PBL is a method of providing support for weapon systems by designating what system performance is required, such as a given level of system availability, and placing the responsibility for how it is accomplished on the support provider, which manages resources to achieve performance objectives. Logistics support for almost all of DOD’s weapon systems, such as materiel management, maintenance, and engineering, is provided by a combination of government and private-sector sources. In the past, under traditional support arrangements, the government generally managed the provision of weapon system support, using a combination of support providers from the government and the private sector. PBL support arrangements often use a private-sector support integrator to manage support providers from both the public and private sectors to meet specified performance requirements. PBL evolved from performance-based service contracting, which has been used in both the public and private sectors. The Federal Acquisition Regulation defines performance-based contracting as structuring all aspects of an acquisition around the purpose of the work to be performed. The Federal Acquisition Regulation further defines the statement of work for a performance-based acquisition as describing the required results in clear, specific, and objective terms with measurable outcomes. Performance-based service contracting has been referenced in regulation, guidance, and policy for more than two decades, and federal agencies have used it to varying degrees for acquiring a range of services. In 1991 the Office of Management and Budget issued a policy letter establishing the use of a performance-based approach for service contracting, and in 1994 it initiated a governmentwide pilot project to encourage the use of performance-based service contracts in federal agencies, including DOD. In October 1997, the Federal Acquisition Regulation was amended to incorporate the Office of Management and Budget’s 1991 policy. The Federal Acquisition Regulation currently establishes a policy that agencies use performance-based contracting methods to the maximum extent practicable for the acquisition of services, with certain exceptions. Using performance-based service contracts is intended to offer a number of potential benefits, such as encouraging contractors to be innovative and to find cost-effective ways of delivering services for a fixed level of funding. By shifting the focus from process to results, these contracts can potentially produce better outcomes and reduced costs. The Office of Management and Budget reported that the agencies participating in the pilot reduced contract prices and improved customer satisfaction with contractor work after introducing performance-based contracting. As an approach for supporting military weapon systems, PBL emerged from a 1999 DOD study to test logistics reengineering concepts that placed greater reliance on the private sector for providing weapon system support to reduce support costs and improve weapon system performance. The goal was for the military departments to reduce costs and improve efficiency by pursuing logistics support “reengineering” efforts using contractors. The fiscal years 2001-2005 Defense Planning Guidance advanced this cost reduction effort by establishing a goal that directed each military department to reduce the operation and support costs of its fielded systems by 20 percent by the year 2005. During this time, the Under Secretary of Defense (Acquisition and Technology) directed the services to use an existing pilot program containing 30 weapon systems to demonstrate the type of cost savings depicted in the fiscal years 2001-2005 Defense Planning Guidance. The areas identified for potential cost savings were reducing demand on the supply chain by improving the reliability and maintainability of the equipment, reducing supply chain response time, and increasing competitive sourcing of product support. Some of the 30 pilot programs involved performance- type arrangements that the services subsequently converted to, or designated as, PBL arrangements. This emphasis on reducing costs through PBL implementation was reiterated in DOD’s 2001 Quadrennial Defense Review Report, which advocated the implementation of PBL to compress the supply chain by removing steps in the warehousing, distribution, and order fulfillment processes; to reduce inventories; and to decrease overhead costs while improving the readiness of major weapon systems and commodities. In November 2001, DOD identified PBL as the preferred weapons system support strategy. In May 2003, DOD further strengthened this emphasis on PBL by stating in a DOD policy directive that acquisition managers shall use performance-based strategies for sustaining products and services whenever feasible and PBL strategies shall optimize total system availability while minimizing cost and the logistics footprint. In concept, a properly structured PBL arrangement is supposed to provide a level of performance and also reduce costs over time. According to the DOD/Defense Acquisition University PBL guide, a key aspect of PBL is the inclusion of an incentive for the support provider to reduce costs through increased reliability. Further, PBL arrangements can inherently motivate support providers to improve component and system reliability, since such improvements can provide the foundation for increased profit over the long term. In other words, the support provider should have the incentive to make reliability improvements to ensure that performance metrics are met and also to increase profit by earning a performance incentive tied to the metrics (an award fee or award term) and by reducing costs while still being paid the agreed-upon, fixed price for the remainder of the contract. The DOD/Defense Acquisition University PBL guide also states that a critical element of the PBL arrangement that facilitates this incentive and motivation is contract length. Further, long-term contracts provide the support provider with confidence in continuing cash flows and provide sufficient time for receiving an adequate return on any investments made to improve reliability. In 1995, before DOD identified PBL as the preferred weapons system support strategy, DOD’s economic analysis instruction recommended using an economic analysis for evaluating options for weapon system support. The instruction stressed the importance of considering in the analysis both qualitative and quantitative factors. With respect to quantitative factors, the instruction recommended that costs and benefits be expressed in terms of net present value to account for the time value of money. These were also to be expressed as life cycle costs and benefits that were to be calculated and compared for each feasible alternative for meeting a given weapon system support objective. Specifically, the economic analysis instruction identified and characterized the following seven elements that should be present in an economic analysis: objectives—to clearly identify the function to be accomplished and not to assume a specific means of achieving a desired result; assumptions—to incorporate both actual data and future alternatives—to comprise a comprehensive list of the feasible and infeasible options followed by a discussion of the infeasible options and comparisons of only the feasible options; costs and benefits—to compare the quantitative (expressed in terms of net present value) and qualitative factors for each option; sensitivity and uncertainty (risk) analyses—to determine the effect of uncertainties on the results of the analysis and to provide a range of costs and benefits; summary of the results of the analysis; and summary of the analysis’s recommendations. In DOD’s 2001 PBL guide, in which DOD identified PBL as the preferred weapon system support strategy, the department recommended that for all new systems and fielded acquisition category I and II systems, program offices use an analytical tool called a business case analysis to support the decision to use PBL arrangements for weapon system support. In 2004 and 2005, DOD guidance on conducting business case analyses described this tool in less specific terms than those used to describe the criteria laid out in DOD’s economic analysis instruction. However, there are some common themes in the guidance and instruction. For example, a January 2004 Under Secretary of Defense (Acquisition, Technology and Logistics) memorandum on PBL business case analysis calls for an assessment of “best value,” or the greatest overall benefit. The DOD/Defense Acquisition University PBL guide repeats the characterization of the business case analysis as a tool with the goal of determining a best-value solution and suggests that at a minimum a business case analysis should include an introduction outlining the purpose and objectives of the program, an explanation of the methods and assumptions used in the analysis, calculations of the relative costs and benefits of each weapon system support option, the financial and nonfinancial impacts of each, a risk assessment, and a section with conclusions and recommendations. Finally, both DOD’s economic analysis instruction and the DOD/Defense Acquisition University PBL guide recommend documenting the results of the analysis, including all calculations and sources of data, down to the most basic inputs, to provide an auditable and stand-alone document. According to the guidance, a business case analysis must stand on its own and be able to withstand rigorous analysis and review by independent agencies. DOD’s 2004 and 2005 guidance on conducting business case analyses also recommended that program offices update their business case analyses at key decision points both to validate the approach taken and to support future plans and use certain criteria, such as the capability of a PBL arrangement to reduce the cost per operational unit of performance (i.e., cost per flight hour), to assess all acquisition I and II programs without plans for a PBL arrangement for the potential application of a PBL strategy at the system, subsystem, or major assembly level. If the assessment showed potential for a PBL arrangement, a business case analysis should be conducted and completed by the September 30, 2006, deadline required by DOD’s Strategic Planning Guidance. In our review, we looked at PBL arrangements initiated as early as 1996 (when performance-based contracting was encouraged governmentwide) and as recently as 2007 (by which time, at the DOD level, PBL arrangements had moved from being encouraged to being required whenever feasible). These PBL arrangements represent contract values totaling approximately $12.1 billion and range from a low of $10.5 million to a high of $4.9 billion. Table 1 lists, by service, the weapon system programs supported by the 29 PBL arrangements we reviewed. DOD has generally not used business case analyses consistently or effectively to influence decision making regarding the use of PBL. Although DOD guidance recommended that these analyses be used to guide decisions on the cost-effectiveness of weapon system support arrangements, about half of the programs we reviewed either did not conduct such an analysis or did not retain adequate supporting documentation.