Defense Management:

DOD Needs to Demonstrate That Performance-Based Logistics Contracts Are Achieving Expected Benefits

GAO-05-966: Published: Sep 9, 2005. Publicly Released: Sep 9, 2005.

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The Department of Defense (DOD) contracts with private sector companies to perform depot maintenance of weapon systems using performance-based logistics--that is, purchasing a defined level of performance over a defined time period at a fixed cost to the government. After implementing such contracts, program offices are to validate their efficacy using cost and performance data; DOD cannot otherwise ensure cost savings and improved performance are being achieved through the use of performance-based logistics. GAO was asked to review the implementation of performance-based logistics to determine whether DOD could demonstrate cost savings and improved responsiveness from these arrangements. In conducting its review, GAO analyzed the implementation of performance-based logistics arrangements for 15 weapon system programs.

DOD program offices could not demonstrate that they have achieved cost savings or performance improvements through the use of performance-based logistics arrangements. Although DOD guidance on implementing these arrangements states program offices should update their business case analysis based on actual cost and performance data, only 1 of the 15 program offices included in GAO's review had performed such an update consistent with DOD guidance. In the single case where the program office had updated its business case analysis, it determined that the performance-based logistics contract did not result in expected cost savings and the weapon system did not meet established performance requirements. In general, program offices had not updated their business case analysis after entering into a performance-based logistics contract because they assumed that the costs for weapon system maintenance incurred under a fixed-price performance-based logistics contract would always be lower than costs under a more traditional contracting approach and because they lacked reliable cost and performance data needed to validate assumptions used. Furthermore, the Office of the Secretary of Defense has not established procedures to monitor program offices to ensure they follow guidance and update the business case analysis. Additionally, program officials said because of limitations in their own information systems, they typically relied on cost and performance data generated by the contractors' information systems to monitor performance-based logistics contracts. The program offices, however, had not determined whether contractor-provided data were sufficiently reliable to update their business case analysis. Although the Defense Contract Management Agency and the Defense Contract Audit Agency are most commonly used to monitor higher risk contracts, such as cost plus contracts, they are potential resources available to assist program offices in monitoring fixed-price performance-based contracts. In doing so, these DOD agencies have the capability to verify the reliability of contractors' information systems and collect cost and performance data needed to update their business case analysis. Until program offices follow DOD's guidance and update their business case analysis based on reliable cost and performance data, DOD cannot evaluate the extent to which performance-based logistics arrangements are achieving expected benefits and being effectively implemented within DOD.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: DOD concurred with this recommendation and agreed to work with the military services to develop tracking procedures. While DOD took steps to improve sustainment metrics, which could produce improved performance and cost data for updating business case analyses following implementation of a performance-based logistics arrangement, the department did not develop procedures to track whether program offices that enter into these arrangements validate their business case decisions consistent with DOD guidance. During audit work performed for a follow-up review, we found that only the Army had developed a tracking system and a centralized oversight process to monitor the status of PBL arrangements, including dates for initial and subsequent business case analyses. The remaining services had not established oversight responsibilities to ensure that business case decisions were validated. As a result, in December 2008 we again reported that many of the performance-based logistics arrangements we reviewed had not updated their business case analyses to validate the approach taken and to support future plans in accordance with DOD and service policies and guidance (GAO-09-41). The report included recommendations for DOD to issue guidance clarifying when business case analyses should be updated and for the services to revise guidance to implement internal controls to ensure that business case analyses are prepared and updated.

    Recommendation: To demonstrate that performance-based logistics arrangements are resulting in reduced costs and increased performance, and to improve oversight of performance-based logistics contracts, the Secretary of Defense should direct the Under Secretary of Defense (Acquisition, Technology and Logistics) to reaffirm DOD guidance that program offices update their business case analyses following implementation of a performance-based logistics arrangement and develop procedures, in conjunction with the military services, to track whether program offices that enter into these arrangements validate their business case decisions consistent with DOD guidance.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD issued new guidance and requirements to address this recommendation. First, DOD revised chapter 5 of the Defense Acquisition Guidebook, which now states that the reliability of contractor cost and performance data should be verified during monitoring of performance-based logistics arrangements. The new guidance also states that increased use of the Defense Contract Management Agency and Defense Contract Audit Agency in overseeing these arrangements may be considered. Second, DOD took steps to improve life-cycle sustainment metrics. DOD expects these metrics will be used in monitoring system performance in terms of availability and reliability and ownership costs. Specifically, in May 2007, DOD revised its JCIDS instruction and manual (CJCSI 3170-.01F and CJCSM 3170.01C) establishing a mandatory sustainment key performance parameter and ownership cost key system attribute as metrics to drive future sustainment decisions, including business case analyses.

    Recommendation: To demonstrate that performance-based logistics arrangements are resulting in reduced costs and increased performance, and to improve oversight of performance-based logistics contracts, the Secretary of Defense should direct the Under Secretary of Defense (Acquisition, Technology and Logistics) to direct program offices to improve their monitoring of performance-based logistics arrangements by verifying the reliability of contractor cost and performance data. The program offices may wish to increase the role of the Defense Contract Management Agency and the Defense Contract Audit Agency in overseeing performance-based logistics contracts.

    Agency Affected: Department of Defense

 

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