GAO-11-318SP: Defense: More comprehensive and complete cost data can help DOD improve the cost-effectiveness of sustaining weapon systems

Defense

More comprehensive and complete cost data can help DOD improve the cost-effectiveness of sustaining weapon systems

Why Area Is Important

The Department of Defense (DOD) spends billions of dollars each year to sustain its weapon systems. After a weapon system is developed, tested, and produced, it enters the operating and support (O&S) phase of its life cycle. O&S costs can account for 70 percent or more of the total ownership costs over a system's lifetime and include the direct and indirect costs for spare parts, fuel, maintenance, personnel, support facilities, and training. GAO's work has shown that weapon systems may experience O&S cost growth after they are acquired due to various factors such as lower than expected reliability, obsolete replacement parts, and increased usage. If agency budgets tighten, the continued burden of O&S cost growth could affect DOD's ability to afford other priorities.

In an effort to improve weapon system support and reduce costs in the late 1990s, DOD began to use a support strategy known as performance-based logistics (PBL). Unlike more traditional support arrangements, which involve the purchase of individual support elements (such as parts), PBL arrangements involve the purchase of performance outcomes such as weapon system availability.

What GAO Found

DOD can improve the cost-effectiveness of sustaining individual weapon systems, potentially saving billions of dollars, by enhancing its effort to collect, retain, and analyze more comprehensive and accurate O&S cost data, including cost data for PBL arrangements. In the absence of key information on O&S costs for its major weapon systems, DOD may not be well equipped to analyze, manage, and reduce these costs. DOD estimated that costs for supporting its weapon systems amounted to at least $132 billion in fiscal year 2008, but the department does not know total O&S costs associated with its systems.

GAO reviewed seven aviation weapon systems and reported in 2010 that DOD lacked life-cycle O&S cost estimates and complete historical data on actual O&S costs, which are needed to effectively track and analyze the growth of these costs. Life-cycle cost estimates are developed to support decisions at key acquisition milestones and, under GAO's guidance for cost-estimating best practices, the thorough documentation and retention of these estimates are also essential for use in preparing future cost estimates. However, current DOD acquisition and cost-estimating guidance does not specifically address requirements for the retention of life-cycle O&S cost estimates and supporting documentation.

Additionally, GAO found problems with incomplete and inaccurate data in the services' cost visibility data systems designated as the authoritative sources for historical data on actual O&S costs. DOD has issued guidance that includes a recommendation regarding the types of historical data on actual O&S costs that the services could collect for their weapon systems, but this suggestion is not mandatory. Although O&S costs for the seven systems GAO reviewed had grown, it was unclear how much of the growth was unexpected without more complete cost information.

While DOD has moved toward PBL as its preferred strategy to support weapon systems, GAO reviewed PBL arrangements for selected weapon systems in 2008 and found that the ability of these arrangements to reduce costs remained unclear. According to a department assessment in 2009, about 20 percent of weapon systems were being supported under PBL arrangements. GAO found that many DOD program offices that implemented PBL arrangements lack detailed support cost data. Additionally, various other factors—such as the lack of business case analyses to compare the costs and benefits of PBL against other weapon system support options—further limited an evaluation of the costs of this support strategy. At the time GAO conducted its review, it found that neither DOD nor the services required detailed cost reporting for PBL arrangements. Also, GAO reported that business case analyses were inconsistently used for PBL decision making because DOD did not require that the analyses be conducted and updated or provide specific criteria to guide their development.

Actions Needed

DOD currently has a number of initiatives to improve weapon system support and better manage and reduce weapon system O&S costs. For example, DOD has indicated its intent to focus more attention on O&S cost requirements and weapon system reliability during the acquisition process. DOD is also working to implement the recommendations made in an internal November 2009 assessment of weapon system product support. The assessment identified weaknesses in O&S cost management and recommended a number of corrective actions, such as (1) establishing an O&S affordability requirement, including linking O&S budgets to readiness; (2) developing and implementing an affordability process with all DOD stakeholders (such as the financial and program management communities); and (3) increasing the visibility of O&S costs and their drivers across the supply chain. Regarding PBL, the Air Force now requires program managers to conduct business case analyses, thereby comparing the costs and benefits of PBL against other support options, and Air Force interim guidance, issued in 2009, also directs detailed cost reporting for contractor logistics support arrangements, which often include PBL arrangements. DOD also included a broad cost reporting requirement for certain programs in acquisition guidance and is developing additional guidance for the collection of more comprehensive cost data from PBL support providers. However, this guidance and DOD's other initiatives are either not yet implemented or too recent for GAO to evaluate their impact.

While DOD has taken some positive steps, more remains to be done to improve the collection, retention, and analysis of O&S cost data—steps that would significantly enhance DOD's ability to manage and potentially reduce O&S costs. GAO recommended in July 2010 that the department take the following actions:

  • Revise guidance to specifically require the retention of life-cycle O&S cost estimates for major weapon systems, as well as the supporting documentation used to develop these estimates. These estimates and supporting documentation, if retained, could provide a benchmark for subsequent cost analysis of the weapon systems, enable identification of major cost drivers, and aid in improving cost estimates for future systems.
  • Identify the cost elements needed to track and assess actual O&S costs for effective cost analysis and program management for major weapon systems, and require the collection of these elements in the services' O&S cost visibility data systems. Collecting complete data would put the services in a good position to track costs over time, compare costs with previous estimates, and determine whether and why cost growth is occurring.
  • Require the services to periodically update life-cycle O&S cost estimates for major weapon systems after these systems are acquired, which would enhance DOD's ability to compare actual performance to planned or expected results.

DOD concurred or partially concurred with these and other related recommendations, noting that the department is committed to strengthening its O&S data availability as well as its use of O&S estimates in the governance process for major defense acquisition programs.

With regard to PBL, GAO recommended in December 2008 that the department (1) require program offices to collect and report detailed support cost data for their PBL arrangements; (2) revise guidance to require the development of PBL business case analyses to better support the decision-making process on the use of these arrangements; and (3) define the elements to be included in these analyses so they are comprehensive and sound.

These actions would generate more detailed cost data and improve the analyses of PBL arrangements to determine if they are the most cost-effective approach to supporting weapon systems. DOD concurred or partially concurred with these and other related recommendations but has not yet implemented all corrective actions.

The lack of complete and reliable O&S cost data makes it difficult to determine the full extent of potential savings on weapon system O&S costs. However, based on DOD's estimate that it spent at least $132 billion in fiscal year 2008 on weapon system support alone, for every 1 percent reduction in costs, there would be an annual cost savings of $1.3 billion. As an illustration of the potential for significant cost-savings, a goal of reducing support costs by 5 percent over a period of time would translate to annual cost savings of approximately $6.6 billion. More ambitious O&S cost reduction goals would potentially result in greater cost savings.

Framework for Analysis

To assess the potential for DOD to achieve savings by reducing its O&S costs, GAO relied on the prior work under the "Related GAO Products" tab.

Area Contact

For additional information about this area, contact Jack E. Edwards at (202) 512-8246 or edwardsj@gao.gov.