Report No. DODIG-2012-102 June 18, 2012 Better Cost-Control Measures Are Needed on the Army's Cost-Reimbursable Services Contract for Logistics Support of Stryker Vehicles Additional Copies To obtain additional copies of this report, visit the Web site of the Department of Defense Inspector General at http://www.dodig.mil/audit/reports or contact the Secondary Reports Distribution Unit at (703) 604-8937 (DSN 664-8937) or fax (571) 372-7469 Suggestions for Audits To suggest or request audits, contact the Office of the Deputy Inspector General for Auditing by phone (703) 604-9142 (DSN 664-9142), by fax (571) 372-7469, or by mail: Department of Defense Office of Inspector General Office of the Deputy Inspector General for Auditing Attn: Audit Suggestions/13F25-04 4800 Mark Center Drive Alexandria, VA 22350-1500 Acronyms AAA Army Audit Agency ACC Army Contracting Command ASA(ALT) Assistant Secretary of the Army for Acquisition, Logistics, and Technology AWCF Army Working Capital Fund BCA Business Case Analysis CAP Contractor Acquired Property CLS Contractor Logistics Support DFARS/PGI Defense Federal Acquisition Regulation Supplement, Procedure, Guidance, Instruction DVH Double V-Hull FAR Federal Acquisition Regulation OPTEMPO Operational Tempo ORR Operational Readiness Rate PBL Performance-Based Logistics PEO Program Executive Officer PMO Project Management Office TLCSM Total Life-Cycle Systems Management USD(AT&L) Under Secretary of Defense for Acquisition, Technology, and Logistics U.S.C. United States Code INSPECTOR GENERAL DEPARTMENT OF DEFENSE 4800 MARK CENTER DRIVE ALEXANDRIA, VIRGINIA 22350-1500 June 18,2012 MEMORANDUM FOR UNDER SECRETARY OF DEFENSE FOR ACQUISITION, TECHNOLOGY, AND LOGISTICS AUDITOR GENERAL DEPARTMENT OF THE ARMY SUBJECT: Better Cost-Control Measures Are Needed on the Army's Cost-Reimbursable Services Contract for Logistics Support of Stryker Vehicles (Report No. DODIG-20 12-1 02) We are providing this report for information and use. The Army's cost-reimbursable services contract for logistics support of Stryker vehicles lacked adequate cost-control metrics and a tangible deliverable. The contractor was authorized to spend about $1.453 billion, but we calculated the operational support costs for Stryker vehicles at about $1.117 billion for 5 years, resulting in about $335.9 million that the contractor used to accumulate inventory that could have been put to better use. As a result of the audit, the Project Manager for Stryker Brigade Combat Team identified $152.4 million in excess inventory that will be used to reduce Program Year 2011 and Program Year 2012 contract requirements. This report is the first of three reports on the effectiveness of the contractor logistics support strategy for the Stryker family of vehicles. We considered management comments on a draft of this report when preparing the final report. The Director, Defense Procurement and Acquisition Policy; Assistant Secretary of Defense for Logistics and Materiel Readiness; Assistant Secretary of the Army for Acquisition, Logistics, and Teclll1010gy; Program Executive Officer Ground Combat Systems; and Executive Director, Army Contracting Command comments conformed to the requirements of DoD Directive 7650.3; therefore, additional comments are not required. We appreciate the cOUltesies extended to the staff. Please direct questions to Mr. Helll'Y F. Kleinknecht at (703) 604-9324 (DSN 664-9324). ~D.!t£I:~'!'~ Assistant Inspector General Acquisition and Contract Management Report No. DODIG-2012-102 (Project No. D2011-D000CH-0032.000) June 18, 2012 Better Cost-Control Measures Are Needed on the Army’s Cost-Reimbursable Services Contract for Logistics Support of Stryker Vehicles • establish the cost-reimbursable contract What We Did as one of the basic contract forms: either We evaluated the effectiveness of the contractor the completion-form contract in which logistics support strategy for the Stryker family the contractor is required to deliver a of vehicles. The Project Management Office for specified, definitive end product or the Stryker Brigade Combat Team (PMO Stryker) term-form contract in which the entered into the contract with General Dynamics contractor is required to provide a Land Systems with a singular focus to achieve specified level of effort for a stated an operational readiness rate (ORR) goal of period of time; and 90 percent and actually achieved an ORR in excess of 96 percent. This report is the first of • establish an effective means to measure three reports and addresses performance metrics operational costs and ensure that the and contract type; subsequent reports will level of operational funding was tied to address the contract funding procedures, the actual workload required to sustain contractor billings, and controls over the Stryker vehicle, but instead, used Government property being managed by the estimates made years earlier. contractor. What We Found Consequently, the Stryker contractor logistics support contract had no tangible deliverable; PMO Stryker and the Army Contracting neither complied with nor met the intent of DoD Command (ACC)-Warren contracting officer performance-based logistics guidance; and did did not implement adequate cost-control not meet Federal Acquisition Regulation procedures on the cost-reimbursable services requirements for a cost-reimbursable contract. contract valued at about $1.5 billion from In addition, the Army had no means to measure March 2007 to February 2012 because they did the efficiency of the contractor’s cost not: performance or actual cost overruns or • adequately define performance-based underruns in relation to the fixed fee. Also, the contract requirements in clear, specific, sole focus on operational readiness created an and objective terms with measurable incentive for the contractor to spend all outcomes. The contract included a available funds on Army inventory, valued by metric for availability (90-percent ORR), General Dynamics at about $676.2 million, but did not include essential metrics resulting in little, if any, cost risk for the relating to cost-per-unit usage (for contractor or incentive to control cost. example, miles driven) and logistics footprint (that is, dollars in inventory); The contractor was authorized to spend about $1.453 billion on the contract, but we calculated the operational support costs for Stryker vehicles at about $1.117 billion for the first i Report No. DODIG-2012-102 (Project No. D2011-D000CH-0032.000) June 18, 2012 5 years, resulting in about $335.9 million used Additionally, the Director, Defense Procurement to accumulate inventory that could have been and Acquisition Policy; Assistant Secretary of put to better use. As a result of the audit, PMO Defense for Logistics and Materiel Readiness; Stryker identified $152.4 million in excess and the Assistant Secretary of the Army for inventory that will be used to reduce Program Acquisition, Logistics, and Technology need to Year 2011 (October 2011 to February 2012) and establish a multifunctional team to support PMO Program Year 2012 (March 2012 to Stryker and ACC officials in negotiating the February 2013) contract requirements. next Stryker logistics support contract scheduled for award in June 2013. What We Recommend Among other recommendations, the Program Management Comments and Executive Officer Ground Combat Systems with the support of the Executive Director, ACC, Our Response should require PMO Stryker to establish and Management comments were responsive to the monitor appropriate cost and inventory control recommendations, and management is taking metrics, define contract remedies that include action to address cost-control measures, both positive and negative fee measures related contract-type, and operational support funding to inventory turns and inventory accuracy issues. PMO Stryker is performing a business metrics, use one of the basic contract forms case analysis to determine whether PBL is the (either term or completion), and define a appropriate strategy and cost-reimbursable is the tangible deliverable. Further, the Program appropriate contract type to execute logistics Executive Officer Ground Combat Systems support of Stryker vehicles. Additionally, PMO needs to continue to review operational support Stryker will continue to monitor operational costs for Stryker vehicles and determine support costs and consider currently available whether current funding levels are appropriate. inventory to satisfy future requirements. Please We also recommend converting the high-risk, see the recommendations table on page iii. cost-reimbursable contract or portions of the contract to a lower risk, firm-fixed-price contract. Figure 1. Stryker Vehicle, Mobile Gun System Source: www.sbct.army.mil ii Report No. DODIG-2012-102 (Project No. D2011-D000CH-0032.000) June 18, 2012 Recommendations Table Management Recommendations No Additional Comments Requiring Comment Required Director, Defense Procurement 5 and Acquisition Policy Assistant Secretary of Defense for Logistics and Materiel 5 Readiness Assistant Secretary of the Army for Acquisition, Logistics, and 2, 5 Technology Program Executive Officer 1, 3 Ground Combat Systems Executive Director, Army 4 Contracting Command-Warren iii Table of Contents Introduction 1 Objectives 1 Background 1 Review of Internal Controls 7 Finding. Inadequate Cost Controls on the Cost-Reimbursable Services Contract for Logistics Support of Stryker Vehicles 8 Performance-Based Contract Did Not Adequately Define Requirements With Measurable Outcomes