Army Industrial Operations: Budgeting and Management of Carryover Could Be Improved
Published: 2013-06-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The 13 Army Industrial Operations activities support combat readiness by providing depot maintenance and ordnance services to keep Army units operating worldwide. To the extent that Industrial Operations 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 Industrial Operations at the end of the fiscal year. As requested, GAO reviewed issues related to Army Industrial Operations carryover. GAOs objectives were to determine whether, and to what extent, Army Industrial Operations (1) actual carryover exceeded allowable carryover for fiscal years 2006 through 2012; (2) budget information on carryover approximated actual information for fiscal years 2006 through 2012, and if not, whether the Army took actions to align the two; and (3) carryover increased during fiscal years 2011 and 2012 and causes for the carryover. To address these objectives, GAO reviewed relevant carryover guidance, analyzed carryover and related data for Industrial Operations, and interviewed Army officials.
section_title: What GAO Found
paragraphs: From fiscal years 2006 through 2012, Army's Industrial Operations' actual carryover was under the allowable amounts in 5 of the 7 fiscal years. However, carryover more than doubled during that period, reaching a high of $5.8 billion in fiscal year 2011. Army officials stated that fiscal year 2011 was an abnormal year because Industrial Operations (1) received more orders than it had ever received--$7.5 billion in new orders--and (2) implemented a system called the Logistics Modernization Program (LMP) that changed the business rules for recognizing revenue and therefore resulted in carryover being higher than it would have been under the prior system. Army officials anticipate carryover decreasing in fiscal year 2013. According to the Army fiscal year 2014 budget, the Army expects carryover to be under $4 billion at the end of fiscal year 2013.
The Army's budget estimates for carryover were less than the actual carryover amounts each year beginning in fiscal year 2006--at least $1.1 billion each year. GAO's analysis showed that the actual amounts of carryover exceeded budgeted amounts primarily because (1) the Army underestimated new orders to be received from customers for all 7 years reviewed, particularly with respect to procurement funded orders, and (2) for fiscal year 2011, Industrial Operations performed over $1 billion less work than budgeted because Army officials were unaware of the impact that LMP would have on revenue when developing the fiscal year 2011 budget. The Army is taking actions intended to better align the customers' budgets with Industrial Operations' budgets.
Industrial Operations' carryover grew significantly in fiscal years 2011 and 2012 to represent about 12.7 and 9.5 months of work, respectively. GAO found three causes for the carryover: (1) the scope of requested work was not well defined, (2) parts were not available to perform the work, and (3) revenue recognition business rules were changed as part of the implementation of LMP. The Army formed a working group in April 2012 that identified actions to help reduce carryover. However, these actions have not been implemented and no timetable for implementation has been set.
section_title: What GAO Recommends
paragraphs: GAO is making three recommendations to the Department of Defense (DOD) that are aimed at implementing the planned actions identified by the Army's working group to improve the budgeting and management of 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. The depot maintenance services  include the repair and overhaul of a wide range of vehicles and other  military assets, including helicopters, such as the Apache and Black  Hawk; combat vehicles, such as the Abrams tank and High Mobility Multi- purpose Wheeled Vehicles (HMMWV); and air defense systems, such as  the Patriot missile. The ordnance services include manufacturing,  renovating, and demilitarizing an array of defense-related munitions and  components, such as howitzers, large-caliber ammunition, rockets,  bombs, missiles, and incendiary devices. Many of these military assets  and munitions were used to support the Army’s efforts in Iraq and  Afghanistan.
When Army Industrial Operations work has been ordered and funded  (obligated) by customers (such as the Army) but has not been completed  at the end of a fiscal year, it is referred to as carryover. 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. Further, excessive amounts of  carryover 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.
You asked us to review issues related to the Army Industrial Operations’  carryover. Our objectives were to determine whether, and to what extent,  Army Industrial Operations’ (1) actual carryover exceeded the allowable  amount of carryover from fiscal years 2006 through 2012; (2) budget  information on carryover from fiscal years 2006 through 2012  approximated actual information, and if not, whether the Army took  actions to align the two; and (3) carryover increased during fiscal years  2011 and 2012 and causes for the carryover for those 2 fiscal years.
To address the first and second objectives, we obtained and analyzed  Army Industrial Operations reports that contained information on  budgeted and actual carryover and the allowable amount of carryover for  fiscal years 2006 through 2012. We analyzed carryover beginning with  fiscal year 2006 because the Army’s fiscal year 2006 budget reported a  consolidation of the Army Working Capital Fund’s (AWCF) depot  maintenance and ordnance activity groups into a consolidated Industrial  Operations activity group, making a comparison to prior fiscal years  difficult. We met with responsible officials from the Army to obtain their  views on the causes for variances between actual carryover and (1) the  allowable amount and (2) budgeted carryover. We also met with these  officials to discuss actions the Army has taken and is taking to reduce the  amount of carryover. 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 DOD’s guidance for  exceptions to the carryover policy and discussed any exceptions with the  Office of the Under Secretary of Defense (OUSD) (Comptroller) and Army  headquarters officials to obtain explanations for the exceptions.
To address the third objective, we met with responsible Army officials to  identify contributing factors that caused the carryover. Further, to  corroborate the information provided by these officials, we selected eight  weapon system workloads with high dollar amounts of fiscal year 2011  carryover from four Army depots. The carryover associated with these  workloads represented about 35 percent of Industrial Operations’  carryover for fiscal year 2011 and was one of the top five workloads with  carryover at each of the four depots. We obtained and analyzed orders  and amendments associated with these workloads and discussed the  information in these documents with the depots to determine the causes  for the carryover. Additionally, we discussed and obtained documentation  on the actions the Army is taking to better manage and reduce carryover.  A more detailed discussion of our scope and methodology is contained in  appendix I.
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. We conducted this performance audit from May 2012 to June  2013 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: Army Industrial Operations provides 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. Industrial  Operations relies on sales revenue from customers to finance its  continuing operations. 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—that is, neither make a gain nor incur a loss. Customers,  such as the Army, use appropriated funds (including operation and  maintenance or procurement appropriations) to finance orders placed  with Industrial Operations. 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 operated installation  activities, each with unique core competencies. These include 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 preponderance of  the workload performed by Industrial Operations relates to depot-level  maintenance.
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), each 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 HMMWV and Abrams tank, whereas 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: Carryover consists of both the unfinished portion of Army Industrial  Operations work started but not completed and work that was accepted  but has not yet begun. Some carryover is appropriate at the end of the  fiscal year in order for working capital funds such as Industrial Operations  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 Industrial Operations’ 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 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 amount of new orders received that year and the outlay rate  of the customers’ appropriations financing the work. The DOD carryover  policy further provides that the work on the current fiscal year’s orders is  expected to be completed by the end of the following fiscal year. 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 and (2) the reported actual carryover, net of  exclusions (adjusted carryover), 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. To the extent that adjusted carryover  exceeded the allowable carryover, DOD and the congressional defense  committees may reduce future budgets. According to 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 (i.e.,  waivers) must be submitted to the Director for Revolving Funds, OUSD  (Comptroller) separate from the budget documents. OUSD (Comptroller)  officials informed 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: Implementation of the Logistics Modernization Program
paragraphs: The Army implemented the Logistics Modernization Program (LMP) at  two Army Industrial Operations activities in fiscal year 2009 and 10 Army  Industrial Operations activities in fiscal year 2011. According to the  Army’s budget, LMP provides the Army a modernized logistics and  finance system that delivers a fully integrated suite of software and  business processes, providing streamlined data on maintenance, repair  and overhaul, finance, acquisition, spare parts, and materiel. LMP  changed the point in time when Industrial Operations activities recognized  revenue. The point in time when revenue is recognized is important  because when an Industrial Operations activity performs work it earns  revenue and the carryover is reduced. Prior to the implementation of  LMP, the Army activities recognized revenue on parts and material when  the activities received the items and assigned them to orders. This  procedure led, in some cases, to Industrial Operations activities buying  material or spare parts and recognizing revenue and reducing carryover  before the parts and material were actually used in repairing weapon  systems. Under LMP, revenue is recognized when the material and parts  are brought to the assembly area for installation on the weapon  systems—much later in the repair process for weapon systems that have  long repair cycle times.
section_title: Adjusted Carryover Was under the Allowable Amount for 5 of the Last 7 Fiscal Years
paragraphs: From fiscal years 2006 through 2012, the Army reported that Industrial  Operations’ actual carryover, adjusted for waivers/exclusions (adjusted  carryover), was under the allowable amounts in 5 of the 7 fiscal years.  From fiscal years 2006 through 2012, Industrial Operations’ total actual  carryover increased from $2.3 billion to $5 billion, reaching a high of   $5.8 billion—12.7 months of work—at the end of fiscal year 2011.1 shows the Army Industrial Operations actual adjusted carryover,  allowable carryover, and the amount over (or under) the allowable  carryover for fiscal years 2006 through 2012.
section_title: Budgeted Information on Carryover Underestimated Actual Carryover Information, but the Army Began Taking Action to Align These in Fiscal Year 2012
paragraphs: The Army’s budget estimates for its Industrial Operations carryover were  consistently less than the actual carryover amounts each year from fiscal  years 2006 through 2012. For the 7-year period, the Industrial Operations  actual carryover exceeded budgeted carryover by at least $1.1 billion  each year. This was primarily because (1) the Army underestimated its  Industrial Operations new orders received from customers for each of the  7 years and (2) for fiscal year 2011, Industrial Operations performed over  $1 billion less work than budgeted. Reliable budget information on  carryover is critical because decision makers use this information when  reviewing Industrial Operations budgets. Table 2 compares the dollar  amounts of the Army’s budgeted and actual Industrial Operations  carryover and the difference between these amounts for fiscal years 2006  through 2012.
One factor we found that contributed to actual carryover exceeding  budgeted carryover by over $1 billion annually over the 7-year period was  that the Army significantly underestimated the amount of new orders to be  received from its Industrial Operations customers. As shown in table 3,  from fiscal years 2006 through 2012, Army Industrial Operations  budgeted to receive about $35.6 billion in new orders, but Industrial  Operations reports showed that it actually received about $45.7 billion in  new orders. As a result, Industrial Operations underestimated new orders  received from customers by about $10.1 billion over the 7-year period.
We analyzed the appropriations funding new orders to determine which  appropriation had the largest variance. The Army’s total budgeted new  order amounts for the 7-year period were within 15 percent of the total  actual new order amounts for the operation and maintenance and other  appropriations categories. The largest differences for these two  appropriation categories occurred in fiscal years 2006 and 2007, when  Industrial Operations budget assumptions in support of the Global War on  Terrorism underestimated the amount of orders actually received.However, over the same period, our analysis of budgeted and actual  orders showed that actual new orders funded by the procurement  appropriation category exceeded budgeted new orders by about   $5.8 billion, or 118 percent. Actual amounts funded by the procurement  appropriation category exceeded budgeted amounts by over 50 percent  in all but one year, with actual amounts exceeding budgeted amounts by  more than 100 percent in 4 of the 7 years. Table 4 shows Army Industrial  Operations’ budgeted new orders compared to actual new orders by  appropriation category funding the orders for fiscal years 2006 through  2012.
Army headquarters and AMC officials stated that they recognized that  Army Industrial Operations had difficulty in accurately budgeting for new  orders, particularly for procurement-funded orders and carryover. In  discussing this matter with Army headquarters officials, the officials stated  that Industrial Operations develops its budgets based on information from  customers. However, Industrial Operations underestimated the amount of  new orders because (1) the customers did not always notify Industrial  Operations of their plans to provide some orders, (2) the customers did  not always commit to providing some orders, and (3) customer  requirements subsequently changed from the time they prepared their  budgets to the time the orders were placed with Industrial Operations.  The Army officials we spoke with stated that improved communications  between Industrial Operations and customers is needed to help better  ensure that budgeted orders approximate actual orders. Specifically, they  stated that customers and Industrial Operations need to work together so  that Industrial Operations receives reliable new order information to be  included in its budgets.
To improve the management of carryover, the Army formed a working  group in April 2012. Among other things, the working group identified that  improved planning and communication was needed on budgeting for  orders. The working group identified a number of actions that have the  potential for remedying the budgeting and actual carryover and order  variances, including the following:
Holding a series of monthly or quarterly meetings to better manage  carryover, including issues related to orders received from customers.  For example, beginning in July 2012, AMC and the LCMCs and their  individual activities began to hold quarterly meetings that provide  information on the status of Industrial Operations’ carryover, orders,  and revenue. Production issues for specific workloads and strategies  to reduce carryover are discussed at these meetings. Strategies  aimed at increasing revenue and reducing carryover include working a  second shift at the activities or actions to obtain long lead time parts.
Establishing a policy on acceptance of unscheduled new orders.
Requiring the program managers (customers) to clearly identify  planned depot work in their procurement budgets so Industrial  Operations can better determine the dollar amount of budgeted orders  funded with procurement appropriations.
In addition, AMC has taken or plans to take the following actions intended  to improve the management and budgeting of Industrial Operations’  carryover and orders.
AMC reviewed orders received by Industrial Operations from  customers in the fourth quarter of fiscal year 2012 and disapproved  some orders that were unplanned and not included in the Industrial  Operations fiscal year 2012 budget because the orders would  increase fiscal year 2012 carryover. Specifically, AMC disapproved  $97 million of orders received from Industrial Operations’ customers.
During fiscal year 2013, the Army plans to better align the customers’  budgets with the Industrial Operations budgets. AMC identified three  points during the budget and requirements process at which budget  information on orders can be updated with the most current workload  data. At these points, AMC, the LCMCs, and the Industrial Operations  activities will meet with their customers, including the Office of the  Assistant Secretary of the Army (Acquisition, Logistics and  Technology), the Army National Guard, and the Army Reserve, and  review the customers’ requirements and update the Industrial  Operations budgets for any orders to be received.
If fully and effectively implemented, these actions should help address the  order and carryover budgeting issues. However, the Army has not yet  developed a timetable for implementing the actions identified by the  working group.
subsections: section_title: Army Earned Less Revenue Than Budgeted in Fiscal Year 2011
paragraphs: Our analysis of Army Industrial Operations budget documents showed  that Industrial Operations earned less revenue than budgeted in fiscal  year 2011, contributing to actual carryover exceeding the budgeted  amount by $2.5 billion for fiscal year 2011. Even though the total  budgeted and actual revenue was nearly equal from fiscal years 2006  through 2012, Industrial Operations’ budget data also showed that  Industrial Operations’ actual revenue for fiscal year 2011 fell below  budgeted revenue by about $1 billion and below the previous year’s  results by $688 million. Table 5 shows a comparison between budgeted  and actual revenue for fiscal years 2006 through 2012.
Army officials stated that the implementation of LMP at the Industrial  Operations activities in fiscal years 2009 and 2011 contributed to the  fiscal year 2011 actual revenue falling below the prior year and budgeted  amounts. First, in the first quarter of fiscal year 2011, LMP was  implemented at 10 of the 13 Industrial Operations activities. At the  deployment activities, revenue was lower in fiscal year 2011 because of  production delays caused by the workforce being unfamiliar with the  revised LMP requirements. Second, when the fiscal year 2011 Industrial  Operations budget was developed in the summer of 2009, 2 of the 13  Industrial Operations activities had just deployed LMP and 10 of the 13  had not yet deployed LMP. The LCMCs and the activities did not fully  understand the impact LMP would have on revenue recognition at the  time of their budget submissions, resulting in actual revenue being less  than budgeted.
section_title: Carryover Increased at the End of Fiscal Years 2011 and 2012 and Was Caused by Several Factors
paragraphs: Much of the growth in Army Industrial Operations’ carryover occurred in  the past 2 fiscal years. During this period, carryover grew from $2.3 billion  at the end of fiscal year 2006 to a high of $5.8 billion at the end of fiscal  year 2011. Carryover grew in fiscal year 2011 because Industrial  Operations received more orders ($7.5 billion) than work it performed  ($5.5 billion). At the end of fiscal year 2012, carryover totaled about   $5 billion.
We analyzed eight workloads that accounted for $2 billion of the   $5.8 billion in carryover at the end of fiscal year 2011. The carryover  associated with these workloads represented about 35 percent of  Industrial Operations’ carryover for fiscal year 2011. In analyzing these  workloads, we found three primary causes for the carryover: (1) the scope  of work was not well defined, (2) parts needed to perform the work were  not available, and (3) revenue recognition business rules were changed  as part of the implementation of LMP. As an additional cause, the  Industrial Operations activities accepted some orders in the third and  fourth quarters of fiscal year 2011, which provided them little time to  resolve any scope of work or parts issues in fiscal year 2011. Table 6  summarizes the results of our analysis of the key causes of carryover  related to the eight workloads we analyzed.
In order for the Army Industrial Operations activities to perform work in a  timely manner and minimize carryover, the activities should have a well- defined scope of work, including approved technical data and  documented processes. Industrial Operations officials informed us that  the lack of a well-defined scope of work was one of the causes of  carryover. Our analysis of eight Industrial Operations workloads  corroborated the information provided by Industrial Operations officials  and found that work on two workloads was delayed and carryover  increased because the scope of work was not well defined.
For example, in July 2010, Letterkenny accepted its first order to convert  3 Mine Resistant Ambush Protected vehicles to a different operational  purpose. The converted vehicle is referred to as a Route Clearance   Under the accepted work order, Letterkenny was  Vehicle (RCV).expected to design and engineer 3 prototype vehicles, establish a  technical data package to convert the vehicles, and develop a statement  of work and a bill of materials. The 3 vehicles were expected to be  completed by December 2010—about 6 months later. However, the depot  experienced problems designing the modified vehicle, reaching  agreement with its customer on the new design, and performing tests on  the first vehicle. The final technical data package to convert the additional  vehicles and the development of the statement of work and the bill of  materials were delayed until the new design was agreed upon and the  first vehicle was tested. As the depot continued to work with its customer  on the design of the 3 pilot vehicles, in July 2011, Letterkenny accepted  its second order under this program for the production of 10 vehicles. One  month later, the depot accepted a third order for over 300 production  vehicles for $211 million. Because of the delays in completing the 3  prototype vehicles that were to identify the specifications of the work to be  performed, the depot carried over about $211 million in work orders into  fiscal year 2012.
Moreover, the depot had a total of three pilot vehicles and 292 production  vehicles on order at the end of fiscal year 2012. ordered was almost complete as of September 30, 2012. The depot  carried over about $209 million in work orders into fiscal year 2013. A  photo of a Mine Resistant Ambush Protected vehicle that is being  converted to an RCV is shown in figure 2.
The production vehicle quantities decreased from fiscal years 2011 through 2012  because the unit funded cost per vehicle increased.
subsections: section_title: Parts Not Readily Available to Perform Repair Work
paragraphs: Without the right mix and sufficient quantity of spare parts, the Army  Industrial Operations activities are impaired in their ability to complete  their funded workloads in a timely and efficient manner. Industrial  Operations officials informed us that parts shortages was one of the  causes of carryover. Our analysis of Industrial Operations data  corroborated these officials’ views and found that parts shortages at the  activities contributed to carryover for seven of the eight workloads we  reviewed. Parts were not available for work to proceed in a timely manner  because (1) the depots accepted orders funded with procurement  appropriations in fiscal year 2011 but contracts to purchase parts needed  to perform the work were not awarded until fiscal years 2012 or 2013 and  (2) the HMMWV work outpaced the ability of the supply chain to provide  the parts. The delay in receipt of parts extended the time needed for the  activities to complete work on the orders which, in turn, increased the  amount of work that carried over into the following fiscal year or fiscal  years. For example, as summarized in figure 3 and discussed in more  detail below, parts shortages impaired Industrial Operations’ depots at  Red River and Letterkenny from completing their HMMWV work orders.
Our analysis of Army order and contract data associated with five  workloads found that contracts for critical parts were not awarded until 1  or 2 fiscal years after the orders were accepted by the depots. This  resulted in almost all the fiscal year 2011 funds carrying over on these  workloads at the end of fiscal year 2011 and funds on these orders  continuing to carry over at the end of fiscal year 2012. Table 7 shows the  workload, description of the parts ordered, date the first fiscal year 2011  order was accepted, contract award date for buying critical parts, and key  contract terms.
Work on the five fiscal year 2011 workloads shown above was delayed to  fiscal year 2012 or 2013 because of the timing of the award of contracts  for critical parts needed to complete the Army Industrial Operations work  orders. For four of the five workloads, the award of the contracts to  purchase parts occurred 1 or more years after the depot received the  order to perform the work. Further, as illustrated in the following  examples, work was delayed in fiscal year 2012 on some of these fiscal  year 2011 orders because of the terms of the contracts—the contractor  can only produce a certain number per month.
In August 2011, Anniston accepted five orders totaling $44 million for  the conversion of 20 M1A1 Abrams tanks to Assault Breacher  Vehicles (ABV). In order to perform the work, Anniston had to remove  the old turrets, fabricate new turrets, and convert the tank hulls to  address the vehicles’ new function—to breach mine fields and barrier  obstacles. Anniston officials told us that they could not begin work on  the orders until they received material (government-furnished  equipment) that was being procured by the program manager.  However, the contract to procure the government-furnished  equipment was not awarded until December 2011—fiscal year 2012— and the contractor could only produce three kits per month. Anniston  began work on the ABV orders in May 2012 so that the work fell in  line with the delivery of the government-furnished equipment. As a  result, the first vehicle on the order was not completed until October  2012—fiscal year 2013—and the production of the vehicles at  Anniston was limited to three per month to match the supplier’s ability  to manufacture the needed kits. The depot carried over the entire  amount into fiscal year 2012 and $25 million into fiscal year 2013.
During fiscal year 2012, Anniston accepted five more ABV Army  orders totaling $48.3 million to produce 22 ABVs and almost all the  work—$46.3 million—carried over into fiscal year 2013. Similar to the  orders accepted in fiscal year 2011, Anniston had to maintain a low  monthly production quantity because one of the contractors could only  deliver three material kits per month. A photo of an ABV is shown in  figure 4.
Letterkenny received four orders in the second quarter of fiscal year  2011 totaling $156 million for 17 Force Provider modules.Letterkenny procures equipment to fill approximately 43 of the 101  containers that make up each new build module. The 43 containers  hold approximately 346 different types of new equipment comprising  thousands of individual components. Letterkenny carried over almost  the entire amount into fiscal year 2012—$156 million.
In fiscal year 2012, Letterkenny accepted three more orders totaling  $18 million for six new Force Providers. However, a contract was not  awarded to buy containers until August 2012—over a year after  receiving the first fiscal year 2011 order. Letterkenny received about  700 containers from August through December 2012. In the  meantime, work essentially stopped on the new build program in July  and August 2012 because of the lack of sufficient containers to  complete 13 of the 17 modules on the fiscal year 2011 orders and 6  modules on the fiscal year 2012 orders. Without the containers, the  depot could not complete work on the fiscal years 2011 and 2012  orders and reduce carryover on the orders. The depot carried over  $79 million into fiscal year 2013 associated with the fiscal year 2011  and 2012 new build orders. A photo of a Force Provider is shown in  figure 5.
The work that Red River and Letterkenny performed on the HMMWV in  fiscal years 2011 and 2012 outpaced the ability of the supply chain to  provide the parts. In June 2011, Red River and Letterkenny accepted  orders to overhaul 7,971 HMMWVs. At the end of fiscal year 2011, the  amount of the orders was $839 million, and of that amount, $837 million  carried over into fiscal year 2012. In order to perform the work on these  vehicles, Letterkenny had to reestablish its production line since it was  previously shut down because of the lack of HMMWV work. Further, both  depots had to hire contractor personnel to staff the production line and  establish a supply chain so that the depots could obtain the parts to  perform the work. Both depots encountered problems with obtaining  sufficient quantities of parts, such as doors, gunner protection kits,  windshields, turret bearings, and half shafts, to perform the work. This  parts problem was exacerbated at Red River when the depot went to a  double shift on disassembling and assembling HMMWVs in April 2012.  As a result of the parts shortage, at the end of fiscal year 2012, Red River  and Letterkenny completed 767 of the vehicles ordered in fiscal year  2011. In addition, the depots assembled another 4,254 vehicles but the  vehicles were missing parts. The depots carried over $356 million of  these orders into fiscal year 2013. A photo of a HMMWV is shown in  figure 6.
As discussed previously, the implementation of LMP changed the  revenue recognition business rules and resulted in increased carryover in  fiscal years 2011 and 2012. The point in time when revenue is recognized  is important because when an Army Industrial Operations activity  performs work, it earns revenue, thereby reducing carryover. As  discussed earlier, the Army implemented LMP at two Industrial  Operations activities in fiscal year 2009 and 10 Industrial Operations  activities in fiscal year 2011. While the Army could not determine the  extent of the change on Industrial Operations’ carryover resulting from  implementation of LMP, officials at Army headquarters, LCMCs, and the  depots stated that they believed carryover increased because of the  change in revenue recognition rules.
For example, Corpus Christi reported in fiscal year 2011 that it accepted  orders totaling about $455 million to repair and upgrade 57 Black Hawk  helicopters. The established repair process time for the UH-60L Black  Hawk averaged approximately 1 year in fiscal year 2011. The change in  the business rules for recognizing revenue on parts and material because  of the implementation of LMP in May 2009 caused revenue on the fiscal  year 2011 orders to be recognized, or earned, in fiscal year 2012. Prior to  the implementation of LMP, the depot’s business rules recognized  revenue on parts and material on the Black Hawk when they were turned  into the supply system during the disassembly process and replacement  parts were requisitioned and received—usually within the first 90 days.  Under LMP, revenue for parts and material is not recognized until parts  and material are brought to the assembly area for installation on the  aircraft. Final assembly of the aircraft occurs about 266 days after  acceptance of the orders. As a result, at least in part due to the change in  revenue recognition rules under LMP, at the end of fiscal year 2011,  Corpus Christi documentation showed that it carried over into the next  fiscal year $425 million associated with these orders—93 percent of the  order amounts. A photo of a Black Hawk helicopter is shown in figure 7.
Because of the size of the carryover at the end of fiscal year 2011, the  Army recognized that it needed to improve its management of carryover,  and in April 2012, the Army formed a working group. The working group  identified, among other things, that it was the Army Industrial Operations  activities’ responsibility to ensure that they have the necessary resources  for performing the work. The working group identified the following six  elements that the Industrial Operations activities should review when  receiving orders for work to be performed:
Skilled labor. Are there adequate labor hours available with the  required skills to execute the work?
Parts. Is there sufficient stock on hand or in the supply pipeline to  complete the program schedule on time?
Tools and equipment. Are all required special tools, fixtures, jigs, and  stands on hand or being acquired?
Process. Is there approved technical data, including a defined scope  of work, documented processes, and internal process capacity,  available to complete the work?
Requirements. Is there an understanding of the total Army  requirements as well as the required depot production for the  workload after considering back orders, average monthly demand,  potential surge requirements, and alternate source of repair?
Funding. Is there available funding and rate of required funding to  support production?
Further, the working group determined that if the Industrial Operations  activities determine that they do not have the capability to perform any of  the six elements, the activities should be required to send orders to their  management for review and approval. Also, for any areas for which  resources are not available, the activities should be required to develop a  plan on how they will resolve the issue, such as obtaining parts that are  not in the supply system.
To convey the working group’s results, the Army plans to issue two policy  memos during fiscal year 2013. According to Army officials and  documentation we reviewed, one policy memo will address (1) the  LCMCs’ and activities’ responsibilities for acceptance of orders and  performing the work (regardless of the appropriation funding the orders)  and (2) the six elements discussed above. The second policy memo will  address orders funded with procurement appropriations. According to  Army officials, this second policy memo will discuss various aspects of  procurement-funded orders, including different types of work such as pilot  programs, prototypes, fabrication, and data requirements. According to  the Army, this action should result in a better alignment of the work to the  customer delivery schedule and prevent the acceptance of workloads that  are not executable in a specific fiscal year. We agree that these actions  are needed for orders placed with Industrial Operations. If properly  implemented, the Army’s actions should help address our concerns that  (1) the scope of work was not well defined and (2) parts were not  available to perform the work. However, the Army has not issued the  planned policy memos. The memos should contain specific timetables for  implementing their planned actions and establish procedures to include  steps to be followed by Industrial Operations in evaluating orders  received from customers.
section_title: Conclusions
paragraphs: The work that Army Industrial Operations performs supports combat  readiness by restoring equipment to a level of combat capability  commensurate with a unit’s future mission. Reliable budgeted information  on Industrial Operations, including carryover information, is essential for  Congress and DOD to perform their oversight responsibilities, including  reviewing and making well-informed decisions on Industrial Operations  budgets. The Army reported in its budgets to Congress that Industrial  Operations’ adjusted carryover was under the allowable amount at the  end of fiscal years 2011 and 2012. However, budget estimates for  carryover were consistently less than the actual amounts each year from  fiscal years 2006 through 2012 primarily because of Industrial Operations  underestimating new orders from customers, particularly procurement- funded orders. Budget estimates could be improved by addressing the  major factors that caused variations between budgeted and actual  amounts, including improved communication between customers and  Industrial Operations. The Army recognized that it needed to improve the  budgeting and management of carryover and formed a working group in  April 2012. The working group identified a number of actions that are  under way and planned to help remedy this situation. However, the Army  has not yet implemented these planned actions and does not have a  timetable for implementation.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of Defense direct the Secretary of the  Army to take the following three actions to improve the budgeting and  management of Army Industrial Operations’ carryover:  Issue the planned working group policy memos and establish a  timetable for implementing these actions for improving the  management of carryover.
Implement the working group’s planned actions to improve the  budgeting for new orders to be received by Army Industrial  Operations.
Establish procedures, including required steps, to be followed by  Army Industrial Operations activities in evaluating orders received  from customers to ensure that the activities have resources (such as  parts and materials, skilled labor, tools, equipment, technical data,  and funding) to perform the work.
section_title: Agency Comments
paragraphs: DOD provided written comments on a draft of this report. In its comments,  which are reprinted in appendix II, DOD concurred with the three  recommendations and cited actions planned or under way to address  them. Specifically, DOD commented that by the end of fiscal year 2013,  the Army will issue policy memorandums with actions to be implemented  by the beginning of the second quarter of fiscal year 2014. The  memorandums will address the following: (1) the responsibilities and  criteria of the Industrial Operations activities to accept new orders  whether budgeted or unbudgeted and (2) new procurement-funded orders  to better align the work to customer delivery schedules. Further, DOD  stated that the Army’s fiscal year 2014 budget guidance included direction  for program managers to identify planned depot workload in procurement  budgets beginning in the fiscal year 2014 President’s Budget cycle and  that the same direction will be included in subsequent budget cycle  guidance. Finally, DOD indicated that the Army will establish procedures  to implement the policy memorandum on the acceptance of new orders  beginning with the second quarter of fiscal year 2014.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, and the Secretary of the Army. 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 whether, and to what extent, Army Industrial Operations’  actual carryover exceeded the allowable amount of carryover from fiscal  years 2006 through 2012, we obtained and analyzed Industrial  Operations reports that contained information on actual carryover and the  allowable amount of carryover for fiscal years 2006 through 2012. We  analyzed carryover beginning with fiscal year 2006 because the Army’s  fiscal year 2006 budget reported a consolidation of the Army Working  Capital Fund’s depot maintenance and ordnance activity groups into  Industrial Operations, making a comparison to prior fiscal years difficult.  We met with responsible officials from Army headquarters and Army  Materiel Command (AMC) to obtain their views on the causes 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 guidance for  exceptions to the carryover policy and discussed any exceptions with  Office of the Under Secretary of Defense (OUSD) (Comptroller) and Army  headquarters officials to obtain explanations for the exceptions.
To determine whether, and to what extent, Army Industrial Operations’  budget information on carryover from fiscal years 2006 through 2012  approximated actual information, and if not, whether the Army took  actions to align the two, we obtained and analyzed Industrial Operations  reports that contained information on budgeted and reported actual new  orders, revenue, and actual carryover data for fiscal years 2006 through  2012. We also analyzed the new order data by the appropriations  financing the orders to determine whether there were variances by  appropriations for budgeted and reported actual new order amounts for  the 7-year period. We met with responsible officials from Army  headquarters and AMC to obtain their views on causes for variances  between budgeted and reported actual new order, revenue, and carryover  amounts. We also met with these officials to discuss actions the Army  was taking to improve budgeting and management of carryover.
To determine whether, and to what extent, Army Industrial Operations’  carryover increased during fiscal years 2011 and 2012, and causes for  the carryover for those 2 fiscal years, we met with responsible officials  from Army headquarters, AMC, the Office of the Assistant Secretary of  the Army (Acquisition, Logistics and Technology), the Life Cycle  Management Commands (LCMC), and four depots that had orders with  high dollar amounts of fiscal year 2011 carryover to identify contributing  factors that caused the carryover. We also performed walk-throughs of  the Army’s Anniston, Corpus Christi, Letterkenny, and Red River depots’  operations to observe the work being performed by the depots and  discussed with officials causes for workload carrying over from one fiscal  year to the next. Further, to corroborate the information provided by  Industrial Operations officials, we selected eight weapon system  workloads with high dollar amounts of fiscal year 2011 carryover from four  Army depots. The carryover associated with these workloads represented  about 35 percent of Industrial Operations’ total carryover at the end of  fiscal year 2011 and was one of the top five workloads with carryover at  each depot. We followed up on the status of carryover on these eight  workloads at the end of fiscal year 2012. We obtained and analyzed  orders and amendments associated with these workloads and discussed  the information in these documents with the depots to determine the  causes for the carryover. We discussed the carryover information on  these workloads with officials in the program management offices at the  Office of the Assistant Secretary of the Army (Acquisition, Logistics and  Technology) to determine their roles and responsibilities in providing  orders to the depots and their impact on carryover. We also discussed  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 (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. We also reviewed the  Commander’s Critical Item Reports for fiscal years 2011 and 2012 that  provide information on inventory items (spare parts) needed by the  depots. In reviewing the reports, we determined whether needed  inventory items were associated with customer orders that had carryover  for the workloads that we reviewed. 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 OUSD (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.; AMC, Huntsville, Alabama; the Aviation  and Missile Command LCMC, Huntsville, Alabama; the Tank, Automotive  and Armaments Command LCMC, 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) at Huntsville, Alabama, and Warren, Michigan.
We conducted this performance audit from May 2012 to June 2013 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.