oversight

Air Force Privatization-In-Place: Analysis of Aircraft and Missile Guidance System Depot Repair Costs

Published by the Government Accountability Office on 1997-12-22.

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

                  United States General Accounting Office

GAO               Report to Congressional Requesters




December 1997
                  AIR FORCE
                  PRIVATIZATION-IN-
                  PLACE
                  Analysis of Aircraft and
                  Missile Guidance System
                  Depot Repair Costs




GAO/NSIAD-98-35
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division

             B-277787

             December 22, 1997

             Congressional Requesters

             As requested, we reviewed the Air Force’s interim cost comparison of
             operating its former Aerospace Guidance and Metrology Center (AGMC) in
             Newark, Ohio, prior to its closure with the current privatized-in-place cost
             as the Boeing Guidance Repair Center (BGRC).1 We previously discussed
             the AGMC/BGRC cost comparison issues in testimonies during March and
             April 1997.2 This report provides our assessment of the interim
             comparison, including the major reasons for cost differences between the
             two activities. This report contains no recommendations.


             AGMC was closed as a result of a 1993 decision of the Base Realignment and
Background   Closure (BRAC) Commission. In recommending the closure of the Newark
             Air Force Base/AGMC, the Commission noted that the workload could be
             privatized or moved to other depot maintenance activities. The BRAC
             recommendation states

             “The Aerospace Guidance and Metrology Center (AGMC) depot will be closed; some
             workload will move to other depot maintenance activities including the private sector.”


             After the BRAC recommendation to close AGMC was finalized, (1) the Air
             Force moved a small portion of AGMC’s Air Force workload to other Air
             Force depots, (2) the Navy moved most of its AGMC workload to other
             sites, and (3) the Army moved all of its AGMC workload to other sites. The
             Air Force decided to privatize-in-place the remaining AGMC workloads. At
             the time it made this decision, the Air Force relied on an analysis that
             estimated privatizing would save about $5 million in 1997. However, the
             preaward analysis was not documented and Air Force officials do not
             know the basis for the costs included. Consequently, the Air Force was not
             able to reconcile its current interim study to its precontract award
             analysis.

             Since October 1996, the Newark, Ohio facility has been operated as the
             Boeing Guidance Repair Center by two contractors—Boeing North
             American, Inc., (Autonetics Electronics Systems Division) and Wyle
             Laboratories, Inc. The BGRC repair contract is managed by the Air Force’s
             1
              The term Boeing Guidance Repair Center refers to the facility housing the two privatization-in-place
             contractors —the Boeing Company and Wyle Laboratories.
             2
             Defense Depot Maintenance: Uncertainties and Challenges DOD Faces in Restructuring Its Depot
             Maintenance Program (GAO/T-NSIAD-97-111, Mar. 18, 1997) and (GAO/T-NSIAD-97-112, Apr. 10, 1997).



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                          Ogden, Utah, Air Logistics Center program office. Weapon system and
                          item management functions for missile inertial guidance systems are
                          performed at Ogden and the same functions for aircraft inertial guidance
                          systems are managed at the Air Force’s Oklahoma City Air Logistics
                          Center. The Air Force is retaining ownership of depot plant equipment
                          with an estimated value of $326 million. The Newark-Heath-Licking
                          County Port Authority is in the process of purchasing the Newark Air
                          Force Base real property.3 The Port Authority currently leases the facility
                          to Boeing, which then subleases a portion of the facility to Wyle
                          Laboratories. Additional details regarding the AGMC’s mission and the
                          depot’s closure and privatization-in-place are found in appendix I.


Privatization-in-Place    The Air Force’s AGMC and two Navy facilities are the only
Experience                privatizations-in-place resulting from BRAC decisions and have,
                          consequently, created much interest in the cost and benefits of this
                          concept.4 The question of whether closing and privatizing-in-place AGMC’s
                          workload would result in savings arose soon after the 1993 BRAC closure
                          decision. After the decision, Air Force organizations conducted several
                          studies comparing the projected cost of privatizing-in-place the AGMC depot
                          maintenance workload against the historical costs of the Air Force depot.
                          These studies concluded that costs of a privatized-in-place operation
                          would exceed the historic costs by $6.2 million to $20 million, on a
                          projected workload of about $82 million to $90 million. However, in late
                          1995, at the time of the decision to award the contract, an Air Force
                          Materiel Command (AFMC) analysis concluded that privatization-in-place
                          would save about $5 million in 1997 and a total of $20 million over the
                          5-year contract period.


Preliminary Analysis of   In April 1996, we testified that preliminary data showed (1) unit costs were
Contract Costs            higher after privatization-in-place for 201, or about 79 percent of the items
                          we reviewed; and (2) overall, repair costs increased by about $6 million for
                          the 254 items reviewed.5 We also noted that AFMC’s projected 5-year
                          savings of $20 million did not include all relevant costs. For example,


                          3
                           The Heath-Newark-Licking County Port Authority is the Ohio chartered local reuse authority
                          responsible for redeveloping and managing the closed Newark Air Force Base facilities.
                          4
                           The AGMC privatization-in-place is different from current Air Force outsourcing efforts at San
                          Antonio and Sacramento Air Logistics Centers. The Air Force is now conducting public-private
                          competitions at these centers following DOD’s December 1996 reinstitution of these competitions.
                          5
                           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).



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                       estimated contract costs excluded $15 million in material costs for eight
                       contract items.

                       Following a 9-month transition period, the first full year of the BGRC
                       contract operations began in October 1996. After the first quarter, Ogden
                       and Oklahoma City logistics center personnel noted that funds were being
                       expended faster than anticipated for the BGRC contract. The most
                       significant factor appeared to be the increased amount of material being
                       ordered. After reviewing Ogden and Oklahoma City information, we
                       requested that the aircraft guidance program office at the Oklahoma City
                       Air Logistics Center and the missile guidance program office at Ogden Air
                       Logistics Center compare contractor versus Air Force depot costs for the
                       fiscal year 1997 workload. Headquarters, AFMC, managed this evaluation.


                       The Air Force’s interim comparison estimates that BGRC’s first year
Results in Brief       privatization-in-place costs will be higher than AGMC’s historical costs for
                       similar work. The methodology used in the comparison is analytically
                       sound and appears reasonable given the status of the program; however,
                       until actual cost data is available, it is premature to reach a final
                       conclusion on the cost issue. Three factors significantly influenced the
                       increased cost at the facility—estimated increased material cost, contract
                       oversight, and contractor award fee. As with any successful privatization,
                       improved contractor process efficiencies and operating cost reductions
                       are needed to offset such cost factors. The contractor disagrees with the
                       Air Force study and is working with AFMC to resolve their differences. The
                       Air Force will continue to monitor these contracts as actual cost data
                       becomes available. Specifically our work shows:

                   •   The Air Force performed an interim analysis comparing both actual and
                       estimated aircraft and missile inertial navigation system repair and
                       metrology costs at the Boeing Guidance Repair Center to actual historic
                       costs for comparable workloads prior to privatization-in-place. The
                       analysis estimated that the first full year of operations at the
                       privatized-in-place Center will likely cost $14.1 million more than it would
                       have if the facility had continued to operate as a public activity. This is a
                       16-percent cost increase.
                   •   Boeing questioned the Air Force Materiel Command’s assessment, saying
                       that its own estimate indicates that costs are about $6.8 million lower than
                       before privatization-in-place. Boeing also noted that it is exceeding
                       contract quality requirements and minimum delivery schedules. Air Force
                       officials stated that Boeing’s cost analysis is not complete and



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                             comprehensive. For example, they noted that Boeing’s estimate did not
                             include contract administration and oversight costs of about $3.4 million,
                             and overstated historic operations and maintenance costs by about
                             $5 million.
                         •   The Air Force cost study methodology is analytically sound and used the
                             best available data. Based on the available data, the methodology provides
                             a reasonable interim estimate of costs for similar workloads performed by
                             the Air Force depot and during the first year of privatization-in-place. The
                             Air Force’s methodology is consistent with Department of Defense (DOD)
                             guidance on public-private depot competitions in the Defense Depot
                             Maintenance Council Cost Comparability Handbook and in supplemental
                             procedures provided by the Air Force for conducting public-private
                             competitions.
                         •   The Air Force’s interim study does not include a variable-by-variable
                             comparison between historical and current costs of operations, but it does
                             identify three cost factors contributing to the increased costs at the
                             facility. They are: (1) estimated increased material cost of $3.4 million,
                             (2) contract administration and oversight costs of $5.5 million, and
                             (3) estimated contractor award fees of $5.2 million.


                             The Air Force’s July 1997 interim study projected that the
Air Force Interim            privatization-in-place of guidance repair and metrology workloads at BGRC
Study Indicates That         will result in fiscal year 1997 costs being from $3 million to $32 million
Contract Costs               more than the costs of performing the same work when the facility was
                             operated as an Air Force depot. Actual data was used to determine AGMC’s
Exceed Costs of              pre-closure costs and actual cost data available to date and estimates were
AGMC Operations              used to project BGRC’s costs for 1997. The Air Force plans to update BGRC’s
                             costs using complete actual data after the 1997 workload is closed out.
                             The contractor disagreed with the AFMC interim study and provided its own
                             analysis. Air Force officials said the Boeing analysis was not
                             comprehensive because it (1) did not include contract administration and
                             oversight costs and (2) overstated AGMC costs prior to
                             privatization-in-place.


                             In April 1997, AFMC estimated that privatized-in-place repair operations for
Results of Air Force’s       the year would cost from $7.7 million to $31.2 million more than historical
July 1997 Interim            costs of AGMC operations—a 10.2- to 44.8-percent increase—with a most
Study                        likely increase of $16.1 million. In July 1997, AFMC expanded its interim




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                               cost analysis to include the metrology costs6 and revised its prior
                               estimates based on a reevaluation of overhead and base operation and
                               support costs. Using actual cost data, this reevaluation increased the costs
                               of each workload repaired prior to privatization by allocating all base
                               operation and support costs from the Newark Air Force Base, including
                               those not directly affecting the depot maintenance business area, to the
                               maintenance and metrology workloads. The later projection indicated that
                               the privatized-in-place repair and metrology operations during the first
                               year of the contract would cost from $3.4 to $32 million more than the
                               historical AGMC cost—a 3.8- to 39-percent increase—with a most likely
                               increase of $14.1 million, or about 16 percent. Because these comparisons
                               are subject to change, AFMC officials noted that they would be revisited
                               when the fiscal year 1997 contract period is over. Appendix II summarizes
                               the results of these analyses.

Earlier Study Results Cannot   The AFMC 1995 precontract award analysis indicated potential savings of
Be Reconciled                  $5 million in fiscal year 1997 through privatization-in-place. However, the
                               more recent, interim study suggests that privatization-in-place may cost
                               $14.1 million more, which would indicate a 16-percent cost increase. The
                               interim analysis estimated the cost of operating the privatized facility to be
                               3.7 percent higher than the preaward study, and the preclosure cost of
                               operations to be about 15.6 percent less than the preaward study. Table 1
                               provides a comparison of total costs from AFMC’s preaward and interim
                               post-award analyses. We asked AFMC Headquarters officials for the
                               rationale for the difference between these estimates—particularly the
                               substantial decrease in AGMC’s preclosure cost. They stated that they do
                               not have the documentation supporting the $5 million savings, and,
                               therefore, they are not able to reconcile differences between the 1995 and
                               current analyses. They noted that the estimated inhouse costs from the
                               interim study were based on the fiscal year 1995 data obtained from the
                               end-item cost report dated September 30, 1995, adjusted for quantity
                               differences. Comparability adjustments were made to cost elements as
                               specified in the cost comparability handbook for public-private
                               competitions. Air Force officials said no data was available to support the
                               estimated inhouse costs included in the preaward study and the estimates
                               do not provide a valid comparative baseline of historical costs. On the
                               other hand, the interim study provides an accurate baseline of AGMC’s costs
                               for comparison with the current and future costs of the privatized activity.
                               Our review of historical data and study documentation supports this
                               conclusion.


                               6
                               AGMC performed overall technical direction and management of the Air Force Metrology and
                               Calibration Program and operated the Air Force Measurement Standards Laboratory.



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Table 1: Results of AFMC Studies
Comparing Estimated Fiscal Year 1997       Dollars in millions
Organic to Privatized-in-Place Costs                                                                          AFMC Cost Analyses
for Same Workload
                                                                                                               Preaward       Interim
                                           Operations                                                             study         study
                                           AGMC (Air Force depot)                                                     $99.8    $84.2
                                           BGRC (privatized depot)                                                     94.8     98.3
                                           Difference                                                                 $ 5.0   –$14.1
                                           Source: AFMC November 1995, April 1997, and July 1997 AGMC cost studies.




Boeing Disagrees With Air                  Boeing officials disagreed with the results of AFMC’s most recent interim
Force Interim Study                        study. They believe it overstates the contractor’s material consumption
                                           and neglected to adjust for historic military construction expenditures. As
                                           a result, they are concerned that AFMC miscalculated the cost of
                                           privatization-in-place. In response, Boeing did its own analysis estimating
                                           that privatization-in-place would cost $67.2 million compared to its
                                           estimate of $74.0 million for government operations—a $6.8 million
                                           savings over government operations in fiscal year 1997. Boeing officials
                                           met with AFMC officials on August 5, 1997, to present their analysis and to
                                           gain an understanding of the AFMC methodology. According to Boeing and
                                           AFMC officials, the Boeing estimate did not include a detailed analysis of
                                           specific workloads and costs. AFMC officials added that the Boeing analysis
                                           was not comprehensive. For example, they pointed out that Boeing’s
                                           estimate did not include contract administration and oversight costs of
                                           about $3.4 million, and it overstated historic AGMC operations and
                                           maintenance costs by about $5 million.

                                           However, AFMC did acknowledge the need to address Boeing’s concern
                                           about historic military construction expenditures and to meet with Boeing
                                           to discuss the need for some adjustments to its cost comparison. AFMC
                                           stated that the issue of material consumption would be resolved through
                                           an Air Force Audit Agency review that is scheduled to be completed in
                                           December 1997.

                                           Boeing officials also pointed out that they are meeting or exceeding
                                           contract requirements for cost, schedule, and performance. For example,
                                           Boeing officials, noted that they are:

                                       •   underrunning target costs by 5 percent and 15 percent for Intercontinental
                                           Ballistic Missile and aircraft guidance system repair;




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                        •   exceeding minimum delivery schedules and delivering more end-items per
                            month than AGMC had been tasked to deliver in fiscal year 1995; and
                        •   exceeding quality requirements by achieving less than a 3-percent quality
                            deficiency report rate versus the contract goal of 10 percent or less.

                            We agree with Boeing that preliminary indications show that it is meeting
                            contract goals. It will not be until all the costs are available for 1997, the
                            first full year of privatized operations, that we will be able to determine
                            how the cost of the privatized maintenance operations compares with cost
                            of comparable maintenance operations by the Air Force depot.


                            Our work indicates that, in general, AFMC’s methodology for estimating the
AFMC Interim Study          cost of work performed at the privatized-in-place BGRC facility and the cost
Methodology Is              for the same work based on AGMC cost data was reasonable. The
Reasonable and              methodology was analytically sound and used the best available data. In
                            selecting its methodology and identifying the appropriate data, AFMC
Provides Indications        gathered input and addressed criticisms from various Air Force, Defense
of Reason for Cost          Contract Management Command, and contractor officials. AFMC’s
                            methodology is consistent with DOD guidance on public-private depot
Increases                   competitions found in the Defense Depot Maintenance Council Cost
                            Comparability Handbook and in supplemental Air Force procedures for
                            conducting public-private competitions. Defense contractors participated
                            in the development of the handbook and in subsequent revisions. We
                            previously reviewed the handbook as a part of our assessment of depot
                            maintenance public-private competitions and found that it generally
                            covers the factors that should be considered in such competitions. In
                            performing its analysis, the Air Force Materiel Command used actual data
                            where it was known and estimated costs when actual costs were not
                            available. Estimated costs were expressed as ranges, using most likely,
                            low, and high estimates. A summary of the methodology used for the
                            analysis is provided in appendix III.


Reasons for Increased       AFMC’s  interim study does not include a variable-by-variable comparison
Contractor Cost             between historical and current costs of operations. However, the study
                            provides sufficient data to identify three factors that increased costs at the
                            facility: (1) material cost, (2) contract administration and oversight, and
                            (3) contractor award fee.

Materials                   Material orders have significantly increased since privatization. However,
                            the Air Force has not determined the extent to which material



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    consumption has increased. Therefore, the interim AFMC study results
    covered the range of possible contractor material consumption from no
    increase at the low end to a 100-percent increase, or about $15.7 million at
    the high end, with the most likely increase being 35 percent, or about
    $5.5 million.

    AFMC asked the Air Force Audit Agency to determine the contractor’s
    actual material consumption. While the Audit Agency does not anticipate
    completing the audit until December 1997, auditors have visited BGRC to
    review material ordering and consumption with the contractor and
    program offices. Based on work performed thus far, the auditors made the
    following observations:

•   Contractor inventory records are not sufficiently complete to allow them
    to determine the value of total inventory on hand.
•   Contractor inventory records do not provide an accurate basis for
    determining the value of inventory usage.
•   The contractor appears to have a greater amount of government-furnished
    material than necessary for existing needs.
•   Items to be repaired have been misclassified as government-furnished
    material.

    According to Audit Agency officials, two factors will inhibit AFMC’s ability
    to reconcile physical inventory with the inventory records and establish
    material consumption rates. First, with Air Force and contractor
    concurrence, the contractor accepted a transfer of initial material
    inventory from the Air Force without the Air Force performing a physical
    inventory. According to the Audit Agency, the contractor disputes the
    accuracy of the Air Force’s inventory transfer documents and, therefore, it
    may be impossible to determine how much material the contractor has
    consumed. In addition, the contractor assumed control over stock already
    issued to the shop floor that was not on Air Force inventory records.
    Therefore, the Air Force has no accurate way to measure consumption of
    those items typically held in stock at repair work benches.

    According to the Air Force Audit Agency, because the contract award fee
    structure does not emphasize minimizing the use of government-furnished
    material, the contractor may have used a greater amount of such material
    than necessary in order to reduce repair turn around time on items.
    Nonetheless, BGRC personnel maintain that BGRC’s consumption of material
    does not vary significantly from prior AGMC consumption levels because it




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                         is repairing items using the same people, the same facilities, and the same
                         repair procedures.

                         While the increased ordering of material clearly represents an increased
                         cost to the program during the period evaluated, it is uncertain how
                         material consumption will compare over a longer period. Considering the
                         significant increase in material orders and the absence of actual
                         consumption data, we believe it is reasonable for AFMC to reflect this
                         increase in its treatment of material consumption at this time.

Contract Oversight and   Consistent with the Defense Depot Maintenance Council’s Cost
Administration           Comparability Handbook, the interim study includes contract oversight
                         and administration as an additional cost to privatization. AFMC estimated
                         this cost for the two BGRC contracts to be $3.4 million for 1997. The
                         contracts require oversight from three entities: the Defense Contract
                         Management Command (DCMC), the Ogden Air Logistics Center’s program
                         office, and the Defense Contract Audit Agency (DCAA). The payroll costs
                         for these organizations as well as the cost of supplies and travel expenses
                         added by AFMC seem appropriate for the cost comparison.

Contractor Award Fee     AFMC’s interim study recognizes that the award fee earned by the
                         contractor accounts for a portion of the cost of privatization-in-place.
                         While the fee can range from zero to 10 percent of the estimated contract
                         cost, the average Air Force fee for performance reviews to date has been
                         9.4 percent. In its cost study, AFMC provided for varying projections of
                         contractor award fees, based on historical data and contractor
                         performance during the first half of 1997. The estimated fee ranged from
                         5 percent to 10 percent, with 9 percent being suggested as the most likely
                         award fee rate, equating to a most likely contractor fee of about
                         $5.2 million for 1997.

                         Including this cost element is consistent with a December 1996 joint
                         memorandum from the Principal Deputy Assistant Secretaries of the Air
                         Force for Acquisitions and for Financial Management, which called for
                         recognizing award fees in evaluating public-private depot competitions.
                         According to AFMC officials, the award fee adjustment was added to the
                         standard adjustments provided for in the Cost Comparability Handbook to
                         enhance the Air Force’s ability to arrive at decisions that provide the best
                         overall value to the government. The methodology followed in estimating
                         this cost element appears reasonable.




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                      The Air Force’s interim comparison estimates that BGRC’s first year
Conclusions           privatization-in-place costs will be higher than AGMC’s historical costs for
                      similar work. The methodology used in the comparison is analytically
                      sound and appears reasonable given the status of the program; however,
                      until actual cost data is available, it is premature to reach a final
                      conclusion on the cost issue. Three factors significantly influenced the
                      increased cost at the facility—estimated increased material cost, contract
                      oversight, and contractor award fee. As with any successful privatization,
                      improved contractor process efficiencies and operating cost reductions
                      are needed to offset such cost factors. The contractor disagrees with the
                      Air Force study and is working with AFMC to resolve their differences.
                      Further, the Air Force will continue to monitor these contracts as actual
                      cost data becomes available.


                      DOD officials provided oral comments on a draft of this report addressing
Agency and            two points. The first pertained to our reference to the Air Force’s interim
Contractor Comments   analysis as using 0 percent, 35 percent and 100 percent to simulate the
and Our Evaluation    minimum, most likely, and maximum cost. Air Force officials stated that
                      its interim analysis actually assigned 100 percent to both the minimum and
                      most likely material consumption cost computations and 200 percent to
                      the maximum material costs. The 100 percent referred to by the Air Force
                      is the same as the historic material consumptions costs and represents the
                      0-percent increase we use in our explanation for the minimum condition.
                      In stating that there was no increase in material assigned to the most likely
                      scenario, the Air Force was referring to the material consumption variable
                      input to the model. Our discussion of this factor refers to the material
                      consumption cost estimates that resulted from the processing of the
                      model. The second comment dealt with our discussion of the employee
                      benefits proposal submitted by Boeing. Since the benefit proposal has
                      since been rejected, we have removed from the draft of this report our
                      discussion of the proposal and its potential cost.

                      Officials from the Autonetics and Missile Systems Division of Boeing
                      North American, Inc., also commented, raising concerns about comments
                      made by the Air Force Audit Agency and about the material usage
                      assumptions in the AFMC interim study. Boeing officials said they thought
                      the Audit Agency’s comments about material consumption were
                      misleading because the level of inventory was not properly recorded at the
                      time of transition. Moreover, they said that the Audit Agency’s approach
                      greatly overstated material usage. As previously discussed, lacking precise
                      data on material consumption, the Air Force study used a range from no



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              increase on the low end to a high of a 100-percent increase, with a
              35-percent increase used to represent the most likely usage. In the absence
              of actual consumption data, Air Force officials stated that they based their
              treatment of consumption on material orders, which should provide a
              good indicator of consumption. Given the high material usage indicators
              but the lack of definitive data, the Air Force also took several independent
              actions. It initiated a material consumption review by the Air Force Audit
              Agency and made plans for a follow-on analysis when actual consumption
              data is available. We believe the Air Force study approach and follow-on
              actions provide a reasonable approach.


              To obtain information for this report, we reviewed documents and
Scope and     interviewed officials from the Office of the Secretary of Defense and the
Methodology   Headquarters, Air Force, Washington, D.C.; Headquarters, Air Force
              Materiel Command, Wright-Patterson Air Force Base, Ohio; and two
              subordinate activities—the Ogden Air Logistics Center, Hill Air Force
              Base, Utah, and the Oklahoma Air Logistics Center, Tinker Air Force Base,
              Oklahoma. Since some of the actual data needed to make such an
              assessment is not yet available, we reviewed preliminary cost estimates.
              We also discussed and gathered documentation on the program and the
              benefits and costs of privatization-in-place with representatives from the
              BGRC, Heath, Ohio; the Newark-Heath-Licking County Port Authority; and
              Defense Contract Management Command at BGRC.

              We discussed and reviewed the supporting data for the AFMC’s cost
              analysis with representatives from the Ogden and Oklahoma Air Logistics
              Centers, as well as with Boeing representatives and the AFMC cost-analysis
              team. We reviewed DOD’s guide for making cost comparisons between
              public depots and private contractors (the Defense Depot Maintenance
              Council’s Cost Comparability Handbook) to ensure that the AFMC study
              included all applicable cost elements and included any necessary
              adjustments. We also reviewed Air Force procedures for conducting
              public-private depot competitions. To test the reasonableness of the AFMC
              methodology used to allocate the Newark Air Force Base operating
              support costs to AGMC aircraft, missile, and metrology workloads, we
              consulted responsible officials in the DOD comptroller and Air Force
              financial management organizations, and reviewed applicable DOD
              instructions on reimbursable base support costs. We reviewed the type of
              source used for each cost element to ensure that actual data was used
              when available instead of estimates. We reviewed contractor cost reports
              to assess for shifts in cost trends that may impact the cost analysis.



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Further, during the development of the cost study, we held extensive
discussions with the cost-analysis team to review adjustments, both
additions and deletions, for reasonableness.

We conducted our review from March through August 1997 in accordance
with generally accepted government auditing standards.


We are sending copies of this report to the Director, Office of Management
and Budget; the Secretaries of Defense and the Air Force; and other
interested parties. We will make copies available to others upon request.

Please contact me at (202) 512-4812 if you or your staff have any questions
concerning this report. Major contributors to this report were Jim Wiggins,
Julia Denman, Larry Junek, and John Strong.




David R. Warren, Director
Defense Management Issues




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List of Requesters

The Honorable James M. Inhofe
Chairman
The Honorable Charles S. Robb
Ranking Minority Member
Subcommittee on Readiness
Committee on Armed Services
United States Senate

The Honorable Neil Abercrombie
The Honorable Saxby Chambliss
The Honorable Tillie K. Fowler
The Honorable James V. Hansen
The Honorable John N. Hostettler
The Honorable Ernest J. Istook
The Honorable Walter B. Jones, Jr.
The Honorable Solomon P. Ortiz
The Honorable Norman Sisisky
The Honorable J.C. Watts, Jr.
House of Representatives




Page 13                          GAO/NSIAD-98-35 Air Force Privatization-in-Place
Contents



Letter                                                                                                1


Appendix I                                                                                           16

AGMC Mission and
Closure History
Appendix II                                                                                          23

AFMC Interim Cost
Analysis Summaries
Appendix III                                                                                         24

AFMC Cost Analysis
Methodology
Related GAO Products                                                                                 26


Tables                 Table 1: Results of AFMC Studies Comparing Estimated Fiscal                    6
                         Year 1997 Organic to Privatized-in -Place Costs for Same
                         Workload
                       Table II.1: AFMC Estimated Fiscal Year 1997 Costs for Missile                 23
                         and Aircraft Workload Before and After Privatization-in-Place
                       Table II.2: AFMC Estimated Fiscal Year 1997 Costs for Missile,                23
                         Aircraft, and Metrology Workloads Before and After
                         Privatization-in-Place

Figures                Figure I.1: Photographs of Boeing Guidance and Repair Center                  17
                       Figure I.2: Examples of Various Test and Repair Stations at                   19
                         Boeing Guidance and Repair Center, Heath, Ohio
                       Figure I.3: Air Force, Contractor, and Local Reuse Authority                  22
                         Relationship




                       Page 14                          GAO/NSIAD-98-35 Air Force Privatization-in-Place
Contents




Abbreviations

AFMC       Air Force Materiel Command
AGMC       Aerospace Guidance and Metrology Center
BGRC       Boeing Guidance Repair Center
BRAC       Base Realignment and Closure
DCAA       Defense Contract Audit Agency
DCMC       Defense Contract Management Command
DOD        Department of Defense


Page 15                        GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix I

AGMC Mission and Closure History


              Prior to its closure in 1996, Newark Air Force Base supported the
              industrial complex comprising the Aerospace Guidance and Metrology
              Center (AGMC), supporting two Air Force missions—depot maintenance
              and metrology and calibration. AGMC provided the Air Force with
              depot-level repair for inertial guidance and inertial navigation systems and
              displacement gyroscopes for the Minuteman and Peacekeeper
              intercontinental ballistic missiles and most of the Air Force’s aircraft. In
              fiscal year 1994, AGMC’s depot maintenance workload consisted of about
              900,000 hours; almost 10,500 items were produced to support repair
              requirements for 66 Air Force, Navy, and Army systems and components.
              This work was accomplished by about 500 maintenance and engineering
              personnel and 325 management and support personnel. Figure I.1 shows
              an aerial view of the Newark facility.




              Page 16                            GAO/NSIAD-98-35 Air Force Privatization-in-Place
                                           Appendix I
                                           AGMC Mission and Closure History




Figure I.1: Photographs of Boeing Guidance and Repair Center




Navy DMINS test station.                                                      Technician in clean room.




                                     Aircraft guro repair




                                                                                                Gyro Test Station
Inertial Navigator Unit testing



                                           Page 17                               GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix I
AGMC Mission and Closure History




AGMC was different from the Air Force air logistics centers because it did
not have weapon system and item management responsibility collocated
at the same base. For Air Force systems repaired at AGMC, weapon system
and item management functions are performed primarily at the Ogden,
Utah, or Oklahoma City, Oklahoma, Air Logistics Centers.




Page 18                            GAO/NSIAD-98-35 Air Force Privatization-in-Place
                                                         Appendix I
                                                         AGMC Mission and Closure History




Figure I.2: Examples of Various Test and Repair Stations at Boeing Guidance and Repair Center, Heath, Ohio




 Receiving area for missile guidance induction showing shipping                                                              Automatic testing on guidance gyros.
 containers for minute man missiles.




                                                        Diagnostic and functional testing on Pendulous Integrating Gyro
                                                        Accelerometer (PIGA), a component of the minute man inertial
                                                        guidance system.




 PIGA test station                                                                                         Minute Man ICBM platform vibration station



                                                         Page 19                                             GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix I
AGMC Mission and Closure History




For its second Air Force mission—metrology and calibration—AGMC
performed overall technical direction and management of the Air Force
Metrology and Calibration Program and operated the Air Force
Measurement Standards Laboratory. About 200 personnel were involved in
the metrology and calibration mission—109 in generating technical orders,
certification of calibration equipment, and management operations and 89
in the standards laboratory.

The Department of Defense (DOD) considered AGMC’s work conducive to
conversion to the private sector and recommended closing Newark Air
Force Base/AGMC through privatization and/or transferring the workload to
other depots. DOD justified the closure by (1) identifying at least 8.7 million
hours of excess Air Force depot maintenance capacity, with the closure of
AGMC expected to reduce the excess by 1.7 million hours and (2) applying
the eight base closure criteria to Air Force bases having depots and
ranking Newark Air Force Base low relative to the others.

DOD estimated that implementing its recommendation on Newark Air
Force Base/AGMC would cost $31 million, result in an annual savings of
$3.8 million, and have an 8-year payback period for closure and relocation
expenses. In our report on the base closure and realignment
recommendations and selection process, we estimated that the Newark
Air Force Base/AGMC closure costs would be $38.29 million, with a 13-year
payback. The Base Closure and Realignment Commission determined that
the AGMC workload could either be contracted out or privatized-in-place at
the same location, although the BRAC noted that industry interest in
privatization-in-place was limited. The BRAC recommended closing Newark
Air Force Base/AGMC—noting that workload could be moved to other
depot maintenance activities, including the private sector.

Our December 1994 report questioned the impending closure of AGMC and
recommended reassessment of the Air Force closure and
privatization-in-place plans.1 DOD reevaluated its decision and reaffirmed
its closure and privatization-in-place plans. In December 1995, the Air
Force awarded two 5-year contracts for repair and metrology services at
Newark: an estimated $264 million cost plus award fee contract to
Rockwell International for AGMC’s repair mission2 and a $19 million cost
plus award fee contract to Wyle Laboratories for operation of the Air

1
 Aerospace Guidance and Metrology Center: Cost Growth and Other Factors Affect Closure and
Privatization (GAO/NSIAD-95-60, Dec. 9, 1994).
2
 Following the decision to close AGMC, the Army and the Navy transferred about 95,000 direct labor
hours of work to other sources of repair.



Page 20                                       GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix I
AGMC Mission and Closure History




Force’s standard metrology laboratory. In October 1996, Boeing acquired
the AGMC repair operations through its acquisition of Rockwell
International.

In addition to these contract operations, the Air Force retained about
130 government employees at Newark—about 69 percent of the preclosure
metrology staff. They perform such functions as (1) periodically reviewing
and certifying the operations of the Air Force’s 130 metrology laboratories
and (2) helping the Defense Contract Management Command monitor
Wyle Laboratories’ metrology contract. In addition, 24 government civilian
employees of the Defense Contract Management Command provide on-site
contract oversight.

The Newark-Heath-Licking County Port Authority is in the process of
purchasing the Newark Air Force Base real property.3 The Port Authority
currently leases the facility to Boeing, which then subleases a portion of
the facility to Wyle Laboratories. Figure I.3 depicts the relationship
between the Air Force, the contractors, and the local reuse authority.




3
 The Newark-Heath-Licking County Port Authority is the Ohio chartered reuse authority responsible
for redeveloping and managing the closed Newark Air Force Base facilities.



Page 21                                      GAO/NSIAD-98-35 Air Force Privatization-in-Place
                                           Appendix I
                                           AGMC Mission and Closure History




Figure I.3: Air Force, Contractor, and Local Reuse Authority Relationship




                                           Page 22                            GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix II

AFMC Interim Cost Analysis Summaries


Table II.1: AFMC Estimated Fiscal Year
1997 Costs for Missile and Aircraft                                                 Optimistic      Most likely      Pessimistic
Workload Before and After                Missiles AGMC                            $39,654,845      $38,143,561       $37,625,067
Privatization-in-Place (Mar./Apr. 1997
                                         Missiles BGRC                             43,010,320        44,933,117       50,858,073
analyses)
                                         Difference                                $3,355,475        $6,789,556      $13,233,006


                                         Aircraft AGMC                            $35,540,990      $33,092,111       $32,002,958
                                         Aircraft BGRC                             39,923,218        42,416,090       49,954,755
                                         Difference                                $4,382,228        $9,323,979      $17,951,797


                                         Total AGMC                               $75,195,835      $71,235,672       $69,628,025
                                         Total BGRC                                82,933,538        87,349,207      100,812,828
                                         Total difference                          $7,737,703      $16,113,535       $31,184,803
                                         Source: AFMC March/April 1997 AGMC cost analyses.



Table II.2: AFMC Estimated Fiscal Year
1997 Costs for Missile, Aircraft, and                                               Optimistic      Most likely      Pessimistic
Metrology Workloads Before and After     Missiles AGMC                            $42,993,855      $41,154,587       $40,512,943
Privatization-in-Place (June/July 1997
                                         Missiles BGRC                             43,527,092        45,509,268       51,321,727
analyses)
                                         Difference                                  $533,237        $4,354,681      $10,808,784


                                         Aircraft AGMC                            $37,147,039      $34,386,422       $33,271,371
                                         Aircraft BGRC                             39,920,618        42,380,471       50,710,634
                                         Difference                                $2,773,579        $7,994,049      $17,439,263


                                         Metrology AGMC                            $9,529,315        $8,671,675       $8,196,359
                                         Metrology BGRC                              9,654,497       10,453,622       11,982,424
                                         Difference                                  $125,182        $1,781,947       $3,786,065


                                         Total AGMC                               $89,670,209      $84,212,684       $81,980,673
                                         Total BGRC                                93,102,207        98,343,361      114,014,785
                                         Total difference                          $3,431,998      $14,130,677       $32,034,112
                                         Source: AFMC June/July 1997 AGMC cost analyses.




                                         Page 23                                  GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix III

AFMC Cost Analysis Methodology


               In performing its cost analysis, the Air Force Materiel Command (AFMC)
               used actual cost data when it was known. Estimated cost data were
               expressed as ranges, using most likely, low, and high estimates. The cost
               analysis was constructed using triangular probability distributions for
               each estimated cost element. The cost elements were then summed
               statistically using a probability simulation model, with all estimated costs
               stated in fiscal year 1997 dollars. To provide a valid basis for comparison,
               AFMC determined that it was necessary to derive AGMC and contract cost
               estimates using two distinct methodologies.

               The AGMC estimate is based largely on fiscal year 1995 data obtained from
               the end-item cost report dated September 30, 1995, adjusted for quantity
               differences. The cost categories in that report consist of (1) depot product
               direct hours, (2) direct labor, (3) direct material, (4) shop overhead,
               (5) support overhead, and (6) general and administrative costs. The
               organic estimate also included cost categories for unprogrammed work
               and cost comparability adjustments. Comparability adjustments were
               additions to the Defense Maintenance Business Area for expenditures
               funded by other sources. These adjustments were made in accordance
               with the Defense Depot Maintenance Council Cost Comparability
               Committee Handbook dated August 10, 1993. Cost comparability
               adjustments consisted of the following cost elements: state unemployment
               tax, unfunded civilian retirement, casualty insurance, impact aid, retiree
               health benefits, other operation and maintenance costs, and costs
               associated with the guidance replacement program (new cost on the
               contract).

               For the contract estimate, AFMC based many of the most likely input
               variables on costs as stated in the current contract. Latest revised
               estimates for the contract cost categories were obtained from the
               Contractor/Schedule Status Report dated end-of-month December 1996
               and February 1997. Additional cost categories for the contract estimate
               included security, lease, depot maintenance business area contract fees,
               equipment depreciation, capital expenditures, and privatization-in-place
               costs.




               Page 24                            GAO/NSIAD-98-35 Air Force Privatization-in-Place
Appendix III
AFMC Cost Analysis Methodology




Page 25                          GAO/NSIAD-98-35 Air Force Privatization-in-Place
Related GAO Products


              Outsourcing DOD Logistics: Savings Achievable but Defense Science
              Board’s Projections Are Overstated (GAO/NSIAD-98-48, Dec. 8, 1997).

              Air Force Depot Maintenance: Information on the Cost Effectiveness of
              B-1B and B-52 Support Options (GAO/NSIAD-97-210BR, Sept. 12, 1997).

              Navy Depot Maintenance: Privatizing the Louisville Operations in Place Is
              Not Cost Effective (GAO/NSIAD-97-52, July 31, 1997).

              Defense Depot Maintenance: Challenges Facing DOD in Managing Working
              Capital Funds (GAO/T-NSIAD/AIMD-97-152, May 7, 1997).

              Depot Maintenance: Uncertainties and Challenges DOD Faces in
              Restructuring Its Depot Maintenance Program (GAO/T-NSIAD-97-111, 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-NSIAD-97-110, Mar. 12, 1997).

              Navy Ordnance: Analysis of Business Area Price Increases and Financial
              Losses (GAO/AIMD/NSIAD-97-74, Mar. 14, 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).




              Page 26                            GAO/NSIAD-98-35 Air Force Privatization-in-Place
Related GAO Products




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).

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).




Page 27                              GAO/NSIAD-98-35 Air Force Privatization-in-Place
                   Related GAO Products




                   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).




(709265, 709240)   Page 28                             GAO/NSIAD-98-35 Air Force Privatization-in-Place
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