oversight

Depot Maintenance: DOD's 50-50 Reporting Should Be Streamlined

Published by the Government Accountability Office on 2003-09-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to Congressional Committees




September 2003
                 DEPOT
                 MAINTENANCE
                 DOD’s 50-50 Reporting
                 Should Be
                 Streamlined




GAO-03-1023
                                                September 2003


                                                DEPOT MAINTENANCE

                                                DOD's 50-50 Reporting Should Be
Highlights of GAO-03-1023, a report to          Streamlined
Congressional Committees




Under 10 U.S.C. 2466, not more                  Continuing weaknesses in DOD’s data gathering, reporting processes, and
than 50 percent of each military                financial systems prevented GAO from determining with precision if the
department’s annual depot                       military services complied with the 50-50 requirement in fiscal years 2001-2.
maintenance funding can be used                 DOD data show all the services, except the Air Force in fiscal year 2001, to
for work done by private-sector                 be below the 50-percent funding limit on private sector work. However, as
contractors. The Department of
Defense (DOD) also must submit
                                                before, GAO found errors in the data that, if corrected, would overall
two reports to the Congress                     increase funding of the private sector and move each service closer to the
annually on the division of depot               contract limit. For example, for fiscal year 2002, the Navy did not include
maintenance funding between the                 about $401 million in private sector maintenance work on aircraft carriers
public and private sectors—one                  and surface ships. Correcting for these and other errors would increase the
about the percentage of funds                   Navy’s percentage of private sector depot maintenance funds for that year
spent in the previous 2 fiscal years            from the 42.6 percent reported to 46.9 percent. Such data weaknesses show
(prior-years report) and one about              that prior-years reports do not precisely measure the division of
the current and 4 succeeding fiscal             maintenance funding. At best, over time these results provide rough
years (future-years report). As                 approximations and indicate trends that may be useful to decision makers.
required, GAO reviewed the two
DOD reports submitted in early
2003 and is, with this report,
                                                Because of data deficiencies and changing budget projections, the future-
submitting its views to the                     years report does not provide reasonable estimates of public and private
Congress on whether (1) the                     sector maintenance funding for fiscal years 2003-7 and limits its usefulness
military services met the so-called             to decision makers. GAO reported this shortcoming in the past, and
“50-50 requirement” for fiscal years            problems continue. For example, the Army underreported maintenance
2001-2 and (2) the projections for              work at nondepot locations as it continues to consolidate the work and
fiscal years 2003-7 are reasonable              better control it at such locations. Other Army work was not reported
estimates. GAO also identified                  because some commands did not receive guidance and others misapplied it.
opportunities to improve the                    These errors would add about $200 million annually to the Army’s future
reporting process.                              estimate and increase the percent of projected funding in the private sector.

                                                Opportunities still exist for improvements, including for streamlining the 50-
GAO suggests that the Congress                  50 reports, continued service audit agency support, and data development.
consider amending 10 U.S.C. 2466                Streamlining the 50-50 reports could help address problems caused by,
to require only one annual 50-50                among other factors, inexact program estimates. Second, although DOD is
report to cover the prior, current,             concerned that recent revisions to federal audit standards could keep
and budget years for which data                 service auditors from further participation in the 50-50 process, GAO
are generally more reliable and                 believes that a way can be developed to enable auditors’ continued support
potential impacts more immediate.               yet ensure their independence. Third, data development could be helped by
GAO also recommends that DOD
                                                better disseminating guidance and training participating personnel.
improve 50-50 data collection and
validation by, among other actions,             DOD’s Reported Fiscal Year 2002 50-50 Data and GAO’s Adjustments
using service audit agencies for                Numbers in percent
timely review and validation of 50-                                           Public work   Public work          Private work         Private work
50 data. DOD concurs with the                    Service                        reported      adjusted               reported             adjusted
report recommendations.                          Army                                51.5          49.2                   46.5                 49.0
                                                 Navy/Marine                         54.5            50.3                 42.6                    46.9
www.gao.gov/cgi-bin/getrpt?GAO-03-1023.          Corps
                                                 Air Force                           54.1            51.4                 45.8                    48.5
To view the full product, including the scope
and methodology, click on the link above.       Source: GAO analysis of DOD data.
For more information, contact Barry W.
Holman at (202) 512-5581 or                     Note: Totals reported and adjusted will not equal 100 percent due to rounding and legislatively
holmanb@gao.gov.                                excluded public-private partnerships.
Contents


Letter                                                                                         1
                       Results in Brief                                                        2
                       Background                                                              4
                       Weaknesses in Data Preclude Determinations of Compliance in
                         Prior-Years Report                                                    9
                       Future-Year Projections Are Not Reasonable and Not Very Useful         12
                       Opportunities Exist to Improve DOD Reporting                           13
                       Conclusions                                                            16
                       Matter for Congressional Consideration                                 17
                       Recommendations for Executive Action                                   17
                       Agency Comments and Our Evaluation                                     18

Appendix I             GAO Adjustments for Errors, Omissions, and
                       Inconsistencies in Military Departments 50-50 Data for
                       Fiscal Year 2002                                      19
                       Department of the Army                                                 19
                       Department of the Navy                                                 20
                       Department of the Air Force                                            21

Appendix II            Scope and Methodology                                                  24



Appendix III           Comments from the Department of Defense                                27



Related GAO Products                                                                          34



Tables
                       Table 1: DOD Reported Depot Maintenance Funding Allocations             8
                       Table 2: GAO Changes to Army’s FY 2002 50-50 Data                      19
                       Table 3: GAO Changes to Navy’s and Marine Corps’ FY 2002 50-50
                                Data20
                       Table 4: GAO Changes to Air Force’s FY 2002 50-50 Data                 22




                       Page i                                      GAO-03-1023 Depot Maintenance
Abbreviations

DOD       Department of Defense
OSD       Office of the Secretary of Defense



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Page ii                                                 GAO-03-1023 Depot Maintenance
United States General Accounting Office
Washington, DC 20548




                                   September 15, 2003

                                   The Honorable John Warner
                                   Chairman
                                   The Honorable Carl Levin
                                   Ranking Minority Member
                                   Committee on Armed Services
                                   United States Senate

                                   The Honorable Duncan Hunter
                                   Chairman
                                   The Honorable Ike Skelton
                                   Ranking Minority Member
                                   Committee on Armed Services
                                   House of Representatives

                                   Under 10 U.S.C. 2466, not more than 50 percent of annual depot
                                   maintenance funding provided to the military departments and
                                   defense agencies can be used for work accomplished by private-sector
                                   contractors. Section 2466 also directs the Department of Defense (DOD)
                                   to submit two annual reports to the Congress on the distribution of depot
                                   maintenance funding between the public and private sectors. The first
                                   report is to identify the percentage of funds expended by each military
                                   department and defense agency during the preceding 2 fiscal years for the
                                   performance of depot maintenance workloads by the public and private
                                   sectors (the “prior-years report”). The second report is to project the same
                                   information for the current and 4 succeeding fiscal years (the “future-years
                                   report”). For 2003, DOD issued the prior-years report on
                                   February 11, 2003, and the future-years report on April 7, 2003.

                                   Section 2466 also requires us to submit our views to the Congress on
                                   whether DOD complied with the so-called “50-50 requirement” in the
                                   prior-years report and whether the projections in the future-years report
                                   are reasonable. Accordingly, this report discusses whether (1) the military
                                   departments met the 50-50 requirement for fiscal years 2001 and 2002 and
                                   (2) the projections for fiscal years 2003 through 2007 represent reasonable
                                   estimates. As part of our work, we also identified opportunities to improve
                                   the reporting process. To accomplish these objectives, we analyzed the
                                   50-50 reported data and each service’s procedures and internal
                                   management controls for collecting, aggregating, and validating depot
                                   maintenance information for purposes of responding to the section 2466


                                   Page 1                                         GAO-03-1023 Depot Maintenance
                   requirements. We limited our analysis of future-years data because initial
                   audit efforts identified significant continuing problem areas, similar to
                   those found in prior audits, that are not likely to change.


                   Continuing weaknesses in DOD’s data gathering, reporting processes, and
Results in Brief   financial systems prevented us from determining with precision whether
                   the services were in compliance with the 50-50 requirement for fiscal years
                   2001 and 2002. DOD’s data as submitted to the Congress shows the
                   military departments to be below the 50-percent funding limitation on
                   private sector work, except for the Air Force, which for 2001 reported
                   itself above the limit1 but below it in 2002. However, as in past years, we
                   found errors and omissions in the data that, if corrected, would overall
                   increase the percentages of funding going to the private sector and move
                   each department closer to the contract limit. For example, in its data for
                   fiscal year 2002, the Navy did not include about $401 million in private
                   sector maintenance work on aircraft carriers accomplished during the
                   same time as nuclear refueling and on surface ships being placed in an
                   inactive status. The Marine Corps, which compared to the other services
                   has the smallest workload but the largest proportion of errors, did not
                   report most depot maintenance workloads from the command responsible
                   for system acquisitions and upgrades, understating private-sector
                   workloads by about $32 million and public sector workloads by about
                   $7 million. Correcting for these and other errors we found would increase
                   the Department of the Navy’s percentage of depot funds for work
                   accomplished in the private sector during fiscal year 2002 from the
                   42.6 percent reported to 46.9 percent, a gain of over 4 percentage points.
                   These weaknesses indicate the data in the prior-years report cannot be
                   relied on to provide a precise measure of the balance of funding between
                   the public and private sectors for the military departments. At best, over
                   time these reports provide rough approximations of the public-private
                   funding allocations, with some indications of trends that may be useful
                   information to the Congress in exercising its oversight role and to DOD
                   officials in managing the depot maintenance program.

                   Because of supporting data deficiencies and the changing nature of budget
                   projections, the future-years report does not provide reasonable estimates


                   1
                    The Secretary of the Air Force issued a national security waiver for fiscal year 2001 as
                   provided by 10 U.S.C. 2466(b) at that time. This provision was subsequently amended
                   (sec. 341, P.L. 107-107, Dec. 28, 2001) to designate the Secretary of Defense as the waiver
                   authority instead of the secretaries of the military departments.




                   Page 2                                                    GAO-03-1023 Depot Maintenance
of public and private sector depot maintenance funding allocations for
fiscal years 2003 through 2007, thereby limiting its usefulness to
congressional and DOD decision makers. We have reported this
shortcoming with the future-years report in the past, and the problems
continue to occur. For example, as in past years, the Army underreported
public and private sector depot-level maintenance work at field locations
as it continues unfinished efforts to consolidate maintenance activities and
better control the proliferation of depot-level tasks at nondepot locations.
Other Army work was not reported because some commands did not
receive 50-50 guidance and others misapplied the guidance. While the
Army’s supporting documentation for the projected data was inadequate,
errors and omissions of similar magnitude to the prior years data would
add more than $200 million annually to the Army’s reported future work
for both public and private sectors. As with the prior years, the net effect
of the problems we found generally increases the percentage of workload
expected to be accomplished by the private sector. Besides reporting
errors, other internal and external factors can create large fluctuations in
reported data, which in turn can provide a distorted and misleading view
to outside observers about efforts to remain compliant with the 50-50
requirement. For example, in the current future-years report, the Air
Force’s projected public sector work financed through the working capital
fund is $3.0 billion higher than the amount reported for the same 4-year
time period in the future-years report submitted in 2002. Although this
would appear to indicate a large influx of new work to the public depots,
in reality the amount of work, according to budget estimates and
management reports, is expected to remain fairly level during this
reporting period in terms of production hours and size of workforce. Most
of the dollar (and percentage) increase in public sector work is the result
of price hikes in the sales rate charged to its customers, a condition
primarily caused by increases in the cost of spare and repair parts used in
the maintenance process.

Recently DOD’s improvements in 50-50 guidance and operating processes
have reached a plateau in terms of quality and direction. However,
opportunities still exist to improve 50-50 data and management processes
and controls, including through a streamlined 50-50 report, service audit
agency participation in that process, and an improved data development
process. Streamlining the 50-50 report to focus on the data that are likely
to be more accurate and extending the time DOD officials have to put the
data together should improve the quality of the reported 50-50 data.
Furthermore, DOD officials indicated their concerns that the issue of
auditor independence, arising from a recent revision of government
auditing standards, could keep service auditors from further participation


Page 3                                         GAO-03-1023 Depot Maintenance
                            in 50-50 reviews. However, the continued participation of the service audit
                            agencies—to verify data and identify errors to be corrected by 50-50
                            managers before reports are submitted to the Congress—is critical to
                            improving data accuracy and completeness. We believe that, as such
                            participation by auditors has been done with regard to the base
                            realignment and closure process, a process can be developed to enable
                            service auditors’ valuable participation to continue while the services are
                            compiling their data, with audit agencies still maintaining their
                            independence. Lastly, opportunities for improvement in the data
                            development process include better dissemination of guidance and
                            enhanced training for personnel who collect and report the data.

                            We are including a matter for congressional consideration regarding the
                            streamlining of the 50-50 reports by reducing the number of years of future
                            data that are collected and combining the prior-year and future-year
                            reports into one report with a later reporting date. We are also making
                            recommendations to the Department of Defense for improving the 50-50
                            data reported to the Congress (1) by assuring the timely participation of
                            the service audit agencies in reviewing the data before reports are
                            submitted to the Congress and (2) by increasing management’s attention
                            to the dissemination of guidance to all organizations and personnel
                            participating in the process and to the improvement of training for
                            personnel responsible for developing and aggregating data.

                            In written comments on a draft of this report, DOD concurred with the
                            report’s recommendations while disagreeing with limited portions of our
                            analyses. The department’s comments are included in appendix III.



Background
Governing Legislation and   In addition to the 50-50 requirement in 10 U.S.C. 2466, two other title 10
Previous Reports            provisions directly affect the reporting of workload allocations to the
Concerning the 50-50        public and private sectors.
Requirement                 •   Section 2460 defines depot maintenance to encompass material
                                maintenance or repair requiring the overhaul, upgrade, or rebuilding of
                                parts, assemblies, or subassemblies and the testing and reclamation of
                                equipment, regardless of the source of funds or the location at which
                                maintenance or repair is performed. Depot maintenance also




                            Page 4                                          GAO-03-1023 Depot Maintenance
    encompasses software maintenance, interim contractor support,2 and
    contractor logistics support3 to the extent that work performed in these
    categories is depot maintenance. The statute excludes from depot
    maintenance the nuclear refueling of an aircraft carrier, the
    procurement of major modifications or upgrades of weapon systems,
    and the procurement of parts for safety modifications, although the
    term does include the installation of parts for safety modifications.

•   Section 2474 directs DOD to designate public depots as Centers of
    Industrial and Technical Excellence and to improve their operations so
    as to serve as recognized leaders in their core competencies.4 Section
    342 of the National Defense Authorization Act for Fiscal Year 2002
    (P.L. 107-107, Dec. 28, 2001) amended this statute to exclude qualifying
    public-private partnerships5 from the 50-percent funding limitation on
    contracting in section 2466. Section 342 provides that the funds
    expended for the performance of depot-level maintenance by
    nonfederal government personnel located at the centers shall not be
    counted when applying the 50-percent limitation if the personnel are
    provided pursuant to a public-private partnership. This exclusion
    initially applied to depot maintenance funding for fiscal years 2002
    through 2005. Section 334 of the National Defense Authorization Act
    for Fiscal Year 2003 (P.L. 107-314, Dec. 2, 2002) extended this period to
    include all contracts entered into through fiscal year 2006.

The Office of the Secretary of Defense (OSD) has issued guidance to the
military departments for reporting public-private workload allocations.


2
 Interim contractor support is designed to be an interim support arrangement in which a
contractor provides depot maintenance (and sometimes other logistics support) as part of
the acquisition strategy for new systems.
3
  Contractor logistics support is designed to be a lifetime support concept in which a
contractor provides most or all elements of logistics support, including depot maintenance.
4
  Core competencies are depot-level maintenance capabilities to be retained in public
depots to meet defense strategic and contingency plans and for which the military
departments believe that DOD should be a recognized leader in the national technology and
industrial base.
5
 DOD guidance defines a public-private partnership for depot maintenance as an
agreement between a public-sector depot maintenance activity and one or more private
industry or other entities to perform work or utilize facilities and equipment. Such an
arrangement includes use of public facilities, equipment, and employees to perform work
for the private sector under certain defined circumstances; private-sector use of public-
sector equipment and facilities to perform work for the public sector; and work-sharing
agreements using both public- and private-sector facilities and/or employees.




Page 5                                                  GAO-03-1023 Depot Maintenance
The guidance is consistent with the definition of depot-level maintenance
and repair in 10 U.S.C. 2460.6 The military departments have also issued
internal instructions to manage the data collection and reporting process,
tailored to their individual organizations and operating environments.

Based on the congressional mandate regarding the DOD 50-50
requirement, this is the sixth year that we have reported on the prior-year
numbers and the fourth year reporting on the future-year numbers.7 In past
years, we have reported on continuing data errors and inconsistencies in
reporting by the military departments and problems in documenting and
independently validating 50-50 data. We have recommended increasing
management attention to and emphasis on the 50-50 reporting process,
improving guidance in specific maintenance categories, and implementing
better internal controls. We have also observed that the 50-50 process is
complex, involving numerous reporting entities and commands, and
requiring the incorporation of evolving new concepts of logistics support,
changing locations and organizations for accomplishing depot
maintenance, and changes in statutory provisions. Service officials told us
that the reporting process is somewhat burdensome and time frames for
collecting data are constrictive. Further complications in reporting result
from relatively high turnover in staff responsible for collecting and
managing data and uneven management attention and priority accorded
the 50-50 process.

Our work has historically been augmented by the efforts of the service
audit agencies, which have participated in the 50-50 processes in varying
degrees. We have recommended the continued involvement of the auditors
to review and validate reporting processes and results and to correct
substantial errors and omissions before the 50-50 data are submitted to the
Congress.




6
 Because of the difficulty of segregating installation costs for safety modifications from
costs for installing other modifications (e.g., for improved performance), OSD’s guidance
specifies that all modification installation costs be reported when an installation is
considered to be a depot-level service.
7
 For the two most recent reports, see U.S. General Accounting Office, Depot Maintenance:
Change in Reporting Practices and Requirements Could Enhance Congressional
Oversight, GAO-03-16 (Washington, D.C.: Oct. 18, 2002) and Depot Maintenance:
Management Attention Required to Further Improve Workload Allocation Data,
GAO-02-95 (Washington, D.C.: Nov. 9, 2001). Other related GAO products are listed at the
end of this report.




Page 6                                                   GAO-03-1023 Depot Maintenance
                           Our prior reports also recognized the limitations of DOD’s financial
                           systems, operations, and controls. Our audits of DOD’s financial
                           management operations have routinely identified pervasive weaknesses in
                           financial systems, operations, and internal controls that impede its ability
                           to provide useful, reliable, and timely financial information for day-to-day
                           management and decision making. In the financial management systems
                           area, DOD continues to struggle in its efforts to implement systems to
                           support managerial decision-making. As we recently reported,8 DOD can ill
                           afford to invest in systems that are not capable of providing DOD
                           management with more accurate, timely, and reliable information on the
                           results of the department’s business operations.

                           To date, none of the military services or major DOD components has
                           passed the test of an independent financial audit. A continuing inability to
                           capture and report the full cost of its programs represents one of the most
                           significant impediments facing DOD. Nonetheless, the data used to
                           develop the 50-50 report are the only data available and are accepted and
                           used for DOD decision making and for congressional oversight.


Summary of Data in DOD’s   Table 1 provides a consolidated summary of DOD’s 2003 prior-years and
50-50 Reports              future-years reports to the Congress on public and private sector workload
                           allocations for depot maintenance. The amounts shown are DOD’s record
                           of actual obligations incurred for depot maintenance work in fiscal years
                           2001 and 2002 and projected obligations for fiscal years 2003-2007 based
                           on the defense budget and service funding baselines.9 The percentages
                           show the relative allocations between the public and private sectors and
                           the exempted workloads. Adding the private and private-exempted
                           percentages together shows what the private-sector amount would have
                           been reported as, absent the recent legislation to exempt qualified
                           partnership workload.




                           8
                             See U.S. General Accounting Office, Department of Defense: Status of Financial
                           Management Weaknesses and Progress Toward Reform, GAO-03-931T (Washington, D.C.:
                           June 25, 2003).
                           9
                            Although 10 U.S.C. 2466 specifies reporting of funds expended in the prior years and
                           projected to be expended in the future years, DOD’s past and current 50-50 reports are
                           based on obligation data. A DOD official explained that obligation data are considered to
                           be more appropriate because of the statutory requirement to report funds made available in
                           a given fiscal year and because expenditure data may not be completely recognized in the
                           accounting records for a year or more following the funds’ obligation.




                           Page 7                                                  GAO-03-1023 Depot Maintenance
Table 1: DOD Reported Depot Maintenance Funding Allocations

 Dollars in millions
                                             Prior fiscal years                                           Future fiscal years
                                                    2001               2002              2003          2004          2005          2006          2007
 Army
 Public                                          $1,205              $1,373            $1,781        $1,790        $1,907        $2,017        $2,008
                                                  52.2%              51.5%             55.8%         52.8%         53.6%         52.6%         52.7%
 Private                                         $1,102              $1,239           $1,325         $1,517        $1,562        $1,729        $1,716
                                                  47.8%              46.5%             41.5%         44.7%         43.9%         45.1%         45.0%
 Private exempta                                          -               $51             $84           $86           $87           $87           $87
                                                                       1.9%              2.6%          2.5%          2.4%          2.3%          2.3%
 Total                                           $2,307              $2,663            $3,190        $3,393        $3,556        $3,833        $3,812


 Navy/Marine Corps
 Public                                          $4,342              $5,258            $4,986        $4,594        $5,237        $5,172        $5,178
                                                  54.7%              54.5%             54.1%         54.2%         55.2%         55.0%         56.3%
 Private                                         $3,593              $4,110           $4,188         $3,836        $4,173        $4,144        $3,903
                                                  45.3%              42.6%             45.4%         45.2%         44.0%         44.0%         42.5%
                       a
 Private exempt                                           -            $273               $46           $51           $74           $94          $111
                                                                       2.8%              0.5%          0.6%          0.8%          1.0%          1.2%
 Total                                           $7,935              $9,642            $9,220        $8,481        $9,484        $9,411        $9,192


 Air Force
 Public                                          $3,322              $4,467            $4,456        $4,993        $5,404        $5,530        $5,629
                                                  47.7%              54.1%             51.9%         56.8%         57.9%         56.6%         53.7%
 Private                                         $3,643              $3,781           $4,120         $3,791        $3,922        $4,230        $4,848
                                                  52.3%              45.8%             48.0%         43.1%         42.0%         43.3%         46.2%
 Private exempta                                          -               $12              $9             $8            $7            $7            $8
                                                                       0.1%              0.1%          0.1%          0.1%          0.1%          0.1%
 Total                                           $6,965              $8,260            $8,585        $8,792        $9,333        $9,768      $10,484
Source: DOD’s “50-50” Reports, dated Feb. 11 and Apr. 7, 2003.
                                                                 a
                                                                  The provision in 10 U.S.C. 2474 to exempt qualified public-private partnerships from the 50-percent
                                                                 funding limitation began with the 2002 reporting year and is now continued for all contracts entered
                                                                 into through fiscal year 2006. DOD interpreted this to mean that exemptions should also be reported
                                                                 for fiscal year 2007 for contracts initiated in 2002 through 2006.




                                                                 Page 8                                                         GAO-03-1023 Depot Maintenance
                         DOD’s prior-years report for fiscal years 2001 and 2002 as submitted to the
Weaknesses in Data       Congress shows the Departments of the Army and Navy to be below the
Preclude                 50-percent funding limitation on private sector workloads for both years.
                         The Air Force reported itself over the limitation in 2001 and below it in
Determinations of        2002. (See table 1.) The net effects of correcting for the errors and
Compliance in Prior-     omissions we identified would increase the percentages of workload going
                         to the private sector and move each department closer to the contract
Years Report             limit. Appendix I shows the amounts and effects of our adjustments to the
                         reported data submitted by the military departments for fiscal year 2002
                         and provides a description of the major deficiencies we found. Overall,
                         however, recurring weaknesses in DOD’s data gathering, reporting
                         processes, and financial systems prevented us from determining with
                         precision whether the services were in compliance with the 50-50
                         requirement for fiscal years 2001 and 2002.


Department of the Army   The Army reported its private sector funding to be below the 50-percent
                         limit for both fiscal years 2001 and 2002. Army 50-50 reporting involves
                         multiple commands with somewhat different processes for collecting,
                         summarizing, and validating data. Although the Army utilized a new, more
                         centralized financial system to collect 50-50 data that corrected some of
                         the transcription errors we found last year,10 we continued to find errors,
                         omissions, and inconsistencies in its data.

                         For example, as in past years, the Army underreported public and private
                         sector depot-level maintenance work at field locations as it continues
                         unfinished efforts to consolidate maintenance activities and better control
                         the proliferation of depot-level tasks at nondepot locations. Other Army
                         work was not reported because some commands did not receive 50-50
                         instructions and others misapplied the guidance. Unfamiliarity with the
                         guidance was caused in some instances by the large turnover from last
                         year in the staff responsible for collecting and summarizing data. Staff
                         turnover was cited by each of the military services as contributing to
                         increased errors and training needs. To the extent we identified them,
                         these specific errors would add about $228 million in total to the Army’s
                         public and private sector workloads in 2002; the net effect of correcting
                         for these errors would add 2.5 percent to the private sector percentage
                         allocation in 2002. (See table 2 in app. I.)




                         10
                              GAO-03-16.




                         Page 9                                         GAO-03-1023 Depot Maintenance
Department of the Navy,      The Navy reported its private sector funding to be below the 50-percent
including the Marine Corps   limit for both fiscal years. Similar to the Army, the Navy’s 50-50 process
                             also involves multiple naval commands as well as the Marine Corps. As in
                             prior years, we believe this increases the complexity in managing the
                             process and in ensuring consistency in application of the guidance. It also
                             exacerbates the less than adequate data validation efforts.

                             We identified several problems that carried over from last year’s 50-50
                             efforts. The Navy did not report any depot maintenance work
                             accomplished along with the nuclear refueling of its aircraft carriers, citing
                             the exclusion of nuclear refueling from the 10 U.S.C. 2460 definition of
                             depot maintenance. We continue to believe that depot repairs not directly
                             associated with refueling tasks should be reported because these kinds of
                             repair actions are reported by other organizations and funding for these
                             tasks are identifiable in contracts and financial systems. The Navy also
                             continues to inconsistently report inactivation activities that involve the
                             servicing and preservation of systems and equipment before it is placed in
                             storage or in an inactive status. Officials report public sector workloads
                             for inactivation activities on nuclear ships but do not report such work on
                             nonnuclear ships, saying that the former workload is complex while the
                             latter is not. We think all such depot-level work should be counted since
                             the statute and implementing guidance does not make a distinction of
                             complexity. These two examples would add about $401 million to the
                             private sector workloads in fiscal year 2002.

                             We also determined that about $41 million of partnership workloads were
                             incorrectly exempted from reporting because the work was not
                             accomplished at a designated depot or was not performed by contract
                             employees.

                             The Marine Corps data are included as part of the Department of the Navy
                             50-50 report for compliance purposes, but the Corps exercises a separate
                             process for collecting data. Compared to the other services, the Marine
                             Corps has a small depot program but makes more relative errors and has
                             substantial shortcomings in its management oversight and control actions.
                             For example, most of the program offices in the command that is
                             responsible for acquiring and upgrading weapon systems did not report at
                             all. Our review found that this understated the private sector total for
                             fiscal year 2002 by about $32 million and the public sector total by almost
                             $7 million. We also identified other errors including a nearly $19 million
                             overstatement of the public sector when an official incorrectly included
                             obligations from fiscal year 2001 in the total for 2002.



                             Page 10                                         GAO-03-1023 Depot Maintenance
                        On balance, for the Department of the Navy as a whole we found the total
                        dollar amount of errors affected the private sector data more than the
                        public sector. Correcting for the errors we found substantially increases
                        the private sector percentage share in fiscal year 2002 from 42.6 percent to
                        46.9 percent, a gain of over 4 percent. (See table 3 in app. I.)


Department of the Air   The Air Force reported that it exceeded the 50-percent funding limitation
Force                   for the private sector in 2001. As provided by law at the time, the Secretary
                        of the Air Force issued a waiver.11 The Air Force reported itself back below
                        the limitation for fiscal year 2002.

                        Most of the errors we found were the same or similar from past reviews.
                        For example, the Air Force continues to make a significant adjustment in
                        its reporting for contract administration and oversight costs. The
                        adjustment increases the reported public sector funding and decreases the
                        private sector. The total adjustment was $125 million (in absolute terms)
                        for fiscal year 2002. Consistent with the 50-50 guidance, which states that
                        costs should be associated with the end product (i.e., the repaired item),
                        we think these costs should instead be treated as contracting expenses.
                        Accordingly, we reversed this adjustment in our analysis. The Air Force
                        also continues to count some component repair costs twice, once when
                        the component is repaired and again when it is installed in an equipment
                        item or assembly during a periodic overhaul. Officials said these are both
                        reportable events, while we think this overstates the amount of actual
                        repair work done. Eliminating the double count would affect about $666
                        million in 2002—a $485 million decrease in the public sector amount and a
                        $181 million decrease in the private sector.

                        As in past years, we also identified many errors in the amounts reported
                        for programs supported by interim and contractor logistics support
                        contracts. We determined that several programs used incorrect factors and
                        assumptions to calculate the depot portion of total contract costs. We
                        found other programs that could not adequately explain or justify their
                        estimating methods—some had been developed years ago by officials no
                        longer in the program and simply applied by new staff without checking
                        their validity nor maintaining adequate supporting documentation to
                        explain and rationalize the results. Relatively high turnover of staff



                        11
                          The Air Force also reported itself as exceeding the 50-percent limit in fiscal year 2000,
                        and a notice of the waiver was duly issued to the Congress.




                        Page 11                                                    GAO-03-1023 Depot Maintenance
                      responsible for collecting and managing 50-50 data tends to increase the
                      number and persistence of errors and omissions. In total, the net effect of
                      the errors we found would increase the private sector allocation in 2002 by
                      about 2.7 percent. (See table 4 in app. I.)


                      Because of the changing nature of budget projections and supporting data
Future-Year           deficiencies, the future-years report does not provide reasonable estimates
Projections Are Not   of public and private sector depot maintenance funding allocations for
                      fiscal years 2003 through 2007. Furthermore, the services tend to place
Reasonable and Not    less emphasis and priority on collecting and validating future-years data.
Very Useful           The reported projections are based, in part, on incorrect data,
                      questionable assumptions and estimating factors, and some
                      inconsistencies with existing budgets and management plans. As with the
                      prior years, the net effect of the problems we found generally increases
                      the percentage of funding for projected private sector work. The
                      uncertainty and instability of budget estimates combined with the errors
                      and omissions we found result in a future-years report that is not very
                      useful to congressional and DOD decision makers.

                      We found many of the same problems identified in the prior-years data
                      were continued in the future-years projections. The Army continued to
                      underreport maintenance work at field locations and made other errors
                      similar to its prior-years presentation. While supporting documentation for
                      the Army’s projected data was inadequate, errors and omissions of the
                      same magnitude as fiscal year 2002 would add more than $200 million
                      annually to the totals projected for the public and private sectors in the
                      Army’s future-years report. Similarly, in its respective projections, the
                      Navy continued to not report depot maintenance accomplished with, but
                      not directly related to nuclear refueling; the Marine Corps underreported
                      work from the acquisition command; and the Air Force contract estimates
                      again involved some questionable estimating factors and assumptions.
                      Overall, we found this year as in the past that the services tend to place
                      less emphasis and priority on collecting and validating the future-years
                      data compared to efforts on the prior-years data.

                      Besides errors in reporting, other internal and external factors can create
                      large fluctuations in reported data, which in turn can provide a distorted
                      and misleading view to outside observers about efforts to remain
                      compliant with the 50-50 requirement. For example, in the current future-
                      years report, the Air Force’s projected public-sector work financed
                      through the working capital fund is about $3.0 billion higher than the total
                      amount reported for the same 4-year time period in the future-years report


                      Page 12                                        GAO-03-1023 Depot Maintenance
                         submitted in 2002. Although this would appear to indicate a large influx of
                         new work to the public depots, in reality the amount of work, according to
                         budget estimates and management reports, is expected to remain fairly
                         level during this reporting period in terms of production hours and size of
                         workforce. Most of the dollar (and percentage) increase in public-sector
                         work is the result of price hikes in the sales rate charged to its customers.
                         Price hikes were caused primarily by increases in the cost of spare and
                         repair parts that were used in the repair process.

                         The future-year estimates are not reasonable because they represent
                         budget and planning data that change over time, incorporate the same
                         errors found in prior-year data, and also have other problems. The budget
                         and planning data used to project the share of depot maintenance work to
                         be performed in the public and private sectors in the future are estimates.
                         At best, they provide only rough estimates of future funding allocations;
                         and these estimates change over time. As an illustration, our comparison
                         of the consistency of the 2003 reported data with that in DOD’s 50-50
                         reports submitted in 2002 showed that congressional and DOD decision
                         makers were given quite a different view this year of the public-private
                         sector workload mix than that presented just last year. With so many
                         errors and frequent changes, the future-years data may be misleading and
                         not very useful to congressional and DOD decision makers, particularly
                         the further estimates are in the future. While we have identified these
                         shortcomings in the past, the problems continue and show no signs of
                         getting better.

                         DOD officials agreed that the planning and budget data available for
                         making future projections beyond the budget year are not very useful as
                         predictors of the balance of future workloads between the public and
                         private sectors. They also noted that when the services are within a few
                         percentage points of the 50-50 ceiling, as they are now, the accuracy of the
                         conclusions drawn from the unreliable future projections does not provide
                         a very good basis for forecasting the future.


                         Despite prior improvements, opportunities continue to exist to make 50-50
Opportunities Exist to   data a more complete and accurate representation of the balance of
Improve DOD              funding for depot maintenance work assigned to the public and private
                         sectors. First, streamlining the 50-50 report would offer an opportunity to
Reporting                focus improvement efforts on the data where improvements are most
                         likely to be realized. Second, continued participation of the service audit
                         agencies should improve the quality of the 50-50 data, particularly if the
                         audit support is timely to allow for corrections to be made before the 50-50


                         Page 13                                         GAO-03-1023 Depot Maintenance
                           report goes to the Congress. Finally, there are opportunities to improve
                           the data development process.


Streamlining the 50-50     As previously discussed, the future-years dataparticularly that estimated
Report                     for the years beyond the current year and budget yeardo not provide a
                           reasonable estimate of the future balance of funding for depot
                           maintenance between the public and private sectors. Further, the data may
                           be so bad as to be misleading. Streamlining the data collected to provide
                           data for a shorter period of time could allow responsible officials to focus
                           more closely on the data that are more accurate. Additionally, if the report
                           date to the Congress were extended, the report could be based on more
                           actual costs and require fewer projections, improving the quality of the
                           reported data.


Participation of Service   While we continue to believe that the service audit agencies could help the
Audit Agencies             military departments improve 50-50 reporting, their future involvement is
                           uncertain. As we have reported in the past, auditor involvement typically
                           identified and corrected substantial errors in the data before the 50-50
                           reports went to the Congress. However, this year the Air Force Audit
                           Agency did not participate; while the Army did participate, some of the
                           errors they identified were not corrected in the reports to the Congress;
                           and the Navy audit was not done in time to result in changes to the 50-50
                           data submitted to the Congress. A more meaningful review would be one
                           that was carried on when the data are being aggregated, with input to the
                           process in time to influence the reported data. DOD officials told us that
                           the audit services were not expecting to work on future 50-50 efforts.
                           Audit services are reconsidering their roles because of recent changes to
                           government auditing standards regarding auditor independence when
                           performing both audit and nonaudit management assistance services to
                           the same client.12

                           Air Force auditors have had a positive role in the 50-50 process in past
                           years. Serving in an advisory capacity, they identified errors and cognizant
                           program officials made corrections before the Air Force input was
                           finalized and forwarded to the Office of the Secretary of Defense. This
                           year, however, Air Force auditors decided not to participate. Officials said



                           12
                             See revised standards in U.S. General Accounting Office, Government Auditing
                           Standards: 2003 Revision, GAO-03-673G (Washington, D.C.: June 1, 2003).




                           Page 14                                               GAO-03-1023 Depot Maintenance
                      they were concerned about conflict of interest because auditors
                      participating in the management services review could also be involved in
                      audit service reviews of depot maintenance programs, processes, and
                      funds. While Army auditors participated in the process during this year’s
                      cycle and some of their work influenced changes in this year’s reported
                      data, some errors were not corrected because of time constraints imposed
                      by the 50-50 reporting schedule. Army officials said the Army Audit
                      Agency would not likely be involved in next year’s 50-50 process primarily
                      because of concerns about independence. Navy auditors became involved
                      in the process this year after we recommended their participation in prior
                      reports. However, the Navy Audit Service work was not done in time to
                      influence the Navy’s 50-50 report. According to audit service officials, their
                      decision to do an audit of the data after it was submitted rather than
                      providing advisory services to cognizant officials developing the Navy’s 50-
                      50 report was influenced by the before-mentioned change in audit
                      standards. Navy program officials said that because a post-process audit
                      did not improve the 50-50 data, the audit service would not be used next
                      year.

                      We recognize that recent changes in government auditing standards have
                      been made to better address and specify independence issues arising
                      when an audit organization undertakes both audit and nonaudit services
                      for the same client. Nonetheless, the new auditing standards do not
                      preclude auditors from verifying the accuracy of data; providing other
                      technical assistance to the 50-50 process; and accomplishing other audits
                      of the depot maintenance process, programs, and activities. Improved
                      planning, management involvement, and documentation of roles and
                      responsibilities may be required; but a process can be developed to ensure
                      independence will not be compromised. This has already been done so
                      that the service audit agencies can perform similar functions—evaluating
                      validity and consistency of data as it is being developed for subsequent
                      decision making—in support of the base realignment and closure process.


Improving the Data    Incremental improvements in data development were noticeable in the
Development Process   first several years of 50-50 reporting as guidance was clarified and
                      expanded. However, as we reported last year, the quality of the 50-50 data
                      is not continuing to improve as it did in earlier years of the reporting
                      requirement.13 Overall quality and direction of DOD’s reporting seems to


                      13
                           GAO-03-16.




                      Page 15                                         GAO-03-1023 Depot Maintenance
              have reached a plateau where further major improvements have been
              limited. As we have previously discussed, one of the reasons this has
              occurred is that 50-50 guidance was not always distributed to the people
              who needed it. Further, significant turnover of personnel responsible for
              developing the data without providing sufficient time and training to
              familiarize them regarding the 50-50 requirement and process adversely
              affected the quality of the 50-50 data. In short, the priority afforded this
              process by management at all levels in the department is not sufficient to
              ensure that the data are as accurate as possible.


              Continuing errors and omissions in the data for both the prior- and future-
Conclusions   years reports indicate that each of the service components is closer to
              exceeding the limitation on percentage of work permitted to be performed
              by the private sector than DOD’s reporting would indicate. At best, DOD’s
              data over time should be treated as providing a rough approximation of
              the allocation of depot maintenance workloads between the public and
              private sectors with some indication of trends. As such, the information on
              actual prior-years allocations can be useful to the Congress in its oversight
              role and to DOD officials in deciding support strategies for new systems
              and in evaluating depot policies and practices. On the other hand, because
              it provides an increasingly less reliable estimate of projected allocations
              the further it gets from the current year, the future-years report is not a
              very useful tool for informing the Congress or DOD officials about likely
              future compliance. This occurs because of the changing nature of
              projections, a combination of errors and omissions, less emphasis by the
              services on the collection and validation of future-years data, and the use
              of ever-changing budgetary estimates to construct projections. These
              budgetary estimates—and built-in assumptions—become more inexact
              and more problematic the further into the future the projections are made
              due to their very speculative and volatile natures. Indeed, tracking the 50-
              50 projected data from year to year reveals wide swings in the total
              amounts reported and in the relative allocations to the public and private
              sectors. As a result, congressional and DOD decision makers were given
              quite a different view this year of the public-private sector workload mix
              than that presented just last year. We believe that these problems are
              likely to continue and we question the cost-effectiveness of collecting and
              aggregating data for 3 years past the current and budget years given the
              problems identified with the estimates.

              Furthermore, after the first several years of 50-50 reporting, the overall
              quality of DOD reporting in terms of accuracy and completeness has not
              improved significantly. Indeed, the overall quality and direction seem to


              Page 16                                         GAO-03-1023 Depot Maintenance
                      have reached a plateau where further major improvements to reporting
                      may be unachievable and where the environmental factors that complicate
                      reporting are not expected to change much. These complicating factors—
                      including a burdensome collection process, tight timeframes for collecting
                      data, high staff turnover, uneven management attention, changing
                      concepts about maintenance organization and delivery—present
                      continued challenges to the services in their ability to make significant
                      improvements to their collection, documentation, and reporting processes.
                      Notwithstanding these constraints, opportunities still exist to improve the
                      reporting, including continued use of the audit services and renewed
                      efforts to ensure guidance is appropriately disseminated and staff trained
                      in its use.


                      Given that we continue to see the same problems and complicating factors
Matter for            in our current and past assessments of 50-50 reports and considering that
Congressional         the volatile nature of budget estimates is not likely to change, the
                      Congress should consider amending 10 U.S.C. 2466 to require only one
Consideration         annual 50-50 report. The single report would cover a 3-year period (prior
                      year, current year, and budget year) for which the data are generally more
                      reliable and the potential impacts more immediate. The Congress should
                      also consider extending the due date for the single report from February 1
                      of each year to April 1; this would provide more time for the military
                      departments to collect and validate data and allow for the incorporation of
                      more actual cost data for the current year estimate.


                      To enhance data verification and validation, we recommend that the
Recommendations for   Secretary of Defense require the secretaries of the military departments to
Executive Action      direct the use of service audit agencies, or an agreed-upon alternate
                      method, for third-party review and validation of 50-50 data and to ensure
                      that auditor-identified errors in the data are rectified before reports are
                      submitted to the Congress.

                      To ensure consistent and complete reporting, we recommend that the
                      Secretary of Defense direct the secretaries of the military departments to
                      ensure that 50-50 reporting guidance is appropriately disseminated to
                      reporting organizations and individuals and that staff are properly and
                      timely trained in the application of the guidance.




                      Page 17                                        GAO-03-1023 Depot Maintenance
                     In written comments on a draft of this report from the Deputy Under
Agency Comments      Secretary of Defense for Logistics and Materiel Readiness, DOD concurred
and Our Evaluation   with the report’s recommendations. However, the department did not
                     agree with limited portions of our analyses regarding some selected
                     workloads and the resulting impacts on the percentage allocation of funds
                     between the public and private sectors. These workloads involve the
                     Navy’s nuclear carrier refueling and surface ship inactivation and the Air
                     Force’s adjustment for general and administrative expenses and double
                     counting of some reparable workloads. DOD’s written comments, and our
                     evaluation of these items in question, are reprinted in appendix III.


                     We are sending copies of this report to congressional committees; the
                     Secretary of Defense; the Secretaries of the Army, the Navy, and the Air
                     Force; and the Director, Office of Management and Budget. We will make
                     copies available to others upon request. In addition, the report will be
                     available at no charge on the GAO Web site at http://www.gao.gov.

                     If you or your staff has questions regarding this report, please contact me
                     at (202) 512-8412 or holman@gao.gov or Julia Denman, Assistant Director,
                     at (202) 512-4290 or denmanj@gao.gov. Other major contributors to this
                     report were David Epstein, Bruce Fairbairn, Jane Hunt, Larry Junek,
                     Robert Malpass, Andy Marek, Marjorie Pratt, John Strong, and Bobby
                     Worrell.




                     Barry W. Holman
                     Director, Defense Capabilities
                     and Management




                     Page 18                                        GAO-03-1023 Depot Maintenance
                    Appendix I: GAO Adjustments for Errors,
Appendix I: GAO Adjustments for Errors,
                    Omissions, and Inconsistencies in Military
                    Departments 50-50 Data for Fiscal Year 2002


Omissions, and Inconsistencies in Military
Departments 50-50 Data for Fiscal Year 2002
                    Our review of the data supporting the Department of Defense’s (DOD)
                    prior-years report identified errors, omissions, and inconsistencies that, if
                    corrected, would revise the total workloads and increase the private-
                    sector allocations for each of the military departments. Brief descriptions
                    of the larger and more extensive problems found follow the adjusted
                    figures.


                    Our review of fiscal year 2002 data reported by the Army and of supporting
Department of the   documentation for selected activities identified errors, omissions, and
Army                inconsistencies that, if corrected, would result in significant adjustments
                    in the public and private sector percentages reported to the Congress, as
                    shown in table 2.

                    Table 2: GAO Changes to Army’s FY 2002 50-50 Data

                     Dollars in millions
                     Public work reported                     $1,372.6                 51.5%
                        Net adjustments                            50.9
                     Public work adjusted                     $1,423.5                 49.2%


                     Private work reported                    $1,238.7                 46.5%
                        Net adjustments                           177.0
                     Private work adjusted                    $1,415.7                 49.0%


                     Private work exempted                        $51.4                 1.9%
                        Net adjustments                              0
                     Exempted adjusted                            $51.4                 1.8%
                    Source: GAO analysis of DOD data.



                    Errors we found included the following examples:

                    •     Unreported depot-level work associated with the Army’s ongoing
                          efforts to consolidate maintenance activities and craft a national
                          maintenance program. Our prior 50-50 reports have documented
                          continuing problems and shortcomings in accurately and consistently
                          reporting depot maintenance accomplished by both public and private
                          sector sources at nondepot locations.




                    Page 19                                               GAO-03-1023 Depot Maintenance
                    Appendix I: GAO Adjustments for Errors,
                    Omissions, and Inconsistencies in Military
                    Departments 50-50 Data for Fiscal Year 2002




                    •     Unreported one-time repair actions. These are depot repairs that are
                          accomplished at non-depot locations following an organization’s
                          request and approval to do this work on a limited basis.

                    •     Unreported work by commands that did not receive Army reporting
                          guidance and other misreported and understated work by some
                          commands that received but misapplied the guidance.

                    •     Other adjustments included (1) errors identified by the Army Audit
                          Agency but not corrected in the data sent to the Office of the Secretary
                          of Defense (OSD) for inclusion in the prior-years 50-50 report to the
                          Congress; and (2) depot support work identified in a contractor’s study
                          of the proliferation of depot work at non-depot locations.


                    Our review of fiscal year 2002 data reported by the Navy and Marine Corps
Department of the   and of supporting documentation for selected activities identified errors,
Navy                omissions, and inconsistencies that, if corrected, would result in
                    significant adjustments in the public and private sector percentages
                    reported to the Congress, as shown table 3.

                    Table 3: GAO Changes to Navy’s and Marine Corps’ FY 2002 50-50 Data

                     Dollars in millions
                     Public work reported                        $5,258.1               54.5%
                        Net adjustments                           (115.5)
                     Public work adjusted                        $5,142.6               50.8%


                     Private work reported                       $4,110.4               42.6%
                        Net adjustments                            640.9
                     Private work adjusted                       $4,751.3               46.9%


                     Private work exempted                        $273.1                 2.8%
                        Net adjustments                            (40.7)
                     Exempted adjusted                            $232.4                 2.3%
                    Source: GAO analysis of DOD data.

                    Note: Numbers in parentheses are negative.




                    Page 20                                                 GAO-03-1023 Depot Maintenance
                        Appendix I: GAO Adjustments for Errors,
                        Omissions, and Inconsistencies in Military
                        Departments 50-50 Data for Fiscal Year 2002




                        Errors we found included the following examples:

                        •   Unreported depot work on nuclear aircraft carriers. As reported last
                            year, Navy officials cite the definition in 10 U.S.C. 2460, which excludes
                            from depot maintenance the nuclear refueling of aircraft carriers, in
                            justifying why they do not report any of the depot work accomplished
                            at the same time as refueling. We believe that depot work that is
                            reportable elsewhere and separate from the refueling tasks should be
                            reported.

                        •   Inconsistent reporting of ship inactivations, which include depot tasks
                            for servicing and preserving equipment before they are placed in
                            storage or in an inactive status. Navy officials report for 50-50 purposes
                            the nuclear ship inactivation work performed in the public sector but
                            do not report surface ship inactivation work performed by the private
                            sector.

                        •   Underreporting of maintenance work by the command responsible for
                            acquiring and upgrading Marine Corps weapon systems. Failure to
                            report has several causes, including misunderstanding of what should
                            be reported, limited dissemination of the 50-50 guidance, and
                            inadequate management and oversight of the collection process to
                            identify and resolve reporting deficiencies.

                        •   Incorrectly exempting some private-sector activities from reporting.
                            The Navy exempted more work than did the other departments; but we
                            found some in error, including partnering work accomplished at a
                            contractor facility and some work actually performed by government
                            employees. Partnership work qualifying for the exemption must be
                            accomplished at designated public depots by contractor employees.

                        •   Other errors included (1) work subcontracted by the public shipyards
                            to the private sector reported as public sector work and (2)
                            misreporting by the Marine Corps of work obligated in fiscal year 2001
                            rather than 2002.


                        Our review of fiscal year 2002 data reported by the Air Force and of
Department of the Air   supporting documentation for selected activities identified errors,
Force                   omissions, and inconsistencies that, if corrected, would result in
                        significant adjustments in the public and private sector percentages
                        reported to the Congress, as shown in table 4.




                        Page 21                                          GAO-03-1023 Depot Maintenance
Appendix I: GAO Adjustments for Errors,
Omissions, and Inconsistencies in Military
Departments 50-50 Data for Fiscal Year 2002




Table 4: GAO Changes to Air Force’s FY 2002 50-50 Data

 Dollars in millions
 Public work reported                        $4,467.0               54.1%
    Net adjustments                           (547.9)
 Public work adjusted                        $3,919.1               51.4%


 Private work reported                       $3,781.4               45.8%
    Net adjustments                            (82.5)
 Private work adjusted                       $3,698.9               48.5%


 Private work exempted                         $11.9                 0.1%
    Net adjustments                                0
 Exempted adjusted                             $11.9                 0.2%
Source: GAO analysis of DOD data.

Note: Numbers in parentheses are negative.


Errors we found included the following examples:

•     As in past years, Air Force officials continue to adjust the 50-50 data for
      the salaries and overhead expenses of government employees
      administering depot maintenance contracts funded through the
      working capital fund. Officials subtract these amounts from the
      reported private sector amount—where they are accounted for within
      the working capital fund—and add them to the public sector funding
      for 50-50 reporting. Consistent with the 50-50 guidance that states that
      costs should be associated with the end product, we think these costs
      should be treated as contracting expenses.

•     Our review of Air Force workloads determined that funding for some
      component repairs was counted twice in 50-50 data, once when the
      item was repaired and the second time when it was installed into a
      weapon system or major subsystem during its overhaul. This resulted
      in overstating both public sector work and, by a lesser amount, private
      sector work.

•     Errors occurred in reporting depot costs on interim contractor support
      and contractor logistics support contracts. Our review of selected
      programs identified numerous errors resulting in net underreporting of
      depot maintenance work performed by contractors. Many problems
      resulted from questionable factors and assumptions used in developing


Page 22                                                 GAO-03-1023 Depot Maintenance
Appendix I: GAO Adjustments for Errors,
Omissions, and Inconsistencies in Military
Departments 50-50 Data for Fiscal Year 2002




    estimating methodologies. Because interim contractor support and
    contractor logistics support contracts often cover more than just depot
    maintenance (including lower levels of maintenance, supply
    operations, and logistics program management), the OSD guidance
    allows for the use of estimating methods. This can cause complications
    and introduce subjectivity into the data collection process. Newer
    contract approaches under acquisition reform efforts pose particularly
    challenging problems in identifying the depot portion.

Examples of errors and questionable practices we found included

•   not updating a methodology when contract provisions and
    circumstances change, resulting in not reporting additional
    maintenance work from increased operational contingencies and new
    orders of materials;
•   assuming a straight percentage of total cost as depot work where data
    exists to make a more exact accounting;
•   not reporting maintenance on a newly acquired modification; and
•   not reporting software depot maintenance.




Page 23                                        GAO-03-1023 Depot Maintenance
              Appendix II: Scope and Methodology
Appendix II: Scope and Methodology


              To determine whether the military departments met the 50-50 requirement
              in the prior-years report, we analyzed each service’s procedures and
              internal management controls for collecting and reporting depot
              maintenance information for purposes of responding to the section 2466
              requirement. We reviewed supporting details (summary records,
              accounting reports, budget submissions, and contract documents) at
              departmental headquarters, major commands, and selected maintenance
              activities. We compared processes to determine consistency and
              compliance with legislative provisions, OSD guidance, and military service
              instructions. We selected certain programs and maintenance activities for
              a more detailed review.1 We particularly examined reporting categories
              that DOD personnel and we had identified as problem areas in current and
              past reviews. These areas included interserviced workloads,2 contractor
              logistics support, warranties, software maintenance, and depot
              maintenance at nondepot locations. We evaluated processes for collecting
              and aggregating data to ensure accurate and complete reporting and to
              identify errors, omissions, and inconsistencies. We coordinated our work,
              shared information, and obtained results of the Army and Air Force
              service audit agencies’ data validation efforts.

              To determine whether the future-year projections were based on accurate
              data, valid assumptions, and existing plans and represented reasonable
              estimates, we followed the same general approach and methodology used
              to review the prior-years report. Although the future-years report is a
              budget-based projection of obligations, the definitions, guidance,
              organization, and processes used to report future data are much the same
              as for the prior-years report of actual obligations. We discussed with DOD
              officials the main differences between the two processes and the manner
              in which the data were derived from budgets and planning requirements
              and key assumptions made in the outyear data.

              For reviews of both 50-50 reports, we performed certain checks and tests,
              including variance analyses, to judge the consistency of this information
              with data from prior years and with the future-years budgeting and


              1
               We selected the programs reviewed based on size and importance, leads obtained from
              internal auditors, and any previously identified areas of concern. Given the nature of our
              sample, the results are not projectible to the universe of depot maintenance activities. We
              also did not audit the integrity of DOD’s financial systems and accounting data used to
              prepare the 50-50 reports.
              2
               Interserviced workload is maintenance that one military service performs on equipment
              owned and funded by another service.




              Page 24                                                  GAO-03-1023 Depot Maintenance
Appendix II: Scope and Methodology




programming data used in DOD’s budget submissions and reports to the
Congress. For example, we compared each service’s 50-50 data reported in
February and April 2003 for the period 2001 through 2006 with data
reported for these same years in the 50-50 reports submitted in 2002. We
found repeated and significant changes, even though the estimates were
prepared only about 1 year apart. We used this analysis to further discuss
with officials and analyze reasons for changes in reported data and
percentage allocations between the 2002 and 2003 reports submitted to the
Congress. Variance analysis showed that congressional and DOD decision
makers were given quite a different view of the public-private sector
workload mix than that presented just last year.

Several factors concerning data validity and completeness were
considered in our methodology and approach to reviewing the prior- and
future-years reports. One key factor is the continuing deficiencies we
have noted in DOD’s financial systems and reports that preclude a clean
opinion on its financial statements and that result in limited accuracy of
budget and cost information. Another factor is that documenting depot
maintenance workload allocations between the public and private sectors
is becoming more complicated by the consolidation of maintenance
activities and the performance of depot-level maintenance at field
locations. These complicating factors (1) make it more difficult to identify
work that meets the statutory definition of depot maintenance,
(2) complicate workload reporting, and (3) result in underreporting of
depot maintenance for both the public and private sectors. In addition,
changes in business philosophy and approach can make analysis more
difficult. For example, many new contracts are performance-based and
may not discretely identify maintenance activities or account separately
for their costs. This can result in under- and overreporting of depot
maintenance work performed in the private sector. It also forces more
reliance on the contractor for providing information needed in 50-50
reporting and may result in DOD officials having to use more assumptions
and estimating methodologies in lieu of contract data.

As part of our efforts to identify areas for improvement, we reviewed
DOD’s efforts to improve the accuracy and completeness of reports. We
discussed with officials managing and coordinating the reporting process
their efforts to address known problem areas and respond to
recommendations by the audit agencies and us. We compared this year’s
sets of instructions with last year’s to identify changes and additions. We
reviewed efforts to identify reporting sources and to distribute guidance
and taskings. We asked primary data collectors to provide their opinions
on how well efforts were managed and data verified and to identify “pain


Page 25                                        GAO-03-1023 Depot Maintenance
Appendix II: Scope and Methodology




points” and ideas they had to improve reporting. We reviewed prior
recommendations and service audit agency findings to determine whether
known problem areas were being addressed and resolved. We applied this
knowledge to identify additional areas for improving the reporting process
and management controls.

We interviewed officials, examined documents, and obtained data at OSD,
Army, Navy, Marine Corps, and Air Force headquarters in the Washington,
D.C., area; Army Materiel Command in Alexandria, Virginia; Naval Sea
Systems Command in Washington, D.C.; Naval Air Systems Command in
Patuxent River, Maryland; Marine Corps Materiel Command in Albany,
Georgia; Air Force Materiel Command in Dayton, Ohio; Army Audit
Agency in Washington, D.C.; Naval Audit Service in Crystal City, Virginia;
several public depots managed by the military departments’ materiel
commands; and selected operating bases. We conducted our review from
February to July 2003 in accordance with generally accepted government
auditing standards.




Page 26                                       GAO-03-1023 Depot Maintenance
                                      Appendix III: Comments from the Department
Appendix III: Comments from the       of Defense



Department of Defense

Note: GAO’s comments
supplementing those in
the report text appear at
the end of this appendix.




                            Page 27                                          GAO-03-1023 Depot Maintenance
                              Appendix III: Comments from the Department
                              of Defense




Report language
is now on p. 18.




 Report language
 is now on p. 18.




                    Page 28                                          GAO-03-1023 Depot Maintenance
                                Appendix III: Comments from the Department
                                of Defense




 Report language is
 now on p. 17.




Report language is
now on p. 21. See
also p. 10.



See comment 1.




See comment 2.




                      Page 29                                          GAO-03-1023 Depot Maintenance
                                      Appendix III: Comments from the Department
                                      of Defense




Report language is now
on p. 23. See also p. 11.




See comment 3.




Report language is now
on p. 23. See also p. 11.


See comment 4.




                            Page 30                                          GAO-03-1023 Depot Maintenance
                          Appendix III: Comments from
                          the Department of Defense




               The following are GAO’s comments on the Department of Defense’s letter
               dated August 26, 2003.

               1. The department did not agree with our adjustment for nuclear aircraft
GAO Comments      carriers. The Navy interprets the 10 U.S.C. 2460 exclusion of nuclear
                  refueling of aircraft carriers from the definition of depot maintenance
                  to mean that no work associated with the refueling complex overhaul
                  of nuclear carriers is reportable for 50-50 purposes. Navy officials also
                  said that non-nuclear depot repairs on carriers are not severable tasks
                  to be split out from contracts. We continue to believe that the costs of
                  depot repairs and tasks not directly associated with nuclear refueling
                  tasks during carrier overhauls should be reported. Many maintenance
                  tasks performed at the same time as the nuclear refueling are not
                  related to the refueling; and when these and similar tasks are
                  performed during other maintenance activities, the Navy does report
                  them as depot maintenance. We found that the funding for these tasks
                  is clearly identifiable in the contract financial records and could be
                  counted just like other 50-50 work. In our view, without some nexus
                  between that work and refueling work, it would be inconsistent with
                  the plain language of section 2460 to exempt that work simply because
                  it was performed during a refueling complex overhaul of nuclear
                  carriers. We deleted the reference to severable tasks in the body of the
                  report, as our intent was not to suggest that the Navy break out non-
                  nuclear work from nuclear work onto separate contracts or work
                  orders, but rather that the funding for non-nuclear refueling work
                  accomplished on existing contracts be identified and reported.

               2. The department did not agree with our adjustment for surface ship
                  inactivations. DOD considers nuclear ship inactivation work to be a
                  relatively complex process that is equivalent to depot level
                  maintenance, but that conventional ship inactivation work performed
                  by the private sector is not as complex and is not equivalent to depot-
                  level maintenance. In addition, the department’s written response
                  indicated that surface ship inactivation work accomplished by the
                  public sector is also not reported in the 50-50 data. We believe that
                  inactivation work should be reported because the relevant title 10
                  statutes and OSD’s 50-50 guidance do not make this distinction of
                  relative complexity and requires reporting of all depot maintenance,
                  regardless of location and source of funding. Further, DOD’s Financial
                  Management Regulation 7000.14-R, vol. 6A, ch. 14 (which prescribes
                  depot maintenance reporting requirements) includes inactivation as a
                  depot maintenance activity. Although we did not review inactivation



               Page 31                                        GAO-03-1023 Depot Maintenance
                 Appendix III: Comments from
                 the Department of Defense




      work accomplished by public sector workers, it should also be
      reported if it meets the definition of depot maintenance.

3. The Air Force did not agree with our reversal of the 50-50 reporting
   adjustment it makes for the salaries and overhead expenses of
   government employees administering depot maintenance contracts.
   The Air Force believes that the costs for government personnel
   managing depot maintenance contracts represent public sector costs;
   therefore, to report them as contract would misrepresent the public-
   private sector percentage allocations. However, OSD’s 50-50 guidance
   requires that all the costs associated with accomplishing a specific
   depot workload—labor, material, parts, indirect, and overhead—
   should be counted for 50-50 purposes in the sector accomplishing the
   actual maintenance. The guidance cites examples, such as counting the
   contract maintenance on depot plant equipment as public sector costs
   because the plant equipment is part of the costs incurred to perform
   maintenance at the depot. Similarly, we think that contract
   administrative costs should be counted as part of the costs incurred to
   accomplish the work in the private sector. We note that the Air Force
   will stop making this adjustment after this year when financing for the
   depot contracts is moved from the working capital fund to direct
   appropriations. It remains to be seen, however, how the Air Force will
   account for contract administrative expenses in the future.

4. The department did not agree that counting the repair costs twice for
   some components installed in higher level assemblies is inconsistent
   with the statutory requirements of 10 U.S.C. 2466(e) and 10 U.S.C.
   2460. The Air Force believes that the original repair cost for a
   component and its subsequent cost as material used in system or
   subsystem overhaul are two distinct and separate transactions and that
   both costs should be reported for 50-50 purposes. We continue to
   believe that counting some component repair costs twice when the
   components are incorporated in a higher-level assembly distorts the
   50-50 reports and the actual amount of work accomplished by both the
   public and private sectors. In our view, there is no reason to conclude
   that the intent of title 10 requires double counting component repairs
   and that a more reasonable reading is that DOD can implement those
   provisions so as to allow for adjustments in reporting to more
   accurately reflect the cost of depot work. DOD adopted a similar
   approach in response to a recommendation in our 2001 report.1 In that


1
    GAO-02-95.



Page 32                                        GAO-03-1023 Depot Maintenance
           Appendix III: Comments from
           the Department of Defense




    report, we found that unrealistic and outdated budget data were being
    reported when there were other, more accurate information sources.
    Accordingly, OSD revised its 50-50 guidance to allow for revising
    budgetary estimates to better reflect known and anticipated changes in
    workloads, workforce, priorities, and performance execution rates.
    This resulted in the Air Force reporting additional hundreds of millions
    of dollars in projected depot work based on current workload
    estimates. A similar approach could be used to eliminate the effects of
    double counting reparables later used in higher-level assemblies.




Page 33                                        GAO-03-1023 Depot Maintenance
                       Related GAO Products
Related GAO Products


             Depot Maintenance: Key Unresolved Issues Affect the Army Depot
             System’s Viability. GAO-03-682. Washington, D.C.: July 7, 2003.

             Department of Defense: Status of Financial Management Weaknesses
             and Progress Toward Reform. GAO-03-931T. Washington, D.C.: June 25,
             2003.

             Depot Maintenance: Change in Reporting Practices and Requirements
             Could Enhance Congressional Oversight. GAO-03-16. Washington D.C.:
             October 18, 2002.

             Depot Maintenance: Management Attention Needed to Further Improve
             Workload Allocation Data. GAO-02-95. Washington, D.C.: November 9,
             2001.

             Defense Logistics: Actions Needed to Overcome Capability Gaps in the
             Public Depot System. GAO-02-105. Washington, D.C.: October 12, 2001.

             Defense Maintenance: Sustaining Readiness Support Capabilities
             Requires a Comprehensive Plan. GAO-01-533T. Washington, D.C.:
             March 23, 2001.

             Depot Maintenance: Key Financial Issues for Consolidations at Pearl
             Harbor and Elsewhere Are Still Unresolved. GAO-01-19. Washington, D.C.:
             January 22, 2001.

             Depot Maintenance: Action Needed to Avoid Exceeding Ceiling on
             Contract Workloads. GAO/NSIAD-00-193. Washington, D.C.:
             August 24, 2000.

             Depot Maintenance: Air Force Waiver to 10 U.S.C. 2466.
             GAO/NSIAD-00-152R. Washington, D.C.: May 22, 2000.

             Depot Maintenance: Air Force Faces Challenges in Managing to 50-50
             Ceiling. GAO/T-NSIAD-00-112. Washington, D.C.: March 3, 2000.

             Depot Maintenance: Future Year Estimates of Public and Private
             Workloads Are Likely to Change. GAO/NSIAD-00-69. Washington, D.C.:
             March 1, 2000.

             Depot Maintenance: Army Report Provides Incomplete Assessment of
             Depot-type Capabilities. GAO/NSIAD-00-20. Washington, D.C.: October 15,
             1999.


             Page 34                                     GAO-03-1023 Depot Maintenance
                     Related GAO Products




           Depot Maintenance: Status of the Navy’s Pearl Harbor Project.
           GAO/NSIAD-99-199. Washington, D.C.: September 10, 1999.

           Depot Maintenance: Workload Allocation Reporting Improved, but
           Lingering Problems Remain. GAO/NSIAD-99-154. Washington, D.C.:
           July 13, 1999.

           Navy Ship Maintenance: Allocation of Ship Maintenance Work in the
           Norfolk, Virginia, Area. GAO/NSIAD-99-54. Washington, D.C.: February
           24, 1999.

           Defense Depot Maintenance: Public and Private Sector Workload
           Distribution Reporting Can Be Further Improved. GAO/NSIAD-98-175.
           Washington, D.C.: July 23, 1998.

           Defense Depot Maintenance: DOD Shifting More Workload for
           New Weapon Systems to the Private Sector. GAO/NSIAD-98-8.
           Washington, D.C.: March 31, 1998.

           Defense Depot Maintenance: Information on Public and Private Sector
           Workload Allocations. GAO/NSIAD-98-41. Washington, D.C.: January 20,
           1998.

           Defense Depot Maintenance: Uncertainties and Challenges DOD Faces in
           Restructuring Its Depot Maintenance Program. GAO/T-NSIAD-97-112.
           Washington, D.C.: May 1, 1997. Also GAO/T-NSIAD-97-111. Washington,
           D.C.: March 18, 1997.

           Defense Depot Maintenance: DOD’s Policy Report Leaves Future Role of
           Depot System Uncertain. GAO/NSIAD-96-165. Washington, D.C.: May 21,
           1996.

           Defense Depot Maintenance: More Comprehensive and Consistent
           Workload Data Needed for Decisionmakers. GAO/NSIAD-96-166.
           Washington, D.C.: May 21, 1996.

           Defense Depot Maintenance: Privatization and the Debate Over the
           Public-Private Mix. GAO/T-NSIAD-96-148. Washington, D.C.: April 17,
           1996. Also GAO/T-NSIAD-96-146. Washington, D.C.: April 16, 1996.

           Depot Maintenance: Issues in Allocating Workload Between the Public
           and Private Sectors. GAO/T-NSIAD-94-161. Washington, D.C.: April 12,
           1994.


(350315)
           Page 35                                     GAO-03-1023 Depot Maintenance
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