Defense Management:

Processes to Estimate and Track Equipment Reconstitution Costs Can Be Improved

GAO-05-293: Published: May 5, 2005. Publicly Released: May 5, 2005.

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The high pace of military operations in Iraq and elsewhere has generated a multibillion dollar equipment maintenance requirement that must be addressed after units return home. Upon returning from deployments, active, reserve, and National Guard units reconstitute, or restore, their equipment to a condition that enables them to conduct training and prepare for future deployments. The Department of Defense (DOD) uses a two-phased process to develop equipment reconstitution supplemental budget estimates. GAO reviewed this process for the fiscal year 2004 supplemental budget to determine (1) the extent to which the process produced reliable estimates of reconstitution requirements in the fiscal year 2004 supplemental budget, and (2) whether DOD is accurately tracking and reporting reconstitution costs.

DOD's two-phased process to develop its fiscal year 2004 equipment reconstitution cost estimates contained weaknesses that produced errors, which may result in misstatements of future-year reconstitution cost requirements. The model DOD used to estimate costs in the first phase of the process generated unreliable estimates due to two main reasons. First, the model can overstate aircraft and ship reconstitution costs because these costs are covered in two different sections of the model. As a result, the model's estimate for Air Force aircraft reconstitution was overstated by over $1 billion. Second, there is uncertainty over what maintenance requirements the model covered. The Office of the Secretary of Defense (OSD) and the services developed their requirements with the understanding that the model did not calculate all maintenance requirements. GAO learned that the model may duplicate some requirements that the services manually calculated and included in their cost estimates. Consequently, DOD cannot have confidence that its equipment reconstitution budget estimate is reliable. There are also reconstitution estimating and guidance problems associated with the second phase of the process, where the services may develop alternative estimates outside of the model. For instance, the Army failed to consider funding in its baseline budget that would be available for equipment reconstitution. In another instance, the services included requirements in their reconstitution estimates that appear to go beyond equipment reconstitution as established by OSD's guidance. Nonetheless, GAO found an accumulation of unfulfilled equipment reconstitution requirements, because OSD guidance excluded the services from requesting funds for projected battle and other expected losses. The effect of losses not recognized in OSD's supplemental budget requirements have not yet been quantified and may be significant. GAO believes these problems are creating a backlog of equipment reconstitution requirements that will eventually need to be addressed in future budgets. DOD has not accurately tracked and reported its equipment reconstitution cost because the services are unable to segregate equipment reconstitution from other maintenance requirements as required. As a result, DOD cannot accurately report the cost of equipment reconstitution and, consequently, the total cost of the global war on terror. The Air Force does not break out its equipment reconstitution obligations from other global war-on-terrorism obligations in a DOD monthly cost report because it does not have a mechanism that can track the amounts obligated on equipment reconstitution and delineate such obligations from routine maintenance. Further, Army- and Navy-reported equipment reconstitution obligations are likely overstated in the monthly report because they include other maintenance costs--such as those related to equipment used in training exercises--that do not fall within DOD's description of equipment reconstitution.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to our recommendation, the Office of the Under Secretary Defense/Comptroller (OUSD(C)) modified its annual instructions to the services regarding the services' development of GWOT supplemental requirements vis-a-vis equipment reconstitution. Specifically, the OUSD(C) instructions specified that Services are allowed to request funding for replacing equipment that has reached the end of its useful life, or is beyond economical repair.

    Recommendation: To correct the weaknesses identified in the equipment reconstitution cost estimating process the department used when developing its fiscal year 2004 supplemental budget request, the Secretary of Defense should direct the OSD comptroller to ensure that all potential equipment reconstitution requirements are considered when developing supplemental budget requests by allowing the services to include anticipated equipment losses--both operational losses and maintenance washouts--in their supplemental budgeting process.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD concurred with our recommendation and took action to implement it in OSD's call for FY 2006 supplemental requirements from the services. Specifically, OSD's requirements call delineated and defined the levels of maintenance that the services were to consider and include when preparing submissions to current and future GWOT supplemental equipment reconstitution requirements.

    Recommendation: To correct the weaknesses identified in the equipment reconstitution cost estimating process the department used when developing its fiscal year 2004 supplemental budget request, the Secretary of Defense should direct the OSD comptroller to clarify its supplemental budget guidance to the services on what types of maintenance requirements should and should not be included as equipment reconstitution when developing the supplemental budget.

    Agency Affected: Department of Defense

  3. Status: Closed - Not Implemented

    Comments: DOD did not concur with this recommendation and also stated that it did not plan to take any action regarding this recommendation.

    Recommendation: To correct the weaknesses identified in the equipment reconstitution cost estimating process the department used when developing its fiscal year 2004 supplemental budget request, the Secretary of Defense should direct the Secretary of the Army to establish a step in its supplemental estimating process to offset the estimate with the baseline budget to improve future contingency funding estimates.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: Representatives of the Department of the Air Force, the Office of the Under Secretary of Defense-Comptroller (OUSDC) and the Institute for Defense Analysis (IDA) met in fall 2005 (beginning of FY 2006) to discuss, explore, and resolve the flying hour calculation duplication existent in IDA's model that GAO identified and which formed the basis for this recommendation. As a result of that meeting, the methodology used for Air Force calculations was enhanced to better capture their requirement. While OUSD(C) did not task IDA to update USAF cost factors, IDA instead corrected the duplication systemically by changing the standard procedure used by IDA to prepare for the supplemental building process. In the months leading up to the supplemental submission, IDA now contacts the Services directly for cost factor approval, and OUSD(C) also maintains contact with the USAF analyst along with the analysts from the other Services, and reviews and stresses accuracy of supplemental cost factors.

    Recommendation: To correct the weaknesses identified in the equipment reconstitution cost estimating process the department used when developing its fiscal year 2004 supplemental budget request, the Secretary of Defense should direct the OSD comptroller to clearly establish what equipment maintenance requirements should be covered by the COST model and communicate this information to IDA to ensure that the model calculations reflect only these maintenance costs.

    Agency Affected: Department of Defense

  5. Status: Closed - Implemented

    Comments: During our review, we determined that the COST model contains an error that can result in a duplication of reconstitution cost estimates. In our report, GAO-05-293, we explained that all services support their aircraft through a flying-hour program that covers costs associated with operating aircraft, such as petroleum, oil and lubricants, consumables (supplies), and spare parts. As a result, all organizational- and intermediate-level maintenance and repair requirements are met through the flying-hour program. Since the operations cost section of the COST model already includes flying- hour program funding, the inclusion of an equation for aircraft reconstitution in the equipment reconstitution section of the model is redundant. Air Force officials told us that due to their flying-hour program, additional funding specifically addressing organizational- and intermediate-level reconstitution of aircraft was not needed. However, the Air Force's fiscal year 2004 supplemental budget request included about $1.2 billion in the equipment reconstitution section for aircraft maintenance that was also covered by the operations cost section of the COST model. According to Air Force officials, they were unaware that the equipment reconstitution section duplicated the aircraft maintenance costs that are covered in the operations cost section of the COST model. The Air Force officials told us that in developing their cost estimates for fiscal year 2004, they did not effectively eliminate the duplication discussed above. As a result of GAO bringing the duplication to their attention, Air Force budget officials eliminated the duplication by using the COST model's override function. As a result, the Air Force did not duplicate the aircraft maintenance costs for fiscal year 2005 as they had the previous year, fiscal year 2004. In total, the Air Force eliminated $464.0 million from their COST model calculations, thereby reducing their budget estimate for fiscal year 2005 by the same amount.

    Recommendation: To correct the weaknesses identified in the equipment reconstitution cost estimating process the department used when developing its fiscal year 2004 supplemental budget request, the Secretary of Defense should direct the OSD comptroller to revise its contingency operations support tool (COST) model to ensure that costs covered by the model's operating tempo cost elements are not duplicated by costs in the model's reconstitution cost elements.

    Agency Affected: Department of Defense

  6. Status: Closed - Implemented

    Comments: DOD concurred with and took action to implement our recommendation by creating new categories of costs within the GWOT reporting structure and cost accumulation processes. Specifically, DOD first revised its Financial Management Regulation (Volume 12, Chapter 23) to create a separate cost category for recording and reporting equipment reconstitution costs. The new category included breakdowns for each by the traditional three levels of equipment maintenance potentially used to reconstitute equipment. As a result, the DOD GWOT cost reports now provide insight into the funds used for equipment reconstitution.

    Recommendation: To ensure that Congress has a clear insight into the cost of equipment reconstitution, the Secretary of Defense should direct the services, in conjunction with DFAS, to develop comprehensive and consistent methods for tracking and reporting equipment reconstitution obligations. This includes (1) developing a mechanism within the Air Force for identifying, accumulating, and reporting its equipment reconstitution obligations; and (2) refining the Navy and Army processes for identifying obligations that are incurred for equipment reconstitution.

    Agency Affected: Department of Defense

 

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