DOD’s Methodology for Estimating and Comparing the Full Cost to the Taxpayer of Work Performed by Its Workforces is Limited in Certain Aspects

DOD Instruction 7041.04 reflects improvements to DOD’s methodology  for estimating and comparing the full cost to the taxpayer of work  performed by military and civilian personnel and contractor support since  the initial issuance of DTM 09-007, but the instruction is still limited in  certain areas. Further, CAPE has not yet evaluated certain  retirement and retiree health benefit cost elements that it is using to  reflect the full cost of currently employed military and civilian personnel. Best  practices as reflected in GAO’s Cost Estimating and Assessment Guide  state, however, that establishing ground rules for cost estimating provides  a common set of agreed on estimating standards that provide guidance  and minimize conflicts in definitions. For  example, the average rate for training in the Army for fiscal year 2012  was $6,490 per servicemember. However, according to Army data, the  amortized cost of training for an officer with a general aviation area of  concentration can range from about $6,500 to $93,600 a year, depending  on rank. Some officials have requested more developed guidance  on these cost elements, but CAPE did not provide more specific direction  in its recently issued instruction. CAPE Has Not Established Business Rules for Estimating Reserve and National Guard Costs

Although Reserve and National Guard personnel are a significant part of  the military workforce, comprising about 38 percent of the military  workforce end strength in fiscal year 2012, CAPE did not establish  business rules for developing cost estimates for these personnel in its  instruction. The Federal Accounting Standards Advisory Board  Handbook states that a cost methodology that captures full costs should  include any resources directly or indirectly used to perform work. Portions of Certain Retirement-Related Cost Elements May Not Be Relevant

The instruction directs users to include payments the government makes  into funds to support the retirement and health benefits that current  military and civilian personnel who become eligible for retirement will  receive upon retirement; however, a portion of these payments may not  be relevant to current personnel. Still, implementation challenges exist. DOD Components Reported Incorporating the Business Rules into Their Workforce Mix Decisions, but Opportunities for Use Have Been Limited

While the DOD components we examined generally reported to us that  they have incorporated the business rules identified in the preceding DTM  and current instruction to create cost estimates in support of workforce  mix decisions, their opportunities to use the business rules have been  limited. Some DOD officials said they were not clear on uses of the DTM beyond  in-sourcing, and others said their reported instances of using the business  rules may underestimate the actual number of reported instances. Officials within OSD and headquarters elements said they did not know  the extent to which officials throughout the department are aware of the  instruction and the requirement to use the associated business rules. DOD Components Use Different Tools to Implement the DTM

CAPE recently completed development of a DOD-wide software tool for  implementing DOD Instruction 7041.04. In addition, best practices in GAO’s Cost  Estimating and Assessment Guide state that in order to be reliable, cost  estimates should be derived using an overall process that produces high- quality cost estimates that are comprehensive and accurate and that can  be easily and clearly traced, replicated, and updated. Officials in  CAPE told us that the components’ use of the DOD-wide tool will not be  required, enforced, or monitored. An assessment of these various tools  would enable CAPE to identify the advantages and disadvantages of  allowing multiple cost estimation tools. DOD Components May Be Relying on Data Sources That Do Not Contain the Most Accurate Data for Determining Contractor Costs

When estimating contractor support costs for a new or expanding  mission, Instruction 7041.04 provides several options for users to  consider, although these options may not be the most accurate data  sources. Further,  DOD officials we spoke to during this review said that GSA’s website  does not provide targeted data, such as actual contractor rates by  function or geographic location. To improve DOD’s methodology for estimating and comparing the full  cost of its various workforces, we recommend that the Secretary of  Defense direct the Office of Cost Assessment and Program Evaluation  office to take the following three actions:
Further develop guidance for cost elements that users have identified  as challenging to calculate, such as general and administrative,  overhead, advertising and recruiting, and training;
Develop business rules for estimating the full cost of National Guard  and Reserve personnel; and  In coordination with the department’s Office of the Actuary and  appropriate federal actuarial offices, reevaluate the inclusion and  quantification of pension, retiree health care costs, and other relevant  costs of an actuarial nature and make revisions as appropriate. Specifically, DOD concurred with two of our  recommendations and partially concurred with three. Appendix I: Scope and Methodology

To evaluate the extent to which the Department of Defense’s (DOD)  methodology for estimating and comparing the cost of work performed by  military, civilian, and contractors reflects the full cost to the taxpayer, we  identified each of the cost elements contained in the most recent version  of Directive Type-Memorandum (DTM) 09-007 and DOD Instruction  7041.04 and compared them to best practices in GAO’s Cost Estimating  and Assessment Guide, guidance in the Federal Accounting Standards  Advisory Board Handbook, and the Office of Management and Budget  guidelines for Performance of Commercial Activities.
Why GAO Did This Study

DOD must make cost-effective decisions in the use of its military, civilian, and contractor workforces, and CAPE issued guidance that provides a methodology for cost estimates and comparisons among workforces. The conference report accompanying the National Defense Authorization Act for Fiscal Year 2013 mandated that GAO review the cost methodology in Directive-Type Memorandum (DTM) 09-007 or its successor guidance to determine whether they reflect the actual, relevant, and quantifiable costs to taxpayers for work performed by these workforces. This report evaluates the extent to which (1) DOD's methodology reflects the full cost to the taxpayer, and (2) DOD's components incorporated the business rules in the memorandum and successor instruction into workforce mix decisions. GAO compared DOD's cost methodology to guidance from other government entities and interviewed officials from components applying the methodology, as well as other appropriate DOD officials.

What GAO Found

The Department of Defense (DOD) has improved its methodology for estimating and comparing the full cost to the taxpayer of work performed by military and civilian personnel and contractor support, but the methodology continues to have certain limitations. Best practices state that cost estimating rules should include a common set of standards that minimize conflicts in definitions, but DOD's methodology does not provide guidance for certain costs. For instance, its estimate of service training costs divides total training funding by the number of servicemembers. Using this method yields an average training cost of $6,490 per servicemember in the Army for fiscal year 2012. However, Army data show that training for a general aviation officer can be as high as $93,600 a year, while the training for an enlisted infantryman can be as low as about $4,600 a year. DOD's Cost Assessment and Program Evaluation (CAPE) office has not provided more specific direction on training costs, although some officials have requested it. Additionally, CAPE officials told GAO they did not include Reserve and National Guard personnel in the methodology because usually these personnel are used on a short-term basis. However, a portion of these personnel do serve in a full-time capacity. The Federal Accounting Standards Advisory Board has noted that a cost methodology should include any resources directly or indirectly used to perform work, and DOD relies on Reserve and National Guard personnel, for example, to provide airlift capabilities in support of military operations. Further, CAPE has not yet evaluated certain retirement-related cost elements. A portion of these cost elements may not be appropriate to include because they are not attributable to current military and civilian personnel. Without more specific direction in these areas, it will be more difficult for DOD to have reasonable assurance that its cost estimates and comparisons reflect the full and most accurate cost to the taxpayer of work performed by its various workforces.
DOD components GAO examined generally have incorporated business rules contained in the memorandum and successor instruction into their workforce mix decisions, although DOD officials said opportunities to use the rules have been limited due to budgetary factors and few new or expanded missions. Moreover, implementation challenges exist. Some officials raised questions about the extent to which other officials throughout DOD are aware of a requirement to use the methodology for decisions other than in-sourcing. Further, CAPE recently completed a DOD-wide software tool for implementing its instruction, but at the time of GAO's review, some DOD components had developed their own tools. CAPE officials told GAO that the components' use of its DOD-wide tool will not be required, enforced, or monitored, and that CAPE has not reviewed the components' tools. Best practices state that to be reliable, cost estimates should be derived using a process that produces results that are accurate and can be traced, replicated, and updated. Assessing these tools would enable CAPE to identify the advantages and disadvantages of allowing multiple tools and provide reasonable assurance that cost estimates are reliable. Further, the instruction directs users to a General Services Administration (GSA) website for determining contractor support costs. GAO has reported on limitations of GSA's website such as its reporting of data that do not reflect post-competition prices. Without reliable data sources, DOD components may not be using the most suitable data needed to produce credible cost estimates.

What GAO Recommends

GAO is recommending that DOD develop further guidance on certain cost elements, such as training; develop business rules for estimating Reserve and National Guard costs; evaluate inclusion or non-inclusion of cost elements related to retirement; assess cost models being used across the department; and reassess sources for contractor data. DOD concurred with two and partially concurred with three of GAOs recommendations. GAO continues to believe it is important for DOD to fully address the recommendations in order to achieve desired results.