DOD Directive 5000.1, the Defense Acquisition System, highlights the  department’s preference for using performance-based logistics at the  platform level, stating, “Program Managers shall develop and implement  performance-based logistics strategies that optimize total system  availability while minimizing cost and logistics footprint.” As part of its  implementation of this strategy, in 2003 DOD proposed that the Congress  adopt legislative changes that would allow the services to increase the  appropriations allocation flexibility within a weapon system program,  allowing the program manager to use funds from different accounts  (such as operation and maintenance; research, development, test, and  evaluation; and procurement) to pay for system support costs. In the private sector, performance-based contracting is a tool used  according to the applicability of subsystem or component and  circumstance, when it is cost-effective and reduces risk in a  noncompetitive environment. DOD officials have stated that this is an industry best practice and should  be adopted more aggressively, but in 7 of 14 companies we interviewed  that used some type of performance-based contracting, this agreement  was used at the subsystem or component level—that is, for engines,  auxiliary power units, wheels, or brakes— and it was generally used for  older systems. The life-cycle management issues are comparable to those  of DOD in managing its weapon system sustainment programs. In contrast, traditional transaction-based time and material contracts are  used to purchase logistics inputs—such as quantities of spare parts,  specific repair tasks, and engineering studies. For example, officials  from one company said they used a performance-based contract for the  older of the two types of engines in the company’s inventory. But in the absence of reliable and  complete performance data as a baseline, the adoption of this approach  as the preferred support strategy for new weapon systems could  undermine DOD’s ability to negotiate cost-effective terms—particularly  since the performance-based contracts at the weapon system level have  cost-reimbursement elements, while the private-sector companies  generally used fixed-price agreements. First, they prefer to take advantage of  competition whenever it is available and to manage support contracts  through the use of competitive procedures. Second, company officials  emphasized the importance of gaining purchasing power from volume  discounts on subsystems or components across their entire fleet of  systems as a reason for not implementing performance contracting at the  platform level. Finally, by having contracts at the subsystem or component  level, companies can avoid the administrative costs that would be charged  by a prime integrator. However,  logistics officials agree that the product support strategy should clearly  provide for the future delivery of the technical data when required to  support competition or alternative source development. Using performance-based logistics at the platform level also creates  risk by contracting out the program integration function—a core function  that private contractors consider essential for the cost-effective  management of costly and complex systems over their life cycle. Regarding our recommendation to incorporate in its performance-based  logistics guidance to the services the private sector’s practice of using  performance-based logistics as a tool to achieve economies at the  subsystem or component level, DOD’s response stated that the department  recognizes the need to re-emphasize the use of performance-based  logistics for subsystems and components in its policy memorandum and  guide books. To identify commercial industries that use complex and costly equipment  with life-cycle management issues similar to military weapon systems, we  interviewed DOD depot maintenance and logistics policy officials.
Why GAO Did This Study

The Department of Defense (DOD) is pursuing a policy that promotes performance-based logistics at the platform level as the preferred product support strategy for its weapon systems, based in part on DOD's perception that this is an industry best practice. GAO was asked to compare industry practices for activities using complex and costly equipment with life-cycle management issues similar to those of military systems to identify lessons learned that can be useful to DOD. This is the first of two reports addressing DOD's implementation of performance-based logistics and is intended to facilitate DOD's development of new guidance on the use of this approach.

What GAO Found

DOD's current policy for implementing performance-based logistics as a preferred support approach at the weapon system platform level does not reflect the practices of private-sector companies that support expensive and complex equipment with life-cycle management issues. The companies GAO interviewed use performance-based contracting as a tool rather than as a preferred support concept at the weapon system platform level. While 7 of the 14 companies GAO interviewed use some type of performance-based contracting, they use it at the subsystem or component level--for commodities such as engines, wheels, and brakes--when it is cost-effective and reduces risk in a noncompetitive environment. DOD's proposed policy of pursuing performance-based logistics as the preferred support approach at the platform level results in contracting out the program-integration function--a core process the private-sector firms consider integral to successful business operations. Further, this proposed policy could limit opportunities to take advantage of competition when it is available for subsystems or components as well as limit opportunities to gain purchasing power from volume discounts on components across an entire fleet and avoid the administrative costs charged by a prime integrator. While DOD is proposing the aggressive use of performance-based logistics on both older and new weapon system platforms, the companies GAO interviewed use performance-based contracting at the subsystem or component level when it is cost-effective--often in a noncompetitive environment when the manufacturer controls expensive repair parts, such as engines. In general company officials said they rely more widely on other contracting vehicles, such as time and material contracts, particularly for new systems. Company officials noted that in the absence of accurate and reliable information on system performance to establish a baseline for evaluating the cost-effectiveness of a performance-based contract for new systems, the risk of the negotiated price's being excessive is increased. The companies GAO interviewed also emphasized the importance of having rights to the technical data--such as maintenance drawings, specifications, and tolerances--needed to support the management of all logistics contracts and, should the service provider arrangements fail, to support competition among alternate providers. In contrast, DOD program managers often opt to spend limited acquisition dollars on increased weapon system capability rather than on rights to the technical data--thus limiting their flexibility to perform work in-house or to support alternate source development should contractual arrangements fail.