Buying simulations: Congress says service contracts no longer allowed.

A new law that effectively bans the Defense Department from outsourcing the operation of flight simulators is casting serious doubts on military plans to expand the use of these devices.

Following a congressional investigation of the Air Force and Army practice of buying training as a service, lawmakers concluded that these contracts are a bad deal for taxpayers, and directed the Defense Department to only purchase training simulators under the traditional rules of military procurement.

"The secretary of defense may not enter into a service contract to acquire a military flight simulator," states the fiscal year 2007 defense authorization bill.

The widespread use of simulation service contracts for years has been lauded as smart business, supporters say, because it allows the military to spread out the cost over many years, rather than pay for the hardware upfront. Military officials also like the arrangement because it shifts to contractors the responsibility of maintaining the simulators and of keeping the technology up to speed with commercial advances.

Many members of Congress, however, dislike service contracts, as they make it more difficult to track expenses and itemize costs. The oversight of simulation service contracts is made uniquely complicated by the lack of a standard method of measuring costs and performance, according to the Government Accountability Office.

In a September report, the congressional watchdog agency denounced the use of simulation service contracts as currently structured, and called for the Defense Department to exercise more oversight over these projects.

The GAO findings and subsequent move by Congress to outlaw service contracts are particularly bad news to the Air Force. They deal a potentially deadly blow to a decade-long effort, known as the "distributed mission training" program. DMO began in the late 1990s, at a time when the military was downsizing, and the outsourcing of services was all the rage.

Under DMO contracts, companies were awarded long-term deals to provide state-of-the-art simulator training on-demand at the location of the trainee, with the ultimate goal of networking different sites together to create more realistic flying scenarios. Plans called for each fighter unit eventually to be equipped with high-fidelity simulators.

When the DMO program was launched, the Air Force was operating obsolete simulators and its procurement dollars were dwindling. Simulator services from contractors could be funded by operations and maintenance dollars, rather than from acquisition accounts. Another key selling point for the Air Force was the reliance on contractors to keep the simulators concurrent with aircraft upgrades.

The simulators in the DMO program include the F-15C, F-16, Airborne Warning and Control System (AWACS), and F-15E.

In 2003, the Army followed the Air Force lead and awarded a service contract to obtain simulator training for the helicopters in its Flight School XXI program. The approximate value of the Air Force and Army contracts, GAO estimated, is nearly $2 billion. For fiscal year 2006, the Air Force budgeted $200 million for DMO services.

Current DMO facilities include five F15C, five AWACS and six F-16 sites. The Boeing Co. operates the F-15 simulators; Plexsys Interface Products is the contractor for the AWACS simulators; and Lockheed Martin runs the F-16 training centers.

In each of the DMO contracts, GAO concluded, the Air Force is not getting its money's worth. "The decision to use service contracts was not supported by a thorough analysis of the costs and benefits of this approach versus alternative approaches."

As an example of the pitfalls associated with service contracts, GAO cited the F-16 training program. As early as May 2001, Lockheed Martin notified the Air Force that it was unable to provide simulator services as originally agreed and wished to restructure the contract. Later, the company cited Air Force funding problems and schedule slips as the basis for claims against the service, and notified the Air Force that its financial situation under the contract was no longer viable.

"Over time, the Air Force F-16 training requirements changed, and the F-16 mission training center contract awarded to Lockheed Martin was not structured in a way to accommodate modifications that would meet with both parties' satisfaction," a Lockheed Martin spokesman told National Defense.

GAO said this case illustrates the risks involved in service contracts, especially when a contractor has to be replaced. Lockheed's contract expires in June 2007, and the Air Force had intended to solicit industry bids for a new contract. The contractor-selection process and transition to a new vendor could create a two-year gap when F-16 simulator training services would not be available to pilots. For the F-16 block 40 aircraft, the Air Combat Command plans to spend approximately $20 million to refurbish old F-16 unit training devices, GAO said. "These devices are limited in training potential compared to the current level of simulation."

The Air Force had intended to award a new F-16 contract in November 2006, but the project was halted after the legislation was signed in late September, said Kent D. Clark, deputy chief of flight operations at the Air Combat Command, in Langley, Va.

In an interview, Clark defended the DMO approach to buying training services, but said it is understandable why lawmakers want the Air Force to buy simulators under procurement, not service, contracts.

"It was the color of the money," Clark said. "Our friends on Capitol Hill don't have visibility on the operations and maintenance dollars that go into various items. They do have visibility into the investment funding. That was causing a problem up there."

Service contract expenses are easier for the Air Force to absorb, he said. "You can amortize the cost over the length of the contract and it falls nice and even. The contractor charges a service and recoups his cost over the length of the contract." If the money has to be moved into acquisition, it means the costs are borne upfront.

The Air Combat Command, which is responsible for training all Air Force units, calculated that, to replace DMO simulators for the F-15 and the F-16 alone, it will need $235 million between fiscal years 2008 and 2013. Whether those funds are approved remains to be seen, Clark said. "We still have to work through the reprogramming of the money and recolor the money, and find those additional funds." This is going to "make things very difficult for us," he said.

The F-16 training sites are the most pressing concern, he added. The F-15 and the AWACS contracts do not run out for several more years, and Congress does not require the Air Force to cancel them.

An acquisition program to equip the F-16 training sites could take several years, Clark said. Rather than the two-year break forecast by GAO, he added, it will be four to five years before the new systems are up and running. Of the F-16's six training sites, only four will remain: two at Shaw Air Force Base, S.C.; one at Spangdahlem Air Base, Germany, and one at Misawa Air Base, Japan. Two sites at Mountain Home Air Force Base, Idaho, are being closed as a result of the Defense Department's 2005 round of bases closures.

Despite the turmoil, this is far from a "sky is falling" scenario, Clark cautioned. The Air Force, after all, does most of its training on real aircraft, and the training will continue even in the absence of simulators.

Aircraft are our primary training devices," Clark said. "Sometimes, I think we get caught up in the high-fidelity simulators and the DMO world, and we begin to think that is the only way we can train pilots."

Once the Air Force begins to acquire simulators like any other piece of military hardware, it will have to figure out how to make sure the technology is upgraded in a timely fashion.

"It's always been a concern under the traditional approach." Clark said. Another drawback of acquiring simulators is that their budgets historically have been vulnerable to cuts. When dollars are tight, the simulators tend to become expendable. "Weapon upgrades always are funded over the training devices," Clark said. "That was one of the primary reasons we went to service contracts, so we could require concurrency with the weapon systems."

Clark said he strongly disagrees with GAO's presumption that service contracts are wasteful. "We could buy those devices and software but they would quickly get outdated, and we would end up with a bunch of high-tech doorstops ... We felt that the services' approach was a valid approach. It puts the onus of keeping the devices current and technologically advanced on the contractor."

Another controversial issue raised by GAO is that the Air Force has failed to fly enough hours on the simulators to make the contract worthwhile. In the case of the F-16 simulator, GAO noted, the hourly cost of flying ranges from $700 to $5,000, depending on how many hours are tallied.

"That always comes up," Clark said. "Our explanation to GAO--which it didn't accept--is that our primary device is the aircraft. If we wanted to push up the utilization rates for the simulators we would have to take people out of the cockpits."

That thinking is about to change, however. The Air Force is cash strapped and wants to cut back on flying hours and shift more of the training to simulators, senior officials said repeatedly. Simulation supporters note that the hourly expense of operating a simulator is a fraction of what it costs to fly a real aircraft.

F-15C pilots soon will be mandated to earn a significant percentage of their flying hours in the simulators. "We were prepared to do that in the F-16," but that is no longer possible because the training center contract will end in eight months. "We gave F-16 individual unit commanders an option to move training to simulators, but we made it mandatory for the F-15C and will be making it mandatory for the F-15E once we get those on line," Clark said. Boeing is under contract to build the F-15E simulators, but they have not yet been completed. Shifting more training to simulation still can be done, but it will take longer than planned, said Clark. "We will do it one step at a time."

The legislation that prevents the Defense Department from using service contracts does authorize the secretary of defense to request a waiver if he deems a service contract is necessary for national security reasons. "It has not been determined if we'll pursue a waiver for the F-16 mission training center," Clark said. "We are trying to decide whether it's wise to pursue a waiver."

Coincidentally, at the same time that the GAO investigation of service contracts was unfolding, Rand Corp. published a study that actually endorses the outsourcing of simulation facilities. Christopher Paul, a social scientist who co-authored the study, contends that buying simulators under conventional procurement programs is "both fiscally wasteful and a hindrance to innovation," because it creates a "system of inefficient long-term commitments to what are effectively contractor-proprietary simulation systems."

In the report, titled "Implementing and Evaluating an Innovative Approach to Simulation Training Acquisitions," Rand researchers concluded that the Pentagon would be better off buying training services on firm-fixed-price contracts and also injecting "seed" money into industry to promote innovation.

In foreign militaries, such as the British Royal Air Force and military services in Singapore and Australia, there is a growing trend in favor of purchasing simulation services rather than the actual devices.

"We thought that if we build it, they will come. But there's no field of dreams here," said Wally White, director of business development at Lockheed Martin Simulation, Training & Support. The company provides its convoy trainer to the Army on a per-student, per-hour training fee basis.

Additional reporting by Grace Jean