Marine Corps Depot Maintenance: Budgeting and Management of Carryover Could Be Improved
Published: 2012-06-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Marine Corps DMAG repairs and overhauls weapon systems and support equipment to battle-ready condition for deployed and soon-to-be deployed units. To the extent that DMAG does not complete work at year-end, the work and related funding will be carried over into the next fiscal year. Carryover is the reported dollar value of work that has been ordered and funded by customers but not completed by DMAG at the end of the fiscal year. GAO was asked to determine (1) if DMAGs actual carryover exceeded the allowable amount and actions the Marine Corps is taking to reduce carryover; (2) if budget information on DMAG carryover approximated actual results; (3) if there was growth in carryover during the period of OIF/OEF and the reasons for any such growth; and (4) reasons for recent years carryover. To address these objectives, GAO (1) reviewed relevant carryover guidance, (2) obtained and analyzed reported carryover and related data for DMAG against requirements, and (3) interviewed DOD, Navy, and Marine Corps officials.
section_title: What GAO Found
paragraphs: GAOs analysis of Marine Corps depot maintenance activity group (DMAG) reports showed that from fiscal years 2004 through 2011, reported actual carryover exceeded the allowable amounts in the most recent 6 years of the 8- year period, ranging from $59 million in fiscal year 2007 to $7 million in fiscal year 2011. GAOs analysis also showed that the amounts of carryover exceeding the allowable amounts have declined in each of the past 4 years. These reductions could be attributed to DMAG actions, including implementing production efficiencies that reduced the time required to repair weapon systems.
In contrast, DMAGs budgeted carryover amounts were less than the allowable amounts for all 8 years GAO reviewed. In the most recent 6 years, DMAGs reported actual carryover amounts exceeded budgeted carryover by at least $50 million. GAOs analysis showed this occurred because the Marine Corps underestimated DMAGs new orders every year during this 6-year period from a low of 51 percent to a high of 175 percent.
The reported dollar value of DMAG carryover significantly increased during the initial years of Operation Iraqi Freedom/Operation Enduring Freedom (OIF/OEF) from $49 million in fiscal year 2002 to $271 million in fiscal year 2005. This increase could be primarily attributed to new orders from customers more than tripling over this period. GAOs analysis found that the increase in new orders was the result of higher depot maintenance requirements supporting OIF/OEF. Since fiscal year 2005, reported actual carryover amounts have remained relatively stable, averaging $296 million or 6.4 months of work.
GAO identified three factors that were key to DMAGs carryover in fiscal years 2010 and 2011 including: (1) experiencing unanticipated increases in its workload requirements, (2) starting DMAG work on new orders later in the fiscal year because it was already performing work on other orders, and (3) accepting amendments on existing orders in the last quarter of the fiscal year that increased the scope of work.
section_title: What GAO Recommends
paragraphs: GAO recommends that DOD improve the budgeting and management of DMAG carryover by comparing budgeted to actual information on carryover and orders and making adjustments to budget estimates as appropriate. DOD concurred with GAOs recommendations and cited related actions planned.

section_title: Letter
paragraphs: The Marine Corps depot maintenance activity group (DMAG) is part of the  Navy Working Capital Fund. It provides for the repair and overhaul of  weapon systems and support equipment to battle-ready condition for  deployed and soon-to-be deployed Marine Corps units, including  repairing and overhauling such Marine Corps ground combat vehicles  and equipment as the High Mobility Multi-purpose Wheeled Vehicles  (HMMWV) and Assault Amphibious Vehicles.
DMAG operates two maintenance centersconcept, under which customers (such as the military services) are to be  charged for the anticipated full cost of goods and services provided. To  the extent that DMAG does not complete work at year-end, the work and  related funding are to be carried into the next fiscal year. The term  “carryover” refers to the reported dollar value of DMAG work that has  been ordered and funded (obligated) by customers (such as the Marine  Corps) but not completed by DMAG at the end of the fiscal year. The  congressional defense committees have recognized that some carryover  is appropriate to facilitate a smooth flow of work during the transition from  one fiscal year to the next. However, past congressional defense  committee reports have raised concerns that the level of carryover in  military service working capital funds may be more than is needed.  Excessive amounts of carryover financed with customer appropriations  may result in future requests being subject to reductions by the  Department of Defense (DOD) and the congressional defense  committees during the budget review process.   under the working capital fund  In response to your request, this report provides the results of our  assessment to determine (1) if DMAG reported actual carryover  exceeded the allowable amount of carryover from fiscal years 2004  through 2011 and any actions the Marine Corps is taking to reduce  carryover; (2) if budget information on DMAG carryover from fiscal years  2004 through 2011 approximated reported actual results; (3) if there was  growth in DMAG carryover during the period of Operation Iraqi  Freedom/Operation Enduring Freedom (OIF/OEF) and the reasons for  any such growth; and (4) the reasons for the fiscal years 2010 and 2011  carryover.
To address the first and second objectives, we obtained and analyzed  DMAG reports that contained information on budgeted and reported  actual carryover against the allowable amount of carryover for fiscal years  2004 through 2011. We analyzed carryover since fiscal year 2004  because prior to fiscal year 2004 DOD had a different policy for  determining the allowable amount of carryover. We met with responsible  officials from the Navy and Marine Corps to determine the reasons for  significant variances between (1) reported actual carryover and the  allowable amount or (2) budgeted and reported actual carryover. We also  met with these officials to discuss the actions the Marine Corps has and is  taking to reduce the amount of carryover.
To address the third objective, we analyzed reported order, revenue, and  carryover amounts and months of carryover from fiscal years 1998  through 2011 to determine the extent to which OIF/OEF impacted DMAG  workload and carryover. We selected the period from fiscal years 1998  through 2011 to highlight any changes in reported actual carryover  information from the period before and during OIF/OEF. We reviewed and  analyzed Marine Corps documentation, including the DMAG budgets, to  determine the reasons for the growth in carryover.
To address the fourth objective, we met with responsible officials from the  Navy and Marine Corps to identify contributing factors that led to the  carryover. We also performed walkthroughs of the Albany and Barstow  maintenance centers’ operations and discussed with officials reasons for  fiscal years 2010 and 2011 carryover. In order to more fully understand  the reasons for carryover at the maintenance centers, we obtained and  analyzed 60 orders (30 orders for fiscal year 2010 and 30 orders for fiscal  year 2011) that had the largest dollar amount of carryover. Carryover  amounts associated with these orders represented 49 percent and 68  percent of DMAG’s total carryover for fiscal years 2010 and 2011,  respectively. We selected 60 orders because they were the largest and  most recent orders at the time of our audit. We reviewed the orders and  related amendments and discussed the information in these documents  with Marine Corps and DMAG maintenance center officials at Albany and  Barstow to determine the reasons for the carryover. Further details on our  scope and methodology are provided in appendix I.
We conducted this performance audit from July 2011 through June 2012  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. We requested comments on a  draft of this report from the Secretary of Defense or his designee. Written  comments from the Office of the Under Secretary of Defense  (Comptroller) are reprinted in appendix II.
subsections: section_title: Background
paragraphs: The Marine Corps Logistics Command (MCLC) (Programs and  Resources Department), in conjunction with the Office of the Marine  Corps Deputy Commandant (Programs and Resources) are responsible  for developing DMAG’s budget. The budget is then submitted to the  Office of the Assistant Secretary of the Navy (Financial Management and  Comptroller) for review and inclusion in the Navy Working Capital Fund  budget submission to Congress.
DMAG relies on sales revenue rather than direct appropriations to finance  its continuing operations. DMAG is intended to (1) generate sufficient  resources to cover the full costs of its operations and (2) operate on a  break-even basis over time—that is, neither make a gain nor incur a loss.  Customers, such as the Marine Corps, use appropriated funds, (primarily  operations and maintenance and to a lesser extent procurement  appropriations), to finance orders placed with DMAG. DMAG repairs,  overhauls, and modifies all types of ground combat and combat support  equipment, including such major-end items as the HMMWV, Medium  Tactical Vehicle Replacement, Assault Amphibious Vehicle, and the Light  Armored Vehicle (LAV).
subsections: section_title: Carryover and Its Use
paragraphs: DOD uses the term “carryover” to refer to the reported dollar value of  working capital fund activities work that has been ordered and funded  (obligated) by customers but not completed by the end of the fiscal year.  As such, carryover consists of both the unfinished portion of working  capital fund activities work started but not completed, as well as work that  was accepted, but that has not yet begun. Both DOD and congressional  defense committees have agreed that some carryover is appropriate at  the end of the fiscal year in order for working capital funds 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 working capital fund activities (1) have enough work to  continue operations in the new fiscal year and (2) retain the appropriate  number of personnel with sufficient skill sets to perform depot  maintenance work. 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. By limiting the amount of carryover, DOD can  use its resources in the most efficient and effective manner and minimize  the backlog of work and “banking” of related funding for work and  programs to be performed in subsequent years.
section_title: DOD’s Carryover Policy
paragraphs: DOD’s carryover policy is provided in DOD Financial Management  Regulation 7000.14-R, volume 2B, chapter 9. Under the policy, the  allowable amount of carryover each year is based on the amount of new  orders received in a given year and the outlay rate of the customers’  appropriations financing the work. For example, DMAG received about  $462 million in new orders funded with the Marine Corps operation and  maintenance appropriation—one of several appropriations funding orders  DMAG received in fiscal year 2010. The DOD outlay rate for this  appropriation was 57.5 percent. Therefore, the amount of funds DMAG  was allowed to carry over into fiscal year 2011 was $196 million ($462  million multiplied by 42.5 percent, which represents 1 minus the 57.5  percent outlay rate for the operation and maintenance, Marine Corps  appropriation). The DOD carryover policy provides that the work on the  fiscal year 2010 orders is expected to be completed by the end of fiscal  year 2011. According to the DOD regulation, this carryover metric allows  for an analytical-based approach that holds working capital fund activities  to the same standard as general fund execution and allows for  meaningful budget execution analysis.
In accordance with the DOD Financial Management Regulation,nonfederal orders, (2) non-DOD orders, (3) foreign military sales, (4) work  related to base realignment and closure, and (5) work-in-progress are to  be excluded from the carryover calculation. The reported actual carryover  (net of exclusions) is then compared to the amount of allowable carryover  using the above-described outlay-rate method to determine whether the  actual carryover amount is over or under the allowable carryover amount.   (1)
section_title: DMAG Reported Actual Carryover Exceeded the Allowable Amount Since Fiscal Year 2006, but Actions Are Under Way to Reduce Carryover
paragraphs: Our analysis of DMAG reports showed that from fiscal year 2004 through  fiscal year 2011, reported actual carryover exceeded the allowable  amounts in 6 of the 8 years. During the most recent 6-year period, the  reported amounts of actual carryover exceeded the allowable amounts  each year, ranging from a high of $59 million in fiscal year 2007 to a low  of $7 million in fiscal year 2011. Our analysis also showed that the extent  to which DMAG carryover exceeded the allowable amounts declined each  year since fiscal year 2007. Table 1 shows the reported DMAG actual  carryover, allowable carryover, and the amount over (or under) the  allowable carryover for fiscal years 2004 through 2011.
According to MCLC (Programs and Resources Department) officials,  DMAG has implemented actions to reduce carryover, and actions taken  have contributed to recent declines in the carryover amounts that  exceeded the allowable amounts. Specifically, these officials cited the  following four actions:
Beginning in the second quarter of each fiscal year, MCLC evaluates  new orders for their impact on the amount of workload that will carry  over to the next fiscal year that potentially could exceed the allowable  amount. Considering the impact that new orders have on carryover, in  2008 MCLC established criteria for the acceptance of new orders  including (1) determining if the customer order supports OIF/OEF  workload and if there are viable alternatives to the scope of the order  and/or source of repair for which the customer is able to mitigate, and  (2) determining whether there are alternatives that DMAG can use to  avoid carrying over workload into the new fiscal year (i.e., increase  overtime, augment personnel, and/or subcontract portions of the  workload).
Beginning in 2008, DMAG formed a working group to engage its  customers and the Defense Finance and Accounting Service to  reduce times for closing completed orders. In addition, DMAG closed  out orders with small remaining balances that reduced the unobligated  balances on the orders. For example, DMAG has earned an additional  $2.3 million in revenue in fiscal year 2011 due to an August 2011  change to the Defense Industrial Financial Management System to  automatically bill to revenue the residual dollar amounts left on  customer orders. This reduced the customers’ outstanding  unliquidated obligation balances to zero—thus eliminating $2.3 million  in fiscal year 2011 that would carry over to the next fiscal year.
Twice annually, DMAG formally meets with its major customers to  validate the current and upcoming fiscal year workload requirements  and modify plans at the MCLC maintenance centers to address  current bona fide need of the orders. Beginning in the 2007-2008 time  frame, MCLC began developing mitigating strategies for controlling or  reducing carryover due to the elevated carryover levels (i.e., schedule  realignments or alternate sources of repair or supply).
MCLC’s two maintenance centers have implemented production and  workflow efficiencies, including new concepts of operations intended  to streamline operations, that are expected to reduce repair cycle  times for damaged weapon systems. For example, efforts to improve  the efficiency of production processes for a variant of the HMMWV at  the Barstow maintenance center reduced repair cycle time by 45 days  from 86 days in fiscal year 2010 to 41 days in fiscal year 2011.  Reduced repair cycle times allow the centers to perform more work in  the same period of time, generating more revenue by the centers and  thus reducing carryover.
section_title: Marine Corps Underestimated Carryover in Its Budgets
paragraphs: DMAG budget estimates for carryover were consistently less than  allowable amounts each year from fiscal year 2004 through fiscal year  2011. However, in contrast, for the most recent 6 years, DMAG’s actual  reported amount of carryover exceeded budgeted carryover amounts by at  least $50 million each year. Our analysis showed the actual amounts of  reported carryover exceeded budgeted amounts primarily because the  Marine Corps underestimated DMAG’s new orders received from  customers. Reliable budget information on carryover is critical because  decision makers use this information when reviewing DMAG’s budgets.  Table 2 summarizes the dollar amounts of budgeted and actual DMAG  carryover that was over or under the allowable dollar amounts and the  difference as shown in DMAG budgets for fiscal years 2004 through 2011.
Our analysis of DMAG budget documents showed that for fiscal years  2004 through 2011, the Marine Corps budgeted DMAG’s revenue (work  to be performed) to be more than the budgeted dollar value of new orders  to be received each year. Specifically, during the 8-year period, the  DMAG budgets showed revenue would be approximately $2.5 billion.  This revenue estimate was almost $400 million more than the budgeted  $2.1 billion for expected new orders. As a result, planned carryover would  remain relatively stable and under $100 million. Figure 1 shows the  DMAG budgeted new orders, revenue, and carryover amounts for fiscal  years 2004 through 2011.
Although the Marine Corps budgeted for DMAG’s revenue to exceed new  orders and carryover to remain relatively stable as shown in figure 1,  subsequent DMAG reporting showed that for fiscal years 2004 through  2011, it actually received more new orders than revenue as shown in  figure 2. In fact, for 5 of the 8 years, reported actual new orders received  exceeded actual revenue. For the 8-year period, actual reported revenue  was about $4.1 billion or $156 million less than the $4.3 billion in actual  reported new orders received. As a result, reported actual carryover  increased from a low of $168 million in fiscal year 2004 to a high of $326  million in fiscal year 2008 during the 8-year period. Figure 2 shows the  actual new orders, revenue, and carryover amounts shown in DMAG  budgets for fiscal years 2004 through 2011.
Our further analysis of DMAG budget documents showed that the Marine  Corps significantly underestimated the amount of new orders to be  received from DMAG’s customers. As shown in figure 1, from fiscal years  2004 through 2011, DMAG budgeted to receive about $2.1 billion in new  orders, but as shown in figure 2, subsequent DMAG records showed that  it actually received about $4.3 billion in new orders. As a result, DMAG’s  budget underestimated new orders received from customers by a  cumulative total of about $2.2 billion over the 8-year period we reviewed.  Furthermore, DMAG records showed that actual new orders received  from customers exceeded budgeted orders ranging from 51 percent in  fiscal year 2010 to 175 percent in fiscal year 2006 over the 8-year period.  Table 3 shows a comparison between budgeted and actual new orders  for fiscal years 2004 through 2011 based on DMAG budget  documentation.
According to MCLC (Programs and Resources Department) officials, the  Marine Corps formulates its budgets for new orders based on  documented customer requirements—that is, for which the customers  provide DMAG with letters of intent. Letters of intent documents the dollar  amount of work the customers intend to provide to DMAG for various  weapon systems and equipment repair and overhaul. These estimated  amounts are used by the Marine Corps for forecasting DMAG workload  as well as for budgeting.
In September 2009, the Marine Corps DMAG budget analyst from the  Office of the Under Secretary of Defense (Comptroller) stated that DMAG  needed more reliable information on budgeted new orders. In information  exchanges between the office’s budget analyst and the Marine Corps, the  analyst suggested that the Marine Corps increase fiscal year 2011  budgeted new orders to approximate the fiscal year 2009 levels assuming  the new orders are still expected to be near the fiscal year 2009 level,  even if DMAG did not have letters of intent to support this workload.  However, the Marine Corps did not increase the budgeted new order  amount because it was not documented in letters of intent. As shown in  table 3, DMAG’s actual new orders for fiscal year 2011 exceeded  budgeted new orders by $314 million or 106 percent.
In developing the DMAG budgets for fiscal years 2004 through 2011, the  Marine Corps did not consider recent years’ trends and consistently  underestimated (1) the amounts of carryover that would exceed the  allowable amounts and (2) the amounts of new orders to be received from  customers. Specifically, the Marine Corps did not compare budgeted to  actual data and consider this data in determining whether adjustments  should be made to the estimated amounts of DMAG carryover and order  data in its future budgets. Until the Marine Corps considers all future work  (including work for which DMAG has not yet received letters of intent) in  developing its budgets, its (1) budgeted amounts of carryover that are  over or under the allowable amounts and (2) budgeted new orders will  continue to be of limited value for managerial decision making.
section_title: DMAG Carryover Grew Significantly as a Result of OIF/OEF
paragraphs: Our analysis of documents and interviews with Marine Corps officials  disclosed that DMAG carryover significantly increased from $49 million in  fiscal year 2002 to $271 million in fiscal year 2005. We determined this  increase was primarily because new orders from DMAG customers more  than tripled from $188 million in fiscal year 2002 to $583 million in fiscal  year 2005. Available Marine Corps documentation, including DMAG’s  budgets, showed that new orders increased to facilitate higher depot  maintenance requirements in support of OIF/OEF operations. Since fiscal  year 2005, available records show carryover remained at about the fiscal  year 2005 level—averaging 6.4 months of workload. To assess the extent  of growth in carryover due to OIF/OEF, we analyzed data for the period  before and during the period of OIF/OEF operations. Figure 3 depicts  DMAG actual new orders, revenue, carryover, and months of carryover  beginning in fiscal year 1998 for a 14-year period based on available  Marine Corps documentation.
To illustrate the impact that changes in new orders and revenue had on  carryover during the 14-year period, table 4 summarizes the data into  three segments aligned with workload supporting peacetime operations  (fiscal years 1998 through 2002), workload supporting the initial years of  OIF/OEF (fiscal years 2003 through 2005), and workload supporting  continuing elevated military operations under OIF/OEF (fiscal years 2006  through 2011).
For fiscal years 1998 through 2002, DMAG was operating at levels to  support peacetime workload. Specifically, during the 5-year period, the  amount of workload received (new orders) from DMAG customers ($983  million) roughly equaled the amount of work performed (revenue) by  DMAG ($1,022 million). DMAG carryover remained under $75 million and  represented on average about 3.7 months of workload.
Beginning in fiscal year 2003, depot maintenance workload increased in  response to the buildup in deployed weapon systems and equipment and  their associated increase in equipment wear and tear in support of  OIF/OEF. While revenue generated from depot maintenance operations  more than doubled, from $212 million in fiscal year 2002 to $480 million in  fiscal year 2005, reported new orders more than tripled, from $188 million  in fiscal year 2002 to $583 million in fiscal year 2005. Over the period,  reported new orders exceeded revenue by about $223 million and  carryover increased from $49 million at the end of fiscal year 2002 to  $271 million at the end of fiscal year 2005—representing about 6.6  months of workload. The maintenance centers, according to MCLC  (Programs and Resources Department) officials, experienced personnel  and parts shortages during the early years of the buildup in OIF/OEF  military operations overseas because (1) in some cases, the centers did  not have sufficient numbers of personnel with the required skill sets  needed to address the rapidly increasing workload and (2) the DOD  supply system and supporting private sector commercial production did  not keep pace with the increased spare parts and raw material  requirements that were needed by the maintenance centers, such as  obtaining steel needed to satisfy an emerging requirement to armor  critical warfighting equipment.
MCLC (Programs and Resources Department) officials informed us that  by fiscal year 2007, the maintenance centers resolved much of their  personnel and parts shortages that resulted from the increased new  orders supporting OIF/OEF. To resolve personnel and supply shortages,  these officials told us that the centers employed multiple strategies such  as (1) working with local colleges to obtain skilled employees and  implementing personnel strategies that allowed DMAG the flexibility to  expand or contract personnel within 48 to 72 hours using a combination  of full-time, temporary, and contractor personnel and (2) working with the  Defense Logistics Agency to eliminate or significantly reduce spare parts  shortages. Our review confirmed that personnel and parts shortages,  including raw materials issues, are no longer a major contributing factor to  increased carryover amounts.
According to MCLC (Programs and Resources Department) officials,  DMAG resolved much of its personnel and spare parts shortages.  However, our analysis showed that, since fiscal year 2005, DMAG had  not further reduced the carryover resulting from the increases in new  orders between fiscal years 2003 through 2005. As shown in table 4, the  DMAG carryover averaged $296 million and represented about 6.4  months of workload since fiscal year 2005. Further, for fiscal years 2006  through 2011, the amount of revenue generated by the centers’  operations ($3,337 million) have roughly equaled the new orders  accepted by the centers ($3,356 million)—a difference over the 6-year  period of only $19 million.
section_title: Primary Reasons for Carryover at the End of Fiscal Years 2010 and 2011
paragraphs: Our analysis of 60 orders (and related amendments) with the largest  amounts of carryover for fiscal years 2010 and 2011 (the most recent  data available) identified three primary reasons for carryover: (1)  unanticipated increases in quantities or workload requirements to  customer orders, (2) starting work on new orders later in the fiscal year  because the centers had not yet completed work on other existing orders  from the current and prior fiscal year, and (3) accepting amendments to  existing orders in the last quarter of the fiscal year that increased order  quantities or the scope of work. Table 5 provides summary information on  the primary reasons for DMAG carryover based on our review of 60 large- dollar carryover orders for the most recent 2-year period—30 each year.
Accurately forecasting the scope of work on orders is essential for  ensuring that the maintenance centers operate efficiently and complete  work on orders as scheduled. However, we found that for 45 of the 60  orders for fiscal years 2010 and 2011 that we reviewed, customers  increased quantities or added unanticipated workload requirements  throughout the fiscal year that delayed completing work on existing  orders. MCLC (Programs and Resources Department) officials cited  unplanned workload requirements as a primary driver for carryover.  These officials stated that (1) while the maintenance centers do not drive  workload requirements, the maintenance centers must respond to the  customers’ bona fide needs for the repair of the warfighters’ equipment to  support emergent requirements in the field, and (2) since OIF/OEF  operations began, DMAG began to accept all orders (and related  amendments) associated with those operations where viable alternative  sources of repair could not be found, even though accepting such orders  may contribute to “over the allowable” carryover. For example, the DMAG  fiscal year 2010 budget cited the acceptance of unplanned workload by  the maintenance centers to repair war-ravaged equipment and weapon  systems returning from overseas contingency operations as the reason  for the maintenance centers exceeding the allowable carryover in fiscal  year 2008. Below are two examples in which unplanned workload  requirements affected carryover.
In November 2009, MCLC accepted an order totaling $2.1 million that  was financed with fiscal year 2010 operation and maintenance,  Marine Corps appropriated funds to perform depot maintenance work  on five Light Armored Vehicles (LAV) at the Barstow maintenance  center. The order was amended three times in fiscal year 2010 to  increase quantities to 28 vehicles, increase funding to $11.7 million,  and extend the work completion date into fiscal year 2011. The center  carried over $7.9 million of the $11.7 million order principally because  many of the vehicles had excessive corrosion in the hull floor plate  and side board areas that were much greater than anticipated and  which required additional welding and plate replacement. Barstow  officials said that the additional welding, plate replacement, and  extensive corrosion repair caused the repair cycle time to be extended  beyond the timelines originally anticipated to complete the work and  caused work delays on other variants of LAVs concurrently being  worked on at the center. The center completed work on the order in  September 2011.
In December 2010, MCLC accepted an order totaling $1.4 million that  was financed with fiscal year 2011 operation and maintenance,  Marine Corps appropriated funds to perform depot maintenance work  (inspect and repair only as necessary) on 18 rough terrain forklifts at  the Albany maintenance center. The order was amended nine times in  fiscal year 2011 to increase the quantity to 118 forklifts, increase the  total amount of the order to $9.4 million, and extend the work  completion date into fiscal year 2012. According to center officials, the  vehicles required more repair work than was initially planned in terms  of cost and repair cycle time, which necessitated a change in the  scope of the work. This change was reflected in one of the  amendments showing that the statement of work changed from an  “inspect and repair only as necessary” requirement to a “rebuild”  requirement, which required a more comprehensive type and scope of  depot maintenance work to be performed and required additional  funds to finance the work. Because of the change to increase  workload requirements, the center carried over $4.4 million of the $9.4  million into fiscal year 2012.
subsections: section_title: Work on New Orders Began Later in Fiscal Year because Work on Existing Orders Was Not Completed
paragraphs: Completing work on prior-year orders and beginning work on new orders  for the current year early in the fiscal year is critical to maintaining low  carryover balances. Our review of 60 orders and amendments for fiscal  years 2010 and 2011 found that, for 27 orders reviewed, work was  delayed on new orders because the maintenance centers had not yet  completed work on other current- and prior-year orders. Below are two  examples of orders that we reviewed.
In November 2009, MCLC accepted an order totaling $2.4 million that  was financed with fiscal year 2010 funds appropriated for Marine  Corps operation and maintenance to perform depot maintenance work  on 27 High Mobility Multi-purpose Wheeled Vehicles (HMMWV) at the  Albany maintenance center. The order was amended four times from  March 2010 to September 2010 to increase quantities to 45  HMMWVs, increase funding to $4.7 million, and extend the work  completion date into fiscal year 2011. The center carried over almost  the entire amount of the $4.7 million order because the center was  working on other fiscal year 2010 HMMWVs. Due to customer  requirements, as well as capability, utilization, and production  constraints, the center could not begin work on this order until the  center completed work on the other orders. The center did not begin  work on this order until September 17, 2010—10 months after the  initial order was accepted, and did not complete work on the order  until August 2011—near the end of fiscal year 2011.
In November 2010, MCLC accepted an order totaling $1.5 million that  was financed with fiscal year 2011 funds appropriated for Marine  Corps operation and maintenance to perform depot maintenance work  on three LAVs at the Barstow maintenance center. Because the  Barstow maintenance center was still performing depot maintenance  work on a fiscal year 2010 LAV order for the same vehicle  configuration, the Marine Corps Supply Management Center (SMC)  (customer) issued an amendment in February 2011 to reduce  quantities to zero and deobligate the entire amount on the fiscal year  2011 order. Our analysis of order documentation showed that the  customer deobligated the funds because the Barstow maintenance  center did not require the funds at that time, as the center was still  performing work on the fiscal year 2010 LAV order. Beginning in  March 2011, the MCLC accepted amendments to increase quantities  on the fiscal year 2011 order to 20, increase funding to $10.5 million,  and changed the scope of the work to include the replacement of  missing communications equipment. Barstow maintenance center  began performing depot maintenance work on this fiscal year 2011  order in April 2011—7 months into the fiscal year and 5 months after  the order was originally placed. Because the Barstow center was  working the fiscal year 2010 order, work was delayed on the fiscal  year 2011 LAV order causing the center to carry over $3.8 million into  fiscal year 2012.
section_title: Amendments Accepted in the Last Quarter of the Fiscal Year
paragraphs: The timing of the receipt and acceptance of orders from customers affect  the amount of carryover at year-end. Our examination of 60 orders for  fiscal years 2010 and 2011 determined that, in 25 cases we reviewed,  amendments to orders accepted in the last quarter of the fiscal year  contributed to carryover. These amendments either increased order  quantities or expanded the scope of work on existing orders with the  maintenance centers. DOD Financial Management Regulation provides  that depots cannot perform work until they receive and accept orders from  customers. According to MCLC (Programs and Resources Department)  officials, since some of these orders or amendments to these orders were  planned and funded in the fourth quarter, DMAG could not start work until  it received and accepted amended orders as specified in the DOD  regulation.
In June 2006, we reported that carryover is greatly affected by orders  received late in the fiscal year. late in the fiscal year increase the amount of carryover. Further, we  reported that the most frequent reason DOD activity groups accepted  orders at the end of the fiscal year was because funds were provided to  the customers late in the fiscal year to finance existing requirements.  DOD customers stated that it is common for military services to provide  funds to them late in the fiscal year after the military services review their  programs to identify funds that will not be obligated by year-end. When  these funds are identified, the military services realign the funds to  programs that can use them. These funds are then used to finance orders  placed with working capital fund activities at year-end. Our discussion  with SMC officials—the largest DMAG customer—confirmed that the  information reported in June 2006 was also applicable for fiscal years  2010 and 2011. The officials stated that there is a significant advantage to  using unobligated funds at fiscal year-end that are set to expire on  September 30 because the maintenance centers can perform more work  to satisfy its customers’ unfunded requirements. Two examples we  identified of amended orders received late in the fiscal year that increased  carryover are presented below.
GAO, Defense Working Capital Fund: Military Services Did Not Calculate and Report  Carryover Amounts Correctly, GAO-06-530 (Washington D.C.: June 27, 2006).
In fiscal year 2010, MCLC accepted an order and amendments to the  order totaling $31.2 million that was financed with fiscal year 2010  operation and maintenance, Marine Corps appropriated funds to  inspect and repair only as necessary 389 HMMWVs at the Albany  maintenance center. The order was amended eight times in fiscal  year 2010 to increase quantities from 25 vehicles to 389 vehicles,  increase funding from $2.0 million to $31.2 million, and extend the  work completion date into fiscal year 2011. During the fiscal year, the  Albany center completed about 90 percent of the work on the order  through the seventh amendment. However, on September 30, 2010— the last day of the fiscal year—MCLC received and accepted an  amendment to the order increasing funding by $4.9 million and the  quantity by 61 vehicles. The funding cited on this order was set to  expire that same day. The entire amount of this amendment carried  over into fiscal year 2011. According to a SMC official, the  amendment was issued to the Albany maintenance center on  September 30, 2010, because funding on a HMMWV order with the  Barstow maintenance center was identified by the center as excess to  requirements 2 days before the end of the fiscal year. The funding  was set to expire at the end of the fiscal year and, if not obligated on  another order by September 30, 2010, could not be used for new  requirements. As a result, the funding from the Barstow maintenance  center that was to expire on September 30, 2010, was applied to the  Albany order. The center carried over $7.6 million into fiscal year 2011  on this order and completed work on the order in March 2011.
In planning the fiscal year 2011 workload, SMC expected to issue  orders to MCLC for the Albany and Barstow maintenance centers to  perform depot maintenance on 179 Logistics Vehicle Systems’ front  power units. In order to repair the vehicles, MCLC issued a  commercial subcontract to the original equipment manufacturer to  purchase cabs and other operating material and supplies needed to  support work at the Albany and Barstow maintenance centers for the  179 vehicles. Subsequent to the subcontract being awarded, the  Marine Corps maintenance strategy changed on the Logistics Vehicle  Systems to reduce the need for the cabs purchased on the contract.  In return, SMC (the customer) decided to decrease the scope of work  from a planned 179 vehicles to 47 vehicles. Through May 2011, the  MCLC accepted orders with amendments totaling $8.9 million to  support work on the 47 vehicles. Because costs associated with  terminating the contract with the original equipment manufacturer for  the excess cabs and other operating material and supplies would be  nearly as much as having the contractor complete the order, the  Marine Corps decided to have the contractor complete the order and  transfer ownership of the excess cabs and other operating material  and supplies to MCLC headquarters. In June 2011, MCLC informed  SMC that $9.8 million, in addition to the $8.9 million provided earlier,  would need to be returned in order to pay for the cost of the  contracted cabs and other operating material and supplies ordered  from the contractor and to complete work on the remaining 47  vehicles. On September 15 and 29, 2011, SMC issued amendments  to fund the additional $9.8 million using fiscal year 2011 Marine Corps  operation and maintenance funds that became available when other  programs indentified excess funds that would expire on September  30, 2011. Because funding was provided late in the fiscal year, the  centers carried over $9.4 million of the $18.7 million in orders on this  program into fiscal year 2012. The orders are to be closed in fiscal  year 2012 when deliveries from the contractor are complete and  ownership of the excess cabs and other operating material and  supplies are transferred to MCLC headquarters.
section_title: Conclusions
paragraphs: Reliable carryover information is essential for Congress and DOD to  effectively perform their oversight responsibilities, including reviewing and  making well-informed decisions on the Marine Corps’ DMAG budget.  However, our review found that for the 8-year period from 2004 through  2011, the Marine Corps budgets show it underestimated the amount of  new orders to be received from DMAG customers. As a result, while the  Marine Corps budgets showed that DMAG’s carryover would be under  the allowable amount, subsequent Marine Corps financial records  showed the actual reported carryover exceeded the allowable amount for  the most recent 6 years. The carryover information can be a management  tool for (1) controlling the amount of work that can carry over from one  fiscal year to the next, and (2) identifying problems in other areas such as  developing budgets on the amount of new orders for depot maintenance  work. However, because the Marine Corps has underestimated the  amount of new orders in its budgets, current reported data on carryover is  of limited utility for decision-making purposes.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of Defense direct the Secretary of the  Navy and Commandant of the Marine Corps to take the following two  actions to improve the budgeting and management of Marine Corps’  DMAG carryover:
Augment DMAG budget development and review procedures to  require a comparison of recent years’ trends in budgeted carryover  amounts that are over or under the allowable amounts to the actual  carryover amounts to identify any differences, reasons for any such  differences, and make any appropriate adjustments to budget  estimates on carryover.
Augment DMAG budget development and review procedures to  require a comparison of recent years’ trends in budgeted orders to  actual orders to identify any differences, reasons for any such  differences (including work for which DMAG had not received letters  of intent), and make any appropriate adjustments to budget estimates  on new orders to be received from customers.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD provided written comments on a draft of this report. In its comments,  DOD concurred with both of our recommendations and cited actions  planned to address them. Specifically, the Office of the Under Secretary  of Defense (Comptroller) stated that it will evaluate if actual year end  carryover trends were included as a factor for the carryover estimates in  the fiscal year 2014 budget. It stated that a review of the fiscal year 2012  actual carryover to the budgeted carryover will be part of the budget  analysis including an evaluation of deviations from the allowable amount  of carryover. Further, the Office of the Under Secretary of Defense  (Comptroller) stated it will evaluate if customer order trends were included  as a factor in developing customer order estimates in the fiscal year 2014  budget. It stated that a review of the fiscal year 2012 actual customer  orders to the fiscal year 2012 budgeted customer orders will be part of the  analysis.
While DOD concurred with the two recommendations in our draft report  and commented on its plans to perform additional carryover and customer  order trend analyses as part of the fiscal year 2014 budget process,  DOD’s comments did not clearly provide that it will augment its budgeting  process to incorporate carryover and customer order trend analyses  beyond the fiscal year 2014 budget process as we recommended. In  discussing DOD’s comments with Office of the Under Secretary of  Defense (Comptroller) officials, they clarified that, in accord with the intent  of our recommendations, they intended to take the cited corrective  actions to improve the DMAG budgeting for carryover and customer  orders for all fiscal years beginning in fiscal year 2014. Specifically, they  stated that DOD intended to ascertain how prior year DMAG carryover  and new order trends were incorporated into the carryover estimates and  use the data in evaluating Marine Corps DMAG budgets in not only the  fiscal year 2014 budget, but in all future budgets.
We are sending copies of this report to the appropriate congressional  committees. We are also sending copies to the Secretary of Defense; the  Secretary of the Navy; and the Commandant of the Marine Corps. The  report also is available at no charge on the GAO Web site at  http://www.gao.gov.
Should you or your staff have any questions concerning this report,  please contact me at (202) 512-9869 or khana@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be  found on the last page of this report. Key contributors to this report are  listed in appendix III.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine if (1) the depot maintenance activity group (DMAG)  reported actual carryover exceeded the allowable amount of carryover  from fiscal years 2004 through 2011 and any actions the Marine Corps is  taking to reduce carryover, and (2) budget information on DMAG  carryover from fiscal years 2004 through 2011 approximated reported  actual results, we obtained and analyzed DMAG reports that contained  information on budgeted and reported actual carryover and the allowable  amount of carryover for fiscal years 2004 through 2011. We analyzed  carryover since fiscal year 2004 because prior to fiscal year 2004, DOD  had a different policy for determining the allowable amount of carryover.  We met with responsible officials from Navy and Marine Corps  headquarters and the Marine Corps Logistics Command (MCLC)  (Programs and Resources Department) to determine the reasons for  significant variances between (1) reported actual carryover and the  allowable amount or (2) budgeted and reported actual carryover. We also  met with these officials to discuss the actions the Marine Corps has and is  taking to reduce the amount of carryover.
To determine if there was growth in DMAG carryover during the period of  Operation Iraqi Freedom/Operation Enduring Freedom (OIF/OEF) and the  reasons for any such growth, we analyzed reported order, revenue, and  carryover amounts and months of carryover from fiscal years 1998  through 2011 to determine the extent to which OIF/OEF impacted DMAG  workload and carryover. We selected the period from fiscal years 1998  through 2011 to highlight any changes in reported actual carryover  information from the period before and during OIF/OEF. We reviewed and  analyzed Marine Corps documentation including the DMAG budgets to  determine the reasons for the growth in carryover. Further, we met with  responsible officials from MCLC (Programs and Resources Department)  to discuss reasons for variances between reported actual carryover from  one year to the next.
To determine the reasons for fiscal years 2010 and 2011 carryover, we  met with responsible officials from the Navy and Marine Corps  headquarters and MCLC (Programs and Resources Department) to  identify contributing factors that led to the carryover. We also performed  walkthroughs of the Albany and Barstow maintenance centers’ operations  and discussed with officials reasons for workload carrying over from one  fiscal year to the next for fiscal years 2010 and 2011. Further, in order to  more fully understand the reasons for carryover at the maintenance  centers, we obtained and analyzed 60 orders (30 orders for fiscal year  2010 and 30 orders for fiscal year 2011) that had the largest dollar  amount of carryover. Carryover amounts associated with these orders  represented 49 percent and 68 percent of DMAG’s total carryover for  fiscal years 2010 and 2011, respectively. We selected 60 orders because  they were the largest and most recent orders at the time of our audit. We  reviewed the orders with amendments for each of the orders and  discussed the information in these documents with MCLC (Programs and  Resources Department) and maintenance center Albany and Barstow  officials to determine the reasons for the carryover. We summarized and  categorized the results.
Financial information in this report was obtained from official Navy and  Marine Corps budget documents and accounting reports. To assess the  reliability of the data, we (1) reviewed and analyzed the factors used in  calculating carryover for the completeness of the elements included in the  calculation, (2) interviewed Navy and Marine Corps officials  knowledgeable about the carryover data, (3) reviewed GAO reports on  depot maintenance activities, and (4) reviewed fiscal years 2010 and  2011 customer orders submitted to DMAG to determine whether they  were adequately supported by documentation. In reviewing these orders,  we obtained the status of the carryover at the end of the fiscal year. On  the basis of procedures performed, we have concluded that these data  were sufficiently reliable for the purposes of this report. We performed our  work at the Headquarters of the Office of the Under Secretary of Defense  (Comptroller), the Office of the Assistant Secretary of the Navy (Financial  Management and Comptroller), and Marine Corps Deputy Commandant  (Programs and Resources), Washington, D.C.; Marine Corps Logistics  Command, Albany, Georgia; the maintenance center at Albany, Georgia  and the maintenance center at Barstow, California. We conducted this  performance audit from July 2011 through June 2012 in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Greg Pugnetti, Assistant Director;  Steve Donahue; Keith McDaniel; and Hal Santarelli made key  contributions to this report.