Over the last few years, DOD has issued guidance on the implementation of  performance-based logistics. The aim of the business case analysis is to  justify the decision to enter into a performance-based logistics contract. DOD Program Offices Could Not Demonstrate Cost Savings and Performance Improvement Resulting from the Use of Performance-Based Logistics

DOD program offices could not demonstrate that their use of performance- based logistics arrangements had achieved cost savings and performance  improvements because they had not updated their business case analysis  as suggested by DOD guidance. Two DOD agencies, DCMA and DCAA, have the  capability to assist program offices in monitoring fixed-price performance- based contracts, verifying the reliability of contractors’ information  systems, and collecting cost and performance data. Although an updated business  case analysis based on actual cost and performance data might show that  cost savings and performance improvements were being achieved, only  1 of the 15 program offices had updated its business case analysis  consistent with DOD guidance. Program officials did not follow DOD guidance to update and validate their  business case analyses because they assumed that costs incurred under  fixed-price performance-based logistics arrangements would always be  lower than costs incurred under more traditional contracting  arrangements, and several program officials cited a lack of reliable data  needed to validate expected costs savings and improved performance. The results of these updates could be used by  DOD to assess the implementation of performance-based logistics  arrangements and evaluate the extent to which performance-based  logistics arrangements are achieving expected benefits. DOD Program Offices Relied on Contractors’ Data Without Verifying the Reliability of the Data

DOD program offices included in our review stated that because of  limitations in their own information systems, they typically relied on cost  and performance data generated by the contractors’ information systems to  monitor performance-based logistics contracts. The program offices, however, had not determined whether the  contractor-provided data were sufficiently reliable to update their business  case analyses. In addition, during our review of  the private sector’s use of performance-based logistics, we noted that  private-sector companies that use performance-based logistics contracts,  whether fixed price or cost-plus, closely monitor cost and performance  information to effectively manage their contracts. DCMA and DCAA officials said that they have a greater role in monitoring  cost information for cost-plus contracts because such contracts are  considered high risk. DOD guidance states that program offices, after  entering into performance-based logistics arrangements, should update  their original business case analysis using actual cost and performance  data to validate their assumptions, but most of the program offices we  reviewed had not followed this guidance, and the Office of the Secretary of  Defense was not monitoring whether program offices were following the  guidance.
Why GAO Did This Study

The Department of Defense (DOD) contracts with private sector companies to perform depot maintenance of weapon systems using performance-based logistics--that is, purchasing a defined level of performance over a defined time period at a fixed cost to the government. After implementing such contracts, program offices are to validate their efficacy using cost and performance data; DOD cannot otherwise ensure cost savings and improved performance are being achieved through the use of performance-based logistics. GAO was asked to review the implementation of performance-based logistics to determine whether DOD could demonstrate cost savings and improved responsiveness from these arrangements. In conducting its review, GAO analyzed the implementation of performance-based logistics arrangements for 15 weapon system programs.

What GAO Found

DOD program offices could not demonstrate that they have achieved cost savings or performance improvements through the use of performance-based logistics arrangements. Although DOD guidance on implementing these arrangements states program offices should update their business case analysis based on actual cost and performance data, only 1 of the 15 program offices included in GAO's review had performed such an update consistent with DOD guidance. In the single case where the program office had updated its business case analysis, it determined that the performance-based logistics contract did not result in expected cost savings and the weapon system did not meet established performance requirements. In general, program offices had not updated their business case analysis after entering into a performance-based logistics contract because they assumed that the costs for weapon system maintenance incurred under a fixed-price performance-based logistics contract would always be lower than costs under a more traditional contracting approach and because they lacked reliable cost and performance data needed to validate assumptions used. Furthermore, the Office of the Secretary of Defense has not established procedures to monitor program offices to ensure they follow guidance and update the business case analysis. Additionally, program officials said because of limitations in their own information systems, they typically relied on cost and performance data generated by the contractors' information systems to monitor performance-based logistics contracts. The program offices, however, had not determined whether contractor-provided data were sufficiently reliable to update their business case analysis. Although the Defense Contract Management Agency and the Defense Contract Audit Agency are most commonly used to monitor higher risk contracts, such as cost plus contracts, they are potential resources available to assist program offices in monitoring fixed-price performance-based contracts. In doing so, these DOD agencies have the capability to verify the reliability of contractors' information systems and collect cost and performance data needed to update their business case analysis. Until program offices follow DOD's guidance and update their business case analysis based on reliable cost and performance data, DOD cannot evaluate the extent to which performance-based logistics arrangements are achieving expected benefits and being effectively implemented within DOD.