Air Force and Army cite the increasingly complex training requirements needed to prepare for the ever more lethal battlefield environment as a factor that has led to greater reliance on flight simulators. A flight simulator is a system that tries to realistically replicate, or simulate, the experience of flying an aircraft. Flight simulators range from video games to full-sized cockpit replicas mounted on hydraulic (or electromechanical) actuators and controlled by state-of-the-art computer technology. According to Air Force and Army officials, aircraft simulators are a cost- effective way of helping to develop and refine operational flight skills. Simulators can facilitate training that might be impractical or unsafe if done with actual systems and allow for concentrated pilot practice in selected normal and emergency actions. Simulators also can train operators and maintainers to diagnose and address possible equipment faults, and enhance proficiency despite shortages of equipment, space, ranges, or time. In the late 1990s, the Air Force and Army were faced with increasingly obsolete simulators and the need to quickly acquire up-to-date pilot and aircrew training. In 1997, the then-Commander of the Air Force’s Air Combat Command proposed an innovative approach of buying training as a service, under which the contractors would own, operate, and maintain the simulator hardware and software. The simulator service contracts are one component of a much broader effort, now known as the DMO program. The DMO goal is to provide state-of-the-art simulator training on- demand at the location of the trainee, with the ultimate vision of networking different sites together to create more realistic flying scenarios. Plans call for each fighter unit eventually to be equipped with high-fidelity simulators. As of the fiscal year 2002 budget, the DMO program was formalized in the Air Force budget with the assignment of a program element line item that combined previous program elements for the various simulator systems. For fiscal year 2006, over $200 million was budgeted for the program. In the early 2000s, Army use of rotary-wing aviation simulation training was limited because the simulators being used were grossly obsolete and based on late 1970s’ technology. To revamp its helicopter training, the Army in late 2001 began the Flight School XXI program. Following the Air Force’s lead, the Army decided to acquire up-to-date simulator training using a service contract. Congress and the Office of Management and Budget (OMB) have recently addressed the growing level of procurement of services. For example, Congress included provisions in Section 801 of the National Defense Authorization Act for Fiscal Year 2002 designed to improve management and oversight of procurement of services. To ensure that DOD acquires services by means that are in its best interest and managed in compliance with applicable statutes, regulations, directives, and other requirements, the Act required DOD to establish a service acquisition management structure, comparable to the management structure that applies to the procurement of products. In September 2003, we reported that DOD and the military services had a management structure in place for reviewing individual services acquisitions valued at $500 million or more, but that approach did not provide a departmentwide assessment of how spending for services could be more effective. Also, OMB Circular A-11’s Appendix B, “Budgetary Treatment of Lease-Purchases and Leases of Capital Assets,” was amended in 2005 to require agencies to submit to OMB for review any service contracts that require the contractor to acquire or construct assets valued over $50 million. While these provisions do not apply to the previously-awarded simulator training contracts, future replacement contracts will be covered. All of the Air Force and Army simulator service contracts are funded with O&M funds. O&M funds are typically used for such things as military force operations, training and education, and depot maintenance. The contracts are requirements contracts, meaning that the government, within available funds, shall order from the contractor all the training services specified for each of the aircraft platforms that are required during the effective performance periods. Additionally, each contract contains language limiting the government’s liability in the event the contract is terminated. For example, the Air Force F-15C contract states that the government reserves the right to terminate the contract for its sole convenience and that such termination prior to the issuance of a funded task order shall result in no payment to the contractor of any amount for any work performed or costs incurred. Table 1 provides additional descriptive information for each contract. The military services are relying on industry to capitalize the required up- front investment needed to acquire simulator hardware and software, with the understanding that the contractors will amortize this investment by selling training services by the hour. Each contract establishes operating hours and the hourly payment rates for the life of the contracts, with rates structured to provide the contractor with higher income in the initial years of service. In calendar year 2004, for example, if the F-16 contractor provided Shaw AFB with simulator availability that met 95 percent of the required system elements, the hourly rate would be $5,225, whereas in calendar year 2006, it would drop to $709 per hour. We have previously identified the need to examine the appropriate role for contractors to be among the challenges in meeting the nation’s defense needs in the 21st century. We recently reported that the government’s increasing reliance on contractors for missions previously performed by government employees highlights the need for sound planning and contract execution. The structure of the simulator service contracts was heavily influenced by mid-1990s’ acquisition reform initiatives such as the Federal Acquisition Streamlining Act of 1994 and the Clinger-Cohen Act of 1996. These Acts encouraged agencies to use commercial acquisition procedures as a way to streamline the acquisition process. Differences under commercial versus non-commercial procedures pertain, for example, to the contracting officer’s determination of price reasonableness, the government’s right to inspect and test, and government rights to acquire technical data. Appendix III outlines these and other key differences. The Air Force contracts for simulator training are structured as commercial acquisitions, but the Army’s is not. Army officials told us they could not justify calling the requirement “commercial” because the simulators would be configured to reflect combat helicopters, which do not exist in the commercial market. In August 2005, a DOD Inspector General review of the procurement procedures for the F-16 contract concluded that the simulator service did not meet the definition or intent of a commercial service and recommended that the Air Force not use commercial procedures for the re-competed F-16 contract. The Air Force is using non- commercial procedures for the new contract. To allow for contractor recoupment of up-front investment, the strategy to acquire simulator services envisioned longer duration contracts. This coincided with practices in commercial industry, where long-term relationships between buyer and seller were becoming common. The Air Force and Army adopted this approach by including award-term incentives in the contracts. This incentive can best be described as a variant of an award-fee incentive, where the contractor is rewarded for excellent performance with an extension of the contract period instead of additional fee. Under the award-term concept, an assessment of the contractor’s performance is presented to the term determining official, who unilaterally determines whether to award an extension or a reduction to the contract ordering period. The potential total years of contract performance under the simulator contracts range from 13 to 19.5 years. Appendix IV contains the details of each contract. Award-term incentives are relatively new in government contracting and are not addressed in the Federal Acquisition Regulation (FAR). Several key players are involved with acquisition and use of simulator training. For the Air Force: Air Combat Command: The requiring entity—the user of simulator training services—is located at Langley AFB, Virginia. The command trains, equips and maintains combat-ready forces for rapid deployment and employment. Aeronautical Systems Center: This organization is the acquisition agency for the simulator contracts. Located at Wright-Patterson AFB, Ohio, it manages development, acquisition, modification, and in some cases, sustainment for a wide variety of aircraft and related equipment programs. The center develops attack, bomber, cargo, fighter, trainer, and reconnaissance aircraft for the Air Force. Air Force fighter units: These are the users of the simulator training, which currently is taking place in 10 fighter units. Fort Rucker, Alabama: Fort Rucker is the requiring entity for the Army’s helicopter flight simulator services. It is the home of all Army aviation flight training and the location of the initial training for new aviators, known as Flight School XXI. The types of helicopters used in Flight School XXI training are the TH-67 basic training helicopter, Chinook, Blackhawk, Apache, and the Attack Reconnaissance Helicopter. Unlike the Air Force’s multiple sites, the helicopter simulators provided under the service contract are located at only this one training site, not at each operational unit. Army Program Executive Office for Simulation, Training and Instrumentation: This office’s mission is to provide training, testing, and simulation solutions for soldier readiness. The office is co-located in Orlando, Florida, with the Naval Air Systems Command, which awarded the contract on behalf of the Army. Both the Air Force and Army were faced with obsolete simulators due to decisions to not devote sufficient procurement funds to upgrade existing simulator hardware and software. The decision to buy simulator training as a service allowed use of O&M funds, which would alleviate the need to compete for procurement funds. Further, it was envisioned that service contracts would allow for automatic simulator upgrades to match the changing aircraft configurations, because industry would be responsible for acquiring, operating, and maintaining the simulators and keeping them concurrent.