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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

May 2007: 

Defense Budget: 

Trends in Operation and Maintenance Costs and Support Services 
Contracting: 

GAO-07-631: 

GAO Highlights: 

Highlights of GAO-07-631, a report to congressional committees 

Why GAO Did This Study: 

The Department of Defense (DOD) spent about 40 percent of the total 
defense budget to operate and maintain the nationís military forces in 
fiscal year 2005. Operation and maintenance (O&M) funding is considered 
one of the major components of funding for readiness. O&M 
appropriations fund the training, supply, and equipment maintenance of 
military units as well as the infrastructure of military bases. Over 
the past several years, DOD has increasingly used contractors, rather 
than uniformed or DOD civilian personnel, to provide O&M services in 
areas such as logistics, base operations support, information 
technology services, and administrative support. 

The House Appropriations Committee directed GAO to examine growing O&M 
costs and support services contracting. This GAO report (1) identifies 
the trends in O&M costs and services contracts and the reasons for the 
trends, (2) discusses whether increased services contracting has 
exacerbated the growth of O&M costs, and (3) provides perspectives on 
the benefits and concerns associated with increased contracting for 
support services. GAO analyzed DODís O&M appropriations, budgets, and 
services contract costs over a 10-year period and developed case 
studies of outsourced O&M-related work at three installations. GAO is 
not making any recommendations. DOD made only technical comments on a 
draft of this report. 

What GAO Found: 

DODís O&M and services contract costs increased substantially between 
fiscal years 1995 and 2005, with most growth occurring since fiscal 
year 2001. DODís O&M costs were almost constant between fiscal years 
1995 and 2000. However, between fiscal years 2000 and 2005, DODís O&M 
costs increased from $133.4 billion to $209.5 billionóan increase of 
$76.1 billion, or 57 percent, in constant fiscal year 2007 dollars. 
This growth was primarily caused by increased military operations 
associated with the global war on terrorism and other contingencies. In 
addition to increased O&M costs, DOD has increasingly relied on 
contractors to perform O&M-related work. Between fiscal years 2000 and 
2005, DODís services contract costs in O&M-related areas increased by 
73 percent. According to DOD and service officials, several factors 
have contributed to the increased use of contractors for support 
services: (1) increased O&M requirements from the global war on 
terrorism and other contingencies, which DOD has met without an 
increase in active duty and civilian personnel, (2) federal government 
policy, which is to rely on the private sector for needed commercial 
services that are not inherently governmental in nature, and (3) DOD 
initiatives, such as its competitive sourcing and utility privatization 
programs. 

Sufficient data are not available to determine whether increased 
services contracting has caused DODís costs to be higher than they 
would have been had the contracted activities been performed by 
uniformed or DOD civilian personnel. Because existing policy generally 
does not require a public/private competition for contractor 
performance of a new or expanded commercial requirement, in-house cost 
estimates have not been prepared for most of the work awarded to 
contractors as a result of increased O&M requirements from expanded 
military operations. Without this information, an overall determination 
cannot be made of the effect of increased services contracting on O&M 
cost growth. DOD does maintain data from its competitive sourcing, or A-
76, program. GAOís analysis of the military servicesí reported 
information on 538 A-76 decisions during fiscal years 1995 through 2005 
to contract out work formerly performed by uniformed and DOD civilian 
personnel showed that the decisions generally resulted in reducing the 
governmentís costs for the work. However, the number of A-76 
public/private competition contracts is relatively small and the 
results from this program may not be representative of the results from 
all services contracts for new or expanded O&M work. 

Although DOD officials have cited certain benefits from increased use 
of contractors for support services, such as allowing more uniformed 
personnel to be available for combat missions, concerns have also been 
cited. For example, Congress recently required DOD to prescribe 
guidelines giving consideration to performing more work using 
government employees and GAO has noted concerns over DODís approach to 
services acquisition. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-631]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Brian Lepore at (202) 512-
4523 or leporeb@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

O&M and Services Contract Costs Have Increased Significantly: 

Data Are Insufficient to Determine Whether Increased Services 
Contracting Has Exacerbated O&M Cost Growth: 

Different Perspectives Exist on the Benefits and Concerns Associated 
with Increased Contracting for Support Services: 

Concluding Observations: 

Agency Comments: 

Appendix I: Scope and Methodology: 

Appendix II: GAO Contact and Staff Acknowledgments: 

Tables: 

Table 1: Changes in Service Contract Costs in Selected Categories: 

Table 2: A-76 Public/Private Competition Decisions for Fiscal Years 
1995 through 2005: 

Figures: 

Figure 1: O&M Costs for Fiscal Years 1995 through 2005: 

Figure 2: Percent Change in DOD Costs by Major Budget Category from 
Fiscal Year 1995 to 2000: 

Figure 3: Percent Change in DOD Costs by Major Budget Category from 
Fiscal Year 2000 to 2005: 

Figure 4: Percent Change in the Services' O&M Costs: 

Figure 5: Supplemental O&M Appropriations for Fiscal Years 2000 through 
2005: 

Figure 6: Services' O&M Costs with and without Supplemental Funding, 
Transfers, and Reprogrammings: 

Figure 7: First Performance Period Results from Army A-76 Public/ 
Private Competition Decisions to Outsource Work between Fiscal Years 
1995 and 2005: 

Figure 8: First Performance Period Results from Navy and Marine Corps A-
76 Public/Private Competition Decisions to Outsource Work between 
Fiscal Years 1995 and 2005: 

Figure 9: First Performance Period Results from Air Force A-76 Public/ 
Private Competition Decisions to Outsource Work between Fiscal Years 
1995 and 2005: 

Abbreviations: 

DOD: Department of Defense: 
GWOT: global war on terrorism: 
O&M: operation & maintenance: 

United States Government Accountability Office: 
Washington, DC 20548: 

May 18, 2007: 

Congressional Committees: 

The Department of Defense (DOD) spent about $210 billion, or 40 percent 
of the total defense budget, to operate and maintain the nation's 
military forces in fiscal year 2005.[Footnote 1] As a major component 
of DOD's funding for readiness, operation and maintenance (O&M) 
appropriations fund the training, supply, and equipment maintenance of 
military units as well as the administrative and facilities 
infrastructure of military bases. Over the past several years, DOD has 
increasingly used private sector contractors, rather than uniformed or 
DOD civilian personnel, to provide O&M-related services in areas such 
as logistics, weapon systems, and base operations support; information 
technology services; and administrative support. 

In its June 2006 report accompanying the DOD Appropriations Bill, 2007, 
the House Appropriations Committee expressed concern about the 
increasing costs of operating our military forces.[Footnote 2] The 
committee further stated that this trend may have been exacerbated by 
efforts to contract out a substantial portion of the military services' 
logistic and support activities. To gain better insight about the costs 
and consequences of contracting out, as well as other factors 
generating an increase in operation and maintenance costs, the 
committee directed us to prepare a comprehensive analysis covering 
fiscal years 1995 through 2005. Accordingly, this report (1) identifies 
the trends in O&M costs and services contracts and the reasons for the 
trends, (2) discusses whether increased services contracting has 
exacerbated the growth of O&M costs, and (3) provides perspectives on 
the benefits and concerns associated with increased contracting for 
support services. 

To address these objectives, we reviewed and analyzed DOD's O&M 
appropriations, budget documentation, and services contract costs and 
identified the related trends for fiscal years 1995 through 2005. To 
consider inflation, we adjusted cost data to constant fiscal year 2007 
dollars using DOD's adjustment factors.[Footnote 3] We discussed with 
DOD and service headquarters officials the reasons for the trends and 
how greater reliance on the private sector for O&M activities formerly 
performed in-house has affected the overall O&M budget. We also 
assessed the availability of information related to services contracts, 
reviewed and analyzed information from DOD's competitive sourcing, or A-
76, program, and visited three installations to develop case study 
examples of O&M-related work that was contracted out either as a result 
of A-76 public/private competitions or because the uniformed personnel 
who formerly performed the work were needed to support other missions. 
For the case study examples, we identified cost estimates for the work 
when performed by government employees, the reasons that the work was 
contracted out, the actual contract costs, and the reasons for any 
contract cost growth. We did not review the actual contracts. In 
reviewing contract costs, we relied on cost data provided by 
installation officials. We also discussed with installation officials 
any consequences associated with increased contracting out of O&M work. 
Additionally, we examined DOD's response to recent legislation 
requiring DOD to consider performing more work by government employees, 
reviewed steps recently taken by the military services to control 
support services contract costs, and summarized our recent reports 
concerning DOD's acquisition of services. 

We conducted our review from August 2006 through March 2007 in 
accordance with generally accepted government auditing standards. A 
more detailed description of our scope and methodology is included in 
appendix I. 

Results in Brief: 

Largely driven by increased military operations related to the global 
war on terrorism (GWOT) and other military contingencies, DOD's O&M and 
services contract costs increased substantially since fiscal year 2001. 
DOD's O&M costs were almost constant from fiscal years 1995 to 2000, 
increasing by about 2 percent in the Army and declining about 1 percent 
in the Navy and Marine Corps and 2 percent in the Air Force. However, 
between fiscal years 2000 and 2005, DOD's O&M costs, including 
supplemental O&M funds, increased from $133.4 billion to $209.5 
billion, an increase of $76.1 billion, or 57 percent. Among the 
military services during this period, O&M costs increased by 137 
percent in the Army, 30 percent in the Navy and Marine Corps, and 29 
percent in the Air Force. Most of this growth occurred since fiscal 
year 2001 and was primarily caused by increased military operations 
associated with GWOT and other contingencies such as hurricane relief. 
In addition, DOD and service officials stated that other factors also 
contributed to the growth in O&M costs, such as the aging of military 
infrastructure and equipment; increased costs for installation 
security, antiterrorism force protection, communications, information 
technology, transportation, fuel, and utilities; and certain changes in 
acquisition approaches. While O&M costs have increased, so has DOD's 
reliance on contractors to perform O&M-related work. For example, 
between fiscal years 2000 and 2005, DOD's service contract costs in O&M-
related areas increased by 73 percent. According to DOD and service 
officials, several factors have contributed to the increased use of 
contractors for support services. First, the GWOT and other 
contingencies have significantly increased O&M requirements and DOD has 
met these requirements without an increase in active duty and civilian 
personnel. To do this, DOD relied not only on reserve personnel 
activations, but also on increased use of contractor support. Second, 
federal government policy is to rely on the private sector for needed 
commercial services that are not inherently governmental in nature, 
which includes many of the requirements generated from the GWOT in 
areas such as logistics and base operations support. Third, some 
initiatives, such as DOD's competitive sourcing and utility 
privatization programs, have resulted in greater reliance on the 
private sector. 

Sufficient data are not available to determine whether increased 
services contracting has caused DOD's costs to be higher than they 
would have been had the contracted activities been performed by 
uniformed or DOD civilian personnel. Because existing policy generally 
does not require a public/private competition for private sector 
performance of a new requirement or segregable expansion of an existing 
commercial activity performed by government personnel, DOD officials 
stated that in-house cost estimates have not been prepared for most of 
the work awarded to contractors as a result of increased O&M 
requirements from GWOT and other contingencies. Without this 
information, an overall determination cannot be made of the effect of 
increased services contracting on O&M cost growth. DOD does maintain 
detailed data from its competitive sourcing program, commonly referred 
to as the A-76 program. These data include information on contracts for 
work formerly performed in-house that were awarded to the private 
sector as a result of a public/private cost competition.[Footnote 4] 
Our analysis of the military services' reported information on 538 
decisions during fiscal years 1995 through 2005 to contract out work 
formerly performed by uniformed and DOD civilian personnel showed that 
the decisions generally resulted in reducing the government's costs for 
the work. However, compared to all O&M-related contracts, the number of 
A-76 public/private competition contracts is small and the results from 
this program may not be representative of the results from all services 
contracts for new or expanded O&M work. DOD officials further noted 
that outsourcing work formerly performed by uniformed personnel may 
reduce the cost of the work but also increase O&M costs because 
military personnel appropriations are used to compensate uniformed 
personnel and O&M appropriations are used to pay contractors for their 
services. 

Differing perspectives exist on the benefits and concerns associated 
with increased contracting for support services. DOD officials noted 
that under certain circumstances increased use of contractors for 
support services can be beneficial by allowing more uniformed personnel 
to be available for combat missions and providing certain support 
capabilities that are in short supply in the active and reserve 
components. On the other hand, concerns over increased contracting for 
support services have been cited by the Congress, the military 
services, and us. For example, the Congress recently required DOD to 
prescribe guidelines giving consideration to performing more work using 
government employees. Section 343 of the National Defense Authorization 
Act for Fiscal Year 2006 required the Secretary of Defense to prescribe 
guidelines and procedures for ensuring that consideration is given to 
using government employees for work that is currently performed or 
would otherwise be performed by contractors[Footnote 5]. In February 
2007, DOD officials stated that they plan to issue the required 
guidance in the near future and that the use of government employees 
instead of contractors to meet O&M-related requirements in some 
circumstances might result in savings. Further, citing the need to 
control costs and achieve fiscal efficiencies, the Army and the Air 
Force recently issued policy memorandums calling for a reduction in 
services contract costs. The Secretary of the Army stated in a January 
2007 memorandum that he expected to see significant reductions in the 
number of Army contracted services personnel during the remainder of 
fiscal year 2007 and the Secretary of the Air Force set targets for 
realizing estimated savings in Air Force support services contract 
cost[Footnote 6]s. Navy officials stated that although they had not 
issued any new policy on contracted services, the issue is a concern 
and the Navy had reduced its planned contractor support budgets in both 
fiscal year 2007 and 2008. At the three installations we visited, local 
officials also cited concerns over increased contracting for support 
services--such as the loss of flexibility that is inherent with the use 
of uniformed and DOD civilian personnel in some circumstances, the 
difficulty in preparing accurate contract statements of work to help 
avoid contract modifications, and the availability of sufficient 
resources to ensure adequate contract oversight. Finally, in November 
2006, we reported that DOD's approach to services acquisition did not 
always take the necessary steps to ensure that customer needs were 
translated into well-defined contract requirements or that postcontract 
award activities resulted in expected outcomes[Footnote 7]. As a 
result, DOD was potentially exposed to a variety of risks, including 
purchasing services that did not fully meet customer needs or that 
should have been provided in a different manner or with better results. 
DOD concurred with the report's recommendations to address these 
concerns and stated that the department was taking or planned to take 
actions to improve the acquisition of services. 

Although there may be some merit in DOD developing more information on 
the cost-effectiveness of its O&M services contracts that were not 
awarded through the A-76 public/private competitive process, at this 
time we are not recommending that DOD do this because performing the 
analyses to determine the estimated in-house costs to perform this work 
can be expensive and time consuming; contracting with the private 
sector may be the only alternative to meet certain requirements in the 
short term, especially during times of increased operations; and, as 
long as DOD uses competition in its contract solicitations for new and 
expanded requirements and provides adequate contract oversight, cost 
efficiencies could be achieved through normal market forces. DOD made 
no comments on a draft of this report except for technical comments, 
which we incorporated where appropriate. 

Background: 

O&M appropriations support the training, supply, and equipment 
maintenance of military units as well as the administrative and 
facilities infrastructure of military bases. Along with military 
personnel costs, which are funded with separate military personnel 
appropriations, O&M funding is considered one of the major components 
of DOD's funding for readiness. 

O&M funds provide for a diverse range of programs and activities that 
include the salaries and benefits for most DOD civilian employees; 
depot maintenance activities; fuel purchases; flying hours; base 
operations; consumable supplies; health care for active duty service 
personnel and other eligible beneficiaries; reserve component 
operations; and DOD-wide support functions including several combat 
support agencies, four intelligence agencies, and other agencies that 
provide common information services, contract administration, contract 
audit, logistics, and administrative support to the military 
departments. 

The Congress provides O&M appropriations to 11 service-oriented O&M 
accounts--the Army, Navy, Marine Corps, Air Force, Army Reserve, Navy 
Reserve, Marine Corps Reserve, Air Force Reserve, Army National Guard, 
Air National Guard, and defensewide--and to program accounts, such as 
the defense health program. In addition to the regular annual O&M 
appropriations, the Congress can make supplemental O&M appropriations 
to finance the incremental costs above the peacetime budget that are 
associated with contingencies, such as the GWOT. 

Since late 1995, DOD has encouraged the services and the defense 
agencies to conduct cost comparison studies as provided for in the 
Office of Management and Budget's Circular A-76. Under the A-76 
process, otherwise known as competitive sourcing, the military services 
and other defense components conduct a public/private competition for a 
commercial activity currently performed by government personnel to 
determine whether it would be cost-effective to contract with the 
private sector for that activity's performance. On the other hand, a 
public/private competition is not required for private sector 
performance of a new requirement, private sector performance of a 
segregable expansion of an existing commercial activity performed by 
government personnel, or continued private sector performance of a 
commercial activity. However, before government personnel may perform a 
new requirement, an expansion to an existing commercial activity, or an 
activity performed by the private sector, a public/private competition 
is required to determine whether government personnel should perform 
the commercial activity. 

The DOD Commercial Activities Management Information System is DOD's 
database of record established to meet reporting requirements on the 
conduct of A-76 competitions and the results from implementing A-76 
decisions, whether the decisions are to continue using government 
employees to perform the work or to outsource the work. For contracts 
awarded to the private sector, the database includes the estimated cost 
to perform the work using government employees, the contract award 
amount, the actual contract cost for each contract performance period, 
and brief reasons for any cost growth over the performance periods. A 
contract performance period is normally for 12 months, although the 
first performance period may cover a shorter transition period when the 
work is initially conveyed to the contractor. Contract information is 
to be maintained through the end of the last performance period 
included in the competition. Installation officials are responsible for 
reporting information on the A-76 program for input into the DOD 
database. 

O&M and Services Contract Costs Have Increased Significantly: 

Driven primarily by increased operations associated with GWOT and other 
contingencies, DOD's O&M costs increased substantially between fiscal 
years 1995 and 2005, with the most growth occurring since fiscal year 
2001. DOD's reliance on contractors for support services also increased 
substantially during this period in order to meet increased military 
requirements without an increase in active duty and civilian personnel 
and because federal government policy is to rely on the private sector 
for needed commercial services that are not inherently governmental in 
nature, which includes many of the requirements generated from the GWOT 
in areas such as logistics and base operations support. 

Most Growth in O&M Costs Occurred since Fiscal Year 2001: 

Although DOD's O&M costs increased significantly between fiscal years 
1995 and 2005, there was a distinct difference in the rate of growth 
between the early and latter years of this 10-year period. 
Specifically, as shown in figure 1, DOD's annual O&M costs were 
practically constant until 2001, when the costs began to increase. 

Figure 1: O&M Costs for Fiscal Years 1995 through 2005: 

[See PDF for Image] 

Source: GAO analysis of DOD data. 

Note: The costs shown in the figure are actual total obligation 
authority, which includes regular O&M appropriations, any supplemental 
O&M appropriations, and any funding from other appropriation accounts 
transferred or reprogrammed into the O&M account during budget 
execution. 

[End of figure] 

Figure 2 shows that during the first half of the 10-year period from 
fiscal year 1995 to fiscal year 2000, DOD's O&M costs increased about 1 
percent. In comparison, costs in DOD's other major budget categories 
during this period changed as follows: military personnel costs 
declined about 13 percent; procurement costs increased about 21 
percent; research and development costs increased about 4 percent; and 
other costs increased about 1 percent. DOD total costs were almost 
constant between fiscal year 1995 and fiscal year 2000. 

Figure 2: Percent Change in DOD Costs by Major Budget Category from 
Fiscal Year 1995 to 2000: 

[See PDF for Image] 

Source: GAO analysis of DOD data. 

[End of figure] 

Figure 3 shows that a significant change in cost growth occurred during 
the subsequent 5-year period from fiscal year 2000 to fiscal year 2005, 
when DOD's O&M costs increased about 57 percent. In the other major 
budget categories during this period, military personnel costs 
increased about 36 percent, procurement costs increased by about 62 
percent, research and development increased by about 62 percent, and 
other costs increased about 13 percent. DOD total costs increased about 
51 percent between fiscal year 2000 and fiscal year 2005. 

Figure 3: Percent Change in DOD Costs by Major Budget Category from 
Fiscal Year 2000 to 2005: 

[See PDF for Image] 

Source: GAO analysis of DOD data. 

[End of figure] 

Trends in O&M costs at the military service level generally reflect the 
overall DOD trend. As shown in figure 4, between fiscal years 1995 and 
2000, little change occurred in each service's O&M costs. However, 
considerable cost growth occurred between fiscal years 2000 and 2005. 
Among the services, the Army had the largest percentage of growth in 
O&M costs between fiscal years 2000 and 2005. During this period, the 
Army's O&M costs increased by about 137 percent, while the Navy and 
Marine Corps' and the Air Force's O&M costs increased by about 30 
percent and 29 percent, respectively. 

Figure 4: Percent Change in the Services' O&M Costs: 

[See PDF for Image] 

Source: GAO analysis of DOD data. 

[End of figure] 

Increased Military Operations Were the Primary Reason for O&M Cost 
Growth: 

According to DOD and service officials, the primary cause for increased 
O&M costs since fiscal year 2001 is the increase in military operations 
associated with GWOT and other contingencies, including hurricane 
relief. However, the officials also stated that other factors have 
contributed to the growth in O&M costs, such as the aging of military 
infrastructure and equipment; increased costs for installation 
security, antiterrorism force protection, communications, information 
technology, transportation, and utilities; and certain changes in 
acquisition approaches. 

The fight against terrorism has resulted in operations and deployments 
around the globe that are in addition to the usual peacetime 
operations. According to DOD, the related costs have included not only 
the personnel costs associated with mobilizing National Guard and 
reserve forces but also the costs of supporting these forces and the 
increased pace of operations. O&M-funded costs include a wide range of 
activities and services supporting operations including costs related 
to (1) predeployment and forward-deployed training of units and 
personnel; (2) personnel support costs including travel, subsistence, 
reserve component personnel activation and deactivation costs, and unit-
level morale, welfare, and recreation; (3) establishment, maintenance, 
and operation of housing and dining facilities and camps in the 
theaters of operation; (4) petroleum, oils and lubricants, spare parts, 
consumable end items, and other items necessary to support the 
deployment of air, ground, and naval units; (5) establishment, 
maintenance, and operation of facilities including funds for roads, 
water, supply, fire protection, hazardous waste disposal, force 
protection bunkers and barricades; (6) command, control, 
communications, computers and intelligence within the contingency areas 
of operations; (7) organization-level maintenance including repairs to 
equipment and vehicles; (8) intermediate-and depot-level maintenance of 
weapons and weapon system platforms requiring service after the wear 
and tear of combat operations; and (9) contracts for services for 
logistics and infrastructure support to deployed forces. 

The additional military costs associated with GWOT and other 
contingencies have been primarily funded through supplemental 
appropriations. Figure 5 shows the annual amount of supplemental O&M 
funds appropriated each year from fiscal year 2000 through fiscal year 
2005. During this period, supplemental O&M appropriations totaled about 
$210 billion and, according to the services, additional amounts were 
transferred or reprogrammed from other accounts to the O&M accounts of 
the military services. 

Figure 5: Supplemental O&M Appropriations for Fiscal Years 2000 through 
2005: 

[See PDF for Image] 

Source: GAO analysis of congressional data. 

Note: GAO analyzed the annual supplemental O&M appropriations for DOD. 

[End of figure] 

Although costs associated with the GWOT and other contingencies have 
been the primary reason for increased O&M costs between fiscal years 
2000 and 2005, other factors also contributed to the O&M cost growth in 
the military services. To illustrate, if the services' annual O&M total 
obligation authority is adjusted by removing annual supplemental O&M 
appropriations and net transfers and reprogrammings into the O&M 
account, the result shows that O&M costs still grew during this time 
period, as illustrated in figure 6. Specifically, between fiscal years 
2000 and 2005, O&M costs after the adjustment grew by about 44 percent 
in the Army, 17 percent in the Navy and Marine Corps, and 2 percent in 
the Air Force. 

Figure 6: Services' O&M Costs with and without Supplemental Funding, 
Transfers, and Reprogrammings: 

[See PDF for Image] 

Source: GAO analysis of congressional and DOD data. 

Note: GAO analyzed annual supplemental O&M appropriations and DOD data 
on the military services excluding the services' reserve components. 

[End of figure] 

According to service officials, baseline O&M costs have increased 
between fiscal years 2000 and 2005 because of many factors, such as 
aging of military infrastructure and equipment, and increased costs for 
installation security, antiterrorism force protection, communications, 
information technology, transportation, and utilities. Navy officials 
particularly cited the implementation of DOD's utility privatization 
program as a factor contributing to increased O&M costs. In a September 
2006 report, we noted that DOD's utility costs could potentially 
increase by another $954 million to pay costs associated with remaining 
utility systems that might be privatized.[Footnote 8] Increased O&M 
costs are also attributable to certain changes in DOD's acquisition 
approaches. For example, the Air Force historically bought space launch 
vehicles, such as the Delta and Titan rockets, as products paid for 
with procurement appropriations. Now, under the Evolved Expendable 
Launch Vehicle program, the Air Force uses O&M appropriations to 
purchase launch services using contractor-owned launch vehicles. The 
projected cost of this program is $28 billion. Further, as we noted in 
our September 2006 report, the Army and the Air Force turned to service 
contracts for simulator training primarily because efforts to modernize 
existing simulator hardware and software had lost out in the 
competition for procurement funds.[Footnote 9] As a result, the 
simulators were becoming increasingly obsolete. Buying training as a 
service meant that O&M funds could be used instead of procurement 
funds. 

DOD's Reliance on Contractors for Support Services Has Increased since 
Fiscal Year 2000 for Several Reasons: 

To meet military requirements during a period of increased operations 
without an increase in active duty and civilian personnel, DOD has 
relied not only on reserve personnel activations but also on increased 
use of contractor support in areas such as management and 
administrative services, information technology services, medical 
services, and weapon systems and base operations support. Between 
fiscal years 2000 and 2005, DOD's service contract costs in O&M-related 
areas increased over $40 billion, or 73 percent. Table 1 highlights the 
growth in several service contract categories. 

Table 1: Changes in Service Contract Costs in Selected Categories: 

Fiscal year 2007 dollars in billions. 

Service category: Professional, administrative, and management support; 
Contract costs: Fiscal year 2000: $14.6; 
Contract costs: Fiscal year 2005: $30.1; 
Change from fiscal year 2000 to 2005: Amount: $15.5; 
Change from fiscal year 2000 to 2005: Percentage: 107. 

Service category: Maintenance and repair of equipment; 
Contract costs: Fiscal year 2000: 7.7; 
Contract costs: Fiscal year 2005: 12.3; 
Change from fiscal year 2000 to 2005: Amount: 4.6; 
Change from fiscal year 2000 to 2005: Percentage: 60. 

Service category: Data processing and telecommunications; 
Contract costs: Fiscal year 2000: 6.3; 
Contract costs: Fiscal year 2005: 11.0; 
Change from fiscal year 2000 to 2005: Amount: 4.7; 
Change from fiscal year 2000 to 2005: Percentage: 74. 

Service category: Medical; 
Contract costs: Fiscal year 2000: 2.8; 
Contract costs: Fiscal year 2005: 8.4; 
Change from fiscal year 2000 to 2005: Amount: 5.6; 
Change from fiscal year 2000 to 2005: Percentage: 199. 

Service category: Maintenance and repair of real property; 
Contract costs: Fiscal year 2000: 6.6; 
Contract costs: Fiscal year 2005: 8.0; 
Change from fiscal year 2000 to 2005: Amount: 1.5; 
Change from fiscal year 2000 to 2005: Percentage: 22. 

Service category: Utilities and housekeeping; 
Contract costs: Fiscal year 2000: 3.9; 
Contract costs: Fiscal year 2005: 7.0; 
Change from fiscal year 2000 to 2005: Amount: 3.1; 
Change from fiscal year 2000 to 2005: Percentage: 79. 

Service category: Transportation and travel; 
Contract costs: Fiscal year 2000: 3.4; 
Contract costs: Fiscal year 2005: 6.6; 
Change from fiscal year 2000 to 2005: Amount: 3.3; 
Change from fiscal year 2000 to 2005: Percentage: 97. 

Service category: Conservation and natural resources; 
Contract costs: Fiscal year 2000: 1.7; 
Contract costs: Fiscal year 2005: 2.3; 
Change from fiscal year 2000 to 2005: Amount: 0.7; 
Change from fiscal year 2000 to 2005: Percentage: 39. 

Service category: Operation of government-owned facilities; 
Contract costs: Fiscal year 2000: 2.3; 
Contract costs: Fiscal year 2005: 2.1; 
Change from fiscal year 2000 to 2005: Amount: (0.2); 
Change from fiscal year 2000 to 2005: Percentage: -9. 

Service category: Technical representative services; 
Contract costs: Fiscal year 2000: 1.4; 
Contract costs: Fiscal year 2005: 1.7; 
Change from fiscal year 2000 to 2005: Amount: 0.3; 
Change from fiscal year 2000 to 2005: Percentage: 23. 

Service category: Special studies and analyses; 
Contract costs: Fiscal year 2000: 1.2; 
Contract costs: Fiscal year 2005: 1.5; 
Change from fiscal year 2000 to 2005: Amount: 0.2; 
Change from fiscal year 2000 to 2005: Percentage: 19. 

Service category: Modification of equipment; 
Contract costs: Fiscal year 2000: 1.1; 
Contract costs: Fiscal year 2005: 1.4; 
Change from fiscal year 2000 to 2005: Amount: 0.3; 
Change from fiscal year 2000 to 2005: Percentage: 29. 

Service category: Educational and training services; 
Contract costs: Fiscal year 2000: 1.1; 
Contract costs: Fiscal year 2005: 1.4; 
Change from fiscal year 2000 to 2005: Amount: 0.3; 
Change from fiscal year 2000 to 2005: Percentage: 23. 

Service category: Other[A]; 
Contract costs: Fiscal year 2000: 1.3; 
Contract costs: Fiscal year 2005: 2.0; 
Change from fiscal year 2000 to 2005: Amount: 0.7; 
Change from fiscal year 2000 to 2005: Percentage: 58. 

Total; 
Contract costs: Fiscal year 2000: $55.4; 
Contract costs: Fiscal year 2005: $95.9; 
Change from fiscal year 2000 to 2005: Amount: $40.6; 
Change from fiscal year 2000 to 2005: Percentage: 73. 

Source: GAO analysis of DOD data. 

Notes: GAO analyzed DOD's DD350 database of all contracting actions 
exceeding $25,000. Some numbers in the table may not calculate 
correctly due to rounding. 

[A] "Other" includes contracts for quality control, testing, and 
inspection; equipment lease, rental, and installation; social services; 
photographic, mapping, and printing services; and salvage services. 

[End of table] 

DOD officials noted several factors that have contributed to DOD's 
increased use of contractor support. First, the GWOT and other 
contingencies have significantly increased O&M requirements and DOD has 
met these requirements without an increase in active duty and civilian 
personnel. To do this, DOD relied not only on reserve personnel 
activations, but also on increased use of contractor support. 

Second, Office of Management and Budget Circular A-76 notes that the 
long-standing policy of the federal government has been to rely on the 
private sector for needed commercial services and that commercial 
activities should be subject to the forces of competition to ensure 
that the American people receive maximum value for their tax 
dollars.[Footnote 10] The circular notes that a public/private 
competition--which can involve a lengthy and costly process--is not 
required for contractor performance of a new requirement or private 
sector performance of a segregable expansion of an existing commercial 
activity. On the other hand, the circular states that before government 
personnel may perform a new requirement or an expansion of an existing 
commercial activity a public/private competition is required to 
determine whether government personnel should perform the work. 

Third, DOD initiatives that have required that consideration be given 
to outsourcing certain work performed by uniformed and DOD civilian 
personnel have resulted in outsourcing decisions. For example, between 
fiscal years 1995 and 2005, DOD's competitive sourcing, or A-76 public/ 
private competition, program resulted in 570 decisions to contract out 
work that had been performed by over 39,000 uniformed and DOD civilian 
personnel. Also, in 1997, DOD decided that privatization of military 
installation utility systems was the preferred method for improving 
utility systems and services because privatization would allow 
installations to benefit from private sector financing and 
efficiencies. As of March 2006, DOD had awarded contracts to privatize 
117 systems and had an additional 904 systems in various phases of the 
privatization evaluation and solicitation process. 

Fourth, service officials noted that in some instances certain 
personnel issues tend to favor the use of contractor support. For 
example, service officials stated that because of limitations on 
headquarters personnel authorizations, the use of contractor support is 
often the only readily available option to accomplish new or expanded 
commercial work requirements at service headquarters. Service officials 
also noted that it is generally easier to terminate or not renew a 
contract than to lay off government employees in the event of reduced 
work requirements. For this reason, use of contractor support is often 
favored when there is uncertainty over the length of time that support 
services will be needed, which is the case for some work supporting 
GWOT and other contingencies. 

Data Are Insufficient to Determine Whether Increased Services 
Contracting Has Exacerbated O&M Cost Growth: 

Sufficient data are not available to determine whether increased 
services contracting has caused DOD's costs to be higher than they 
would have been had the contracted activities been performed by 
uniformed or DOD civilian personnel. Although overall quantitative 
information was not available, our analysis of the military services' 
reported information from its competitive sourcing program, commonly 
referred to as the A-76 public/private competition process, and case 
studies of O&M-related work contracted out at three installations 
showed that outsourcing decisions generally resulted in reducing the 
government's costs for the work. However, compared to all O&M-related 
contracts, the number of A-76 public/private competition contracts is 
small, the results from this program may not be representative of the 
results from all services contracts for new or expanded O&M work, and 
certain limitations exist with the use of the A-76 data. Further, a 
recent DOD study found that the Army's use of contract security guards 
at domestic installations cost more than the use of guards employed by 
the Army.[Footnote 11] 

Information Needed to Assess the Effect of Increased Services 
Contracting Is Unavailable: 

To determine whether increased services contracting has exacerbated the 
growth of O&M costs, information is needed that allows for a comparison 
of the contract costs with the costs of performing the same work in- 
house with uniformed or DOD civilian personnel. However, in most cases 
DOD does not know how much contracted services work would cost if the 
work were performed by government employees. DOD officials noted that 
existing policy generally does not require a public/private competition 
for private sector performance of a new or expanded commercial 
requirement and, as a result, in-house cost estimates have not been 
prepared for most of the work awarded to contractors as a result of 
increased O&M requirements from GWOT and other contingencies. In the 
absence of such quantitative data, information is not available to 
determine whether the government's costs are higher than they would 
have been had the contracted services work been performed by uniformed 
or DOD civilian personnel. 

A-76 Public/Private Competition Data Indicate Outsourcing Decisions 
Were Cost-effective but Data Limitations Exist: 

While overall information was not available to determine whether 
increased services contracting has exacerbated O&M cost growth, DOD 
does maintain data on its competitive sourcing program, otherwise known 
as the A-76 public/private competition process, which allows a 
comparison of in-house and contract costs for some O&M related work. 
Specifically, DOD's A-76 program data include in-house and contract 
cost information on contracts for work formerly performed by uniformed 
or DOD civilian personnel that were awarded to the private sector as a 
result of a public/private cost competition or, under certain 
conditions prior to May 2003, direct conversion to contractor 
performance. As shown in table 2, of the 1,112 total A-76 public/ 
private competition decisions that were made between fiscal years 1995 
and 2005, the military services decided to outsource the work in 570, 
or 51 percent, of the cases. These decisions resulted in contracting 
out the work formerly performed by over 39,000 uniformed and DOD 
civilian personnel. In the remaining cases, based on the public/private 
cost comparison the military services decided to continue performing 
the work in-house. 

Table 2: A-76 Public/Private Competition Decisions for Fiscal Years 
1995 through 2005: 

Military service: Army; 
A-76 decisions: Total: 222; 
A-76 decisions: To outsource: 98; 
A-76 decisions: Percent outsourced: 44; 
Positions covered by A-76 decisions: Total: 31,481; 
Positions covered by A-76 decisions: To outsource: 13,395; 
Positions covered by A-76 decisions: Percent outsourced: 43. 

Military service: Navy; 
A-76 decisions: Total: 405; 
A-76 decisions: To outsource: 99; 
A-76 decisions: Percent outsourced: 24; 
Positions covered by A-76 decisions: Total: 28,746; 
Positions covered by A-76 decisions: To outsource: 6,440; 
Positions covered by A-76 decisions: Percent outsourced: 22. 

Military service: Marine Corps; 
A-76 decisions: Total: 35; 
A-76 decisions: To outsource: 15; 
A-76 decisions: Percent outsourced: 43; 
Positions covered by A-76 decisions: Total: 4,072; 
Positions covered by A-76 decisions: To outsource: 1,214; 
Positions covered by A- 76 decisions: Percent outsourced: 30. 

Military service: Air Force; 
A-76 decisions: Total: 450; 
A-76 decisions: To outsource: 358; 
A-76 decisions: Percent outsourced: 80; 
Positions covered by A-76 decisions: Total: 27,892; 
Positions covered by A-76 decisions: To outsource: 18,116; 
Positions covered by A-76 decisions: Percent outsourced: 65. 

Total; 
A-76 decisions: Total: 1,112; 
A-76 decisions: To outsource: 570; 
A-76 decisions: Percent outsourced: 51; 
Positions covered by A-76 decisions: Total: 92,191; 
Positions covered by A-76 decisions: To outsource: 39,165; 
Positions covered by A-76 decisions: Percent outsourced: 42. 

Source: GAO analysis of DOD data. 

[End of table] 

At the time of our review, the Army, Navy, Marine Corps, and Air Force 
had reported detailed contract cost data on 538 of the 570 A-76 
decisions to outsource work. Our analysis of these data showed that the 
public/private competition decisions generally resulted in reducing the 
government's costs for the work.[Footnote 12] Specifically, according 
to data reported during the first contract performance period, the Army 
estimated savings of about $33 million from 96 contracts, the Navy and 
Marine Corps estimated savings of about $74 million from 88 contracts, 
and the Air Force estimated savings of about $115 million from 354 
contracts.[Footnote 13] Figures 7, 8, and 9 show each service's 
reported A-76 outsourcing information for contracts resulting from both 
public/private competitions and direct conversion from government to 
contractor performance between fiscal years 1995 and 2005. 

Figure 7: First Performance Period Results from Army A-76 Public/ 
Private Competition Decisions to Outsource Work between Fiscal Years 
1995 and 2005: 

[See PDF  for Image] 

Source: GAO analysis of DOD data. 

Note: Numbers in the figure may not total correctly due to rounding. 

[End of figure] 

Figure 8: First Performance Period Results from Navy and Marine Corps A-
76 Public/Private Competition Decisions to Outsource Work between 
Fiscal Years 1995 and 2005: 

[See PDF for Image] 

Source: GAO analysis of DOD data. 

[End of figure] 

Figure 9: First Performance Period Results from Air Force A-76 Public/ 
Private Competition Decisions to Outsource Work between Fiscal Years 
1995 and 2005: 

[See PDF for Image] 

Source: GAO analysis of DOD data. 

Note: Numbers in the figure may not total correctly due to rounding. 

[End of figure] 

Although the services' A-76 data show that decisions to outsource work 
were cost-effective, several limitations are associated with the use of 
this information. First, DOD officials noted that when work performed 
by uniformed personnel is outsourced, the personnel generally are 
assigned to other duties. Thus, while the cost to perform the 
outsourced work may be less than when it was performed in-house, the 
overall cost to the government may actually increase because the 
uniformed personnel continue to be paid to perform different work and a 
contractor is now paid to do the work formerly performed by the 
uniformed personnel. Also, outsourcing of work formerly performed by 
uniformed personnel may also increase O&M costs because military 
personnel appropriations are used to compensate uniformed personnel and 
O&M appropriations are used to pay contractors for services work. 

Second, compared to all O&M-related contracts, the number of A-76 
public/private competition contracts is small and the results from this 
program may not be representative of the results from all services 
contracts for new or expanded O&M work. For example, for the 538 A-76 
outsourcing decisions for fiscal years 1995 through 2005 with reported 
cost data, the total contract value for the first performance period 
was about $1.2 billion. Yet, in fiscal year 2005 alone, the value of 
DOD's O&M-related services contracts exceeded $95 billion. 

Third, the available A-76 public/private competition information 
compares the contract costs with the cost estimates for work using 
government employees during the first contract performance period. Our 
review of contract costs in subsequent performance periods showed that 
contractor costs frequently grew and in many cases exceeded the 
government employee cost estimate in subsequent periods. However, 
according to DOD cost information, the cost growth was usually 
attributed to requirements being added to the contract and contract 
wage increases, which the government employee cost estimate did not 
reflect. As a result, information is normally not available to 
determine whether the outsourcing continued to be cost-effective for 
those contracts that subsequently cost more than the estimate using 
government employees. 

Fourth, the reliability of the services' reported A-76 public/private 
competition contract costs and savings appears questionable. The DOD 
Inspector General reported in November 2005 that DOD had not 
effectively implemented a system to track and assess costs of 
performance under the A-76 program.[Footnote 14] The report stated that 
because system users did not always maintain supporting documentation 
for key data elements and entered inaccurate and unsupported costs, and 
the military services used different methodologies to calculate 
baseline costs, DOD's A-76 database included inaccurate and unsupported 
costs, and as a result, reported costs and estimated savings may be 
either overstated or understated. DOD officials noted that, while the 
estimated savings may be either overstated or understated, there were 
still savings and that DOD was in the process of addressing the 
report's recommendations for improving the tracking system. 

During our visits to Fort Hood, Naval Air Station Pensacola, and 
Langley Air Force Base, we reviewed the accuracy of reported cost 
information on contracts awarded as a result of A-76 public/private 
competitions. According to information provided by Fort Hood officials, 
we found that actual contract costs were greater than the costs 
reported in the DOD A-76 database for one contract. However, the 
difference was less than 1 percent. At Naval Air Station Pensacola, 
there were no differences in the costs reported in the A-76 database 
and the actual costs for eight contracts awarded as a result of A-76 
competitions. At Langley Air Force Base, we found some differences in 
the reported and actual costs for four contracts awarded as a result of 
A-76 competitions. For the four contracts over 4 years, the actual 
contract costs, according to installation officials, were about 
$250,000, or 5 percent, more than reported in the database. However, 
even with the increased actual costs, the contracts still showed 
considerable savings over the estimated costs using government 
employees. 

Case Studies Generally Show That Decisions to Contract Out Were Cost- 
effective: 

During our visits to Fort Hood, Naval Air Station Pensacola, and 
Langley Air Force Base, we reviewed examples of O&M-related work that 
was contracted out, or slated to be contracted out, either as a result 
of an A-76 public/private competition or because the uniformed 
personnel who formerly performed the work were needed to support other 
missions. According to installation officials, the outsourcing of work 
formerly performed in-house had not resulted in any unexpected funding 
or other consequences. Officials at each installation stated that their 
outsourcing efforts had resulted in reduced costs for performing the 
work and that they were satisfied with contractor performance. The 
following examples illustrate the outsourcing results from specific 
cases of work formerly performed in-house at the three installations we 
visited and in general show that the outsourcing efforts appeared to be 
cost-effective. 

Fort Hood: 

* In June 2000, as a result of an A-76 public/private competition, Fort 
Hood contracted the operation and maintenance of the installation's 
firing range. During the A-76 competition, the cost estimate to 
continue performing the work in-house was $37.1 million over the 4-year 
and 7-month total performance period. The estimate was based on using 
118 civilian and 11 military personnel to do the work. The work was 
awarded to a contractor who bid $30.8 million to perform the work. Fort 
Hood officials stated that between the time of the contract 
solicitation and the time the contractor took over range operations, 
changes occurred in unit training events and range operating standards 
which caused the work requirement to increase far above the level 
included in the solicitation's statement of work. As a result, the 
officials stated that the contract was modified to provide for the 
increased workload and actual contract costs totaled $38.2 million 
through the end of the total performance period in December 2004. 
Although the contract costs exceeded the in-house estimate by $1.1 
million, or 3 percent, Fort Hood officials stated that they were 
confident that the outsourcing was cost-effective because the in-house 
cost estimate would have exceeded the actual contract costs if the in- 
house estimate had included the cost of the workload subsequently added 
to the contract. The officials also stated that they were satisfied 
with the contractor's performance. 

* In January 2003, Fort Hood contracted the installation's ammunition 
supply work because the uniformed personnel who formerly performed the 
work at Fort Hood were needed to help support the GWOT. According to 
installation officials, the work, which included the receipt, storage, 
and issue of training ammunition, had historically been performed by 
approximately 180 uniformed personnel, who were also responsible for 
completing collateral military duties. The officials stated that the 
work was converted to contractor performance by modifying an existing 
Fort Hood support services contract to add the ammunition supply work 
for about $1.8 million annually. According to the officials, the 
contractor used between 45 and 56 people to do the work, and 
performance metrics, such as inventory accuracy, improved after the 
contractor took over the work. Although an analysis was not performed 
to compare the contract cost with the cost to perform the work with 
uniformed personnel, Fort Hood officials stated that they believe that 
the outsourcing was cost-effective because the contractor was 
performing the work with far fewer people compared to the number of 
uniformed personnel who formerly did the work. The officials stated 
that a new contract for the work was awarded in June 2006 at an annual 
cost of about $2.3 million. The officials attributed the increase in 
contract costs to new requirements that were added to the scope of the 
work. 

Naval Air Station Pensacola: 

* In January 2001, as a result of an A-76 public/private competition, 
Naval Air Station Pensacola contracted the installation's receipt, 
storage, and distribution of petroleum, oil, and lubrication products. 
The work had previously been performed by 14 civilian personnel at an 
estimated annual cost of about $700,000. During the A-76 competition, 
the cost estimate to continue performing the work using government 
employees was $355,000 annually based on reducing the number of 
employees needed to do the work to seven. Naval Air Station Pensacola 
officials stated that the work was awarded to a contractor who bid 
$250,000 annually to do the work. This amount was about $450,000 less 
than the original cost of the work and about $105,000 less than the 
estimate to continue performing the work in-house. Primarily because of 
added work requirements, reported data showed that the actual contract 
costs increased to $315,000 by the fifth contract performance period. 
Nevertheless, Naval Air Station Pensacola officials noted that this 
outsourcing effort continued to cost less than the estimated cost to 
perform the work in-house. The officials also stated that they were 
satisfied with the contractor's performance. 

* In March 2002, as a result of another A-76 public/private 
competition, Naval Air Station Pensacola contracted the management of 
household goods shipments for military personnel arriving and departing 
the installation. The work had previously been performed by 21 civilian 
personnel at an estimated cost of about $6.1 million over a 5-year 
period. During the A-76 competition, the cost estimate to continue 
performing the work in-house was $3.8 million over the 5-year total 
contract performance period, based on streamlining the work and 
reducing the number of employees needed to do the work. Naval Air 
Station Pensacola officials stated that the work was awarded to a 
contractor who bid $2.8 million to perform the work over the total 
performance period. This amount was about $1.1 million less than the in-
house estimate. Through the first 3 years and 3 months of the contract, 
reported data showed that the actual contract costs were about 13 
percent higher than the contractor's bid amount but were still less 
than the estimated cost to perform the work in-house. Naval Air Station 
Pensacola officials stated that contract costs were higher because of 
wage rate increases. The officials also stated that they were satisfied 
with the contractor's performance. 

Langley Air Force Base: 

* In June 2000, as a result of an A-76 public/private competition, 
Langley Air Force Base contracted transient aircraft services work. 
During the A-76 competition, the cost estimate to continue performing 
the work in-house was $1.1 million annually based on using 14 military 
and 7 civilian personnel to do the work. According to Langley Air Force 
Base officials, the work was awarded to a contractor who bid $365,000 
to perform the work, and the actual contract cost to perform the work 
during the first performance period was about $374,000. This amount was 
about $726,000, or about 66 percent, less than the estimated cost to do 
the work in-house. Although reported data showed that contract costs 
increased by 8 percent by the third contract performance period 
primarily because of wage rate adjustments, the contract still cost 
less than the estimated in-house cost to perform the work. Langley Air 
Force Base officials stated that they were satisfied with the 
contractor's performance and that the contract was recompeted in 2003 
and awarded at approximately the same cost. 

* In October 2001, as a result of another A-76 public/private 
competition, Langley Air Force Base contracted certain records 
management services. During the A-76 competition, the cost estimate to 
continue performing the work in-house was $643,000 annually based on 
using 13 uniformed personnel to do the work. According to Langley Air 
Force Base officials, the work was awarded to a contractor who bid 
about $337,000 to perform the work during the first annual performance 
period. This amount was $306,000, or about 48 percent, less than the 
estimated cost to perform the work in-house. According to the available 
data and Langley Air Force Base officials, the actual contract cost 
during the first performance period was the same as the bid amount. 
Although reported data showed that contract costs increased to about 
$394,000 by the fifth contract performance period primarily because of 
wage rate adjustments, the officials noted that the cost was still less 
than the in-house estimate for the work. The officials also stated that 
they were satisfied with the contractor's performance. 

DOD Report Noted That Contract Security Guards Cost More than 
Government-Employed Guards: 

A recent DOD report provides another comparison of costs for work 
performed by contractors and government personnel.[Footnote 15] In this 
case, DOD found that contract security guards at domestic installations 
cost more than use of guards employed by the government. However, as 
with the reported results from A-76 contracts, because the data used in 
DOD's report is from a relatively small number of contracts, the 
results may not be representative of the results of all O&M related 
services contracts. 

The John Warner National Defense Authorization Act for Fiscal Year 2007 
required the Secretary of Defense to submit a report including an 
explanation of the Army's progress in responding to our April 2006 
report that assessed the Army's acquisition of security guards and an 
assessment of the cost-effectiveness and performance of contract 
security guards.[Footnote 16] Our report noted that in the aftermath of 
the September 11, 2001, attacks, DOD sent numerous active-duty, U.S.- 
based personnel to Afghanistan, Iraq, and other destinations to support 
the GWOT.[Footnote 17] These deployments depleted the pool of military 
security guards at a time when DOD was faced with increased security 
requirements at its U.S. installations. To ease this imbalance, the 
Congress authorized DOD to waive a prohibition against the use of 
contract security guards at domestic military installations. The Army, 
the first service to use the authority, had awarded contracts worth 
nearly $733 million for contract guards at 57 installations as of 
December 2005. 

Our report also noted that the Army had relied heavily on sole-source 
contracts to acquire contract security guards, despite the Army's 
recognition early on that it was paying considerably more for its sole- 
source contracts than for those awarded competitively. Our report made 
recommendations to the Secretary of Defense to improve management and 
oversight of the contract security guard program. 

In early 2007, DOD issued its report, which stated that the Army 
concurred with our recommendations and was in the process of 
resoliciting security guard contracts to increase the use of 
competition. In regard to comparing the costs of government-employed 
and contract security guards, DOD reported that the contract security 
guards were more expensive than use of government guards. However, the 
amount of the cost difference varied widely depending on whether the 
contract was awarded competitively. In cases where the contracts were 
awarded competitively, the contracts cost about 5 percent more than use 
of government guards. However, in cases where the contracts were not 
awarded competitively; the contracts cost about 42 percent more than 
government guards. DOD's report also noted its view that the security 
guard contracts provided greater flexibility in this instance to adjust 
the workforce level up or down when the threat level changes and a 
performance test showed no difference in the effectiveness between 
government and contract security guards. 

Different Perspectives Exist on the Benefits and Concerns Associated 
with Increased Contracting for Support Services: 

DOD officials cited several benefits associated with the increased use 
of contractors for support services in certain circumstances. On the 
other hand, concerns over increased contracting have also been cited by 
the Congress, the military services, and us. 

Benefits from Increased Use of Contractor Support: 

DOD officials noted that when expanded military missions, deployments, 
and other contingencies increase operational requirements, additional 
personnel are needed to perform the extra work. For mission support 
work, additional personnel might be obtained from several alternatives, 
such as increasing the size of the active military force, mobilizing 
reserve forces, hiring government employees, or contracting for 
services with the private sector. In certain circumstances, the 
officials stated that increased use of contractor support to help meet 
expanded mission support work has certain benefits. For example, the 
officials noted that the use of contractors can provide a force 
multiplier effect when contractor personnel perform military support 
missions to allow more uniformed personnel to be available for combat 
missions. Moreover, contractors can provide support capabilities that 
are in short supply in the active and reserve components, thus reducing 
the frequency and duration of deployments for certain uniformed 
personnel. The officials also stated that obtaining contractor support 
in some instances can be faster than hiring government workers and, 
when there is uncertainty over the length of time that support services 
will be needed, the use of contractor support instead of government 
employees can be advantageous because it is generally easier to 
terminate or not renew a contract than to lay off government employees 
when the operations return to normal. Further, the officials stated 
that they believed that contracts for new and expanded requirements can 
be cost-effective when the contracts are subjected to the forces of 
competition in the private sector. 

Concerns from Increased Use of Contractor Support: 

Recently cited concerns associated with increased use of contractor 
support have included (1) the need for DOD to consider performing more 
work using government employees, (2) controlling support services 
contract costs, (3) reduced operational flexibility resulting from some 
outsourcing contracts, (4) the difficulty in ensuring accurate contract 
statements of work and sufficient contract oversight, and (5) questions 
on the adequacy of DOD's services acquisition process. 

The Congress Recently Required DOD to Consider Performing More Work In- 
house: 

The National Defense Authorization Act for Fiscal Year 2006 required 
DOD to prescribe guidelines and procedures for ensuring that 
consideration is given to performing more work using government 
employees.[Footnote 18] Section 343 of the Act requires the Secretary 
of Defense to prescribe guidelines and procedures for ensuring that 
consideration is given to using government employees for work that is 
currently performed or would otherwise be performed by contractors. The 
guidance is to provide for special consideration to be given to 
contracts that (1) have been previously performed by federal government 
employees at any time on or after October 1, 1980; (2) are associated 
with the performance of inherently governmental functions; (3) were not 
awarded on a competitive basis; or (4) have been determined to be 
poorly performed due to excessive costs or inferior quality. In 
February 2007, DOD officials stated that they had been working on 
developing the required guidelines and that they planned to issue the 
new guidance in the near future. The officials also stated that the use 
of government employees instead of contractors to meet O&M-related 
requirements in some circumstances might result in savings. 

Military Services Have Taken Steps to Control Support Services Contract 
Costs: 

Each of the military services has expressed concerns over increasing 
contract costs for support services. Citing the need to control costs, 
the Secretaries of the Army and the Air Force have issued policy 
memorandums calling for review and reduction in services contracts. For 
example, the Secretary of the Army stated in a January 2007 memorandum 
that he expected to see significant reductions in the number of Army 
contracted services personnel during the remainder of fiscal year 2007. 
Also, in a March 2006 memorandum, the Secretary of the Air Force set 
targets for realizing estimated savings in Air Force contract support 
services costs. Navy officials stated that although they have not 
issued any new policy statements on contracted services, the issue is a 
concern. The officials stated that the Navy proactively reduced its 
planned contractor support budgets in both fiscal year 2007 and 2008. 

Installation Officials Noted Reduced Flexibility in Some Instances and 
Other Concerns with Outsourcing: 

During our installation visits, local officials noted some concerns 
with outsourcing of support services. For example, Fort Hood officials 
stated that outsourcing of work formerly performed in-house can result 
in reduced flexibility in being able to quickly respond to changing 
requirements. The officials noted that in some instances when a new or 
different work requirement develops, uniformed and DOD civilian 
personnel can be reassigned to perform the tasks on a temporary basis 
or as a collateral duty. However, before contractors perform new or 
different work requirements, contract changes normally have to be 
negotiated, which can result in delays before the new work is started. 
Installation officials also noted concern over the difficulty in 
preparing accurate contract statements of work in order to avoid 
contract changes. Naval Air Station Pensacola officials stated that in 
some cases numerous contract changes occurred when the original 
statement of work did not anticipate or accurately define certain work 
situations. Further, installation officials cited concerns over 
ensuring adequate contract oversight. Officials at Naval Air Station 
Pensacola noted that ensuring adequate oversight becomes increasingly 
difficult as the number of contracts increases. 

GAO Has Noted Concerns with Services Acquisition: 

In November 2006, we reported that DOD's approach to managing service 
acquisitions has tended to be reactive and has not fully addressed the 
key factors for success at either the strategic or transactional 
level.[Footnote 19] As a result, the growth in service contracting over 
the past 10 years was, in large part, not a managed outcome. Further, 
DOD's approach did not always take the necessary steps to ensure 
customer needs were translated into well-defined contract requirements 
or that postcontract award activities resulted in expected outcomes. As 
a result, DOD was potentially exposed to a variety of risks, including 
purchasing services that did not fully meet customer needs or that 
should have been provided in a different manner or with better results. 
Also, in January 2007 testimony before the Subcommittee on Readiness 
and Management Support, Senate Committee on Armed Services, we noted 
that long-standing problems with contract management continue to 
adversely affect service acquisition outcomes even as DOD has become 
more reliant on contractors to provide services for DOD's 
operations.[Footnote 20] For example, the lack of sound business 
practices--poorly defined requirements, inadequate competition, and 
inadequate monitoring of contractor performance--exposes DOD to 
unnecessary risk and wastes resources. We have found cases in which the 
absence of well-defined requirements and clearly understood objectives 
complicates efforts to hold DOD and contractors accountable for poor 
service acquisition outcomes. Likewise, obtaining reasonable prices 
depends on the benefits of a competitive environment, but we have 
reported on cases in which DOD sacrificed competition for the sake of 
expediency. Monitoring contractor performance to ensure DOD receives 
and pays for required services is another control we have found 
lacking. In the testimony, we noted DOD has taken some steps to improve 
its management of services acquisition, and it is developing an 
integrated assessment of how best to acquire services. 

Concluding Observations: 

DOD's O&M costs and reliance on contractors to perform O&M-related work 
have increased substantially since fiscal year 2001. However, 
sufficient data are not available to determine whether increased 
services contracting has caused DOD's costs to be higher than they 
would have been had the contracted activities been performed by 
uniformed or DOD civilian personnel. While we believe that there may be 
some merit in DOD developing more information on the cost-effectiveness 
of its O&M services contracts that fall outside of the A-76 public/ 
private competition process, at this time we are not recommending that 
DOD do this for several reasons. First, performing the analyses to 
determine the estimated in-house costs to perform work awarded to 
contractors can be expensive and time consuming. Second, according to 
DOD officials, contracting with the private sector may be the only 
alternative to meet certain requirements in the short term, such as 
when uniformed personnel must be diverted from performing peacetime 
work to supporting operational missions. Third, as long as DOD uses 
competition in its contract solicitations for new and expanded 
requirements and provides adequate contract oversight, cost 
efficiencies could be achieved through normal market forces. 

Agency Comments: 

DOD made no comments on a draft of this report except for technical 
comments, which we incorporated where appropriate. 

We are sending copies of this report to the Secretaries of Defense, the 
Army, the Navy, and the Air Force; the Commandant of the Marine Corps; 
and the Director, Office of Management and Budget. We will make copies 
available to others upon request. In addition, the report will be 
available at no charge on GAO's Web site at http://www.gao.gov. 

If you or your staff have any questions about this report, please 
contact me at (202) 512-4523 or by e-mail at leporeb@gao.gov. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this report. The GAO staff members who 
made key contributions to this report are listed in appendix II. 

Signed by: 

Brian J. Lepore, Director: 
Defense Capabilities and Management: 

List of Committees: 

The Honorable Carl Levin: 
Chairman: 
The Honorable John McCain: 
Ranking Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Daniel K. Inouye: 
Chairman: 
The Honorable Ted Stevens: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
United States Senate: 

The Honorable Ike Skelton: 
Chairman: 
The Honorable Duncan L. Hunter: 
Ranking Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable John P. Murtha: 
Chairman: 
The Honorable C.W. Bill Young: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

[End of section] 

Appendix I: Scope and Methodology: 

To identify the trends in operations and maintenance (O&M) costs and 
services contracts and the reasons for the trends, we reviewed and 
analyzed the Department of Defense's (DOD) O&M appropriations, budget 
documentation, and services contract costs and identified the related 
trends for fiscal years 1995 through 2005. We used costs as reflected 
by total obligation authority, which includes regular O&M 
appropriations, any supplemental O&M appropriations, and any funding 
from other appropriation accounts transferred or reprogrammed into the 
O&M account during budget execution. To consider inflation, we adjusted 
cost data to constant fiscal year 2007 dollars using DOD's adjustment 
factors. We discussed with DOD and service headquarters officials the 
reasons for the trends in O&M costs and how outsourcing of O&M 
activities formerly performed in-house has affected the overall O&M 
budget. We shared the results of our analyses with DOD and service 
officials and incorporated their comments as appropriate. 

To discuss whether increased services contracting has exacerbated the 
growth of O&M costs, we determined the availability of information 
related to services contracts including whether in-house cost estimates 
were available for all contracts for new or expanded work awarded as a 
result of the global war on terrorism (GWOT) and other contingencies. 
We also reviewed and analyzed information from DOD's competitive 
sourcing, or A-76, program. Further, we visited three installations-- 
Fort Hood, Texas; Naval Air Station Pensacola, Florida; and Langley Air 
Force Base, Virginia--to develop case study examples of O&M-related 
work that was contracted out either as a result of A-76 public/private 
competitions or because the uniformed personnel who formerly performed 
the work were needed to support other missions. Fort Hood and Langley 
Air Force Base were selected based on discussions with our requesters, 
and Naval Air Station Pensacola was selected based on recommendations 
from Navy officials who stated that the installation had a cross 
section of contracts for O&M work that was formally performed in-house. 
At each installation, we reviewed O&M budget information and discussed 
with local officials any adverse consequences associated with 
contracting out O&M-related work. For the case studies highlighting 
examples of work that was outsourced to private contractors, we 
identified cost estimates for the work if performed by government 
employees, the reasons that the work was contracted out, the actual 
contract costs, and the reasons for any contract cost growth. We relied 
on cost data provided by the installation officials and did not review 
any actual contracts. However, we did review the accuracy of reported 
information on selected contracts awarded as a result of A-76 public/ 
private competitions. 

To provide perspectives on the benefits and concerns associated with 
increased contracting for support services, we discussed this issue 
with DOD officials. We also examined DOD's response to recent 
legislation requiring DOD to give consideration to performing more work 
using government employees. We also discussed with DOD and service 
headquarters officials the effect of increased contracting support for 
support services and reviewed steps recently taken by the military 
services to control service contract costs. We also discussed with 
installation officials concerns associated with outsourcing O&M- 
related work that was formally performed in-house. Additionally, we 
summarized recent GAO reports that identified concerns with DOD's 
acquisition of services. 

We conducted our review from August 2006 through March 2007 in 
accordance with generally accepted government auditing standards. 

[End of section] 

Appendix II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Brian J. Lepore, (202) 512-4523 or leporeb@gao.gov: 

Acknowledgments: 

In addition to the contact named above, Mark A. Little, Assistant 
Director; Alissa Czyz; Kevin Keith; Harry Knobler; Gary Phillips; and 
Sharon Reid made key contributions to this report. 

FOOTNOTES 

[1] Unless otherwise stated, operation and maintenance (O&M) costs in 
this report are total obligation authority and are expressed in 
constant fiscal year 2007 dollars. 

[2] H.R. Rep. No. 109-504, at 46-47 (2006). 

[3] Office of the Under Secretary of Defense (Comptroller), National 
Defense Budget Estimates for Fiscal Year 2007, "Table 5-4, Department 
of Defense Deflators--Total Obligation Authority" (Washington, D.C.: 
March 2006). 

[4] Under the A-76 program prior to 2003, commercial activities 
involving 10 or fewer full time employees could be directly converted 
to performance by a private contractor without a cost comparison under 
certain circumstances. 

[5] National Defense Authorization Act for Fiscal Year 2006, Pub. L. 
No. 109-163, ß 343 (2006). 

[6] Secretary of the Army, Memorandum for Distribution, Subject: 
Improved Management and Justification of Service Contract Requirements 
(Washington, D.C.: Jan. 29, 2007); and Secretary of the Air Force, 
Memorandum for All Major Commands, Subject: Contractor Support Approval 
Authority Policy Memo 06A-002 (Washington, D.C.: Mar. 9, 2006). 

[7] GAO, Defense Acquisitions: Tailored Approach Needed to Improve 
Service Acquisition Outcomes, GAO-07-20 (Washington, D.C.: Nov. 9, 
2006). 

[8] GAO, Defense Infrastructure: Actions Taken to Improve the 
Management of Utility Privatization, but Some Concerns Remain, GAO-06-
914 (Washington, D.C.: Sept. 5, 2006). 

[9] GAO, Contract Management: Service Contract Approach to Aircraft 
Simulator Training Has Room for Improvement, GAO-06-830 (Washington, 
D.C.: Sept. 22, 2006). 

[10] Office of Management and Budget, Circular No. A-76 (Revised), 
Subject: Performance of Commercial Activities (Washington, D.C.: May 
29, 2003). 

[11] Deputy Under Secretary of Defense (Installations and Environment), 
Report to Congress: Contractor Performance of Security Guard Functions 
(Washington, D.C.: January 2007). 

[12] Our analysis relied on the data reported by the services. We did 
not review the actual contracts. 

[13] All amounts in this report related to A-76 contracts are in 
current year dollars--not fiscal year 2007 dollars. 

[14] See DOD Office of Inspector General, D-2006-028. 

[15] See Deputy Under Secretary of Defense (Installations and 
Environment), Report to Congress: Contractor Performance of Security 
Guard Functions (January 2007). 

[16] John Warner National Defense Authorization Act for Fiscal Year 
2007, Pub. L. No. 109-364, ß 333 (2006). 

[17] GAO, Contract Security Guards: Army's Guard Program Requires 
Greater Oversight and Reassessment of Acquisition Approach, GAO-06-284 
(Washington, D.C.: Apr. 3, 2006). 

[18] National Defense Authorization Act for Fiscal Year 2006, Pub. L. 
No. 109-163, ß 343 (2006). 

[19] See GAO-07-20. 

[20] GAO, Defense Acquisitions: DOD Needs to Exert Management and 
Oversight to Better Control Acquisition of Services, GAO-07-359T 
(Washington, D.C.: Jan. 17, 2007). 

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