Navy Depot Maintenance:

Cost and Savings Issues Related to Privatizing-in-Place at the Louisville, Kentucky, Depot

NSIAD-96-202: Published: Sep 18, 1996. Publicly Released: Sep 18, 1996.

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David R. Warren
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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) plans to privatize-in-place the Navy's Louisville, Kentucky, depot maintenance workload, focusing on the: (1) impact on excess depot capacity and operating costs at remaining industrial facilities; (2) cost-effectiveness of this planned privatization-in-place option; and (3) statutory requirements affecting transfers of depot maintenance workloads to the private sector.

GAO found that: (1) privatization-in-place is not cost-effective given the excess capacity in the DOD depot maintenance system; (2) the Navy's privatization plan for the Louisville depot will not reduce excess capacity at the remaining depots or in the private sector and may be more costly than transferring the work to other depots; (3) DOD pays for the excess capacity whether it is in the public or private sector; (4) privatizing the facility may not comply with statutory requirements for public-private competitions, since the Navy plans to use noncompetitive procurement procedures; (5) the Navy overstated the cost of transferring the Louisville workload to other depots by at least $66 million and generally assumed that privatization would save 20 percent, which is not likely to be realized; (6) the Navy's projection is based on conditions that are not relevant for most depot maintenance workloads and does not reflect the cost of excess capacity in the public sector; (7) the Navy did not assess the risk associated with contracting the depot's core workload, since the majority of the workload is mission essential; and (8) in July 1996, the Navy awarded contracts to Hughes Missile Systems Company and United Defense Limited Partnership for work in progress, but it did not verify that the privatization plan conformed with statutory requirements for public-private competition.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Defense Depot Maintenance Council (DDMC) tasked the services to recompute core capability requirements. A risk assessment is a necessary step in that process. Since the Navy had not accomplished this, the Deputy Under Secretary of Defense (Logistics) issued a follow-up letter to the Navy in July 1997. In late 1998, the services submitted recomputed core capability requirements and risk assessments to the DDMC. According to DDMC official, the Under Secretary of Defense for Acquisition and Technology did not approve or disapprove the services submissions, but instead on August 10, 1999 tasked the services to again recompute core requirements for submission by December 23, 1999. While the services have been recomputing core requirements, the Navy has exercised the Louisville workload contract options.

    Recommendation: The Secretary of Defense should direct the Secretary of the Navy, before exercising any contract options for the Louisville depot maintenance workloads, to ensure military depots have the required capability needed to sustain core depot repair and maintenance capability, and adequately document a risk assessment for privatizing mission-essential work being considered for privatization.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: OSD required the Navy to conduct a cost analysis before exercising an option on the Louisville contract. Navy completed the its analysis before awarding the UDLP and Hughes contracts. The Navy's analysis recognized that transferring the workloads to underutilized facilities would reduce the overhead costs for each production unit. However, the Navy's analysis applied per-unit savings only to the workloads transferred, and not to existing workloads at receiving locations. In GAO's Louisville follow-up report (NSIAD-97-52), it pointed out the deficiency in the Navy's analysis and recommended that future cost analyses include the total cost and savings associated with overhead cost reduction that would be realized at underutilized DOD and contractor facilities for workloads already produced at these locations.

    Recommendation: The Secretary of Defense should direct the Secretary of the Navy, before exercising any contract options for the Louisville depot maintenance workloads, to, at a minimum, revise the Navy's cost analysis to reflect the annual cost savings from workload transfers on the workloads currently performed at those locations by spreading the fixed costs over the increased workload.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: DOD reports that existing guidance in the Federal Acquisition Regulation provides that before exercising a contract option, contracting officers must determine that exercise of the option is the most advantageous method of filling government needs, price and other factors considered. This includes, where applicable, use of competitive procedures to determine the most advantageous offer.

    Recommendation: The Secretary of Defense should direct the Secretary of the Navy, before exercising any contract options for the Louisville depot maintenance workloads, to use competitive procedures, where applicable, to ensure the cost-effectiveness of the Louisville privatization-in-place initiative.

    Agency Affected: Department of Defense


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