Air Force Depot Maintenance:

Improved Pricing and Financial Management Practices Needed

AFMD-93-5: Published: Nov 17, 1992. Publicly Released: Nov 17, 1992.

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Pursuant to a congressional request, GAO reviewed the Air Force Depot Maintenance Industrial Fund (DMIF) which has been incorporated into the Defense Business Operations Fund (DBOF).

GAO found that: (1) DMIF suffered losses and experienced a steady increase in its backlog of work because managers used overly optimistic productivity assumptions in their budget estimates; (2) work-force productivity was adversely affected by frequent changes in the size and mix of the workload; (3) the DMIF backlog grew from $843 million at the end of fiscal year (FY) 1987 to $1,348 million at the end of FY 1991; (4) DMIF lost $93.4 million during FY 1990 and FY 1991 because Air Force Materiel Command (AFMC) headquarters directed DMIF managers not to bill Air Force customers for some work; (5) the decision not to charge Air Force customers for work performed caused financial reports to provide a misleading picture of DMIF performance, and was inconsistent with a Department of Defense (DOD) initiative to develop industrial fund sales prices that approximate the costs incurred in providing goods and services to customers; and (6) DMIF recent profits were due almost entirely to improperly charging customers for work that was not performed, transfers of more than $85 million from Air Force operation and maintenance appropriations to DMIF, an AFMC policy that authorized DMIF maintenance activities to increase prices over those previously approved by DOD, and the addition of surcharges to DMIF FY 1992 sales prices in order to recover some of the fund's prior year losses.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Air Force issued guidelines on April 30, 1993 on the (1) specific billing policy for appropriate adjustments in response to changes in customer requirements or contractor prices, (2) specific policy on adjusting prices in accordance with cost adjustments experienced in finalizing contract prices. Further, on September 30, 1993, the Air Force issued a letter to the Commander, Air Force Materiel Command, directing them to implement GAO's recommendations concerning DBOF activities charging the stabilized price for work performed.

    Recommendation: The Commander, AFMC, should direct DMIF maintenance activities to: (1) return all customer funds that become available as a result of reductions in the scope of the repair requirement; (2) adjust prices charged customers to match corresponding adjustments made in finalizing contract price estimates; and (3) comply with the rate stabilization policy.

    Agency Affected: Department of Defense: Department of the Air Force: Air Force Materiel Command

  2. Status: Closed - Implemented

    Comments: On April 30, 1993, Air Force issued guidelines directing the five Air Logistics Centers to comply with current DOD policies. The guidelines also rescinded existing Air Force policy to bill customers for work received during the last 45 days of the fiscal year at the following year's prices.

    Recommendation: The Commander, AFMC, should: (1) establish control procedures to ensure that this guidance is properly implemented; and (2) monitor the amount of unneeded customer funds that are returned to expired appropriations.

    Agency Affected: Department of Defense: Department of the Air Force: Air Force Materiel Command

  3. Status: Closed - Implemented

    Comments: On April 30, 1993, Air Force Issued guidelines that rescinded existing Air Force policy to bill customers for work received during the last 45 days of the fiscal year at the following year's prices.

    Recommendation: The Secretary of Defense should direct the Comptroller of Defense to ensure that DMIF does not charge its customers more than the approved stabilized prices.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: The Air Force anticipated that, by the beginning of FY 1995: (1) customer funds and depot maintenance operations will be properly aligned; and (2) normal funded carryover levels will be achieved. In December 1992, the House Armed Services Committee requested that we follow up on our Air Force depot maintenance report (GAO/AFMD-93-5). Based on the results of our work, the Authorization Conference Committee reduced the amount of fiscal year 1994 funds earmarked for depot maintenance by $290 million.

    Recommendation: The Secretary of Defense should direct the DOD Comptroller to limit industrial fund customers' fiscal year 1994 budget requests to work that: (1) is likely to be accomplished during fiscal year 1994; or (2) is needed in order to ensure a continuous flow of work through industrial fund activities at the end of the year.

    Agency Affected: Department of Defense

  5. Status: Closed - Implemented

    Comments: On June 22, 1994, we issued a report on DBOF pricing practices and financial reports. One issue discussed in the report was the backlog of funded work to be performed at the Air Force Logistics Centers. Our current work on DBOF pricing is also looking at the excessive amount of funded work on DBOF pricing is also looking at the excessive amount of funded work at the five Centers. This work is being done at the request of the Chairman, Subcommittee on Readiness, House Committee on National Security. (Job Code 511322).

    Recommendation: The Secretary of Defense should direct the Secretary of the Air Force to: (1) determine why DMIF has more than a 6-month backlog of contract work; and (2) reduce the size of this backlog.

    Agency Affected: Department of Defense

  6. Status: Closed - Implemented

    Comments: GAO has continually stated that increasing prices to recover prior year losses is inconsistent with a basic intent of the Fund--that prices should reflect the actual cost incurred in providing goods and services. DOD does not agree with this recommendation and currently recoups losses through increasing prices it will charge Fund customers. As a result, in our March 1995 report, Defense Business Operations Fund: Management Issues Challenge Fund Implementation (GAO/AIMD-95-79), March 1, 1995, we recommend that the Congress enact legislations to prohibit DOD from including amounts in the Fund's prices for recovering prior year losses.

    Recommendation: The Secretary of Defense should direct DBOF activities to discontinue the practice of using surcharges to recoup prior-year operating losses.

    Agency Affected: Department of Defense

  7. Status: Closed - Implemented

    Comments: DOD disagrees with this recommendation and currently recoups losses through the pricing structure. But as part of GAO's ongoing DBOF work, DOD and GAO are discussing this matter and pursuing resolution of this issue. The House Armed Services Committee agrees with GAO in that increasing prices to recover prior-year losses is inconsistent with a basic tenet of DBOF. Therefore, in its fiscal year 1995 Committee report, it directed the Secretary of Defense to seek an appropriation to recover prior-year losses. The Senate Armed Services Committee also raised concerns, in its fiscal year 1995 Committee report, with DBOF's accumulation of large operating losses. In our March 1995 report, Defense Business Operations Fund: Management Issues Challenge Fund Implementation (GAO/AIMD-95-79, March 1, 1995), we reiterated our position and recommendation on this matter.

    Recommendation: The Secretary of Defense should request congressional appropriations whenever DBOF activities' accumulated prior-year losses are adversely affecting the operation of the Fund.

    Agency Affected: Department of Defense

  8. Status: Closed - Not Implemented

    Comments: On the basis of information available at this time, DOD believes that the productivity assumptions and cost reduction goals directed through the budget review process are realistic actions.

    Recommendation: The Secretary of the Air Force should direct the Commander, AFMC, to use more realistic productivity assumptions in future DMIF budget submissions as a basis for preparing the President's budget.

    Agency Affected: Department of Defense: Department of the Air Force

  9. Status: Closed - Implemented

    Comments: On March 27, 1993, the DOD Comptroller's office directed the Air Force to bill for past efforts noted by GAO. In addition, Air Force headquarters issued a letter dated September 30, 1993, to the Commander, Air Force Material Command, directing implementation of the GAO recommendation. Further, the Air Force Operation and Maintenance appropriation was billed $75.4 million for work performed, but not previously billed.

    Recommendation: The Secretary of the Air Force should direct the Commander, AFMC, to comply with the DOD policy that requires industrial fund activities to bill their customers for all authorized work that is performed.

    Agency Affected: Department of Defense: Department of the Air Force

  10. Status: Closed - Implemented

    Comments: The National Performance Review (NPR) resulted in the elimination of all federal personnel manuals. DOD personnel policy is now being developed by DOD members. Two elements are essential for the Fund to respond to workload changes and operate in a businesslike manner: preservation of workforce flexibility and establishment of new federal competitive appointment procedures. DOD managers need the ability to employ or release personnel when workload increases or decreases.

    Recommendation: The Secretary of the Air Force should direct the Commander, AFMC, to identify the changes to existing personnel practices and regulations that are needed in order to allow DMIF to better respond to unanticipated work-load changes and to operate the fund in a more businesslike manner.

    Agency Affected: Department of Defense: Department of the Air Force

 

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