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Contingency Operations: Defense Cost and Funding Issues (Briefing Report, 03/15/96, GAO/NSIAD-96-121BR).

Pursuant to a congressional request, GAO provided information on the
costs of Department of Defense (DOD) contingency operations in fiscal
year (FY) 1995, focusing on the: (1) extent to which an emergency
supplemental appropriation covered those costs; (2) impact of funding
shortages or overages on the services; and (3) accuracy of DOD and
service methods for estimating such costs.

GAO found that: (1) DOD and the services reported about $2.223 billion
in contingency operations costs for FY 1995, primarily for operations in
southwest Asia, Haiti, Cuba, and the former Yugoslavia; (2) the reported
costs were $12 million less than the amount Congress provided through an
emergency supplemental appropriation of $2.235 billion; (3) the Army and
the Navy had to absorb their respective $75-million and $34-million
shortfalls between what Congress provided and their actual costs by
making reductions in other areas; (4) other DOD agencies collectively
reported a shortfall of about $3 million; (5) the Marine Corps and the
Air Force spent their respective $15 million and $110 million in excess
funding on facility repairs, maintenance, and improvements; (6) reported
costs of contingency operations surged in September 1995 to about 4
times more than the previous month's costs; (7) estimating costs of
contingency operations is difficult because it involves making
assumptions about such factors as force requirements, operation
duration, logistical operations, and costs; and (8) although DOD and the
services can make some improvements to their models for developing costs
of potential force structure changes to aid them in estimating the costs
of contingency operations, such estimations will continue to be inexact
and require adjustments.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-96-121BR
     TITLE:  Contingency Operations: Defense Cost and Funding Issues
      DATE:  03/15/96
   SUBJECT:  Defense contingency planning
             Future budget projections
             Budget surplus
             Cost overruns
             Supplemental appropriations
             Military operations
             Developing countries
             Statistical methods
             Funds management
IDENTIFIER:  Bosnia
             Haiti
             Asia
             Yugoslavia
             Somalia
             Cuba
             Korea
             DOD Operation Southern Watch
             Iraq
             Army Logistics Civil Augmentation Program
             DOD Operation Vigilant Warrior
             
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Cover
================================================================ COVER


Briefing Report to Congressional Requesters

March 1996

CONTINGENCY OPERATIONS - DEFENSE
COST AND FUNDING ISSUES

GAO/NSIAD-96-121BR

Contingency Operations

(701081)


Abbreviations
=============================================================== ABBREV

  DOD - Department of Defense
  OMB - Office of Management and Budget
  O&M - operation and maintenance
  LOGCAP - Logistics Civil Augmentation Plan

Letter
=============================================================== LETTER


B-271388

March 15, 1996

The Honorable Strom Thurmond
Chairman
Committee on Armed Services
United States Senate

The Honorable Floyd D.  Spence
Chairman
Committee on National Security
House of Representatives

The Department of Defense (DOD) participated in contingency
operations in several places during fiscal year 1995, including
Haiti, Southwest Asia, and the former Yugoslavia.  To help cover the
incremental costs\1 of these operations, Congress provided DOD with a
supplemental appropriation.  As requested, we are providing
information on (1) the extent that the supplemental appropriation
fully covered DOD's reported incremental costs and the impacts on the
services from any funding shortages or overages and (2) the accuracy
of the methods of estimating incremental costs in comparison to
actual costs and potential improvements to better estimate costs.  We
plan to further examine DOD's reported fiscal year 1995 costs, as
explained below, and will provide a report on our findings. 


--------------------
\1 As used in this report, incremental costs are those costs that
would not have been incurred except for the operation.  This is the
same definition contained in the Omnibus Budget and Reconciliation
Act of 1990 (P.L.  101-508). 


   BACKGROUND
------------------------------------------------------------ Letter :1

DOD received appropriations of $253 billion for fiscal year 1995, of
which $92 billion was for operation and maintenance (O&M).  Through
fiscal year 1996, DOD's annual appropriations have not included funds
for possible contingency operations.  DOD has not budgeted for the
incremental costs of military operations or contingencies.  It has
budgeted to be ready to conduct such operations. 

When the services have had to conduct these operations, the planned
budget execution cycle was disrupted.  DOD then had to absorb the
incremental costs of these operations, which were mostly O&M items,
within its existing appropriations or seek supplemental
appropriations.\2

In the Emergency Supplemental Appropriations and Rescissions for the
DOD to Preserve and Enhance Military Readiness Act of 1995 (P.L. 
104-6), Congress in April 1995 provided DOD $2,235 million for
incremental costs associated with ongoing operations in a variety of
locations, including Somalia, Rwanda, the former Yugoslavia, Haiti,
Cuba, Southwest Asia, and Korea. 

Contingency operations begin when the President decides to commit
U.S.  military forces to respond to developing world conditions that
he judges affect U.S.  interests.  Some of these operations carry
over from one year to the next.  For new operations, DOD's requests
for supplemental funds are based on cost estimates that are developed
before the actual deployment of military forces or early in the
deployment.  Developing the estimate involves (1) making assumptions
about a variety of factors such as the operation's expected duration
and (2) costing out the assumed requirements, using standard cost
factors that are in turn based on historical costs and, where there
are no cost factors, military judgment.  For existing operations, DOD
projects costs based on costs incurred in the previous year unless it
expects an operation to change in size, scope, or duration. 


--------------------
\2 The Air Force has included funds in its military personnel
appropriation account for the payroll cost of reserve volunteers
participating in contingency operations. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

DOD reported fiscal year 1995 contingency operations-related
incremental costs of $2,223 million.  While DOD ended the fiscal year
with supplemental funding of $12 million above its reported
incremental costs, some of the services and DOD agencies had reported
costs that were in excess of their portion of the supplemental
appropriation while other services and DOD agencies reported costs
that were below their portion of the supplemental appropriation. 

The Air Force, the Marine Corps, the Defense Intelligence Agency, and
the U.S.  Special Operations Commmand collectively received fiscal
year 1995 supplemental funding of $133 million in excess of their
reported incremental costs for contingency operations.  The Air Force
and the Marine Corps used the excess funding for a variety of
otherwise unfunded operational needs, such as runway repairs (Air
Force) and equipment maintenance (Marine Corps).  The Army, the Navy,
the Defense Health Program, and the Defense Mapping Agency, on the
other hand, collectively reported costs that exceeded supplemental
funding by $120 million.\3 Army officials believed that the Army
covered its funding shortfall by reductions in areas such as training
and travel.  The Navy absorbed its shortfall by realigning funding
from lower priority programs. 

Through August 1995, DOD had reported costs of $1.9 billion. 
Projecting August costs to September, we estimate that had September
costs approximated August costs, DOD's full fiscal year 1995 reported
costs would have been $266 million below appropriated funding. 
However, reported September costs were about 4 times more than the
costs of the previous month and over $120 million more than the sum
of the prior 3 months--June through August.  We are continuing to
review the September costs to determine the reasons for this surge. 

Accurately estimating the cost of contingency operations,
particularly those involving uncertain situations such as the one in
Bosnia, is difficult.  DOD has to make judgments about a variety of
factors, such as the duration of operations, before operations begin. 
Events, however, may differ from the assumptions.  For example, in
the case of Vigilant Warrior, the deployment of military forces to
Southwest Asia in response to Iraqi troop movements, DOD originally
estimated that the operation would cost $462 million in fiscal year
1995.  However, the operation had reported costs that were about $200
million below the estimate because the operation concluded sooner
than expected as the Iraqis pulled their troops back.  In costing out
its assumptions, one of the services, the Army, uses a mathematical
model to some extent.  Because the model was not designed for
contingency operations, it has some limitations, such as the lack of
worldwide transportation rates, and the data are sometimes up to 3.5
years old. 

While some improvements can be made to estimating methodologies, cost
estimates, by their inherent nature, will often be inexact. 
Therefore, it will often be difficult for Congress to know how much
funding it should authorize for contingency operations.  There are
steps Congress can take, however, to deal with the uncertainty. 


--------------------
\3 The differences between the reported incremental costs and funding
do not add due to rounding. 


   MATTERS FOR CONGRESSIONAL
   CONSIDERATION
------------------------------------------------------------ Letter :3

If Congress does not want emergency supplemental funds authorized and
appropriated for contingency operations to be spent for other
purposes, it may want to clearly specify in supplemental
appropriation legislation that supplemental funds provided for
contingency operations may only be used for (1) the expenses incurred
in support of contingency operations and (2) the reimbursement of
accounts initially utilized to fund those operations.  In instances
where initial funding proves to be inadequate and Congress considers
providing further funding, it may also wish to require DOD to
reprogram or transfer excess funds among the services if some
services have costs below their funded level while others have costs
above it before providing additional funds. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :4

To analyze DOD's incremental costs and funding for contingency
operations, we compared its reported incremental costs to approved
supplemental funding.  To do this, we reviewed DOD's contingency
operations cost reports, supplemental funding legislation, and DOD
documents distributing funding to the military services and other DOD
agencies.  We also interviewed officials in DOD, each of the service
headquarters, and selected major commands. 

To obtain information on the impact of funding shortfalls and
overages, we reviewed service documents and met with officials in the
military services, including selected major commands.  We also
discussed these matters with officials from the Office of the
Secretary of Defense. 

To obtain information on the methodology for estimating costs, we
reviewed service documents and interviewed relevant officials in DOD,
each service headquarters, and selected major commands.  We discussed
the kinds of assumptions that must be made in developing estimates
and how these assumptions are costed out.  Where models were used for
costing, we discussed the primary use of these models and their
adaptability for costing contingency operations.  We focused our work
on the Army's use of models because it makes the most use of models
in estimating contingency costs. 

We have previously reported that when considering the cost of
operations it should be recognized that DOD's financial systems
cannot reliably determine costs.  Systems are classified as high risk
and cannot easily capture actual incremental costs.  Only the total
obligations are captured by the accounting systems.  The services use
various management information systems to identify incremental
obligations and to estimate costs. 

We performed our work between January and March 1996 in accordance
with generally accepted government auditing standards.  We reviewed
the information in this briefing report with DOD officials and made
changes where appropriate. 


---------------------------------------------------------- Letter :4.1

We are providing copies of this report to the Chairmen and Ranking
Minority Members of the House and Senate Committees on Appropriations
and the Ranking Minority Members of the Senate Committee on Armed
Services and the House Committee on National Security.  We are also
sending copies to the Secretaries of Defense, the Army, the Air
Force, and the Navy and the Director, Office of Management and
Budget.  Copies will be made available to others upon request. 

If you or your staff have any questions about this report, please
contact me at (202) 512-3504.  The major contributors to this report
are listed in appendix I. 

Richard Davis
Director, National Security
 Analysis


BACKGROUND
============================================================ Chapter I


   REPORTED INCREMENETAL COSTS FOR
   FISCAL YEAR 1995 CONTINGENCY
   OPERATIONS
---------------------------------------------------------- Chapter I:1



   (See figure in printed
   edition.)


The Secretary of Defense's 1995 Annual Report to the President and
the Congress describes contingency operations as military operations
that go beyond the routine deployment or stationing of U.S.  forces
abroad but fall short of large-scale theater warfare.  U.S.  military
forces participated in several contingency operations during fiscal
year 1995.  These operations included (1) the activities in support
of United Nations peace operations in Haiti, Southwest Asia, and the
former Yugoslavia; (2) the increased deployment of military
capability to South Korea in response to heightened tensions; (3) the
deployment of additional military forces to Kuwait and Saudi Arabia
in response to the threat of renewed Iraqi aggression against Kuwait;
and (4) the enforcement of a revised U.S.  policy designed to prevent
Cuban migrants from reaching the United States.  The map shows where
these operations occurred and the Department of Defense's (DOD)
reported incremental costs for each operation. 

Most of DOD's reported incremental costs were for operations in four
areas--Southwest Asia, Haiti, Cuba, and the former Yugoslavia.  These
costs totaled about $2 billion, or 92 percent of DOD's total reported
incremental costs.  Within Southwest Asia, DOD participated in
operations to (1) enforce United Nations sanctions against Iraq, (2)
enforce the no-fly zone over both northern and southern Iraq, and (3)
provide humanitarian relief to the population of northern Iraq. 


COST AND FUNDING
=========================================================== Chapter II


   SUMMARY OF INCREMENTAL COSTS
   AND FUNDING DURING FISCAL YEAR
   1995
--------------------------------------------------------- Chapter II:1



   (See figure in printed
   edition.)


In April 1995, Congress provided DOD with an emergency supplemental
appropriation of $2,235 million to fund contingency operations
occurring in fiscal year 1995.  The vast majority--91 percent--of the
appropriation was for operation and maintenance (O&M), which funds
the operating costs of a deployment, such as transportation and
contractor support.  The balance of the appropriation was for
military personnel accounts, which fund the cost of incremental pay,
such as imminent danger pay.  Through the end of fiscal year 1995,
DOD reported about $2,223 million for contingency operations-related
incremental costs.  Therefore, DOD ended the fiscal year with
supplemental funding of $12 million above its reported incremental
costs.  Some of the services and other DOD agencies, however, had
reported costs that were in excess of their portion of the
supplemental appropriation, while other services and DOD agencies
reported costs that were below their share of the supplemental
appropriation. 

Congress appropriates funds to the military services and other DOD
components by appropriation accounts.  Reprogramming large sums
within an appropriation requires congressional approval. 
Transferring funds across appropriations accounts requires statutory
authority.  In comparing reported costs with funding, it is necessary
to examine not only the total appropriation but also its individual
components.  The overages and underages we found in total and by
service and appropriation account are discussed in more detail later. 


   ARMY INCREMENTAL COSTS AND
   FUNDING DURING FISCAL YEAR 1995
--------------------------------------------------------- Chapter II:2



   (See figure in printed
   edition.)

\a Totals do not add due to rounding. 


The Army had a $75-million shortfall between its reported incremental
costs and its portion of the supplemental appropriation.  Within
appropriation accounts, the Army had an $81-million shortfall in O&M
funding compared to reported costs and a $6-million\4 excess in
military personnel funding. 

The Army had to absorb its O&M shortfall within its fiscal year 1995
appropriations.  Army officials told us that they could not
specifically identify what expenditures were reduced to absorb the
shortfall.  They were, however, able to tell us that there were no
reductions in base operations.  They believed that reductions were
made in areas such as training and travel.  We were unable to
document the impact of reductions at this time, but we plan to pursue
this matter further. 

The Army's reported shortfall may not be as great as its reported
costs suggests.  In related work we are doing on the reliability of
DOD's reported incremental costs for contingency operations at the
request of the Chairmen of the House Committees on International
Relations and National Security, we are finding that some Army O&M
costs are overstated.  The Army has not offset its reported
incremental costs to reflect costs that it does not incur when
soldiers are deployed for contingency operations, such as normal base
operations or training that cannot be attended.  For example, in
fiscal year 1995, the U.S.  Army Forces Command estimated that
military units did not incur about $11 million in normal operating
costs as a result of deploying to contingency operations. 
Consequently, this estimate would reduce reported costs by that
amount.  While there were instances of underreporting of costs in
fiscal year 1994, we are not aware of any such instances in fiscal
year 1995. 

The Army received $6 million more in its portion of the supplemental
military personnel appropriation than it reported in military
personnel costs.  According to the Army, it used these excess funds
to help cover an overall funding shortage in its total military
personnel appropriation. 


--------------------
\4 The Army reported $66.7 million in incremental military personnel
contingency costs and received funding of $72.4 million, for a
difference of $5.7 million.  The slide and text differ by $1 million
due to rounding. 


   AIR FORCE INCREMENTAL COSTS AND
   FUNDING DURING FISCAL YEAR 1995
--------------------------------------------------------- Chapter II:3



   (See figure in printed
   edition.)


The Air Force's portion of supplemental funding was $110 million
above its reported incremental costs.  Within its O&M appropriation
account, the Air Force received $118 million more in supplemental
funding than it reported in costs.  At the same time, it reported
that military personnel costs exceeded its supplemental military
personnel appropriation by $8 million. 

Our related ongoing work suggests that the Air Force's O&M overage
may be even greater than the amount reported.  For example, we found
that the Air Force overstated its fiscal year 1995 incremental flying
hour costs by $7 million at one command because of the way flying
hour costs are calculated.  According to Air Force officials, the Air
Force calculates flying hours by multiplying reported flying hours by
a budgeted flying hour cost factor reflecting historical costs. 
Actual costs for flying hours may be above or below the budgeted
factor.  In this example, actual costs were lower than the reported
costs. 

Excess O&M funding was used for a variety of otherwise unfunded
operational needs, such as (1) runway repairs; (2) roof repairs; (3)
heating, air conditioning, and ventilation projects; and (4)
quality-of-life projects, such as repairs to child development
centers and dormitories.  These projects were categorized by the Air
Force as "unsatisfactory" real property maintenance requirements for
fiscal year 1995.  Excess funding was also used to support depot
maintenance requirements, command and control communication systems,
and underground fuel storage tanks in the Pacific theater. 

To partly cover the military personnel funding shortfall of $8
million, the Air Force reprogrammed $156 million in fiscal year 1995
within its military personnel appropriation.  According to an Air
Force official, the reprogrammed funds covered the shortfall in
supplemental appropriations for incremental military pay. 


   NAVY INCREMENTAL COSTS AND
   FUNDING DURING FISCAL YEAR 1995
--------------------------------------------------------- Chapter II:4



   (See figure in printed
   edition.)


The Navy had a $34-million shortfall between its reported incremental
costs and its portion of the supplemental appropriation.  The Navy
had reported shortfalls in both its O&M and military personnel
accounts. 

The reported O&M shortfall was $31 million.  Navy officials stated
that the Navy absorbed its shortfall by realigning funding from lower
priority programs, but they could not identify the affected programs. 
Our related ongoing work, however, suggests that the shortfall may
not be as great as the reported costs suggest.  We found an instance
where the Navy may have overstated its costs in fiscal year 1995
because it did not adjust incremental flying hour costs to reflect
over $1 million worth of free fuel received.  While the Navy has
advised us that it does account for free fuel in its flying hour cost
factors, it did not provide any documents to support this position. 

The Navy's reported military personnel costs were $3 million below
its share of the supplemental military personnel appropriation. 
According to a Naval Reserve Force official, this shortfall was
absorbed within the reserve military personnel appropriation. 



   MARINE CORPS INCREMENTAL COSTS
   AND FUNDING DURING FISCAL YEAR
   1995
--------------------------------------------------------- Chapter II:5



   (See figure in printed
   edition.)


The Marine Corps' portion of the supplemental appropriation was $15
million above its reported incremental costs.  The Marine Corps
applied the additional O&M funds toward the Fleet Marine Forces'
fiscal year 1995 depot level reparables, corrosion control, and
equipment maintenance requirements. 


   OTHER DOD INCREMENTAL COSTS AND
   FUNDING DURING FISCAL YEAR 1995
--------------------------------------------------------- Chapter II:6



   (See figure in printed
   edition.)


Other DOD agencies, such as the U.S.  Special Operations Command, the
Defense Health Program, the Defense Intelligence Agency, and the
Defense Mapping Agency, collectively reported $62 million in
incremental costs.  They received $59 million from the supplemental
appropriation, resulting in a funding shortfall of $3 million. 
However, some agencies had reported costs in excess of their portion
of the supplemental appropriation, while other agencies had reported
costs below their portion of the supplemental appropriation.  The
Defense Intelligence Agency and the U.S.  Special Operations Commmand
together reported costs that were $8 million below their portion of
the supplemental appropriation.  The Defense Health Program and the
Defense Mapping Agency together reported costs that were $11 million
above their portion of the supplemental appropriation.  We do not
know at this time how the agencies that had funding shortfalls
absorbed these costs and how the agencies that had remaining funding
utilized those funds. 



   REPORTED INCREMENTAL COSTS
   SURGED IN LATE FISCAL YEAR 1995
--------------------------------------------------------- Chapter II:7



   (See figure in printed
   edition.)


Through August 1995, DOD had reported costs of $1.9 billion. 
Projecting August costs to September, we estimate that had September
costs been the same as August costs, DOD's full fiscal year 1995
reported costs would have been $266 million dollars below
appropriated funding.  However, reported costs surged in September to
bring reported costs within $12 million of the funding provided
through the supplemental appropriation.  The reported September costs
were about 4 times more than the costs of the previous month and over
$120 million more than the sum of the prior 3 months--June through
August.  This surge was related to $134 million in reported costs for
Operation Southern Watch and $75 million in reported costs for
operations involving the former Yugoslavia. 

We are continuing to review these September costs for fiscal year
1995 to determine the reasons for this surge.  The amount of costs
reported in any reporting period can vary due to the pace of
operations or the advent of new operations.  For example, reported
fiscal year 1994 costs surged in late fiscal year 1994 largely
because of the U.S.  intervention in Haiti, which began in September
1994.  We are not aware of any similar surge of operations in late
fiscal year 1995 other than the bombing campaign in Bosnia, which
began in late August and ended September 22, 1995.  However, we do
not believe that the campaign by itself was of sufficient magnitude
to account for the surge in reported costs. 


ESTIMATING METHODOLOGY
========================================================== Chapter III


   CONTINGENCY OPERATION COST
   ESTIMATING
-------------------------------------------------------- Chapter III:1



   (See figure in printed
   edition.)

Contingency operations begin when the President decides to commit
U.S.  military forces to respond to developing world conditions that
he judges affect U.S.  interests.  Some of these operations carry
over from year to year.  For new operations, DOD's requests for
supplemental funds are based on cost estimates that are developed
before the actual deployment of military forces or early in the
deployment.  Developing the estimate involves (1) making assumptions
about a number of factors, including military personnel for the
operation, its expected duration, and the logistical requirements to
support operations and (2) costing out the assumed force, using
standard cost factors that are in turn based on historical costs and,
where there are no cost factors, military judgment.  For existing
operations, DOD projects costs based on costs incurred in the
previous year unless it expects an operation to change in size,
scope, or duration. 

Cost estimates tend to increase.  For example, within DOD, in
developing the cost estimate for fiscal year 1995 contingency
operations, the overall estimate increased by $104 million.  Within
this amount, DOD's Comptroller's office reduced proposed funding for
part of one operation, Cuba migrant operations, by $3 million and
increased funding by a total of $107 million for several other
operations, including those operations in Haiti.  Cost estimates have
also increased as a result of reviews at the Office of Management and
Budget (OMB), which examines them when the administration seeks
supplemental funding.  For example, OMB increased the estimate by a
total of $126 million over the amount proposed by DOD. 

In developing the cost estimate for operations in and around Bosnia
for fiscal years 1996 and 1997, the estimated cost increased by $164
million between the preliminary and final estimates submitted to the
Deputy Secretary of Defense.  In approving the final decision
document, the Deputy Secretary added $96 million to the amount
proposed in the final program budget decision to reflect December
1995 special pay for military personnel deployed in and around Bosnia
and command and control augmentation initiatives, which had not been
included in the estimate.  In developing the plan for financing the
operation, DOD further increased the estimated cost by almost $82
million based on more recent information. 

Actual costs can vary from the estimate as changes occur to an
operation.  For example, DOD estimated that the operation in Haiti
would cost $465 million in fiscal year 1995, but through the end of
fiscal year 1995, DOD had reported costs of $569 million.  This was
in part due to unforeseen requirements associated with Operation
Uphold Democracy and the United Nation's effort. 


   ASSUMPTIONS
-------------------------------------------------------- Chapter III:2



   (See figure in printed
   edition.)

Events may differ from the assumptions used to estimate costs. 
Examples of potential differences between events and assumptions
include the duration of operations, logistical support requirements,
environmental factors, force size, and eligibility for special pay
and allowances.  The nature of contingency operations makes it
particularly difficult to have good assumptions.  Initial estimates
are developed before or during the outset of an operation and are
frequently "best guess" estimates. 

In the case of Vigilant Warrior, the deployment of military forces to
Southwest Asia in response to Iraqi troop movements, DOD originally
estimated that the operation would cost $462 million in fiscal year
1995.  However, the operation ended with reported costs of only $258
million.  This amount was about $204 million below the estimated
amount because the operation concluded sooner than expected as the
Iraqis pulled their troops back. 

Actual logistical support requirements may also differ from
assumptions.  For example, in the Bosnia deployment it was assumed
that rail would be the predominant mode of deployment transportation. 
Because of time pressures, adverse weather conditions, and rail
delays, more airlift was used than originally anticipated.  Through
January 1996 Bosnia deployment transportation costs were currently
exceeding DOD's estimate by $84 million. 

The Logistics Civil Augmentation Program's (LOGCAP) support in Bosnia
is also far more than what was originally assumed.  DOD estimated the
cost of LOGCAP at $191.6 million.  The LOGCAP contractor had
originally estimated the cost at $350 million, but DOD reduced the
estimate to $191.6 million because it believed that there was
duplication between the services the contractor would provide and the
services military personnel would provide.  Through February 1996,
the Army, which manages LOGCAP and pays the contractor, had already
spent $247.3 million for LOGCAP, or $55.7 million more than DOD
estimated for the entire operation.  Estimated LOGCAP costs have been
rising rapidly.  At the end of January 1996, the contractor was
estimating that total LOGCAP costs would be $371 million, whereas by
the week ending February 10, 1996, the contractor's cost estimate had
reached $422 million, and Army officials told us that they thought
the cost could go as high as $500 million.  Several factors have
contributed to the increase.  The geography of the U.S.  sector in
Bosnia and force protection concerns did not allow for the 10 to 12
large base camps originally planned and so the number of camps has
increased to 23.  The number of feeding locations also increased from
the 12 originally planned to 24.  Muddy ground conditions and the
number of camps required more extensive site preparation and
construction, which cost more than originally anticipated. 

Force size may be greater or less than what is initially assumed in a
cost estimate.  For example, the President authorized the activation
of up to 4,300 reservists to support operations in Bosnia.  The 4,300
and an estimated 300 volunteers, not counted as part of the call-up,
were used as the basis for calculating the incremental military
personnel salary cost of $196 million estimated for the Bosnia
operation.  Fewer reservists have been called up than were
authorized, but more reservists have volunteered for active duty.  On
balance, it appears that between 165 and 340 fewer reservists will be
on active duty than was assumed.  Using DOD assumptions and actual
deployment figures, we estimate that the salary costs for the reserve
activation, including volunteers, could be over $20 million less than
DOD estimated. 

Personnel deployed to contingency operations may be eligible to
receive a variety of special pays and allowances, such as imminent
danger pay, certain places pay (formerly called foreign duty pay),
and family separation pay.  Eligibility for these special pays and
allowances vary by location and individual circumstance.  For
example, in the case of the Bosnia cost estimate, DOD did not take
these variations into account.  Only those personnel deployed to,
traveling into, or flying over Bosnia, Croatia, Serbia, Montenegro,
and Macedonia are eligible to receive the $150 per month for imminent
danger pay.  This excludes most of the 7,000 personnel scheduled to
be deployed to Hungary and Italy.  As a result of not taking this and
other variations into account, DOD overestimated special pays by
about $43 million. 




   USE OF MODELS
-------------------------------------------------------- Chapter III:3



   (See figure in printed
   edition.)

DOD and each of the services have models that can be used to develop
costs of potential force structure changes.  The Army also uses its
model as an aid in developing contingency operation cost estimates,
making the most use of models among the services in this regard. 
According to Army officials, in developing the Bosnia cost estimate,
this model was used to estimate deployment and some operating costs,
such as fuel and repair parts.  The model estimates costs based on
factors such as the types of units, the number of personnel and
equipment to be deployed, the deployment location, and the modes of
transportation. 

According to Army officials, the Army's cost model was not originally
designed to provide cost estimates for contingency operations.  Since
it is one of the few models available that provides good planning
numbers, as noted above the Army uses it as an aid in developing
contingency operation cost estimates.  We found limitations with the
model related to its use in developing the Bosnia cost estimate.  One
limitation is that the model does not contain worldwide
transportation rates.  It only contains data on those countries in
which the United States expects to or has previously conducted
operations.  In developing the Bosnia cost estimate, officials
assumed German rail rates in their estimates when they lacked
information on rates in countries through which the rail movement
would transit, such as Hungary and Austria.  During the deployment,
the Army found in a number of instances that rail rates in Austria
and Hungary were much higher than German rail rates.  For example,
the Army's analysis of rail charges to move 35 railcars with
oversized cargo showed that while Austria accounted for 26 percent of
the rail distance traveled it accounted for 43 percent of the actual
rail cost. 

Army officials stated that the cost model has been updated to include
rail rates for Bosnia, but it still does not include rail rates for
countries enroute to Bosnia from Germany, such as Austria, Croatia,
and Hungary.  The lack of worldwide information could affect future
contingency cost estimates should U.S.  forces deploy to other
locations in which the United States has no previous experience. 

The second limitation is that the model does not have current prices
and rates for such items as non-U.S.  fuel and transportation,
although it can be updated by the user at any time.  In developing
the Bosnia estimate in late 1995, Army officials stated that due to
time constraints and the unavailability of current information they
used existing data in the model.  In 1995 the model contained a fuel
price of 73 cents a gallon for fuel in Germany.  Actual fuel prices
in Bosnia in 1996, the year in which most of the operation is
occurring, are between 85 cents and 96 cents a gallon--
16 to 32 percent more.  In addition, transportation rates used in the
model may be based on information that is up to three and one-half
years old.  For example, the Army calculated costs of the Bosnia
operation using a 1995 version of its cost model.  Army
representatives told us the model had been updated in 1994 based on
1993 published transportation rates.  The 1993 rates were developed
by the Military Traffic Management Command using cargo projections
that were up to 18 months old.  Army officials stated that they are
looking into developing an independent cost model that will provide
more accurate contingency cost estimates. 




   IMPROVING COST ESTIMATING
-------------------------------------------------------- Chapter III:4



   (See figure in printed
   edition.)

The major difficulty in preparing contingency operation cost
estimates is the need to make assumptions before or in the early
stages of an operation.  Generally, as an operation progresses and
the services both gain operating experience and reporting of costs
actually incurred begins, the cost estimate becomes more refined. 
While there are methodological improvements that can be made to
improve estimating, because of the uncertainty in cost estimating, it
is difficult to know how much funding Congress should appropriate. 
Therefore, in considering funding levels we have identified the
following guidelines Congress may wish to consider. 

  Any supplemental funding provided should only be available for (1)
     expenses incurred in support of contingency operations and (2)
     reimbursement of accounts initially utilized to fund those
     operations.  In fiscal year 1995, some of the military services
     ended the year with contingency costs below the amounts
     appropriated by Congress for contingency operations in that
     year, while other services had costs that exceeded those
     appropriations.  Because the supplemental appropriations were
     not earmarked for contingency operations, those services with
     excess funds used the funds for other needs that otherwise would
     have gone unfunded. 

  If initial contingency operation funding proves to be inadequate,
     but some services have costs below their funded level while
     others have costs above it, excesses earmarked for contingencies
     should be redistributed by transfer before Congress provides
     additional funds.  DOD's plan for funding Bosnia operations, for
     example, which involves an initial reprogramming, followed by
     supplemental appropriations, and then a second reprogramming for
     any remaining costs, lends itself to redistributing funds at the
     time of the second reprogramming. 

  Appropriation levels should be reevaluated as more experience and
     actual cost data become available.  The second reprogramming in
     the Bosnia funding plan would lend itself to a reevaluation. 

There are some methodological improvements that can be made in the
cost estimating process.  These involve estimating special pays and
allowances.  Cost estimators should be able to improve this part of
the estimate by first establishing which special pays and allowances
apply for a contingency operation and the approximate number of
people eligible for them.  Longer term improvements include
developing independent cost models or adapting existing models to
better reflect contingency operations. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Steven H.  Sternlieb, Assistant Director
Ann Borseth, Evaluator
Lisa M.  Quinn, Evaluator
James F.  Reid, Evaluator

OFFICE OF THE GENERAL COUNSEL

Margaret L.  Armen, Attorney-Adviser

NORFOLK FIELD OFFICE

Joseph A.  Rutecki, Evaluator-in-Charge
Carleen C.  Bennett, Evaluator
Suzanne K.  Wren, Evaluator

KANSAS CITY FIELD OFFICE

John G.  Wiethop, Evaluator
David J.  Henry, Evaluator

*** End of document. ***