DOD is seeking to contract out more of its depot maintenance requirements. In March 1996, DOD issued regulations directing that new systems and major upgrade programs “shall maximize the use of contractor provided, long-term, total life-cycle logistics support that combines depot-level maintenance along with wholesale and selected retail materiel management functions.”
DOD’s approach to assuring product quality and fair prices for depot maintenance work that is contracted out to the private sector where competition is limited is through contract management and oversight requirements. The military services manage and oversee depot maintenance contracts with assistance from the Defense Contract Audit Agency (DCAA) and the Defense Contract Management Command (DCMC). DOD expects that commercial products and services, which are subject to competitive market forces, will result in high-quality products and services at a lower cost. DCAA’s staffing has decreased by 1,046 personnel—over 18 percent—from fiscal year 1993 to July 1997. For example, as part of DOD’s plan to rely more on contractor self-oversight, DCAA can reduce its oversight after determining that strengthened contractor internal controls can be relied upon. They are also relying more on sampling methods to assure quality and contract compliance rather than having inspectors doing 100-percent inspections. Most of this work is awarded on a sole-source basis to original equipment manufacturers that own the technical data rights. Undefined Requirements Are a Characteristic of Many Maintenance Workloads

We examined 345 depot maintenance contracts awarded by 12 contracting organizations, and found that 212, or 61 percent, were fixed-price type contracts that had price and performance generally defined at the time of contract award. DOD also has developed a strategic plan for improving logistics functions and activities. Although the plan provides guidance and implementation strategy for some important objectives related to depot maintenance, it does not specifically address the contract depot maintenance issues raised in this report. In response to that recommendation, DOD has stated that a specific plan for improving the efficiency and reducing the cost of DOD’s logistics programs, including depot maintenance, is not needed because the QDR and DRI provide an overall strategic plan and strategy for reducing DOD’s infrastructure. Recommendation

We recommend that the Secretary of Defense require the development of a detailed implementation plan to guide future management improvement efforts to increase the cost effectiveness of DOD’s depot maintenance program, including issues related to improving the management and cost-effectiveness of contract depot maintenance workloads. Defense Outsourcing: Challenges Facing DOD as It Attempts to Save Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed how the Department of Defense (DOD) manages contracting for depot maintenance, focusing on the: (1) characteristics of that contracting; and (2) implications of those characteristics for future depot maintenance contract management processes and procedures.

What GAO Found

GAO noted that: (1) DOD is attempting to rely more on competitive market forces to assure quality products at fair prices; (2) consistent with recent declines in the defense budget, resources for administering and auditing contracts have been cut significantly, with DOD reducing its total acquisition workforce at all levels; (3) from fiscal year (FY) 1993 to July 1997, the Defense Contract Audit Agency (DCAA) and the Defense Contract Management Command (DCMC) reduced their personnel levels by more than 18 and 24 percent, respectively, and further reductions are planned; (4) in making these reductions, both organizations are reengineering their processes; (5) they are attempting to rely more on competitive market forces and contractor internal processes and controls to assure quality products at fair prices, but it is uncertain whether these processes and conditions will function as expected; (6) at present, depot maintenance contracting represents a challenge to relying on commercial market forces; (7) about 91 percent of the depot maintenance contracts GAO reviewed were awarded noncompetitively, mostly to original equipment manufacturers that own the data rights; (8) other factors, including difficulties in precisely defining requirements, also impact efforts to rely on competitive market forces; (9) as DOD continues transitioning from its traditional contract management and oversight structure, it will need to increase the use of competitively awarded depot maintenance contracts; (10) to the extent that competition for some maintenance workloads is not possible or practicable, DOD will need to address how best to assure product quality and reasonable prices when competitive market forces are not present; (11) DOD has developed a logistics strategic plan that lays out specific objectives and strategies for improving DOD's logistics activities; (12) however, the plan does not address the depot maintenance issues raised in this report; (13) GAO has previously recommended that the Secretary of Defense require the development of a detailed implementation plan for improving the efficiency and effectiveness of DOD's logistics activities to include depot maintenance; and (14) the challenges that DOD faces in successfully relying on competitive market forces for depot maintenance require management attention and actions to address the unique characteristics of DOD's depot maintenance activities and assure that expected savings can be achieved.