mechanism for shipyard maintenance reflects  fundamental choices about how DOD goods and services are provided.  Naval shipyards have operated under some type of revolving fund  financing system, which includes working capital funds, for decades.  Working capital funding requires shipyards to track and report their total  costs in order to determine operating results (profits and losses) and  future billing rates. In doing so, the working capital fund focuses attention  on the total costs of providing a good or service. The fees that a working  capital-funded shipyard charges for the services provided are based on  total projected costs and projected workload for the year. Total costs  include fixed costs and sunk costs that are independent of the amount of  work performed as well as costs that vary according to workload.  Consequently, the price that shipyards charge may be viewed by the  customers as too high. If customers view shipyard rates as too high, they  may defer maintenance, reduce the scope, or shift to a new maintenance  provider, such as an intermediate maintenance facility that is direct  funded or does not include fixed costs in its prices. Under direct funding,  direct appropriations authorize DOD to incur obligations for designated  purposes, such as ship maintenance or modifications. Direct-funded  shipyards provide maintenance services to the fleets for free, but they are  still reimbursed for modifications and conversions. Both capital  expenditures and military construction at direct-funded shipyards are  funded through separate direct appropriations. Thus, direct funding may  reduce the availability of data on shipyards’ total costs unless the data are  specifically requested or developed.
The Navy’s report also did not provide complete information on some  specific matters. For example, the Navy’s report did not provide complete  information on the capital improvement program. The Navy report noted  differences in funding of the shipyard’s capital improvement program  since the conversion to direct funding. Under working capital funding,  funds function from the fees charged for the services they provide  consistent with their statutory authority. Under direct funding,  appropriations authorize DOD to incur obligations for designated  purposes. However, more information would have helped in  understanding whether, after the conversion to direct funding, the  approved funding met total shipyard capital improvement program  requirements as well as requirements for the shipyard’s sustainment,  restoration, and modernization program, which provides funds to keep the  facilities in good working order, restores facilities, and makes alterations  to meet higher standards or accommodate new functions or missions. As  we pointed out in our 2001 report, Pearl Harbor was budgeted for less than  5 percent of the identified capital improvement program requirements for  the consolidated facility over 3 fiscal years.
In addition, buyout costs for the two East Coast shipyards are still pending  because the final amounts have not been negotiated. The Navy report  stated that it had not fully resolved buyout costs for converting the two  East Coast shipyards. These costs are to be negotiated by the Navy, OSD,  and the Defense Finance and Accounting Service after the end of fiscal  year 2006. Based on end-of-fiscal-year projections, buyout costs will total  $231.5 million for these shipyards. The Navy included $140.1 million in the  President’s fiscal year 2007 budget for projected working capital fund  buyout costs for the two East Coast shipyards, leaving a projected balance  of $91.4 million. The report also did not note that Puget Sound will incur  additional buyout costs of more than $53 million due to operating losses  for working capital fund projects carried over during the transition to  direct funding.
section_title: Navy Did Not Address Unresolved Issues Identified in Prior Studies
paragraphs: The Navy’s March 2006 report did not show data that adequately  addressed issues identified as unresolved in prior studies. Specifically, the  Navy did not identify (1) methodologies for achieving total cost visibility  and (2) performance metrics to measure improved results, such as  increased productivity, achieved by the consolidation of maintenance  facilities and the conversion to direct funding.
subsections: section_title: Navy Did Not Identify Methodologies for Total Cost Visibility
paragraphs: The Navy’s report did not discuss the Navy’s approach and methodology  for achieving total cost visibility at the consolidated facility. Section  322(b)(2) called for the Navy to address, among other things, the effect of  direct funding on (1) the cost visibility of specific work performed and (2)  the total cost of consolidated ship maintenance operations on an ongoing  basis. The Navy stated that the conversion to direct funding had been  made without sacrificing cost visibility because the same information  systems used to accumulate costs under the working capital fund have  remained in place. The Navy report identified broad cost categories,  provided total budget and expenditures figures for the consolidated  facility for fiscal years 2004 and 2005, and compared the total percentage  of actual to budgeted expenditures. However, the report did not discuss  how the conversion to direct funding had changed the way the Navy has to  accumulate cost data and achieve total cost visibility for specific work  performed.
Prior reviews have raised issues about the Navy’s ability to provide data  showing total cost visibility. We reported in 2001 that the management and  financial systems at Pearl Harbor did not have reliable data on an ongoing  basis to determine the cost of delivering a direct labor hour of ship  maintenance work, a key metric for evaluating the consolidated facility’s  productivity and performance. Determining the total cost of delivering  specific ship maintenance is important for other reasons as well. The  Statement of Federal Financial Accounting Standard No. 4 states that  reporting entities should accumulate and report the costs of their activities  on a regular basis for management information purposes and that costs  may be accumulated through cost accounting systems or “cost finding”  techniques. The full cost of an output is the sums of (1) the cost of  resources consumed that directly or indirectly contribute to the output  and (2) the cost of identifiable supporting services provided by other  entities. Also, we reported that the Navy had not implemented a method to  routinely and systematically accumulate and account for the full cost of  operations, such as tracking indirect overhead costs as closely under  direct funding. We recommended in our 2001 report that the Navy  implement a method to account for the total cost of consolidated ship  maintenance operations on an ongoing basis. DOD concurred with our  recommendation, and our current work supports the validity of this  recommendation.
The DOD-IG reported in December 2005 that cost information was not  collected to determine the total cost (including all associated overhead  costs) required to establish an overhead rate to charge non-DOD  customers for maintenance performed. The DOD-IG found that, according  to Puget Sound officials, under direct funding the consolidated activity no  longer routinely accumulated costs necessary to compute an overhead  rate to charge its customers. They did not track these costs because  Commander, Pacific Fleet, is responsible for funding all overhead costs  under mission funding. The DOD-IG’s report recommended that the Navy  develop an instruction addressing the processes and business practices to  be used at direct-funded shipyards, issue guidance to address financial  reporting and cost information accumulation requirements, and update  existing reporting and cost guidance to reflect changes since consolidating  and transitioning to direct funding. The Navy did not concur with these  recommendations, but indicated they supported improving top-down  guidance, operating procedures, and consistency of financial information,  and ensuring compliance with fiscal policy.
Our current review confirmed the Navy has not yet developed policies,  procedures, and information systems to routinely and systematically  accumulate and account for the total cost of specific work performed or  total costs of consolidated shipyard operations on an ongoing basis. Under  direct funding, the shipyard does not track and provide cost accounting  for all costs associated with specific projects. While the shipyard can  generate data on direct labor and material costs associated with individual  projects, other Navy commands must provide the remaining cost data  needed to determine the total costs for the consolidated facility.
The Navy’s report did not discuss the added complexities in systematically  producing the total cost data for auditable financial statements under  direct funding. Developing a methodology to collect total cost data under  direct funding would help produce auditable financial statements, and it  would better inform congressional defense committees’ authorization and  appropriation decisions. Navy officials said they still needed to develop  procedures for efficiently generating the data in new budget exhibits being  developed for Navy direct-funded shipyards. They also said developing a  methodology on the total cost of shipyard work would help them abide by  the definition and comply with annual reporting required, respectively, by  Sections 2460 and 2466 of Title 10, United States Code. These sections  define depot maintenance and limit the percentage allocation of funds that  may be expended for contractor performance of depot-level maintenance  and repair work. More specifically, the military departments and defense  agencies cannot expend more than 50 percent of annual depot  maintenance funding to contract for depot-level maintenance and repair  by nonfederal contractor personnel. The Secretary of Defense is required  to submit a report annually identifying, for each of the armed forces and  each defense agency, the percentage of workload funding expended  between the public and private sectors for the preceding fiscal year, and  projected expenditures for the current and ensuing fiscal year. The Navy  has developed data needed to respond to these reporting requirements for  Puget Sound Naval Shipyard each year, but its methods have not provided  the total cost visibility needed. Naval Audit Service officials said they are  reviewing the Navy’s processes for complying with this annual reporting  requirement. Consequently, OSD and Navy officials do not yet have  complete and reliable cost and related data needed for making fully  informed decisions related to ship maintenance activities.
section_title: Navy Did Not Identify Performance Metrics Demonstrating Improved Results Achieved by Consolidating Maintenance Facilities and Converting to Direct Funding
paragraphs: The Navy’s report did not provide performance metrics demonstrating  improved results associated with consolidating ship maintenance facilities  at Puget Sound and converting the shipyard to direct funding. For  example, the Navy’s report asserts that benefits of direct funding are  increased agility of the workforce and minimized administrative burden  associated with reassignment of workers to high-priority projects.  However, the report provided no performance metric data demonstrating  these or other benefits, such as increased productivity and quality of work,  that might be expected from the consolidation of maintenance facilities  and adoption of a single financing structure. Outcome-oriented  performance metrics provide a means for agencies to assess their progress  toward meeting goals and objectives under an analytical framework.
Prior reviews have raised concerns about the Navy’s lack of performance  metrics regarding the consolidation of ship maintenance facilities. Our  2001 review at Pearl Harbor found that although the consolidation had  made more effective use of workers and facilities in Hawaii, the  performance metrics tested by the Navy had not provided a conclusive  assessment of the consolidated facility’s accomplishments in achieving  greater efficiencies and lowering costs. We recommended that the Navy  develop additional metrics to measure the efficiency and effectiveness of  consolidated ship maintenance activities, drawing on lessons learned from  the consolidation at Pearl Harbor. DOD concurred with our  recommendation.
The DOD-IG report also found that the Navy lacked adequate performance  metrics for the consolidated Puget Sound facility. The DOD-IG found that  the Navy did not have metrics and goals for Puget Sound that would help  show the impact of direct funding on operations at the consolidated  shipyard. The report recommended that OSD and the Navy jointly  establish metrics and goals and baseline these metrics to evaluate Puget  Sound’s transition to direct funding. It also recommended that the Navy  establish policies and procedures for direct-funded metrics and goals to  ensure information is consistently collected and reported and supporting  documentation is maintained to fully support reported results. The Navy  concurred, but did not identify the proposed actions and completion dates.  The Navy further stated that the primary advantage of converting the  shipyards to direct funding is that it allows fleet commanders as opposed  to fleet support activities to control priorities and, further, that this benefit  does not fit neatly into a metric that can be compared in “before and after”  snapshots. Without performance metrics to measure progress toward  meeting goals and objectives, the Navy lacks data needed for evaluating  the changes it has made and making fully informed decisions related to the  management of consolidated ship maintenance activities. The CBO  reported that having appropriately structured annual summary reports for  each shipyard could enable Congress to monitor shipyards’ finances and  performance regardless of the type of funding used to pay for their  operations. While the CBO is currently evaluating proposed metrics that  are intended to demonstrate naval shipyards’ performance, the metrics  being proposed do not address assessing the progress being made to  consolidate facilities and convert to direct funding.
We determined that after the initial consolidation of facilities at Puget  Sound, Navy officials identified a need for metrics that would be used to  provide an ongoing assessment of the consolidation process of the  shipyard and intermediate maintenance facility. More specifically, the  region placed high importance on the establishment of metrics designed to  fully measure the progress and assess the effects of consolidation,  including quality, cost, schedule, and workforce development. These  metrics were to provide a factual basis for management actions as the  consolidation continued into maturity. However, efforts to collect these  metric data were halted in July 2005, and although the shipyard had a  variety of metrics at the time of our review, it did not have metrics in place  related specifically to the consolidation or direct funding. As a result, it  was not quantifying or measuring the level of productivity achieved since  the consolidation and conversion to direct funding.
section_title: Navy Report Did Not Identify Problems with Information Systems Not Designed for Direct Funding
paragraphs: The Navy’s report did not disclose shortcomings in its information systems  at Puget Sound Naval Shipyard that have hindered its ability to efficiently  and reliably meet its financial and business operations reporting  requirements. The consolidated shipyard’s information systems were not  designed for reporting direct-funding operations. The Navy’s report said  the shipyard utilized its existing information system, enabling it to  maintain the same cost data as a shipyard financed by the working capital  fund. It stated only that Puget Sound experienced some data collection  and reporting anomalies that were corrected by the end of fiscal year 2004.
The DOD-IG reported in December 2005 that the information systems  available at Puget Sound Naval Shipyard did not fully support the  consolidated activity’s operations. It found that after the consolidation and  conversion to direct funding, Puget Sound decided to maintain two  information systems and their subsystems to manage operations and  activities. For example, multiple subsystems and databases from the Puget  Sound shipyard information system and the Trident Refit Facility were  maintained and manual interfaces established to reflect the consolidated  facility’s projects. Those systems and databases required considerable  manual effort to assemble information and reports for the consolidated  activity. For projects that spanned multiple fiscal years, Puget Sound  personnel had to extract data from multiple databases and add them  together to determine the total cost of a specific project. Furthermore, the  shipyard had to implement new procedures to enable the appropriated  funds to be deobligated at the end of the year, and new obligations set up  for the next year. The report recommended that the Navy identify  information system requirements for supporting the operations of all  consolidated activities affected by the shipyard transition to direct funding  in order to avoid costly manual workarounds and manage communications  between systems. The DOD-IG considered the need to properly plan and  identify information system requirements crucial to avoiding costly fixes  and workarounds, and requested the Navy provide a plan of action with  milestones. The Navy concurred with the recommendation; however, it did  not identify any proposed actions or completion dates.
Our review verified that the information systems at Puget Sound Naval  Shipyard consolidated facility were not designed to provide the types of  cost and operational data being requested under direct funding. As a  result, the systems have required extensive changes and manual  administrative efforts by shipyard personnel to support the consolidated  facility’s financial and business operations reports being requested under  direct funding. As a test, we requested data on the total cost of specific  work performed on a multiyear direct-funded ship maintenance project.  The data the shipyard could provide were limited to direct costs, mainly  labor and material. According to shipyard officials, determining total costs  for a ship maintenance project was simpler under the working capital fund  because the projects were funded on a multiyear basis, and the system  was set up to track costs that spanned more than a single fiscal year.  However, to identify the total amount spent over several years on a ship  maintenance project under direct funding, they have to identify the total  amount spent each year, and manually enter it into another spreadsheet to  add the data together.
Also, data reliability is of concern. For example, shipyard and intermediate  maintenance facility personnel we talked with said numerous problems  were encountered and manually addressed when the shipyard and the  intermediate maintenance facility personnel, cost, material, and industrial  data systems and databases were linked together for the consolidation and  conversion to direct funding. For example, senior staff spent considerable  time checking output data for errors with the shipyard, intermediate  maintenance facility, and Defense Finance and Accounting Service  information systems. When causes of problems were identified, systems  files were set up to catch problems so the data could be corrected.  Although the Navy was able to collect cost and performance data to  populate its proposed shipyard budget exhibits in the March 2006 report,  Navy officials said its processes need to become more efficient and visible,  and show how the data are collected.
Navy officials in headquarters and Puget Sound recognized the need for  improved information systems to support the Puget Sound Naval Shipyard  consolidated facility and other East Coast shipyards converting from  working capital funding to direct funding. However, the Navy has not  identified a solution—including requirements, corrective actions, time  frames, and resources—to address shortcomings in the information  systems supporting Puget Sound. Furthermore, this issue is not unique to  Puget Sound Naval Shipyard, but impacts all shipyards converting to direct  funding. Addressing the need for improvement in the information systems  could also contribute to the Navy’s long-term plan to install an  enterprisewide system as part of DOD’s business systems modernization  program. However, they said this new enterprisewide system will not be  available for years under current Navy plans, and in the meantime they are  limited each year to a relatively small amount of funds that can be  requested for data system improvements. Consequently, the Navy is  requesting additional funds annually for critical short-term information  system changes needed as Norfolk and Portsmouth Naval Shipyards  convert to direct funding, in lieu of redesigning efficient and reliable  information systems that meet the needs of these shipyards.
section_title: Conclusions
paragraphs: The Navy has expected to achieve benefits from consolidating  maintenance activities at Pearl Harbor and Puget Sound and converting  the shipyards to direct funding. These changes are intended to make these  fleet support activities more efficient and effective. The Navy has asserted  that using a single financing system (direct funding) at the consolidated  facilities enables it to move workers more freely among projects in  response to fleet priorities. DOD intends to convert the remaining two  East Coast shipyards to direct funding in fiscal year 2007, expecting even  greater benefits. However, the Navy has not developed a methodology for  determining total cost visibility or performance metrics for measuring  outcome-oriented results associated with consolidating the facilities and  converting the shipyards to direct funding. In addition, the Navy does not  have information systems in place that systematically produce reliable  information needed for both total cost visibility and performance metrics.  Thus, the Navy will not have the data needed to evaluate the changes it has  made at its consolidated facilities. Furthermore, although prior reviews  have reported on these issues, they continue to persist because specific  actions and time frames have not been established and monitored. As the  Navy moves ahead to improve fleet support activities by consolidating  regional maintenance activities and converting its remaining two  shipyards to direct funding, opportunities exist to improve the  management of these changes and achieve expected benefits.
section_title: Recommendations for Executive Action
paragraphs: To improve the Navy’s management of consolidated maintenance facilities  and the conversion of shipyards to direct funding, we recommend that the  Secretary of Defense direct the Secretary of the Navy to take the following  three actions:  Implement a method to routinely and systematically provide for total cost  visibility of ship maintenance work performed.
Develop metrics to ensure that the planned changes to consolidate the  management, operations, and funding of facilities performing ship  maintenance are being implemented; that specific productivity  improvements and other benefits are being achieved; and that areas where  performance is lacking or problems exist are identified.
Develop specific plans for information systems designed to efficiently  support the financial and business operations at its shipyards, including  identification of requirements, corrective actions, time frames, and  resources needed.
section_title: Matter for Congressional Consideration
paragraphs: The Congress should require the Navy to periodically report on its specific  improvement plans and progress, as well as any impediments requiring  congressional action, to ensure that shortcomings in the information  systems supporting the Navy’s consolidation of regional maintenance  facilities and conversion to direct funding are addressed in a timely  manner.
section_title: Agency Comments and Our Evaluation
paragraphs: In comments on a draft of this report, DOD concurred with our  recommendations and cited actions it would take to implement them.  Concerning our recommendation that DOD implement a method to  routinely and systematically provide for total cost visibility of ship  maintenance work performed, DOD reported that the Navy will implement  revised policy and initiatives to systematically provide the desired total  cost visibility of ship maintenance work performed at the four Naval  shipyards, and that proposed guidance is being coordinated for  implementation by September 30, 2006, pending final congressional  approval of the fiscal year 2007 President’s Budget.
On the recommendation to develop metrics, DOD said it will continue to  refine the Naval shipyard exhibit to ensure Committee concerns related to  shipyard performance are fully addressed and that alternative metrics,  including a metric addressing increased productivity, will be developed.  While DOD’s response is encouraging, it is not clear whether DOD intends  to develop specific metrics that measure and assess the effects of  consolidation and funding changes, as discussed in our report. Such  metrics would identify the scope of the consolidation and workforce  affected, and ensure that the planned changes to consolidate the  management, operations, and funding of facilities performing ship  maintenance are being implemented; specific productivity improvements  and other benefits are being achieved; and areas where performance is  lacking or problems exist are identified. As a result, we have revised this  recommendation to be more specific.
Regarding our recommendation on information systems designed to  efficiently support financial and business operations at its shipyards, DOD  commented that the existing information technology workarounds at  Puget Sound Naval Shipyard reflected a temporary situation associated  with a pilot program. DOD said the Navy will resolve the longer term  information technology needs to eliminate manual workarounds and  provide the necessary tools to support the Regional Maintenance Plan. As  noted in the report, Navy officials have previously told us that they are  limited each year to a relatively small amount of funds that can be  requested for data system improvements. Consequently, they have  requested funding only for critical short-term information system changes  needed as shipyards convert to direct funding, in lieu of redesigning  efficient and reliable information systems that meet the needs of these  shipyards. Because of the funding issues involved and the critical need for  information system improvements supporting the Navy’s direct-funded  shipyards, we believe that additional congressional oversight could assist  the Navy in its efforts to implement planned changes in a timely manner.  Therefore, we have added a matter for congressional consideration.
section_title: Scope and Methodology
paragraphs: To assess the Navy’s March 2006 report to Congress, we reviewed the  Navy’s reporting requirements established in Section 322(b)(2) of the  National Defense Authorization Act for Fiscal Year 2006. We evaluated the  information and data presented in the Navy’s report to support its  assessment of the matters specified in Section 322(b)(2) as well as the  report’s overall conclusions. We discussed the Navy’s report with officials  responsible for its development and visited the consolidated facility at  Puget Sound to obtain information on the implementation of direct  funding. We also obtained and analyzed additional supporting  documentation from Navy officials regarding the matters covered in the  report. We discussed this work with officials in the Office of the Under  Secretary of Defense for Acquisition, Technology, and Logistics; the OSD  Comptroller; the Assistant Secretary of the Navy for Financial  Management and Comptroller; the Chief of Naval Operations; the Naval  Sea Systems Command; and the Puget Sound Naval Shipyard and Trident  Refit Facility in the state of Washington. We reviewed prior GAO, CBO,  DOD-IG, and Naval Audit Service reports on the conversion of Pearl  Harbor and Puget Sound naval shipyards to direct funding. We discussed  the issues of cost visibility and performance metrics with those who  conducted these reviews and with Navy headquarters and Puget Sound  officials. We reviewed performance metrics the Puget Sound Naval  Shipyard uses in managing the shipyard and intermediate maintenance  facilities. We also obtained an understanding of issues related to the  information systems supporting Puget Sound. We met with officials  responsible for data system management and discussed challenges and  changes that have been needed to support Puget Sound’s operations and  how these issues may affect other shipyards converting to direct funding.  We asked for data on the total cost of operations for a full fiscal year and  the cost of work for specific ship maintenance projects. We also discussed  information system and performance metrics issues related to  consolidation and direct funding with officials at the Trident Refit Facility.  As a part of our assessment of cost visibility, performance metrics, and  information systems, we discussed with Navy officials quality and  reliability of the financial and operations data generated for the  consolidated facility. We conducted our work between March and May  2006 in accordance with generally accepted government auditing  standards.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, the Secretary of the Navy, 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 the GAO Web site at http://www.gao.gov. If you or your staffs  have any questions on the matters discussed in this report, please contact  me at (202) 512-5140. Contact points for our Offices of Congressional   Relations and Public Affairs may be found on the last page of this report.  Key contributors to this report are listed in appendix III.
section_title: Appendix I: Matters in Section 322(b)(2) of the National Defense Authorization Act for Fiscal Year 2006
paragraphs: The National Defense Authorization Act for Fiscal Year 2006 required the  Secretary of the Navy to submit a report to the congressional defense  committees by March 1, 2006, containing the Secretary’s assessment on  the effects of converting Puget Sound from the working capital fund to  direct funding on 11 matters. The matters are listed below.
subsections: section_title: Matters Identified in Section 322(b)(2)
paragraphs: A. The cost visibility of specific work performed.
B. The total cost of consolidated ship maintenance operations on an  ongoing basis.
C. The ability to distinguish between depot and intermediate work of  consolidated ship maintenance activities.
D. The costs associated with buyout expenses for the transfer of the  shipyards of the Navy on the east coast of the United States from funding  through the working capital fund of the Navy to funding on a direct basis.
E. The flexibility of the shipyard to continue routine ship maintenance  operations during a potential funding gap at the beginning of a fiscal year  or when expected maintenance costs exceed annual appropriations.
F. Operational and financial flexibility and responsiveness of funding on a  direct basis compared to funding through the working capital fund of the  Navy.
G. Long-term funding for the capital improvement programs of the  shipyard.
H. Compliance with Section 2460 of Title 10, United States Code, which  defines the work that is considered to be depot-level maintenance and  repair versus work that is considered to be a major modification of a  weapons system.
I. Compliance with Section 2466 of Title 10, United States Code, which  limits the amount of depot-level maintenance and repair workload of the  Department of Navy that is performed by nonfederal government  personnel in any fiscal year to not more than 50 percent of the total depot  workload reported to the department in that fiscal year.
J. Compliance with Sections 1115 and 1116 of Title 31, United Stated Code,  which require agencies to set annual performance goals, measure  performance toward the achievement of those goals, and publicly report  on progress.
K. Compliance with Chapter 35 of Title 31, United States Code, which  requires audited financial statements to include the ability to properly  charge and account for reimbursable workload.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Thomas Gosling, Assistant  Director; Grace Coleman; Lee Cooper; and Amy Sheller were major  contributors to this report.