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

Letter

Background

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.

Carryover and Its Use

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.

DOD’s Carryover Policy

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.

Implementation of the Logistics Modernization Program

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.

Adjusted Carryover Was under the Allowable Amount for 5 of the Last 7 Fiscal Years

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.

Budgeted Information on Carryover Underestimated Actual Carryover Information, but the Army Began Taking Action to Align These in Fiscal Year 2012

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.

Army Earned Less Revenue Than Budgeted in Fiscal Year 2011

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.

Carryover Increased at the End of Fiscal Years 2011 and 2012 and Was Caused by Several Factors

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.

Parts Not Readily Available to Perform Repair Work

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.

Conclusions

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.

Recommendations for Executive Action

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.

Agency Comments

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.

Appendix I: Scope and Methodology

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.

Appendix II: Comments from the Department of Defense

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Greg Pugnetti (Assistant Director), Steve Donahue, Keith McDaniel, and Hal Santarelli made key contributions to this report.