oversight

Navy Depot Maintenance: Privatizing Louisville Operations in Place Is Not Cost-Effective

Published by the Government Accountability Office on 1997-07-31.

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

                  United States General Accounting Office

GAO               Report to Congressional Requesters




July 1997
                  NAVY DEPOT
                  MAINTENANCE
                  Privatizing Louisville
                  Operations in Place Is
                  Not Cost-Effective




GAO/NSIAD-97-52
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division

             B-275524

             July 31, 1997

             The Honorable Herbert H. Bateman
             Chairman
             The Honorable Norman Sisisky
             Ranking Minority Member
             Subcommittee on Military Readiness
             Committee on National Security
             House of Representatives

             As requested, we are providing a follow-up to our September 1996 report
             on the Navy’s preliminary cost comparison of privatizing-in-place
             maintenance workloads at its Louisville, Kentucky, depot with transferring
             the workloads to other Navy facilities.

             This report provides the results of our review of the Navy’s final cost
             analysis and early contractor cost data through May 1997. Our objectives
             were (1) to determine whether privatizing the depot maintenance
             workload in place at Louisville is more cost-effective than transferring the
             workload to other DOD facilities and (2) to review the practicability of
             transferring the Louisville workload to other defense commercial
             contractor facilities.


             During the 1995 Base Realignment and Closure (BRAC) process, the
Background   Department of Defense (DOD) recommended that the Louisville depot be
             closed and its workloads transferred to several DOD facilities. The naval
             gun repair workload was projected to transfer to the Norfolk Naval
             Shipyard, Virginia; the Phalanx ship close-in-air defense system to the
             Naval Surface Warfare Center, Crane, Indiana; and the engineering support
             functions to the Naval Surface Warfare Center, Port Hueneme, California.

             During the BRAC Commission’s review of DOD’s recommendations, the city
             of Louisville proposed that DOD privatize the depot workload in place. The
             Commission found that the Navy’s savings estimate did not include all
             costs at the Norfolk Naval Shipyard and that an additional $18 million
             could be required. Further, the Commission found that the Navy did not
             include $13.4 million in closure-related moving costs and that these
             additional costs could increase the one-time cost to close to $136 million.
             While the additional closure costs could extend the closure payback
             period from 3 to 4 years, the Navy’s cost estimate supporting closure was
             accepted by the Commission. The Commission also found that the gun




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systems engineering functions at Louisville are consistent with operational
requirements, and that the maintenance and overhaul functions performed
at the facility have contributed substantially to the effectiveness of the
facility in serving the Department of the Navy. The Commission
recommended the following:

“close the Naval Surface Warfare Center, Crane Division Detachment, Louisville. Transfer
workload, equipment and facilities to the private sector or local jurisdiction as appropriate
if the private sector can accommodate the workload onsite; or relocate necessary functions
along with necessary personnel, equipment and support to other naval technical activities,
primarily the Naval Shipyard, Norfolk; Naval Surface Warfare Center, Hueneme, California;
and the Naval Surface Warfare Center, Crane, Indiana.”


Subsequently, the Navy made a preliminary decision to privatize-in-place
the Louisville depot’s operations, with some Navy program management
positions remaining at the privatized facility. The decision was made to
retain the field engineering support function at the privatized Louisville
depot.1

On the basis of our review of the Navy’s preliminary cost analysis, we
reported in September 1996 that privatization-in-place did not appear to be
the most cost-effective approach given excess capacity in DOD’s depot
maintenance system and in the private sector.2 We stated that
privatization-in-place would not reduce excess capacity and that such
privatization, if not effectively managed, including the downsizing of
remaining depot infrastructure, could exacerbate inefficiencies inherent in
underutilized depot maintenance capacity. For example, the Norfolk Naval
Shipyard and Crane Naval Surface Warfare Center, the primary depot
facilities that could have received the Louisville workloads, are expected
to have 7.1 million and 1.8 million direct labor hours of excess capacity in
1999.

According to industry representatives, the private sector has been
reducing its excess capacity through mergers, closures, and
consolidations, but DOD has not made comparable reductions in its
infrastructure. For example, a recent Defense Science Board study team
concluded that privatization-in-place should be avoided, since it tends to
preserve excess capacity. A privatization task force comprised of top


1
The 170 Navy civilians in the Louisville engineering support pool are assigned to the Naval Surface
Warfare Center, Crane Division.
2
Navy Depot Maintenance: Cost and Savings Issues Related to Privatizing-in-Place at the Louisville,
Kentucky, Depot (GAO/NSIAD-96-202, Sept. 18, 1996).



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                   executives from the aerospace industry that was formed in 1996 by the
                   governor of California concluded that privatization-in-place

                   “inhibits the realization of cost savings intended from base closures and the performance
                   goal improvements that privatization is intended to achieve. Privatization-in-place,
                   therefore, does not solve the excess capacity problem within either the public or private
                   sector of the defense industrial base.”


                   Our September 1996 report was based on preliminary Navy estimates that
                   were updated just prior to contract award. As you are aware, the Secretary
                   of the Navy notified Congress on June 13, 1996, that as provided for in the
                   Competition in Contracting Act, the Navy intended—in the public
                   interest—to award non-competitive contracts to the two defense
                   contractors selected by the Louisville local redevelopment authority. On
                   July 19, 1996, the Navy awarded contracts to Hughes Missile Systems
                   Company for the Phalanx ship close-in-air defense system and to United
                   Defense Limited Partnership for gun repair workloads.


                   The Navy’s privatization-in-place of the workloads at the Louisville depot,
Results in Brief   without reducing excess capacity at its remaining depots, does not appear
                   to be as cost-effective as transferring the workloads to other underutilized
                   Navy facilities. Our analysis shows that the Navy’s final cost comparison of
                   the proposed privatization-in-place versus the transfer of workloads to
                   other Navy facilities understated the annual savings from transferring the
                   work and overstated the one-time transfer cost. We estimate the one-time
                   transition cost for transferring the workload is about $10 million less than
                   the Navy projected. Using our estimate, the cost for the transfer option is
                   about $234 million, or about $100 million more than the
                   privatization-in-place option. We estimate annual savings of $29.9 million
                   for the transfer option, or about $20.6 million more than the Navy
                   estimated. Using our estimates, the transfer option would pay back the
                   additional one-time transition cost in less than 3.5 years, compared to the
                   additional 12-year payback period computed using the Navy estimates.

                   The Navy’s analysis recognized that transferring the workloads to
                   underutilized facilities would reduce the overhead cost for each
                   production unit. However, the Navy’s analysis applied per-unit savings
                   only to the workloads transferred and not to existing workloads at
                   receiving locations. Our analysis applies overhead per-unit savings to
                   workloads at the receiving locations as well as for those being transferred.
                   We estimate that transferring the workload rather than privatizing-in-place




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                         would have resulted in savings of about $48.6 million over the first 5-year
                         period. Further, after that time, transferring would result in annual savings
                         of about $29.9 million.

                         One of the contractors at Louisville could take over part of Louisville’s
                         workload at another industrial activity it operates that has significant
                         excess capacity. The United Defense Limited Partnership has the
                         capability and the capacity to handle the gun repair workload at a
                         government-owned, contractor-operated facility in Fridley, Minnesota,
                         which currently manufactures gun systems. We estimate that transferring
                         the gun repair workload to the Fridley facility could result in annual
                         savings of about $9.2 million on the consolidated Navy workloads
                         performed at that facility. Navy officials stated that the Navy intends to
                         divest itself of this facility. Officials at the Hughes Missile Systems
                         Company in Tucson, Arizona, said they could not handle the other
                         Louisville workload—the Phalanx close-in-weapon system—in existing
                         facilities without incurring large infrastructure costs.

                         We recently issued a report identifying DOD infrastructure activities as a
                         high-risk area.3 Our primary concerns related to inefficient business
                         processes and excess capacity. We pointed out that DOD needs an overall
                         plan for addressing the problem. The situation at Louisville is
                         representative of this overall concern.


                         Our analysis of the Navy’s comparative cost study shows that the Navy
Annual Recurring         overstated transfer cost by about $10 million and understated annual
Costs Make               recurring savings by about $20.6 million. Using the revised data, we
Privatizing-in-Place     estimate that privatizing-in-place the Louisville depot workload will cost
                         about $48.6 million over the 5-year contract period, rather than save
the Less                 $63.7 million as the Navy estimated. Further, beyond the initial 5-year
Cost-Effective Option    contract period, we estimate that transferring the workload would result
                         in additional annual savings of at least $29.9 million. The actual annual
                         savings could be higher or lower depending on future workloads and
                         capacity utilization at both Louisville and the Navy shipyards and warfare
                         centers.


Analysis of Navy Study   The Navy’s comparative cost analysis of the workload transfer and
                         privatization options considered annual recurring and one-time transition
                         cost elements. The Navy reported that transferring the workload to other

                         3
                          High-Risk Series: Defense Infrastructure (GAO/HR-97-7, Feb. 1997).



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                                             depots would result in higher annual savings, but would require larger
                                             one-time transition costs. Based on this information, the Navy estimated
                                             that it could save about $63.7 million over the 5-year contract period by
                                             privatizing-in-place rather than transferring the workloads to other depots,
                                             as shown in table 1.

Table 1: Summary of the Navy’s Cost
Analysis of Transfer and Privatization       Dollars in millions
Options Over the 5-Year Contract                                           Cost by closure option
Period
                                             Type of cost                               Transfer    Privatization   Difference
                                             One-time                                     $243.6          $133.4       $110.2
                                             Annual recurring                              427.4           473.9        –46.5
                                             Total                                        $671.0          $607.3        $63.7
                                             Source: Navy cost analysis.



                                             Using this data, it would take 12 years to pay back the one-time cost
                                             difference.

                                             However, we found that the Navy’s cost analysis:

                                         •   overstated one-time transition costs to transfer workload to other depots
                                             by $9.4 million and
                                         •   excluded $20.6 million in annual recurring savings at the receiving depots
                                             ($103 million over the 5-year contract period).

                                             Using this data, we estimate that the Navy would save about $48.6 million
                                             over the 5-year contract period by transferring the Louisville workload to
                                             other depots, as shown in table 2.

Table 2: Our Cost Analysis of Transfer
and Privatization Options Over the           Dollars in millions
5-Year Contract Period                                                     Cost by closure option
                                             Type of cost                               Transfer    Privatization   Difference
                                             One-time                                     $234.2          $133.4       $100.8
                                             Annual recurring                              324.5           473.9       –149.4
                                             Total                                        $558.7          $607.3       –$48.6

                                             Using this data, we estimate the cost of transferring this work would pay
                                             back the one-time cost difference in about 3.5 years.




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One-Time Transition Costs   Transition costs are one-time, up-front costs that are incurred to
to Transfer Overstated      disestablish the Louisville facility as a government-owned and operated
                            activity and to establish operations to perform the required work under
                            the privatization-in-place or transfer options. The key transition cost
                            elements for the privatization-in-place option were personnel separation
                            and relocation costs and civilian retraining, administrative, and
                            environmental costs. The key transition cost elements for the transfer
                            option were personnel separation and relocation costs; equipment
                            relocation and military construction costs; and other property
                            transportation, administrative, repair process documentation, and
                            environmental costs.

                            The Navy estimated that the transition costs would be about $243 million
                            for the transfer option and $133 million for privatizing-in-place—a
                            one-time cost difference of about $110 million to transfer the workloads.
                            Our analysis shows this cost difference is overstated by $9.4 million
                            because the Navy (1) did not justify about $8 million in administrative
                            costs for the transfer option and (2) did not adjust the estimated personnel
                            relocation costs by about $1.4 million to reflect the smaller number of
                            employees that would be needed. Adjusting the Navy’s estimate for these
                            factors reduces the difference between the two options to about
                            $100 million, as shown in table 3.




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Table 3: Our Estimate of One-Time
Transition Cost Estimates to                                                            Cost
Privatize-in-Place Versus Transfer                                                           Transfer         Privatization
Louisville Depot Workload to Other   Transition cost categories                                option               option         Difference
Navy Depots
                                     Military construction                                    $32,820
                                     Environmental                                             11,204                 $5,225
                                     Personnel transfer/severance                              76,192a                64,339
                                     Civilian retraining                                         3,824                11,380
                                     Transportation                                            12,466                  1,740
                                     Property disposal                                                2                3,033
                                     Phone services                                                   6                    12
                                     Equipment relocation                                      42,127                  3,993
                                     Equipment disposal                                            232                     20
                                     Interim contract costs                                      4,600                 2,355
                                     Administrative                                             3,108 b               11,829
                                     Minor construction                                          1,480                 3,225
                                     Repair/refurbishment                                        3,617                 1,640
                                     Other procurement                                           3,726                   322
                                     Other costs                                               38,800                 24,239
                                     Total costs                                            $234,204               $133,352         $100,852
                                     a
                                      We reduced the Navy’s personnel relocation cost estimate by $1.4 million to reflect the actual
                                     number of people that would be needed at the receiving depot.
                                     b
                                         We reduced the Navy’s administrative cost estimate for $8 million in unjustified costs.

                                     Source: Navy cost analysis, with our adjustments as footnoted.




Annual Recurring Savings             Our analysis shows the Navy estimate of $9.3 million annual recurring
From Transfer Option                 savings from transferring the workloads to underutilized facilities was
Understated                          understated by $20.6 million. We estimate annual recurring savings to be
                                     $29.9 million, or about $150 million over the 5-year contract period. The
                                     Navy estimated the impact of overhead rate savings on workloads being
                                     transferred to the underutilized facilities but did not apply the overhead
                                     rate to existing workloads at those facilities. We developed our estimate
                                     using labor rate data from the potential receiving Navy locations at the
                                     Norfolk and Crane facilities and revised it to reflect the reduction in
                                     overhead costs that would result from spreading fixed overhead costs over
                                     a larger workload base. As shown in table 4, reduction in rates at the
                                     Norfolk and Crane facilities would produce annual savings of about
                                     $20.6 million on their existing workloads.




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Table 4: Our Estimate of Annual
Overhead Rate Savings on the Existing                                                 Direct labor       Reduction in
Workloads at Receiving Depots           Receiving depots                                    hours               rates                Savings
                                        Norfolk Naval Shipyard                           8,969,051                $1.32           $11,807,215
                                        Crane Surface Warfare Center                     4,337,000                  2.02            8,776,380
                                        Total                                                                                     $20,583,595
                                        Note: Direct labor hours and rate reductions are yearly averages over the period of the
                                        privatization contracts.



                                        The draft of this report we provided to DOD for comment stated that the
                                        $29.9-million consolidation savings were in addition to the BRAC
                                        Commission’s $28.6 million savings estimate. Navy officials did not agree
                                        that the total BRAC savings should be added to the consolidation savings
                                        estimate. They noted that the estimated BRAC savings were based on the
                                        elimination of depot and nondepot personnel and base operating costs.
                                        They further stated that much of the nondepot related savings had been
                                        achieved under privatization, and that the depot related savings were
                                        reflected in the $29.9-million estimate. After reviewing supporting Navy
                                        and BRAC data, we agree that some, but not all of the BRAC savings from
                                        eliminating nondepot personnel and operating support costs had been
                                        achieved and depot savings were reflected in our $29.9-million estimate.
                                        The data showed that about $12 million of the BRAC savings was achieved
                                        by eliminating nondepot personnel and operating costs. However, we
                                        could not determine exactly how much of this amount had been saved.

                                        In its 1995 report, the BRAC Commission expressed concern about savings
                                        that were not included in the Cost of Base Realignment Actions model.
                                        Specifically, the Commission identified the exclusion of savings achievable
                                        by consolidating functions at fewer locations. The Commission reported
                                        that even though savings from consolidation are difficult to estimate, they
                                        are a legitimate savings due to the closure process.


Declining Workload May                  Declining workloads and the impact of these declines on maintenance cost
Further Increase Costs                  have been key reasons for closing depots through the base realignment
                                        and closure process. Consolidating workloads from the closed facilities
                                        with workloads in remaining depot facilities was to improve capacity
                                        utilization at remaining facilities and reduce costs by spreading fixed
                                        overhead costs over a larger number of production units. According to
                                        Navy officials, over the 4-year period between 1992 and 1995, the




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Louisville depot’s workload declined about 32 percent. They noted that
further Navy workload declines are likely.

DOD officials stated that the repair workload for the Phalanx system is
about what was projected for the fiscal year 1997 contract period.
However, the gun repair workload initially projected for fiscal year 1997
has not materialized. In July 1996, at the time of contract award, the
contractor’s overhead rates were based on a projected funded workload
valued at about $44.9 million. In September 1996, United Defense Limited
Partnership rates for fiscal year 1997 were renegotiated based on a lower
projected funded workload valued at about $35.2 million. According to
Defense Contract Management Command and contractor officials, the
actual value of the 1997 funded gun repair workload could be as low as
$21 million—a reduction of over 50 percent from the initially projected
funded workload. As a result, United Defense Limited Partnership has an
increasingly fewer number of production units to share its fixed overhead
costs, resulting in increased costs for each unit produced. As an indicator
of these increased costs, in May 1997, United Defense increased its
estimate of funding required for 13 contract items by $3.3 million—an
increase of 26 percent. These 13 items are the only line items from the
46 funded line items in the gun repair workload for which the contractor
has reported any costs for fiscal year 1997. According to Navy officials,
under the cost-type contract used at the Louisville depot, it is likely that
additional Navy workload declines will increase costs further. Contractor
and local reuse authority officials note that efforts are being made to bring
in other gun repair workload as well as some commercial work. However,
officials stated that the high overhead rates make it difficult for the
Louisville depot to attract new work. We have reported that workload
declines in Navy shipyards have also resulted in losses that will require
rate increases.4

One of the key advantages of the transfer option was to broaden the
workload base at the receiving location to lessen the impact of temporary
shifts in workload. As workloads continue to decline, a larger industrial
facility with a broader workload base could potentially reassign laborers
to another workload with less impact on the total cost of operations.




4
 Defense Depot Maintenance: Challenges Facing DOD in Managing Working Capital Funds
(GAO/T/NSIAD/AIMD-152, May 7, 1997).



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                      We examined the potential for consolidating portions of the Louisville
Potential for Using   workloads with compatible military programs currently being
Existing Contractor   accomplished in DOD contractor facilities to determine if consolidation
Facilities for the    savings could be achieved. The Louisville depot’s gun repair workload
                      constitutes about 46 percent of the total maintenance workload at that
Louisville Workload   facility. We determined that this workload fits the existing capabilities and
                      available capacity of the government-owned, contractor-operated United
                      Defense Limited Partnership facility in Fridley, Minnesota, which currently
                      operates with significant excess capacity. Such a move could result in a
                      gross annual savings of about $13.9 million for Fridley’s existing workload.
                      However, because labor rates are higher at the Fridley facility, the
                      transferred workload would cost $4.7 million more per year than at the
                      Louisville depot, reducing the potential annual savings for the
                      consolidated workload to $9.2 million.

                      Navy officials stated that consolidation at the Fridley facility is not a
                      realistic option since the Navy plans to divest itself of that facility. It is
                      uncertain where the contractor may decide to locate the current Fridley
                      research and development, production support, and manufacturing
                      workloads. Since the Louisville depot has related workload with
                      significant excess capacity, it is one option that may be considered. If
                      these workloads were moved to the Louisville depot, significant overhead
                      savings could be achieved for the gun repair workloads currently
                      performed there.

                      We also reviewed the potential for transferring the Phalanx close-in
                      weapon system, which accounts for the remaining 56 percent of the
                      depot’s workload, to the Hughes Missile Systems Company facility in
                      Tucson, Arizona. This does not appear to be a feasible option because
                      previous Hughes production consolidation initiatives, which resulted in
                      the closure of unneeded facilities to reduce excess capacity, limited
                      available capacity to the production of circuit cards. Hughes officials
                      stated that prior to their consolidation initiatives, the Tucson facilities
                      would likely have had the necessary capacity to absorb Louisville’s
                      Phalanx workload.


                      Costly excess capacity in the Navy depot infrastructure has been
Conclusions and       aggravated by the recent privatization-in-place of the Louisville depot. Our
Recommendations       February 1997 report on defense infrastructure identified infrastructure
                      activities as a high-risk area that requires breaking down cultural
                      resistance to change, overcoming service parochialism, and setting forth a



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                  clear framework for a reduced defense infrastructure to avoid waste and
                  inefficiency. Our primary concerns related to inefficient business
                  processes and excess capacity. We pointed out that DOD needs an overall
                  plan for addressing the problem. The situation at the Louisville depot is
                  representative of this overall concern. While this facility is now leased by
                  the local reuse authority and operated by the contractors, it is increasingly
                  inefficient as the workload continues to decline. The Navy must pay the
                  cost for this inefficiency and the inefficiency of other facilities that could
                  have been made more productive and cost-effective had the Louisville
                  workloads been consolidated there.

                  We recommend that the Secretary of Defense direct the Secretary of the
                  Navy to (1) develop a plan for reducing excess depot maintenance
                  capacity and costs and (2) prior to exercising any contract options for the
                  Louisville workload, conduct a cost analysis that would compare the
                  cost-effectiveness of privatizing the Louisville workload in place with
                  transferring it to underutilized DOD or contractor facilities. The cost
                  analysis should also include the total cost and savings associated with
                  overhead cost reduction that would be realized at underutilized DOD and
                  contractor facilities for workloads already produced at these locations.


                  DOD’s response to our draft report, which is provided in appendix I,
Agency Comments   generally concurred with our recommendations. DOD concurred with the
                  intent of our recommendation to develop a plan to reduce excess capacity
                  but stated that it would be inappropriate to wait until such a plan is
                  developed before deciding to exercise the contract renewal options for the
                  Louisville workload. The DOD response noted that in deciding whether or
                  not to exercise the Louisville contract options, the Navy must follow the
                  Federal Acquisition Regulation (FAR). While we recognize that the Navy
                  must follow the FAR in executing contract options, the regulations provide
                  the Navy with some degree of latitude in deciding whether to execute
                  contract options. If it develops an overall plan for reducing excess
                  capacity, the Navy can consider the cost implications of excess capacity at
                  other DOD depots before executing contract renewal options on the
                  Louisville workload. Nonetheless, we revised our recommendation so the
                  development of a plan to reduce excess capacity is separate from our
                  recommendation related to exercising the option on the Louisville
                  workload. DOD agreed that there is a need to reduce excess depot
                  maintenance capacity.




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                  DOD partially concurred with our recommendation that the Navy conduct a
                  cost analysis before exercising any renewal options for the Louisville
                  workload. DOD stated that it will direct the Secretary of the Navy to
                  conduct and adequately document a cost analysis in conjunction with any
                  decision affecting the continuation of previously privatized workloads
                  from the Louisville depot. However, the DOD response noted that the
                  alternatives permitted by BRAC did not include transferring the Louisville
                  workload to other contractor facilities, and therefore, that analysis would
                  be inappropriate. We continue to believe that reducing excess capacity in
                  both the public and private sectors is essential to reducing the cost of
                  DOD’s depot maintenance program. Therefore, in making future workload
                  allocation decisions for the Louisville workload, DOD and other contractor
                  facilities should be considered.

                  The draft of this report stated that the Navy planned to implement a pilot
                  program for pension portability at the Louisville depot.5 The program
                  would have allowed DOD civilian employees of this depot and other
                  activities on closed military bases whose jobs were privatized-in-place to
                  accrue years of federal service for the purpose of determining eligibility
                  for civil service retirement benefits for their private sector employment.
                  Subsequently, the Deputy Secretary of Defense announced that the
                  Department would not be establishing a pilot program at Louisville or any
                  other privatized facility. We removed the information contained in our
                  draft report referring to this program.


                  To examine the cost-effectiveness of the Louisville depot
Scope and         privatization-in-place relative to transferring the work to other DOD
Methodology       facilities, including the impact of excess capacity in existing Navy
                  facilities, we reviewed documents and interviewed officials from the

              •   Office of the Secretary of Defense and the Office of the Secretary of the
                  Navy in Washington, D.C.;
              •   Naval Sea Systems Command and Naval Surface Warfare Center
                  Headquarters, Arlington, Virginia;
              •   Naval Surface Warfare Center field locations in Louisville, Kentucky; Port
                  Hueneme, California; and Crane, Indiana;
              •   Norfolk Naval Shipyard, Virginia; and




                  5
                   This program was authorized by section 1616 of the National Defense Authorization Act for Fiscal
                  Year 1997, P.L. 104-201.



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•   Defense Contract Management Command and Defense Contact Audit
    Agency contractor sites at United Defense Limited Partnership, Fridley,
    Minnesota, and Hughes Missile Systems Company, Tucson, Arizona.

    To analyze the Navy’s cost study, we reviewed the supporting data for the
    Navy’s cost analysis, comparing estimates under each budget category. We
    reviewed the material cost elements for relevance, completeness, and
    accuracy and discussed our observations with responsible Navy
    management and contracting officials.

    To determine the feasibility of transferring the Louisville workloads to DOD
    contractor facilities, we interviewed officials from the United Defense
    Limited Partnership and the Hughes Missile Systems Company, the two
    companies awarded 1-year contracts for the Louisville workload. We also
    interviewed Defense Contract Management Command and Defense
    Contract Audit Agency officials at each facility, collected data on
    contractor operating cost and current workload, and calculated the cost
    impact of transferring the workload covered by the Louisville privatization
    contracts to these private sector facilities.

    We conducted our review from July 1996 through February 1997 in
    accordance with generally accepted government auditing standards.


    We are sending copies of this report to the Secretaries of Defense and the
    Navy; the Director, Office of Management and Budget; and interested
    congressional committees. Copies will also be made available to others
    upon request.

    Please contact me at (202) 512-8412 if you or your staff have any questions
    regarding this report. Major contributors to this report were Jim Wiggins,
    Julia Denman, Larry Junek, and John Strong.




    David R. Warren, Director
    Defense Management Issues




    Page 13                                 GAO/NSIAD-97-52 Navy Depot Maintenance
Appendix I

Comments From the Department of Defense




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Appendix I
Comments From the Department of Defense




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Appendix I
Comments From the Department of Defense




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Appendix I
Comments From the Department of Defense




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Appendix I
Comments From the Department of Defense




Page 18                                   GAO/NSIAD-97-52 Navy Depot Maintenance
Related GAO Products


              Defense Depot Maintenance: Challenges Facing DOD in Managing Working
              Capital Funds (GAO/T/NSIAD/AIMD-152, May 7, 1997).

              Depot Maintenance: Uncertainties and Challenges DOD Faces in
              Restructuring Its Depot Maintenance Program (GAO/T/NSIAD-111, Mar. 18,
              1997) and (GAO/T/NSIAD-112, Apr. 10,1997).

              Defense Outsourcing: Challenges Facing DOD As It Attempts to Save
              Billions in Infrastructure Costs (GAO/T/97-110, Mar. 12, 1997).

              High-Risk Series: Defense Infrastructure (GAO/HR-97-7, Feb. 1997).

              Air Force Depot Maintenance: Privatization-in-Place Plans are Costly
              While Excess Capacity Exists (GAO/NSIAD-97-13, Dec. 31, 1996).

              Army Depot Maintenance: Privatization Without Further Downsizing
              Increases Costly Excess Capacity (GAO/NSIAD-96-201, Sept. 18, 1996).

              Navy Depot Maintenance: Cost and Savings Issues Related to
              Privatizing-in-Place the Louisville, Kentucky, Depot (GAO/NSIAD-96-202,
              Sept. 18, 1996).

              Defense Depot Maintenance: Commission on Roles and Mission’s
              Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July 15,
              1996).

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

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

              Defense Depot Maintenance: Privatization and the Debate Over the
              Public-Private Mix (GAO/T-NSIAD-96-146, Apr. 16, 1996 ) and (GAO/T-NSIAD-96-148,
              Apr. 17, 1996).

              Military Bases: Closure and Realignment Savings Are Significant, but Not
              Easily Quantified (GAO/NSIAD-96-67, Apr. 8, 1996).

              Depot Maintenance: Opportunities to Privatize Repair of Military Engines
              (GAO/NSIAD-96-33, Mar. 5, 1996).




              Page 19                                    GAO/NSIAD-97-52 Navy Depot Maintenance
           Related GAO Products




           Closing Maintenance Depots: Savings, Personnel, and Workload
           Redistribution Issues (GAO/NSIAD-96-29, Mar. 4, 1996).

           Navy Maintenance: Assessment of the Public-Private Competition Program
           for Aviation Maintenance (GAO/NSIAD-96-30, Jan. 22, 1996).

           Depot Maintenance: The Navy’s Decision to Stop F/A-18 Repairs at Ogden
           Air Logistics Center (GAO/NSIAD-96-31, Dec. 15, 1995).

           Military Bases: Case Studies on Selected Bases Closed in 1988 and 1991
           (GAO/NSIAD-95-139, Aug. 15, 1995).

           Military Base Closure: Analysis of DOD’s Process and Recommendations
           for 1995 (GAO/T-NSIAD-95-132, Apr. 17, 1995).

           Military Bases: Analysis of DOD’s 1995 Process and Recommendations for
           Closure and Realignment (GAO/NSIAD-95-133, Apr. 14, 1995).

           Aerospace Guidance and Metrology Center: Cost Growth and Other
           Factors Affect Closure and Privatization (GAO/NSIAD-95-60, Dec. 9, 1994).

           Navy Maintenance: Assessment of the Public and Private Shipyard
           Competition Program (GAO/NSIAD-94-184, May 25, 1994).

           Depot Maintenance: Issues in Allocating Workload Between the Public and
           Private Sectors (GAO/T-NSIAD-94-161, Apr. 12, 1994).

           Depot Maintenance (GAO/NSIAD-93-292R, Sept. 30, 1993).

           Depot Maintenance: Issues in Management and Restructuring to Support a
           Downsized Military (GAO/T-NSIAD-93-13, May 6, 1993).

           Air Logistics Center Indicators (GAO/NSIAD-93-146R, Feb. 25, 1993).

           Defense Force Management: Challenges Facing DOD as it Continues to
           Downsize its Civilian Workforce (GAO/NSIAD-93-123, Feb. 12, 1993).

           Navy Maintenance: Public/Private Competition for F-14 Aircraft
           Maintenance (GAO/NSIAD-92-143, May 20, 1992).

           Military Bases: Information on Air Logistics Centers (GAO/NSIAD-90-287FS,
           Sept. 10, 1990).



(709220)   Page 20                                   GAO/NSIAD-97-52 Navy Depot Maintenance
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