In  fiscal year 2014, DOD obligated over $156 billion on contracted services,  which constituted more than half of DOD’s total contract spending. DOD’s Process for Planning, Programing, Budgeting, and Execution

Each year DOD uses the PPBE process to determine and prioritize  requirements and allocate resources and funding to the military  departments and defense agencies. Further, DOD obligated more than half of contracted service dollars to  three service portfolio groups—knowledge-based, research and  development, and facility-related services. DOD’s  programming policy and supplemental military guidance, however, does  not require components to identify future spending on contracted services  beyond the budget year. For example, the Army plans to request data from  program offices, such as product service code data, on all service  contracts to be awarded over the next 5 years. In contrast, the Air Force  plans to continue to collect object class data only for those service  contracts using operations and maintenance funds beyond the budget  year. DOD, however, lacks a mechanism to coordinate these efforts  which increases the risk of the collection of inconsistent data. Planned Service Contract Spending Is Not Required to Be Identified in the POM Submissions Beyond the Budget Year

While program offices we reviewed generally maintained data on their  service contract requirements beyond the budget year, neither DOD  Directive 7045.14 or supplemental military department guidance require  program offices to identify which requirements through the FYDP will be  met through the use of service contracts in POM inputs. DOD Budget Exhibits Submitted to Congress Provide Limited Visibility into Contracted Services Spending

DOD budget exhibits provide limited visibility to Congress on planned  spending for contracted services. In addition, the primary budget exhibit  for services does not meet statutory reporting requirements. In 2009,  Congress required DOD to develop an exhibit to identify amounts  requested for its service contract spending, in part, to improve oversight  by DOD and Congress of DOD’s contracted services. In implementing  this provision, however, DOD excluded up to $100 billion—almost two- thirds—on its estimated spending on contracted services for fiscal year  2014 on which it was required to report, in part to maintain consistency  with other reporting requirements. Moreover, unlike DOD budget exhibits for weapon systems and other  major acquisitions, DOD’s other budget exhibits that contain some  information on contracted services are not required to include data on  projected spending on contracted services beyond the current budget  fiscal year. Without a roadmap of future service contract spending needs,  Congress has limited visibility into an area that constitutes more than half  of DOD’s annual contract spending. DOD’s contracted services budget exhibit intended to meet that statutory  reporting requirement, found in the Operation and Maintenance Overview  report, however, significantly underreports DOD’s estimated budget  request for contracted services. Nevertheless, this approach has resulted in DOD not  meeting its reporting requirements on services. Other DOD Budget Exhibits Provide Only Limited Information on One Year of Future Spending Data for Service Contracts

Although DOD spends the majority of its contract spending on services,  requirements to forecast future year spending is limited to the next budget  year. As a result, the  Congress has limited insights into DOD’s planned expenditures for  services beyond the current budget year. Recommendations for Executive Action

To ensure that senior leadership within the Office of the Secretary of  Defense and the military departments are better positioned to make  informed decisions regarding the volume and type of services that should  be acquired over the future year defense program, we recommend that  the Secretaries of the Army, Navy, and Air Force revise their  programming guidance to collect information on how contracted services  will be used to meet requirements beyond the budget year. To ensure the military departments’ efforts to integrate services into the  programming process and senior service managers efforts to develop  forecasts on service contract spending provide the department with  consistent data, we recommend that the Secretary of Defense establish a  mechanism, such as a working group of key stakeholders—which could  include officials from the programming, budgeting and requirements  communities as well as the senior services managers—to coordinate  these efforts. In written  comments, DOD concurred with one of our three recommendations and  partially concurred with two.
Why GAO Did This Study

In 2014, DOD obligated over $156 billion to contractors that provide services, such as for engineering support, to meet needs. These contracted services constituted more than half of DOD's total contract spending. House Report 113-446 contained a provision for GAO to evaluate DOD's management of contracted services. This report assesses (1) trends in DOD spending on contracted services, (2) DOD's insight into its requirements for contracted services, and (3) how DOD reports on contracted services in its budget requests to Congress. GAO analyzed the most recent data available on DOD service contract spending from fiscal years 2010 through 2014, reviewed programming guidance and budget documents as well as a non-generalizable selection of six program office inputs to the budget and planning process for three military commands that spent the most on services in 2013, and interviewed DOD officials.

What GAO Found

Over the last 5 years, the Department of Defense (DOD) consistently obligated more on services than products. These obligations are significant. For example, in 2014 alone, DOD obligated $85 billion on its three largest types of services—knowledge-based, research and development, and facility-related services. This amount was more than double the amount DOD obligated for aircraft, land vehicles and ships, the three largest product categories DOD acquired.
Program offices within each of the military departments that GAO met with maintained data on current and estimated future spending needs for contracted service requirements, but they did not identify service contract spending needs beyond the next year, as there was no requirement to do so. As a result, DOD leadership's insight into future spending on contracted services is limited. DOD programming policy requires the military departments and defense agencies to develop a program objective memorandum (POM) that identifies and prioritizes requirements and total funding needs for the current budget year and then four additional years into the future. This policy and the military departments' supplemental POM guidance, however, do not address contracted services. The military departments have started efforts to collect data on contract services requirements beyond the budget year but these efforts could result in the collection of disparate data. For example, the Army plans to request data from program offices on all service contracts to be awarded over the next 5 years. In contrast, the Air Force plans to continue to collect data only for service contracts using operations and maintenance funds beyond the budget year. Unless DOD establishes a mechanism to coordinate efforts—a key internal control standard—it risks collecting different data leading to inconsistency across the department.
DOD's budget exhibits on contract services provide limited visibility to Congress on planned spending, and the primary exhibit for contracted services does not meet statutory reporting requirements. In 2009, Congress required DOD to develop an exhibit to summarize its service contract spending, in part, to improve oversight by DOD and Congress of DOD's contracted services. In its fiscal year 2014 exhibit, however, DOD excluded up to $100 billion—almost two-thirds—of its estimated spending on contracted services, including those for contingency operations and for medical care, on which it was statutorily required to report. Unlike DOD budget exhibits for weapon systems, DOD's other budget exhibits that contain limited information on contracted services do not include data on projected spending beyond the current budget year. Without a roadmap of future service contract spending needs, Congress has limited visibility into an area that constitutes more than half of DOD's annual contract spending.

What GAO Recommends

Congress should consider amending reporting requirements to include estimated spending on services beyond the budget year. GAO recommends that the Secretary of Defense and military departments revise POM guidance, coordinate efforts to forecast services, and fully comply with budget reporting. DOD concurred with the budget reporting recommendation and partially concurred with the two others, citing challenges with estimating future spending, but did not address revised guidance or coordination. GAO believes such actions are needed.