The National Defense Authorization Act for Fiscal Year 2004 provided DOD with the authority to establish (1) a pay-for-performance management system, (2) an appeals process, and (3) a labor relations system—which together comprise the major components of NSPS. The legislation permits DOD significant flexibility in designing NSPS, allowing for a new framework of rules, regulations, and processes to govern how defense civilian employees are hired, compensated, promoted, and disciplined. The law grants DOD certain exemptions from laws governing federal civilian personnel management found in Title 5 of the U.S. Code. Congress provided these flexibilities in response to DOD’s position that the inflexibility of federal personnel systems was one of the most important constraints to the department’s ability to attract, retain, reward, and develop a civilian workforce to meet the national security mission of the 21st century. On November 1, 2005, DOD and OPM jointly developed and issued the final NSPS regulations in the Federal Register. In the Federal Register, DOD estimated the overall costs associated with implementing NSPS to be approximately $158 million through 2008. The components’ estimates projected that over 700,000 civilian employees would be converted to the new system over a period of 4 years. By component, the Army projected converting 235,000 civilian employees between fiscal years 2005 and 2008; the Navy, 185,985; the Air Force, 128,408; and the Washington Headquarters Services, 156,454. DOD established a team to design and implement NSPS and manage the transformation process. In April 2004, the Secretary of Defense appointed an NSPS Senior Executive to, among other things, design, develop, and establish NSPS. Under the Senior Executive’s authority, the PEO was established as the central policy and program office to design, plan, develop, deploy, assess, and fully implement NSPS. Specifically, the PEO’s responsibilities include designing the labor relations, appeals, and human resource/pay-for-performance systems; developing communication and training strategies; modifying personnel information technology; and drafting joint enabling regulations and internal DOD implementing regulations. As the central DOD-wide program office, the PEO directs and oversees the components’ NSPS program managers, who report to their parent components and the NSPS PEO. These program managers also serve as their components’ NSPS action officers and participate in the development, planning, implementation, and deployment of NSPS. Figure 1 shows the organization of the NSPS design and implementation team. DOD’s estimate that it will cost $158 million to implement NSPS between 2005 and 2008 does not include the full cost that the department expects to incur as a result of implementing the new system. Federal financial accounting standards state that reliable information on the costs of federal programs and activities is crucial for effective management of government operations and recommend that full costs of programs be reported so that decision makers have information necessary to make informed decisions on resources for programs, activities, and outputs, and to ensure that they get expected and efficient results. According to the standards, the full cost of a program or activity includes both those costs that are specifically identifiable to carry them out, or direct costs, and those costs that are common to multiple programs or activities but cannot be specifically identified with any particular program or activity, or indirect costs. While the standards emphasize that cost information is essential for managing federal programs, their activities, and outputs, the standards also provide that items may be omitted from cost information if that omission would not change or influence the judgment of a reasonable person relying on the cost information. To implement NSPS, the PEO estimated costs of about $51 million for the start-up and operation of its office and the start-up of the National Security Labor Relations Board. The components estimated costs of about $23 million in fiscal year 2005, about $27 million in fiscal year 2006, about $35 million in fiscal year 2007, and $22 million in fiscal year 2008, as shown in table 1. Typical direct costs include salaries and benefits for employees who work directly on NSPS activities; materials and supplies used in the work; various costs associated with office space, equipment, facilities, and utilities that are used exclusively to produce the output; and the costs of goods and services received from other segments or entities that are used to produce the output. DOD’s estimate included several broad cost categories. These categories are (1) design and implementation, (2) training, (3) evaluation, (4) human resources automated systems, and (5) program office operations. DOD’s estimate contained some examples of the types of costs included in each of these broad categories. However, before calculating its estimate, DOD had not fully defined what direct and indirect costs should be included for it to effectively manage NSPS. Neither could DOD provide us with complete supporting documentation that identifies the specific types of costs included in its estimate. The Standards for Internal Controls in the Federal Government require that all transactions and other significant events, such as cost estimates, be clearly documented. Based on our review of the documentation provided by DOD and discussions with PEO and component officials, however, the estimate does not include all direct costs of implementing the system. For example, PEO and component officials stated that the estimate includes direct costs for the start-up and operation of the Program Executive Office and the National Security Labor Relations Board; development and delivery of training materials, Web-based courses, and classroom sessions by DOD contractor and civilian instructors; modification of existing automated personnel and payroll transaction processing systems—the Defense Civilian Personnel Data System and the Defense Civilian Pay System—to accommodate changes brought about by NSPS; travel costs for NSPS trainers and training participants; outreach with employees and other parties; and collaboration activities with employee representatives. However, PEO and component officials agreed that the estimate does not include all direct costs of implementing the system. For example, PEO and component officials agreed that the estimate does not include the full salary costs of all civilian and military personnel who directly support NSPS activities departmentwide and any of the direct costs that the various organizations and defense agencies expect to incur to implement the system, such as salaries and benefits for employees who work directly on NSPS activities and materials and supplies used in NSPS activities. Furthermore, PEO and component officials acknowledge that the estimate did not include any of the typical indirect costs associated with the design and implementation of NSPS such as costs of general administrative services, general research, and technical support. Without a cost estimate that includes all costs that the department expects to incur as a result of implementing the new system, decision makers—within DOD and Congress—will not have the complete cost information they need to make decisions about whether adequate resources are being provided for implementing NSPS. Moreover, component officials told us that certain categories of the estimated costs provided by the components do not contain comparable cost elements. One of DOD’s key financial management regulation principles—comparability—requires the reporting of financial management data in the same manner throughout DOD, using common definitions when necessary. However, officials from the Departments of the Army, Navy, and Air Force and the Washington Headquarters Services told us that they used different approaches to estimate NSPS funding requirements when calculating this cost estimate. While the PEO issued general instructions to the military services and the Washington Headquarters Services for estimating the costs associated with the design and implementation of NSPS, this office did not provide a description of the specific types of direct and indirect costs to be included in the estimate or a cost-estimating methodology containing assumptions and approaches. The PEO guidance provided a general reporting template with broad cost categories but did not contain detailed instructions for ensuring comprehensive and comparable cost estimates. Army and Navy officials told us that they estimated civilian personnel costs under the category of “Program Office Operations”; the Air Force officials noted that they estimated civilian personnel costs under four other categories; and Washington Headquarters Services officials stated that they did not estimate their NSPS design and implementation costs in any of the eight categories. Without comparable cost estimates, DOD and congressional decision makers cannot contrast and compare or otherwise evaluate NSPS implementation costs across the various DOD components. The total amount of funds DOD has expended or obligated to design and implement NSPS during fiscal years 2005 through 2006 cannot be determined because DOD has not established an effective oversight mechanism to ensure that all these costs are fully captured. In May 2005, the NSPS Senior Executive established guidance intended to provide the PEO with visibility over NSPS expenditures. The guidance requires the components to develop appropriate mechanisms to capture these costs within their official appropriation accounting systems and allows them flexibility to establish the desired level of specificity to track NSPS costs— such as a job order number and cost account code—provided the established mechanism allows complete visibility of all costs. In addition, the guidance requires the components to submit reports quarterly of their NSPS obligations to the NSPS PEO. This guidance does not, however, define the direct and indirect costs that DOD requires the components to capture. Our prior work on DOD’s financial and related business management and systems has revealed pervasive deficiencies that affect its ability to control costs; ensure basic accountability; anticipate future costs and claims on the budget; measure performance; maintain funds control; prevent and detect fraud, waste, and abuse; and address pressing management issues. GAO first designated DOD financial management as high risk in 1995. Based on discussions with PEO and component officials and our review of the quarterly reports of NSPS implementation costs submitted for fiscal years 2005 and 2006, the components’ official appropriation accounting systems do not capture the total amount of funds reported expended or obligated to design and implement NSPS. By component, the Army’s quarterly reports indicated that $9.8 million had been obligated to implement NSPS; however, just $6.0 million of these costs were captured in the Army’s official accounting system.