United States General Accounting Office
GAO Report to the Chairman, Committee on
Armed Services, U.S. Senate
November 1999
DEFENSE LOGISTICS
New 120-mm Tank
Training Round
Procurement Will
Result in Savings
GAO/NSIAD-00-34
United States General Accounting Office National Security and
Washington, D.C. 20548 International Affairs Division
B-282830 Leter
November 22, 1999
The Honorable John W. Warner
Chairman, Committee on Armed Services
United States Senate
Dear Mr. Chairman:
In March 1975, the Department of Defense designated the Army as the
Single Manager for Conventional Ammunition1 with responsibility for
procuring conventional ammunition common to all military services. As the
single manager, the Army has relied on government-owned and private
sector facilities to meet its conventional ammunition requirements.
However, with the reduction in ammunition budgets and declining
requirements, the Army has significantly downsized the number of
government-owned plants in recent years and currently has eight plants
producing ammunition. One of these is the Radford Army Ammunition
Plant, which historically has produced propellant used in making
ammunition.
Tank training ammunition in fiscal year 1999 amounted to about
$205 million, or 24 percent of the total Army conventional ammunition
budget, and, therefore, has a significant impact on the ammunition
production base. In 1995, faced with dramatic reductions in ammunition
requirements, the Army attempted to reduce costs by awarding multiyear
firm fixed-price contracts covering fiscal years 1995 through 1998 for the
production of 120-mm tank training rounds to two contractors, Alliant
Techsystems and Primex Technologies. In addition, a 1993 study of the
propellant production base showed that Radford’s ability to compete for
propellant business was declining and the Army needed Radford for its
wartime replenishment mission2 for propellant. Therefore, both
contractors were required to purchase the training round propellant from
Radford. In 1999, the Army entered into new contracts for tank training
1
Conventional ammunition includes artillery, bombs, demolition material, fuzes, grenades,
mines, mortars, propellant charges, pyrotechnics, unguided rockets, small arms, and tank
training ammunition.
2
Replenishment means replacing ammunition losses after a conflict in accordance with
defense planning guidance.
Page 1 GAO/NSIAD-00-34 Defense Logistics
B-282830
rounds with the two contractors covering fiscal years 1999 through 2003.
Because the Army believed that Radford’s industrial capability no longer
required special protection, it allowed the contractors to purchase
propellant competitively. As a consequence, one contractor chose to
purchase propellant from a private company.
As requested, we determined whether the Army’s actions in 1999 resulted
in savings on the purchase of 120-mm tank training rounds, the effect the
Army’s decision to no longer direct that propellant be purchased from
Radford had on plant overhead and employment, and the potential effect
on Radford’s wartime replenishment mission.
Results in Brief The Army could achieve about $52 million in savings over a 5-year period
from its 1999 contracts for the procurement of 120-mm tank training
rounds if all contract options are exercised. The Army expects to achieve
the savings based on a negotiated decrease in price per round from the
1995 to the 1999 multiyear contracts. However, a decision by one of the
contractors to use a propellant producer other than Radford resulted in a
50-percent reduction in Radford’s propellant business for the tank training
round program.
To absorb increased overhead costs due to the loss of business, the
operating contractor at Radford negotiated price increases for propellant
with the Army for two new contracts totaling at least $14 million. Another
result of the Army’s decision to no longer direct that propellant be
purchased from Radford was that the contractor reduced its workforce at
Radford of 1,200 by 185 personnel. These personnel reductions required the
contractor to incur certain employee separation costs and affected the
contractor’s retirement funding liabilities. The Army recognized that the
1999 multiyear contracts could affect Radford’s operations but believed the
impact would be minimized because Radford was in a competitive position
to win other Department of Defense contracts.
The loss of propellant work does not affect Radford’s ability to meet its
wartime replenishment mission. Radford’s facilities have the capacity to
produce about 100 million pounds of propellant per year but currently are
only producing 10 million pounds per year. With additional personnel, this
provides more than adequate capacity for Radford to meet its
replenishment requirements. Radford officials stated that as long as the
propellant lines are operating, they would be able to replenish propellant in
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B-282830
accordance with requirements contained in current Defense Planning
Guidance.
Background The Radford Army Ammunition Plant, located in Radford, Virginia, is the
Army’s only government-owned, contractor-operated propellant production
facility. Since 1994, the Army has contracted with Alliant Techsystems to
operate Radford as the facility use contractor.3 Radford is currently capable
of producing a variety of propellants used in Department of Defense
ammunition products such as the 120-mm tank training and tank tactical
rounds and the Hydra-70 rocket.
Since 1987, the Army has procured its 120-mm tank training rounds from
two prime contractors, Alliant Techsystems (formerly Honeywell) and
General Defense (subsequently bought by Olin). The two contractors were
responsible for choosing their subcontractors and obtaining all
components. The contracts for fiscal year 1988 provided for a 70-percent/
30-percent split between the contractors, with the larger share going to the
lowest offeror. From 1988 through 1994, contracts were awarded annually
on a cost-plus basis. In 1993, to reduce costs, the Army decided to award
multiyear firm fixed-price contracts for the 120-mm tank training rounds.
In 1993, with Alliant and Olin considering a merger, the Army became
concerned that the contractors might acquire propellant from a source
other than Radford. Based on a detailed study of the propellant production
base, the Army determined that Radford, because of high costs, could not
compete in an open market for tank training round propellant business, yet
the facility could not remain viable without this business. Therefore, the
Army, in awarding the first in a series of multiyear contracts for 120-mm
tank training rounds for fiscal years 1995 through 1998, required that the
prime contractors, Alliant and Olin, 4 purchase propellant for the training
rounds from Radford.
3
The facility use contract provides for Alliant’s use of Radford facilities to complete work
for government as well as commercial customers, subcontract work, and foreign sales.
4
Olin subsequently spun off its Ordnance and Aerospace Divisions, which became Primex
Technologies.
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B-282830
In 1997, the Army began developing its tank training round acquisition
strategy for fiscal years 1999 through 2003. Under this strategy, the Army
believed that Radford could now compete in the open market because
overhead costs at Radford were down due to the rents obtained through
the Armament Retooling and Manufacturing Support Act 5 as well as the
infusion of Alliant’s own money for modernization purposes. Therefore, the
Army no longer required that the manufacturing contractors purchase
propellant from Radford for the 1999 multiyear contracts. The Army also
planned to award firm fixed-price contracts and split the work between its
two manufacturing contractors on a 60-percent/40-percent basis with the
lowest price offeror receiving the larger share.
Multiyear Contracts The Army could achieve about $52 million in savings based on the
negotiated decrease in price per round from the 1995 to the 1999 multiyear
Provide Savings but contracts if all contract year options are exercised.6 However, to absorb the
Reduce Radford impact of decreased work at Radford due to the 1999 multiyear contracts,
Alliant negotiated price increases for propellant on other new contracts
Workload with the Army and reduced personnel. The reduction-in-force caused
Alliant to incur certain separation costs, and affected retirement fund
liabilities, including the employee pension fund, that funds retirees’ annual
annuities, and the post-retirement benefits fund, that funds retiree health
care costs. While the Army realized that Radford would be affected by the
tank training round contracts, it believed Radford was capable of attracting
additional business that would offset the loss of business due to the 1999
multiyear awards.
Multiyear Contracts Savings According to the former head of the Army tank team, the Army wanted to
achieve certain savings for the 1999 multiyear contracts. However, after the
contractors had submitted their proposals, the Army realized that the
proposals would not allow them to achieve their savings goal. Once the
proposals were evaluated, the Army offered the contractors a price per
round based on a 50-percent/50-percent split rather than the original
5
The Armament Retooling and Manufacturing Support Act of 1992 encouraged, to the
maximum extent practicable, nondefense commercial firms to use government-owned,
contractor-operated ammunition manufacturing facilities of the Department of the Army.
6
The contract is for a base year plus 4 option years for specific types and quantities of tank
training rounds.
Page 4 GAO/NSIAD-00-34 Defense Logistics
B-282830
60-percent/40-percent split. To protect the integrity of the procurement,
this offer was limited to acceptance or rejection in a short time period. If
either contractor rejected the offer, the contracts were to be awarded
according to the allocation stated in the solicitation. The contractors
accepted the Army’s proposed price per round, which reduced the price of
the rounds from the original proposals by an additional $1.2 million over
the life of the contracts. This potentially could result in a total savings of
about $52 million over the life of the contracts if all options are exercised.
As shown in table 1, each type of training round decreased in price from the
1995 multiyear contracts to the 1999 multiyear contracts.
Table 1: Price Per Round Savings From 1995 Multiyear Contracts to 1999 Multiyear Contracts
1995 Multiyear 1999 Multiyear Price difference
Training round contract price contract price per round Quantity Savingsa
M831A1 $552.04 $518.07 $33.97 469,928 $15,961,461
M865 524.51 490.70 33.81 1,075,266 36,350,183
Total $52,311,644
a
Savings do not precisely calculate due to rounding associated with price difference per round.
Source: Army Industrial Operations Command.
Price Increases Negotiated As part of the acquisition strategy, the Army did not require the contractors
for Propellant at Radford to purchase propellant from Radford for the 1999 multiyear contracts. One
of the contractors chose a different producer for its propellant needs,
resulting in Radford losing 50 percent of the tank training round propellant
business it had under the 1995 multiyear contracts. To absorb the loss to
the propellant business base, Alliant, which operates the Radford plant,
allocated a portion of its overhead costs to other propellant products.
Alliant negotiated price increases with the Army on at least two propellant
products directly related to the loss of propellant business for the tank
training round. One such product was the propellant for the Hydra-70
rocket, a weapon system fired from helicopters such as the Apache and
Cobra and aircraft such as the Air Force F-16 Falcon. The Army also agreed
to a price increase for propellant for tank tactical rounds. The total impact
of the increased prices is at least $14 million over the life of the contracts.
Page 5 GAO/NSIAD-00-34 Defense Logistics
B-282830
Reduced Employment To further reduce its overhead costs due to a reduction in its business base,
Levels and Contractor Costs Alliant reduced employment levels. As shown in table 2, as a result of losing
50 percent of the tank training round propellant business, Alliant reduced
at Radford its workforce at Radford of 1,200 by 185 personnel, or about 15 percent.
Some left under a voluntary separation program or took Alliant’s offer of
early retirement for affected employees; others were laid off.
Table 2: Personnel Reductions at Radford
Total number Direct Indirect
Type of reduction-in-force of employees personnela personnelb
Involuntary layoff 107 93 14
Voluntary separation program 21 6 15
Voluntary incentive retirement 57 0 57
Total 185 99 86
a
Direct personnel are those who work directly on the production lines.
b
Indirect personnel include non-production positions such as maintenance personnel.
Source: Alliant Techsystems−Radford.
According to an Alliant official, Alliant incurred about $3.2 million in
severance and early retirement incentive costs to reduce employee levels
as a result of the reduced workload. The reductions also increased Alliant’s
liabilities for employee retirement pension and post-retirement benefits.
According to an Alliant official, based on an actuarial evaluation, as of
January 1, 1999, the pension fund was about $91.8 million overfunded. As a
result of the retirements, outlays from the pension fund will reduce this
surplus. At the time of this report, it is unknown how much the surplus will
be reduced, but according to an Alliant official, the reduction is not
expected to reduce the fund’s viability. The post retirement benefits
account, on the other hand, as of January 1, 1999, is underfunded by about
$57.2 million.7 An Alliant official stated that until their actuaries complete
their analysis at the end of calendar year 1999, the impact of losing the
propellant business on this account will not be known. The official
estimated that about $2.4 million in incentive costs it incurred for early
retirements were paid out of Alliant’s overfunded pension fund at Radford.
7
According to an Army official, Alliant has developed a schedule for funding this amount.
Page 6 GAO/NSIAD-00-34 Defense Logistics
B-282830
Severance costs totaled about $814,000 and were paid out of the plant’s
overhead account.
Army’s Assessment of 1999 According to an Army official, Alliant and Members of Congress raised
Multiyear Contracts’ Effect concerns about the effect of the loss of business on overhead rates and
costs associated with a reduction-in-force. Due to these concerns, in
on Radford’s Operations January 1999, the Army performed a cost analysis that showed personnel
would be reduced by about 11 percent and costs from the loss of propellant
business totaling about $17.5 million over the life of the contract would be
allocated to other Department of Defense programs. The Army’s Cost and
Economic Analysis Center reviewed this analysis and found it to be
reasonable. The Army did not alter its procurement strategy because, as
previously discussed, Radford had decreased its overhead costs and,
therefore, the Army believed Radford could successfully compete for
future contracts, thereby minimizing the impact of the loss of tank training
round propellant production to the business base. In fact, since the award
of the tank training round contracts, Radford won the propellant contract
for the Hydra-70 rocket.
Replenishment Mission Radford has sufficient capacity to perform its replenishment mission with
additional personnel. The plant is capable of producing about 100 million
Is Not Threatened pounds of propellant per year; while its current production is 10 million
pounds per year. According to current Defense Planning Guidance on
ammunition replenishment, Department of Defense components are to
provide the capability to replace the projected consumption (for one major
theater war) of critical munitions, troop support items, and spares
generally within 3 years. This mission requires Radford to produce about
92 million pounds of propellant and 97 million pounds of trinitrotoluene,
also known as TNT, if needed. According to an Alliant official, in order to
accomplish this mission, Radford has to maintain a large facility and
operating production lines. The official stated that losing 50 percent of the
tank training round propellant business has no immediate impact on
Radford’s ability to meet its wartime replenishment mission since
production lines are operating. However, if enough business is lost and
lines are shut down, there is increased risk that replenishment schedules
cannot be met within the Defense Planning Guidance time frames without
increased expenses.
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Agency Comments On October 25, 1999, we requested comments on a draft of this report. The
Director of Strategic and Tactical Systems in the Office of the Under
Secretary of Defense for Acquisition and Technology provided oral
comments on November 5, 1999. The Director concurred with the report.
Scope and To determine whether the Army’s actions in 1999 resulted in savings on the
purchase of 120-mm tank training rounds and the effect of the Army’s
Methodology decision to no longer direct that propellant be purchased from Radford on
plant overhead and employment, we reviewed the contract files for the
1995 and 1999 multiyear contracts, compared the prices of other
Department of Defense products produced at the plant before and after the
award of the second multiyear contracts, reviewed the cost analysis
performed by the Army, and analyzed employment levels at Radford before
and after the loss of propellant business, including the effect of workforce
reductions on retirement funds. We also interviewed officials at the Office
of the Secretary of Defense, Washington, D.C.; the U.S. Army Cost &
Economic Analysis Center, Falls Church, Virginia; the Army Materiel
Command, Alexandria, Virginia; the Industrial Operations Command, Rock
Island, Illinois; the Radford Army Ammunition Plant, Radford, Virginia;
Alliant Techsystems Headquarters, Hopkins, Minnesota; and Primex
Technologies Headquarters, St. Petersburg, Florida.
To determine the potential effect on Radford’s wartime replenishment
mission, we reviewed the plant’s replenishment requirements and the
requirements contained in the current Defense Planning Guidance and
discussed replenishment with Army and contractor officials.
We conducted our review from May through October 1999 in accordance
with generally accepted government auditing standards.
We are sending copies of this report to the Honorable William Cohen,
Secretary of Defense; the Honorable Louis Caldera, Secretary of the Army;
the Honorable Jacob Lew, Director, Office of Management and Budget;
Senator Carl Levin, Ranking Minority Member, Senate Committee on
Armed Services; Representative Floyd D. Spence, Chairman, and
Representative Ike Skelton, Ranking Minority Member, House Committee
on Armed Services. Copies will also be made available to others upon
request.
Page 8 GAO/NSIAD-00-34 Defense Logistics
B-282830
Key contributors to this report are listed in appendix I.
Sincerely yours,
David R. Warren, Director
Defense Management Issues
Page 9 GAO/NSIAD-00-34 Defense Logistics
Appendix I
GAO Contact and Staff Acknowledgments AA
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GAO Contact Ronald L. Berteotti (214) 777-5702
Acknowledgments In addition to the name above, Kimberly C. Seay, C. Douglas Mills, Jr., and
Robert J. Rivas made key contributions to this report.
(709414) Leter Page 10 GAO/NSIAD-00-34 Defense Logistics
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Address Correction Requested
Defense Logistics: New 120-mm Tank Training Round Procurement Will Result in Savings
Published by the Government Accountability Office on 1999-11-22.
Below is a raw (and likely hideous) rendition of the original report. (PDF)