DOD’s DTM 09-007 established business rules, or standard procedures, to estimate and compare the full cost of military and DOD civilian personnel and contractor support. These rules were incorporated with amendments into DOD Instruction 7041.04, which supersedes the DTM. According to the DTM and the instruction, when developing national security policies and making program commitments, DOD officials must be aware of the full costs of personnel and have a thorough understanding of the implications of those costs to DOD and, on a broader scale, the federal government. To facilitate this awareness, the DTM provided and the instruction provides business rules for DOD officials to estimate the full costs of the defense workforce and contracted support for tasks supporting planning, defense acquisition, and force structure. According to the instruction, the Office of the Secretary of Defense (OSD) and all DOD components are required to use these business rules when performing an economic analysis to support workforce decisions, such as determining the workforce mix of new or expanding mission requirements that are not inherently governmental or exempt from private-sector performance, and in-sourcing. Table 1 shows how the DOD components can generally use the business rules established in DTM 09-007 and in DOD Instruction 7041.04 to estimate and compare personnel costs and to support workforce mix decisions. DOD Instruction 7041.04 does not require DOD’s components to make workforce decisions based on cost alone, but it does require the components to consider cost in the decision making process when the function in question is not required by law, regulation, or policy to be performed by a certain workforce (e.g., inherently governmental or military essential functions) and other workforce factors are equal. In other cases, the cost of using personnel to perform work may not be part of the decision making process. For example, a June 2013 memorandum from the Assistant Secretary of Defense states that during civilian furloughs the use of either military personnel or contractors to compensate for workload resulting from the civilian furloughs is prohibited. DOD Instruction 7041.04 states that the full costs of personnel include labor costs, current and deferred compensation costs paid in cash and in- kind, as well as direct and indirect non-labor costs. For contractor support, the full cost is the sum of the service contract, the cost of goods, services and benefits provided in-kind to contractors or reimbursed by DOD, and the costs to DOD in support of the contract and contract administration. See table 2 for a description of the full cost of performance by military and civilian personnel, and contractor support, as defined in DOD Instruction 7041.04. Further, the Federal Accounting Standards Advisory Board Handbook defines full cost as the total amount of resources used to produce the output. More specifically, the full cost of an output is the sum of (1) the costs of resources consumed directly or indirectly that contribute to the output, and (2) the costs of identifiable supporting services provided by units within the reporting entity and by other reporting entities. The Director of CAPE is the principal advisor to the Secretary of Defense and other senior officials in DOD for independent cost assessment, program evaluation, and analysis. DOD Instruction 7041.04 states that CAPE, in collaboration with USD(P&R), and the Under Secretary of Defense (Comptroller), is responsible for developing a cost model for DOD-wide application to implement the business rules identified in the instruction. The instruction also states that CAPE, USD(P&R), the Under Secretary of Defense (Comptroller), and the heads of the DOD components (such as the heads of the military departments) and OSD components, are responsible for using the business rules identified in the instruction. This includes using the business rules to estimate the full costs of the defense workforce in support of planning, defense acquisition, force structure decisions, and when performing an economic analysis in support of workforce mix decisions. The DOD Office of the Actuary provides actuarial expertise on all matters relating to military compensation and benefits, including performing annual valuations of the military retirement system, education benefits under the Montgomery G. I. Bill, and health care for the military retired population. We have previously made recommendations to DOD to develop a methodology to estimate the full cost of military and civilian personnel. In our May 2006 report, we found that from fiscal years 2005 through 2007, the Air Force, the Army, and the Navy collectively converted or planned to convert a total of 5,507 military health care positions to civilian positions.We found at that time that it was unknown whether these conversions would increase or decrease costs to DOD, primarily because the methodology each of the departments considered using did not include the full cost of military personnel. Accordingly, we recommended, and DOD generally agreed, that the Secretaries of the Air Force, the Army, and the Navy coordinate with CAPE to develop the full cost for military personnel and for federal civilian or contract replacement personnel in assessing whether anticipated costs to hire civilian replacement personnel will increase costs to DOD for defense health care. In response to this recommendation, DOD issued DTM 09-007 in January 2010, which provided a full cost methodology for assessing military, civilian, or contractor support personnel costs to inform workforce mix decisions, including military to civilian conversions. In our February 2008 report on DOD’s efforts to address legislative requirements to use a full cost methodology to certify and report on planned conversions of military medical and dental positions to civilian medical and dental positions, we found that the Navy’s methodology was the only one that addressed the specific factors identified by the John Warner National Defense Authorization Act for Fiscal Year 2007 for positions planned for conversion for fiscal years 2007 and 2008. The Air Force and the Army relied on composite military rates, instead of using a full cost methodology. These composite rates did not include all of the required cost factors, such as training and recruiting costs. Accordingly, we recommended that DOD, among other things, develop operating guidance for the military departments to use when justifying future conversions of military medical and dental positions to civilian positions. In our recommendation we stated that this guidance should stipulate requirements to use a consistent full cost methodology for comparing the cost of military and civilian personnel. Officials in CAPE attributed the development of DTM 09-007, in part, to these recommendations. DOD Instruction 7041.04 reflects improvements to DOD’s methodology for estimating and comparing the full cost to the taxpayer of work performed by military and civilian personnel and contractor support since the initial issuance of DTM 09-007, but the instruction is still limited in certain areas. For example, DOD’s instruction provides limited guidance on estimating overhead costs and adjusting advertising and recruiting, and training costs. In addition, CAPE has not established business rules for estimating the cost of a part of DOD’s total workforce—Reserve and National Guard personnel. Further, CAPE has not yet evaluated certain retirement and retiree health benefit cost elements that it is using to reflect the full cost of currently employed military and civilian personnel. DOD Instruction 7041.04 reflects a number of improvements in estimating certain cost elements in comparison to DTM 09-007, addressing some of the limitations users of the DTM and the interested parties we met with identified. While the DTM did not identify a responsible office for preparing clarifying guidance to assist users in applying the methodology, the instruction establishes that CAPE, among its other responsibilities, will be responsible for issuing such guidance. Also, CAPE has expanded the methodology to address specific elements that users of the DTM previously identified as missing, such as the cost of foregone taxes, lost productivity during periods of transition, and some other non-common costs associated with converting from contract to government performance. Lastly, CAPE has been developing, refining, and testing a DOD-wide software tool—the Full Cost of Manpower—that employs the business rules established in the instruction, and the instruction provides a link to this tool. However, while CAPE has addressed several of the limitations users of the preceding DTM and other interested parties identified, certain limitations still exist. DOD’s instruction provides limited direction on estimating general and administrative and overhead costs, and adjusting advertising and recruiting, and training costs. DOD Instruction 7041.04 states that the cost elements contained in the instruction can be modified or augmented in each specific case as necessary, but that the DOD components should be prepared to support each decision with sufficient justification. Best practices as reflected in GAO’s Cost Estimating and Assessment Guide state, however, that establishing ground rules for cost estimating provides a common set of agreed on estimating standards that provide guidance and minimize conflicts in definitions. The instruction directs users to include general and administrative and overhead costs in cost estimates. These costs include the goods, services, and benefits that support more than one organization. More specifically, these costs include a share of supplies and facilities and professional support services, and a fair share of the recurring costs of higher-level management and professional support services for organizations that produce or provide more than one product or service. The instruction provides a list of direct included for military and civilian personnel, but does not provide data sources or guidance on how to estimate them. Instead, CAPE identified subject-matter experts in each of the military departments to serve as points of contact to address these types of questions and provide assistance in the future. DODI 7041.04 defines direct costs as costs that are related directly to the production of a specific good or the performance of a specific service. Typical direct costs are the compensation of employees for performance of work, fringe benefit costs, and the costs of materials consumed or expended in the performance of the work. to contractors through a public-private competition using OMB Circular A-76.