Army Industrial Operations:

Budgeting and Management of Carryover Could Be Improved

GAO-13-499: Published: Jun 27, 2013. Publicly Released: Jun 27, 2013.

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khana@gao.gocv

 

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What GAO Found

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.

Why GAO Did This Study

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.

What GAO Recommends

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.

For more information, contact Asif A. Khan at (202) 512-9869 or khana@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In June 2013, GAO reported that Army Industrial Operations carryover grew significantly in fiscal years 2011 and 2012 to represent about 12.7 and 9.5 months of work, respectively. 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. To reduce carryover, the Army formed a working group in April 2012. To convey the working group's results, the Army planned to issue two policy memos in fiscal year 2013 that govern (1) the acceptance of orders by the Industrial Operations activities and (2) issuance of orders funded with procurement appropriations. However, at the conclusion of our review in June 2013, the Army had not issued the policy memos and no timetable for implementation had been set. GAO recommended that the Secretary of the Army issue the planned working group policy memos and establish a timetable for implementing the actions for improving the management of carryover. In response to our recommendation, the Army issued the first of two policy memos in October 2013. The memo stated that the policies and procedures discussed in the memo were effective immediately and the U.S. Army Materiel Command is expected to establish internal controls to ensure compliance with the new policy on acceptance of new orders no later than December 31, 2013. The second memo governing business rules for procurement funded orders with depot maintenance activities was issued in January 2014. The policy memo states that the guidance will take effect upon issuance of the memo. With the issuance of the memos, the Army should be in a better position to manage carryover at the Army Industrial Operations activities.

    Recommendation: To improve the budgeting and management of Army Industrial Operations' carryover, the Secretary of Defense should direct the Secretary of the Army to issue the planned working group policy memos and establish a timetable for implementing these actions for improving the management of carryover.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: In June 2013, GAO reported that the Army's budget estimates for carryover were less than the actual carryover amounts each year from fiscal years 2006 through 2012. 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. GAO's analysis showed a factor for actual carryover exceeding the budgeted amounts were the Army underestimated new orders to be received from customers for all 7 years reviewed, particularly with respect to procurement funded orders. An Army working group identified several actions that could improve the budgeting for new orders to be received by Army Industrial Operations. GAO recommended that the Secretary of Army implement the working group's planned actions. The Army implemented three actions identified by the working group to improve the budgeting for new orders. First, on January 5, 2014, the Army issued guidance to the acquisition program managers and the Army Materiel Command, Life-Cycle Management Command counterparts defining the business roles for procurement funded depot maintenance activities. One such business role directs the Program Executive Office to identify the annual depot maintenance requirements as a unique item in the Army's budget exhibit submission. Second, the Army conducts senior-level quarterly meetings between the Army Materiel Command, the Life Cycle Management Commands, and Industrial Operations to ensure the most current workload is identified throughout the budget and requirements process. Third, beginning with the Army's fiscal year 2014 budget guidance, the Army directed program managers to identify planned depot workload clearly in procurement budgets. With the implementation of these actions, the Army should improve its budgeting for new orders -- a factor for the differences between budgeted and actual carryover for the 7 years GAO reviewed.

    Recommendation: To improve the budgeting and management of Army Industrial Operations' carryover, the Secretary of Defense should direct the Secretary of the Army to implement the working group's planned actions to improve the budgeting for new orders to be received by Army Industrial Operations.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: In June 2013, GAO reported that Army Industrial Operations carryover grew significantly in fiscal years 2011 and 2012 to represent about 12.7 and 9.5 months of work, respectively. 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. In analyzing eight workloads that accounted for $2 billion of the $5.8 billion in carryover at the end of fiscal year 2011, GAO 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 Logistics Modernization Program. As an additional cause, the Industrial Operations activities accepted some orders in the third and fourth quarter of fiscal year 2011, which provided them little time to resolve any scope of work or parts issues in fiscal year 2011. GAO recommended that the Secretary of Defense direct the Secretary of the Army establish procedures to be followed by Army Industrial Operations activities in evaluating orders received from customers to ensure the activities have resources (such as parts and material, skilled labor, equipment, technical data, and funding) to perform the work. DOD concurred with the recommendation and stated that the Army is in the process of establishing procedures to implement controls over the acceptance of new orders by the Industrial Operations activities. Further, the Army Industrial Operations activities planned to begin using the new procedures by the start of the second quarter of fiscal year 2014. Acceptance of new orders will be based on the available resources such as parts and materials, skilled labor, tools, equipment, technical data, and funding to perform the work. On October 28, 2013, the Army issued a policy memorandum establishing the criteria for the acceptance of new orders by the Industrial Operations activities. The memorandum stated the guidance must be implemented no later than December 31, 2013. In March 2014, an Army official provided us with a January 2014 briefing by the Army's TACOM Life Cycle Management Command to illustrate the implementation of the procedures. With the implementation of the new order acceptance procedures, the Army should be in a better position to manage carryover at the Army Industrial Operations activities.

    Recommendation: To improve the budgeting and management of Army Industrial Operations' carryover, the Secretary of Defense should direct the Secretary of the Army to 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 Affected: Department of Defense

 

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