The objective of the Navy’s ship maintenance program is to perform all necessary maintenance consistent with available funding and provide reasonable assurance that ships will be available for required operations. Ship maintenance, conducted during periods the Navy calls availabilities, includes three types of requirements: time-directed, condition-based, and modernization. Time-directed requirements include those that are periodic in nature and are based on elapsed time or recurrent operations. Condition-based requirements, which are based on the physical condition of the ship, are usually identified by the ship’s crew or inspection teams. Lastly, modernization requirements include changes that either add new capability or improve reliability and maintainability of existing systems. Officials of the Shipbuilders Council of America, the South Tidewater Association of Ship Repairers, private shipyards, and ship repair companies in the Norfolk area have expressed concern that the Navy’s implementation of its policies and procedures favored the Norfolk Naval Shipyard, contributing to the private sectors’ declining ship maintenance workload in the Norfolk area during fiscal year 1998. The Navy’s allocation of ship maintenance workload in the Norfolk, Virginia, area is guided by legislative requirements and established Navy policy objectives, such as (1) retaining a certain level of public sector capability, (2) allowing sailors to remain at their home ports when shorter repairs are being done, and (3) achieving economic and efficient public depot maintenance operations. Historically, large ship dry-dockings and nuclear ship maintenance projects in the Norfolk, Virginia, area are usually allocated to either Newport News or the Norfolk Naval Shipyard and maintenance projects for conventional surface ships are usually contracted with private ship repair companies or allocated to Norfolk Naval Shipyard. In addition, Newport News performs some medium to small conventional ship maintenance work for the Navy. Further, in making workload allocation decisions, Navy officials stated they also consider: The statutory requirement of 10 U.S.C. 2466, more commonly called the 50-50 rule, wherein the Department of the Navy is required to contract not more than 50 percent of funds made available for depot-level maintenance with the private sector. This requirement is for the whole Navy and applies to all types of depot maintenance at all locations. The 50-50 requirement excludes funds obligated for the (1) procurement of major modifications or upgrades of weapon systems that are designed to improve performance or (2) nuclear refueling of an aircraft carrier. To more fully identify all sources of funding for ship maintenance and repair work in the Norfolk area, we included obligated funds for these activities in our analysis for this report. The Navy’s home port policy is to, where possible, do ship repair and maintenance work of 6 months or less at the ship’s home port, thus improving the ship crew’s quality of life by reducing time away from home. If the estimated project is to take 6 months or less, the Navy solicits proposals for maintenance contracts from private shipyards and ship repair companies located near the ship’s home port. If the estimate is more than 6 months, the Navy expands the solicitation to include additional ship repair companies operating on the coast—the Atlantic coast for the Atlantic Fleet. Core work requirements, where the Navy tries to maintain the required capabilities within organic Navy shipyards to meet readiness and sustainability requirements of the weapon systems that support the wartime and contingency scenarios. According to Navy documents, core capabilities consist of the minimum facilities, equipment, and skilled personnel necessary to meet these readiness and sustainability requirements. The Navy’s guaranteed manday policy, where Navy officials try to match the workload to Norfolk Naval Shipyard workforce because the shipyard’s workforce and related costs have already been committed in the Navy’s budget. In terms of reported obligations for ship maintenance work in the Norfolk area during fiscal years 1994 through 1998, the largest amount of ship maintenance funding went to the private shipyards and repair companies.Among the private sector activities, Newport News received the largest portion of the obligated funds. Reported obligations for the smaller private shipyards and repair companies fluctuated from year to year but, for a variety of reasons, were proportionately much less in fiscal year 1998 than in other recent years and were also less than the Navy initially scheduled for fiscal year 1998. During fiscal years 1994 through 1998, the Navy reported obligating nearly $6.9 billion for the ship maintenance work in the Norfolk area. It provided Norfolk Naval Shipyard with about 31.1 percent of this work and private shipyards and repair companies were allocated 68.9 percent. (See table 1.) Table 1 also shows that reported obligations for fiscal year 1998 were much higher than previous years, with the largest percentage obligated to private shipyards and repair companies. Most of the 1998 obligations went to Newport News to fund a complex overhaul and nuclear refueling of the U.S.S. Nimitz. In the years in which Newport News has such a large workload, major funding spikes occur. In contrast, there was no similar workload assigned to Newport News in fiscal year 1996. Navy officials told us that funding to Newport News was smaller in 1996 because (1) there was less nuclear ship maintenance work—work historically allocated to either Newport News or Norfolk Naval Shipyard and (2) Newport News was already operating near full capacity. Newport News is a large nuclear-capable yard and is capable of doing ship repair work that other smaller shipyards and repair companies in the Norfolk area are not. Smaller private shipyards and repair companies in the area do repair work on conventional ships and are not qualified to do nuclear-related work. Therefore, to make our private sector analysis more meaningful, we separated the Navy’s reported obligations according to whether they were provided to Norfolk Naval Shipyard, Newport News, or other smaller shipyards and repair companies. As shown in table 2, Newport News received the largest obligations in all but 1 year between fiscal year 1994 and 1998. Table 2 also shows that the smaller private shipyards and repair companies received a much lower percentage of the total obligations in fiscal year 1998 than in other years. There was less conventional ship maintenance work—work historically allocated to smaller shipyards and repair companies or to the Norfolk Naval Shipyard. For example, the Navy reported that the total number of ships in the Atlantic Fleet decreased from 191 in fiscal year 1994 to 165 in fiscal year 1998. Similarly, the reported number of conventional steam-powered ships, maintenance-intensive ships that smaller ship repair companies have historically worked on, decreased in the Atlantic Fleet from 38 to 26 between fiscal year 1994 and 1997, and was projected to decrease to 23 ships during fiscal year 1998. According to Navy officials, conventional steam-powered ships require more maintenance than other ships because they are older and contain more mechanical parts than newer ships, which have more reliable component systems that are easier to remove, replace with new component systems, and repair elsewhere. During fiscal year 1998, the Navy provided the smaller private shipyards and repair companies in the Norfolk area less conventional maintenance work than initially scheduled in its private sector planning report dated September 23, 1996. This change occurred largely for operational reasons and requirement changes and because four conventional maintenance projects originally scheduled to go to the private sector were reassigned to the Norfolk Naval Shipyard to meet workload targets established for the public shipyard under the Navy’s guaranteed manday policy. Appendix III details the final distribution of the CNO projects scheduled for fiscal year 1998. In September 1996, Naval Sea Systems Command (NAVSEA) issued the Navy’s private sector depot-level planning report for fiscal years 1997 and 1998. The report contained CNO conventional maintenance projects that were not yet funded but were tentatively planned for allocation to the private shipyards and repair companies in the Norfolk area in fiscal years 1997 and 1998. Navy officials told us that the unfunded schedule was recognized as being subject to change and changes did subsequently occur. Nonetheless, some private shipyards and repair companies expected to receive larger amounts of work than they ultimately obtained because of the information in the report. In fiscal year 1998, the Navy reduced the size of the maintenance package for seven CNO maintenance projects and deferred one CNO project to fiscal year 1999 because several ships scheduled for maintenance needed less maintenance than expected and other Atlantic Fleet ships needed more maintenance than scheduled, requiring the Navy to transfer additional ship maintenance funds to those projects. In addition, the Navy canceled three scheduled projects: the U.S.S. Roberts project was canceled because the ship needed less maintenance than expected, the U.S.S. Radford project was canceled because the ship had operational commitments, and the U.S.S. Guam project was canceled because the ship was decommissioned in August 1998. During fiscal year 1998, the Navy also assigned the Norfolk Naval Shipyard four CNO maintenance projects, initially scheduled for competition in the private sector. This was done to meet workload targets established for Norfolk Naval Shipyard under the Navy’s guaranteed manday policy. The objective of the Navy’s guaranteed manday policy is to match the workload to Norfolk Naval Shipyard’s workforce during the budget execution year since the shipyard’s workforce figures and related costs have already been committed in the Navy’s budget and workload reductions would result in losses. Based on previous work, we believe that the guaranteed manday policy is generally sound from a cost and operational standpoint because, without it, the Norfolk Naval Shipyard would lose money as a result of having work below the level required to support its budgeted workforce. Prior to fiscal year 1995, the Navy’s shipyards reported significant operating losses. These losses were partly due to (1) fleet and system commanders’ operational and administrative decisions that resulted in less work being assigned to the public shipyards than was projected and budgeted for and (2) the Navy’s lack of flexibility to quickly deviate from the budgeted workforce because of Federal Civil Service requirements that require workers be notified before they can be separated. To minimize future departures from the budgeted workload, the Navy implemented the guaranteed manday program.