oversight

Defense Acquisitions: Further Action Needed to Improve DOD's Insight and Management of Long-term Maintenance Contracts

Published by the Government Accountability Office on 2012-05-31.

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

             United States Government Accountability Office

GAO          Report to the Subcommittee on
             Readiness, Committee on Armed
             Services, House of Representatives


May 2012
             DEFENSE
             ACQUISITIONS
             Further Action
             Needed to Improve
             DOD’s Insight and
             Management of Long-
             term Maintenance
             Contracts




GAO-12-558
                                               May 2012

                                               DEFENSE ACQUISITIONS
                                               Further Action Needed to Improve DOD's Insight
                                               and Management of Long-term Maintenance
                                               Contracts
Highlights of GAO-12-558, a report to
Subcommittee on Readiness, Committee on
Armed Services, House of Representatives




Why GAO Did This Study                         What GAO Found
DOD spends billions annually to                At the departmental level, neither the Department of Defense (DOD) nor the
maintain its weapon systems and, at            individual military departments know the extent to which weapon system
times, uses long-term maintenance              programs rely on long-term maintenance contracts. DOD policy requires DOD
contracts with a potential period of           and the military departments to approve acquisition strategies and lifecycle
performance of 5 years or more. These          sustainment plans, which include information on contractor support, but DOD
contracts can encourage contractors to         officials reported that they do not collect information on the use of long-term
invest in new facilities, equipment, and       contracts. DOD’s limited visibility over long-term maintenance contracts reflects
processes, but may hinder DOD’s                broader DOD challenges with managing services acquisition. GAO’s past work
ability to incentivize contractors’
                                               has identified the need for DOD to obtain better data on its contracted services to
performance and control costs,
                                               enable it to make more strategic decisions. DOD is considering a number of
especially in the absence of a
competitive environment or if DOD
                                               policy- and data-related initiatives that could improve its knowledge of these
does not acquire access to technical           contracts, but these efforts are in the early stages of development.
data that can enable DOD to select an          Decisions made early in the acquisition process can limit DOD’s ability to select
alternative maintenance provider.              alternative maintenance providers over the life cycle of a weapon system
GAO was asked to evaluate (1) the              program. Program officials believed that DOD had the ability to select alternative
extent to which DOD uses long-term             service providers for half of the contracts GAO reviewed, as DOD either had
maintenance contracts, (2) DOD’s               sufficient technical data or there was an existing competitive environment. DOD
ability to select alternative                  officials believed the lack of technical data, funding, or expertise would hinder
maintenance providers, and (3) how             them from selecting alternative service providers on the other contracts GAO
these contracts have been structured           reviewed. Recent legislation and DOD’s 2010 efficiency initiatives emphasize the
to incentivize performance and                 importance of technical data considerations. GAO found that eight weapon
manage cost. GAO reviewed a                    systems that underwent DOD acquisition-related reviews between October 2010
nongeneralizable sample of 10 long-            and October 2011 considered technical data issues, but not all have determined
term contracts to illustrate different         the extent to which they will acquire these data or the cost to do so.
maintenance approaches. GAO
interviewed program officials and              Once the decision is made to use long-term contracts, DOD faces choices on
reviewed contract documentation.               how to best incentivize contractor performance and manage costs. GAO found
GAO also reviewed information on               that the 10 long-term maintenance contracts reviewed varied in terms of the
eight programs recently reviewed by            incentives employed and tools used to gain insight into contractor costs. For
DOD to determine how these programs            example, GAO found that all 5 contracts with the longest durations, potentially
addressed technical data needs.                ranging from 9 to 22 years, used monetary incentives such as award or incentive
                                               fees, or contract term incentives that can extend the life of the contract by several
What GAO Recommends                            years. However, DOD and program officials expressed some concerns about the
GAO recommends that DOD collect                lack of insight on contractors’ costs. In two cases, program offices established
information on the extent to which             fixed prices for the entire potential length of the 9- and 15-year contracts without
DOD uses long-term maintenance                 the ability to renegotiate prices or obtain incurred cost data. In comparison to the
contracts and develop lessons learned          contracts with the longest durations, the five contracts GAO reviewed with
regarding the use of incentives and            maximum lengths of 5 years made less use of incentives or cost-control tools
cost-control tools. DOD concurred with         and generally did not have the ability to renegotiate contract prices, but program
each of the recommendations and                officials believed that the shorter-term nature of the contracts mitigated some of
indicated that it would develop                their risks. DOD does not collect information concerning the effectiveness of the
methodologies to implement them.               various incentives or cost control tools used on long-term maintenance contracts,
                                               but it has identified efforts made by individual programs to improve acquisition of
                                               maintenance services. Developing lessons learned on what incentives and cost-
                                               control tools work best would help inform future acquisition strategies and reduce
View GAO-12-558. For more information,
contact Belva M. Martin at (202) 512-4841 or   risk.
martinb@gao.gov or Cary Russell at (202)
512-5431 or russellc@gao.gov.
                                                                                        United States Government Accountability Office
Contents


Letter                                                                                      1
               Background                                                                   4
               DOD Does Not Know the Extent to Which It Relies on Long-term
                 Maintenance Contracts                                                      8
               Early Acquisition Decisions Limit DOD’s Ability to Select
                 Alternative Maintenance Providers                                        14
               Programs Use Different Approaches to Incentivize Performance
                 and Obtain Insights into Contractor Costs                                21
               Conclusions                                                                28
               Recommendations for Executive Action                                       28
               Agency Comments and Our Evaluation                                         29

Appendix I     Scope and Methodology                                                      30



Appendix II    Comments from the Department of Defense                                    33



Appendix III   GAO Contact and Staff Acknowledgments                                      35



Tables
               Table 1: Selected Characteristics of Long-term Maintenance
                        Contracts Reviewed by GAO                                         12
               Table 2: Impact of Technical Data Access on Ability to Change
                        Maintenance Service Providers for the Contracts GAO
                        Reviewed                                                          15
               Table 3: Weapon System Programs’ Plans to Acquire Technical
                        Data during Development and Production                            19
               Table 4: Longer-term Contracts’ Use of Incentives and Tools to
                        Control Costs                                                     22
               Table 5: Program Offices’ Use of Incentives and Tools to Control
                        Costs on Shorter Duration Maintenance Contracts GAO
                        Reviewed                                                          25




               Page i                               GAO-12-558 Long-term Maintenance Contracts
Abbreviations

USD(AT&L)                  Office of the Under Secretary of Defense for
                            Acquisition, Technology, and Logistics
JSTARS                     Joint Surveillance Target Attack Radar System
DOD                        Department of Defense
FPDS-NG                    Federal Procurement Data System-Next
                            Generation


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Page ii                                       GAO-12-558 Long-term Maintenance Contracts
United States Government Accountability Office
Washington, DC 20548




                                   May 31, 2012

                                   The Honorable J. Randy Forbes
                                   Chairman
                                   The Honorable Madeleine Z. Bordallo
                                   Ranking Member
                                   Subcommittee on Readiness
                                   Committee on Armed Services
                                   House of Representatives

                                   The Department of Defense (DOD) spends billions of dollars each year
                                   on operating and support costs for weapon systems, including for
                                   maintenance, engineering support, and personnel. Such costs historically
                                   account for approximately 70 percent of a weapon system’s total life-cycle
                                   cost. 1 Among such expenses are those associated with depot-level repair
                                   of weapon systems, which includes overhaul, upgrades, and rebuilding of
                                   parts and assemblies. According to a recent DOD report, the department
                                   spent approximately $33 billion in fiscal year 2010 to maintain its weapon
                                   systems through both government and commercial providers. In some
                                   instances, DOD may determine that depot-level maintenance will be
                                   performed through a contractor using long-term contracts for
                                   maintenance services that can span more than a decade. DOD officials
                                   note that a long-term contract can encourage contractors to invest in new
                                   facilities, equipment, and processes, but may also hinder the
                                   government’s ability to appropriately incentivize the contractor’s
                                   performance and control costs, especially in the absence of a competitive




                                   1
                                    According to DOD officials, operating and support costs generally range from 60 to 80
                                   percent of a weapon system’s total costs, depending on the weapon system type.
                                   According to DOD, product support encompasses materiel management, distribution,
                                   technical data management, maintenance, training, cataloging, configuration
                                   management, engineering support, repair parts management, failure reporting and
                                   analysis, and reliability growth.




                                   Page 1                                       GAO-12-558 Long-term Maintenance Contracts
environment or if the government does not acquire access to the
technical data needed to maintain the weapon system. 2

In May 2011, GAO reported that DOD continues to face challenges that
could undermine competition of maintenance contracts, including
shortcomings in how programs’ technical data rights requirements
necessary for competition are determined. 3 Additionally, GAO has
previously reported on DOD’s increased reliance on contractors for
maintenance and other logistics support for its weapon systems,
management challenges associated with the acquisition of major weapon
systems, and the department’s lack of insight into costs associated with
depot maintenance and other weapon support contracts. 4 Consequently,
given these issues and the long-term nature of certain maintenance
contracts, you requested that we review various aspects of DOD’s use of
long-term contracts for maintaining its weapon systems. To address this
request, we evaluated (1) the extent to which DOD uses long-term
maintenance contracts to support major weapon system programs, (2)
DOD’s ability to select alternative maintenance services providers for its
major weapon system programs, and (3) how long-term maintenance
contracts have been structured to incentivize contractors’ performance
and manage contractor costs.

For the purposes of this report, we defined long-term maintenance
contracts as those with a potential period of performance of five years or


2
  Defense Federal Acquisition Regulation Supplement contract clause 252.227-7013
defines technical data as “recorded information, regardless of the form or method of the
recording of a scientific or technical nature (including computer software documentation)...
[but not including] computer software or data incidental to contract administration, such as
financial and/or management information.” Technical data for weapon systems includes
drawings, specifications, standards, and other details necessary to ensure the adequacy
of item performance, as well as manuals that contain instructions for installation,
operation, maintenance, and other actions needed to support weapon systems. GAO,
Defense Acquisition: DOD Should Clarify Requirements for Assessing and Documenting
Technical-Data Needs, GAO-11-469 (Washington, D.C.: May 11, 2011).
3
GAO-11-469.
4
 GAO, Defense Management: DOD Needs to Reexamine its Extensive Reliance on
Contractors and Continue to Improve Management and Oversight, GAO-08-572T
(Washington, D.C.: Mar. 11, 2008); Defense Acquisitions: Assessments of Selected
Weapon Programs, GAO-10-388SP (Washington, D.C.: Mar. 30, 2010); and Defense
Logistics: Improvements Needed to Enhance Oversight of Estimated Long-term Costs for
Operating and Supporting Major Weapon Systems, GAO-12-340 (Washington, D.C.: Feb.
2, 2012).




Page 2                                        GAO-12-558 Long-term Maintenance Contracts
more that provide depot-level maintenance services or support
performance of maintenance functions. Further, this report focuses on the
policies and practices that pertain to major defense acquisition
programs. 5 To determine the extent to which DOD uses long-term
maintenance contracts, GAO discussed with DOD and military
department officials the data DOD collects on maintenance approaches
and related contract information and reviewed various reports, including
Distribution of DOD Depot Maintenance Workload, as well as DOD’s
analysis of Federal Procurement Data System-Next Generation (FPDS-
NG) data related to maintenance services. 6 After determining department-
wide data concerning the use of such contracts was unavailable, we
worked with military department officials to identify long-term
maintenance contracts used by major weapon system programs. Based
on these discussions, we reviewed 10 long-term contracts supporting
seven major defense acquisition programs. We selected these contracts
to represent each of the three military departments and to illustrate
different maintenance approaches.

To determine the extent to which major weapon system programs could
select alternate maintenance services providers, we reviewed acquisition
plans and interviewed program officials to obtain their insight on the
factors that would hinder or facilitate the department’s ability to do so. We
also interviewed program officials and reviewed documents on eight
major defense acquisition programs identified by the Office of the Under
Secretary of Defense for Acquisition, Technology, and Logistics
(USD(AT&L)) as having a major acquisition review between October 2010
and October 2011 to determine whether program officials had considered
technical data rights in their acquisition strategies or life-cycle
sustainment plans submitted as part of these reviews.

To determine how long-term maintenance contracts were structured to
incentivize performance and provide insight into costs, we reviewed



5
 Major defense acquisition programs are those estimated by the Under Secretary of
Defense for Acquisition, Technology, and Logistics to require an eventual total
expenditure of more than $365 million for research, development, test, and evaluation,
based on fiscal year 2000 constant dollars; $2.190 billion for procurement in fiscal year
2000 constant dollars; or are designated as a major defense acquisition program by the
milestone decision authority.
6
 The Federal Procurement Data System-Next Generation is the federal government’s
current system for tracking information on contracting actions.




Page 3                                        GAO-12-558 Long-term Maintenance Contracts
             available acquisition plans, contractual information such as pricing data
             and price negotiation memoranda, incentive plans, and performance data
             and interviewed cognizant program officials for the long-term contracts we
             reviewed. As part of this effort, we reviewed the program offices’ use of
             monetary incentives such as award and incentive fees, performance
             bonuses, and downward price adjustments, as well as their use of
             contract term incentives, including award terms and incentive options,
             which can extend the contract’s period of performance. Further, to
             determine the extent to which programs gained insight into contractor
             costs, we identified whether they had the ability to renegotiate contract
             prices, obtained incurred cost data, or used cost-based incentive metrics.
             Appendix I provides more detailed information on our scope and
             methodology.

             We conducted this performance audit from February 2011 through
             May 2012 in accordance with generally accepted government auditing
             standards. Those standards require that we plan and perform the audit to
             obtain sufficient, appropriate evidence to provide a reasonable basis for
             our findings and conclusions based on our audit objectives. We believe
             that the evidence obtained provides a reasonable basis for our findings
             and conclusions based on our audit objectives.


             DOD spends billions of dollars annually to maintain complex weapon
Background   systems including aircraft, ships, ground-based systems, missiles,
             communications equipment, and other types of electronic equipment that
             require regular and emergency maintenance to support national security
             goals. Maintenance of this equipment is divided into three levels
             corresponding to the extent and complexity of these repairs—depot-level,
             intermediate, and organizational. DOD defines depot maintenance as the
             highest level of maintenance and it generally refers to major maintenance
             and repairs, such as overhauling, upgrading, or rebuilding parts,
             assemblies, or subassemblies. This level of maintenance can consist of
             repair to entire weapon systems, major assemblies that comprise a
             system, or the components that make up those assemblies. Depot
             maintenance also includes installation of system modifications that extend
             the operational life of weapon systems. Such repairs and overhauls have
             long been provided by DOD maintenance personnel, private contractors,
             or a mixture of the two through public-private partnerships performed at
             government-owned and private facilities. Intermediate maintenance
             consists of repair capabilities possessed by operating units and in-theater
             sustainment organizations that include remove-and-replace operations for
             subcomponents, local manufacture, and other repair capabilities.


             Page 4                               GAO-12-558 Long-term Maintenance Contracts
                           Organizational maintenance consists of the tasks necessary for day-to-
                           day operation including inspection and servicing.


Several Policies Guide     The department’s overarching acquisition guidance, DOD Directive
Decisions on Maintenance   5000.01, states that the program manager shall be the single point of
Approaches                 accountability for accomplishing program objectives for total life-cycle
                           systems management, including sustainment. DOD Instruction 5000.02,
                           which provides additional DOD guidance for managing and overseeing
                           defense acquisition programs, requires that program managers perform a
                           core logistics analysis to support major acquisition milestone reviews after
                           the technology or system development phase. 7 Such logistics
                           considerations, to include those related to maintenance, are contained
                           within the life-cycle sustainment plan that was, until recently, reviewed as
                           part of the acquisition strategy for major weapon system programs. In
                           April 2011, DOD directed that the life-cycle sustainment plan be reviewed
                           separately from the acquisition strategy and, in September 2011, directed
                           that those sustainment plans associated with certain major weapon
                           systems be approved by the Assistant Secretary of Defense for Logistics
                           and Materiel Readiness at all milestone decision points during weapon
                           system development and at the full-rate production decision. 8 Further,
                           DOD has established a new template for the plans’ content to include the
                           extent to which contractor services will support maintenance.

                           DOD has issued instructions that provide guidance to the military
                           departments and program offices on defining maintenance requirements
                           and approaches. For example, DOD Directive 4151.18 requires that the
                           source of depot-level repair for major weapon systems be determined
                           during the weapon system’s development. 9 It also provides instruction on


                           7
                            Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics,
                           Department of Defense Instruction 5000.02, Operation of the Defense Acquisition System,
                           December 8, 2008.
                           8
                            Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics,
                           Document Streamlining—Program Strategies and Systems Engineering Plan, April 20,
                           2011; and Document Streamlining—Life-Cycle Sustainment Plan, September 14, 2011.
                           Specifically, the Assistant Secretary of Defense for Logistics and Materiel Readiness is to
                           review and approve sustainment plans for major defense acquisition programs designated
                           as Acquisition Category ID or those that are designated as being of special interest.
                           9
                            Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics,
                           Department of Defense Directive 4151.18, Maintenance of Military Materiel, March 31,
                           2004.




                           Page 5                                        GAO-12-558 Long-term Maintenance Contracts
                         determining if depot-level maintenance for a weapon system will be
                         performed at a government-owned and government-operated (hereinafter
                         referred to as “organic”) depot, by a private-sector contractor, or some
                         combination of the two. Section 2466 of Title 10 of the U.S. Code places
                         limitations, however, on contracted depot-level maintenance of materiel.
                         The statute provides that not more than 50 percent of funds made
                         available in a fiscal year for depot-level maintenance and repair may be
                         used for contracted services. This is known as the 50/50 requirement.
                         DOD is also required to report annually on past and projected workload
                         allocations. DOD Directive 4151.18 requires that USD(AT&L) monitor
                         compliance with the directive and review the adequacy of DOD
                         maintenance programs and resources. Additionally, it requires DOD
                         components develop tools and management procedures to implement the
                         content of the directive. 10

                         Additionally, DOD Instruction 4151.20 provides instruction for determining
                         “core” maintenance requirements as defined in Section 2464 of Title 10 of
                         the U.S. Code. 11 These core requirements are considered essential for
                         the national defense and require that DOD maintain a logistics capability
                         that is government-owned and government-operated to ensure DOD can
                         effectively respond to a mobilization, national defense contingency
                         situations, and other emergency requirements in a timely manner. To
                         ensure that life-cycle sustainment planning is done early in a weapon
                         system’s development phase, the National Defense Authorization Act for
                         fiscal year 2012 revised the assessment of core maintenance
                         requirements and directed DOD to identify such requirements at
                         acquisition milestones. 12


Recent Legislative and   In recent years, Congress and DOD have emphasized the need to
DOD Efforts to Enhance   maintain competition throughout the life cycle of weapon system
Competition              programs and improve how the department acquires services. For



                         10
                           DOD components include the Office of the Secretary of Defense, the military
                         departments, the Chairman of the Joint Chiefs of Staff, the combatant commands, the
                         Office of the Inspector General, the defense agencies, DOD field activities, and all other
                         organizational entities in DOD.
                         11
                           Department of Defense Instruction 4151.20, Depot Maintenance Core Capabilities
                         Determination Process, January 5, 2007.
                         12
                          Pub. L. No. 112-81 § 801 (2011).




                         Page 6                                         GAO-12-558 Long-term Maintenance Contracts
example, Congress passed the Weapon System Acquisition Reform Act
of 2009, requiring DOD to ensure competition or the option of competition
throughout a weapon system program’s life cycle, in part, by requiring
DOD to consider purchase of complete technical data packages when
cost-effective. 13 In May 2011, however, we reported that DOD continues
to face challenges that could undermine competition of maintenance
contracts, including shortcomings in how programs’ technical data rights
requirements that are necessary for competition are determined. 14 We
recommended, and DOD agreed, that the department should update its
acquisition and procurement policies to clarify requirements for
documenting technical data requirements and to issue instructions for
program managers to use when conducting analyses used to determine
technical data rights needs for a weapon program. 15

More recently, in September 2010, as part of DOD’s efficiencies initiative,
USD(AT&L) issued guidance intended to improve affordability and cost
control, competition, and management of services acquisitions, among
other areas. 16 Among the specific actions called for are taking steps to
improve insight into contract costs, increasing competition in services
contracting, and setting rules for the acquisition of technical data rights.
For example, DOD’s September 2010 guidance noted that military
departments and DOD components will be required to review the length
of time that services contracts remain in effect before recompetition,
noting that single-award services contracts should be limited to 3 years
unless justified by the senior manager for services. It also notes that
certain other types of services contracts, such as those for logistics, may
not be appropriate for such limits. Subsequently, DOD issued guidance in
November 2010 requiring program managers for all acquisition programs


13
  Pub. L. No. 111-23 § 202(b)(7) (2009).
14
  GAO-11-469.
15
   DOD may obtain different levels of rights to technical data, including unlimited rights,
government-purpose rights, and limited rights. If DOD obtains unlimited rights, it may
provide the data to anyone for any reason. However, if DOD obtains government-purpose
rights, it may provide the data to third-party contractors only for activities in which DOD is
involved, including competitive reprocurement but not including commercial purposes. If
DOD obtains limited rights, it may only use the data internally and may provide the data to
third parties in a limited number of circumstances.
16
 Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics,
Better Buying Power: Guidance for Obtaining Greater Efficiency and Productivity in
Defense Spending, September 14, 2010.




Page 7                                         GAO-12-558 Long-term Maintenance Contracts
                            to (1) conduct a business-case analysis that outlines the technical data
                            rights the government will pursue to ensure competition and (2) include
                            the results of this analysis in acquisition strategies at a program’s
                            entrance into the engineering and manufacturing development phase of
                            the acquisition. 17


                            At the departmental level, neither DOD nor the individual military
DOD Does Not Know           departments know the extent to which weapon system programs rely on
the Extent to Which It      long-term maintenance contracts. This includes the most basic
                            information—how many of such contracts are currently in use. DOD does
Relies on Long-term         not collect or maintain such information during its reviews of acquisition
Maintenance                 strategies or life-cycle sustainment plans, nor do existing data collection
Contracts                   systems provide the type of information needed to do so. Consequently,
                            we worked with the military departments to identify a number of long-term
                            maintenance contracts and selected 10 contracts supporting seven major
                            weapon systems for detailed review. We found that these contracts varied
                            widely in terms of breadth of requirements, potential period of
                            performance, and value. For example, our work found that these
                            contracts could extend up to 22 years if the contractor meets performance
                            criteria and earns award terms. These contracts also constituted a
                            significant investment for the government. Program offices reported
                            obligations of over $18.4 billion on these 10 contracts through the end of
                            fiscal year 2011. In that fiscal year alone, programs obligated nearly
                            $1.7 billion on the 10 contracts we reviewed.


Lack of Data on Long-Term   DOD was unable to provide us a list of ongoing long-term maintenance
Maintenance Contracts       contracts. Further, DOD officials noted that existing reports and data
Reflect Broader DOD         collection systems do not provide the department information on the use
                            of long-term maintenance contracts. For example, USD(AT&L) reports to
Challenges with Managing    Congress annually on the percentage of funds expended during the
Services Acquisition        preceding fiscal year for public and private maintenance and repair
                            activities, and project funding requirements for the current and ensuing




                            17
                              Under Secretary of Defense for Acquisition, Technology, and Logistics, Implementation
                            Directive for Better Buying Power – Obtaining Greater Efficiency and Productivity in
                            Defense Spending, November 3, 2010.




                            Page 8                                      GAO-12-558 Long-term Maintenance Contracts
fiscal year. 18 However, USD(AT&L) is not required to include information
on the distribution of these contracts among the department’s weapon
system programs, the total number of contracts used, or the length of
performance of these contracts in these reports. Similarly, USD(AT&L)
officials noted that while they have used FPDS-NG to perform contract
spend analysis for various categories of services, including maintenance
services, FPDS-NG does not record the potential period of performance
for all contracts, including those that use incentives that may extend the
life of the contract. Additionally, while some contract actions associated
with maintenance are coded as such in FPDS-NG, our analysis found that
other maintenance-related activities may be reported as management
support, logistics support, and system engineering services. Further, we
found that the Defense Acquisition Management Information Retrieval
System, DOD’s web-based data system that tracks programmatic
information on major defense acquisition programs, did not contain
accurate information on what major weapon systems were currently
fielded and are being maintained.

DOD’s limited visibility over long-term maintenance contracts reflects
broader DOD challenges with managing services acquisition. Over the
past decade, our work has identified the need for DOD to obtain better
data on its contracted services to enable it to make more strategic
decisions. For example, in 2006, we reported that DOD’s approach to
managing services acquisition tended to be reactive and had not fully
addressed the key factors for success at either a strategic or transactional
level. 19 The strategic level is where the enterprise sets a direction for what
it needs, captures knowledge to make informed management decisions,
ensures departmentwide goals and objectives are achieved, and
assesses the resources it has to achieve desired outcomes. The strategic
level sets the context for the transactional level, where the focus is on
making sound decisions on individual service acquisition using valid and
well-defined requirements, appropriate business arrangements, and
adequate management of contractor performance.



18
  Prior GAO work found systemic weaknesses in DOD’s data gathering and reporting
processes to support these efforts, which prevents the precise calculation of DOD’s
funding for public and private-sector depot maintenance and repair workloads, even at the
aggregate level. See GAO, Depot Maintenance: Issues and Options for Reporting on
Military Depots, GAO-08-761R (Washington, D.C.: May 15, 2008).
19
 GAO, Defense Acquisitions: Tailored Approach Needed to Improve Service Acquisition
Outcomes, GAO-07-20 (Washington, D.C.: Nov. 9, 2006).




Page 9                                       GAO-12-558 Long-term Maintenance Contracts
Our prior work has shown, however, that while DOD obtains insight into
individual programs through various program reviews, DOD does not
collect or maintain that information to inform strategic decisions. For
example:

•    In response to congressional direction, DOD and the military
     departments have established procedures for reviewing, approving
     and monitoring services acquisitions, including those for maintenance.
     Further, since 2006, all proposed services acquisitions with a value
     estimated at more than $1 billion or designated as “special interest”
     are reviewed by USD(AT&L), while military department or other
     defense component officials review acquisition strategies for those
     below this threshold. Contract requirements, risks, and business
     arrangements are among the items included in reviewed acquisition
     strategies. Though these reviews take place, DOD does not collect or
     aggregate the information they produce to provide department-wide
     insight into the use of long-term maintenance contracts.

•    Additionally, to improve DOD’s services acquisition process,
     USD(AT&L) implemented an independent management review, or
     peer review, process for its service contracts in 2008. 20 Occurring
     after approval of the acquisition strategy, these peer reviews are
     conducted prior to and after award of services contracts, and are
     published to facilitate cross-sharing of best practices and lessons
     learned on various contracting issues, including the use of
     competition, contract structure and type, definition of contract
     requirements, and cost or pricing methods. Each of these reviews
     provides for the discussion of issues related to contracting strategy,
     but DOD officials noted that they do not collect or maintain information
     on what type of contracting approach was used to acquire all services
     that support DOD weapon systems. Further, while DOD collects and
     makes available lessons learned from these reviews in areas such as
     source selection and use of incentives, DOD officials stated that the
     process has not resulted in lessons learned or best practices specific
     to the use of long-term maintenance contracts.

•    Similarly, DOD policy and guidance require USD(AT&L) and military
     department senior acquisition executives approve acquisition


20
  For more information see GAO, Defense Acquisitions: Status of DOD’s Implementation
of Independent Management Reviews for Services Acquisitions, GAO-10-284
(Washington, D.C.: Jan. 28, 2010).




Page 10                                    GAO-12-558 Long-term Maintenance Contracts
                              strategies and life-cycle sustainment plans during program milestone
                              reviews. Each of these documents is to include information on the
                              proposed acquisition approach, including the use of contractor
                              support. Our discussions with USD(AT&L) and representatives from
                              the military department offices responsible for reviewing these plans
                              found these offices do not maintain information on the extent to which
                              long-term maintenance contracts are used by weapon system
                              programs.

Long-term Maintenance    In the absence of department-wide data on the use of long-term
Contracts GAO Reviewed   maintenance contracts, we selected 10 long-term maintenance contracts
Had Widely Varied        that supported seven major weapon systems. We found that these
                         contracts varied widely in terms of breadth of requirements, potential
Characteristics          period of performance, and value. 21 For example, the contracts we
                         reviewed included those that supported maintenance of an entire weapon
                         system platform such the Air Force’s Joint Surveillance Target Attack
                         Radar System (JSTARS) to more specific depot-level maintenance
                         support activities for system components, such as the Navy’s T-45 engine
                         contract. Table 1 shows selected characteristics of the 10 contracts we
                         reviewed.




                         21
                           We were unable to determine, even after working with military department and program
                         officials, the number of long-term maintenance contracts used to maintain major defense
                         acquisition programs. For example, we requested information from offices responsible for
                         major defense acquisition programs as identified by the military departments, but found
                         that in many instances program offices either did not provide the requested information or
                         the information provided was incomplete, precluding a department-wide assessment.
                         Consequently, we worked with officials from the military departments to identify potential
                         programs that might be using long-term contracts. Air Force acquisition officials identified
                         at least nine programs that used long-term maintenance contracts, including the F-22 and
                         C-17. Navy and Army officials indicated that we needed to contact program executive
                         offices or program offices to obtain more precise information on the extent to which such
                         contracts are used.




                         Page 11                                        GAO-12-558 Long-term Maintenance Contracts
Table 1: Selected Characteristics of Long-term Maintenance Contracts Reviewed by GAO

                                                                                                                                   Obligations
                                                                                                                                       through
                        Component/platform                                                                                         September
Military                supported by long-       Contract type and                                                      Award          30, 2011
                                                           a
department/system       term contract            incentives                       Potential contract term                year      (in billions)
Air Force
                        C-130J airframe          Firm-fixed price                 10 years: 2-year base + 3-
                                                 contract/award fee               year option + 3-year option
                                                                                  + 2-year option                          2006              $0.3
                        C-130J engine            Firm-fixed price                 9 years:1-year base + eight
C-130 transport                                  requirements                     1-year options
aircraft                                         contract/incentive fee                                                    2007              $0.5
                        T56 engine               Fixed-price-award-term           15 years: 7-year base + 8
                                                 requirements contract with       possible award term years
                                                 economic price
                                                 adjustment/award term                                                     1999            $13.9
JSTARS surveillance     Platform                 Cost-plus award fee              22 years: 6-year base + 16
aircraft                                         contract/award term              possible award term years                2000              $1.9
KC-10 tanker            Platform                 Firm-fixed price indefinite      9 years: 2-year base +
aircraft                                         delivery/indefinite quantity     2-year option + 2 year
                                                 contract/incentive option        option + 3 possible
                                                 years                            incentive option years                   2009              $0.8
Army
                                   b
AH-64 helicopter        Airframe                 Firm-fixed price contract        5 years: 1-year base + four
                                                                                  1-year options                           2010              $0.2
CH-47 helicopter        Engine                   Firm-fixed price                 5 years: 1-year base + four
                                                 contract/incentive fee           1-year options                           2011            <$0.1
Navy
MH-60 helicopter        Airframe and avionics    Firm-fixed price                 4-year base with no
                                                                                         c
                                                 requirements contract            options                                  2011              $0.2
                        Airframe                 Firm-fixed price contract        5 years: 1-year base + four
                                                                                  1-year options                           2008              $0.3
T-45 trainer aircraft
                        Engine                   Firm-fixed price                 5 years: 1-year base + four
                                                 requirements contract            1-year options                           2008              $0.2
                                          Source: GAO analysis of DOD data.
                                          a
                                           Contract type and incentives represent the predominant type of contract vehicle and incentives used.
                                          A requirements contract provides for filling all purchase requirements of a government activity for
                                          supplies or services during the contract period from a single contractor. Indefinite delivery, indefinite
                                          quantity contracts provide for an indefinite quantity of supplies or services for a fixed time. A firm-
                                          fixed price contract provides for a price that is not subject to any adjustment on the basis of the
                                          contractor’s cost experience in performing the contract. A fixed-price contract with economic price
                                          adjustment provides for upward and downward revision of the stated contract price upon the
                                          occurrence of specified contingencies. Cost-plus-award-fee contract is a cost-reimbursement contract
                                          that provides for a fee consisting of a base amount fixed at inception of the contract and an award
                                          amount based upon a judgmental evaluation by the government. Federal Acquisition Regulation Part
                                          16.
                                          b
                                           Contract also provides for maintenance of the CH-47 airframe.




                                          Page 12                                              GAO-12-558 Long-term Maintenance Contracts
c
 According to program documentation, initial acquisition strategy called for a 5-year contract. Pricing
for the current contract was negotiated together with the preceding 1-year bridge contract for a total
5-year pricing negotiation.


In addition to maintenance activities, the contracts we reviewed also
provide supply chain management, technical data management, training,
equipment configuration management, and engineering support, among
other requirements. Further, we found that long-term maintenance
contracts could extend up to 22 years if the contractor meets performance
criteria and earns award terms. Lastly, we found that these contracts
constituted a significant investment for the government, as program
offices reported obligations of over $18.4 billion on these contracts
through the end of fiscal year 2011. In that fiscal year alone, programs
obligated nearly $1.7 billion on the 10 contracts we reviewed.

DOD officials noted that although long-term contracts can encourage
contractors to invest in new facilities, equipment, and processes to
support depot-level maintenance, such contracts may hinder the
government’s ability to appropriately incentivize the contractor’s
performance and control costs. DOD officials noted that the department is
pursuing a number of initiatives that could potentially improve DOD’s
insight into long-term maintenance contracts and their management. For
example, USD(AT&L) officials pointed out that the department is creating
a standalone instruction for service acquisitions, based on DOD
Instruction 5000.02. Although the instruction is in the early stages of
development, USD(AT&L) officials said that it will provide more detailed
guidance for the acquisition of specific services and reflect issues such as
duration that have been raised in recent DOD guidance. USD(AT&L)
officials said that the department is currently considering expanding or
updating the Defense Acquisition Management Information Retrieval
system to retain contract information for major service contracts, such as
contractors’ performance histories, contract lengths, contract types, and
incentives used for these services.




Page 13                                              GAO-12-558 Long-term Maintenance Contracts
                            Decisions made early in the acquisition process can limit DOD’s ability to
Early Acquisition           select alternative maintenance providers over the life cycle of a weapon
Decisions Limit             system program. Program officials believed they could select an
                            alternative service provider in the future for 5 of the 10 contracts we
DOD’s Ability to            reviewed, but the degree to which the government obtained access to
Select Alternative          technical data would be an obstacle in doing so for the other half. DOD
Maintenance                 has updated its policies to emphasize determining technical data needs
                            earlier in the acquisition life cycle. Information we collected on eight
Providers                   weapon system programs in development or early stages of production
                            that were reviewed by USD(AT&L) between October 2010 and October
                            2011 indicated that at least half have acquired or plan to acquire sufficient
                            technical data to compete maintenance services or to perform
                            maintenance with organic depot personnel should the need arise. The
                            programs, however, had yet to determine the extent to which they will
                            acquire these data or the cost to do so.


Some Major Weapon           DOD program officials said that decisions made early in the acquisition
System Programs Could       cycle, especially with regard to acquiring technical data, may hinder the
Select an Alternative       department’s ability to change maintenance service providers for depot-
                            level activities. As we reported in May 2011, technical data can enable
Maintenance Service         the government to complete maintenance work in-house, as well as to
Provider but Others Faced   competitively award contracts for the acquisition and sustainment of a
Obstacles                   weapon system. 22 More recently, we reported that for contracts pertaining
                            to DOD weapon programs, which can involve products as well as support
                            services, the lack of access to proprietary technical data and a heavy
                            reliance on specific contractors for expertise limits or even precludes the
                            possibility of competition. Even when access to technical data is not an
                            issue, the government may have little choice other than to rely on the
                            contractors that were the original equipment manufacturers, and that, in
                            some cases, designed and developed the weapon system. 23 Of the ten
                            contracts we reviewed only three were competitively awarded. Table 2
                            summarizes the impact of technical data access on DOD programs’ ability
                            to select alternate services providers for maintenance on the contracts we
                            reviewed.




                            22
                             GAO-11-469.
                            23
                             GAO, Defense Contracting: Competition for Services and Recent Initiatives to Increase
                            Competitive Procurements, GAO-12-384 (Washington, D.C.: Mar. 15, 2012).




                            Page 14                                     GAO-12-558 Long-term Maintenance Contracts
Table 2: Impact of Technical Data Access on Ability to Change Maintenance Service Providers for the Contracts GAO
Reviewed

                                                                  Ability to transition
                                      Competed                  contracted maintenance                       Ability to recompete
Military      Component/platform
                                      contract?                work to an organic depot?                    maintenance contracts?
department/   supported by
system        long-term contract      Yes/No            Yes/No         Reason                        Yes/No     Reason
Air Force
              C-130J airframe         No                No             Insufficient access to        No         Insufficient access to
                                                                       technical data                           technical data
              C-130J engine           No                No             Insufficient access to        No         Insufficient access to
                                                                       technical data                           technical data
C-130
              T56 engine              Yes               Yes            Sufficient access to          Yes        Access to technical data
                                                                       technical data; engine                   allows the program to
                                                                       maintenance was once                     recompete the current
                                                                       done organically                         contract
JSTARS        Platform                No                No             Insufficient access to        No         Insufficient access to
                                                                       technical data                           technical data
KC-10         Platform                Yes               No             Insufficient access to        Yes        The aircraft is commercially
                                                                       technical data                           derived and there is a
                                                                                                                competitive environment
Army
                         a
AH-64         Airframe                No                Yes            Sufficient access to         No          Insufficient access to
                                                                       technical data; the airframe             technical data for
                                                                       maintenance is done                      recompetition
                                                                       organically with contractor
                                                                       support
CH-47         Engine                  No                Yes            Sufficient access to          No         Insufficient access to
                                                                       technical data; engine                   technical data for
                                                                       maintenance is done                      recompetition
                                                                       organically with contractor
                                                                       support
Navy
MH-60         Airframe and avionics   No                No             Insufficient access to        No         Insufficient access to
                                                                       technical data                           technical data
              Airframe                Yes               No             Insufficient access to        Yes        Sufficient amount of
                                                                       technical data                           technical data procured to
                                                                                                                recompete contract for this
T-45                                                                                                            commercially derived
                                                                                                                aircraft
              Engine                  No                No             Insufficient access to        No         Insufficient access to
                                                                       technical data                           technical data
                                           Source: GAO analysis of DOD data.
                                           a
                                            Contract also provides for maintenance of the CH-47 airframe.


                                           DOD acquired technical data sufficient to potentially select an alternative
                                           service provider—either by transitioning contracted maintenance work to


                                           Page 15                                              GAO-12-558 Long-term Maintenance Contracts
an organic depot or recompeting maintenance contracts—for 5 of the 10
maintenance contracts we reviewed. Three of these programs had
sufficient access to technical data to perform maintenance services
organically. For example,

•   Depot maintenance for the AH-64 and CH-47 helicopter airframe
    components was already performed organically at the Corpus Christi
    Army Depot prior to the use of contractor support. However, the
    program determined that contractor support could improve its
    maintenance practices and the availability of components. While
    government personnel continue to do all maintenance work on
    airframe components, since 2004 the Army has used a contractor to
    provide parts integration, technical engineering and logistics support
    which has significantly increased system availability.

•   As a result of a 1995 Base Realignment and Closure decision, the
    military depot that maintained the T56 engines for the C-130 program
    was closed. To mitigate the impact of the closing on the local
    community and employees, the maintenance workload was performed
    by the private sector at the same location. The Air Force used a
    public-private competition—an opportunity for the public and private
    offerors to compete for the work—to determine the most cost-effective
    source of repair, and the T56 engine maintenance is now provided by
    a contractor. 24
Two other programs reported they are able to recompete maintenance
services contracts even though neither program purchased complete
technical data associated with the weapon system. According to program
officials, they could compete contracts for maintenance services either
because they acquired sufficient technical data for specific portions of the
aircraft or because there was a competitive environment for maintenance
services for commercially-derived systems. The latter are weapon
systems that were adapted for military use from a commercial item as
opposed to weapon systems developed for the military. For example,

•   The Navy’s T-45 trainer aircraft program was designated to be
    maintained by contractors for the life of the program, as it is not a core
    asset and there was a competitive environment with multiple vendors


24
  GAO, Depot Maintenance: Air Force Is Assessing Engine Maintenance Options for Work
Currently Performed at Kelly Aviation Center, GAO-11-274R (Washington, D.C.: Feb. 11,
2011).




Page 16                                    GAO-12-558 Long-term Maintenance Contracts
    to provide maintenance support for this commercially available
    aircraft. During development, the Navy purchased technical data for
    DOD-specific aspects of the plane’s airframe design, allowing the
    program office to recompete maintenance contracts throughout the
    life cycle of the system. Specifically, after the program split its system-
    level maintenance contract into separate engine and airframe
    contracts, it was able to leverage its access to technical data to
    competitively award the airframe contract. When the airframe contract
    was recompeted in 2007, five vendors submitted capability
    statements. Program officials told us that they expect a similar
    industry response when the contract is recompeted again this year.

•   Similarly, for the KC-10 aircraft, the aircraft is based on a commercial
    design and uses contractor logistics support for maintenance
    services. The Air Force has competitively awarded five maintenance
    contracts since the KC-10 was acquired in 1978. The last competition
    occurred in 2010 and there were two proposals which resulted in the
    selection of a new contractor.
For 5 of the 10 contracts, however, programs reported they could neither
transition contracted maintenance services to an organic depot nor
recompete the contract due to insufficient access to technical data as well
as factors such as insufficient funding, staffing, and expertise in some
cases. For example,

•   According to JSTARS program officials, the Air Force currently cannot
    convert contracted maintenance work to an organic depot or
    recompete the work because it has insufficient access to technical
    data for the aircraft’s unique systems and equipment. Prior to
    awarding the current contract, the JSTARS program utilized 17
    sustainment contracts with the government managing these contracts
    and performing some portions of maintenance organically. However,
    in September 2000, the Air Force noncompetitively awarded a
    contract so that a single contractor would be responsible for
    sustainment activities that were previously performed under contracts
    or by government personnel. Program officials said that when the Air
    Force took on the more limited role of oversight of the prime
    contractor, program staffing and expertise were reduced significantly.
    They added that, as a result, the program office currently lacks the
    engineers, equipment specialists, inventory managers, and other staff
    and skills needed to manage all sustainment activities if the
    requirements included in the current contract were to be performed by
    multiple service providers.




Page 17                                 GAO-12-558 Long-term Maintenance Contracts
                           •   Though previous models of the Air Force’s C-130 fleet are maintained
                               organically, contractors developed the C-130J model (both the
                               airframe and engine) as a commercial item and it was acquired by the
                               Air Force without related technical data. As a result, the program
                               office must acquire maintenance services for all components unique
                               to this model of the aircraft from the original equipment manufacturers
                               through contracts. Program officials noted that there is a requirement
                               to eventually bring the aircraft maintenance to organic depots, but
                               noted that even if it were able to acquire the necessary technical data,
                               the program office would need substantial funding to develop
                               capabilities at the organic depots.

Technical Data Rights      Recent acquisition reforms such as the Weapon System Acquisition
Need to Be Considered      Reform Act of 2009 and DOD’s recent initiatives seeking greater
Early in the Acquisition   efficiency and cost savings in acquisitions have put greater emphasis on
                           obtaining technical data rights and on maintaining competition throughout
Process                    the life cycle of weapon systems. For example, Congress has required
                           that DOD issue comprehensive guidance on life-cycle management,
                           develop and implement product support strategies, and appoint product
                           support managers for major weapon systems, while DOD’s September
                           2010 efficiency initiatives memorandum includes a requirement that each
                           military department set rules for acquisition of technical data rights as part
                           of a plan to improve competition. DOD has taken a number of actions,
                           including revising its acquisition policy to ensure that technical data
                           requirements are considered during the acquisition process at key
                           milestones. More recently, DOD has drafted guidance for developing
                           open systems architecture contracts. This guidance will provide additional
                           information to program managers regarding purchase of technical data
                           and planning for an open systems architecture that may allow for
                           increased flexibility in maintenance and purchase of such data.

                           Data we collected on eight DOD weapon systems currently in
                           development or early stages of production that were reviewed by
                           USD(AT&L) between October 2010 and October 2011 as part of an
                           acquisition review indicates that the programs have considered
                           maintenance and other sustainment issues when making decisions
                           regarding technical data needs. Table 3 summarizes these eight
                           programs’ plans to acquire access to technical data rights.




                           Page 18                                GAO-12-558 Long-term Maintenance Contracts
Table 3: Weapon System Programs’ Plans to Acquire Technical Data during Development and Production

Military
                                                                               a
department     Program                              Technical data decision
Air Force      MQ-9 Reaper unmanned                 Program officials said the Air Force is assessing the technical data required to
               aircraft system                      maintain the weapon system at the component level.
               AH-64 Apache Block III               Army officials stated that the program will leverage the existing maintenance
               helicopter                           arrangement for previous variants of the aircraft and assess what technical data
                                                    are necessary to maintain the Block III-unique components.
Army           XM982 Excalibur guided               The program reports that it is working with the contractor to ensure negotiated
               artillery projectile                 technical data are received, including those for certain proprietary technologies.
               MQ-1C Gray Eagle unmanned            According to Army officials, the Army will assess the technical data required for
               aircraft system                      specific system components.
               AIM 9X Sidewinder air-to-air         Navy officials stated that the Navy is pursuing unlimited data rights for this new
               missile                              missile variant.
               E2D AHE Advanced Hawkeye             Navy officials stated that the Navy plans to obtain access to technical data as it is
               aircraft                             being developed for components unique to this variant, and will take possession
                                                    of this data at the time the last aircraft is delivered.
Navy           Littoral Combat Ship surface         The Navy’s acquisition strategy states that technical data will be acquired to
               combatant                            support organic and private support to the system. According to officials, the
                                                    department purchased government purpose rights and unlimited technical data
                                                    rights for over 95 percent of the sea frame and the interface of the mission
                                                    package components.
               SSBN(X) Ohio-class replacement Program officials said the Navy plans to acquire unlimited technical data rights to
               ballistic missile submarine    support depot maintenance at government facilities.
                                          Source: GAO analysis of DOD data.
                                          a
                                           DOD may obtain different levels of rights to technical data including unlimited rights, government-
                                          purpose rights, and limited rights. If DOD obtains unlimited rights, it may provide the data to anyone
                                          for any reason. However, if DOD obtains government-purpose rights, it may provide the data to third-
                                          party contractors only for activities in which DOD is involved, including competitive reprocurement but
                                          not including commercial purposes. If DOD obtains limited rights, it may only use the data internally
                                          and may provide the data to third parties in a limited number of circumstances.


                                          For the eight programs we reviewed, at least four have acquired or plan
                                          to acquire sufficient data to compete maintenance services or to perform
                                          maintenance with organic depot personnel while others had yet to
                                          determine the extent to which they will acquire these data or the cost to
                                          do so. For example:

                                          •     The Navy acquired government purpose rights and unlimited technical
                                                data rights for over 95 percent of major components for the Littoral
                                                Combat Ship, according to program officials. 25 They said that most of


                                          25
                                            Specifically, Navy officials said that under this acquisition, the government purchased
                                          technical data for the sea frame and mission package component interface.




                                          Page 19                                             GAO-12-558 Long-term Maintenance Contracts
     the depot-level maintenance on the Littoral Combat Ship is expected
     to be performed by the private sector, and the Navy reports that
     competitive environment should enhance the ability of the Navy to
     control life-cycle sustainment costs.

•    The Air Force has begun to analyze components on the MQ-9 aircraft
     and to determine what technical data is required to maintain the
     aircraft, according to program officials. They told us they are
     performing a business case analysis that will determine if technical
     data should be acquired for approximately 600 aircraft parts and
     major air frame components, but only a small percentage of these
     components have been assessed through this process to date.

•    The Army will assess the technical data needs to maintain specific
     system components for components of the MQ-1C Gray Eagle as a
     means of retaining flexibility of maintenance options during
     sustainment. According to Army officials, the sustainment plan calls
     for the current contracting arrangement to transition to a public-private
     partnership in the future.
We previously reported that DOD program managers often opt to spend
limited acquisition dollars on increased weapon system capability rather
than on acquiring the rights to technical data, thus limiting their flexibility
to perform maintenance work in house or to support the development of
an alternative source should contractual arrangements fail. 26 Unless DOD
assesses and secures its rights for the use of technical data early in the
weapon system acquisition process when it has the greatest leverage to
negotiate, DOD may face later challenges in developing sustainment
plans or changing these plans as necessary over the life cycle of its
weapon systems. Delaying action in acquiring technical data rights can
make these data cost-prohibitive or difficult to obtain later in a weapon
system’s life cycle.




26
 GAO, Defense Management: Opportunities to Enhance the Implementation of
Performance-Based Logistics, GAO-04-715 (Washington, D.C.: Aug. 16, 2004).




Page 20                                   GAO-12-558 Long-term Maintenance Contracts
                              Once the decision is made to use long-term contracts, DOD faces
Programs Use                  choices on how to best incentivize contractor performance and manage
Different Approaches          costs. Of the 10 contacts we reviewed, we found that DOD programs that
                              used contracts extending longer than 5 years made frequent use of
to Incentivize                incentives to motivate performance and tools that provide insight into and
Performance and               control of costs. Program officials acknowledged, however, that in some
Obtain Insights into          instances incentive structures needed to be periodically revised to better
                              incentivize contractor performance and they may not have sufficient
Contractor Costs              insight on contractor costs. Program offices using contracts lasting 5
                              years, on the other hand, made less use of incentives and generally did
                              not have the ability to renegotiate contract prices, but believed that the
                              shorter-term nature of the contracts mitigated some of their risks. Further,
                              program offices now obtain incurred cost data for two contracts, which
                              they expect will help in the negotiation of better contract prices. The
                              various contract lengths, incentives and cost-control tools across the
                              programs we reviewed reflects the differences of each acquisition and the
                              mission-specific maintenance approaches taken to support each weapon
                              system, but the department has not collected information on their
                              effectiveness on long-term maintenance contracts.


Programs with Longer-         Of the programs we reviewed, we found that the Air Force awarded five
term Contracts Used           relatively longer-term contracts—between 9 and 22 years—that
Different Incentives and      incentivized contractor performance and attempted to gain insight into
                              and control costs in various ways. All five of these contracts used some
Tools to Provide Visibility   combination of monetary or contract term incentives to encourage
on Costs                      contractor performance. These programs varied, however, in terms of the
                              approaches used to gain insights into the contractors’ costs. For example,
                              the JSTARS program used cost-based incentive metrics, scheduled
                              specific opportunities to renegotiate the contract’s price, and received
                              incurred cost data. In contrast, the contract to maintain the C-130’s T56
                              engine did not use any of these approaches to gain cost insight. Table 4
                              summarizes the incentives and tools used to gain cost insight and cost
                              control.




                              Page 21                               GAO-12-558 Long-term Maintenance Contracts
Table 4: Longer-term Contracts’ Use of Incentives and Tools to Control Costs

                                                                                    Cost-based        Scheduled
Military                Potential              Monetary             Contract-term    incentive           price        Incurred cost
department/contract     contract length        incentive              incentive        metric        renegotiation        data
Air Force
JSTARS                  22 years                                                                                        
C-130 T56 engine        15 years                     -                                 -                   -                -
C-130J airframe         10 years                                             -         -                                  
C-130J engine            9 years                                             -         -                                   -
KC-10                    9 years                     -                                                    -                -
                                          Source: GAO analysis of DOD data.



                                          Program offices can use incentives to motivate contractors to provide
                                          exceptional levels of contract performance. Three longer-term contracts
                                          we reviewed include monetary incentives in the form of an award fee or
                                          an incentive fee, while three contracts use contract term incentives where
                                          a point system is used to award additional contract years. Program
                                          officials acknowledged that the incentives needed to be adjusted at times.
                                          For example, the JSTARS program uses an award fee incentive to
                                          motivate short-term contractor performance and an award term incentive
                                          to motivate the contractor’s long-term performance. Over the course of
                                          the JSTARS contract, the contractor has earned nearly all the available
                                          award fee and award term years despite some serious performance
                                          issues in 2009. In this case, the Air Force identified several serious
                                          maintenance failures, including the presence of foreign objects in engine
                                          filters and aircraft structural damage resulting from maintenance errors,
                                          that were caused by the JSTARS contractor and which could have
                                          resulted in serious personal injury and loss of aircraft. Because the
                                          incentive structure encompasses the broad range of responsibilities
                                          assigned to the contractor, the contractor still earned most of that
                                          evaluation period’s available fee and enough award term points to earn
                                          another year of contractor performance. The fee-determining official
                                          noted that if it were possible, he would have given the contractor a much
                                          lower award fee and rating. While the failures were reflected in the award
                                          fee evaluation under three performance metrics, the contractor’s
                                          aggregate performance against the remaining metrics allowed it to earn
                                          90 percent of the eligible fee for this 2009 evaluation period. The JSTARS
                                          program subsequently amended its award fee plan to make the contractor
                                          ineligible for 40 percent of the award fee if its performance caused or
                                          contributed to a major accident. The contractor has earned at least 95




                                          Page 22                                           GAO-12-558 Long-term Maintenance Contracts
percent of the available award fee for every other evaluation period since
the contract was awarded in 2000.

Program offices structured contract term incentives differently, which
provided DOD different degrees of flexibility to award additional years of
performance. For example, the award term plans for the JSTARS and
C-130 T56 engine contracts we reviewed guarantee additional years of
work if contractors meet or exceed incentive metrics. Both the JSTARS
and C-130 T56 engine contractors have earned the maximum number of
possible award term years. Conversely, the current incentive option
offered by the KC-10 program differs from the award terms used by the
JSTARS or C-130 T56 contracts in key respects. The KC-10 program’s
incentive includes “must-meet” metrics and a high degree of government
discretion in awarding the additional incentive year. For example, even if
the contractor meets all incentive metrics and earns the maximum
available number of points needed to be considered for an additional
incentive year, the program office can still decline to award the additional
year. Additionally, if the contractor does not meet the standard set for any
“must-meet” metric, it will not receive an incentive year. By structuring the
incentive in this way, the program office mitigates the risk of the
contractor earning incentives despite unsatisfactory performance, as in
the previous JSTARS example. According to KC-10 officials, the
contactor would not earn its first available incentive year with an
approximate contract value of $450 million because it failed to provide
continuous support for the initiation of global tanker support activities, a
“must-meet” metric, among other performance shortcomings.

Some of the programs that use longer-term contracts adjusted incentive
metrics to influence contractor performance in areas needing
improvement. For example, C-130J program officials said that since
awarding the airframe maintenance contract in 2006, they gradually
added more incentive metrics to the airframe contract’s award fee plan to
incentivize contractor performance in other areas. After the contractor
improved performance in providing engineering services, the program
office added an incentive metric to improve the contractor’s performance
for supply chain management.

The programs using the five longer-term contracts we reviewed also use
to varying degrees different tools to gain insight into and control costs
over the term of the contracts, as illustrated by the following examples.




Page 23                                GAO-12-558 Long-term Maintenance Contracts
•    The JSTARS cost-type contract was awarded on a non-competitive
     basis to the system’s original equipment manufacturer and the
     contractor bears little risk under this long-term arrangement, but the
     program office has taken measures to obtain insights into and control
     the contractor’s costs. The program office used the incurred cost data
     it receives under the cost-type contract to help renegotiate contract
     prices during triennial reviews. 27 Additionally, the program uses cost-
     based incentive metrics to evaluate performance for award fee and
     award term determinations. For example, under the terms of the
     program’s January 2012 award fee plan, 10 percent of the
     contractor’s award fee is determined by tracking cost performance
     against contract estimates. This same metric is used to represent 10
     percent of award term determinations. In addition, cost containment is
     also evaluated as part of a weapon system improvement metric that
     accounts for 37 percent of award term determinations.

•    The C-130J program structured its potentially 10-year airframe and 9-
     year engine maintenance firm-fixed price contracts so that prices
     would be renegotiated at certain points during the contracts’
     durations. For example, the program office receives incurred cost data
     for the airframe contract, and has renegotiated prices three times
     since the contract was awarded in 2006, with another renegotiation
     scheduled for January 2014. Program officials said that receiving
     incurred cost data helped them negotiate a 13 percent reduction in
     total contract costs during the last scheduled price renegotiation in
     January 2012. Program officials told us they can also gain insight into
     cost baselines through regular contractor performance monitoring and
     evaluation. For example, according to officials, the contractor
     supporting airframe maintenance used a new system to track parts
     that allowed for better utilization of spare parts and led to a decrease
     in hours needed to perform the contract requirement. Program
     officials were able to negotiate a lower price for that contract
     requirement during the next scheduled price negotiation.




27
  We reported in 2008 that the United Kingdom used an “open book accounting”
arrangement to gain visibility into contractors’ costs. Additionally, the four long-term
contracts used as examples by the United Kingdom’s Ministry of Defence each scheduled
price negotiations during their 10- to 25-year terms. See GAO, Defense Logistics:
Improved Analysis and Cost Data Needed to Evaluate the Cost-effectiveness of
Performance Based Logistics, GAO-09-41 (Washington, D.C.: Dec. 19, 2008).




Page 24                                     GAO-12-558 Long-term Maintenance Contracts
                                         •     In contrast, neither the C-130 T56 engine contract nor the KC-10
                                               program scheduled price renegotiations despite establishing firm-fixed
                                               prices for the entire potential length of the 15- and 9-year life of the
                                               respective contracts. For example, the C-130 T56 engine contract has
                                               prices fixed for the entire 15-year potential term of the contract with
                                               adjustments made for changes in best estimated quantities and for
                                               economic adjustments. Program officials expressed concern over
                                               their lack of insight into the contractor’s incurred costs and added that
                                               having such information, along with scheduled price renegotiations at
                                               the 5-year and 10-year points in the contract, would likely have been
                                               helpful in controlling maintenance costs. While KC-10 program
                                               officials cited the benefit of competition to drive down prices for
                                               maintenance services, USD(AT&L) officials indicated that proposed
                                               contracts reflecting a similar approach, where prices for the entire
                                               duration of a long-term contract are priced at award, would be
                                               reviewed carefully to ensure that the government’s interests were
                                               adequately protected.

Programs with Shorter-                   The Army and Navy programs we reviewed used contracts with a
term Contracts Tended Not                maximum length of five years and generally did not make as frequent use
to Use Incentives or Price               of incentives or cost-control tools as programs using longer contracts.
                                         Army and Navy program officials indicated that they would prefer to use
Renegotiation Techniques                 longer contracts in the future to enable contractors to invest in support
                                         infrastructure and improvements. Table summarizes the incentives and
                                         tools used for cost insight and cost control.

Table 5: Program Offices’ Use of Incentives and Tools to Control Costs on Shorter Duration Maintenance Contracts GAO
Reviewed

                                                                Contract-
Military               Potential             Monetary             term         Cost-based          Scheduled price          Incurred cost
department/ contract   contract length       incentive          incentive    incentive metric       renegotiation               data
Army
AH-64 and CH-47        5 years                    -                    -              -                                           
airframes
CH-47 engine           5 years                                        -              -                     -                       -
Navy
T-45 airframe          5 years                                        -              -                     -                       -
T-45 engine            5 years                    -                    -              -                     -                       -
                              a
MH-60                  4 years                                        -              -                     -                      
                                         Source: GAO analysis of DOD data.
                                         a
                                          According to program documentation, the initial acquisition strategy called for a 5-year contract. Due
                                         to delays in contract award the current contract is for only 4 years.




                                         Page 25                                             GAO-12-558 Long-term Maintenance Contracts
Across the five contracts with a maximum length of five years, three used
monetary incentives and none used incentives that lengthen the
contract’s term. The T-45 program office uses a performance bonus
incentive, which allows the program to withhold monthly performance
bonuses for contractor performance that did not meet or exceed
thresholds on both incentive metrics. The program measures ready-for-
training availability and the maintenance cancellation rate. The contractor
must meet or exceed performance thresholds for these metrics at all
three locations where the aircraft are based to receive an overall bonus.
As a result, the contractor could lose as much as 65 percent of the
available bonus by not meeting requirements at a single location.
According to program officials, this incentivizes the contractor to perform
optimally at all three locations. Performance records show that the
contractor has earned most of the available bonus since the contract was
awarded in 2008. Similarly, the contract for CH-47 engine maintenance
support includes a clause which allows the contractor to earn an incentive
fee for reducing engine repair turn-around time. Since the contract began
in 2011, there has been one evaluation period; the contractor did not
meet the incentive metric and did not earn any incentive fee. On the other
hand, MH-60 program officials told us that incentives in the form of
additional payments are not necessary for their program’s maintenance
support contract. They added that the contractor is self-incentivized to
maximize its profit in this firm-fixed price contracting arrangement, which
can be achieved through realizing efficiencies. Furthermore, they
questioned the value of paying a contractor to provide services above and
beyond what the program requires. 28 Instead, contract provisions allow
the government to reduce the contractor’s payment if the contractor’s
work does not meet minimum thresholds. MH-60 program officials
reported that they have not had to make any downward price adjustments
because the contractor is exceeding contract requirements.

Programs are now receiving incurred cost data to control maintenance
costs for two five-year, firm-fixed price contracts, though this approach
was not used in previous contracts for the same services. Since 2009, the
MH-60 program office has required the contractor to submit incurred cost
data semiannually. Program officials said that they were directed by the


28
  In 2008, GAO reported on the department’s awarding of incentives for performance
exceeding contract requirements in performance based logistics arrangements, noting that
paying for excess performance may not provide the best value to the government. See
GAO-09-41.




Page 26                                     GAO-12-558 Long-term Maintenance Contracts
Office of the Assistant Secretary of the Navy to request the contractor’s
incurred cost data and were supported by USD(AT&L) in negotiating for it.
By comparing incurred costs and contract prices, program officials said
that they were able to negotiate more favorable prices for the 2011 follow-
on maintenance support contract. During the previous contract, the
contractor was able to realize efficiencies that drove down its incurred
costs. With access to this information, the MH-60 program was able to re-
baseline contract costs and negotiate lower prices to reflect these
efficiencies. The AH-64 and CH-47 programs also receive incurred cost
data. A May 2011 DOD Inspector General audit found that the AH-64 and
CH-47 programs were paying above fair and reasonable prices for parts
supplied through their 5-year maintenance support contract. 29 The
Inspector General reviewed costs for 24 high-dollar parts and calculated
that the contractor charged the Army about $13 million more than the fair
and reasonable prices for 18 of the parts. Based on this finding, these
programs began reviewing incurred costs for the highest-value parts
supplied through this contract. The incurred cost review is being
performed in parallel with a major update of total parts pricing on the
contract, and program officials expect that there will be many downward
price changes as a result. The program office plans to perform this review
annually over the term of the contract.

DOD has not collected information concerning the effectiveness of the
various incentives or cost-control tools used on long-term maintenance
contracts, but it has recognized efforts made by individual programs to
improve acquisitions of such services. For example, during a December
2010 peer review of the MH-60 airframe contract, USD(AT&L) officials
noted that the use of incurred cost data allowed the program to negotiate
lower prices for certain services. Program officials told us that it was
difficult to negotiate for incurred cost data for fixed-priced contracts as
contractors are generally reluctant to share their actual costs and seek to
protect business-sensitive information. USD(AT&L) and military
department officials told us that they are encouraging program officials to
be more aggressive when asking for incurred costs, especially in
situations where the government does not have the benefit of leveraging
competition.



29
  Department of Defense Inspector General, Excess Inventory and Contract Pricing
Problems Jeopardize the Army Contract with Boeing to Support the Corpus Christi Army
Depot, D-2011-061 (Arlington, Va.: May 3, 2011).




Page 27                                    GAO-12-558 Long-term Maintenance Contracts
                      DOD does not collect data on the extent to which long-term contracts are
Conclusions           currently used and managed, but our assessment of 10 contracts shows
                      the value of having such information. Decisions made early in the
                      acquisition cycle, and in particular, whether DOD will buy the rights to
                      technical data are critical to availing itself of choices later in a program’s
                      life cycle. However, in the early stages, programs are often confronted
                      with the choice between allocating scarce resources to enhance
                      capability or maintaining future flexibility in terms of maintaining the
                      system. Once the decision to forgo buying technical data is made, DOD’s
                      leverage in terms of being able to compete maintenance support or to
                      provide it in house is largely lost. Programs must then rely on other, less
                      powerful tools to assure good performance and good prices. The data we
                      collected on eight programs that are in the process of making decisions
                      related to securing access to technical data indicate that DOD is
                      considering its future needs, but final decisions have yet to be made in
                      several cases. The department also does not have information on the
                      approaches used by various programs with long-term maintenance
                      contracts to incentivize contractor performance and gain insight into
                      contractor costs to help ensure that the government is getting the best
                      value for its investment. DOD is considering several policy and data-
                      related initiatives that could improve its insight on these contracts, but
                      these efforts are in the early stages of development. Gaining insight into
                      the department’s use of long-term maintenance contracts as well as
                      identifying lessons learned on what approaches work best to incentivize
                      performance and control costs would help inform future acquisition
                      strategies and reduce risk.


                      To help inform DOD’s use of long-term maintenance contracts, we
Recommendations for   recommend that the Secretary of Defense direct the Under Secretary of
Executive Action      Defense for Acquisition, Technology, and Logistics, in coordination with
                      cognizant offices within each of the military departments, to take the
                      following two actions:

                      •   Collect and analyze information on the use of long-term maintenance
                          contracts by major weapon system programs; and
                      •   Collect and disseminate lessons learned or best practices regarding
                          the use of incentives and cost-control tools that can maximize the
                          government’s leverage when considering the future use of such
                          contracts.




                      Page 28                                GAO-12-558 Long-term Maintenance Contracts
                     DOD provided written comments on a draft of this report, stating that it
Agency Comments      concurred with both recommendations. DOD stated that it planned to
and Our Evaluation   develop methodologies to collect the needed information and disseminate
                     best practices and lessons learned, but did not provide timeframes for
                     doing so. We recognize that weighing options will take some time, but
                     encourage the department to do so in a timely fashion. DOD’s written
                     response is reprinted in appendix II. DOD also provided technical
                     comments that were incorporated as appropriate.


                     We are sending copies of this report to the Secretary of Defense and
                     other interested parties. In addition, the report is available at no charge on
                     the GAO website at http://www.gao.gov.

                     If you or your staff have any questions about this report, please contact
                     Belva M. Martin at (202) 512-4841 or martinb@gao.gov or Cary Russell
                     at (202) 512-5431 or russellc@gao.gov. Contact points for our Offices of
                     Congressional Relations and Public Affairs may be found on the last page
                     of this report. GAO staff who made key contributions to this report are
                     listed in appendix III.




                     Belva M. Martin
                     Director, Acquisition and Sourcing Management




                     Cary B. Russell
                     Acting Director, Defense Capabilities and Management




                     Page 29                                GAO-12-558 Long-term Maintenance Contracts
Appendix I: Scope and Methodology
             Appendix I: Scope and Methodology




             To gain insight into the how long-term maintenance contracts are
             managed by the Department of Defense (DOD), we assessed (1) the
             extent to which DOD uses long-term maintenance contracts to support
             major weapon system programs, (2) DOD’s ability to select alternative
             maintenance services providers for its major weapon system programs,
             and (3) how long-term maintenance contracts have been structured to
             incentivize contractors’ performance and manage contractor costs. After
             consulting with DOD acquisition and logistics officials, for the purposes of
             this report we defined long-term maintenance contracts as those with a
             total potential period of performance of at least 5 years that provide
             depot-level maintenance services or support performance of maintenance
             functions. Additionally, we limited the scope of our review to include those
             long-term contracts that support major defense acquisition programs. 1

             To assess the extent to which DOD uses long-term maintenance
             contracts, we reviewed pertinent DOD acquisition and maintenance
             policies and DOD’s four most recent reports to Congress on the
             distribution of funds for public and private depot maintenance work
             compiled by the Office of the Assistant Secretary of Defense for Logistics
             and Materiel Readiness. Additionally, we examined a recent services
             portfolio analysis of Federal Procurement of Data System-Next
             Generation (FPDS-NG) data performed by the Office of Defense
             Procurement and Acquisition Policy to determine department spending for
             maintenance services. 2 We interviewed senior acquisition and logistics
             officials from the Office of the Under Secretary of Defense for Acquisition,
             Technology, and Logistics and the military departments to determine what
             department-wide data was collected, reported, and analyzed regarding
             long-term maintenance contracts. We also performed independent
             analysis of FPDS-NG data to determine the extent to which this system
             provides insight into DOD’s use of long-term maintenance contracts. After
             determining that DOD lacked department-wide data on the use of long-
             term maintenance contracts, GAO attempted to gather this information



             1
              Major defense acquisition programs are those estimated by the Under Secretary of
             Defense for Acquisition, Technology, and Logistics to require an eventual total
             expenditure of more than $365 million for research, development, test, and evaluation,
             based on fiscal year 2000 constant dollars; $2.190 billion for procurement in fiscal year
             2000 constant dollars; or are designated as a major defense acquisition program by the
             milestone decision authority.
             2
              The Federal Procurement Data System-Next Generation is the federal government’s
             current system for tracking information on contracting actions.




             Page 30                                       GAO-12-558 Long-term Maintenance Contracts
Appendix I: Scope and Methodology




from program offices and program executive offices in each of the military
departments. However, due to data reliability issues and incomplete
responses, GAO determined that it could not use the information
collected with reasonable assurance of accuracy for department-wide
analysis of long-term maintenance contracting use and management.

Based on further discussions with military department officials, we
reviewed 10 long-term contracts supporting seven major defense
acquisition programs. We selected these contracts to represent each of
the military departments and to illustrate different maintenance
approaches. The programs we selected included the following:

Air Force

•   Joint Surveillance Target Attack Radar System (JSTARS)
•   C-130 Hercules transport aircraft
•   KC-10 Extender refueling tanker aircraft

Army

•   AH-64 Apache helicopter
•   CH-47 Chinook helicopter

Navy

•   MH-60 Seahawk helicopter
•   T-45 Goshawk training aircraft

To determine the extent to which DOD has the ability to select alternative
maintenance services providers for its major weapon system programs,
we reviewed DOD and military department policy and interviewed senior
officials in the Office of the Under Secretary of Defense for Acquisition,
Technology, and Logistics and military department officials to determine
how maintenance options are considered and what factors contribute to
retaining program flexibility for sourcing depot-level maintenance. For the
programs we reviewed, we examined acquisition plans to determine how
the government decided upon a contract-based approach to
maintenance. We interviewed cognizant program officials to determine
the factors that impact the government’s ability to change maintenance
providers, focusing on the ability to transition contracted maintenance
work to a government-owned and government-operated depot and the
ability to recompete maintenance contracts. We also requested a list of



Page 31                               GAO-12-558 Long-term Maintenance Contracts
Appendix I: Scope and Methodology




major defense acquisition programs that recently went through an
acquisition review and preliminary information on provisions for acquiring
technical data rights. For the eight programs DOD identified as having
such a review between October 2010 and October 2011, we interviewed
program officials and reviewed acquisition documents, such as
acquisition strategies and life-cycle sustainment plans, which described
the rationale for the program’s plans to acquire technical data rights.

To assess how long-term maintenance contracts were structured to
incentivize contractors’ performance and manage contractor costs, we
reviewed acquisition plans, contractual information, including pricing data
and price negotiation memorandums, and interviewed cognizant
acquisition and logistics officials to understand the incentives and tools
used by program offices to motivate contractor performance and provide
visibility into contractor costs. For the 10 contracts we selected, we
reviewed programs’ use of monetary incentives such as award and
incentive fees, performance bonuses, and downward price adjustments.
Additionally, we reviewed programs’ use of contract term incentives,
specifically award terms and incentive options, which can extend a
contract’s period of performance. We analyzed incentive plans and
contractor performance data to determine how performance was
assessed, recorded, and resulted in the award of fee or additional years
of contracted work. We also interviewed program officials on the use of
incentives and compared prior versions of incentive plans to determine
how incentive metrics changed over time. For the 10 contracts we
reviewed, we identified the extent to which programs used incurred cost
data, price renegotiations, and cost-based incentive metrics as a means
to gain insight into contractor costs. We also interviewed officials from the
Office of the Under Secretary of Defense for Acquisition, Technology, and
Logistics, the military departments, and program offices on the benefits
and risks associated with long-term contracts.

We conducted this performance audit from February 2011 through
May 2012 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




Page 32                                GAO-12-558 Long-term Maintenance Contracts
Appendix II: Comments from the Department
             Appendix II: Comments from the Department
             of Defense



of Defense




             Page 33                                     GAO-12-558 Long-term Maintenance Contracts
Appendix II: Comments from the Department
of Defense




Page 34                                     GAO-12-558 Long-term Maintenance Contracts
Appendix III: GAO Contact and Staff
                  Appendix III: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Belva M. Martin, (202) 512-4841 or martinb@gao.gov
GAO Contacts
                  Cary B. Russell, (202) 512-5431 or russellc@gao.gov


                  In addition to the contacts named above, Carleen Bennett, Assistant
Staff             Director; Timothy DiNapoli, Assistant Director; Steven Banovac; Lee
Acknowledgments   Cooper; Julia Kennon; John Krump; Wiktor Niewiadomski; Bob
                  Swierczek; and Tom Twambly made key contributions to this report.




(120968)
                  Page 35                               GAO-12-558 Long-term Maintenance Contracts
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