a

GAO

United States Government Accountability Office

Report to the Chairman, Subcommittee 

on Defense, Committee on 

Appropriations, House of 

Representatives

June 2005 ARMY DEPOT 

MAINTENANCE

Ineffective Oversight 

of Depot Maintenance 

Operations and 

System 

Implementation 

Efforts

GAO-05-441
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-441.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Gregory D. 

Kutz at (202) 512-9505 or kutzg@gao.gov. 

Highlights of GAO-05-441, a report to the 

Chairman, Subcommittee on Defense, 

Committee on Appropriations, House of 

Representatives 

June 2005

ARMY DEPOT MAINTENANCE 

Ineffective Oversight of Depot 

Maintenance Operations and System 

Implementation Efforts 

GAO identified four management weaknesses that are impairing the 

efficiency and effectiveness of Army depot maintenance operations. The 

activity group’s average sales price increased from $111.87 per hour for 

fiscal year 2000 to $147.07 per hour for fiscal year 2005—a 31 percent 

increase (21 percent if adjusted for inflation). An increase in material costs 

was the major driver of the sales price increase. The Army has identified 

some causes of the higher material costs such as increased material usage to 

rebuild certain weapon systems under the Army’s recapitalization program 

and higher prices that it pays suppliers for parts, but it has not completed a 

comprehensive analysis of material cost increases. As a result, the Army has 

not been able to take proactive steps to control rising material costs. 

GAO analysis showed that in setting future prices, the Army spread depot 

maintenance reported gains and losses across all depots rather than 

allocating them to the individual depot that incurred the gains or losses. 

While DOD policy does not specify how to allocate gains and losses at the 

depot level, this practice does not provide the right incentives to the depots 

to set prices correctly in the budget. If one depot consistently incurred 

losses, the Army would increase the prices at other depots to help recoup its 

losses. As a result, the depot incurring the losses is not held accountable for 

operating on a break-even basis. The end result of this practice is that 

customers of depots with consistent losses are, in effect, subsidized by 

customers of depots with consistent gains. 

GAO analysis also showed that the reported carryover (work not completed 

at fiscal year end) exceeded DOD’s carryover ceilings from fiscal year 1996 

through fiscal year 2003. Too much carryover could result in an activity 

group receiving funds from customers in one fiscal year but not performing 

the work until subsequent fiscal years. Factors contributing to carryover 

exceeding the ceilings include depots receiving new orders at fiscal year-end 

and not being able to obtain parts needed in a timely manner. 

Finally, the Army continued to encounter problems implementing a new 

system intended to improve depot operations. GAO previously reported on 

these problems in May 2004, and noted that the Army’s inadequate 

requirements management and system testing were primary contributing 

factors to the problems. These problems are preventing the Tobyhanna Army

Depot from accurately reporting on its financial operations, which, in turn, 

adversely impacts the depot’s ability to accurately set prices. GAO’s current 

review found that the Army has not put into place an effective management 

process to help ensure that the problems with the system are resolved. While 

the Army developed a process that identified the specific steps that should 

be followed in addressing the problems identified, the process was not 

followed. Until the underlying causes of the problems are corrected, other 

depots implementing LMP will encounter similar problems. 

The Army depot maintenance 

activity group received about $2.6 

billion of orders in fiscal year 2004 

to repair helicopters, combat 

vehicles, and air defense systems. 

To perform this work, the group 

operates under the working capital 

fund concept, where customers are 

to be charged the anticipated costs 

of providing goods and services to 

them. GAO was asked to determine 

(1) if prices charged by the group 

have increased and, if so, why; (2) 

how the group allocates gains or 

losses incurred at the individual 

depot level; and (3) if the group 

exceeded its allowable carryover 

ceilings and the reasons for 

exceeding the ceilings. GAO was 

also asked to determine if the Army 

encountered problems 

implementing a new system, the 

Logistics Modernization Program 

(LMP), at the Tobyhanna Army 

Depot. 

What GAO Recommends

GAO is making recommendations 

to DOD to (1) analyze material cost 

increases and take steps to reduce 

them, (2) allocate gains or losses to 

the individual depot incurring 

them, and (3) comply with the 

carryover policy. Further, GAO is 

recommending improvements in 

the implementation of LMP as well 

as delaying implementation at the 

remaining four depots until 

problems encountered have been 

resolved. DOD concurred with all 

the recommendations. 
Page i GAO-05-441 Army Depot Maintenance

Contents

Letter 1

Results in Brief 2

Background 6

Depot Maintenance Prices Increased Due to Increasing Material 

Costs 8

Method of Allocating Gains and Losses Does Not Provide Incentive 

For Depots to Set Prices Correctly 16

Army Has Consistently Exceeded Carryover Threshold 17

Tobyhanna Army Depot Continues to Experience Difficulty With 

LMP 24

Conclusions 35

Recommendations for Executive Action 35

Agency Comments and Our Evaluation 37

Appendixes

Appendix I: Scope and Methodology 39

Appendix II: Comments from the Department of Defense 42

Appendix III: GAO Contacts and Staff Acknowledgments 46

Tables Table 1: Factors Responsible for the Increases in the Army Depot 

Maintenance Activity Group’s Composite Sales Price 

between Fiscal Years 2000 and 2005 10

Table 2: Depot Base Operations and Maintenance Mission Rates 

Per Direct Labor Hour for Fiscal Year 2001 14

Table 3: Depot Base Operations and Maintenance Mission Rates 

Per Direct Labor Hour for Fiscal Year 2005 15

Table 4: Fiscal Year-End Actual Reported Carryover from Fiscal 

Year 1996 through 2001 Consistently Exceeded DOD’s 

3-month Standard 19

Table 5: Dollar Amount of Reported Actual Carryover for Fiscal 

Years 2002 and 2003 That Exceeded Allowable 

Amounts 20

Table 6: Differences in Selected Account Balances Reported in SDS 

and LMP as of June 30, 2003 28

Table 7: Example of Incorrect Unit Costs in New System 29
Contents

Page ii GAO-05-441 Army Depot Maintenance

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Page 1 GAO-05-441 Army Depot Maintenance

United States Government Accountability Office

Washington, D.C. 20548

A

June 30, 2005 Letr

The Honorable C. W. Young

Chairman, Subcommittee on Defense

Committee on Appropriations

House of Representatives

Dear Mr. Chairman:

The Army depot maintenance activity group supports combat readiness by 

providing services necessary to keep Army units operating worldwide. 

From fiscal year 2000 through fiscal year 2004, the group employed 

between 10,000 and 13,000 people and received approximately $1.4 billion 

to $2.6 billion in new orders each year to repair and overhaul a wide range 

of assets, including helicopters such as the Apache and Blackhawk; combat 

vehicles such as the Abrams tank; air defense systems such as the Patriot 

missile; electronics; and inventory items for the Army, other military 

services, and foreign governments. Many of these weapons systems are 

used to support the Army’s current effort in Iraq and Afghanistan. 

According to Army officials, to perform the work needed in support of the 

global war on terrorism, the number of direct labor hours of work 

increased from 11.6 million in fiscal year 2002 to an estimated 19.3 million 

for fiscal year 2005—a 66 percent increase. The group operates under the 

working capital fund concept, where customers are to be charged for the 

anticipated full cost of goods and services. The group performs its 

operations primarily at five depots—the Tobyhanna Army Depot, 

Tobyhanna, Pennsylvania; the Letterkenny Army Depot, Chambersburg, 

Pennsylvania; the Corpus Christi Army Depot, Corpus Christi, Texas; the 

Anniston Army Depot, Anniston, Alabama; and the Red River Army Depot, 

Texarkana, Texas.

Over the past several years, we have performed work on specific activity 

groups within the Navy and Air Force working capital funds for your 

subcommittee. These reports have discussed several issues including 

(1) the prices charged customers; (2) whether the activity groups realized 

gains or incurred losses; (3) work not completed by the end of the fiscal 

year, generally referred to as carryover; and (4) system initiatives. The 

congressional defense committees have used our Defense Working Capital 

Fund work in reviewing Department of Defense (DOD) budgets. 

As requested and agreed to with your office, our objectives of this 

assignment were to determine (1) if the prices charged by the Army depot 
Page 2 GAO-05-441 Army Depot Maintenance

maintenance activity group have increased and, if so, why; (2) how the 

Army depot maintenance activity group allocates reported gains or losses 

incurred at the individual depot level; (3) if the Army depot maintenance 

activity group exceeded its allowable carryover ceilings1

 and, if so, the 

reasons for exceeding the ceilings; and (4) if the Army encountered 

problems with the implementation of a new system, called the Logistics 

Modernization Program (LMP), at the Tobyhanna Army Depot. Our review 

was performed from June 2004 through April 2005 in accordance with U.S. 

generally accepted government auditing standards. Most of the financial 

information in this report is budget data obtained from official Army 

budget documents. The accounting data used in this report were obtained 

from official Army accounting reports. To assess the reliability of the data, 

we (1) reviewed and analyzed the factors used in determining the prices 

and (2) interviewed Army officials knowledgeable about the data. We 

determined that the data were sufficiently reliable for the purposes in this 

report. Further details on our scope and methodology can be found in 

appendix I. We requested comments on a draft of this report from the 

Secretary of Defense or his designee. Written comments from the Deputy 

Comptroller for Program Budget are reprinted in appendix II.

Results in Brief We identified four management weaknesses that are impairing the 

efficiency and effectiveness of Army depot maintenance operations. These 

weaknesses include (1) ineffective actions to control increasing material 

costs, (2) not allocating reported gains or losses incurred by a specific 

depot to that depot, (3) exceeding ceilings on work carried over at fiscal 

year end, and (4) problems fielding a new system that is intended to 

provide timely and accurate logistical and financial information.

Despite rising prices over the past several years, Army depot maintenance 

officials have not taken effective actions to control material costs—the 

primary cost factor driving up the prices during the time frame covered by 

our work. Our work showed that the Army depot maintenance activity 

group’s average sales price for work increased 31 percent (21 percent if

1

DOD policy establishes a ceiling for the amount of work that can be carried over from one 

fiscal year to the next.
Page 3 GAO-05-441 Army Depot Maintenance

adjusted for inflation) between fiscal years 2000 and 20052 primarily due to 

increasing material costs. According to the activity group’s budget 

documents, the average price per direct labor hour of work accomplished 

(composite sales price)3

 increased from $111.87 per hour for fiscal year 

2000 to $147.07 per hour for fiscal year 2005. Because of the price increase, 

the activity group’s customers will pay about $400 million more for work in 

fiscal year 2005 than they would have paid in fiscal year 2000. Material 

costs accounted for the majority of the sales price increase from fiscal year 

2000 to fiscal year 2005, accounting for over 100 percent4

 of the activity 

group’s sales price increase. Army depot maintenance officials provided 

evidence showing increasing material costs were caused, in part, by 

increased (1) material usage to rebuild selected weapon systems to likenew condition under the Army’s recapitalization program and (2) prices 

that the activity group pays its suppliers for repair parts. However, Army 

depot maintenance officials have not completed a comprehensive analysis 

to determine (1) how much of the increase was due to increased material 

usage under the recapitalization program versus price increases and 

(2) whether they have identified all of the reasons for the material 

increases. As a result, the Army has not been able to take proactive steps to 

control rising material costs.

In setting future prices to break even, the Army spread depot maintenance 

reported gains and losses across all depots, rather than allocating reported 

losses or gains incurred by a specific depot to that depot. While DOD policy 

does not specify how to allocate gains and losses at the depot level, this 

practice does not provide the right incentives to the depots to set prices 

correctly in the budget. In the past, if one depot consistently incurred 

losses, the Army would increase the prices at other depots to help recoup 

its losses. As a result, the depot incurring the losses is not held accountable 

for operating on a break even basis. For example, the Red River Army 

2

 Using the Gross Domestic Product price index updated in January 2004, if the fiscal year 

2000 composite sales price is converted to fiscal year 2005 dollars, the composite sales price 

would be $121.15 and the increase would be 21 percent.

3

 The composite sales price is the average price that customers must pay for a direct labor 

hour of work and is used for budgeting purposes. The average price includes labor, material, 

and overhead costs. For actual work performed, the activity group develops individual sales 

prices, such as the price per hour to perform work on the Apache helicopter, and bills 

customers based on those individual prices.

4

 Other cost factors included in developing the sales price decreased resulting in material 

costs accounting for over 100 percent of the sales price increase.
Page 4 GAO-05-441 Army Depot Maintenance

Depot reported an accumulated loss for 4 of the past 5 fiscal years, 

including fiscal years 2002, 2003, and 2004. For these 3 fiscal years, the 

reported accumulated losses ranged from $18 million to about $48 million, 

indicating that Red River’s customers were not charged enough for the 

goods and services provided to them. On the other hand, the Tobyhanna 

Army Depot—which had a reported revenue that ranged from $259 million 

to $406 million from fiscal years 2000 to 2004—reported an accumulated 

gain for each fiscal year from fiscal year 2000 through fiscal year 2004, 

ranging from $31 million to $169 million, indicating that their customers 

have been charged too much for goods and services. The end result of this 

practice is that customers of depots with consistent losses are in effect 

subsidized by customers of depots with consistent gains.

We also found that the Army depot maintenance activity group’s actual 

reported carryover exceeded DOD’s carryover ceilings from fiscal year 

1996 through fiscal year 2003. The activity group’s reported actual 

carryover did not exceed the allowable amount for fiscal year 2004. We 

reviewed the Army’s fiscal year 2004 carryover calculation and validated 

that the Army’s calculation was done in accordance with DOD’s new 

carryover policy. Too much carryover could cause an activity group to 

receive funds from customers in one fiscal year but not perform the work 

until well into the next fiscal year or subsequent fiscal years. In the past, 

the Congress has reduced the services’ budgets because of excessive 

carryover, including a reduction in the Army’s fiscal year 2003 Operation 

and Maintenance appropriation by $48 million. Factors contributing to the 

four depots that exceeded their carryover ceilings included depots 

receiving new orders at fiscal year-end and depots being unable to obtain 

material needed to perform repair work in a timely manner. Furthermore, 

even though the Army’s reported carryover amount exceeded the ceilings, 

we found that the Army understated its reported actual carryover for fiscal 

years 2002 and 2003. As a result, fiscal year 2003 carryover was understated 

by $95 million. According to Army officials, the understatement occurred 

because DOD provided verbal guidance that was unclear when DOD 

revised its carryover policy. Based on its interpretation of this guidance, the 

Army only included actual carryover on orders received in the current year 

but did not include carryover related to orders received in prior years in 

calculating its reported actual carryover for fiscal years 2002 and 2003.

Finally, management oversight weaknesses are evident in the Army’s 

efforts to implement its new LMP system, which is intended to improve the 

efficiency and effectiveness of depot operations. We previously reported on 

LMP implementation problems in May 2004 and noted that the Army’s 
Page 5 GAO-05-441 Army Depot Maintenance

inadequate requirements management and system testing were primary 

contributing factors to the problems occurring. These problems continue 

to prevent the Tobyhanna Army Depot from accurately reporting on its 

financial operations, including gains and losses, which, in turn, adversely 

affected the depot’s ability to accurately set customer sales prices. For 

example, Army officials believe their fiscal year-end 2003 and 2004 annual 

operating result is overstated by about $125 million due to, among other 

things, miscellaneous gains being reported in LMP when no such gains 

occurred. On our current review, we found that the Army has not put into 

place an effective management process to help ensure that the problems 

identified with LMP are resolved. While the Army and Computer Sciences 

Corporation (CSC), the contractor responsible for developing and 

implementing LMP, developed a process that identified the specific steps 

that should be followed to address known problems, the process was not 

followed. Until the Army institutes a process that ensures the underlying 

causes of problems are identified and corrected, other depots 

implementing LMP will encounter similar problems.

We are making recommendations to the Department of Defense to 

(1) develop a systematic methodology for analyzing material cost increases 

and take action to reduce costs, (2) allocate depot gains and/or losses to 

the individual depots if a trend shows that an individual depot consistently 

realizes gains or incurs losses, (3) continue to comply with the carryover 

policy by not exceeding the ceiling, and (4) improve the management and 

reporting of carryover to decision makers by clarifying guidance for 

calculating carryover. We are also making recommendations to implement 

existing management procedures to resolve identified problems resulting 

from the implementation of LMP and to delay system implementation at the 

four remaining depots until the problems encountered by the Tobyhanna 

Army Depot are resolved.

In its comments on a draft of this report, DOD concurred with all nine of 

the recommendations. Specifically, the Army has added guidance stating 

that gains and losses should be allocated to the individual industrial 

installations if a several year trend shows that an installation has 

consistently realized gains or losses. Further, the Under Secretary of 

Defense (Comptroller) will issue guidance clarifying the present carryover 

policy concerning the calculation of actual carryover as well as the 

allowable amount of carryover. Finally, the Army concurred with our 

recommendations on LMP and recognizes that it can not move forward 

with future deployments to other depots until critical problems identified 

at the Tobyhanna Army Depot are corrected.
Page 6 GAO-05-441 Army Depot Maintenance

Background The Army depot maintenance activity group is part of the Army Working 

Capital Fund, a revolving fund that relies on sales revenue rather than 

direct appropriations to finance its operations. DOD policy requires 

working capital fund activity groups to (1) establish sales prices that allow 

them to recover their anticipated costs from their customers and (2) 

operate on a break even basis over time—that is, to not make a gain nor 

incur a loss, which is referred to as a zero accumulated operating result 

(AOR). DOD policy also requires the activity groups to establish their sales 

prices prior to the start of each fiscal year and to apply these 

predetermined or “stabilized” prices to most orders received during the 

year—regardless of when the work is actually accomplished or what costs 

are actually incurred. For depot maintenance activity groups, DOD policy 

also requires that as long as adequate cash balances are maintained, 

unbudgeted operating losses or gains of $10 million or more per activity 

group will be recouped or returned, as appropriate. This will occur in the 

current fiscal year or, in the case of fourth quarter losses or gains, in the 

first quarter of the next fiscal year.

Developing accurate sales prices is challenging since the process to 

determine the prices begins about 2 years in advance of when the work is 

actually ordered and performed. In essence, the activity group’s budget 

development has to coincide with the development of its customers’ 

budgets so that they both use the same set of assumptions. To develop 

prices, the activity group estimates (1) labor, material, overhead, and other 

costs based on anticipated demand for work as projected by customers;

(2) total direct labor hours for each type of work performed, such as 

helicopters, tanks, and repairable inventory items; (3) the workforce’s 

productivity; and (4) savings due to productivity and other cost-avoidance 

initiatives. In order for an activity group to operate on a break even basis, it 

is extremely important that the activity group accurately estimate the work 

it will perform and the costs of performing the work. Higher-than-expected 

costs or lower-than-expected customer demand for goods and services can 

cause the activity group to incur losses. Conversely, lower-than-expected 

costs or higher-than-expected customer demand for goods and services can 

result in gains. With sales prices based on assumptions that are made as 

long as 2 years before the prices go into effect, some variances between 

expected and actual costs are inevitable.
Page 7 GAO-05-441 Army Depot Maintenance

New Depot Maintenance 

System Expected to 

Improve Financial Data

We have previously reported that DOD has had long-standing problems in 

preparing accurate working capital fund financial reports. For example, in 

its fiscal years 2003 and 2004 Principal Financial Statements, the Army 

acknowledged that its financial management and feeder systems that DOD 

relied on to provide evidence supporting the Army Working Capital Fund 

financial statements did not comply with federal financial management 

system requirements, generally accepted accounting principles, and the 

U.S. Government Standard General Ledger at the transaction level. As a 

result of such deficiencies, the DOD Inspector General (who is required by 

31 U.S.C. sec. 3521(e)(1) to conduct an audit of said financial statements) 

was unable to express an opinion on the reliability of the Army Working 

Capital Fund’s financial statements for fiscal years 1993 through 2004. 

To help improve the Army depot maintenance activity group’s operations, 

including financial management, in February 1998, the Army Materiel 

Command began an effort to replace systems that are at least 30 years old 

that manage inventory and depot maintenance operations with LMP. 

According to the Army, LMP is intended to transform the Army Materiel 

Command’s logistics operations in six core processes, one being financial 

management. LMP is to, among other things, improve accounting and 

reporting on billions of dollars worth of Army weapons systems through 

fully integrated single-source transaction entry, online/real-time data, and 

U.S. Standard General Ledger compliance. Further, LMP is intended to 

bring the logistics community to the point of achieving favorable audit 

opinions on financial statements. LMP became operational at the U.S. Army 

Communications and Electronics Command and Tobyhanna Army Depot in 

July 2003. The Army plans to implement LMP at the other four depots. In 

May 2004,5

 we reported on the Army’s lack of adequate management 

oversight over LMP implementation and the problems being encountered 

after it became operational in July 2003. As discussed later in this report, 

the Army continued to experience significant LMP implementation 

problems at the Tobyhanna Army Depot that inhibited the depot from 

accurately reporting on its financial results of operations, which adversely 

affected the depot’s ability to accurately set customer sales prices. 

5

 GAO, DOD Business Systems Modernization: Billions Continue to Be Invested with 

Inadequate Management Oversight and Accountability, GAO-04-615 (Washington, D.C.: 

May 27, 2004).
Page 8 GAO-05-441 Army Depot Maintenance

Army Merged Its Depot 

Maintenance and Ordnance 

Activity Groups

Beginning with fiscal year 2005 (October 2004), the Army established a new 

Army Working Capital Fund activity group by merging its depot 

maintenance and ordnance activity groups. The new activity group—the 

Industrial Operations activity group—consolidated the existing five Army 

depots and the Army ordnance activities. These two activity groups 

perform different types of work. The depots repair and overhaul a wide 

range of assets such as helicopters and tanks, whereas the ordnance 

activities, among other things, manufacture and sell munitions and large 

caliber weapons critical to the Army’s execution of its warfighting mission. 

The ordnance activity group also provides ammunition stockpile 

management for all services within DOD as well as for foreign military 

customers. Among the benefits of consolidation cited by the Army is that 

the merger of the two activity groups will (1) create a more integrated 

business perspective that encourages cooperation and partnership, 

(2) eliminate duplication of effort associated with preparing and defending 

two separate budget submissions for essentially the same type of service, 

and (3) focus capital investments on the good of the business entity rather 

than on the good of the individual installations.

We reviewed the Army Working Capital Fund fiscal year 2006/2007 budget 

document submitted to the Congress in February 2005. The budget 

document does not provide information on the Army depot maintenance 

activity group. Instead, the budget document consolidates the information 

on the depot maintenance and ordnance activity groups. This consolidation 

of information is discussed later in this report.

Depot Maintenance 

Prices Increased Due 

to Increasing Material 

Costs

Our work showed that the Army depot maintenance activity group’s 

average sales price for work increased 31 percent (21 percent if adjusted 

for inflation) between fiscal years 2000 and 2005.6

 The activity group’s 

budget documents showed that the average price per direct labor hour of 

6

 Using the Gross Domestic Product price index updated in January 2004, if the fiscal year 

2000 composite sales price is converted to fiscal year 2005 dollars, the composite sales price 

would be $121.15 and the increase would be 21 percent.
Page 9 GAO-05-441 Army Depot Maintenance

work accomplished (composite sales price)7 increased from $111.87 per 

hour for fiscal year 2000 to $147.07 for fiscal year 2005. We found that 

material costs accounted for the majority of the sales price increase from 

fiscal year 2000 to fiscal year 2005, accounting for over 100 percent of the 

group’s sales price increase. Army depot maintenance officials provided 

evidence showing increasing material costs were caused, in part, by 

increased (1) material usage to rebuild selected weapon systems to likenew condition under the Army’s recapitalization program and (2) prices 

that the activity group pays its suppliers for repair parts. However, Army 

depot maintenance officials have not completed a comprehensive analysis 

to determine (1) how much of the increase was due to the recapitalization 

program versus price increases and (2) whether they have identified all of 

the reasons for the material cost increases. As a result, the Army has not 

been able to take proactive steps to control rising material costs.

Factors Causing Army 

Depot Maintenance Prices 

to Increase

The composite sales price that the Army depot maintenance activity group 

charged its customers increased from $111.87 per direct labor hour in fiscal 

year 2000 to $147.07 per direct labor hour in fiscal year 2005 – a $35.20 

difference or 31 percent increase. As shown in table 1, our analysis of the 

factors that make up the activity group’s composite price showed that 

direct material, overhead, and direct labor account for all of the costs 

making up the composite price increase charged customers. Table 1 also 

shows that 

• Budgeted material costs were by far the most significant of the factors 

($65.23 per direct labor hour) making up the composite sales price in 

fiscal year 2005 (44 percent of the fiscal year 2005 composite sales 

price). Additionally, material costs increased by $36.14 and accounted 

for over 100 percent of the increase in the group’s sales prices between 

fiscal year 2000 and fiscal year 2005 because other cost factors 

decreased.

• Budgeted overhead costs were the second largest cost factor ($49.47 per 

direct labor hour) making up the composite sales price for fiscal year 

7

 The composite sales price is the average price that customers must pay for a direct labor 

hour of work and is used for budgeting purposes. The average price includes labor, material, 

and overhead costs. For actual work performed, the activity group develops individual sales 

prices, such as the price per hour to perform work on the Apache helicopter, and bills 

customers based on those individual prices.
Page 10 GAO-05-441 Army Depot Maintenance

2005 (34 percent of the fiscal year 2005 composite sales price). However, 

the overhead rate increased by only $3.98 during this time period. A 

large portion of the budgeted overhead costs is associated with 

operating and maintaining the installations.

• Budgeted labor costs were the third largest cost factor ($30.84 per direct 

labor hour) making up the composite sales price for fiscal year 2005 (21 

percent of the fiscal year 2005 composite sales price). The labor costs 

were less than half the material costs’ portion of the composite price for 

fiscal year 2005. Depot officials noted that the labor cost increases were 

primarily due to factors beyond the activity group’s control, such as 

mandated cost-of-living annual salary increases for federal employees. 

As a result, we did not perform an in-depth review of the labor costs 

increases between fiscal year 2000 and fiscal year 2005.

• Budgeted direct other costs (costs for contracts and travel) were the 

fourth largest cost factor (down $1.84 to $4.99 per direct labor hour) 

making up the composite sales price for fiscal year 2005. We did not 

perform an in-depth review of these costs since they decreased between 

fiscal year 2000 and fiscal year 2005.

• All other budgeted cost factors included in developing the composite 

sales price decreased from $3.91 in fiscal year 2000 to a negative $3.46 in 

fiscal year 2005. The negative amount is due to the return of prior gains 

in setting the prices.

Table 1: Factors Responsible for the Increases in the Army Depot Maintenance 

Activity Group’s Composite Sales Price between Fiscal Years 2000 and 2005

Source: GAO analysis of Army Materiel Command and depot data on stabilized rates.

Factor

Fiscal year 2000

rate per hour

Fiscal year 2005

rate per hour Dollar difference

Direct material costs $29.09 $65.23 $36.14

Overhead costs 45.49 49.47 3.98

Direct labor costs 26.55 30.84 4.29

Direct other costs 6.83 4.99 (1.84)

All other costs 3.91 (3.46) (7.37)

Total composite sales 

price

$111.87 $147.07 $35.20
Page 11 GAO-05-441 Army Depot Maintenance

Spiraling Material Costs Are 

Primary Cause of Price 

Increases, but Further 

Analysis Is Needed 

Although table 1 shows that several factors contributed to the increase that 

occurred in the composite hourly sales price for fiscal years 2000 through 

2005, higher budgeted material costs was by far the most significant factor. 

Material costs increased 124 percent, from $29.09 per direct labor hour in 

fiscal year 2000 to $65.23 per direct labor hour in fiscal year 2005. While 

Army depot maintenance officials provided evidence on why the activity 

group’s overall material costs have increased, they have not performed a 

comprehensive analysis of material costs to determine (1) how much of the 

increase was due to the recapitalization program versus price increases 

and (2) whether they have identified all of the reasons for the material cost 

increases.

The Army Has Identified Some 

Causes of Material Cost 

Increases

Army depot maintenance officials stated that the activity group’s higher 

material costs can be attributed, to a large extent, to (1) increased material 

usage to rebuild certain weapon systems to like-new condition, as required 

by the Army’s recapitalization program;8

 and (2) price growth—what the 

activity group pays various suppliers for material and component parts it 

uses to repair weapon systems and other items. For example:

• Due primarily to the recapitalization program, the depot maintenance 

activity group raised the sales price for the repair of the Patriot missile 

air defense system antenna mast group from $398,612 in fiscal year 2002 

to $744,784 in fiscal year 2004, an increase of $346,172 or 87 percent. 

Under this program, the depots automatically replaced more parts than 

they did previously under a traditional weapon system overhaul. This 

resulted in an increase in material costs. For example, under the fiscal 

year 2002 recapitalization pilot program, the Letterkenny Army Depot 

automatically replaced 142 parts on an individual antenna mast group. 

By fiscal year 2004, the number of parts automatically replaced by 

Letterkenny increased to 1,938 or 1,264 percent.

• Due to increased prices paid to suppliers for component parts used in 

repairs, the cost to repair radar sets used for the Patriot missile has 

increased significantly. Depot maintenance officials estimated that for 

8

 Recapitalization is the rebuild and selected upgrade of currently fielded weapons systems 

to ensure operational readiness and rebuild to like-new condition. The objectives of this 

program are to (1) extend the service life of selected weapon systems; (2) reduce the rate of 

growth of operation and support costs for recapitalized weapon systems; (3) improve the 

reliability, maintainability, safety, and efficiency of the weapon systems; and (4) enhance the 

warfighting capabilities of recapitalized weapon systems where needed.
Page 12 GAO-05-441 Army Depot Maintenance

one Patriot missile radar set, they replace approximately 1,500 of the 

5,463 active radar antenna elements when they repair it. In January 2003, 

depot maintenance was purchasing the antenna elements for $724 

apiece from the supplier. About 15 months later, the purchase price for a 

single element increased about 43 percent to $1,038. As a result, the 

stabilized sales price for repairing the radar set increased from 

$6,450,330 in fiscal year 2003 to $7,284,751 in fiscal year 2004, an 

increase of $834,421 or 13 percent in 1 year.

• Due to the recapitalization program, the depot maintenance activity 

group raised its sales price for the repair of the Chinook helicopter from 

$4,431,953 in fiscal year 2003 to $6,754,808 in fiscal year 2005, an 

increase of $2,322,855 or 52 percent. The material component of the 

sales price increased from $2,661,481 in fiscal year 2003 to $4,060,000 in 

fiscal year 2005—an increase of $1,398,519 or 60 percent of the total 

sales price increase. Corpus Christi Army Depot officials stated that 

material costs increased because under the recapitalization program the 

depot is required to (1) replace more parts 100 percent of the time 

during maintenance and (2) follow tighter inspection criteria, which 

results in parts being repaired or replaced more frequently. For 

example, the depot increased the number of helicopter parts required to 

be replaced during maintenance by 217 when it implemented the 

recapitalization program.

• Due primarily to the recapitalization program, the depot maintenance 

activity group raised the sales price for the repair of the engine used in 

the Armored Vehicle Launch Bridge, a folding portable bridge that is 

transported on the top of a tank chassis, and the M88 Hercules Recovery 

Vehicle, used to recover tanks. More specifically, the Anniston Army 

Depot increased the price for the engine from $58,559 in fiscal year 2003 

to $95,451 in fiscal year 2005, an increase of $36,892 or 63 percent. 

During this same time period, the materials costs increased by $38,749 

or 120 percent from $32,183 to $70,932. Since they anticipate repairing 

about 336 of these engines in fiscal year 2005, the impact of the 

increased material costs is about $13 million. 

• Due primarily to increased prices paid to suppliers for component parts, 

the cost to overhaul one type of Bradley Fighting Vehicle increased from 

$409,964 in fiscal year 2003 to $549,291 in fiscal year 2005, an increase of 

$139,327 per vehicle or 34 percent. A major cause of this increase was 

the material cost growth of $30,280 per vehicle. One example of a part 

contributing to the higher material costs is the price of a gyroscope used 
Page 13 GAO-05-441 Army Depot Maintenance

on the vehicle increasing from $11,486 in fiscal year 2003 to $19,381 in 

fiscal year 2005. Further, the price of two transmission parts increased 

from about $1,300 each to $10,092 each over the same time period. 

Army Has Not Performed a 

Comprehensive Analysis of 

Material Cost Increases

One of the primary goals of the working capital fund is to focus the 

attention of all levels of management on the total costs of carrying out DOD 

business operations such as depot maintenance. That is, working capital 

fund operations are intended to operate like a business by developing and 

using effective methods to control operating costs. We found that the Army 

depot maintenance activity group has not achieved that goal nor attempted 

to, at least in part, as it pertains to controlling material costs. Specifically, 

the activity group has not performed a comprehensive analysis to 

determine (1) how much of the increase was due to the recapitalization 

program versus supplier price increases and (2) whether they have 

identified all of the reasons for material cost increases. Such an analysis is 

frequently used for manufacturing processes, for example, to determine if 

material usage has increased and, if so, to determine the impact on material 

costs.

We believe that a comprehensive analysis of material costs is warranted 

because the activity group’s material costs account for over 44 percent of 

the group’s fiscal year 2005 composite sales price and have increased by 

124 percent between fiscal year 2000 and fiscal year 2005. Depot 

maintenance officials at the five Army depots and the Army Materiel 

Command told us that they did not perform such analyses. In fact, officials 

at one depot told us it was not necessary for them to perform analyses on 

material cost increases because they believe they know what their primary 

material cost drivers are: the recapitalization program previously discussed 

and increased prices being paid to one of their parts suppliers. We agree 

with these two reasons. However, without performing a comprehensive 

analysis, the depot cannot quantify the extent to which the causes 

contribute to the higher material costs and does not know if all major 

causes have been identified. Perhaps most important, absent these data, 

DOD does not have the necessary information to try to mitigate costs 

related to usage rates, unit prices, or other causes.

Army Depot Maintenance 

Overhead Represents the 

Second Largest Cost Factor 

Affecting Prices

As illustrated in table 1, our analysis showed that budgeted overhead costs 

were the second largest factor making up the fiscal year 2005 composite 

sales price. Overhead costs consist of two broad cost categories: base 

operations and maintenance mission. Base operations overhead includes 

costs necessary to maintain the installations that support the Army depots 
Page 14 GAO-05-441 Army Depot Maintenance

and other base tenants and include security, fire protection, building 

maintenance, resource management, and personnel and community 

activities. Maintenance mission overhead includes indirect costs that can 

be directly attributed to supporting the depots’ maintenance mission, such 

as supervision, indirect material, general engineering, and mid-level 

management and administrative expenses, but cannot be tied to a specific 

cost center. Tables 2 and 3 illustrate the breakout of the depots’ base 

operations and maintenance mission overhead rates per direct labor hour 

as a percentage of the depots’ total overhead rates for fiscal years 2001 and 

2005.9

Table 2: Depot Base Operations and Maintenance Mission Rates Per Direct Labor Hour for Fiscal Year 2001

Source: Individual Army depots and GAO analysis.

As illustrated in tables 2 and 3, base operations overhead costs represented 

a significant portion of the depots’ total overhead rate per direct labor hour 

for fiscal years 2001 and 2005. In fiscal year 2001, base operations overhead 

as a percentage of the total overhead rate ranged from 39 percent at the 

Letterkenny Army Depot to 54 percent at the Tobyhanna Army Depot. In 

fiscal year 2005, base operations still made up a significant portion of the 

individual depots’ total overhead rates: a range of 28 percent at the 

Anniston Army Depot to 52 percent at the Red River Army Depot. 

9

 Fiscal year 2000 base operations and maintenance mission overhead data were not 

available for all depots.

Army depot

Fiscal year 2001 base operations 

Fiscal year 2001 maintenance 

mission

Rates Total overhead rates

Percent of

overhead total Rates

Percent of

overhead total

Letterkenny $32.73 39 $51.70 61 $84.43

Red River 30.86 50 31.04 50 61.90

Corpus Christi 25.39 41 36.34 59 61.73

Anniston 17.27 42 23.92 58 41.19

Tobyhanna 17.69 54 14.90 46 32.59
Page 15 GAO-05-441 Army Depot Maintenance

Table 3: Depot Base Operations and Maintenance Mission Rates Per Direct Labor Hour for Fiscal Year 2005

Source: Individual Army depots and GAO analysis.

Tables 2 and 3 show that maintenance mission overhead was also a 

significant cost factor making up the individual depots’ total overhead rate 

per direct labor hour for fiscal years 2001 and 2005. In fiscal year 2001, 

maintenance mission overhead as a percentage of the total overhead rate 

ranged from 46 percent at the Tobyhanna Army Depot to 61 percent at the 

Letterkenny Army Depot. By fiscal year 2005, these percentages ranged 

from 48 percent at the Red River Army Depot to 72 percent at the Anniston 

Army Depot. Some maintenance mission overhead costs involve payments 

to organizations external to the depots, such as payments to the Defense 

Finance and Accounting Service for accounting and financial services. We 

also found that from fiscal year 2001 to fiscal year 2005, the maintenance 

mission overhead rate increased at only two of the depots—those that had 

the lowest rates in fiscal year 2001. An official at Anniston Army Depot 

stated that increased quality assurance operations that required hiring 

additional engineers and higher subordinate command management fees 

primarily caused the maintenance mission rate increase. An official at 

Tobyhanna Army Depot stated that increased LMP, Defense Logistics 

Agency, and Defense Finance and Accounting Service fees caused part of 

the increase in its maintenance mission rate. Further, in fiscal year 2002, 

the Army Materiel Command directed the depots to reclassify certain base 

operations costs as maintenance mission to properly allocate overhead 

costs to maintenance mission.

Army depot

Fiscal year 2005 base operations 

Fiscal year 2005 maintenance 

mission

Rates Total overhead rates

Percent of

overhead total Rates

Percent of

overhead total

Letterkenny $24.78 47 $28.08 53 $52.86

Red River 28.80 52 26.86 48 55.66

Corpus Christi 14.35 31 31.32 69 45.67

Anniston 14.73 28 37.22 72 51.95

Tobyhanna 18.71 41 26.51 59 45.22
Page 16 GAO-05-441 Army Depot Maintenance

Method of Allocating 

Gains and Losses Does 

Not Provide Incentive 

For Depots to Set 

Prices Correctly

In setting future prices to break even, the Army spread depot maintenance 

reported gains and losses across all depots, rather than allocating reported 

losses or gains incurred by a specific depot to that depot. While DOD policy 

does not specify how to allocate gains and losses at the depot level, this 

practice does not provide the right incentives to the depots to set prices 

correctly in the budget. If one depot consistently incurred losses, the Army 

would increase the prices at other depots to help recoup the losses. As a 

result, the depot incurring the losses is not held accountable for operating 

on a break even basis. For example, the Red River Army Depot reported an 

accumulated loss for 4 of the past 5 years, including fiscal years 2002, 2003, 

and 2004. For these 3 fiscal years, the reported accumulated losses ranged 

from $18 million to about $48 million, indicating that Red River’s customers 

were not charged enough for the goods and services provided to them. 

Because of the continual reported losses, the Tank-automotive and 

Armaments Command—the major subordinate command that directs Red 

River—sent a team to Red River to determine why the depot reported $29 

million of losses during fiscal year 2003. The team found that Red River did 

not develop accurate budget estimates and underestimated various costs 

that it incurred including salaries, material, and overhead.

On the other hand, the Tobyhanna Army Depot—which had a reported 

revenue that ranged from $259 million to $406 million from fiscal years 

2000 to 2004—reported an accumulated gain for each fiscal year from fiscal 

year 2000 through fiscal year 2004, ranging from $31 million to $169 

million.10 Likewise, the Anniston Army Depot reported an accumulated gain 

for fiscal years 2002 through 2004 ranging from $30 million to $123 million, 

indicating that it has been charging its customers too much for goods and 

services. Tobyhanna officials stated that over the last few years, they 

wanted to reduce their prices more than was allowed by the Army Materiel 

Command to return these gains to customers. Tobyhanna officials said that 

their sales prices were inflated to offset losses at other depots.

Due to its recent business merger of depot maintenance and ordnance 

activity groups beginning in fiscal year 2005, it is even more important for 

the Army to allocate gains and losses incurred by a specific activity to that 

activity. This new activity group is called the industrial operations activity 

group. In the past, the depot maintenance activity group did a much larger 

10 LMP implementation problems at the Tobyhanna Army Depot affected its fiscal year 2003 

and 2004 AOR. LMP problems are discussed later in this report.
Page 17 GAO-05-441 Army Depot Maintenance

business than the ordnance activity group. The Army depot maintenance 

activity group received $2.6 billion in new orders in fiscal year 2003, while 

the ordnance activity group received $832 million of new orders. These 

orders were financed with appropriations in different proportions. For 

example, in fiscal year 2003, 41 percent and 7 percent of the depot 

maintenance orders were financed with operation and maintenance 

appropriations and procurement appropriations, respectively. On the other 

hand, 58 percent and 15 percent of the ordnance orders were financed with 

operation and maintenance and procurement appropriations, respectively. 

If the Army continues its current practice of allocating gains and losses 

across all activities, customers of activities that make a gain will continue 

to subsidize customers of activities that incur a loss. Further, because 

ordnance activities are financed with several appropriations in different 

proportions than depot maintenance activities, spreading gains and losses 

across all activities could result in an inequitable allocation of the gains and 

losses to and from these appropriations.

Army Has Consistently 

Exceeded Carryover 

Threshold

In addition, the Army did not comply with DOD’s carryover policy. We 

found that the Army depot maintenance activity group’s actual reported 

carryover (1) consistently exceeded DOD’s 3-month carryover standard 

from fiscal year 1996 through fiscal year 2001 and (2) continued to exceed 

the allowable amount of carryover as calculated under DOD’s revised 

carryover policy for fiscal years 2002 and 2003. The activity group’s 

reported actual carryover did not exceed the allowable amount for fiscal 

year 2004. We reviewed the Army’s fiscal year 2004 carryover calculation 

and validated that the Army’s calculation was done in accordance with 

DOD’s new carryover policy. Too much carryover could result in an activity 

group receiving funds from customers in one fiscal year but not performing 

the work until well into the next fiscal year or subsequent fiscal years. In 

the past, the Congress has reduced the services’ budgets because of 

excessive carryover, including a $48 million reduction in the Army’s fiscal 

year 2003 Operation and Maintenance appropriation. Factors contributing 

to carryover exceeding the ceilings included depots receiving new orders at 

fiscal year-end and depots not being able to obtain material needed to 

perform repair work in a timely manner. Furthermore, although the Army’s 

reported carryover amount exceeded the ceilings, we found that the Army 

understated its reported actual carryover for fiscal years 2002 and 2003. 

For example, fiscal year 2003 carryover was understated by $95 million. 

According to Army officials, the understatement occurred because DOD’s 

verbal guidance was unclear. Based on its interpretation of this guidance, 

the Army only included actual carryover on orders received in the current 
Page 18 GAO-05-441 Army Depot Maintenance

year but did not include carryover related to orders received in prior years 

in calculating its reported actual carryover for fiscal years 2002 and 2003.

What Is Carryover and Why 

Is It Important

Carryover is the dollar value of work that has been ordered and funded 

(obligated) by customers but not completed by working capital fund 

activities at the end of the fiscal year. Carryover consists of both the 

unfinished portion of work started but not completed, as well as requested 

work that has not yet commenced. Some carryover is necessary at fiscal 

year-end if working capital funds are to operate efficiently and effectively. 

For example, if customers do not receive new appropriations at the 

beginning of the fiscal year, carryover is necessary to ensure that the 

working capital fund activities have enough work to ensure a smooth 

transition between fiscal years. Too little carryover could result in some 

personnel not having work to perform at the beginning of the fiscal year. 

On the other hand, too much carryover could result in an activity group 

receiving funds from customers in one fiscal year but not performing the 

work until well into the next fiscal year or subsequent years. By minimizing 

the amount of carryover, DOD can use its resources in the most effective 

manner and minimize the “banking” of funds for work and programs to be 

performed in subsequent years.

In 1996, DOD established a 3-month carryover standard for all working 

capital fund activities except for the contract portion of the Air Force depot 

maintenance activity group.11 In May 2001, we reported12 that DOD did not 

have a basis for its carryover standard and recommended that DOD 

determine the appropriate carryover standard for the depot maintenance, 

ordnance, and research and development activity groups. According to the 

Office of the Under Secretary of Defense (Comptroller) and Army officials, 

based on our recommendation, in December 2002, DOD provided verbal 

guidance concerning its new carryover policy for working capital fund 

activities. Subsequently, DOD included its revised carryover policy in its 

11 The Air Force is the only military service that included its contract depot maintenance 

operation in its working capital fund. To reflect this difference, DOD established a 4.5-month 

carryover standard to account for the additional administrative functions associated with 

awarding contracts. The Air Force is currently taking its contract depot maintenance 

operation out of the working capital fund and plans to complete this action by the end of 

fiscal year 2007.

12 GAO, Defense Working Capital Fund: Improvements Needed for Managing the Backlog 

of Funded Work, GAO-01-559 (Washington, D.C.: May 30, 2001).
Page 19 GAO-05-441 Army Depot Maintenance

DOD Financial Management Regulation 7000.14-R, Volume 2B, Chapter 9, 

dated June 2004, which eliminated the 3-month standard for allowable 

carryover. Under the new policy, the allowable amount of carryover is to be 

based on the outlay rate13 of the customers’ appropriations financing the 

work. This meant that in determining allowable carryover, the first year 

outlay rate would be used for new orders received in the current year (first 

year of the work order). According to the DOD regulation, this new metric 

allows for an analytical-based approach that holds working capital fund 

activities to the same standard as general fund execution and allows for 

more meaningful budget execution analysis.

Army Reports Showed That 

the Depot Maintenance 

Activity Group Consistently 

Exceeded Carryover Ceiling

Tables 4 and 5 show that the Army depot maintenance activity group’s 

actual reported carryover (1) consistently exceeded DOD’s 3-month 

carryover standard from fiscal year 1996 through fiscal year 2001 and 

(2) continued to exceed the allowable amount of carryover as calculated 

under DOD’s revised carryover policy for fiscal years 2002 and 2003.

Table 4: Fiscal Year-End Actual Reported Carryover from Fiscal Year 1996 through 

2001 Consistently Exceeded DOD’s 3-month Standard

Source: GAO-01-559 and fiscal year 2003 Army Working Capital Fund budget estimate dated February 2002.

13 The amount of allowable carryover using the outlay rate follows. For example, customers 

order $100 of work, which is financed with a specific appropriation. If the outlay rate for this 

appropriation at the appropriation level is 60 percent, then this would result in the depot 

maintenance activity group being allowed to carry over $40 ($100 – $60 [$100 x 60 percent] = 

$40).

Fiscal year Reported actual months of carryover

1996 3.6

1997 3.2

1998 3.4

1999 4.4

2000 4.2

2001 3.4
Page 20 GAO-05-441 Army Depot Maintenance

Table 5: Dollar Amount of Reported Actual Carryover for Fiscal Years 2002 and 2003 

That Exceeded Allowable Amounts

Source: Fiscal years 2004 and 2005 Army Working Capital Fund budget estimates dated February 2003 and February 2004, 

respectively.

Officials at the four depots that exceeded their carryover ceilings informed 

us that reported actual year-end carryover exceeded the allowable amount 

because some depots received and accepted work late in the fiscal year and 

some depots could not obtain the material needed in a timely manner, so 

that less work was performed than planned. While other work can be 

substituted for items awaiting parts, this shifting of the repair work does 

have a negative effect on the amount of work accomplished. The following 

examples illustrate these two reasons regarding why work was not 

performed by fiscal year-end.

• On September 26, 2003—the last week of the fiscal year—the Red River 

Army Depot accepted a customer work order for $17.9 million to 

overhaul 41 Bradley Fighting Vehicles. Because the depot did not begin 

work on this order until October 2003, the entire $17.9 million had to be 

carried over into fiscal year 2004 and was included in the depot’s fiscal 

year-end 2003 reported actual carryover amount. According to Red River 

Army Depot officials, their command told them to accept this order to 

enable the obligation of operation and maintenance funds before they 

expired at year-end.

• In January 2002, the Red River Army Depot accepted a customer work 

order financed with about $3.1 million of operation and maintenance 

funds to overhaul 25 25-ton cranes. Upon starting the work, depot 

officials said they discovered that many of the parts needed for the 

overhaul were no longer readily available, thus requiring the depot to 

research where the parts could be obtained. This delayed the overhaul 

work, which caused about $3.1 million to be included in the depot’s 

fiscal year-end 2002 reported actual carryover and was carried over into 

fiscal year 2003. At the end of fiscal year 2003, almost $1.4 million of the 

work was still not completed and was carried over into fiscal year 2004. 

Dollars in millions

FY 2002 FY 2003

Allowable carryover $548.2 $854.4

Reported actual carryover 584.3 981.5

Carryover above allowable amount $36.1 $127.1
Page 21 GAO-05-441 Army Depot Maintenance

In fact, at the start of fiscal year 2004, none of the 25 cranes had been 

completed. In November 2003, the first 2 cranes were completed, with 

16 more being completed by the end of fiscal year 2004. The remaining 9 

cranes, with about $470,000 of work, were carried over into fiscal year 

2005 and finally completed by November 2004. Thus, due to the 

unavailability of repair parts, uncompleted work on this order was 

included in the depot’s carryover balance at the end of fiscal years 2002, 

2003, and 2004.

• On September 26, 2003, the Tobyhanna Army Depot accepted an order 

for about $2.7 million that was financed by operation and maintenance 

funds to repair a ground mobile navigation radar. Since the depot 

accepted the order late in the fiscal year, the depot was unable to 

schedule and begin the repair work until November 2003. As a result, 

this $2.7 million order was carried over into fiscal year 2004. In addition, 

because of delays in completing a modification upgrade to a component 

on the radar, not all repair work on the radar was completed in fiscal 

year 2004, resulting in about $1.2 million of the order, or 44 percent, 

being carried over into fiscal year 2005.

• In May 2003, the Tobyhanna Army Depot accepted a $3.6 million order 

that was financed by operation and maintenance funds to repair three 

Firefinder radar antennas. The depot received the radar antennas in 

June 2003 but was unable to complete the repair work by the end of the 

fiscal year because it did not receive the other necessary repair parts. 

For example, the depot did not receive completed sets of sentinel 

components and beam steering units from the parts supplier until June 

2004. As a result, the depot reported over $3 million in fiscal year 2003 

carryover and about $2.3 million in fiscal year 2004 carryover.

• On August 24, 2004, the Corpus Christi Army Depot accepted an order 

totaling about $3.1 million that was financed by operation and 

maintenance funds to repair a Black Hawk helicopter. Even though the 

depot did not have the material needed to repair the helicopter, it 

accepted the work order late in the fiscal year. In September 2004, the 

depot ordered the material to make the repairs. Although the depot 

accepted the order and ordered the material in fiscal year 2004, it did 

not begin the repair work until November 2004, when it received the 

material. As a result, the depot reported almost the entire $3.1 million as 

carryover at the end of fiscal year 2004.
Page 22 GAO-05-441 Army Depot Maintenance

• On September 5, 2003, the Letterkenny Army Depot accepted a $5 

million order that was financed by operation and maintenance funds for 

the repair of the Patriot Missile Air Defense System launching stations in 

support of the war in Iraq and Afghanistan. During the week of 

September 19, 2003, the depot began repairing the stations. Since the 

launching stations were received during the last month of the fiscal year, 

the depot was unable to complete repairs on the stations by the end of 

fiscal year 2003. This resulted in the depot reporting about $3.7 million 

as carryover at the end of fiscal year 2003. The depot completed its 

repair on the launching stations in September 2004. 

Reported Actual Carryover 

Was Understated in Fiscal 

Years 2002 and 2003 

Because Prior Year Orders 

Were Not Included

The Army understated its reported actual carryover for fiscal years 2002 

and 2003 because it interpreted DOD’s new carryover guidance as requiring 

only the inclusion of customer orders received in the current year when 

calculating carryover. As a result, the Army did not include customer 

orders received in prior years. For example, the dollar amount of reported 

actual carryover was understated by $95 million at the end of fiscal year 

2003 because carryover related to orders received in fiscal year 2002 and 

prior years was not included. Army officials at headquarters, the Army 

Materiel Command, and the depots acknowledged that the actual carryover 

figures did not include carryover related to prior year orders. As a result, 

the Army reported to the Congress that its actual carryover exceeded the 

allowable amount by $127 million in fiscal year 2003 as shown in table 5, 

when it actually exceeded the allowable amount by $222 million.

DOD changed its carryover policy in December 2002 and stated that the 

revised carryover methodology would be adopted for the first time in the 

fiscal year 2004 budget, which affected the way the fiscal year 2002 

reported actual carryover amount, as well as the fiscal years 2003, 2004, 

and 2005 budgeted amounts, were to be calculated. However, DOD did not 

issue detailed written procedures for calculating actual carryover until 

June 2004. Army headquarters officials stated that prior to the issuance of 

the written guidance in June 2004, the new carryover calculation was based 

on verbal instructions that the Army received from the Office of the Under 

Secretary of Defense (Comptroller). The Army interpreted the new 

guidance to include only actual carryover on orders received in the current 

year and instructed the Army Materiel Command to calculate carryover 

accordingly. The Army Materiel Command then provided this guidance to 

the depots. For example, on March 4, 2003, the Army Materiel Command 

provided carryover guidance for the development of the fiscal year 2005 

budget and specified that the amount of actual carryover was to be based 
Page 23 GAO-05-441 Army Depot Maintenance

on new orders only and not to include actual carryover related to prior year 

orders. When DOD issued the revised DOD regulation in June 2004, Army 

officials realized that they were not calculating reported actual carryover 

correctly and changed their methodology in developing the fiscal year 2006 

depot maintenance budget so that the actual carryover calculation would 

include prior year orders and be in accordance with DOD’s written 

guidance.

Current DOD Policy on 

Calculating Allowable 

Carryover Unclear

In addition to the problem of not including work related to prior year 

orders when reporting actual carryover, problems also existed with 

determining the amount of allowable carryover. As previously stated, in 

June 2004, DOD revised the DOD Financial Management Regulation 

7000.14-R, Volume 2B, Chapter 9 to formalize the December 2002 carryover 

policy. However, this regulation did not contain specific instructions for 

determining allowable carryover for work not completed on prior year 

orders. To clarify its June 2004 written guidance, DOD again provided the 

Army verbal guidance on calculating the allowable carryover amount for 

work not completed on prior year orders. Based on the verbal guidance, the 

Army used the first year outlay rate for both (1) current year orders and 

(2) work not completed on prior year orders. We questioned this 

methodology for calculating allowable carryover with officials from the 

Army and the Office of the Under Secretary of Defense (Comptroller), and 

why they were applying the first year outlay rates to prior year orders 

instead of the applicable second or third year outlay rates. By using only 

the first year rates, the Army was allowed more carryover. After discussing 

our concerns with Office of the Under Secretary of Defense (Comptroller) 

and Army depot maintenance officials, they changed the way they were 

calculating allowable carryover. Specifically, the Army calculated the 

allowable amount of carryover that was included in the Army Working 

Capital Fund fiscal year 2006 budget by applying the first year outlay rate of 

the appropriation financing the order for current year orders only. For 

illustrative purposes, if the Army depot maintenance activity group 

received $100 of new orders in fiscal year 2006 and the outlay rate was 60 

percent, then the allowable amount of carryover would be $40.

In discussing this matter with officials from the Office of the Under 

Secretary of Defense (Comptroller), they acknowledged that the current 

written guidance on calculating allowable carryover was unclear. They 

stated that they have since provided verbal guidance to the Army on how to 

calculate the allowable amount. Specifically, the allowable amount of 

carryover is to be calculated by applying the first year outlay rate of the 
Page 24 GAO-05-441 Army Depot Maintenance

appropriation financing the current year orders. The officials also stated 

that work not completed in the first year of the order is not to be included 

in the calculation because it is expected to be completed by the end of the 

second year of the order for the Army depot maintenance activity group. 

The officials informed us that they plan to issue written guidance on this 

matter.

Tobyhanna Army 

Depot Continues to 

Experience Difficulty 

With LMP

Since its implementation in July 2003, LMP has not been able to provide 

timely and accurate information needed for the economical and efficient 

operations of the Tobyhanna Army Depot. As we reported in May 2004,14

the Army’s inadequate management of its requirements and system testing 

activities before LMP was fielded were the primary contributing factors to 

the problems experienced at Tobyhanna since fiscal year 2003. These 

problems are continuing to prevent the Tobyhanna Army Depot from 

accurately reporting on its financial operations, which, in turn, adversely 

impacts the depot’s ability to accurately set customer sales prices. While 

the Army developed a reasonable approach that was to be followed in 

addressing system problems that must be resolved for LMP to provide the 

intended capabilities, the Army has not been able to effectively implement 

those processes. As a result, the Army was unable to provide evidence to 

show that the corrective actions adequately address the problems 

experienced during LMP implementation. Until the Army effectively 

implements its stated management processes to address the numerous 

problems impeding the efficient and effective operation of LMP at the 

Tobyhanna Army Depot, future deployments can expect to experience 

similar, significant disruptions in their depot maintenance operations. 

Prior GAO Report Identified 

LMP Problems 

In our May 2004 report, we pointed out that the Army had not effectively 

managed its implementation of LMP. This report noted that after LMP was 

deployed in July 2003, operational difficulties at the Tobyhanna Army 

Depot resulted in inaccurate financial management information. More 

specifically, the depot was not (1) producing accurate workload planning 

information, (2) generating accurate customer bills, and (3) capturing all 

repair costs, which impeded the Army’s ability to calculate accurate future 

14 GAO, DOD Business Systems Modernization: Billions Continue to Be Invested with 

Inadequate Management Oversight and Accountability, GAO-04-615 (Washington, D.C.: 

May 27, 2004).
Page 25 GAO-05-441 Army Depot Maintenance

repair prices. As noted in the report, Army program officials acknowledged 

that requirements and testing defects were factors contributing to the 

operational problems.

Requirements represent the blueprint that system developers and program 

managers use to design, develop, and acquire a system. Improperly defined 

or incomplete requirements have been commonly identified as a cause of 

system failure, resulting in systems not meeting their costs, schedules, or 

performance goals. Further, because requirements provide the foundation 

for system testing, requirement defects, such as those noted during our 

review relating to specificity and the ability to determine the relationship 

between requirements (commonly referred to as traceability), preclude an 

entity from implementing a disciplined testing process. That is, 

requirements must be complete, clear, and well documented to design and 

implement an effective testing program. Absent this, an organization is 

taking a significant risk that its testing efforts will not detect significant 

defects until after the system is placed into production. Industry 

experience indicates that the sooner a defect is recognized and corrected, 

the cheaper it is to fix. 

In our May 2004 report, we noted that LMP’s requirements (1) lacked the 

specific information necessary to understand the required functionality 

that was to be provided and (2) did not describe how to determine 

quantitatively, through testing or other analysis, whether the systems 

would meet the Army’s needs. We continue to believe that one reason that 

users have not been provided with the intended systems capabilities is 

because of the breakdown in the requirements management process. As a 

consequence, the Army has implemented error-prone, time-consuming 

manual workarounds as a means to minimize disruption to critical 

operations. As discussed in the next section, our current work 

demonstrated that Tobyhanna’s financial management operations 

continued to be affected by LMP system problems. 

LMP Adversely Affected 

Tobyhanna Army Depot’s 

Financial Management 

Operations

Since the Army has not corrected LMP’s system problems, the Tobyhanna 

Army Depot continues to experience financial management challenges. 

These system problems include the depot’s inability to (1) report net 

operating results that are reliable, (2) properly recognize revenue and bill 

customers, (3) reconcile balances that were converted from the depot’s 

legacy finance and accounting system, the Standard Depot System (SDS), 

to LMP, and (4) produce reliable cost information because LMP contains 

incorrect unit prices and unit of issue data. These problems adversely 
Page 26 GAO-05-441 Army Depot Maintenance

affected Tobyhanna’s ability to accurately set customer sales prices and 

develop reliable budgets for its depot maintenance operations.

Net Operating Results Reported 

by LMP Were Not Reliable

According to an Army headquarters budget official, the fiscal year-end 2003 

and 2004 net operating results were overstated by $74.7 million and $50 

million, respectively, due to problems with the implementation of LMP. 

Research performed by Tobyhanna finance and accounting personnel 

showed that the fiscal year 2003 net operating result was overstated for a 

number of reasons including (1) the recording of $35.2 million of 

miscellaneous gains in LMP that did not occur and (2) an overstatement of 

$39.5 million of revenue in LMP. For example, the $35.2 million of gains 

recorded in LMP should have been reversed because LMP did not correctly 

(1) account for material charged to jobs ($10.4 million), (2) process 

transactions related to the movement of assets and material at the depot 

($11.8 million), (3) account for inventory variance account balances ($12 

million), and (4) account for material returned for credit ($1 million). In the 

Army Working Capital Fund budget for fiscal year 2006/2007, the Army 

plans to revise the accumulated operating results for fiscal year 2005 by 

adjusting it downward by the $124.7 million overstatement. Since the 

accumulated operating result is one factor used in developing prices, this 

adjustment will affect future prices.

LMP Did Not Always Properly 

Recognize Revenue and Bill 

Customers

Shortly after LMP was implemented in July 2003, Tobyhanna officials began 

identifying problems related to the system’s ability to accurately recognize 

revenue and bill customers for goods and services provided. As of January 

2005, the Army had not corrected the problems associated with revenue 

recognition and billing of customers. For example, Tobyhanna officials 

identified 837 work orders with accumulated costs for work performed 

totaling over $44.8 million in September 2004. However, no revenue was 

recognized for the work performed and, as a result, customers were not 

billed for the corresponding amount. For one of the 837 work orders, our 

analysis showed that the depot began incurring costs in May 2004 and had 

total accumulated costs of $2.6 million as of September 2004. Tobyhanna 

officials informed the contractor of this problem in September 2004. In 

December 2004, the contractor told depot officials that it had corrected the 

problem. However, the contractor corrected the problem for the one order 

but did not correct the problems with the remaining 836 orders. Further, 

the contractor did not determine the root cause of the problem, and the 

depot continued to find the same problem with other orders. Once a 

problem is identified, it is critical that it be investigated, the root cause 

identified in order for a systematic solution to be developed, and that the 
Page 27 GAO-05-441 Army Depot Maintenance

solutions be effectively tested to ensure that they address the fundamental 

problem and do not introduce additional problems. 

Another problem related to billing customers involves the Defense Finance 

and Accounting Service (DFAS) and the process used to close customer 

work orders. As part of this process, Tobyhanna sends completed work 

orders to DFAS to be closed out so DFAS can bill customers for any 

authorized funds (customer’s orders) that remain unbilled. DFAS uses LMP 

data to perform this final billing. On September 16, 2004, Tobyhanna 

identified 38 orders where the work was completed and sent this 

information to DFAS for final billing and to close out the orders. However, 

DFAS was not able to perform the final billings and close out these orders 

because no sales order data (commonly referred to as a customer order) 

were recorded in LMP for these 38 orders. In September 2004, the Army 

told the contractor and DFAS about the problem of closing out orders. 

Rather than fixing the root cause of the problem, DFAS agreed to manually 

bill the customers and close the orders. According to Tobyhanna officials, 

the problem will continue since the root cause of the problem was not 

identified and fixed. 

Account Balances Were Not 

Reconciled When Tobyhanna 

Converted to LMP

Tobyhanna Army Depot encountered problems in converting data from the 

legacy system to LMP. Specifically, when Tobyhanna converted from its 

legacy finance and accounting system, SDS, to LMP in July 2003, the June 

30, 2003, ending account balances in SDS did not reconcile to the beginning 

account balances in LMP. According to Tobyhanna officials, the account 

balances should have been the same. However, the officials did not perform 

a detailed analysis to determine why the account balances did not reconcile 

because they (1) were too busy identifying other problems with the 

implementation of LMP and (2) lacked the detailed information to do the 

analysis. Tobyhanna officials informed the contractor that the balances 

were not reconciling in September 2003. However, as of January 2005—

about 18 months after the implementation of the system—the account 

balances in the two systems still could not be reconciled. Table 6 provides 

the account balances shown in SDS and LMP for five selected accounts that 

should have been the same but were different as of June 30, 2003.
Page 28 GAO-05-441 Army Depot Maintenance

Table 6: Differences in Selected Account Balances Reported in SDS and LMP as of 

June 30, 2003

Source: SDS and LMP general ledger balances as of June 30, 2003.

Accurate account balances are important because the amounts are used to 

produce official financial reports such as the income statement—which 

include revenues, expenses, and annual and accumulated operating 

results—that are used to prepare future budgets. For example, the fiscal 

year 2004 operating result is one factor used in developing the fiscal year 

2006 prices. If the information on revenue, costs, and net operating results 

is unreliable, this could adversely affect the reliability of Tobyhanna’s 

customer sales prices. Tobyhanna officials told us that in the past, they 

were able to reconcile the information contained in SDS to the DFAS 

official financial reports, including the income statement. This provided 

them some assurance that the financial reports were correct. However, 

since the implementation of LMP, they have not been able to reconcile the 

data in LMP to the DFAS official reports.

DFAS officials acknowledged that there should not be differences between 

ending account balances in SDS and beginning account balances in LMP. 

However, because of unreconciled differences between the two systems, 

DFAS included a footnote in the depot maintenance activity group’s fiscal 

years 2003 and 2004 year-end financial reports and stated that LMP 

conversion problems affected revenue earned, orders received from 

customers, and billings. As of the end of fiscal year 2004—over 1 year after 

conversion—DFAS was still unable to quantify the effect on revenue. 

Dollars in millions

Account title SDS LMP Difference

Accounts receivable – government $15.6 $(4.6) $20.2

Operating material and supplies, net 3.8 69.6 (65.8)

Accounts payable – public (9.9) (24.9) 15.0

Obligations – funds received 716.9 804.9 (88.0)

Reimbursements earned (revenue) 218.7 206.8 11.9
Page 29 GAO-05-441 Army Depot Maintenance

LMP Contained Erroneous Unit 

Prices and Unit of Issue

LMP did not always contain the correct unit price or unit of issue15 for 

certain materials, resulting in excess material being ordered and incorrect 

prices being charged to jobs. Since LMP contained the wrong values for the 

quantity of issue and price, Tobyhanna received quantities of parts and 

supplies for use in repairing military assets that were far greater than 

intended. Further, these parts and supplies were charged to jobs at higher 

prices than the depot officials thought were being charged. Tobyhanna 

officials informed us that they have experienced unit-price and unit-ofissue problems with LMP since its implementation in July 2003 and that 

these problems continued as of January 2005, causing erroneous cost 

information that distorts the depot’s financial reports, including net 

operating results. The following are two examples illustrating problems 

that Tobyhanna experienced while using LMP to place orders for parts and 

supplies.

• LMP did not contain the correct price for screws, wing nuts, and locking 

washers. According to the officials, if depot maintenance personnel had 

not identified these errors, the customer requesting this work would 

have been charged over $2.8 million for the wing nuts, screws, and 

locking washers, which were actually worth about $400. In fiscal year 

2002, Tobyhanna received a work order from the Army to repair High 

Mobility Multipurpose Wheeled Vehicles. In reviewing the work on this 

order in May 2004, Tobyhanna officials determined that the job had been 

assessed with costs totaling $2,846,686 for plain wing nuts, screws, and 

locking washers instead of costs totaling $411.04 as shown in table 7. 

Table 7: Example of Incorrect Unit Costs in New System 

Source: Tobyhanna Army Depot.

15 DOD defines unit of issue as the quantity of an item, such as each number, dozen, gallon, 

pair, pound, ream, set, or yard.

Item description Quantity

Costs assessed to job Actual costs

Unit costs Total Unit costs Total

Wing nuts 449 $4,214 $1,892,086 $0.42 $188.58

Screws 5,000 138 690,000 0.0392 196.00

Locking washers 900 294 264,600 0.0294 26.46

Total $2,846,686 $411.04
Page 30 GAO-05-441 Army Depot Maintenance

These officials informed us that they identified the problem with this order 

because they knew that the wing nuts, screws, and locking washers could 

not possibly cost $2.8 million. The officials stated that they were aware of 

only two possible reasons for these errors: (1) the contractor who 

developed LMP input incorrect unit-of-issue and/or price data into the 

system or (2) the unit-of-issue and/or price data did not transfer correctly 

from the SDS legacy system to LMP.

• In another case, Tobyhanna officials stated that they did not realize until 

June 2004—almost 1 year after LMP was implemented—that LMP 

contained the wrong unit of issue for washers, which resulted in the 

system multiplying each order for washers placed with DLA by a factor 

of 100. This occurred because when the data were converted, the lowest 

unit of issue for the item was 100, while the shop floor employees 

requisitioned the items by individual item. For example, when a 

requisition for 800 washers was processed by the system, the system 

converted the 800 to 80,000 by multiplying the number ordered (800) 

times the unit of issue applicable for that order (100). Tobyhanna 

officials informed us that they had so many flat washers in inventory 

that it took about three truckloads to return the excess to the Defense 

Logistics Agency.

The Army and the contractor acknowledged that there is a unit-of-issue and 

unit-price problem. In January 2005, they identified over 7,600 items in LMP 

whose base unit of measure was incorrect. According to the officials, 

correcting this problem is not simple in all cases. For example, once the 

inventory item has been used in the system, those transactions for the item 

need to be reversed before the change can be made in the system that 

shows the correct base unit-of-issue value. The officials also noted that 

some of these items have literally thousands of transactions against them, 

since these problems have been present since the system was deployed in 

July 2003.

To avoid the unit-of-issue and unit-price problem that occurred at 

Tobyhanna Army Depot, Army and contractor officials stated that it is 

critical to clean up the base unit-of-issue problems before the system is 

deployed at other sites. Accordingly, they have undertaken a program for 

the second deployment sites to help ensure that the items they will be 

adding to LMP that are not presently in the system have the proper base 

unit-of-issue values. Based on reports provided by the project office, a great 

deal of progress has been made on this initiative. For example, between 

August and November 2004, the number of items at Corpus Christi Army 
Page 31 GAO-05-441 Army Depot Maintenance

Depot with base unit-of-issue problems had dropped by 67 percent from 

180 items to 60 items. It will be critical for Army to ensure that this activity 

is completed prior to converting the legacy data into LMP.

Army’s Efforts to Resolve 

LMP Problems Have Been 

Ineffective

We found that the significant flaws in requirements and testing 

management that adversely affected the initial development and 

implementation of LMP also hampered efforts to correct the operational 

difficulties experienced at Tobyhanna. To address these recurring 

problems, the Army and its contractor, Computer Sciences Corporation 

(CSC), developed a reasonable approach that was to be followed in 

addressing 722 stabilization items—system problems identified by the 

Army that must be resolved for LMP to provide the intended capabilities. 

The ability to effectively implement the necessary project management 

processes (commonly referred to as disciplined processes)16 is a key factor 

in reducing the project risks to acceptable levels17 and is the best indicator 

of a project’s ability to meet its cost, schedule, and performance objectives. 

However, the Army has not been able to effectively implement those 

processes. Accordingly, the Army lacks reasonable assurance that 

(1) system problems experienced during the initial deployment and causing 

the delay of future deployments have been corrected and (2) LMP is 

capable of providing the promised system functionality. 

The Army and its contractor developed specific steps that were to be 

followed in addressing the stabilization items. From an overall perspective, 

the Army’s described approach is aligned with steps one would anticipate 

to see in a project such as LMP. For the most part, each corrective action 

was to include the following steps: 

• Developing and documenting the requirements that were needed to 

resolve the problem being corrected and the test steps that should be 

followed to validate that a corrective action had been properly 

implemented, where appropriate. 

16 Disciplined processes include a wide range of activities including project planning and 

management, requirements management, risk management, quality assurance, and testing. 

17 Acceptable levels refer to the fact that any systems acquisition effort will have risks and will suffer 

the adverse consequences associated with defects in the processes. However, effective 

implementation of disciplined processes reduces the possibility of the potential risks actually 

occurring and prevents significant defects from materially affecting the cost, timeliness, and 

performance of the project.
Page 32 GAO-05-441 Army Depot Maintenance

• Requiring an Army and CSC official to sign off on each corrective action. 

This sign off was used to help provide assurance that (1) the corrective 

action adequately addressed the problem identified in the stabilization 

item and was defined in the requirements document and (2) adequate 

testing had been performed. 

• Establishing an oversight board to review the corrective actions and 

ensure the stated processes had been followed, such as ensuring 

(1) proper documentation had been developed and (2) adequate testing 

had been conducted to provide reasonable assurance that the corrective 

action addressed the problem. Based on a review of the actions taken to 

address the problem, the oversight board would make a decision on 

whether the corrective action should be loaded into the production 

system. The oversight board included Army and CSC personnel.

To ascertain if the Army’s stated corrective action processes were being 

adhered to, we selected 80 of the 276 stabilization items for review that 

were shown as completed as of May 2004. Of the 80 items, we found that 32 

items had been either merged with another corrective action or 

cancelled—meaning they should not have been included in the stabilization 

item inventory. For the remaining items,18 our analysis identified numerous 

instances in which the stated processes were not being followed. As a 

result, the Army was unable to provide evidence to show us that the 

stabilization items had been corrected. Our analysis disclosed the 

following:

• The requirements documentation was inadequate or nonexistent for 24 

items. As previously noted, the lack of adequately defined requirements 

was one of the primary reasons LMP experienced problems when it was 

initially deployed in July 2003. Further, since requirements represent the 

blueprint that system developers and program managers use, it is 

unclear how the individuals assigned to correct a given problem would 

know exactly what needed to be fixed, e.g., the detailed business rules 

that needed to be implemented.

• Testing documentation was insufficient for 33 items. In some cases, 

while there was documentation related to testing, the requirement had 

18 Five of the remaining 48 items related to training, documentation, and data issues and, 

therefore, there were no requirements or testing related to these items. Our analysis is 

based on a review of 43 stabilization items.
Page 33 GAO-05-441 Army Depot Maintenance

not been properly defined. Therefore, one could not ascertain if testing 

was properly conducted. For example, without documentation defining 

the business rules that should be used, a tester cannot develop the types 

of tests to ensure those business rules are implemented. As discussed 

previously, we found numerous problems with the implementation of 

the business rules that should be used for recognizing revenue and 

billing. 

Documentation is one means available to indicate that the stated processes 

are being followed. Without the appropriate documentation, the Army does 

not have reasonable assurance that all of the required steps are being 

followed and cannot validate that a stabilization item has been corrected. 

Further, if a planned corrective action does not resolve a stated problem, 

the documentation, particularly for requirements and testing, can be used 

to ascertain if the requirement was properly defined. In terms of testing, the 

documentation would help indicate if the test was properly designed based 

upon the stated requirement and if all of the attributes were tested as 

required. 

The following are specific examples of cases in which the problem 

resolution process was not followed and, therefore, the Army did not have 

reasonable assurance and could not demonstrate to us that these 

stabilization items were resolved:

• One corrective action related to labor charges was shown as completed 

in July 2004. However, the Army could not provide documentation to 

substantiate that (1) requirements were developed, (2) government 

approval was received, and (3) oversight board approval was obtained. 

Although a testing document was provided, it was impossible to 

determine its adequacy since a corresponding requirements document 

was not available for review. 

• Another corrective action designed to resolve inaccurate entries in the 

general ledger was shown as completed on July 30, 2004. However, the 

Army could not provide documentation that indicated that the 

requirements were developed, testing was performed, and government 

approval was received. In addition, we found a note that indicated 

approval by the oversight board was not necessary, but no one could 

explain why the board’s approval was not needed. 

In discussing these issues with Army officials, they acknowledged that 

although the problem resolution process was documented in May 2004, it 
Page 34 GAO-05-441 Army Depot Maintenance

was not until October 2004 that all items that were submitted to the 

oversight board were required to contain the requisite documentation. To 

ascertain if the project had effectively implemented the disciplined 

processes over other corrective actions subsequent to this later time frame, 

we reviewed 14 “trouble tickets”—specific LMP output problems identified 

by Tobyhanna users—that were reported as completed from October 2004 

through January 2005. These trouble tickets were be resolved with 

essentially the same process used for stabilization items discussed 

previously. For example, the problems identified by Tobyhanna were 

expected to be reviewed to determine the causes and, if the problems were 

caused by the system, the following steps should be taken and 

documented: (1) identify the cause of the problem and the corrective 

action that needed to be taken (requirements), (2) perform adequate 

testing to ensure that the problem was fixed and did not adversely affect 

other LMP functionality, and (3) obtain approval by the contractor and LMP 

staff. In each case, we found that documentation was not available to 

validate that the process had been followed and the problem resolved. 

Examples are discussed below. 

• In October 2004, a program was developed and placed into operation to 

address billing problems reported by Tobyhanna. However, it did not fix 

the problem and generated so many errors that the resulting bills could 

not be released to the customers. In fact, because of the number of 

errors produced by this “fix,” a stabilization item to clean up the 

erroneous data was generated. LMP officials stated they were unsure 

why this happened. Because of the large number of errors generated, it 

was clear that adequate testing had not been performed on this program 

before it was placed into production. 

• As noted previously, one of the major problems with LMP is its inability 

to properly recognize revenue and bill customers. One cause of this 

problem is that, in some cases, the system did not include an estimated 

value for the planned costs of customer orders that were being 

processed by Tobyhanna. When this condition occurred, improper 

amounts of revenue were being recognized and improper bills prepared. 

The Army recognized this problem early in the LMP deployment and 

developed a “fix” in September 2003. However, we found the problem 

was still continuing as late as January 2005, and the Army did not know 

why the September 2003 corrective action was not working as planned. 

If the Army had implemented the necessary disciplined processes, it 

would have likely been able to (1) identify the cause of the initial 

problem and (2) determine why the September 2003 corrective action 
Page 35 GAO-05-441 Army Depot Maintenance

was not working. In one case, this problem generated revenue of over 

$2.8 million that should not have been recognized, and in another case a 

customer was improperly billed for over $1 million. 

Conclusions The Army depot maintenance group has not always achieved the goals 

envisioned under the working capital fund concept—that is, to operate like 

a business by developing and using effective methods to control operating 

costs, charging customers prices that result in break-even status at yearend, and ensuring that accurate and timely information is available to 

manage and report on financial management operations. Specific examples 

of management weaknesses in this area include the lack of proactive steps 

to control rising material costs, overcharging certain depot maintenance 

customers, and excessive amounts of year-end carryover, which could 

result in an activity group receiving funds from customers in one fiscal year 

but not performing the work until well into subsequent fiscal years, thus 

tying up funds for lengthy periods that could otherwise be put to more 

beneficial near-term use. Finally, DOD’s inability to develop and implement 

systems solutions on time and with the promised capability appears to be a 

critical impediment in the planned transformation of depot operations. 

Flaws in the early stages of system development, including inadequate 

requirements management and system testing, are now manifested in 

significant LMP implementation problems at Tobyhanna. The failure to 

resolve these problems will continue to impede operations at Tobyhanna, 

and future deployment locations can expect to experience similar 

significant disruptions in their operations.

Recommendations for 

Executive Action

To improve the business operations of the Army Working Capital Fund, we 

are making the following nine recommendations—two recommendations 

to the Secretary of Defense and seven recommendations to the Secretary of 

the Army:

Analyzing Cost Increases We recommend that the Secretary of the Army direct the Commander, 

Army Materiel Command, to develop and implement a systematic process 

for analyzing the depot maintenance activity group’s material cost 

increases due to the price paid for material and material usage that would 

enable the Army to specifically identify and quantify all material cost 

drivers and take proactive steps to control these rapidly increasing material 

costs.
Page 36 GAO-05-441 Army Depot Maintenance

Allocating Gains or Losses We recommend that the Secretary of the Army direct the Commander, 

Army Materiel Command, to allocate depot gains and/or losses to the 

individual depots if a several-year trend shows that an individual depot 

consistently realizes gains or incurs losses.

Reducing Excessive 

Carryover

We recommend that the Secretary of Defense take the following actions:

• Direct the Under Secretary of Defense (Comptroller) to clarify DOD’s 

written guidance for calculating carryover so that the actual amount of 

carryover associated with current and prior year orders is required to be 

included in the reported amount provided to the Congress and DOD.

• Direct the Under Secretary of Defense (Comptroller) to issue written 

guidance that specifies that only current year orders are used in 

calculating the allowable amount of carryover for the Army depot 

maintenance activity group.

We recommend that the Secretary of the Army direct the Commander, 

Army Materiel Command, to continue to comply with DOD’s policy on not 

exceeding the year-end ceilings on the amount of year-end carryover 

ceilings.

Improving LMP 

Implementation

We recommend that the Secretary of the Army direct the Commander, 

Army Materiel Command to take the following actions:

• Delay implementation of LMP at the four remaining depots until the 

problems encountered by the Tobyhanna Army Depot with the system 

are resolved.

• Implement the existing management procedures for ensuring the 

complete resolution of identified problems resulting from the 

implementation of LMP.

• Reconcile all general ledger account balances between the legacy 

systems and LMP as of the date the Army deploys the system at the four 

depots that have not yet implemented the system.

• Correct unit of issue and material pricing errors in LMP.
Page 37 GAO-05-441 Army Depot Maintenance

Agency Comments and 

Our Evaluation

DOD provided written comments on a draft of this report. While DOD 

concurred with all the recommendations, it noted that our report did not 

fully address the effects of the Global War on Terrorism and the impact it 

had on maintenance workload at the Army depots. According to DOD, 

support for the war more than doubled the depot workload driving up 

personnel and material costs. As stated in our report, we agree that the war 

on terrorism has affected the depots’ workload and impacted material and 

personnel costs. However, the war on terrorism does not affect the Army’s 

(1) practice of spreading gains and losses across all depots, (2) calculation 

of reported actual carryover and the allowable amount of carryover, and 

(3) development of LMP. Regarding increasing material costs, we agree that 

the war does affect overall material costs. However, material costs per 

direct labor hour more than doubled from $29.09 in fiscal year 2000 to 

$65.23 in fiscal year 2005 and accounted for over 100 percent of the sales 

price increase that occurred during this same time period. Because of this 

significant increase, we still believe that the Army needs to identify all 

material cost drivers and take proactive steps to control them.

In its comments, DOD concurred with the nine recommendations in the 

draft report. For most of the recommendations, DOD identified specific 

actions it will take to implement them. For example, DOD believes the 

Army should make every effort to control the growth of material costs. 

While DOD believes the increase in material costs are, in part, related to 

wartime demand increases, the Army will determine the factors affecting 

pricing. Also, the Army indicated that it has updated its budget formulation 

guidance stating that gains and losses should be allocated to the individual 

industrial installations if a several year trend shows that an installation has 

consistently realized gains or losses. Further, the Under Secretary of 

Defense (Comptroller) will issue guidance clarifying the present carryover 

policy concerning the calculation of actual carryover as well as the 

allowable amount of carryover. Finally, the Army concurred with our 

recommendations on LMP and recognized that it cannot move forward 

with future deployments to other depots until critical problems identified 

at the Tobyhanna Army Depot are corrected.

We are sending copies of this report to the Chairmen and Ranking Minority 

Members of the Senate Committee on Armed Services; the Subcommittee 

on Readiness and Management Support, Senate Committee on Armed 

Services; the Subcommittee on Defense, Senate Committee on 

Appropriations; the House Committee on Armed Services; the 
Page 38 GAO-05-441 Army Depot Maintenance

Subcommittee on Readiness, House Committee on Armed Services; and the 

Ranking Minority Member, Subcommittee on Defense, House Committee 

on Appropriations. We are also sending copies to the Secretary of Defense, 

Secretary of the Army, and other interested parties. Copies will be made 

available to others upon request. Should you or your staff have any 

questions concerning this report, please contact Gregory D. Kutz, Managing 

Director, at (202) 512-9505 or kutzg@gao.gov, or William M. Solis, Director, 

at (202) 512-8365 or solisw@gao.gov, or Keith Rhodes, Director, at (202) 

512-6412 or rhodesk@gao.gov. Key contributors to this report are listed in 

appendix III.

Sincerely yours,

Gregory D. Kutz

Managing Director, Forensic Audits and Special Investigations

William M. Solis

Director, Defense Capabilities and Management

Keith A. Rhodes

Chief Technologist, Applied Research and Methodology Center

for Engineering and Technology
Page 39 GAO-05-441 Army Depot Maintenance

Appendix I

Scope and Methodology ApApenednxidexiIs

To determine if the prices charged by the Army depot maintenance activity 

group have increased and, if so, why, we obtained and analyzed budget 

documents that provided information on cost factors such as material 

costs, overhead costs, and labor costs used in developing the prices from 

fiscal year 2000 to fiscal year 2005. We determined the reasonableness of 

the figures by reviewing and analyzing the cost factor data at each depot 

and the Army Materiel Command. We determined which factors caused the 

prices to increase the most and discussed the reasons for the price 

increases with officials at the Army Materiel Command and the five Army 

depots. In addition, we met with Army Materiel Command and depot 

officials to determine what actions they were taking to identify the causes 

for increasing material costs—a significant factor causing the majority of 

the prices to increase from fiscal year 2000 to fiscal year 2005. We also 

obtained information on the impact of increasing material costs on 

repairing certain weapon systems such as the Patriot missile, Chinook 

helicopter, and Bradley fighting vehicle. To assess the reliability of the data, 

we (1) reviewed and analyzed the factors used in determining the prices 

and (2) interviewed Army officials knowledgeable about the data. We 

determined that the data were sufficiently reliable for the purposes in this 

report.

To determine how the Army depot maintenance activity group allocated 

reported gains or losses from fiscal year 2000 through fiscal year 2004, we 

obtained and analyzed budget documents and accounting reports that 

provided information on prices, revenue, costs, annual operating results, 

and accumulated operating results for the depot maintenance activity 

group as well as the individual depots. When the activity group or depots 

reported gains or losses, we met with officials to determine (1) why the 

prices charged customers resulted in a reported gain or a loss and (2) 

whether the activity group allocated reported gains or losses incurred by a 

specific depot to that depot. When reported gains or losses were not 

allocated to the specific depot incurring them, we met with Army officials 

to determine why not. 

To determine if the Army depot maintenance activity group exceeded its 

carryover ceilings in the past and the reasons for exceeding the ceiling, we 

obtained and analyzed (1) the allowable amount of carryover for fiscal 

years 1996 through 2004 and (2) reported actual year-end carryover data for 

fiscal years 1996 through 2004. We also reviewed our prior report (GAO-01-

559) on carryover, which provided information on the allowable amount of 

carryover as well as reported actual year-end carryover data. When the 

reported actual carryover exceeded the carryover ceiling, we met with 
Appendix I

Scope and Methodology

Page 40 GAO-05-441 Army Depot Maintenance

responsible budgeting and/or accounting officials at the Army depots and 

the Army Materiel Command to ascertain why. We also reviewed customer 

orders to determine why the work was not completed on these orders by 

the end of the fiscal year. Further, through a review of documentation and 

discussions with officials at Army headquarters, the Army Materiel 

Command, the depots, and the Office of the Under Secretary of Defense 

(Comptroller), we determined (1) whether the Army was implementing 

DOD’s new carryover policy and (2) how allowable carryover and actual 

reported carryover were being calculated under the new carryover policy.

To determine if the Army encountered problems with the implementation 

of LMP at the Tobyhanna Army Depot, we (1) identified problems reported 

by system users at the Tobyhanna Army Depot to the system developers 

and implementers (Army Materiel Command and CSC), (2) analyzed 

actions taken by the Army and its contractor to resolve reported system 

problems, (3) analyzed system stabilization plan to determine whether 

system problems were sufficiently identified and understood to allow 

proper problem resolution, (4) analyzed Army’s project management 

processes to determine whether underlying root causes of system 

problems were identified and appropriate system solutions were developed 

to resolve reported system problems, and (5) analyzed Tobyhanna’s 

financial reports produced by the legacy system and LMP at the time of 

conversion to LMP to determine whether differences in account balances 

were identified and reconciled. We also met with officials from Tobyhanna 

Army Depot, Defense Finance and Accounting Service, CSC, and Army 

Materiel Command to discuss LMP problems we found with the 

implementation of LMP. We also reviewed our prior report (GAO-04-615), 

which provided information on problems found with LMP’s development 

and implementation at Tobyhanna and at the Communications and 

Electronics Command.

We performed our work at the headquarters, Office of the Under Secretary 

of Defense (Comptroller) and the Office of the Secretary of the Army, 

Washington, D.C.; Army Materiel Command, Virginia; the Tobyhanna Army 

Depot, Tobyhanna, Pennsylvania; the Letterkenny Army Depot, 

Chambersburg, Pennsylvania; the Corpus Christi Army Depot, Corpus 

Christi, Texas; the Anniston Army Depot, Anniston, Alabama; and the Red 

River Army Depot, Texarkana, Texas. We also visited Computer Sciences 

Corporation, Moorestown, New Jersey, the contractor responsible for 

developing and implementing LMP, to discuss with company officials the 

problems being experienced with the implementation of LMP at the 

Tobyhanna Army Depot. Most of the financial information in this report is 
Appendix I

Scope and Methodology

Page 41 GAO-05-441 Army Depot Maintenance

budget data obtained from official Army budget documents. The 

accounting data used in this report were obtained from official Army 

accounting reports. We conducted our work from June 2004 through April 

2005 in accordance with U.S. generally accepted government auditing 

standards. We requested comments on a draft of this report from the 

Secretary of Defense or his designee. DOD provided written comments, 

and these comments are presented in the Agency Comments and Our 

Evaluation section of this report and are printed in appendix II.
Page 42 GAO-05-441 Army Depot Maintenance

Appendix II

Comments from the Department of Defense ApendxiI
Appendix II

Comments from the Department of Defense

Page 43 GAO-05-441 Army Depot Maintenance
Appendix II

Comments from the Department of Defense

Page 44 GAO-05-441 Army Depot Maintenance
Appendix II

Comments from the Department of Defense

Page 45 GAO-05-441 Army Depot Maintenance
Page 46 GAO-05-441 Army Depot Maintenance

Appendix III

GAO Contacts and Staff Acknowledgments ApendxiI

GAO Contacts Gregory D. Kutz, (202) 512-9505

William M. Solis, (202) 512-8365

Keith Rhodes, (202) 512- 6412

Acknowledgments Staff who made key contributions to this report were Richard Cambosos, 

Francine DelVecchio, Chris Martin, Keith McDaniel, Mike Peacock, Janine 

Prybyla, Greg Pugnetti, Chris Rice, Hal Santarelli, Darby Smith, and Ron 

Tobias.

(192134)
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