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Methodology for Estimating the Costs of Its Workforces' which was 
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United States Government Accountability Office: 
GAO: 

Report to Congressional Committees: 

September 2013: 

Human Capital: 

Opportunities Exist to Further Improve DOD's Methodology for 
Estimating the Costs of Its Workforces: 

GAO-13-792: 

GAO Highlights: 

Highlights of GAO-13-792, a report to congressional committees. 

Why GAO Did This Study: 

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

What GAO Found: 

The Department of Defense (DOD) has improved its methodology for 
estimating and comparing the full cost to the taxpayer of work 
performed by military and civilian personnel and contractor support, 
but the methodology continues to have certain limitations. Best 
practices state that cost estimating rules should include a common set 
of standards that minimize conflicts in definitions, but DOD’s 
methodology does not provide guidance for certain costs. For instance, 
its estimate of service training costs divides total training funding 
by the number of servicemembers. Using this method yields an average 
training cost of $6,490 per servicemember in the Army for fiscal year 
2012. However, Army data show that training for a general aviation 
officer can be as high as $93,600 a year, while the training for an 
enlisted infantryman can be as low as about $4,600 a year. DOD’s Cost 
Assessment and Program Evaluation (CAPE) office has not provided more 
specific direction on training costs, although some officials have 
requested it. Additionally, CAPE officials told GAO they did not 
include Reserve and National Guard personnel in the methodology 
because usually these personnel are used on a short-term basis. 
However, a portion of these personnel do serve in a full-time 
capacity. The Federal Accounting Standards Advisory Board has noted 
that a cost methodology should include any resources directly or 
indirectly used to perform work, and DOD relies on Reserve and 
National Guard personnel, for example, to provide airlift capabilities 
in support of military operations. Further, CAPE has not yet evaluated 
certain retirement-related cost elements. A portion of these cost 
elements may not be appropriate to include because they are not 
attributable to current military and civilian personnel. Without more 
specific direction in these areas, it will be more difficult for DOD 
to have reasonable assurance that its cost estimates and comparisons 
reflect the full and most accurate cost to the taxpayer of work 
performed by its various workforces. 

DOD components GAO examined generally have incorporated business rules 
contained in the memorandum and successor instruction into their 
workforce mix decisions, although DOD officials said opportunities to 
use the rules have been limited due to budgetary factors and few new 
or expanded missions. Moreover, implementation challenges exist. Some 
officials raised questions about the extent to which other officials 
throughout DOD are aware of a requirement to use the methodology for 
decisions other than in-sourcing. Further, CAPE recently completed a 
DOD-wide software tool for implementing its instruction, but at the 
time of GAO’s review, some DOD components had developed their own 
tools. CAPE officials told GAO that the components’ use of its DOD-
wide tool will not be required, enforced, or monitored, and that CAPE 
has not reviewed the components’ tools. Best practices state that to 
be reliable, cost estimates should be derived using a process that 
produces results that are accurate and can be traced, replicated, and 
updated. Assessing these tools would enable CAPE to identify the 
advantages and disadvantages of allowing multiple tools and provide 
reasonable assurance that cost estimates are reliable. Further, the 
instruction directs users to a General Services Administration (GSA) 
website for determining contractor support costs. GAO has reported on 
limitations of GSA’s website such as its reporting of data that do not 
reflect post-competition prices. Without reliable data sources, DOD 
components may not be using the most suitable data needed to produce 
credible cost estimates. 

What GAO Recommends: 

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

View [hyperlink, http://www.gao.gov/products/GAO-13-792]. For more 
information, contact Brenda S. Farrell at (202) 512-3604 or 
farrellb@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

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

DOD's Components Report that They Have Incorporated Business Rules 
into Their Workforce Mix Decisions, but Implementation Challenges 
Exist: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Comments from the Department of Defense: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Related GAO Products: 

Tables: 

Table 1: Uses of the Business Rules Established in DTM 09-007 and DOD 
Instruction 7041.04 to Estimate and Compare Personnel Costs and to 
Support Workforce Mix Decisions: 

Table 2: Description of the Full Cost of Performance by Military and 
Civilian Personnel, and Contractor Support: 

Table 3: Retirement, Health, and Veteran Benefit Cost Elements 
Included in DOD Instruction 7041.04: 

Table 4: Number of Instances Selected Military Departments Commands 
and Offices, and Defense Agencies Reported Using DTM-09-007 to Support 
Various Types of Workforce Mix Decisions from January 2010 through 
June 2013: 

Table 5: Select Commands, Offices, and Defense Agencies Contacted 
About Implementing DTM 09-007: 

Table 6: DOD Organizations Contacted for Information on Implementation 
of DTM 09-007: 

Abbreviations: 

CAPE: Cost Assessment and Program Evaluation: 

DOD: Department of Defense: 

DTM: Directive Type-Memorandum: 

GSA: General Services Administration: 

OSD: Office of the Secretary of Defense: 

USD (P&R): Under Secretary of Defense (Personnel and Readiness): 

[End of section] 

GAO:
United States Government Accountability Office: 
441 G St. N.W. 
Washington, DC 20548: 

September 25, 2013: 

Congressional Committees: 

To meet its wide array of mission requirements, the Department of 
Defense (DOD) maintained a military workforce of over 1.4 million 
active duty servicemembers, nearly 850,000 reserve members,[Footnote 
1] and about 800,000 civilian full-time equivalents[Footnote 2] in 
fiscal year 2012. Augmenting that workforce, the department relies on 
about 710,000 contractor full-time equivalent personnel.[Footnote 3] 
As the federal government confronts growing fiscal challenges, DOD 
will compete for resources and face critical workforce decisions to 
meet budgetary constraints. Given these constraints, it is important 
that the department have an analytically rigorous and balanced process 
to estimate the total cost of its military, civilian, and contractor 
workforces to inform workforce decisions and make the necessary 
program decisions to meet its mission requirements. As reflected in 
DOD's Directive-Type Memorandum (DTM) 09-007[Footnote 4] and more 
recently in DOD's Instruction 7041.04, issued on July 3, 2013, 
[Footnote 5] defense officials are to be aware of the full cost of 
personnel and have a thorough understanding of the implications of 
those costs to DOD and the federal government when developing national 
security policies and making program commitments. 

The conference report accompanying the National Defense Authorization 
Act for Fiscal Year 2013[Footnote 6] mandated that GAO review the cost 
methodologies identified in DOD's DTM 09-007 or its successor 
guidance. Specifically, GAO is mandated to review whether the 
methodology reflects the actual, relevant, and quantifiable costs to 
taxpayers for work performed by military, civilian and contractor 
workforces. This report evaluates the extent to which (1) DOD's 
methodology for estimating and comparing the cost of work performed by 
military, civilian and contractor workforces reflects the full cost to 
the taxpayer and (2) DOD's components have incorporated the business 
rules identified in the memorandum and instruction into their 
workforce mix decisions. 

To evaluate the extent to which DOD's methodology for estimating and 
comparing the cost of work performed by military, civilian, and 
contractor workforces reflects the full cost to the taxpayer, we 
reviewed each of the cost elements contained in the most recent 
version of DTM 09-007 and DOD Instruction 7041.04 and compared them to 
best practices in GAO's Cost Estimating and Assessment Guide,[Footnote 
7] guidance in the Federal Accounting Standards Advisory Board 
Handbook,[Footnote 8] and the Office of Management and Budget 
guidelines for Performance of Commercial Activities.[Footnote 9] In 
addition, we reviewed pertinent DOD and service-specific policies and 
guidance and interviewed knowledgeable officials within the offices of 
the Under Secretary of Defense (Personnel and Readiness) (USD(P&R)), 
the Director of Cost Assessment and Program Evaluation (CAPE), and 
DOD's Office of the Actuary. We also met with the Office of Management 
and Budget and other experts and interested parties we selected based 
on their work on issues related to the DTM.[Footnote 10] Specifically, 
we met with the Center for Strategic and International Studies, the 
Center for Strategic and Budgetary Assessments, the American 
Federation of Government Employees, and the Professional Services 
Council to discuss their perspectives on the preceding DTM and DOD 
Instruction. We also obtained the perspectives of the National Guard 
and Reserve community by meeting with the Office of the Secretary of 
Defense (Reserve Affairs) and the Reserve Forces Policy Board. To 
evaluate the extent to which DOD's components have incorporated the 
business rules identified in the memorandum and instruction into their 
workforce mix decisions, we met with knowledgeable officials from 3 to 
4 commands and offices we selected from each of the military 
departments, and 3 defense agencies, for a total of 13 DOD entities. 
The results of these interviews cannot be generalized to all entities 
across DOD but provided insights about incorporation of business rules 
into workforce mix decisions. We used a non-probability sample, based 
on size of civilian workforce as of the end of fiscal year 2012, to 
make our selections. We obtained data from each entity on the number 
of instances they used the business rules identified in the DTM to 
inform workforce decisions from January 2010 through June 2013. In 
addition, we met with officials in 22 other DOD entities that are 
involved in guiding the implementation of the methodology. Although 
the Marine Corps was not part of our non-probability sample, we met 
with several Marine Corps commands and offices to discuss their 
implementation of the methodology. We also obtained and evaluated the 
different software tools developed and employed by each of the 
components, defense agencies, and CAPE to apply the methodology in DTM 
09-007 that was finalized in DOD Instruction 7041.04. 

We conducted this performance audit from December 2012 to September 
2013 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. Further 
details on our objectives, scope, and methodology can be found in 
appendix I. 

Background: 

DOD's DTM 09-007 established business rules, or standard procedures, 
to estimate and compare the full cost of military and DOD civilian 
personnel and contractor support. These rules were incorporated with 
amendments into DOD Instruction 7041.04, which supersedes the DTM. 
According to the DTM and the instruction, when developing national 
security policies and making program commitments, DOD officials must 
be aware of the full costs of personnel and have a thorough 
understanding of the implications of those costs to DOD and, on a 
broader scale, the federal government. To facilitate this awareness, 
the DTM provided and the instruction provides business rules for DOD 
officials to estimate the full costs of the defense workforce and 
contracted support for tasks supporting planning, defense acquisition, 
and force structure. According to the instruction, the Office of the 
Secretary of Defense (OSD) and all DOD components are required to use 
these business rules when performing an economic analysis to support 
workforce decisions, such as determining the workforce mix of new or 
expanding mission requirements that are not inherently governmental 
[Footnote 11] or exempt from private-sector performance,[Footnote 12] 
and in-sourcing.[Footnote 13] Table 1 shows how the DOD components can 
generally use the business rules established in DTM 09-007 and in DOD 
Instruction 7041.04 to estimate and compare personnel costs and to 
support workforce mix decisions. 

Table 1: Uses of the Business Rules Established in DTM 09-007 and DOD 
Instruction 7041.04 to Estimate and Compare Personnel Costs and to 
Support Workforce Mix Decisions: 

Manpower costs: 
Description: The costs of manpower for a specific unit, 
organization, function, mission, or defense acquisition program; 
analysts should report the full costs of both military and civilian DOD 
manpower. 

Workforce mix decisions[A]: 

Description: New or expanded missions: Conduct a cost comparison to 
determine whether civilian personnel or a contractor would perform the 
function(s) at a lower cost. 

Description: In-sourcing: When a function is currently being 
performed under contract, conduct a cost comparison to determine 
whether civilian personnel or a private-sector contractor would perform 
the function at a lower cost. 

Description: Manpower conversions between military and civilian 
personnel: Estimate the cost impact of converting a function from 
military to civilian or from civilian to military performance. 

Description: Outsourcing: DOD components are required to conduct a 
public-private competition in accordance with OMB Circular A-76, and 
applicable law, to determine whether to convert a commercial activity 
currently performed by civilian personnel to private-sector 
performance[B]. 

Source: GAO analysis of DTM 09-007 and DODI 7041.04. 

[A] A cost comparison using the business rules described in DTM 09-007 
and now in DOD Instruction 7041.04 is not required to support new or 
expanded mission and in-sourcing workforce mix decisions if the 
workforce requirement has been determined to be inherently 
governmental or exempt from private-sector performance. 

[B] In the National Defense Authorization Act for Fiscal Year 2010, 
Congress imposed a temporary moratorium on new competitions involving 
functions currently performed by DOD civilian employees until, among 
other things, DOD reviewed and reported on various aspects of its 
public-private competition policies. 

[End of table] 

DOD Instruction 7041.04 does not require DOD's components to make 
workforce decisions based on cost alone,[Footnote 14] but it does 
require the components to consider cost in the decision making process 
when the function in question is not required by law, regulation, or 
policy to be performed by a certain workforce (e.g., inherently 
governmental or military essential functions) and other workforce 
factors are equal.[Footnote 15] In other cases, the cost of using 
personnel to perform work may not be part of the decision making 
process. For example, a June 2013 memorandum from the Assistant 
Secretary of Defense states that during civilian furloughs the use of 
either military personnel or contractors to compensate for workload 
resulting from the civilian furloughs is prohibited.[Footnote 16] 

DOD Instruction 7041.04 states that the full costs of personnel 
include labor costs, current and deferred compensation costs paid in 
cash and in-kind,[Footnote 17] as well as direct and indirect non-
labor costs. For contractor support, the full cost is the sum of the 
service contract, the cost of goods, services and benefits provided in-
kind to contractors or reimbursed by DOD, and the costs to DOD in 
support of the contract and contract administration. See table 2 for a 
description of the full cost of performance by military and civilian 
personnel, and contractor support, as defined in DOD Instruction 
7041.04. 

Table 2: Description of the Full Cost of Performance by Military and 
Civilian Personnel, and Contractor Support: 

Labor Costs: 

Cost: Current; 
Military and Civilian Personnel: Cash and in-kind compensation 
incurred at the time of performance; 
Contractor Support: Cost of the contract to the government. 

Cost: Deferred; 
Military and Civilian Personnel: Cash and in-kind compensation costs 
that will be incurred in the future; 
Contractor Support: [Empty]. 

Non-labor Costs: 

Cost: Direct; 
Military and Civilian Personnel: The costs of goods, services and 
benefits that are used exclusively by an organization; 
Contractor Support: The costs of goods, services, and benefits provided 
in-kind to contractors or reimbursed to contractors by DOD. In 
addition, the cost of services performed by DOD in support of the 
contract and contract administration. 

Cost: Indirect; 
Military and Civilian Personnel: The costs of goods, services, and 
benefits that are not directly related to the production of a specific 
good or services, but instead are associated with the production of a 
variety of goods or services. These costs are also known as general 
and administrative and overhead costs; 
Contractor Support: The costs of goods, services, and benefits provided 
in-kind to contractors or reimbursed to contractors by DOD. In 
addition, the cost of services performed by DOD in support of the 
contract and contract administration. 

Source: GAO analysis of DOD Instruction 7041.04. 

[End of table] 

Further, the Federal Accounting Standards Advisory Board Handbook 
defines full cost as the total amount of resources used to produce the 
output. More specifically, the full cost of an output is the sum of 
(1) the costs of resources consumed directly or indirectly that 
contribute to the output, and (2) the costs of identifiable supporting 
services provided by units within the reporting entity and by other 
reporting entities.[Footnote 18] 

Roles and Responsibilities: 

The Director of CAPE is the principal advisor to the Secretary of 
Defense and other senior officials in DOD for independent cost 
assessment, program evaluation, and analysis. DOD Instruction 7041.04 
states that CAPE, in collaboration with USD(P&R), and the Under 
Secretary of Defense (Comptroller), is responsible for developing a 
cost model for DOD-wide application to implement the business rules 
identified in the instruction. The instruction also states that CAPE, 
USD(P&R), the Under Secretary of Defense (Comptroller), and the heads 
of the DOD components (such as the heads of the military departments) 
[Footnote 19] and OSD components,[Footnote 20] are responsible for 
using the business rules identified in the instruction. This includes 
using the business rules to estimate the full costs of the defense 
workforce in support of planning, defense acquisition, force structure 
decisions, and when performing an economic analysis in support of 
workforce mix decisions. 

The DOD Office of the Actuary provides actuarial expertise on all 
matters relating to military compensation and benefits, including 
performing annual valuations of the military retirement system, 
education benefits under the Montgomery G. I. Bill, and health care 
for the military retired population. 

Previous GAO Work on Estimating the Full Cost of Personnel: 

We have previously made recommendations to DOD to develop a 
methodology to estimate the full cost of military and civilian 
personnel. In our May 2006 report, we found that from fiscal years 
2005 through 2007, the Air Force, the Army, and the Navy collectively 
converted or planned to convert a total of 5,507 military health care 
positions to civilian positions.[Footnote 21] We found at that time 
that it was unknown whether these conversions would increase or 
decrease costs to DOD, primarily because the methodology each of the 
departments considered using did not include the full cost of military 
personnel. Accordingly, we recommended, and DOD generally agreed, that 
the Secretaries of the Air Force, the Army, and the Navy coordinate 
with CAPE to develop the full cost for military personnel and for 
federal civilian or contract replacement personnel in assessing 
whether anticipated costs to hire civilian replacement personnel will 
increase costs to DOD for defense health care. In response to this 
recommendation, DOD issued DTM 09-007 in January 2010, which provided 
a full cost methodology for assessing military, civilian, or 
contractor support personnel costs to inform workforce mix decisions, 
including military to civilian conversions. 

In our February 2008 report on DOD's efforts to address legislative 
requirements to use a full cost methodology to certify and report on 
planned conversions of military medical and dental positions to 
civilian medical and dental positions, we found that the Navy's 
methodology was the only one that addressed the specific factors 
identified by the John Warner National Defense Authorization Act for 
Fiscal Year 2007 for positions planned for conversion for fiscal years 
2007 and 2008.[Footnote 22] The Air Force and the Army relied on 
composite military rates, instead of using a full cost methodology. 
These composite rates did not include all of the required cost 
factors, such as training and recruiting costs. Accordingly, we 
recommended that DOD, among other things, develop operating guidance 
for the military departments to use when justifying future conversions 
of military medical and dental positions to civilian positions. In our 
recommendation we stated that this guidance should stipulate 
requirements to use a consistent full cost methodology for comparing 
the cost of military and civilian personnel. Officials in CAPE 
attributed the development of DTM 09-007, in part, to these 
recommendations. 

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

DOD Instruction 7041.04 reflects improvements to DOD's methodology for 
estimating and comparing the full cost to the taxpayer of work 
performed by military and civilian personnel and contractor support 
since the initial issuance of DTM 09-007, but the instruction is still 
limited in certain areas. For example, DOD's instruction provides 
limited guidance on estimating overhead costs and adjusting 
advertising and recruiting, and training costs. In addition, CAPE has 
not established business rules for estimating the cost of a part of 
DOD's total workforce--Reserve and National Guard personnel. Further, 
CAPE has not yet evaluated certain retirement and retiree health 
benefit cost elements that it is using to reflect the full cost of 
currently employed military and civilian personnel. 

DOD's Instruction Includes Improvements, but Does Not Provide Guidance 
on Estimating and Adjusting Certain Cost Elements Related to Overhead, 
Advertising and Recruiting, and Training Costs: 

Improvements to DOD's Methodology: 

DOD Instruction 7041.04 reflects a number of improvements in 
estimating certain cost elements in comparison to DTM 09-007, 
addressing some of the limitations users of the DTM and the interested 
parties we met with identified. While the DTM did not identify a 
responsible office for preparing clarifying guidance to assist users 
in applying the methodology, the instruction establishes that CAPE, 
among its other responsibilities, will be responsible for issuing such 
guidance. Also, CAPE has expanded the methodology to address specific 
elements that users of the DTM previously identified as missing, such 
as the cost of foregone taxes,[Footnote 23] lost productivity during 
periods of transition,[Footnote 24] and some other non-common costs 
associated with converting from contract to government performance. 
[Footnote 25] Lastly, CAPE has been developing, refining, and testing 
a DOD-wide software tool--the Full Cost of Manpower--that employs the 
business rules established in the instruction, and the instruction 
provides a link to this tool. However, while CAPE has addressed 
several of the limitations users of the preceding DTM and other 
interested parties identified, certain limitations still exist. 

General and Administrative and Overhead Costs: 

DOD's instruction provides limited direction on estimating general and 
administrative and overhead costs, and adjusting advertising and 
recruiting, and training costs. DOD Instruction 7041.04 states that 
the cost elements contained in the instruction can be modified or 
augmented in each specific case as necessary, but that the DOD 
components should be prepared to support each decision with sufficient 
justification. Best practices as reflected in GAO's Cost Estimating 
and Assessment Guide state, however, that establishing ground rules 
for cost estimating provides a common set of agreed on estimating 
standards that provide guidance and minimize conflicts in 
definitions.[Footnote 26] 

The instruction directs users to include general and administrative 
and overhead costs in cost estimates. These costs include the goods, 
services, and benefits that support more than one organization. More 
specifically, these costs include a share of supplies and facilities 
and professional support services, and a fair share of the recurring 
costs of higher-level management and professional support services for 
organizations that produce or provide more than one product or 
service. The instruction provides a list of direct[Footnote 27] and 
indirect[Footnote 28] costs that could be included for military and 
civilian personnel, but does not provide data sources or guidance on 
how to estimate them. Instead, CAPE identified subject-matter experts 
in each of the military departments to serve as points of contact to 
address these types of questions and provide assistance in the future. 

Further, if the user is unable to calculate the cost of overhead when 
considering converting work performed by contractors to performance by 
government employees, the instruction directs them to apply a standard 
overhead rate of 12 percent. The application of a standard 12 percent 
overhead rate is consistent with the rate federal agencies apply when 
considering the conversion of work performed by government employees 
to contractors through a public-private competition[Footnote 29] using 
OMB Circular A-76.[Footnote 30] However, both the DOD Inspector 
General and we have found that the standard rate of 12 percent of 
labor costs does not have a sound analytical basis, which leaves some 
uncertainty about whether the rate may be understated or 
overstated.[Footnote 31] Our past work acknowledged the difficulty of 
obtaining reliable cost data that could provide a sound basis for an 
overhead rate, but we concluded that until actual overhead costs are 
used to develop a more meaningful standard overhead rate, the 
magnitude of savings expected from public-private competitions will be 
imprecise and competition decisions could continue to be 
controversial.[Footnote 32] 

Advertising and Recruiting, and Training Costs: 

In the case of advertising and recruiting, and training costs, the 
instruction directs the components to estimate an average rate, but 
does not provide guidance to adjust these average rates when 
appropriate. For example, the instruction provides a total budget 
figure for advertising and recruiting, and training costs by military 
service. These budget figures are divided by service end strength 
[Footnote 33] to create the average cost per servicemember within each 
service. 

Several users of the methodology within the military departments told 
us they would like additional guidance or have requested additional 
guidance on these costs. These users said they were not sure what was 
included in advertising and recruiting costs and added that some 
functions or specialties would cost more to recruit and train. 
Specifically, the users told us that, for some specialties, the 
average training rates are too low, while for other specialties, the 
rates are too high. The users also said these costs vary depending on 
the rank or grade of the personnel, and depending on whether the 
specialty requires training or certifications. For example, the 
average rate for training in the Army for fiscal year 2012 was $6,490 
per servicemember. However, according to Army data, the amortized cost 
of training for an officer with a general aviation area of 
concentration can range from about $6,500 to $93,600 a year, depending 
on rank.[Footnote 34] In contrast, the amortized cost of training an 
enlisted member with an infantryman area of concentration can range 
from about $4,600 to $8,000 a year depending on pay grade. 

Due to the lack of explanatory guidance on these cost elements, users 
of the preceding DTM told us they have developed their own methods for 
estimating and adjusting these costs, or have not included the costs 
in their estimates. Some officials have requested more developed 
guidance on these cost elements, but CAPE did not provide more 
specific direction in its recently issued instruction. Rather, as 
previously mentioned, CAPE identified subject-matter experts in each 
of the military departments to serve as points of contact to address 
these types of questions. However, without more developed guidance 
that establishes a clear set of ground rules or standards, subject-
matter experts in the military departments and cost estimators must 
make their own assumptions, which can lead to inconsistent estimates, 
as well as hinder DOD's and congressional decision makers' visibility 
over the costs of accomplishing work by the different workforces. 

CAPE Has Not Established Business Rules for Estimating Reserve and 
National Guard Costs: 

Although Reserve and National Guard personnel are a significant part 
of the military workforce, comprising about 38 percent of the military 
workforce end strength in fiscal year 2012, CAPE did not establish 
business rules for developing cost estimates for these personnel in 
its instruction.[Footnote 35] The Federal Accounting Standards 
Advisory Board Handbook states that a cost methodology that captures 
full costs should include any resources directly or indirectly used to 
perform work. Furthermore, the instruction states that the DOD 
components should use the business rules to account for the full cost 
of personnel when developing independent cost estimates and pricing 
units in the force structure. 

Military service officials told us that they currently use or are 
considering using Reserve and National Guard personnel to perform 
work, and that in the absence of business rules for estimating the 
cost of these personnel, some officials said they have generated cost 
estimates for these workforces using their own methods. For example, 
one of the Air Force commands we interviewed conducted a business case 
analysis to evaluate the pros and cons associated with alternative 
workforce structures to help them meet their requirements. This 
analysis included the consideration of three courses of action: (1) 
adding additional contractor support, (2) adding additional civilian 
and active duty military personnel or (3) using reservists to provide 
quick surge capacity. The command officials said they used the 
methodology in the preceding DTM to conduct part of the analysis, and 
used Air Force guidance for the reserve component. 

DOD's military workforce consists of both active military and Reserve 
and National Guard personnel, and we have previously reported the 
importance of DOD employing a strategic approach to managing its total 
workforce to achieve its missions.[Footnote 36] In addition, in 
January 2013, a Reserve Forces Policy Board report to the Secretary of 
Defense recommended that CAPE establish DOD policy or guidance for 
calculating the full cost of the reserve components. The report 
concluded that without such a policy, senior leaders within DOD will 
not have complete or uniform data on the total costs associated with 
active and reserve personnel to make informed workforce decisions. 
[Footnote 37] According to officials in CAPE, determining the best 
person--civilian or military--to fill a full-time position is a far 
different question than determining the best mix of active and reserve 
personnel, and that they will work to develop additional guidance and 
tools as needed. CAPE added that the Board's singular focus on cost 
obscured the fact that many other factors such as peacetime and 
wartime demands, deployment frequency and duration, and unit readiness 
are of equal or greater importance. An official in the Office of the 
Assistant Secretary of Defense for Reserve Affairs, however, stated 
that the reserve components should be included in the instruction in 
order for DOD to make effective workforce decisions for its total 
workforce. 

Although officials within DOD's components told us they have 
estimated, or said they may need to estimate, the cost of Reserve and 
National Guard personnel for cost comparisons, and while CAPE 
officials acknowledged there may be a place for developing guidance 
and tool sets for assessing the costs of these personnel, they were 
not convinced that there is a need to incorporate them into the 
recently issued instruction.[Footnote 38] CAPE officials stated that 
those personnel perform work on a short-term temporary basis and the 
effort required to develop the associated costs would be time 
consuming and resource intensive. However, a portion of Reserve and 
National Guard personnel serve in a full-time capacity, and both part-
time and full-time reservists perform functions in support of DOD's 
various missions.[Footnote 39] For example, DOD relies on Reserve and 
National Guard personnel to provide airlift capabilities in support of 
military operations and in domestic missions and to provide engineer 
units to assist local and state agencies in, among other things, 
construction of roads, bridges, and emergency housing. Without 
establishing business rules for estimating the cost of Reserve and 
National Guard personnel, however, whether as part of the instruction 
or in some other venue, DOD cannot create estimates and comparisons to 
inform workforce mix and force structure decisions for its total 
workforce. 

Portions of Certain Retirement-Related Cost Elements May Not Be 
Relevant: 

The instruction directs users to include payments the government makes 
into funds to support the retirement and health benefits that current 
military and civilian personnel who become eligible for retirement 
will receive upon retirement; however, a portion of these payments may 
not be relevant to current personnel. Retirement and health benefits 
are deferred benefits that current employees will receive in the 
future. These deferred benefits, regardless of when the employee 
receives them, are attributable to current service by an employee and 
are to be included in considering the full costs of a workforce. 
According to the Federal Accounting Standards Advisory Board Handbook, 
however, costs that are attributable to services rendered in prior 
years that are attributable to services previously rendered by current 
retirees and to past service of current active civilian and military 
personnel are sunk costs that should not be included in determining 
current costs.[Footnote 40] 

Accordingly, the instruction appropriately includes several cost 
elements that capture the actuarial "normal cost" to DOD of future 
retirement and health benefits for military and civilian personnel--
that is, the costs of such future benefits that are attributable to a 
current employee's work in a given year.[Footnote 41] In addition, the 
instruction includes several cost elements that represent costs to 
other federal agencies for deferred benefits. For contractor support, 
the cost of retirement and health care are included in the cost of the 
contract. See table 3 for a list of cost elements in the instruction 
related to retirement, health, and veteran benefits for military and 
civilian personnel. 

Table 3: Retirement, Health, and Veteran Benefit Cost Elements 
Included in DOD Instruction 7041.04: 

Costs to DOD: 

Military: Military Retirement Fund; 
Civilian: Retirement Accrual. 

Military: Medicare-Eligible Retiree Health Care Fund; 
Civilian: Federal Retirement Thrift Investment Savings Plan. 

Military: Pre-Medicare-Eligible Health Care; 
Civilian: Federal Employee Health Benefits Program. 

Military: Health Benefits for Active Duty and Dependents; 
Civilian: Social Security. 

Military: Social Security; 
Civilian: Medicare. 

Military: Medicare; 
Civilian: [Empty]. 

Costs to other Federal Agencies: 

Military: Department of Treasury: Contribution for Concurrent Receipts; 
Civilian: Department of Treasury: Contribution for Unfunded Civilian 
Retirement. 

Military: Department of Treasury: Contribution to the Military 
Retirement Fund; 
Civilian: Office of Personnel Management: Post Retirement Health 
Benefits. 

Military: Department of Treasury: Contribution to the Medicare-
Eligible Retiree Health Care Fund; 
Civilian: [Empty]. 

Military: Department of Veteran Affairs: Veterans' Benefits; 
Civilian: [Empty]. 

Military: Military: Department of Labor: Veterans' Employment and 
Training; 
Civilian: Civilian: [Empty]. 

Source: GAO analysis of DOD guidance. 

[End of table] 

In addition to normal costs, however, our analysis found that the 
instruction also directs the inclusion of several cost elements that 
may not be appropriate to consider. These include payments for part of 
unfunded liabilities--any previously identified shortfalls in federal 
retirement assets--for pension and retiree health benefits for which 
trust funds have been established and prefunding payments made for 
services performed previously. A portion of these payments toward an 
unfunded liability may not be relevant to estimating the full cost of 
performance by current military and civilian personnel because they 
capture sunk costs that were incurred at some point in the past and 
are not being incurred currently. In other words, a portion of these 
payments are not attributable to the current employee's performance of 
a service. For example, the Department of Treasury currently makes 
payments into the Military Retirement Fund and the Medicare-Eligible 
Retiree Health Benefit Fund,[Footnote 42] portions of which may not be 
appropriate to consider for current workforce cost comparisons because 
these payments cover a part of the unfunded accrued liability for all 
the retirees and current members who had earned benefits before the 
two accrual funding systems were established.[Footnote 43] 

Actuaries in the Office of the DOD Actuary indicated that CAPE did not 
coordinate or request their input when developing the DTM or the 
instruction. These actuaries did not believe the instruction should 
include costs that contribute toward unfunded benefits earned through 
prior service. Further, the actuaries identified other costs that may 
not be appropriate to include in a measure of current costs. These 
include certain retirement and post-service benefits, such as retiree 
health benefits paid by DOD for non-Medicare-eligible retirees and 
post-service benefits paid by the Department of Veterans Affairs. 
While these costs are not prefunded by contributions into a trust 
fund, the benefits paid in any particular year for these programs are 
also sunk costs that were earned by prior service. DOD actuaries said 
that other cost elements, such as for civilian retirement benefits and 
veterans' benefits may also need to be reevaluated.[Footnote 44] 

DOD actuaries said that CAPE did not provide them a copy of the 
instruction that replaced the DTM for comment. In addition, actuaries 
said that for CAPE to fully evaluate the inclusion of pension, retiree 
health care, and other relevant costs, that office would have to 
consult with DOD's Office of the Actuary as well as other appropriate 
actuarial offices. However, CAPE has not yet done so. To the extent 
the instruction includes cost elements that it should not, DOD 
components and offices following the instruction would be 
overestimating the cost of using certain workforces. 

DOD's Components Report that They Have Incorporated Business Rules 
into Their Workforce Mix Decisions, but Implementation Challenges 
Exist: 

The DOD components we examined, for the most part, including commands, 
offices, and defense agencies, reported to us that they have 
incorporated the business rules identified in the DTM and instruction 
into their workforce mix decisions. Still, implementation challenges 
exist. Some of the DOD components we examined used the business rules 
for estimating and comparing the full cost of DOD personnel and 
contract support to inform workforce mix decisions, while others 
reported they have had limited opportunities to use the business 
rules. However, some military service officials said they did not know 
the extent to which officials at more local levels were aware of the 
DTM or used it, and therefore their reported instances of using the 
business rules may underestimate the actual number of instances. In 
addition, at the time when we met with these organizations, CAPE had 
not completed development of a DOD-wide software tool for implementing 
the instruction and, in the meantime, the components we examined had 
developed their own cost tools to apply the business rules and develop 
cost estimates. Further, the instruction that replaced DTM 09-007 
directs users to data that may not contain the most accurate 
information for determining contractor support costs. 

DOD Components Reported Incorporating the Business Rules into Their 
Workforce Mix Decisions, but Opportunities for Use Have Been Limited: 

While the DOD components we examined generally reported to us that 
they have incorporated the business rules identified in the preceding 
DTM and current instruction to create cost estimates in support of 
workforce mix decisions, their opportunities to use the business rules 
have been limited. Among the 13 DOD components we included in our 
scope, 8 reported that they used the preceding DTM and provided 
documentation showing that cost was a factor in their decision making 
from January 2010 through June 2013, 4 told us that they had not had 
the opportunity to use the DTM but were aware of it, and 1, while it 
also had not had the opportunity to use the DTM, reported that it was 
not aware of it.[Footnote 45] According to the DTM and instruction, 
the policies and procedures established within it are applicable to 
all DOD components. Specifically, the DTM stated and the instruction 
states that, when developing national security policies and making 
program commitments, DOD officials must be aware of the full costs of 
personnel and have a thorough understanding of the implications of 
those costs to DOD and, on a broader scale, to the federal government. 

All eight of the DOD components we examined that reported that they 
had used the DTM to inform workforce mix decisions were commands 
within the military services, and a majority of their cost estimates 
supported in-sourcing decisions--moving work performed by contractors 
to performance by DOD employees. For example, of the 649 instances in 
which the commands we examined reported using the DTM from January 
2010 through June 2013, 639 or 98 percent were to inform in-sourcing 
decisions. Of those 639, the Air Force Materiel Command accounted for 
approximately 525 or 82 percent.[Footnote 46] These commands provided 
us with documentation such as decision memoranda, completed cost 
benefit analysis spread sheets, and briefing slides given to senior 
leadership showing that cost was a factor in their decision-making. 
Further, with the exception of one instance in the Naval Supply 
Systems Command, officials from DOD components we met told us that, 
since January 2010, they have converted neither military to civilian 
positions nor civilian to military positions. The Army Installation 
Management Command and the Air Force Materiel Command reported a few 
instances of new or expanding missions that required the use of the 
DTM. Table 4 shows the number of times the commands we examined used 
the DTM and for what reason. 

Table 4: Number of Instances Selected Military Departments Commands 
and Offices, and Defense Agencies Reported Using DTM-09-007 to Support 
Various Types of Workforce Mix Decisions from January 2010 through 
June 2013: 

Component: Army: 

Command, Office or Agency: Installations Management Command; 
Workforce Mix Decisions: 
In-sourcing: 15; 
Conversion From Civilian to Military Position: 0; 
Conversion From Military to Civilian Position: 0; 
New or Expanding Missions: 7; 
Total: 22. 

Command, Office or Agency: Army Sustainment Command[A]; 
Workforce Mix Decisions: 
In-sourcing: 0; 
Conversion From Civilian to Military Position: 0; 
Conversion From Military to Civilian Position: 0; 
New or Expanding Missions: 0; 
Total: 0. 

Command, Office or Agency: U.S. Army Security Assistance Command; 
Workforce Mix Decisions: 
In-sourcing: 1; 
Conversion From Civilian to Military Position: 0; 
Conversion From Military to Civilian Position: 0; 
New or Expanding Missions: 0; 
Total: 1. 

Component: Navy[B]: 

Command, Office or Agency: Commander, Navy Installations Command; 
Workforce Mix Decisions: 
In-sourcing: 11; 
Conversion From Civilian to Military Position: 0; 
Conversion From Military to Civilian Position: 0; 
New or Expanding Missions: 0; 
Total: 11. 

Command, Office or Agency: Commander, U.S. Pacific Fleet; 
Workforce Mix Decisions: 
In-sourcing: 28; 
Conversion From Civilian to Military Position: 0; 
Conversion From Military to Civilian Position: 0; 
New or Expanding Missions: 0; 
Total: 28. 

Command, Office or Agency: Naval Supply Systems Command; 
Workforce Mix Decisions: 
In-sourcing: 31; 
Conversion From Civilian to Military Position: 0; 
Conversion From Military to Civilian Position: 1; 
New or Expanding Missions: 0; 
Total: 32. 

Command, Office or Agency: Strategic Systems Programs Office; 
Workforce Mix Decisions: 
In-sourcing: 0; 
Conversion From Civilian to Military Position: 0; 
Conversion From Military to Civilian Position: 0; 
New or Expanding Missions: 0; 
Total: 0. 

Component: Air Force: 

Command, Office or Agency: Air Force Materiel Command; 
Workforce Mix Decisions: 
In-sourcing: 525[C]; 
Conversion From Civilian to Military Position: 0; 
Conversion From Military to Civilian Position: 0; 
New or Expanding Missions: 2; 
Total: 527. 

Command, Office or Agency: Air Force Special Operations Command; 
Workforce Mix Decisions: 
In-sourcing: 28; 
Conversion From Civilian to Military Position: 0; 
Conversion From Military to Civilian Position: 0; 
New or Expanding Missions: 0; 
Total: 28. 

Command, Office or Agency:Air Force Office of Special Investigations; 
In-sourcing: 0; 
Conversion From Civilian to Military Position: 0; 
Conversion From Military to Civilian Position: 0; 
New or Expanding Missions: 0; 
Total: Defense Agencies: 0. 

Component: Defense Agencies: 

Command, Office or Agency: Defense Logistics Agency; 
Workforce Mix Decisions: 
In-sourcing: 0; 
Conversion From Civilian to Military Position: 0; 
Conversion From Military to Civilian Position: 0; 
New or Expanding Missions: 0; 
Total: 0. 

Command, Office or Agency: Office of the Secretary of Defense; 
Workforce Mix Decisions: 
In-sourcing: 0; 
Conversion From Civilian to Military Position: 0; 
Conversion From Military to Civilian Position: 0; 
New or Expanding Missions: 0; 
Total: 0. 

Command, Office or Agency: Defense Media Activity; 
Workforce Mix Decisions: 
In-sourcing: 0; 
Conversion From Civilian to Military Position: 0; 
Conversion From Military to Civilian Position: 0; 
New or Expanding Missions: 0; 
Total: Total: 0. 

Total: 
Workforce Mix Decisions: 
In-sourcing: 639; 
Conversion From Civilian to Military Position: 0; 
Conversion From Military to Civilian Position: 1; 
New or Expanding Missions: 9; 
Total: 649. 

Source: GAO analysis of DOD data. 

[A] Officials with the Army Sustainment Command told us that they had 
used the DTM to facilitate workforce mix decisions but did not track 
the usage; therefore, the command was unable to provide us with the 
number of times it used the DTM to inform workforce mix decisions. 

[B] We did not select commands or offices within the Marine Corps in 
our non-probability sample because we could not determine the number 
of civilian personnel within the commands and offices, and therefore 
we did not request Marine Corps data on the number of instances they 
used the DTM to inform workforce mix decisions. See Appendix 1 for 
more information. 

[C] Air Force Material Command, while stating that their data was 
approximated, also noted that their insourcing total was a minimum of 
525 instances. 

[End of table] 

Some DOD officials said they were not clear on uses of the DTM beyond 
in-sourcing, and others said their reported instances of using the 
business rules may underestimate the actual number of reported 
instances. Officials within OSD and headquarters elements said they 
did not know the extent to which officials throughout the department 
are aware of the instruction and the requirement to use the associated 
business rules. For example, it was not clear to some Army officials 
in one office that the business rules were to be used for costing out 
decisions beyond in-sourcing. Other officials noted, however, that the 
business rules identified in the DTM or references to the DTM have 
been incorporated into some service-level policies and procedures to 
support decisions other than in-sourcing. For example, the Army's 
approval form for new service contracts includes a question asking if 
the cost of labor for new services contracts was determined using the 
business rules.[Footnote 47] Some military service officials said they 
did not know the extent to which the reported data represented the 
full degree to which organizations were, in fact, using the business 
rules, and therefore their reported instances of using the business 
rules may underestimate the actual number of instances. For example, 
one official acknowledged to us that it is difficult for his 
organization to identify the degree to which the business rules were 
being applied at the local levels. 

Officials within the agencies and offices that were aware of the DTM 
but had not used it told us of several reasons why they did not 
conduct these types of workforce cost estimates since the initial 
issuance of the DTM. For example, officials said they had not used it, 
in part, due to issues related to the current fiscal environment, such 
as concerns about anticipated reductions in funds available for 
contractor support and limitations on the number of civilian full-time 
equivalents. Officials also said they did not use the DTM because 
their offices do not have direct access to military personnel and have 
had no new or expanded missions. 

DOD Components Use Different Tools to Implement the DTM: 

CAPE recently completed development of a DOD-wide software tool for 
implementing DOD Instruction 7041.04. During the time we met with 
component organizations, however, the DOD-wide tool was not available, 
and in the absence of the tool the components we examined had 
developed their own tools to apply the business rules in the DTM to 
develop workforce cost estimates. When initially released on January 
29, 2010, DTM 09-007 called for CAPE, within one year of its 
publication, to develop a cost model for DOD-wide application that 
employs the business rules set forth in the DTM. In addition, best 
practices in GAO's Cost Estimating and Assessment Guide state that in 
order to be reliable, cost estimates should be derived using an 
overall process that produces high-quality cost estimates that are 
comprehensive and accurate and that can be easily and clearly traced, 
replicated, and updated. 

According to officials in CAPE, they contracted out the development of 
a software tool for the required cost model to implement the business 
rules and, when DOD issued Instruction 7041.04 on July 3, 2013, CAPE 
also released its DOD-wide tool for use across the department. 
Officials in CAPE told us that the components' use of the DOD-wide 
tool will not be required, enforced, or monitored. DTM 09-007 stated 
that CAPE would oversee compliance with both the DTM and the use of 
the DOD-wide tool. When DOD Instruction 7041.04 was issued, however, 
the requirement for CAPE to oversee use of its tool was removed. 

In the absence of CAPE's DOD-wide tool, the Air Force modified an 
existing software tool originally used to inform public-private 
competition decisions, and the Army, the Marine Corps, and the Navy 
developed tools using an existing off-the-shelf software program. 
While the services developed and use different tools, those tools 
generally incorporate the cost elements identified in the DTM and 
current instruction. The defense agencies we met with said they had 
not created tools to implement the business rules, and officials from 
these agencies said they would use the DOD-wide tool when it was made 
available to them. 

According to the instruction, the business rules provide a consistent 
approach for all DOD components to estimate the cost of personnel. 
Accordingly, the instruction provides a list of potential cost factors 
associated with personnel that should be considered in the decision-
making process even when personnel costs are not the only factor. 
Officials in CAPE stated, however, that they have not reviewed the 
services' tools to ensure they are in compliance with the business 
rules and do not plan to review them. An assessment of these various 
tools would enable CAPE to identify the advantages and disadvantages 
of allowing multiple cost estimation tools. DOD decision makers who 
then use these various economic analyses or cost estimates would have 
greater assurance that they are using reliable results to make 
workforce mix decisions. 

DOD Components May Be Relying on Data Sources That Do Not Contain the 
Most Accurate Data for Determining Contractor Costs: 

When estimating contractor support costs for a new or expanding 
mission, Instruction 7041.04 provides several options for users to 
consider, although these options may not be the most accurate data 
sources. For example, the instruction directs the user to begin with 
the negotiated price of an existing contract, which DOD and military 
department officials told us is their preferred option. If an existing 
contract is not available, those officials attempt to find another 
contract that is similar to the contactor support for which costs are 
being estimated. To facilitate this, most of the services, agencies, 
and offices we met with maintain their own database of historical 
contractor data. 

If an existing contract is not available, the instruction directs the 
user to either a General Services Administration (GSA) website 
[Footnote 48] or the Army's online database for contract management 
and reporting to obtain contractor support costs for services. We have 
previously highlighted limitations with GSA's data, however, such as 
the fact that contractors' published rates on the website do not 
reflect post-competition prices.[Footnote 49] The GSA website allows 
users to search for services, and then identifies a list of 
contractors that provide the service along with their rates. The 
listed rates, however, may be negotiated with the contractor. Further, 
DOD officials we spoke to during this review said that GSA's website 
does not provide targeted data, such as actual contractor rates by 
function or geographic location. For example, officials with one 
command we spoke to noted their use of a contractor who possesses 
unique specialized nuclear weapons related knowledge. According to 
those officials, GSA's website does not contain available data for 
unique positions like these. In addition, officials said that GSA's 
website provides too large a range of rates for them to develop 
realistic estimates. Best practices from GAO's Cost Estimating and 
Assessment Guide state that a basic characteristic of credible cost 
estimates is having multiple sources of suitable, relevant, and 
available data. 

In July 2013, when the DOD Instruction replacing DTM 09-007 was 
issued, the Army's Contractor Manpower Reporting Application was added 
as an additional source for contractor data. The Contractor Manpower 
Reporting Application is an online database that automates the Army's 
contract management and reporting process for contract management 
personnel by allowing users to view contract information, track 
contract data, and view various reports based on contract data in the 
application. The Contractor Manpower Reporting Application business 
process captures information on funding source, contracting vehicle, 
organization supported, mission and function performed, labor hours, 
and labor costs for contracted efforts, among other things.[Footnote 
50] Currently the application collects data for the Army, the Air 
Force, and the Navy on the number of contractor employees by using 
direct labor hours and associated cost data. However, DOD is still 
developing its department-wide Contractor Manpower Reporting 
Application system and we previously found that a number of factors 
limit the accuracy and completeness of inventory data.[Footnote 51] 
Officials within CAPE told us they were unaware of some of the 
limitations with the contractor support data sources provided in the 
instruction. In the absence of data sources that are consistent with 
established practices for developing cost estimates, DOD components 
may be using data that do not lead to credible contractor cost 
estimates. 

Conclusions: 

With a total workforce of about 3 million individuals, as well as an 
estimated 710,000 contractor full time equivalents, DOD's investment 
in personnel to accomplish its missions constitutes a substantial 
financial commitment. In those cases where the department can choose 
what workforce it wants to utilize to accomplish tasks, it is crucial 
that it have an accurate method for comparing the costs of its 
civilian, military, and contractor personnel. DOD has taken important 
steps to achieve this goal since our 2008 report on military to 
civilian conversions for health care personnel, including the 
development of DTM 09-007 and its successor Instruction 7041.04. The 
department's current direction for estimating and comparing the cost 
of its available workforces, however, could be improved. For instance, 
users currently find it difficult to develop estimates of particular 
costs such as overhead, advertising and recruiting, and training, and 
the services have not received guidance on developing estimates for 
Reserve and National Guard personnel. Further, as we have noted, there 
is some disagreement within the department about the inclusion of 
certain retirement costs in current workforce cost estimates. More 
comprehensive guidance in these areas could improve the components' 
ability to make accurate cost comparisons between workforces. 

Similarly, the department currently lacks assurance that workforce 
cost estimates and comparisons are consistent across the department, 
but by evaluating the different cost estimation tools currently being 
used by the components, it could decide on the best course to ensure 
consistency and accuracy. Also, current and accurate data on 
contractor support costs is critical for the department in making 
workforce decisions, but due to limitations in some of the data DOD 
has identified for making contractor support cost estimates, 
components may be relying on data sources that do not produce intended 
results. While federal agencies always must make consistent and cost-
effective choices in managing their resources, this is especially true 
given the ongoing fiscal challenges that have imposed budgetary 
constraints across the federal government and are likely to continue 
for some time. 

Recommendations for Executive Action: 

To improve DOD's estimates and comparisons of the full cost of its 
military, civilian, and contractor workforces, we are making the 
following five recommendations to the Secretary of Defense. 

To improve DOD's methodology for estimating and comparing the full 
cost of its various workforces, we recommend that the Secretary of 
Defense direct the Office of Cost Assessment and Program Evaluation 
office to take the following three actions: 

* Further develop guidance for cost elements that users have 
identified as challenging to calculate, such as general and 
administrative, overhead, advertising and recruiting, and training; 

* Develop business rules for estimating the full cost of National 
Guard and Reserve personnel; and: 

* In coordination with the department's Office of the Actuary and 
appropriate federal actuarial offices, reevaluate the inclusion and 
quantification of pension, retiree health care costs, and other 
relevant costs of an actuarial nature and make revisions as 
appropriate. 

To facilitate consistent workforce cost estimates and comparisons, we 
recommend that the Secretary of Defense direct the Office of Cost 
Assessment and Program Evaluation to assess the advantages and 
disadvantages of allowing the continued use of different cost 
estimation tools across the department or directing department-wide 
application of one tool, and revise its guidance in accordance with 
the findings of its analysis. 

To improve DOD's ability to estimate contractor support costs, we 
recommend that the Secretary of Defense direct the Office of Cost 
Assessment and Program Evaluation, consistent with established 
practices for developing credible cost estimates, to research the data 
sources it is currently using and reassess its contractor support data 
sources for use when determining contractor support costs. 

Agency Comments and Our Evaluation: 

In written comments on a draft of this report, DOD agreed with our 
findings that it must make cost-effective decisions in structuring and 
shaping its workforce of military personnel, government civilians, and 
contracted support. Specifically, DOD concurred with two of our 
recommendations and partially concurred with three. DOD's comments are 
reprinted in appendix II. DOD also provided technical comments on the 
draft report, which we incorporated as appropriate. 

DOD partially concurred with our recommendation to further develop 
guidance for the cost elements that users have identified as 
challenging to calculate, such as general and administrative, 
overhead, advertising and recruiting, and training. In commenting on 
our report, DOD stated that it will continue to review the methodology 
for calculating these cost elements and issue clarifying guidance 
where necessary or appropriate. DOD also stated that it is part of an 
inter-agency effort that is developing government-wide cost 
comparisons and that, if or when government-wide cost comparison 
guidance is published, DOD will adjust its own guidance accordingly. 
We continue to believe that fully addressing this recommendation would 
enhance the development of DOD's methodology for estimating and 
comparing the cost of its workforces. 

DOD also partially concurred with our recommendation to develop 
business rules for estimating the full cost of National Guard and 
Reserve personnel. In its comments, DOD stated that it is assessing 
the potential need for reserve manpower costing models, as well as the 
identification of questions that reserve costing policies and models 
would be used to address. Once it has gained a more thorough 
understanding of the questions to be addressed by reserve cost 
estimates, it will begin work on guidance as necessary, and 
development of reserve component costing models if appropriate. We 
continue to believe that fully addressing this recommendation would 
enhance the development of DOD's methodology for estimating and 
comparing the cost of its workforces and DOD's ability to make more 
informed workforce decisions. 

DOD concurred with our recommendation to coordinate with the 
department's Office of the Actuary and appropriate federal actuarial 
offices, reevaluate the inclusion and quantification of pension, 
retiree health care costs, and other relevant costs of an actuarial 
nature and make revisions as appropriate. In its response to our 
report, DOD stated that it will work with the Office of the Actuary, 
and others as necessary, to reevaluate the inclusion and 
quantification of these costs elements and, following evaluation, 
revisions will be made. We believe such actions, if implemented 
effectively, will fully address the intent of the recommendation. 

DOD partially concurred with our recommendation to assess the 
advantages and disadvantages of allowing the continued use of 
different cost estimation tools across the department or directing 
department-wide application of one tool, and revise its guidance in 
accordance with the findings of its analysis. We acknowledge, as DOD 
stated in comments on our report, that the department is open to 
assessing the advantages and disadvantages of allowing the continued 
use of alternate cost estimation tools among the various components, 
and, if necessary, will revise its guidance based on this assessment. 
However, in order to satisfy the intent of this recommendation, DOD 
needs to take action to fully address this recommendation. Doing so 
will facilitate more consistent workforce cost estimates and 
comparisons when DOD's components use the department's methodology for 
estimating and comparing the cost of their workforces. 

Finally, DOD concurred with our recommendation to research the data 
sources it is currently using and reassess its contractor support data 
sources for use when determining contractor support costs. In its 
comments, DOD stated that as the department increases its fidelity 
into contractor support costs through the collection of statutorily 
required information via the Enterprise-wide Contractor Manpower 
Reporting Application in support of the Inventory of Contracts for 
Services, the department will modify its guidance accordingly. We 
believe that this action, if implemented effectively, will address the 
intent of the recommendation. 

We are sending copies of this report to the Secretary of Defense, the 
Under Secretary of Defense for Personnel and Readiness, the Director 
of DOD's Office of Cost Assessment and Program Evaluation, the Office 
of Management and Budget, and appropriate congressional committees. In 
addition, this report will also be available at no charge on the GAO 
Web site at [hyperlink, http://www.gao.gov]. 

If you or your staff have any questions regarding this report, please 
contact me at (202) 512-3604 or farrellb@gao.gov. Contact points for 
the Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made major 
contributions to this report are listed in appendix III. 

Signed by: 

Brenda S. Farrell: 
Director: 
Defense Capabilities and Management: 

List of Committees: 

The Honorable Carl Levin: 
Chairman: 
The Honorable James Inhofe: 
Ranking Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Dick Durbin: 
Chairman: 
The Honorable Thad Cochran: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
United States Senate: 

The Honorable Howard P. McKeon: 
Chairman: 
The Honorable Adam Smith: 
Ranking Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable C.W. Bill Young: 
Chairman: 
The Honorable Pete Visclosky: 
Ranking Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

[End of section] 

Appendix I: Scope and Methodology: 

To evaluate the extent to which the Department of Defense's (DOD) 
methodology for estimating and comparing the cost of work performed by 
military, civilian, and contractors reflects the full cost to the 
taxpayer, we identified each of the cost elements contained in the 
most recent version of Directive Type-Memorandum (DTM) 09-007[Footnote 
52] and DOD Instruction 7041.04[Footnote 53] and compared them to best 
practices in GAO's Cost Estimating and Assessment Guide,[Footnote 54] 
guidance in the Federal Accounting Standards Advisory Board Handbook, 
[Footnote 55] and the Office of Management and Budget guidelines for 
Performance of Commercial Activities.[Footnote 56] We also reviewed 
pertinent DOD and service-specific policies and guidance related to 
workforce mix and economic analysis.[Footnote 57] In addition, we 
interviewed knowledgeable officials within the offices of the Under 
Secretary of Defense (Personnel and Readiness), the Director of Cost 
Assessment and Program Evaluation, DOD's Office of the Actuary, and 
the military services. We also met with the Office of Management and 
Budget[Footnote 58] and other experts and other interested parties we 
selected based on their work on issues related to the DTM. 
Specifically, we met with the Center for Strategic and International 
Studies and the Center for Strategic and Budgetary Assessments, both 
of which are independent nonprofit policy research institutes. We also 
met with the American Federation of Government Employees, a federal 
government employee union, and the Professional Services Council, a 
trade association of the government professional and technical 
services industry. We obtained the perspective of the National Guard 
and Reserve community by meeting with the Office of the Secretary of 
Defense (Reserve Affairs) and the Reserve Forces Policy Board. We also 
reviewed published work by independent research institutes evaluating 
the business rules contained in the preceding DTM, such as those 
issued by the Center for Strategic and International Studies, the 
Project on Government Oversight, and the Reserve Forces Policy Board. 
[Footnote 59] 

To evaluate the extent to which DOD's components have incorporated the 
business rules identified in DTM 09-007 and DOD Instruction 7041.04 
into their workforce mix decisions, we met with knowledgeable 
officials from the offices of the Under Secretary of Defense 
(Personnel and Readiness), the Director of Cost Assessment and Program 
Evaluation, the Secretariat of the Air Force for Manpower and Reserve 
Affairs, Assistant Secretary of the Army for Manpower and Reserve 
Affairs, the Assistant Secretary of the Navy for Manpower and Reserve 
Affairs and Headquarters Marine Corps, Deputy Commandant, Programs and 
Resources.[Footnote 60] We also met with responsible officials in 3 to 
4 commands and offices we selected from each of the military 
departments and 3 defense agencies, for a total of 13 DOD components. 
We used a non-probability sample, based on size, to make our 
selections. The results of these interviews cannot be generalized to 
all entities across DOD but provided insights about incorporation of 
business rules into workforce mix decisions. To choose our sample, we 
requested and obtained data from the Defense Manpower Data Center on 
the number of civilian personnel currently assigned to each of the 
military commands and defense agencies within DOD as of the end of 
fiscal year 2012. Due to the way the number of civilian personnel 
assigned to commands within the Marine Corps is reported to the 
Defense Manpower Data Center, we were unable to align numbers of 
civilian personnel with specific Marine Corps commands or offices. 
Therefore, the Marine Corps was excluded from our selection criteria 
and we did not select any Marine Corps commands as part of our non-
probability sample. Once the data for the other components was 
compiled, we rank ordered the commands within each of the military 
departments and the defense agencies from largest to smallest based on 
civilian personnel counts. For each of the military departments and 
defense agencies, we divided the rank ordered list of commands and 
agencies into three groups: large, medium, and small. We considered 
commands and agencies with 10,000 or more full-time civilian employees 
as large, commands and agencies with at least 1,000 but less than 
10,000 full-time civilian employees as medium; and commands and 
agencies with less than 1,000 full-time civilian employees as small. 
We generated a selection number based on the total number of commands 
and agencies and counted down the rank ordered list of commands and 
agencies to identify those commands and agencies that we would meet 
with. This method resulted in one selected command, office, or agency 
from each of the categories of large, medium, and small.[Footnote 61] 
In addition to discussing with each of these entities their 
implementation of the business rules identified in DTM 09-007, we 
requested the number of times they used the business rules to inform 
workforce decisions (e.g., in-sourcing, workforce conversions, and new 
or expanded missions) from January 2010 when the DTM was issued to 
June 2013. We did not independently validate the number of uses of the 
business rules reported to us by each of the entities or the cost 
estimates used to inform the workforce decisions. Table 5 shows the 
commands and agencies we met with to determine the extent to which DOD 
incorporated the business rules contained in DTM 09-007. 

Table 5: Select Commands, Offices, and Defense Agencies Contacted 
About Implementing DTM 09-007: 

Component: Army: 

Command, Office, or Defense Agency: Installations Management Command. 

Command, Office, or Defense Agency: Army Sustainment Command. 

Command, Office, or Defense Agency: U.S. Army Security Assistance 
Command. 

Component: Navy: 

Command, Office, or Defense Agency: Commander, Navy Installations 
Command. 

Command, Office, or Defense Agency: Commander, U.S. Pacific Fleet. 

Command, Office, or Defense Agency: Navy Supply Systems Command. 

Command, Office, or Defense Agency: Strategic Systems Program Office. 

Component: Air Force: 

Command, Office, or Defense Agency: Air Force Materiel Command. 

Command, Office, or Defense Agency: Air Force Special Operations 
Command. 

Command, Office, or Defense Agency: Air Force Office of Special 
Investigations. 

Component: Defense Agencies: 

Command, Office, or Defense Agency: Defense Logistics Agency. 

Command, Office, or Defense Agency: Office of the Secretary of Defense. 

Command, Office, or Defense Agency: Defense Media Activity. 

Source: GAO. 

[End of table] 

In addition, we met with officials in other DOD entities that are 
involved in guiding the implementation of the methodology. Although 
the Marine Corps was not part of our non-probability sample, we met 
with several Marine Corps commands and offices to discuss their 
implementation of the business rules identified in DTM 09-007. We also 
received a consolidated Marine Corps response to our questions on the 
implementation of the methodology. Table 6 shows the other DOD 
organizations we contacted to discuss the department's efforts to 
implement the business rules contained in the preceding DTM. 

Table 6: DOD Organizations Contacted for Information on Implementation 
of DTM 09-007: 

Assistant Secretary of the Navy, Manpower and Reserve Affairs; 
Office of the Director of Administration and Management;
Office of the Assistant Secretary of Defense for Reserve Affairs;
Director of Cost Assessment and Program Evaluation;
Department of Defense Office of the Actuary;
Army, Office of Force Management Directorate (G 3/5/7);
Deputy Assistant Secretary of the Army for Cost and Economics;
Naval Center for Cost Analysis;
Operational Navy, Chief of Navy Personnel, Total Force Requirements 
Division, Manpower and Accounting Brand (OPNAV N120);
Headquarters Marine Corps, Director of Marine Corps Staff;
Headquarters Marine Corps, Deputy Commandant, Programs and Resources;
Headquarters Marine Corps, Deputy Commandant Aviation;
Headquarters, Marine Corps, Deputy Commandant Manpower and Reserve 
Affairs;
Commander, Marine Corps Systems Command;
Commandant, Combat Development and Integration, Total Force Structure 
Division;
Commandant, Plans, Policy, and Operations;
Marine Corps Combat Development Command, Operations Analysis Division;
Program Element Office, Land System;
Headquarters Marine Corps Training and Education Command;
Headquarters Marine Corps, Director of Marine Corps Staff;
Headquarters Marine Corps, Aviation;
Headquarters Marine Corps, Manpower and Reserve Affairs;
Marine Corps Systems Command;
Secretariat of the Air Force, Deputy Assistant Secretary for Cost and 
Economics, Directorate of Economics and Business Management;
Air Force Cost Analysis Agency;
Air Force Personnel Center. 

Source: GAO. 

[End of table] 

Further, we received a demonstration by the Office of Cost Assessment 
and Program Evaluation of its DOD-wide Full Cost of Manpower tool to 
gain an understanding of DOD's application of the business rules 
contained in DTM 09-007. We also requested and obtained copies of the 
tools from each of the commands, offices, and defense agencies we met 
with to develop an understanding of the software tools they developed 
to apply the business rules in the DTM and in the instruction. For the 
Air Force we obtained a copy of their software tool, DTM-COMPARE. For 
the Army, the Marine Corps, and Navy we obtained copies of the off-the-
shelf software that was programmed to implement the business rules 
contained in the preceding DTM. In addition, we attended an Army 
Installation Management Command training on their Cost Analysis 
Workbook tool. Further, we obtained and reviewed sample documentation 
from the military commands that had applied the business rules 
identified in the preceding DTM to support workforce mix decisions. 

We conducted this performance audit from December 2012 to September 
2013 in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

[End of section] 

Appendix II: Comments from the Department of Defense: 

Office of The Assistant Secretary Of Defense: 
Readiness and Force Management: 
4000 Defense Pentagon: 
Washington, DC 20301-4000: 

September 12, 2013: 

Ms. Brenda Farrell: 
Director, Defense Capabilities and Management: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Dear Ms. Farrell, 

This is the Department of Defense (DoD) response to the GAO Draft 
Report, GAO-13-792, 'Human Capital: Opportunities Exist to Further 
Improve DOD's Methodology for Estimating the Cost of Its Workforces,' 
dated August 15,2013 (GAO Code 351789). The Department appreciates the 
GAO's work on this engagement, as well as the opportunity to review 
and comment on this draft report. 

The Department recognizes that understanding the full costs of its 
workforce is of utmost importance, particularly as it faces an 
increasingly austere budgetary environment and changing force 
structure. The Department agrees with the GAO's findings that it must 
make cost-effective decisions in structuring and shaping its workforce 
of military personnel, government civilians, and contracted support. 
Effective Total Force Management requires integrating fully-burdened 
cost considerations and economic analyses for workforce planning at 
all echelons of the Department and at all points in the planning, 
programming, budgeting, and execution process. This includes 
determining the workforce cost for new or expanding mission 
requirements or capabilities, including those associated with the 
execution of operational capabilities and sustainment of major weapons 
system, as well as decisions on manpower changes to the existing mix 
of military, government civilian, and contract support. 

With regard to the specific recommendations offered by the GAO 
directed to the Office of Cost Assessment and Program Evaluation, the 
Department provides the following: 

Recommendation 1: Further develop guidance for the cost elements that 
users have identified as challenging to calculate, such as general and 
administrative, overhead, advertising and recruiting and training. 

DoD Response: Partially concur. The Department will continue to review 
the methodology for calculating these cost elements and issue 
clarifying guidance where necessary or appropriate. Additionally, the 
Department is part of an inter-agency effort that is developing 
government-wide cost comparison guidance. If or when government wide 
cost comparison guidance is published, the Department will adjust its 
own guidance 
accordingly. 

Recommendation 2: Develop business rules for estimating the full cost 
of National Guard and Reserve personnel. 

DoD Response: Partially concur. The Department is committed to 
generating guidance, and models where applicable, in support of its 
decision making process on relevant issues. The Department is 
assessing potential needs for reserve manpower costing models, as well 
as the identification of questions that reserve costing policies and 
models would be used to address. Once it has gained a more thorough 
understanding of the questions to be addressed by reserve cost 
estimates, it will begin work on guidance as necessary, and 
development if appropriate, of reserve component costing models. 

Recommendation 3: In coordination with the Department's Office of the 
Actuary and appropriate federal actuarial offices, reevaluate the 
inclusion and quantification of pension, retiree health care costs, 
and other relevant costs of an actuarial nature and make revisions as 
appropriate. 

DoD Response: Concur. The Department will work with the Office of the 
Actuary, and others as necessary, to reevaluate the inclusion and 
quantification of these cost elements. As appropriate, following 
evaluation, revisions will be made. 

Recommendation 4: Assess the advantages and disadvantages of allowing 
the continued use of different cost estimation tools across the 
department or directing department-wide application of one tool, and 
revise its guidance in accordance with the findings of its analysis. 

DoD Response: Partially concur. The Office of Cost Assessment and 
Program Evaluation currently makes available a software package to 
assist Components in estimating the full cost of manpower but does not 
mandate its use Department-wide to allow Components flexibility in 
their particular analyses. Manpower costing models, in general, are 
decision support tools and must be tailorable to support the decision 
at hand. The Department encourages the use of more than one model and 
only requires consistency of methodology and cost estimates across all 
Components. The Department is open to assessing the advantages and 
disadvantages of allowing the continued use of alternate cost 
estimation tools among the various Components. If necessary, guidance 
will be revised based on this assessment. 

Recommendation 5: Research the data sources it is currently using and 
reassess its contractor support data sources for use when determining 
contractor support costs (consistent with established practices for 
developing credible cost estimates). 

DoD Response: Concur. The Department strives to provide the best data 
in support of management decisions. At this time, the guidance directs 
users to three sources of contractor support costs. As the Department 
increases its fidelity into contractor support costs through the 
collection of statutorily required information via the Enterprise-wide 
Contractor Manpower Reporting Application in support of the Inventory 
of Contracts for Services, the Department will modify its guidance 
accordingly. 

Should you have any questions, please contact my primary action 
officer Mr. Thomas Hessel, Associate Director of Total Force 
Requirements & Sourcing Policy, at 703-697-3402, or at 
thomas.j.hessel.civ@mail.mil. 

Sincerely, 

Signed by: 

Rich Robbins: 
Director, Total Force Planning & Requirements: 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Brenda S. Farrell, (202) 512-3604 or Farrellb@gao.gov. 

Staff Acknowledgments: 

In addition to the contact named above, David Moser, Assistant 
Director; Timothy Carr, Brian Pegram, Erin Preston, Frank Todisco, 
Erik Wilkins-McKee, and Michael Willems made key contributions to this 
report. 

[End of section] 

Related GAO Products: 

Defense Contractors: Information on the Impact of Reducing the Cap on 
Employee Compensation Costs. [hyperlink, 
http://www.gao.gov/products/GAO-13-566]. Washington, D.C.: June 19, 
2013. 

Human Capital: Additional Steps Needed to Help Determine the Right 
Size and Composition of DOD's Total Workforce. [hyperlink, 
http://www.gao.gov/products/GAO-13-470]. Washington, D.C.: May 29, 
2013. 

Defense Acquisitions: Continued Management Attention Needed to Enhance 
Use and Review of DOD's Inventory of Contracted Services. [hyperlink, 
http://www.gao.gov/products/GAO-13-491]. Washington, D.C.: May 23, 
2013. 

Pension Costs on DOD Contracts: Additional Guidance Needed to Ensure 
Costs Are Consistent and Reasonable. [hyperlink, 
http://www.gao.gov/products/GAO-13-158]. Washington, D.C.: January 22, 
2013. 

Federal Workers: Results of Studies on Federal Pay Varied Due to 
Differing Methodologies. [hyperlink, 
http://www.gao.gov/products/GAO-12-564]. Washington, D.C.: June 22, 
2012. 

Defense Workforce: DOD Needs to Better Oversee In-sourcing Data and 
Align In-sourcing Efforts with Strategic Workforce Plans. [hyperlink, 
http://www.gao.gov/products/GAO-12-319]. Washington, D.C.: February 9, 
2012. 

DOD Met Statutory Reporting Requirements on Public-Private 
Competitions. [hyperlink, http://www.gao.gov/products/GAO-11-923R]. 
Washington, D.C.: September 26, 2011. 

Military Personnel: Comparisons between Military and Civilian 
Compensation Can Be Useful, but Data Limitations Prevent Exact 
Comparison. [hyperlink, http://www.gao.gov/products/GAO-10-666T]. 
Washington, D.C.: April 28, 2010. 

Military Personnel: Military and Civilian Pay Comparisons Present 
Challenges and Are One of Many Tools in Assessing Compensation. 
[hyperlink, http://www.gao.gov/products/GAO-10-561R]. Washington, 
D.C.: April 1, 2010. 

Military Personnel: Guidance Needed for Any Future Conversions of 
Military Medical Positions to Civilian Positions. [hyperlink, 
http://www.gao.gov/products/GAO-08-370R]. Washington, D.C.: February 
8, 2008. 

Military Personnel: Military Departments Need to Ensure That Full 
Costs of Converting Military Health Care Positions to Civilian 
Positions Are Reported to Congress. [hyperlink, 
http://www.gao.gov/products/GAO-06-642]. Washington, D.C.: May 1, 2006. 

[End of section] 

Footnotes: 

[1] The reserve component of DOD's military personnel is comprised of 
the Army, the Navy, the Marine Corps, and the Air Force Reserves and 
the Army and the Air National Guards of the United States. 

[2] The number of civilian full-time equivalents includes all civilian 
employees, including both direct-hire and indirect-hire foreign 
nationals. A full-time equivalent is a standard measure of labor that 
equates to 1 year of full-time work (labor hours as defined by the 
Office of Management and Budget Circular A-11, Preparation, 
Submission, and Execution of the Budget (July, 2013)). 

[3] DOD is required to compile annually an inventory of contracted 
services, pursuant to 10 U.S.C § 2330a, to include, among other data, 
the functions performed, the number of contractor full-time 
equivalents performing the function, and the total dollar amount of 
the services purchased. In its inventory of contracted services, the 
department reported spending about $145 billion for contracted 
services in fiscal year 2011, provided by an estimated 710,000 
contractor full-time equivalents. We have previously found, however, 
that obligations reported for contracted services in budget 
justification materials and obligations reported in the inventory of 
contracted services differ. We have also previously found that a 
number of factors limit the accuracy and completeness of the inventory 
data. See, for example, GAO, Defense Acquisitions: Continued 
Management Attention Needed to Enhance Use and Review of DOD's 
Inventory of Contracted Services, [hyperlink, 
http://www.gao.gov/products/GAO-13-491] (Washington, D.C.: May 23, 
2013). 

[4] Department of Defense Directive-Type Memorandum 09-007, Estimating 
and Comparing the Full Costs of Civilian and Military Manpower and 
Contractor Support (Apr. 3, 2013). The DTM was first issued on January 
29, 2010 and was extended five times. A DTM is a memorandum issued for 
time-sensitive actions that affect current issuances or will become 
DOD issuances (e.g., instructions or directives), and only when time 
constraints prevent publishing a new issuance. DTMs are typically only 
effective for 6 months. 

[5] DOD Instruction 7041.04, Estimating and Comparing the Full Costs 
of Civilian and Active Duty Military Manpower and Contract Support 
(July 3, 2013). 

[6] H.R. Rep. 112-705, at 725 (Dec. 18, 2012). 

[7] GAO, GAO Cost Estimating and Assessment Guide: Best Practices for 
Developing and Managing Capital Program Costs, [hyperlink, 
http://www.gao.gov/products/GAO-09-3SP] (Washington, D.C.: March 2009). 

[8] Federal Accounting Standards Advisory Board, FASAB Handbook of 
Accounting Standards and Other Pronouncements, as Amended (Washington, 
D.C.: June 30, 2012). 

[9] Office of Management and Budget, Circular No. A-76, Performance of 
Commercial Activities, (May 29, 2003). 

[10] The Office of Management and Budget did not provide input on the 
development or conduct an analysis of DTM 09-007 or DOD Instruction 
7041.04. However, OMB stated that it is reviewing the guidance and 
working with DOD as it considers government-wide management guidance 
on cost comparisons. 

[11] The Federal Activities Inventory Reform (FAIR) Act of 1998, Pub. 
L. No 105-270, § 5 (1998) (appended as a note below 31 U.S.C. § 501) 
defines inherently governmental functions as functions that are so 
intimately related to the public interest as to require performance by 
federal government employees. There is currently an open Federal 
Acquisition Regulation case (2012-001) under consideration to 
implement a September 2011 Office of Federal Procurement Policy Letter 
that, among other things, clarified the definition of "inherently 
governmental function" (consistent with the FAIR Act definition). 
Office of Federal Procurement Policy, Policy Letter 11-01, Performance 
of Inherently Governmental and Critical Functions (Sept. 12, 2011). 

[12] DOD Instruction 1100.22 provides criteria for identifying certain 
positions as exempt from performance by the private sector, such as 
activities necessary to provide for the readiness and workforce 
management needs of DOD or mitigate operational risk. Some, but not 
all, functions identified as closely associated with inherently 
governmental functions will meet the criteria necessary to be deemed 
exempt functions by DOD. 

[13] DOD defines in-sourcing as the conversion of any currently 
contracted service or function to DOD civilian or military 
performance. See Deputy Secretary of Defense Memorandum, In-sourcing 
Contracted Services--Implementation Guidance (May 28, 2009). 

[14] Section 129a of Title 10 of the United States Code requires DOD 
policies and procedures to prioritize the achievement of a workforce 
sufficiently sized and of the appropriate mix to carry out DOD's 
mission over cost. 

[15] See DOD Instruction 1100.22, Policy and Procedures for 
Determining Workforce Mix (Apr. 12, 2010) and DOD Instruction 1100.4, 
Guidance for Manpower Management (Feb. 12, 2005). 

[16] Assistant Secretary of Defense for Readiness and Force 
Management, Memorandum, Civilian Furloughs and Total Workforce 
Management (June 28, 2013). 

[17] In-kind compensation refers to noncash benefits provided to 
employees. Deferred benefits impact the current cost of compensation 
because money must be set aside today to provide these benefits in the 
future. 

[18] Federal Accounting Standards Advisory Board, FASAB Handbook of 
Accounting Standards and Other Pronouncements, as Amended (Washington, 
D.C.: June 30, 2012). 

[19] In this context, DOD components include OSD, the military 
departments, the Office of the Chairman of the Joint Chiefs of Staff 
and the Joint Staff, the combatant commands, the Office of the 
Inspector General of the Department of Defense, the defense agencies, 
the DOD field activities, and all other organizational entities within 
the DOD. 

[20] The OSD component heads include the Under Secretaries and 
Assistant Secretaries of Defense. 

[21] GAO, Military Personnel: Military Departments Need to Ensure That 
Full Costs of Converting Military Health Care Positions to Civilian 
Positions Are Reported to Congress, [hyperlink, 
http://www.gao.gov/products/GAO-06-642] (Washington, D.C.: May 1, 
2006). 

[22] GAO, Military Personnel: Guidance Needed for Any Further 
Conversions of Military Medical Positions to Civilian Positions, 
[hyperlink, http://www.gao.gov/products/GAO-08-370R] (Washington, 
D.C.: Feb. 8, 2008). 

[23] Foregone taxes refer to corporate income tax revenue that is 
generated by hiring a contractor to complete work for DOD that could 
partially offset costs of the contract to the federal government, but 
not to DOD. 

[24] Lost productivity during periods of transition refers to the loss 
of workforce productivity resulting from workforce decisions that 
result in a transition from public-to-private performance, private-to-
public performance, or private-to-private performance. 

[25] Non-common costs associated with converting from contract to 
government performance refer to costs that may increase when an 
activity is converted from contractor performance to government 
performance, such as the cost of rights to proprietary software or 
data rights. 

[26] [hyperlink, http://www.gao.gov/products/GAO-09-3SP]. 

[27] DODI 7041.04 defines direct costs as costs that are related 
directly to the production of a specific good or the performance of a 
specific service. Typical direct costs are the compensation of 
employees for performance of work, fringe benefit costs, and the costs 
of materials consumed or expended in the performance of the work. 

[28] DODI 7041.04 defines indirect costs as costs that are not 
directly related to the production of a specific good or service, but 
instead are associated with the production of a variety of goods and 
services. For example, the cost of the administration of a large 
company is an indirect cost that must be spread over the products or 
services that are produced by the company. 

[29] Conducting competitions between public and private sources to 
identify the most cost-effective provider of services is one tool DOD 
can legally use to achieve efficiencies. However, in the National 
Defense Authorization Act for Fiscal Year 2010, Congress imposed a 
temporary moratorium on new A-76 competitions involving functions 
currently performed by DOD civilian employees until, among other 
things, DOD reviewed and reported on various aspects of its public-
private competition policies. 

[30] OMB Circular A-76, Performance of Commercial Activities, (May 29, 
2003) establishes federal policy for the competition of commercial 
activities. 

[31] DOD Office of the Inspector General, Infrastructure and 
Environment: Public/Private Competition for the Defense Finance and 
Accounting Service Military Retired and Annuitant Pay Functions, D-
2003-056 (Arlington, VA: Mar. 21, 2003); GAO, DOD Met Statutory 
Reporting Requirements on Public-Private Competitions, [hyperlink, 
http://www.gao.gov/products/GAO-11-923R] (Washington, D.C.: Sept. 26, 
2011); and GAO, Defense Outsourcing: Better Data Needed to Support 
Overhead Rates for A-76 Studies, [hyperlink, 
http://www.gao.gov/products/GAO/NSIAD-98-62] (Washington, D.C.: Feb. 
27, 1998). 

[32] [hyperlink, http://www.gao.gov/products/GAO-11-923R]. 

[33] End strength represents the actual number of personnel on board 
at the end of a fiscal year. 

[34] Amortization is the gradual extinguishment of any amount over a 
period of time through a systematic allocation of the amount over a 
number of consecutive accounting periods. The Army Military-Civilian 
Cost System's total amortized average cost of training factor is 
derived from the average cost of basic training, average cost of 
initial skill training, average cost of career training, or average 
cost of One Station Unit training. 

[35] H. R. Rep. No. 113-102 (June 7, 2013), accompanying a proposed 
bill for National Defense Authorization Act for Fiscal Year 2014, 
contains language directing the Secretary of Defense to include 
factors for determining the full cost of Reserve Components into 
CAPE's cost model. 

[36] GAO, Human Capital: Additional Steps Needed to Help Determine the 
Right Size and Composition of DOD's Total Workforce, [hyperlink, 
http://www.gao.gov/products/GAO-13-470] (Washington, D.C.: May 29, 
2013). 

[37] Reserve Forces Policy Board, Eliminating Major Gaps in DOD Data 
on the Fully-Burdened and Life-Cycle Cost of Military Personnel: Cost 
Elements Should be Mandated by Policy, RFPB Report FY13-02 (Jan. 7, 
2013). 

[38] Accordingly, CAPE added "active duty" to the title of instruction 
7041.04 to be clear that the instruction did not include discussion of 
Reserve and National Guard personnel costs. 

[39] About 9 percent of the Reserve and National Guard serve as full-
time reservists. These full-time reservists perform duties associated 
with organizing, administering, recruiting, instructing, or training 
the various reserve components. See [hyperlink, 
http://www.gao.gov/products/GAO-13-470] and GAO, Military Personnel: 
DOD Needs to Establish a Strategy and Improve Transparency over 
Reserve and National Guard Compensation to Manage Significant Growth 
in Cost, [hyperlink, http://www.gao.gov/products/GAO-07-828] 
(Washington, D.C.: June 20, 2007). 

[40] Federal Accounting Standards Advisory Board, FASAB Handbook of 
Accounting Standards and Other Pronouncements, as Amended (Washington, 
D.C.: June 30, 2012). 

[41] The "normal cost" is the actuarially determined cost of future 
benefits attributable to employee service during the fiscal year. 

[42] Part of the Department of Treasury's payment to the fund is to 
cover a portion of the normal cost that is not paid by DOD. This 
amount is appropriately included. 

[43] For example, the Military Retirement Fund was established in 
1985. The 2012 payment to the Military Retirement Fund includes funds 
for the amortization of the unfunded liability for all retirement 
benefits earned by military personnel for service prior to 1985. 
Included in the unfunded liability are the consolidated requirements 
of the military departments to cover retired officers and enlisted 
personnel of the Army, Navy, Marine Corps, and Air Force; retainer pay 
of enlisted personnel of the Fleet Reserve of the Navy and Marine 
Corps; and survivors' benefits. 

[44] Payments that are sunk costs may need to be removed from any 
tally of current costs. However, for some of these payments that are 
not prefunded by contributions into a trust fund, an actuarial normal 
cost may have to be included instead. Present measures of current 
costs might be overstated to the extent that current payments for sunk 
costs exceed the normal cost attributable to current service. 

[45] None of the components with whom we met had had the opportunity 
to use the business rules since the release of the Instruction 
replacing the DTM. 

[46] Not all the instances a component reported using the DTM to 
support an in-sourcing decision resulted in a decision to in-source. 

[47] H.R. Rep No. 113-102 (June 7, 2013), accompanying a proposed bill 
for the National Defense Authorization Act for Fiscal Year 2014, 
contains language directing the Under Secretary of Defense for 
Acquisition, Technology, and Logistics, in coordination and 
consultation with the Under Secretary of Defense for Personnel and 
Readiness, to issue policies for implementing a standard checklist for 
services contract approval, and to the extent practicable, to model 
the policies and checklist on those already used by the Army. 

[48] GSA describes its Advantage! Website as an online shopping system 
for interagency contracts for federal agencies across the government. 

[49] GAO, Contracting Strategies: Data and Oversight Problems Hamper 
Opportunities to Leverage Value of Interagency and Enterprisewide 
Contracts, [hyperlink, http://www.gao.gov/products/GAO-10-367] 
(Washington, D.C.: Apr. 2010). 

[50] Contractor Manpower Reporting Application Version 3.6 Full User 
Guide (no date). 

[51] [hyperlink, http://www.gao.gov/products/GAO-13-491] and GAO, 
Defense Acquisitions: Further Actions Needed to Improve Accountability 
for DOD's Inventory of Contracted Services, [hyperlink, 
http://www.gao.gov/products/GAO-12-357] (Washington, D.C.: Apr. 6, 
2012). 

[52] Department of Defense Directive-Type Memorandum 09-007, 
Estimating and Comparing the Full Costs of Civilian and Military 
Manpower and Contractor Support (Apr. 3, 2013). 

[53] DOD Instruction 7041.04, Estimating and Comparing the Full Costs 
of Civilian and Active Duty Military Manpower and Contract Support 
(July 3, 2013). 

[54] GAO, GAO Cost Estimating and Assessment Guide: Best Practices for 
Developing and Managing Capital Program Costs, [hyperlink, 
http://www.gao.gov/products/GAO-09-3SP] (Washington, D.C.: March 2009). 

[55] Federal Accounting Standards Advisory Board, FASAB Handbook of 
Accounting Standards and Other Pronouncements, as Amended (Washington, 
D.C.: June 30, 2012). 

[56] Office of Management and Budget Circular A-76, Performance of 
Commercial Activities, (May 29, 2003). 

[57] For example, we reviewed Deputy Secretary of Defense Memorandum, 
In-sourcing Contracted Services--Implementation Guidance (May 28, 
2009); U.S. Army Cost Benefit Analysis Guide, 3RD Edition, (Apr. 24, 
2013); Air Force Instruction 65-501, Financial Management: Economic 
Analysis, (Aug. 29, 2011); and Naval Supply Systems Command 
Instruction 5310.10, Naval Supply Systems Command In-sourcing Policy 
(Sept. 14, 2012), among others. 

[58] The Office of Management and Budget did not provide input on the 
development or conduct an analysis of DTM 09-007 or DOD Instruction 
7041.04. However, OMB stated that it is reviewing the guidance and 
working with DOD as it considers government-wide management guidance 
on cost-comparisons. 

[59] See Center for Strategic and International Studies, A Report of 
the CSIS Defense-Industrial Group: DOD Workforce Cost Realism 
Assessment (Washington D.C.: May 2011); Project on Government 
Oversight, Bad Business: Billions of Taxpayer Dollars Wasted on Hiring 
Contractors (Washington, D.C.: Sept. 13, 2011); and Reserve Forces 
Policy Board, Eliminating Major Gaps in DOD Data on the Fully-Burdened 
and Life-Cycle Cost of Military Personnel: Cost Elements Should be 
Mandated by Policy (Washington, D.C.: Jan. 7, 2013). 

[60] DOD Instruction 7041.04 was issued on July 3, 2013. Therefore, 
for a majority of our review, DTM 09-007 was the most current guidance. 

[61] We did not meet with a small command in the Navy. We determined 
that the two small commands within the Navy were not appropriate for 
our review. One of the commands was a Reserve Command and the other 
command had classified the total number of civilian personnel. As a 
result, we selected the smallest of the medium commands for the Navy. 

[End of section] 

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