DOD Does Not Know the Extent to Which It Relies on Long-term Maintenance Contracts

At the departmental level, neither DOD nor the individual military  departments know the extent to which weapon system programs rely on  long-term maintenance contracts. We found that these contracts varied  widely in terms of breadth of requirements, potential period of  performance, and value. However, USD(AT&L) is not required to include information  DOD’s limited visibility over long-term maintenance contracts reflects  broader DOD challenges with managing services acquisition. Over the  past decade, our work has identified the need for DOD to obtain better  data on its contracted services to enable it to make more strategic  decisions. Each of these reviews  provides for the discussion of issues related to contracting strategy,  but DOD officials noted that they do not collect or maintain information  on what type of contracting approach was used to acquire all services  that support DOD weapon systems. DOD officials noted that although long-term contracts can encourage  contractors to invest in new facilities, equipment, and processes to  support depot-level maintenance, such contracts may hinder the  government’s ability to appropriately incentivize the contractor’s  performance and control costs. Early Acquisition Decisions Limit DOD’s Ability to Select Alternative Maintenance Providers

Decisions made early in the acquisition process can limit DOD’s ability to  select alternative maintenance providers over the life cycle of a weapon  system program. Program officials believed they could select an  alternative service provider in the future for 5 of the 10 contracts we  reviewed, but the degree to which the government obtained access to  technical data would be an obstacle in doing so for the other half. The  programs, however, had yet to determine the extent to which they will  acquire these data or the cost to do so. Table 2  summarizes the impact of technical data access on DOD programs’ ability  to select alternate services providers for maintenance on the contracts we  reviewed. Programs Use Different Approaches to Incentivize Performance and Obtain Insights into Contractor Costs

Once the decision is made to use long-term contracts, DOD faces  choices on how to best incentivize contractor performance and manage  costs. Program offices using contracts lasting 5  years, on the other hand, made less use of incentives and generally did  not have the ability to renegotiate contract prices, but believed that the  shorter-term nature of the contracts mitigated some of their risks. Table summarizes the incentives and  tools used for cost insight and cost control. Across the five contracts with a maximum length of five years, three used  monetary incentives and none used incentives that lengthen the  contract’s term. DOD has not collected information concerning the effectiveness of the  various incentives or cost-control tools used on long-term maintenance  contracts, but it has recognized efforts made by individual programs to  improve acquisitions of such services. DOD is considering several policy and data- related initiatives that could improve its insight on these contracts, but  these efforts are in the early stages of development. Recommendations for Executive Action

To help inform DOD’s use of long-term maintenance contracts, we  recommend that the Secretary of Defense direct the Under Secretary of  Defense for Acquisition, Technology, and Logistics, in coordination with  cognizant offices within each of the military departments, to take the  following two actions:
Collect and analyze information on the use of long-term maintenance  contracts by major weapon system programs; and
Collect and disseminate lessons learned or best practices regarding  the use of incentives and cost-control tools that can maximize the  government’s leverage when considering the future use of such  contracts. Appendix I: Scope and Methodology

To gain insight into the how long-term maintenance contracts are  managed by the Department of Defense (DOD), we assessed (1) the  extent to which DOD uses long-term maintenance contracts to support  major weapon system programs, (2) DOD’s ability to select alternative  maintenance services providers for its major weapon system programs,  and (3) how long-term maintenance contracts have been structured to  incentivize contractors’ performance and manage contractor costs. For the eight programs DOD identified as having  such a review between October 2010 and October 2011, we interviewed  program officials and reviewed acquisition documents, such as  acquisition strategies and life-cycle sustainment plans, which described  the rationale for the program’s plans to acquire technical data rights.
Why GAO Did This Study

DOD spends billions annually to maintain its weapon systems and, at times, uses long-term maintenance contracts with a potential period of performance of 5 years or more. These contracts can encourage contractors to invest in new facilities, equipment, and processes, but may hinder DODs ability to incentivize contractors performance and control costs, especially in the absence of a competitive environment or if DOD does not acquire access to technical data that can enable DOD to select an alternative maintenance provider.
GAO was asked to evaluate (1) the extent to which DOD uses long-term maintenance contracts, (2) DODs ability to select alternative maintenance providers, and (3) how these contracts have been structured to incentivize performance and manage cost. GAO reviewed a nongeneralizable sample of 10 long-term contracts to illustrate different maintenance approaches. GAO interviewed program officials and reviewed contract documentation. GAO also reviewed information on eight programs recently reviewed by DOD to determine how these programs addressed technical data needs.

What GAO Found

At the departmental level, neither the Department of Defense (DOD) nor the individual military departments know the extent to which weapon system programs rely on long-term maintenance contracts. DOD policy requires DOD and the military departments to approve acquisition strategies and lifecycle sustainment plans, which include information on contractor support, but DOD officials reported that they do not collect information on the use of long-term contracts. DODs limited visibility over long-term maintenance contracts reflects broader DOD challenges with managing services acquisition. GAOs past work has identified the need for DOD to obtain better data on its contracted services to enable it to make more strategic decisions. DOD is considering a number of policy- and data-related initiatives that could improve its knowledge of these contracts, but these efforts are in the early stages of development.
Decisions made early in the acquisition process can limit DODs ability to select alternative maintenance providers over the life cycle of a weapon system program. Program officials believed that DOD had the ability to select alternative service providers for half of the contracts GAO reviewed, as DOD either had sufficient technical data or there was an existing competitive environment. DOD officials believed the lack of technical data, funding, or expertise would hinder them from selecting alternative service providers on the other contracts GAO reviewed. Recent legislation and DODs 2010 efficiency initiatives emphasize the importance of technical data considerations. GAO found that eight weapon systems that underwent DOD acquisition-related reviews between October 2010 and October 2011 considered technical data issues, but not all have determined the extent to which they will acquire these data or the cost to do so.
Once the decision is made to use long-term contracts, DOD faces choices on how to best incentivize contractor performance and manage costs. GAO found that the 10 long-term maintenance contracts reviewed varied in terms of the incentives employed and tools used to gain insight into contractor costs. For example, GAO found that all 5 contracts with the longest durations, potentially ranging from 9 to 22 years, used monetary incentives such as award or incentive fees, or contract term incentives that can extend the life of the contract by several years. However, DOD and program officials expressed some concerns about the lack of insight on contractors costs. In two cases, program offices established fixed prices for the entire potential length of the 9- and 15-year contracts without the ability to renegotiate prices or obtain incurred cost data. In comparison to the contracts with the longest durations, the five contracts GAO reviewed with maximum lengths of 5 years made less use of incentives or cost-control tools and generally did not have the ability to renegotiate contract prices, but program officials believed that the shorter-term nature of the contracts mitigated some of their risks. DOD does not collect information concerning the effectiveness of the various incentives or cost control tools used on long-term maintenance contracts, but it has identified efforts made by individual programs to improve acquisition of maintenance services. Developing lessons learned on what incentives and cost-control tools work best would help inform future acquisition strategies and reduce risk.

What GAO Recommends

GAO recommends that DOD collect information on the extent to which DOD uses long-term maintenance contracts and develop lessons learned regarding the use of incentives and cost-control tools. DOD concurred with each of the recommendations and indicated that it would develop methodologies to implement them.