Army Working Capital Fund: Army Industrial Operations Could Improve Budgeting and Management of Carryover
Published: 2016-06-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Industrial Operations' activities support combat readiness by providing depot maintenance and ordnance services to keep Army units operating worldwide. To the extent that these activities do not complete work ordered and funded by fiscal year-end, the work and related funding will be carried over into the next fiscal year. DOD established a formula based on new orders from customers for determining the allowable carryover as defined by DOD's Financial Management Regulation. GAO was asked to review issues related to carryover.
GAO's objectives were to determine (1) the extent to which Industrial Operations' actual carryover differed from allowable amounts and reasons for differences; (2) the extent to which Industrial Operations' budgeted carryover differed from actual carryover, reasons for differences, and actions Army is taking to improve related budgeting; and (3) the key drivers for orders with large carryover balances and the extent to which the Army is taking actions to reduce carryover. GAO reviewed carryover guidance, analyzed carryover and related data, and interviewed Army officials.
section_title: What GAO Found
paragraphs: GAO's analysis of Army Industrial Operations (Industrial Operations) reports showed that Industrial Operations actual adjusted carryover exceeded its allowable carryover amount from fiscal years 2013 through 2015 by $195 million, $1.1 billion, and $854 million, respectively. This occurred because Industrial Operations performed less work (i.e., earned less revenue) than orders accepted due to staff reductions of more than 5,000 over the 2-year period for fiscal years 2013 and 2014 caused by budgetary uncertainty and the across-the-board spending reductions referred to as sequestration. GAO also determined that the Army did not correctly calculate the allowable carryover amounts for fiscal years 2013 and 2014 as specified by the Department of Defense (DOD) Financial Management Regulation because the Army did not use the most recent data available to perform the calculations. Based on GAO's calculations, Industrial Operations exceeded the allowable amounts by $44 million less in fiscal year 2013 and $27 million more in fiscal year 2014 than reported.
Industrial Operations' actual adjusted carryover also significantly exceeded budgeted adjusted carryover from fiscal years 2013 through 2015. While its budgeted adjusted carryover would have been under the allowable amount by $174 million and $1.2 billion for fiscal years 2013 and 2014, respectively, and over the allowable amount by $186 million for fiscal year 2015, the actual adjusted carryover amount exceeded the allowable amounts all 3 fiscal years because Industrial Operations (1) accepted more new orders than budgeted and (2) performed less work (earned less revenue) than budgeted.
To address budget concerns, the Army has implemented actions intended to improve budget information. However, Industrial Operations has not been able to provide reliable budget information on carryover to decision makers from fiscal years 2013 through 2015.
GAO identified four key drivers for large Industrial Operations carryover balances: (1) work was scheduled to carry over at the end of the fiscal year as part of the normal course of business, (2) work on crash-damaged aircraft was difficult to predict and required nonstandard repairs that necessitated long lead time parts to perform the work, (3) work did not have a well-defined scope of work for repairing the assets, and (4) parts were not available to perform work. The Army is taking actions to reduce carryover. One of those actions is to develop a regulation that consolidates and updates guidance for Industrial Operations. However, this regulation has not yet been completed, issued, and implemented.
section_title: What GAO Recommends
paragraphs: GAO recommends that DOD improve the budgeting and management for carryover by establishing procedures for correctly calculating the allowable carryover, improving budget estimates on carryover, and addressing in its draft regulation scope of work and parts issues that affect carryover. DOD concurred with GAO's recommendations and cited related actions planned or under way.

section_title: Letter
paragraphs: The Army operates 13 Industrial Operations activities that provide depot  maintenance and ordnance services as part of the Army Working Capital  Fund. Depot maintenance services include the repair and overhaul of a  wide range of vehicles and other military assets, including helicopters,  combat vehicles, and air defense systems. Ordnance services include  manufacturing, renovating, and demilitarizing munitions and components.  From fiscal year 2013 through fiscal year 2015, the annual dollar amount  of new orders to perform this work ranged from $4.5 billion to $5.4 billion.  Many of these military assets and munitions were used to support the  Army’s efforts in Iraq and Afghanistan.
When Army Industrial Operations (referred to as Industrial Operations in  this report) work has been ordered and funded (obligated) by customers  (such as the military services) but has not been completed by the end of a  fiscal year, it is referred to as carryover. The Department of Defense  (DOD) Financial Management Regulation establishes the formula to be  used for calculating and determining the amount of carryover allowed at  the end of each fiscal year, which is based in part on the amount of new  orders from customers. 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 noted that the level  of carryover in military service working capital funds may be more than is  needed. Too much carryover could result in the working capital fund  receiving funds from customers in one fiscal year but not performing the  work until well into the next fiscal year or later. Further, excessive  amounts of carryover may result in future appropriations or budget  requests being subject to reductions by DOD and the congressional  defense committees during the budget review process. For example,  according to the explanatory statement accompanying DOD’s fiscal year  2013 appropriations, congressional conferees agreed to reduce Army,  Navy, Air Force, and Marine Corps fiscal year 2013 operation and  maintenance appropriations by a total of $332.3 million because of  concerns about excess carryover.
You asked us to review issues related to Industrial Operations carryover.  Our objectives were to determine (1) the extent to which Industrial  Operations’ actual carryover differed from the allowable amounts from  fiscal years 2013 through 2015 and the reasons for any differences;   (2) the extent to which Industrial Operations’ budgeted carryover differed  from actual carryover from fiscal years 2013 through 2015, reasons for  any differences, and actions Army is taking to improve related budgeting;  and (3) the key drivers for orders with large carryover balances for fiscal  years 2014 and 2015 and the extent to which the Army is taking actions  to reduce carryover.
To address the first and second objectives, we obtained and analyzed  Industrial Operations reports and Army Working Capital Fund budget  estimates submitted to Congress that contained information on budgeted  and actual carryover and the allowable amount of carryover for fiscal  years 2013 through 2015. We analyzed carryover since fiscal year 2013  because we previously reported on Industrial Operations carryover from  fiscal years 2006 through 2012. We met with responsible officials from  the Army to determine the reasons for any variances between (1) actual  carryover and the allowable amount of carryover and (2) budgeted and  actual carryover. We also met with these officials to discuss actions the  Army was taking to improve budgeting and management of carryover,  including the reduction of actual carryover amounts. Further, we identified  and analyzed any adjustments made by the Army that increased the  allowable carryover amounts or reduced the amount of actual carryover.  We reviewed DOD’s guidance for granting exceptions to the carryover  policy and discussed any exceptions with officials from the Office of the  Under Secretary of Defense (Comptroller) and Army headquarters to  obtain explanations for the exceptions.
To address the third objective, we met with responsible officials from  Army headquarters, Army Materiel Command, and Army depots to  identify contributing factors that led to carryover. We focused on carryover  balances for fiscal years 2014 and 2015 to identify current issues  contributing to carryover. We also performed walk-throughs of four Army  depot maintenance operations to observe the work being performed and  discussed with officials the causes for workload carrying over from one  fiscal year to the next. Further, to corroborate the information provided by  Army officials, we obtained and analyzed a total of 80 customer orders  consisting of the 40 orders that had the largest dollar amounts of  carryover at the end of each of fiscal years 2014 and 2015. Carryover  amounts associated with these orders represented 31 percent of the total  carryover each year collectively at the four Army depots we visited for  fiscal years 2014 and 2015. We also interviewed officials and obtained  documentation on the actions the Army is taking to better manage and  reduce carryover.
We obtained the financial and logistical data in this report from official  budget documents and the Army’s logistical system. To assess the  reliability of the data, we analyzed carryover and related data, interviewed  Army officials knowledgeable about the carryover data, and reviewed  customer orders to determine whether they were adequately supported  by documentation. On the basis of procedures performed, we have  concluded that these data were sufficiently reliable for the purposes of  this report. See appendix I for additional details on our scope and  methodology.
We conducted this performance audit from June 2015 to June 2016 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.
subsections: section_title: Background
paragraphs: The 13 Industrial Operations’ activities provide services for a variety of  customers, including the Army, the Navy, the Air Force, non-DOD  agencies, and foreign countries. The majority of the work is for the Army.  Operating under the working capital fund concept, Industrial Operations 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. Customers,  such as the Army, use appropriated funds (typically operation and  maintenance or procurement appropriations) to finance orders placed  with Industrial Operations. When an Industrial Operations activity accepts  a customer order, the amount of the order is obligated on the customer’s  records. Upon accepting the order, the Industrial Operations activity can  start work on the order, such as beginning the work and ordering the  material or parts needed to perform the work.
Industrial Operations provides the Army an in-house industrial capability  to (1) conduct depot-level maintenance, repair, and upgrade; (2) produce  munitions and large-caliber weapons; and (3) store, maintain, and  demilitarize material for DOD. Industrial Operations comprises 13  government-owned and government-operated activities, each with unique  core competencies: five maintenance depots (Anniston, Alabama; Corpus  Christi, Texas; Letterkenny, Pennsylvania; Red River, Texas; and  Tobyhanna, Pennsylvania), three arsenals (Pine Bluff, Arkansas; Rock  Island, Illinois; and Watervliet, New York), two munitions production  facilities (Crane, Indiana, and McAlester, Oklahoma), and three storage  sites (Blue Grass, Kentucky; Sierra, California; and Tooele, Utah). The  five depots perform the preponderance of the Industrial Operations  workload.
Army Materiel Command (AMC) serves as the management command for  Industrial Operations. Industrial Operations activities report under the  direct command and control of the Army’s Life Cycle Management  Commands (LCMC), with each activity aligned in accordance with the  nature of its mission. For example, the work performed at Anniston and  Red River is aligned with the Army’s Tank-automotive and Armaments  Command LCMC mission of developing, acquiring, fielding, and  sustaining ground systems, such as the Mine Resistant Ambush  Protected vehicles and Abrams tank. The work performed at Letterkenny  and Corpus Christi is aligned with the Army’s Aviation and Missile  Command LCMC mission of developing, acquiring, fielding, and  sustaining aviation, missile, and unmanned vehicle systems, such as the  Patriot missile and Black Hawk helicopter.
subsections: section_title: Carryover and Its Use
paragraphs: When Industrial Operations work has been ordered and funded  (obligated) by customers but has not been completed at the end of a  fiscal year, it is referred to as carryover. To calculate the actual carryover  for Industrial Operations, the Army uses the summary-level formula  shown in figure 1.
Some carryover is appropriate in order for working capital fund activities,  such as Industrial Operations, to ensure the continuity of operations from  one fiscal year to the next. For example, if customers do not place orders  at the beginning of the fiscal year because of uncertainty about their full- year appropriations, carryover is necessary to ensure that Industrial  Operations’ activities (1) have enough work to continue operations into  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 inefficient use of resources with some personnel  not having work to perform at the beginning of the fiscal year. On the  other hand, too much carryover could result in the working capital fund  accepting orders from customers in one fiscal year but not performing the  work until well into the next fiscal year or later. Further, excessive  amounts of carryover may result in future appropriations or budget  requests being subject to reductions by DOD and the congressional  defense committees during the budget review process. 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 Financial Management Regulation 7000.14-R, volume 2B, chapter  9, provides that the allowable amount of carryover each year is to be  based on the dollar amount of new orders received that year and the  outlay rate of the customers’ appropriations financing the work. For  example, customer orders financed with a specific appropriation total  $100. If the outlay rate for this appropriation is 60 percent, then the  working capital fund activity group is allowed to carry over $40 (i.e., $100  -  = $40). The DOD carryover policy further provides  that for orders funded with non-procurement appropriations, work on the  current fiscal year’s orders is expected to be completed by the end of the  following fiscal year. For orders funded with procurement appropriations,  however, the DOD Financial Management Regulation requires the first  and second year published outlay rates be used to calculate the allowable  carryover amount. The Army calculates the allowable amount of carryover  for Industrial Operations.
DOD’s Financial Management Regulation also provides that   (1) nonfederal orders, non-DOD orders, foreign military sales, work  related to base realignment and closure, and work in progress are to be  excluded from the carryover calculation; (2) exceptions to the carryover  policy that have been approved by the Director for Revolving Funds,  Office of the Under Secretary of Defense (Comptroller), are to be  excluded from the carryover calculation; and (3) the reported actual  carryover after applying these exclusions and exceptions (referred to as  actual adjusted carryover in this report) is then compared to the amount  of allowable carryover to determine whether the actual carryover amount  is over or under the allowable carryover amount.
According to the DOD Financial Management Regulation, this carryover  policy allows for an analytical-based approach that holds working capital  fund activities to the same outlay standard as the general fund and allows  for meaningful budget execution analysis. Requests for exceptions to the  carryover policy must be submitted by the military services to the Director  for Revolving Funds, Office of the Under Secretary of Defense  (Comptroller), separate from the budget documents. Office of the Under  Secretary of Defense (Comptroller) officials told us that they review  requests for exceptions to the carryover policy on a case-by-case basis.  Depending on the request, they may ask for additional information to  evaluate the request.
section_title: Industrial Operations Actual Adjusted Carryover Exceeded the Allowable Amount Because It Performed Less Work Than Orders Accepted
paragraphs: Our analysis of Industrial Operations reports shows that Industrial  Operations actual adjusted carryover exceeded the allowable carryover  amount by $195 million, $1,065 million, and $854 million for fiscal years  2013, 2014, and 2015, respectively. This occurred because Industrial  Operations performed significantly less work (earned less revenue) than  the amount of orders it accepted. Industrial Operations performed less  work because it reduced personnel by more than 5,000 over the 2-year  period for fiscal years 2013 and 2014 due to budgetary uncertainty based  on the continuing resolution that extended throughout much of fiscal year  2013 and across-the-board spending reductions referred to as  sequestration. We also found that the Army’s calculations of the  allowable carryover amounts for fiscal years 2013 and 2014 were  incorrect as specified by DOD’s Financial Management Regulation  because it did not use data from the most recent DOD Financial  Summary Tables to perform the calculations. Based on our calculations,  Industrial Operations exceeded the allowable amounts by $44 million less  in fiscal year 2013 and $27 million more in fiscal year 2014 than reported  in its budgets.
subsections: section_title: Work Performed by Industrial Operations Was Less Than Orders Accepted for Fiscal Years 2013 and 2014, Resulting in Adjusted Carryover Exceeding the Allowable Amounts
paragraphs: Our analysis of Industrial Operations reports showed that Industrial  Operations actual adjusted carryover amounts for fiscal years 2013  through 2015 exceeded the allowable amounts for each fiscal year  because Industrial Operations performed significantly less work than  orders accepted in fiscal years 2013 and 2014. Table 1 shows the  amounts of actual adjusted carryover, the allowable amounts, and the  actual adjusted carryover amounts over the allowable amounts in  Industrial Operations budgets for fiscal years 2013 through 2015.
Our analysis of Industrial Operations reports showed that it performed  $313 million and $229 million less work than the value of orders accepted  in fiscal years 2013 and 2014, respectively. For fiscal year 2015, our  analysis showed that it performed $55 million more work than orders  accepted. However, because of the significant backlog of unfilled orders  from the prior years— work still needed to be performed in fiscal year  2015—the amount of carryover in fiscal year 2015 still exceeded the  allowable amount. Army headquarters and AMC officials stated that  significantly less work was performed, resulting in less revenue earned for  fiscal years 2013 and 2014, because Industrial Operations reduced  personnel by approximately 4,200 in fiscal year 2013 and an additional  900 in fiscal year 2014. Industrial Operations reduced personnel because  of budgetary uncertainty related to a continuing resolution that extended  throughout much of fiscal year 2013 and sequestration as discussed  below.
On January 10, 2013, the Deputy Secretary of Defense directed the  military departments, including the Army, to take immediate action to  help mitigate budget execution risk because of budgetary uncertainty  based on the fact that DOD was operating under a continuing  resolution and the possibility of the implementation of sequestration in  the beginning of March 2013. The Deputy Secretary of Defense  directed the military departments to formulate plans to mitigate the  effects associated with budgetary uncertainty. The details of the  guidance included imposing hiring freezes, releasing temporary  employees, not renewing term hires, and consideration of the  possibility of furloughs.
Pursuant to the DOD guidance, the Army issued implementing  guidance to the Army components on January 16, 2013. The  guidance directed the Army components to immediately freeze hiring  of civilian personnel with the exception of those for mission-critical  activities, terminate the employment of temporary employees  consistent with mission requirements, consider the possibility of  furloughs, review contract workforce levels for potential adjustment in  accordance with critical mission requirements, and cancel third and  fourth quarter depot maintenance orders and contracts that did not  directly support units deployed to a theater of operations or another  Army priority.
Consistent with direction from DOD and the Army, Industrial Operations  implemented a hiring freeze of civilian employees, restricted overtime,  terminated temporary employees consistent with mission requirements,  and furloughed civilian employees a total of 6 days in fiscal year 2013.  Further, because the fiscal year 2013 full-year DOD appropriations act  was not passed by Congress until midway through fiscal year 2013, some  orders for work at the Industrial Operations activities that DOD customers  likely would have submitted earlier in the year had there been a budget  passed were not submitted until late in fiscal year 2013. According to  Army headquarters officials, the combination of the personnel reductions,  hiring freeze, overtime restrictions, furloughs, and late receipt of orders  resulted in the Industrial Operations activities earning over $1 billion less  revenue than planned in fiscal year 2013. These actions resulted in  Industrial Operations carryover exceeding the allowable amount by   $195 million in fiscal year 2013. The manpower restrictions imposed on  Industrial Operations in fiscal year 2013 continued to negatively affect  carryover in fiscal years 2014 and 2015. Army headquarters officials  stated that Industrial Operations decided not to rehire the employees  released in fiscal year 2013 as the long-term resource outlook indicated  that Industrial Operations’ workload would continue to decline in the  future and it would not have been economical to rehire thousands of  personnel solely to reduce carryover in a declining workload environment.  Consequently, Industrial Operations’ carryover exceeded the allowable  amount by $1,065 million in fiscal year 2014 and $854 million in fiscal  year 2015.
section_title: The Army Did Not Calculate the Fiscal Years 2013 and 2014 Allowable Carryover Amounts Correctly
paragraphs: Based on our review of documentation of how Army calculated the  allowable amounts, we determined that the Army did not use the  appropriate outlay rates in its calculation of the allowable carryover  amounts for fiscal years 2013 and 2014. The Army used the correct  outlay rates for calculating the allowable carryover amount for fiscal year  2015. The correct calculation of the allowable carryover amount is critical  because DOD decision makers and the congressional defense  committees use this information to determine if the carryover was higher  or lower than the allowable carryover amount, which in turn is used to  make budgetary decisions that could affect the amount of appropriations  the Army receives.
According to an Office of the Under Secretary of Defense (Comptroller)  official, the Army should use the most recent DOD Financial Summary  Tables, which are updated annually and contain the outlay rates used for  calculating the allowable amount of carryover. However, the Army did not  do so for the fiscal years 2013 and 2014 calculations of the allowable  carryover amounts and instead used the same outlay rates for some  appropriations that it used for the fiscal year 2012 allowable carryover  calculation. If the Army had used the most recent DOD Financial  Summary Tables issued at the time of its calculations, our analysis  determined that (1) the fiscal year 2013 allowable carryover amount  would have been $44 million higher and correspondingly the amount of  actual adjusted carryover that exceeded the allowable carryover amount  in fiscal year 2013 would be lower by the same amount and (2) the  allowable carryover amount would have been $27 million lower for fiscal  year 2014 and correspondingly the amount of actual adjusted carryover  that exceeded the allowable carryover amount in fiscal year 2014 would  be higher by the same amount.
Army headquarters officials stated that one of the reasons why they did  not use outlay rates contained in the most recent DOD Financial  Summary Tables to calculate the fiscal years 2013 and 2014 allowable  carryover was because the DOD Financial Management Regulation was  not clear on the need to do so when calculating the allowable carryover  amount.
Our review of the provisions contained in the DOD Financial Management  Regulation that cover calculating the allowable carryover amount found  that the DOD Financial Management Regulation did not always specify  using the most recent DOD Financial Summary Tables when calculating  the allowable carryover amount. Specifically, the portion of DOD’s  Financial Management Regulation, volume 2B, chapter 9, titled  “Additional Instructions for Carryover Calculations for the Preparation of  Exhibit Fund-11, Source of Revenue,” states that “Since the FY (fiscal  year) 2004 budget submission, the approved amount of workload carrying  over to subsequent fiscal years is linked to the outlay rate of the source  appropriation as published in the most recent Department of Defense  Financial Summary Tables.” However, the DOD Financial Management  Regulation does not use “most recent” when referring to the DOD  Financial Summary Tables anywhere else in this chapter. For example,  the portion of that same chapter titled, “Instructions for Completing the  Fund-11b, Carryover Ceiling Calculation” states only that “the approved  appropriations outlay rates can be found in the Department of Defense  Financial Summary Tables.” In our discussion of this issue with an Office  of the Under Secretary of Defense (Comptroller) official, the official  agreed with the Army that the language in the DOD Financial  Management Regulation should be clarified and stated that the Office of  the Under Secretary of Defense (Comptroller) plans to update the DOD  Financial Management Regulation to specifically require DOD Working  Capital Fund activities to use the most recent DOD Financial Summary  Tables when calculating the allowable carryover amount.
Army headquarters officials stated that another reason why they did not  use outlay rates contained in the most recent DOD Financial Summary  Tables for calculating the fiscal years 2013 and 2014 allowable carryover  was because the Army did not have documented procedures for  calculating the allowable carryover amount. GAO’s Standards for Internal  Control in the Federal Government states that a key factor in helping  agencies achieve their missions and program results is to implement  appropriate internal controls to help ensure that management’s directives  are carried out. One such control activity would be to develop policies  and procedures to help ensure agency adherence to budget development  and execution requirements. Since the Army did not have documented  procedures for calculating the allowable carryover that is used in its  budget submissions to Congress, the outlay rates used for the fiscal  years 2013 and 2014 allowable carryover calculations were not based  upon the current outlay rates available at the time the budgets were  prepared. Without consistent, reliable calculations of the allowable  carryover amount, DOD decision makers and congressional defense  committees may make important budgeting and resource decisions based  on incorrect information.
section_title: Actual Adjusted Carryover Significantly Exceeded Budgeted Adjusted Carryover Because Industrial Operations Underestimated New Orders and Overestimated Revenue
paragraphs: From fiscal years 2013 through 2015, we found that Industrial Operations’  actual adjusted carryover significantly exceeded budgeted adjusted  carryover. This occurred because Industrial Operations accepted more  orders than budgeted and performed less work (and thus earned less  revenue) than budgeted all 3 years. As shown in table 2, actual adjusted  carryover exceeded budgeted adjusted carryover by over a billion dollars  each year.
Industrial Operations budgeted for adjusted carryover to fall below the  allowable carryover amounts by $174 million and $1.2 billion in fiscal  years 2013 and 2014, respectively, and to exceed the allowable carryover  amount by $186 million in fiscal year 2015. However, because of the  magnitude of differences between budgeted and actual adjusted  carryover shown above, the actual adjusted carryover amount was over  the allowable amount for all 3 years by $195 million, $1.1 billion, and  $854 million for fiscal years 2013, 2014, and 2015, respectively, as shown  in table 3.
subsections: section_title: Actual New Orders Have Consistently Exceeded Budgeted New Orders
paragraphs: Our analysis showed that actual new orders exceeded budgeted new  orders each year from fiscal years 2013 through 2015. Furthermore, this  problem with actual new orders exceeding budgeted new orders is not  new for Industrial Operations. While fiscal years 2013 through 2015  generally showed improvement over prior years, our analysis of budgeted  and actual new orders showed that for the 10-year period from fiscal  years 2006 through 2015, the Army significantly underestimated the  amount of new orders to be received from its Industrial Operations  customers each year. Table 4 compares the dollar amounts of Industrial  Operations actual and budgeted new orders and the differences between  these amounts for the past decade.
Army officials acknowledged that Industrial Operations has had difficulty  accurately budgeting for new orders, as shown above. The officials stated  that Industrial Operations developed its budgets based on input from  customers for future workload projections. These budgets were  developed 2 years in advance of execution. Army officials stated that in  many cases Industrial Operations customers weighed their expected  requirements against their projected funding levels and provided  conservative new order estimates since the operational and fiscal  environment had been so volatile over the past decade. If the Army  includes workload in its new order estimates that does not materialize, a  depot is at risk of incurring unplanned financial loss because the depot is  allocating its overhead costs over less work than planned. These losses  may lead the depots to increase their rates for repairing assets. If funding  availability is higher than the customer originally anticipated or if  operational decisions lead to changes in requirements or priorities,  unplanned workload may materialize at the depots resulting in additional  carryover.
Furthermore, the mix of customer orders (workload) tends to change  during the year of execution from what was previously estimated because  of operational decisions and changing customer requirements that can  increase the carryover at fiscal year-end. For example, Army  headquarters officials stated that if a customer told a depot to expect a  $10 million order to repair High Mobility Multi-purpose Wheeled Vehicles,  but instead sends an order for $10 million to repair trucks, revenue would  most likely be delayed thus increasing carryover. This would occur  because the customer’s change in requirements would necessitate the  depot creating a different production line than anticipated prior to  beginning repair work on the trucks.
As shown in table 4, our analysis showed that budgeted new order data  for the last 3 fiscal years has generally improved from the prior 7 fiscal  years. Army officials stated that the budgeted new orders for the past 3  fiscal years (2013, 2014, and 2015) improved because the Army ended  combat operations in Iraq, thus decreasing operational volatility. As a  result, the workload requirements for the Industrial Operations activities  were more predictable. However, despite the improvement in budgeting  new orders, the Army still consistently underestimated the amount of new  orders accepted from its customers by hundreds of millions of dollars  each year.
section_title: Actual Revenue Was Less Than Budgeted Revenue for Fiscal Years 2013 through 2015
paragraphs: While Industrial Operations actual new orders exceeded budgeted new  orders, resulting in more work to be performed, Industrial Operations also  performed less work than it had budgeted. Our analysis of revenue (work  performed) showed that Industrial Operations performed less actual work  than the amount of work that was expected to be performed as shown in  the budgets for fiscal years 2013 through 2015; the difference was more  than a billion dollars for fiscal years 2013 and 2014, as shown in table 5.
Industrial Operations’ actual revenue was significantly less than budgeted  for fiscal years 2013 and 2014 because, as discussed previously,  Industrial Operations reduced personnel by approximately 4,200 in fiscal  year 2013 and an additional 900 in fiscal year 2014. Industrial Operations  reduced personnel because of budgetary uncertainty related to the  extended continuing resolution and sequestration in fiscal year 2013.  Army officials stated that sequestration and its associated manpower  constraints were implemented in the year of execution and the impact to  revenue was not considered or known when establishing the fiscal years  2013 and 2014 budgets.
section_title: The Army Has Actions Under Way to Improve Budgeted Information, but Problems Remain
paragraphs: To address budgeting concerns, the Army has implemented actions  intended to improve budget information. First, in fiscal year 2012, Army  and AMC senior leadership began reviewing carryover on a continual  basis. There are several senior leader forums where carryover is  reviewed on a weekly, monthly, and quarterly basis. These forums  include, among other things, reviewing variances between budgeted  carryover and actual carryover, identifying factors contributing to the  variances, and identifying actions needed to perform work and reduce  carryover, such as obtaining parts. Second, in fiscal year 2013, the Army  began requiring customers in the acquisition community (i.e., those that  use procurement appropriations to fund orders) to identify depot  maintenance workload in their internal budget documentation to aid the  Army in estimating the workload for the Army Working Capital Fund  budget submission. This internal budget documentation, which is  available to Industrial Operations, includes depot maintenance  requirements for the current year, 1 budget year, and 5 future years.  Additionally, the acquisition community was directed to notify the Army  LCMCs of plans to execute depot maintenance requirements no later  than the end of the first quarter in the year of execution.
The above actions are positive and have the potential for improving future  budgeted carryover information. However, despite these efforts, which  have been under way since at least 2012, the Army’s budgeted carryover  information has continued to differ from actual carryover information by  hundreds of millions or billions of dollars. Since Industrial Operations’  budgets are based on input from its customers, it is important that  Industrial Operations continue to work with its customers to take steps to  reduce the differences between budgeted and actual orders in developing  future budgeted estimates. Reliable budget estimates on carryover are  critical because decision makers use this information when reviewing  Industrial Operations’ budgets. As discussed earlier, actual new orders  have consistently exceeded budgeted new orders for at least a 10-year  period. Internal control standards state that for an entity to run and control  its operations, it must have relevant, reliable, and timely information.  This includes budget information on new orders, revenue, and carryover.  Also, internal control standards state that program managers need both  operational and financial data to determine whether they are meeting their  agencies’ strategic and annual performance plans and meeting their  goals for accountability for effective and efficient use of resources.  Further, financial information is needed for both internal and external  uses. This includes providing reliable budgeted carryover information to  DOD and Congress annually. Without reliable budgeted carryover  information, DOD and congressional decision makers may not be able to  make informed budget decisions.
section_title: Four Key Drivers Led to Carryover at the End of Fiscal Years 2014 and 2015, and the Army Has Actions Under Way to Address Problem Areas
paragraphs: Our analysis of 80 orders (and related amendments) with the largest  amounts of carryover for fiscal years 2014 and 2015 (the most recent  data available) identified four key drivers that contributed to carryover.  These were (1) orders for work that was scheduled to carry over at the  end of the fiscal year, (2) orders for work on crash-damaged aircraft,   (3) orders for work that did not have a well-defined scope of work for  repairing the assets, and (4) orders affected by parts shortages that  delayed the performance of work. Actions to address the first driver are  not necessary because this work was planned to carry over at the end of  the fiscal year as part of the normal business process, and any actions to  address the second driver, crash-damaged aircraft, are limited because of  the unique and unpredictable nature of this type of damage and needed  repairs. The Army has actions under way to address carryover associated  with the work on assets that did not have a well-defined scope of work for  repairing them and parts shortages, but problems continue to persist.
subsections: section_title: Orders for Work Scheduled to Carry Over at the End of the Fiscal Year
paragraphs: Our analysis of 80 orders (and related amendments) for fiscal years 2014  and 2015 determined that 22 orders totaling $190 million and $153 million  in carryover, respectively, involved work that was scheduled to begin  either (1) in the same fiscal year the orders were accepted by the  Industrial Operations depots and be completed in the next fiscal year  because of the length of time needed to complete the work or (2) late in  the fiscal year or in the next fiscal year because other work at the  Industrial Operations depots was scheduled ahead of work on those  orders. As discussed earlier in the report, some carryover is to be  expected and is appropriate at the end of the fiscal year in order for the  Industrial Operations depots to operate efficiently and effectively by  maintaining a steady flow of work. Without sufficient carryover, Industrial  Operations depot officials stated that the depots could not (1) ensure that  enough funded work would be available to continue operations in the next  fiscal year and (2) retain the appropriate number of personnel with  sufficient skill sets to perform depot maintenance work. Adequate  carryover is particularly important when DOD operates under a continuing  resolution, under which Industrial Operations customers do not know their  full-year funding levels at the beginning of the fiscal year. This, in turn,  may cause the Industrial Operations depots to operate for several months  into the next fiscal year relying mostly on funded work from prior fiscal  year orders (i.e., carryover) to continue operations because customers  may limit the amount of new orders they place at the beginning of the  fiscal year in light of budget uncertainties. Carryover provides the  continuity of funded workload necessary to maintain operations from one  year to the next.
section_title: Repair of Crash-Damaged Aircraft Contributed to Carryover
paragraphs: Our analysis of 80 orders (and related amendments) for fiscal years 2014  and 2015 determined that 10 orders involved crash-damaged aircraft. For  crash-damaged aircraft, the requirements to repair the aircraft are largely  unknown prior to inspection, and the repair solutions are based on the  damage and therefore unique to each aircraft. Our review of  documentation on crash-damaged aircraft found that in fiscal years 2014  and 2015, Industrial Operations had a total of $105 million for 20 aircraft  and $71 million for 10 aircraft, respectively, in carryover on orders to  repair crash-damaged aircraft. Crash-damaged aircraft are only repaired  at the Corpus Christi Army Depot.
When crash-damaged aircraft arrive at Corpus Christi Army Depot for  repair, the depot inspects the aircraft for damage to determine what  needs to be repaired and develops repair solutions for the damaged  areas of the aircraft. As the depot develops the repair solutions, the depot  orders the required parts from the DOD supply system, or if the parts are  not in the DOD’s supply system, the depot manufactures the parts or  orders them from a contractor. Once the repair solutions are determined  and parts are obtained, the depot can repair the aircraft. The entire  process can take 2 or more years to complete, depending on what needs  to be repaired on the aircraft.
section_title: Lack of Well-Defined Scope of Work on Orders Contributed to Carryover
paragraphs: Our analysis of 80 orders (and related amendments) for fiscal years 2014  and 2015 determined that work on 19 orders totaling $405 million and  $293 million in carryover, respectively, for these 2 years was delayed  because of the lack of a well-defined scope of work, including approved  technical data, such as engineering drawings and lists of parts needed to  repair the assets (referred to as bill of material). When the depots   (1) have to develop the engineering drawings or (2) do not have a  complete and accurate bill of material and must identify the parts needed  to perform the repair work, actual performance of work is delayed and  thus carryover increases. In those instances, the dollar amount of  carryover is directly affected by the dollar size of the order(s) received  from customers for this work. If the dollar amount of the order is small and  is for the repair of a small number of assets, as generally is the case for  orders for work performed on prototype assets, the dollar amount of the  carryover will be small. On the other hand, if the dollar amount of the  order is large and is for the repair of a large number of assets, as  generally is the case for orders on full production assets, the dollar  amount of carryover will be large. For the 19 orders that we reviewed that  had a scope of work problem, 14 had order and carryover amounts  greater than $10 million each. The following example describes work  performed on Mine Resistant Ambush Protected vehicles (MRAP) that  contributed to carryover because of the lack of a well-defined scope of  work.
In March and July 2012, Letterkenny Army Depot accepted two  production orders totaling $254 million to convert 392 MRAPs to  Route Clearance Vehicles. By the end of fiscal year 2014, the  orders were amended a combined 11 times to decrease vehicle  quantities to 284 and funding to $213 million. Because the depot did  not have a technical data package for the vehicles, it had to develop  approximately 427 engineering drawings to perform the work. Further,  work was delayed on the two orders for about 2 fiscal years because  the depot experienced problems designing the prototype vehicles,  reaching agreement with its customer on the new design, and  performing tests on the prototype vehicles. The final technical data  package for converting the vehicles and the development of the  statement of work and bill of materials on the two orders were delayed  until the new design was agreed upon and the prototype vehicles  were tested. Final approval of the engineering drawings occurred in  March 2014, and the depot started work on the two production orders  in April 2014. Even though the depot started work on the vehicles in  fiscal year 2014, none of the vehicles could be completed by the end  of the fiscal year because of the lack of parts needed to finish them.  The depot carried over about $162 million on these orders into fiscal  year 2015.
By January 2015, the depot was consistently meeting its production  schedule of 18 to 22 Route Clearance Vehicles per month. However,  in August 2015, production halted with 36 vehicles remaining because  of the lack of 56 parts needed to continue the production line. As a  result, the depot released 53 contractor personnel working on the  vehicles. The depot carried over $25.8 million on these orders into  fiscal year 2016. Because of the parts shortages, the depot does not  plan to complete the vehicles until fiscal year 2017—over 4 full fiscal  years after the acceptance of the two fiscal year 2012 orders.
section_title: Parts Needed to Perform Work Were Not Readily Available, Which Contributed to Carryover
paragraphs: Our analysis of 80 Industrial Operations orders (and related amendments)  for fiscal years 2014 and 2015 determined that parts shortages  contributed to carryover on 50 orders totaling $682 million and   $516 million in carryover, respectively. Parts shortages delayed the repair  work being performed on a variety of military assets. Some examples of  parts shortages that contributed to carryover on work at the depots at the  end of fiscal years 2014 and 2015 are discussed below.
Because of the unavailability of radiators, work was delayed on the  repair of Paladin self-propelled howitzers, which are cannon artillery  systems, built on tracked wheeled chassis and operated by crews of  four for use in combat.
Because of the unavailability of parts, work was delayed on the  manufacturing and assembling of ammunition racks, which are used  to store ammunition for the main gun of the Abrams tank.
Because of the unavailability of trigger housings, work was delayed on  the repair of M240 machine guns.
Because of the unavailability of parts such as torque rods, radiators,  alternators, and steering gears, work was delayed on M915A3 trucks.
Because of the unavailability of water heaters, work was delayed on  Force Providers, which is a transportable base camp system that  provides housing and operation space for a variety of missions.
In order to obtain parts from the DOD supply system, the Industrial  Operations activities order them through the Defense Logistics Agency  (DLA) or Army Supply Management. However, if DLA or Army Supply  Management is unable to provide the parts, the Industrial Operations  activities may use other methods to obtain the parts, such as obtaining  parts from other assets (e.g., vehicles or engines), manufacturing the  parts, or purchasing the parts using its local procurement authority. If the  Industrial Operations activities manufacture the parts, they must have the  raw material to perform the work and obtain the specifications for the  parts to be made. While these methods allow work to continue, obtaining  the needed parts this way is generally inefficient. The following two  examples illustrate how parts shortages contributed to carryover.
In fiscal years 2014 and 2015, Red River Army Depot received 8  orders totaling $173 million to repair 1,152 Army MRAP All-Terrain  Vehicles (MATV). The MATV work was a new requirement for this  depot. Time limitations caused by the customers’ need for immediate  production prevented the upfront planning necessary for establishing  an efficient repair process at the beginning of the program. Because  the scope of work was to inspect and repair each MATV as needed,  the parts requirement for each vehicle was varied and prevented the  depot from accurately forecasting all parts requirements at the time  the work was started on a vehicle. While the depot was performing the  repair work, it was addressing issues such as identifying and ordering  the parts it needed for the repairs. In some cases, because of  inaccurate technical data, the depot ordered the wrong parts and had  to return those parts, perform additional analysis to identify the correct  parts, and then order those parts. Furthermore, the depot could not  always obtain the material and parts it needed to make repairs in a  timely manner. For example, some Army MATVs had damage to the  material that lines the floor and sidewalls of the vehicle that provides  additional protection for the warfighter inside the vehicle. However,  the depot could not obtain the material it needed to make these  repairs in a timely manner. As a result of parts and material  shortages, at the end of fiscal year 2015, Red River Army Depot had  completed only 240 of the 1,152 Army MATV vehicles ordered by  customers on these 8 orders. In addition, the depot assembled  another 419 vehicles, but the vehicles were missing parts and  material needed to produce complete vehicles that complied with the  scope of work. At the end of fiscal year 2014, the depot carried over  $113 million of the $120 million of MATV orders it accepted. At the  end of fiscal year 2015, the depot carried over $50 million of the   $173 million of orders.
In fiscal year 2012, Anniston Army Depot accepted an order for   $14 million to repair and overhaul 12 Armored Vehicle Launched  Bridges. The Armored Vehicle Launched Bridge is a tracked vehicle  that carries a folding metal bridge and allows armored or infantry units  to cross rivers, ravines, and other obstacles when no bridge is  conveniently located. Because the launcher configuration for the  folding metal bridge was old and considered obsolete, the Army  developed a new configuration to the hydraulic and electrical system  to increase its lifespan and sustain readiness. In order to perform the  repair and overhaul for the new configuration, the depot needed to  install hydraulic electrical upgrade kits. Each kit is made up of about  220 parts, including hoses, clamps, bushings, pipes, tubes, and  wiring. According to depot officials, these kits were not available  through the DOD supply system, and therefore the depot had to  obtain the parts and assemble the kits piece by piece. Further, the  depot had problems obtaining several of these parts from different  vendors in a timely manner. As a result, the amount of carryover at  the end of fiscal year 2015 was $13.9 million on this $14 million fiscal  year 2012 order.
Parts were not always available to perform the work because the DOD  supply system did not maintain sufficient parts in the right mix to meet  demand. Without the DOD supply system maintaining the right mix and  sufficient quantities of spare parts, Industrial Operations activities cannot  complete their funded workload timely and efficiently. Supply chain  management has been a long-standing problem for DOD. In January  2009, we reported the Army had accumulated billions of dollars in excess  spare parts inventory against current requirements for some items and  substantial inventory deficiencies in other items. The Army inventory did  not align with the current requirements at the time because of (1) a lack of  cost-efficiency metrics and goals and (2) inaccurate demand forecasting.  We reported that without accurate and timely demand data, managers  cannot ensure that their purchasing decisions will result in inventory  levels that are sized to minimize DOD’s investment needed to support  requirements. The Army acknowledged that it faced challenges in its  forecasting procedures and began taking steps to address them.  However, our April 2015 report on defense inventory and our current  review shows that DOD, including the Army, has not fully resolved its  ineffective and inefficient inventory management practices. As a result,  since 1990 we have continued to identify DOD supply chain management  as a high-risk area in part because of ineffective and inefficient  management practices and procedures, weaknesses in accurately  forecasting the demand for spare parts, and other supply chain  challenges.
section_title: The Army Has Actions Under Way to Help Reduce Carryover, but Problems Persist with a Lack of a Well-Defined Scope of Work and Parts Shortages
paragraphs: The Army has three key actions under way to address problems related  to scope of work and parts shortages that we identified in our analysis of  80 orders. First, the Army began holding a series of weekly, monthly, and  quarterly meetings that provide information, among other things, on the  status of Industrial Operations’ carryover, orders, and revenue. These  meetings provide the Army a forum for better identifying carryover issues  and developing plans to mitigate the problems. For example, beginning in  fiscal year 2012, the Army began holding weekly meetings called the  Organic Industrial Base Review that provide information on the status of  Industrial Operations carryover, orders, and revenue. At the meetings,  the Army discusses production issues for specific workloads, such as  parts shortages, and strategies to reduce carryover. The meetings are  attended by Army senior leadership and other officials from organizations  involved in various aspects of the depot maintenance process, such as  AMC, the LCMCs, the 13 Industrial Operations activities, and DLA.
Second, the Army established a specific managerial approval process for  analyzing and accepting orders for work performed at Industrial  Operations activities in fiscal year 2014, and all four depots we visited  had implemented the process by the end of fiscal year 2015. This process  was established in response to work performed by an Army working  group formed in April 2012 to address carryover issues. The Army  evaluates orders based on seven key dimensions. If deficiencies are  identified in one or more of the dimensions, the Industrial Operations  activities are responsible for developing mitigation plans to resolve them.  The seven dimensions consist of the following.
Skilled labor. Industrial Operations activities must ascertain the  availability of all requisite skill levels and labor hours required to  execute the work order.
Parts. Industrial Operations activities must ascertain whether the  DOD supply system has the right quantity and mix of spare parts to  perform the work. Army LCMCs and Industrial Operations activities  must conduct production planning, material provisioning, and  command scheduling to ensure sufficient coordination of available  parts with all sources of supply to meet requirements.
Tools and equipment. Industrial Operations activities must ascertain  whether the activities have all required tools, production equipment,  handling equipment, and quality and testing equipment to perform the  work.
Process. Industrial Operations activities must ascertain whether the  activities have processes that define the scope of work and include  approved technical data, documented internal processes, and  capacity to complete the work.
Assets. Industrial Operations activities must ascertain whether assets  needing repair will be available at the scheduled time for beginning  work at the activities.
Requirements. Industrial Operations activities must ascertain  whether the workload accepted by the activities has a well-defined  scope of work. This includes having information on required  production, impact of back orders, average monthly demand, potential  surge requirements, available technical data package/work  instructions, and alternate sources of supply for unique critical parts  and components.
Funding. Industrial Operations activities must ascertain whether the  accepted workload has available funding to adequately support  production of required deliverables.
Third, AMC is consolidating and updating operational responsibilities and  guidance for planning, accepting, scheduling, controlling, and reporting  depot maintenance and other functions, such as ammunitions operations,  into a single draft regulation titled AMC Organic Industrial Base  Operational Management Policy and Implementation Guidance.  According to an AMC official, the draft guidance is planned to be issued  during fiscal year 2016. The draft regulation provides guidance on the  scope of work and parts as well as coordination and communication  among both AMC and non-AMC stakeholders involved in Industrial  Operations depot activities. For example, the draft regulation states that  the work requirements and changes to the scope of work should be  documented and attached or referenced on the order, and that every  effort should be made to ensure that work specifications and changes are  clear and well documented, especially where new work requirements are  involved. The draft regulation also establishes procedures for managing  the currency and accuracy of production data, including applicable bills of  material, technical data packages, and other technical production data, in  coordination with program executive offices, program managers,  responsible engineering support activities, and depots.
The Army’s issuance and implementation of the draft AMC regulation has  the potential to help resolve scope of work and parts problems that we  identified during our review of orders. For example, the draft AMC  regulation would require a process similar to that the Army used on a  particular MRAP vehicle referred to as the MaxxPro, and this resulted in  the successful performance of work on this vehicle. Specifically, Red  River Army Depot officials stated that prior to the acceptance of full  production orders for the repair of the MaxxPro, the program underwent a  repair planning process in which there was upfront communication and  coordination among the stakeholders from three separate organizations:  the Red River Army Depot, the Tank-automotive and Armaments  Command, and the MaxxPro program manager. The coordinated team  provided expertise in several different functional areas, including  engineering, quality assurance, and supply management. The team’s  objective was to develop the instruction documentation for this new  requirement that specified the work steps to be performed on the  MaxxPro and the identification of the parts needed to perform the repair  work, and to verify the execution of the process through the means of a  pilot program for this vehicle. Red River Army Depot officials stated that  the stakeholders worked closely together to develop a prototype vehicle,  which resulted in the development of a well-defined scope of work and  the list of parts needed to perform the repair work. Red River Army Depot  began work on the MaxxPro production order in fiscal year 2015 and  completed 105 MaxxPro vehicles in fiscal year 2015. According to Red  River Army Depot officials, Red River Army Depot has been successfully  meeting the MaxxPro production schedules set by the customer.
AMC officials acknowledged problems with the scope of work and parts  shortages that we identified on the orders we reviewed. These officials  stated that both the analysis on new orders based on the seven key  dimensions and the draft AMC regulation should help address the scope  of work and parts problems. Specifically, the depots’ analysis of new  orders based on the seven key dimensions was implemented during fiscal  year 2015, and AMC officials stated that the benefits are just now being  realized. Also, the draft AMC regulation contains provisions to help  address the concerns related to scope of work and parts shortages as  well as coordination with stakeholders (both AMC and non-AMC  organizations) involved in performing the work. Once finalized, the draft  regulation is scheduled to be issued in fiscal year 2016 and implemented  after issuance.
As stated previously, GAO’s Standards for Internal Control in the Federal  Government states that a key factor in helping agencies achieve their  missions and program results is to implement appropriate internal  controls. Internal control activities help ensure that management’s  directives are carried out. Control activities are the policies, procedures,  techniques, and mechanisms that enforce management directives. One  such control activity would be to develop policies and procedures for  planning, accepting, scheduling, controlling, and reporting for AMC  organic industrial base. However, the draft AMC regulation, which aims to  provide such policies and procedures, has not been completed. Internal  controls and their proper implementation are important because they  provide reasonable assurance that management directives are carried  out.
section_title: Conclusions
paragraphs: The Army’s 13 Industrial Operations activities provide crucial depot  maintenance and ordnance services to support a wide range of military  assets and programs. In order to provide those services, these activities  must maintain depot maintenance and ordnance production capabilities  year round. Carryover provides the continuity of funded workload  necessary to maintain operations from one fiscal year to the next. While  some carryover is needed to maintain operations from year to year,  Industrial Operations exceeded the allowable amount of carryover the  past 3 fiscal years. Industrial Operations consistently underestimated new  orders and overestimated the amount of work to be performed—the key  elements that determine carryover—by hundreds of millions and  sometimes billions of dollars in its budgets for the past 3 years. In  addition, it made errors in calculating the allowable carryover amounts in  fiscal years 2013 and 2014. Unreliable budget and carryover information  may result in DOD and congressional decision makers making important  budget decisions based on inaccurate data. While some of these  differences were the result of events outside of Industrial Operations’  control, such as sequestration, the Army has several positive actions  under way to help reduce its scope of work and parts problems that  contributed to excess carryover. The ongoing development of a new  regulation on Industrial Operations will be key to improving the  management of carryover. If successfully implemented, this draft  regulation will consolidate and update guidance that among other things  should help reduce scope of work and parts problems and improve  coordination and communication between AMC and non-AMC  organizations.
section_title: Recommendations for Executive Action
paragraphs: We are making four recommendations to the Secretary of Defense to  improve budgeting and management of carryover.
We recommend that the Secretary of Defense direct the Under Secretary  of Defense (Comptroller) to clarify existing guidance in the DOD Financial  Management Regulation to require DOD Working Capital Fund activities  to use the most recent DOD Financial Summary Table when calculating  allowable carryover amounts in annual budget submissions to Congress.
We recommend that the Secretary of Defense direct the Secretary of the  Army to develop, document, and implement internal controls for  developing and monitoring the process of calculating the allowable  amount of carryover in annual budget submissions to Congress.
We recommend that the Secretary of Defense direct the Secretary of the  Army to improve its budget estimates on orders by directing Industrial  Operations to continue to work with its customers on identifying  differences in budgeted and actual orders and consider these differences  and their potential consequences when developing budget estimates.
We recommend that the Secretary of Defense direct the Secretary of the  Army to direct the Army Materiel Command to incorporate in its regulation  provisions for a repair process that includes upfront communication and  coordination among AMC and non-AMC stakeholders that will result in  the development of a well-defined scope of work and parts needed by the  Industrial Operations activities to perform the repair work that will help  reduce carryover.
section_title: Agency Comments
paragraphs: We provided a draft of this report to DOD for comment. In its written  comments, which are reprinted in appendix II, DOD concurred with the  four recommendations and cited actions planned or under way to address  them. Specifically, in response to our first recommendation, DOD  commented that it will update the draft DOD Financial Management  Regulation as we recommended to require that DOD Working Capital  Fund activities use the most recent DOD Financial Summary Table for  calculating allowable carryover amounts in its annual budget  submissions. DOD also stated that it expects to finalize the updated draft  DOD Financial Management Regulation in December 2016. Further, DOD  stated in response to our second recommendation that the Army’s recent  update to its annual working capital fund formulation guidance included  internal procedures for calculating the allowable carryover in annual  budget submissions and will be used in developing the Army Working  Capital Fund’s annual budget submissions beginning with the fiscal year  2018 budget submission.
In response to our third recommendation related to improving budget  estimates on orders, DOD stated that the Army will continue to stress the  importance of improving communication among all Industrial Operations  stakeholders during the depot maintenance requirements and budget  estimate development processes. Further, DOD stated that the Army will  enforce Army policies and business rules on the acceptance of new  orders and the use of historical trend analysis in the preparation of fiscal  year 2018 budget estimates. In response to our fourth recommendation  related to the Army Materiel Command incorporating in its regulation  provisions for a repair process that includes upfront communication and  coordination among AMC and non-AMC stakeholders, DOD stated that  the Army will enforce policy and business rules that require Organic  Industrial Base facilities to communicate with their customers early to  verify the scope of work and ensure that the Army has the required  capability, capacity, equipment, and parts needed to meet delivery  schedules and avoid excessive carryover. DOD also stated that it will  update its policy and publish its draft regulation during fiscal year 2017.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, the Secretary of the Army, and the  Under Secretary of Defense (Comptroller). In addition, the report is  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about 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 the extent to which Army Industrial Operations’ (Industrial  Operations) actual carryover differed from the allowable amounts from  fiscal years 2013 through 2015 and the reasons for any differences, we  obtained and analyzed Industrial Operations reports and Army Working  Capital Fund budget estimates submitted to Congress that contained  information on actual carryover and the allowable amount of carryover for  fiscal years 2013 through 2015. We analyzed carryover since fiscal year  2013 because we previously reported on Industrial Operations carryover  from fiscal years 2006 through 2012. We met with responsible officials  from the Army to determine the reasons for variances between actual  carryover and the allowable amount. Further, we identified and analyzed  any adjustments made by the Army that increased the allowable  carryover amounts or reduced the amount of carryover. We reviewed the  Department of Defense’s (DOD) guidance for granting exceptions to the  carryover policy and discussed any exceptions with officials from the  Office of the Under Secretary of Defense (Comptroller) and Army  headquarters to obtain explanations for the exceptions.
To determine the extent to which Industrial Operations’ budgeted  carryover differed from actual carryover from fiscal years 2013 through  2015, reasons for any differences, and the actions the Army is taking to  improve related budgeting, we obtained and analyzed Industrial  Operations reports and Army Working Capital Fund budget estimates  submitted to Congress that contained information on budgeted and actual  new orders, revenue, and carryover data for fiscal years 2013 through  2015. We analyzed carryover since fiscal year 2013 because we  previously reported on Industrial Operations carryover from fiscal years  2006 through 2012. We also analyzed new orders for fiscal years 2006  through 2015 to obtain trend data on differences between budgeted and  actual new orders received from customers. We met with responsible  officials from the Army to determine the reasons for variances between  budgeted and actual new orders, revenue, and carryover amounts. We  also met with these officials to discuss actions the Army is taking to  improve budgeting of carryover, including reducing carryover amounts.
To determine the key drivers for orders with large carryover balances for  fiscal years 2014 and 2015 and the extent to which the Army is taking  actions to reduce carryover, we met with responsible officials from Army  headquarters, Army Materiel Command, and Army depots to identify  contributing factors that led to carryover. We focused on fiscal years 2014  and 2015 carryover balances to identify current issues contributing to  carryover. We also performed walk-throughs of four depot maintenance  operations to observe the work being performed and discussed with  officials the causes for workload carrying over from one fiscal year to the  next. Further, to corroborate the information provided by Army officials,  we obtained and analyzed a total of 80 customer orders consisting of the  40 orders that had the largest dollar amounts of carryover at the end of  each of fiscal years 2014 and 2015. Carryover amounts associated with  these orders represented 31 percent of the total carryover each year  collectively at the four Army depots we visited for fiscal years 2014 and  2015. Because we selected orders for review based on dollar size of  carryover, they do not represent a statistical selection and the results  cannot be projected to the population. We reviewed the orders and  amendments for each of the orders and discussed the information in  these documents with the officials from the four Army depots to determine  the causes for the carryover. We summarized and categorized the  results. We also discussed and obtained documentation on the actions  the Army depots are taking to better manage and reduce carryover.
We obtained the financial and logistical data in this report from official  budget documents and the Army’s logistical system used by the Army  depots. 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 Army officials  knowledgeable about the carryover data, (3) reviewed GAO reports on  depot maintenance activities, and (4) reviewed customer orders  submitted to Industrial Operations 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 Office of the Under Secretary of Defense (Comptroller), the Office  of the Assistant Secretary of the Army (Acquisition, Logistics and  Technology), and the Office of the Assistant Secretary of the Army  (Financial Management and Comptroller), Washington, D.C.; Army  Materiel Command, Huntsville, Alabama; the Tank-automotive and  Armaments Command Life Cycle Management Command, Warren,  Michigan; the Anniston Army Depot, Anniston, Alabama; the Corpus  Christi Army Depot, Corpus Christi, Texas; the Letterkenny Army Depot,  Chambersburg, Pennsylvania; the Red River Army Depot, Texarkana,  Texas; and the Office of the Assistant Secretary of the Army (Acquisition,  Logistics and Technology), Program Executive Office Combat Support &  Combat Service Support, Warren, Michigan.
We conducted this performance audit from June 2015 to June 2016 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), John Craig, Steve Donahue, and Keith McDaniel made key  contributions to this report.