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entitled 'Army Depot Maintenance: Ineffective Oversight of Depot 
Maintenance Operations and System Implementation Efforts' which was 
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Report to the Chairman, Subcommittee on Defense, Committee on 
Appropriations, House of Representatives: 

June 2005: 

Army Depot Maintenance: 

Ineffective Oversight of Depot Maintenance Operations and System 
Implementation Efforts: 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-441] 

GAO Highlights: 

Highlights of GAO-05-441, a report to the Chairman, Subcommittee on 
Defense, Committee on Appropriations, House of Representatives: 

Why GAO Did This Study: 

The Army depot maintenance activity group received about $2.6 billion 
of orders in fiscal year 2004 to repair helicopters, combat vehicles, 
and air defense systems. To perform this work, the group operates under 
the working capital fund concept, where customers are to be charged the 
anticipated costs of providing goods and services to them. GAO was 
asked to determine (1) if prices charged by the group have increased 
and, if so, why; (2) how the group allocates gains or losses incurred 
at the individual depot level; and (3) if the group exceeded its 
allowable carryover ceilings and the reasons for exceeding the 
ceilings. GAO was also asked to determine if the Army encountered 
problems implementing a new system, the Logistics Modernization Program 
(LMP), at the Tobyhanna Army Depot.

What GAO Found: 

GAO identified four management weaknesses that are impairing the 
efficiency and effectiveness of Army depot maintenance operations. The 
activity groupís average sales price increased from $111.87 per hour 
for fiscal year 2000 to $147.07 per hour for fiscal year 2005óa 31 
percent increase (21 percent if adjusted for inflation). An increase in 
material costs was the major driver of the sales price increase. The 
Army has identified some causes of the higher material costs such as 
increased material usage to rebuild certain weapon systems under the 
Armyís recapitalization program and higher prices that it pays 
suppliers for parts, but it has not completed a comprehensive analysis 
of material cost increases. As a result, the Army has not been able to 
take proactive steps to control rising material costs.

GAO analysis showed that in setting future prices, the Army spread 
depot maintenance reported gains and losses across all depots rather 
than allocating them to the individual depot that incurred the gains or 
losses. While DOD policy does not specify how to allocate gains and 
losses at the depot level, this practice does not provide the right 
incentives to the depots to set prices correctly in the budget. If one 
depot consistently incurred losses, the Army would increase the prices 
at other depots to help recoup its losses. As a result, the depot 
incurring the losses is not held accountable for operating on a break-
even basis. The end result of this practice is that customers of depots 
with consistent losses are, in effect, subsidized by customers of 
depots with consistent gains.

GAO analysis also showed that the reported carryover (work not 
completed at fiscal year end) exceeded DODís carryover ceilings from 
fiscal year 1996 through fiscal year 2003. Too much carryover could 
result in an activity group receiving funds from customers in one 
fiscal year but not performing the work until subsequent fiscal years. 
Factors contributing to carryover exceeding the ceilings include depots 
receiving new orders at fiscal year-end and not being able to obtain 
parts needed in a timely manner. 

Finally, the Army continued to encounter problems implementing a new 
system intended to improve depot operations. GAO previously reported on 
these problems in May 2004, and noted that the Armyís inadequate 
requirements management and system testing were primary contributing 
factors to the problems. These problems are preventing the Tobyhanna 
Army Depot from accurately reporting on its financial operations, 
which, in turn, adversely impacts the depotís ability to accurately set 
prices. GAOís current review found that the Army has not put into place 
an effective management process to help ensure that the problems with 
the system are resolved. While the Army developed a process that 
identified the specific steps that should be followed in addressing the 
problems identified, the process was not followed. Until the underlying 
causes of the problems are corrected, other depots implementing LMP 
will encounter similar problems.

What GAO Recommends: 

GAO is making recommendations to DOD to (1) analyze material cost 
increases and take steps to reduce them, (2) allocate gains or losses 
to the individual depot incurring them, and (3) comply with the 
carryover policy. Further, GAO is recommending improvements in the 
implementation of LMP as well as delaying implementation at the 
remaining four depots until problems encountered have been resolved. 
DOD concurred with all the recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-05-441.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Gregory D. Kutz at (202) 
512-9505 or kutzg@gao.gov.

[End of section]

Contents: 

Letter: 

Results in Brief: 

Background: 

Depot Maintenance Prices Increased Due to Increasing Material Costs: 

Method of Allocating Gains and Losses Does Not Provide Incentive For 
Depots to Set Prices Correctly: 

Army Has Consistently Exceeded Carryover Threshold: 

Tobyhanna Army Depot Continues to Experience Difficulty With LMP: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendixes: 

Appendix I: Scope and Methodology: 

Appendix II: Comments from the Department of Defense: 

Appendix III: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: Factors Responsible for the Increases in the Army Depot 
Maintenance Activity Group's Composite Sales Price between Fiscal Years 
2000 and 2005: 

Table 2: Depot Base Operations and Maintenance Mission Rates Per Direct 
Labor Hour for Fiscal Year 2001: 

Table 3: Depot Base Operations and Maintenance Mission Rates Per Direct 
Labor Hour for Fiscal Year 2005: 

Table 4: Fiscal Year-End Actual Reported Carryover from Fiscal Year 
1996 through 2001 Consistently Exceeded DOD's 3-month Standard: 

Table 5: Dollar Amount of Reported Actual Carryover for Fiscal Years 
2002 and 2003 That Exceeded Allowable Amounts: 

Table 6: Differences in Selected Account Balances Reported in SDS and 
LMP as of June 30, 2003: 

Table 7: Example of Incorrect Unit Costs in New System: 

Letter June 30, 2005: 

The Honorable C. W. Young: 
Chairman, Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

Dear Mr. Chairman: 

The Army depot maintenance activity group supports combat readiness by 
providing services necessary to keep Army units operating worldwide. 
From fiscal year 2000 through fiscal year 2004, the group employed 
between 10,000 and 13,000 people and received approximately $1.4 
billion to $2.6 billion in new orders each year to repair and overhaul 
a wide range of assets, including helicopters such as the Apache and 
Blackhawk; combat vehicles such as the Abrams tank; air defense systems 
such as the Patriot missile; electronics; and inventory items for the 
Army, other military services, and foreign governments. Many of these 
weapons systems are used to support the Army's current effort in Iraq 
and Afghanistan. According to Army officials, to perform the work 
needed in support of the global war on terrorism, the number of direct 
labor hours of work increased from 11.6 million in fiscal year 2002 to 
an estimated 19.3 million for fiscal year 2005--a 66 percent increase. 
The group operates under the working capital fund concept, where 
customers are to be charged for the anticipated full cost of goods and 
services. The group performs its operations primarily at five depots-- 
the Tobyhanna Army Depot, Tobyhanna, Pennsylvania; the Letterkenny Army 
Depot, Chambersburg, Pennsylvania; the Corpus Christi Army Depot, 
Corpus Christi, Texas; the Anniston Army Depot, Anniston, Alabama; and 
the Red River Army Depot, Texarkana, Texas. 

Over the past several years, we have performed work on specific 
activity groups within the Navy and Air Force working capital funds for 
your subcommittee. These reports have discussed several issues 
including (1) the prices charged customers; (2) whether the activity 
groups realized gains or incurred losses; (3) work not completed by the 
end of the fiscal year, generally referred to as carryover; and (4) 
system initiatives. The congressional defense committees have used our 
Defense Working Capital Fund work in reviewing Department of Defense 
(DOD) budgets. 

As requested and agreed to with your office, our objectives of this 
assignment were to determine (1) if the prices charged by the Army 
depot maintenance activity group have increased and, if so, why; (2) 
how the Army depot maintenance activity group allocates reported gains 
or losses incurred at the individual depot level; (3) if the Army depot 
maintenance activity group exceeded its allowable carryover 
ceilings[Footnote 1] and, if so, the reasons for exceeding the 
ceilings; and (4) if the Army encountered problems with the 
implementation of a new system, called the Logistics Modernization 
Program (LMP), at the Tobyhanna Army Depot. Our review was performed 
from June 2004 through April 2005 in accordance with U.S. generally 
accepted government auditing standards. Most of the financial 
information in this report is budget data obtained from official Army 
budget documents. The accounting data used in this report were obtained 
from official Army accounting reports. To assess the reliability of the 
data, we (1) reviewed and analyzed the factors used in determining the 
prices and (2) interviewed Army officials knowledgeable about the data. 
We determined that the data were sufficiently reliable for the purposes 
in this report. Further details on our scope and methodology can be 
found in appendix I. We requested comments on a draft of this report 
from the Secretary of Defense or his designee. Written comments from 
the Deputy Comptroller for Program Budget are reprinted in appendix II. 

Results in Brief: 

We identified four management weaknesses that are impairing the 
efficiency and effectiveness of Army depot maintenance operations. 
These weaknesses include (1) ineffective actions to control increasing 
material costs, (2) not allocating reported gains or losses incurred by 
a specific depot to that depot, (3) exceeding ceilings on work carried 
over at fiscal year end, and (4) problems fielding a new system that is 
intended to provide timely and accurate logistical and financial 
information. 

Despite rising prices over the past several years, Army depot 
maintenance officials have not taken effective actions to control 
material costs--the primary cost factor driving up the prices during 
the time frame covered by our work. Our work showed that the Army depot 
maintenance activity group's average sales price for work increased 31 
percent (21 percent if adjusted for inflation) between fiscal years 
2000 and 2005[Footnote 2] primarily due to increasing material costs. 
According to the activity group's budget documents, the average price 
per direct labor hour of work accomplished (composite sales 
price)[Footnote 3] increased from $111.87 per hour for fiscal year 2000 
to $147.07 per hour for fiscal year 2005. Because of the price 
increase, the activity group's customers will pay about $400 million 
more for work in fiscal year 2005 than they would have paid in fiscal 
year 2000. Material costs accounted for the majority of the sales price 
increase from fiscal year 2000 to fiscal year 2005, accounting for over 
100 percent[Footnote 4] of the activity group's sales price increase. 
Army depot maintenance officials provided evidence showing increasing 
material costs were caused, in part, by increased (1) material usage to 
rebuild selected weapon systems to like-new condition under the Army's 
recapitalization program and (2) prices that the activity group pays 
its suppliers for repair parts. However, Army depot maintenance 
officials have not completed a comprehensive analysis to determine (1) 
how much of the increase was due to increased material usage under the 
recapitalization program versus price increases and (2) whether they 
have identified all of the reasons for the material increases. As a 
result, the Army has not been able to take proactive steps to control 
rising material costs. 

In setting future prices to break even, the Army spread depot 
maintenance reported gains and losses across all depots, rather than 
allocating reported losses or gains incurred by a specific depot to 
that depot. While DOD policy does not specify how to allocate gains and 
losses at the depot level, this practice does not provide the right 
incentives to the depots to set prices correctly in the budget. In the 
past, if one depot consistently incurred losses, the Army would 
increase the prices at other depots to help recoup its losses. As a 
result, the depot incurring the losses is not held accountable for 
operating on a break even basis. For example, the Red River Army Depot 
reported an accumulated loss for 4 of the past 5 fiscal years, 
including fiscal years 2002, 2003, and 2004. For these 3 fiscal years, 
the reported accumulated losses ranged from $18 million to about $48 
million, indicating that Red River's customers were not charged enough 
for the goods and services provided to them. On the other hand, the 
Tobyhanna Army Depot--which had a reported revenue that ranged from 
$259 million to $406 million from fiscal years 2000 to 2004--reported 
an accumulated gain for each fiscal year from fiscal year 2000 through 
fiscal year 2004, ranging from $31 million to $169 million, indicating 
that their customers have been charged too much for goods and services. 
The end result of this practice is that customers of depots with 
consistent losses are in effect subsidized by customers of depots with 
consistent gains. 

We also found that the Army depot maintenance activity group's actual 
reported carryover exceeded DOD's carryover ceilings from fiscal year 
1996 through fiscal year 2003. The activity group's reported actual 
carryover did not exceed the allowable amount for fiscal year 2004. We 
reviewed the Army's fiscal year 2004 carryover calculation and 
validated that the Army's calculation was done in accordance with DOD's 
new carryover policy. Too much carryover could cause an activity group 
to receive funds from customers in one fiscal year but not perform the 
work until well into the next fiscal year or subsequent fiscal years. 
In the past, the Congress has reduced the services' budgets because of 
excessive carryover, including a reduction in the Army's fiscal year 
2003 Operation and Maintenance appropriation by $48 million. Factors 
contributing to the four depots that exceeded their carryover ceilings 
included depots receiving new orders at fiscal year-end and depots 
being unable to obtain material needed to perform repair work in a 
timely manner. Furthermore, even though the Army's reported carryover 
amount exceeded the ceilings, we found that the Army understated its 
reported actual carryover for fiscal years 2002 and 2003. As a result, 
fiscal year 2003 carryover was understated by $95 million. According to 
Army officials, the understatement occurred because DOD provided verbal 
guidance that was unclear when DOD revised its carryover policy. Based 
on its interpretation of this guidance, the Army only included actual 
carryover on orders received in the current year but did not include 
carryover related to orders received in prior years in calculating its 
reported actual carryover for fiscal years 2002 and 2003. 

Finally, management oversight weaknesses are evident in the Army's 
efforts to implement its new LMP system, which is intended to improve 
the efficiency and effectiveness of depot operations. We previously 
reported on LMP implementation problems in May 2004 and noted that the 
Army's inadequate requirements management and system testing were 
primary contributing factors to the problems occurring. These problems 
continue to prevent the Tobyhanna Army Depot from accurately reporting 
on its financial operations, including gains and losses, which, in 
turn, adversely affected the depot's ability to accurately set customer 
sales prices. For example, Army officials believe their fiscal year-end 
2003 and 2004 annual operating result is overstated by about $125 
million due to, among other things, miscellaneous gains being reported 
in LMP when no such gains occurred. On our current review, we found 
that the Army has not put into place an effective management process to 
help ensure that the problems identified with LMP are resolved. While 
the Army and Computer Sciences Corporation (CSC), the contractor 
responsible for developing and implementing LMP, developed a process 
that identified the specific steps that should be followed to address 
known problems, the process was not followed. Until the Army institutes 
a process that ensures the underlying causes of problems are identified 
and corrected, other depots implementing LMP will encounter similar 
problems. 

We are making recommendations to the Department of Defense to (1) 
develop a systematic methodology for analyzing material cost increases 
and take action to reduce costs, (2) allocate depot gains and/or losses 
to the individual depots if a trend shows that an individual depot 
consistently realizes gains or incurs losses, (3) continue to comply 
with the carryover policy by not exceeding the ceiling, and (4) improve 
the management and reporting of carryover to decision makers by 
clarifying guidance for calculating carryover. We are also making 
recommendations to implement existing management procedures to resolve 
identified problems resulting from the implementation of LMP and to 
delay system implementation at the four remaining depots until the 
problems encountered by the Tobyhanna Army Depot are resolved. 

In its comments on a draft of this report, DOD concurred with all nine 
of the recommendations. Specifically, the Army has added guidance 
stating that gains and losses should be allocated to the individual 
industrial installations if a several year trend shows that an 
installation has consistently realized gains or losses. Further, the 
Under Secretary of Defense (Comptroller) will issue guidance clarifying 
the present carryover policy concerning the calculation of actual 
carryover as well as the allowable amount of carryover. Finally, the 
Army concurred with our recommendations on LMP and recognizes that it 
can not move forward with future deployments to other depots until 
critical problems identified at the Tobyhanna Army Depot are corrected. 

Background: 

The Army depot maintenance activity group is part of the Army Working 
Capital Fund, a revolving fund that relies on sales revenue rather than 
direct appropriations to finance its operations. DOD policy requires 
working capital fund activity groups to (1) establish sales prices that 
allow them to recover their anticipated costs from their customers and 
(2) operate on a break even basis over time--that is, to not make a 
gain nor incur a loss, which is referred to as a zero accumulated 
operating result (AOR). DOD policy also requires the activity groups to 
establish their sales prices prior to the start of each fiscal year and 
to apply these predetermined or "stabilized" prices to most orders 
received during the year--regardless of when the work is actually 
accomplished or what costs are actually incurred. For depot maintenance 
activity groups, DOD policy also requires that as long as adequate cash 
balances are maintained, unbudgeted operating losses or gains of $10 
million or more per activity group will be recouped or returned, as 
appropriate. This will occur in the current fiscal year or, in the case 
of fourth quarter losses or gains, in the first quarter of the next 
fiscal year. 

Developing accurate sales prices is challenging since the process to 
determine the prices begins about 2 years in advance of when the work 
is actually ordered and performed. In essence, the activity group's 
budget development has to coincide with the development of its 
customers' budgets so that they both use the same set of assumptions. 
To develop prices, the activity group estimates (1) labor, material, 
overhead, and other costs based on anticipated demand for work as 
projected by customers; (2) total direct labor hours for each type of 
work performed, such as helicopters, tanks, and repairable inventory 
items; (3) the workforce's productivity; and (4) savings due to 
productivity and other cost-avoidance initiatives. In order for an 
activity group to operate on a break even basis, it is extremely 
important that the activity group accurately estimate the work it will 
perform and the costs of performing the work. Higher-than-expected 
costs or lower-than-expected customer demand for goods and services can 
cause the activity group to incur losses. Conversely, lower-than- 
expected costs or higher-than-expected customer demand for goods and 
services can result in gains. With sales prices based on assumptions 
that are made as long as 2 years before the prices go into effect, some 
variances between expected and actual costs are inevitable. 

New Depot Maintenance System Expected to Improve Financial Data: 

We have previously reported that DOD has had long-standing problems in 
preparing accurate working capital fund financial reports. For example, 
in its fiscal years 2003 and 2004 Principal Financial Statements, the 
Army acknowledged that its financial management and feeder systems that 
DOD relied on to provide evidence supporting the Army Working Capital 
Fund financial statements did not comply with federal financial 
management system requirements, generally accepted accounting 
principles, and the U.S. Government Standard General Ledger at the 
transaction level. As a result of such deficiencies, the DOD Inspector 
General (who is required by 31 U.S.C. sec. 3521(e)(1) to conduct an 
audit of said financial statements) was unable to express an opinion on 
the reliability of the Army Working Capital Fund's financial statements 
for fiscal years 1993 through 2004. 

To help improve the Army depot maintenance activity group's operations, 
including financial management, in February 1998, the Army Materiel 
Command began an effort to replace systems that are at least 30 years 
old that manage inventory and depot maintenance operations with LMP. 
According to the Army, LMP is intended to transform the Army Materiel 
Command's logistics operations in six core processes, one being 
financial management. LMP is to, among other things, improve accounting 
and reporting on billions of dollars worth of Army weapons systems 
through fully integrated single-source transaction entry, online/real- 
time data, and U.S. Standard General Ledger compliance. Further, LMP is 
intended to bring the logistics community to the point of achieving 
favorable audit opinions on financial statements. LMP became 
operational at the U.S. Army Communications and Electronics Command and 
Tobyhanna Army Depot in July 2003. The Army plans to implement LMP at 
the other four depots. In May 2004,[Footnote 5] we reported on the 
Army's lack of adequate management oversight over LMP implementation 
and the problems being encountered after it became operational in July 
2003. As discussed later in this report, the Army continued to 
experience significant LMP implementation problems at the Tobyhanna 
Army Depot that inhibited the depot from accurately reporting on its 
financial results of operations, which adversely affected the depot's 
ability to accurately set customer sales prices. 

Army Merged Its Depot Maintenance and Ordnance Activity Groups: 

Beginning with fiscal year 2005 (October 2004), the Army established a 
new Army Working Capital Fund activity group by merging its depot 
maintenance and ordnance activity groups. The new activity group--the 
Industrial Operations activity group--consolidated the existing five 
Army depots and the Army ordnance activities. These two activity groups 
perform different types of work. The depots repair and overhaul a wide 
range of assets such as helicopters and tanks, whereas the ordnance 
activities, among other things, manufacture and sell munitions and 
large caliber weapons critical to the Army's execution of its 
warfighting mission. The ordnance activity group also provides 
ammunition stockpile management for all services within DOD as well as 
for foreign military customers. Among the benefits of consolidation 
cited by the Army is that the merger of the two activity groups will 
(1) create a more integrated business perspective that encourages 
cooperation and partnership, (2) eliminate duplication of effort 
associated with preparing and defending two separate budget submissions 
for essentially the same type of service, and (3) focus capital 
investments on the good of the business entity rather than on the good 
of the individual installations. 

We reviewed the Army Working Capital Fund fiscal year 2006/2007 budget 
document submitted to the Congress in February 2005. The budget 
document does not provide information on the Army depot maintenance 
activity group. Instead, the budget document consolidates the 
information on the depot maintenance and ordnance activity groups. This 
consolidation of information is discussed later in this report. 

Depot Maintenance Prices Increased Due to Increasing Material Costs: 

Our work showed that the Army depot maintenance activity group's 
average sales price for work increased 31 percent (21 percent if 
adjusted for inflation) between fiscal years 2000 and 2005.[Footnote 6] 
The activity group's budget documents showed that the average price per 
direct labor hour of work accomplished (composite sales price)[Footnote 
7] increased from $111.87 per hour for fiscal year 2000 to $147.07 for 
fiscal year 2005. We found that material costs accounted for the 
majority of the sales price increase from fiscal year 2000 to fiscal 
year 2005, accounting for over 100 percent of the group's sales price 
increase. Army depot maintenance officials provided evidence showing 
increasing material costs were caused, in part, by increased (1) 
material usage to rebuild selected weapon systems to like-new condition 
under the Army's recapitalization program and (2) prices that the 
activity group pays its suppliers for repair parts. However, Army depot 
maintenance officials have not completed a comprehensive analysis to 
determine (1) how much of the increase was due to the recapitalization 
program versus price increases and (2) whether they have identified all 
of the reasons for the material cost increases. As a result, the Army 
has not been able to take proactive steps to control rising material 
costs. 

Factors Causing Army Depot Maintenance Prices to Increase: 

The composite sales price that the Army depot maintenance activity 
group charged its customers increased from $111.87 per direct labor 
hour in fiscal year 2000 to $147.07 per direct labor hour in fiscal 
year 2005 - a $35.20 difference or 31 percent increase. As shown in 
table 1, our analysis of the factors that make up the activity group's 
composite price showed that direct material, overhead, and direct labor 
account for all of the costs making up the composite price increase 
charged customers. Table 1 also shows that: 

* Budgeted material costs were by far the most significant of the 
factors ($65.23 per direct labor hour) making up the composite sales 
price in fiscal year 2005 (44 percent of the fiscal year 2005 composite 
sales price). Additionally, material costs increased by $36.14 and 
accounted for over 100 percent of the increase in the group's sales 
prices between fiscal year 2000 and fiscal year 2005 because other cost 
factors decreased. 

* Budgeted overhead costs were the second largest cost factor ($49.47 
per direct labor hour) making up the composite sales price for fiscal 
year 2005 (34 percent of the fiscal year 2005 composite sales price). 
However, the overhead rate increased by only $3.98 during this time 
period. A large portion of the budgeted overhead costs is associated 
with operating and maintaining the installations. 

* Budgeted labor costs were the third largest cost factor ($30.84 per 
direct labor hour) making up the composite sales price for fiscal year 
2005 (21 percent of the fiscal year 2005 composite sales price). The 
labor costs were less than half the material costs' portion of the 
composite price for fiscal year 2005. Depot officials noted that the 
labor cost increases were primarily due to factors beyond the activity 
group's control, such as mandated cost-of-living annual salary 
increases for federal employees. As a result, we did not perform an in- 
depth review of the labor costs increases between fiscal year 2000 and 
fiscal year 2005. 

* Budgeted direct other costs (costs for contracts and travel) were the 
fourth largest cost factor (down $1.84 to $4.99 per direct labor hour) 
making up the composite sales price for fiscal year 2005. We did not 
perform an in-depth review of these costs since they decreased between 
fiscal year 2000 and fiscal year 2005. 

* All other budgeted cost factors included in developing the composite 
sales price decreased from $3.91 in fiscal year 2000 to a negative 
$3.46 in fiscal year 2005. The negative amount is due to the return of 
prior gains in setting the prices. 

Table 1: Factors Responsible for the Increases in the Army Depot 
Maintenance Activity Group's Composite Sales Price between Fiscal Years 
2000 and 2005: 

Factor: Direct material costs; 
Fiscal year 2000 rate per hour: $29.09; 
Fiscal year 2005 rate per hour: $65.23; 
Dollar difference: $36.14. 

Factor: Overhead costs; 
Fiscal year 2000 rate per hour: $45.49; 
Fiscal year 2005 rate per hour: $49.47; 
Dollar difference: $3.98. 

Factor: Direct labor costs; 
Fiscal year 2000 rate per hour: $26.55; 
Fiscal year 2005 rate per hour: $30.84; 
Dollar difference: $4.29. 

Factor: Direct other costs; 
Fiscal year 2000 rate per hour: $6.83; 
Fiscal year 2005 rate per hour: $4.99; 
Dollar difference: ($1.84). 

Factor: All other costs; 
Fiscal year 2000 rate per hour: $3.91; 
Fiscal year 2005 rate per hour: ($3.46); 
Dollar difference: ($7.37). 

Total composite sales price; 
Fiscal year 2000 rate per hour: $111.87; 
Fiscal year 2005 rate per hour: $147.07; 
Dollar difference: $35.20. 

Source: GAO analysis of Army Materiel Command and depot data on 
stabilized rates. 

[End of table]

Spiraling Material Costs Are Primary Cause of Price Increases, but 
Further Analysis Is Needed: 

Although table 1 shows that several factors contributed to the increase 
that occurred in the composite hourly sales price for fiscal years 2000 
through 2005, higher budgeted material costs was by far the most 
significant factor. Material costs increased 124 percent, from $29.09 
per direct labor hour in fiscal year 2000 to $65.23 per direct labor 
hour in fiscal year 2005. While Army depot maintenance officials 
provided evidence on why the activity group's overall material costs 
have increased, they have not performed a comprehensive analysis of 
material costs to determine (1) how much of the increase was due to the 
recapitalization program versus price increases and (2) whether they 
have identified all of the reasons for the material cost increases. 

The Army Has Identified Some Causes of Material Cost Increases: 

Army depot maintenance officials stated that the activity group's 
higher material costs can be attributed, to a large extent, to (1) 
increased material usage to rebuild certain weapon systems to like-new 
condition, as required by the Army's recapitalization program;[Footnote 
8] and (2) price growth--what the activity group pays various suppliers 
for material and component parts it uses to repair weapon systems and 
other items. For example: 

* Due primarily to the recapitalization program, the depot maintenance 
activity group raised the sales price for the repair of the Patriot 
missile air defense system antenna mast group from $398,612 in fiscal 
year 2002 to $744,784 in fiscal year 2004, an increase of $346,172 or 
87 percent. Under this program, the depots automatically replaced more 
parts than they did previously under a traditional weapon system 
overhaul. This resulted in an increase in material costs. For example, 
under the fiscal year 2002 recapitalization pilot program, the 
Letterkenny Army Depot automatically replaced 142 parts on an 
individual antenna mast group. By fiscal year 2004, the number of parts 
automatically replaced by Letterkenny increased to 1,938 or 1,264 
percent. 

* Due to increased prices paid to suppliers for component parts used in 
repairs, the cost to repair radar sets used for the Patriot missile has 
increased significantly. Depot maintenance officials estimated that for 
one Patriot missile radar set, they replace approximately 1,500 of the 
5,463 active radar antenna elements when they repair it. In January 
2003, depot maintenance was purchasing the antenna elements for $724 
apiece from the supplier. About 15 months later, the purchase price for 
a single element increased about 43 percent to $1,038. As a result, the 
stabilized sales price for repairing the radar set increased from 
$6,450,330 in fiscal year 2003 to $7,284,751 in fiscal year 2004, an 
increase of $834,421 or 13 percent in 1 year. 

* Due to the recapitalization program, the depot maintenance activity 
group raised its sales price for the repair of the Chinook helicopter 
from $4,431,953 in fiscal year 2003 to $6,754,808 in fiscal year 2005, 
an increase of $2,322,855 or 52 percent. The material component of the 
sales price increased from $2,661,481 in fiscal year 2003 to $4,060,000 
in fiscal year 2005--an increase of $1,398,519 or 60 percent of the 
total sales price increase. Corpus Christi Army Depot officials stated 
that material costs increased because under the recapitalization 
program the depot is required to (1) replace more parts 100 percent of 
the time during maintenance and (2) follow tighter inspection criteria, 
which results in parts being repaired or replaced more frequently. For 
example, the depot increased the number of helicopter parts required to 
be replaced during maintenance by 217 when it implemented the 
recapitalization program. 

* Due primarily to the recapitalization program, the depot maintenance 
activity group raised the sales price for the repair of the engine used 
in the Armored Vehicle Launch Bridge, a folding portable bridge that is 
transported on the top of a tank chassis, and the M88 Hercules Recovery 
Vehicle, used to recover tanks. More specifically, the Anniston Army 
Depot increased the price for the engine from $58,559 in fiscal year 
2003 to $95,451 in fiscal year 2005, an increase of $36,892 or 63 
percent. During this same time period, the materials costs increased by 
$38,749 or 120 percent from $32,183 to $70,932. Since they anticipate 
repairing about 336 of these engines in fiscal year 2005, the impact of 
the increased material costs is about $13 million. 

* Due primarily to increased prices paid to suppliers for component 
parts, the cost to overhaul one type of Bradley Fighting Vehicle 
increased from $409,964 in fiscal year 2003 to $549,291 in fiscal year 
2005, an increase of $139,327 per vehicle or 34 percent. A major cause 
of this increase was the material cost growth of $30,280 per vehicle. 
One example of a part contributing to the higher material costs is the 
price of a gyroscope used on the vehicle increasing from $11,486 in 
fiscal year 2003 to $19,381 in fiscal year 2005. Further, the price of 
two transmission parts increased from about $1,300 each to $10,092 each 
over the same time period. 

Army Has Not Performed a Comprehensive Analysis of Material Cost 
Increases: 

One of the primary goals of the working capital fund is to focus the 
attention of all levels of management on the total costs of carrying 
out DOD business operations such as depot maintenance. That is, working 
capital fund operations are intended to operate like a business by 
developing and using effective methods to control operating costs. We 
found that the Army depot maintenance activity group has not achieved 
that goal nor attempted to, at least in part, as it pertains to 
controlling material costs. Specifically, the activity group has not 
performed a comprehensive analysis to determine (1) how much of the 
increase was due to the recapitalization program versus supplier price 
increases and (2) whether they have identified all of the reasons for 
material cost increases. Such an analysis is frequently used for 
manufacturing processes, for example, to determine if material usage 
has increased and, if so, to determine the impact on material costs. 

We believe that a comprehensive analysis of material costs is warranted 
because the activity group's material costs account for over 44 percent 
of the group's fiscal year 2005 composite sales price and have 
increased by 124 percent between fiscal year 2000 and fiscal year 2005. 
Depot maintenance officials at the five Army depots and the Army 
Materiel Command told us that they did not perform such analyses. In 
fact, officials at one depot told us it was not necessary for them to 
perform analyses on material cost increases because they believe they 
know what their primary material cost drivers are: the recapitalization 
program previously discussed and increased prices being paid to one of 
their parts suppliers. We agree with these two reasons. However, 
without performing a comprehensive analysis, the depot cannot quantify 
the extent to which the causes contribute to the higher material costs 
and does not know if all major causes have been identified. Perhaps 
most important, absent these data, DOD does not have the necessary 
information to try to mitigate costs related to usage rates, unit 
prices, or other causes. 

Army Depot Maintenance Overhead Represents the Second Largest Cost 
Factor Affecting Prices: 

As illustrated in table 1, our analysis showed that budgeted overhead 
costs were the second largest factor making up the fiscal year 2005 
composite sales price. Overhead costs consist of two broad cost 
categories: base operations and maintenance mission. Base operations 
overhead includes costs necessary to maintain the installations that 
support the Army depots and other base tenants and include security, 
fire protection, building maintenance, resource management, and 
personnel and community activities. Maintenance mission overhead 
includes indirect costs that can be directly attributed to supporting 
the depots' maintenance mission, such as supervision, indirect 
material, general engineering, and mid-level management and 
administrative expenses, but cannot be tied to a specific cost center. 
Tables 2 and 3 illustrate the breakout of the depots' base operations 
and maintenance mission overhead rates per direct labor hour as a 
percentage of the depots' total overhead rates for fiscal years 2001 
and 2005.[Footnote 9]

Table 2: Depot Base Operations and Maintenance Mission Rates Per Direct 
Labor Hour for Fiscal Year 2001: 

Army depot: Letterkenny; 
Fiscal year 2001 base operations: Rates: $32.73; 
Fiscal year 2001 base operations: Percent of overhead total: 39%; 
Fiscal year 2001 maintenance mission: Rates: $51.70; 
Fiscal year 2001 maintenance mission: Percent of overhead total: 61%; 
Total overhead rates: $84.43. 

Army depot: Red River; 
Fiscal year 2001 base operations: Rates: $30.86; 
Fiscal year 2001 base operations: Percent of overhead total: 50%; 
Fiscal year 2001 maintenance mission: Rates: $31.04; 
Fiscal year 2001 maintenance mission: Percent of overhead total: 50%; 
Total overhead rates: $61.90. 

Army depot: Corpus Christi; 
Fiscal year 2001 base operations: Rates: $25.39; 
Fiscal year 2001 base operations: Percent of overhead total: 41%; 
Fiscal year 2001 maintenance mission: Rates: $36.34; 
Fiscal year 2001 maintenance mission: Percent of overhead total: 59%; 
Total overhead rates: $61.73. 

Army depot: Anniston; 
Fiscal year 2001 base operations: Rates: $17.27; 
Fiscal year 2001 base operations: Percent of overhead total: 42%; 
Fiscal year 2001 maintenance mission: Rates: $23.92; 
Fiscal year 2001 maintenance mission: Percent of overhead total: 58%; 
Total overhead rates: $41.19. 

Army depot: Tobyhanna; 
Fiscal year 2001 base operations: Rates: $17.69; 
Fiscal year 2001 base operations: Percent of overhead total: 54%; 
Fiscal year 2001 maintenance mission: Rates: $14.90; 
Fiscal year 2001 maintenance mission: Percent of overhead total: 46%; 
Total overhead rates: $32.59. 

Source: Individual Army depots and GAO analysis. 

[End of table]

As illustrated in tables 2 and 3, base operations overhead costs 
represented a significant portion of the depots' total overhead rate 
per direct labor hour for fiscal years 2001 and 2005. In fiscal year 
2001, base operations overhead as a percentage of the total overhead 
rate ranged from 39 percent at the Letterkenny Army Depot to 54 percent 
at the Tobyhanna Army Depot. In fiscal year 2005, base operations still 
made up a significant portion of the individual depots' total overhead 
rates: a range of 28 percent at the Anniston Army Depot to 52 percent 
at the Red River Army Depot. 

Table 3: Depot Base Operations and Maintenance Mission Rates Per Direct 
Labor Hour for Fiscal Year 2005: 

Army depot: Letterkenny; 
Fiscal year 2005 base operations: Rates: $24.78; 
Fiscal year 2005 base operations: Percent of overhead total: 47%; 
Fiscal year 2005 maintenance mission: Rates: $28.08; 
Fiscal year 2005 maintenance mission: Percent of overhead total: 53%; 
Total overhead rates: $52.86. 

Army depot: Red River; 
Fiscal year 2005 base operations: Rates: $28.80; 
Fiscal year 2005 base operations: Percent of overhead total: 52%; 
Fiscal year 2005 maintenance mission: Rates: $26.86; 
Fiscal year 2005 maintenance mission: Percent of overhead total: 48%; 
Total overhead rates: $55.66. 

Army depot: Corpus Christi; 
Fiscal year 2005 base operations: Rates: $14.35; 
Fiscal year 2005 base operations: Percent of overhead total: 31%; 
Fiscal year 2005 maintenance mission: Rates: $31.32; 
Fiscal year 2005 maintenance mission: Percent of overhead total: 69%; 
Total overhead rates: $45.67. 

Army depot: Anniston; 
Fiscal year 2005 base operations: Rates: $14.73; 
Fiscal year 2005 base operations: Percent of overhead total: 28%; 
Fiscal year 2005 maintenance mission: Rates: $37.22; 
Fiscal year 2005 maintenance mission: Percent of overhead total: 72%; 
Total overhead rates: $51.95. 

Army depot: Tobyhanna; 
Fiscal year 2005 base operations: Rates: $18.71; 
Fiscal year 2005 base operations: Percent of overhead total: 41%; 
Fiscal year 2005 maintenance mission: Rates: $26.51; 
Fiscal year 2005 maintenance mission: Percent of overhead total: 59%; 
Total overhead rates: $45.22. 

Source: Individual Army depots and GAO analysis. 

[End of table]

Tables 2 and 3 show that maintenance mission overhead was also a 
significant cost factor making up the individual depots' total overhead 
rate per direct labor hour for fiscal years 2001 and 2005. In fiscal 
year 2001, maintenance mission overhead as a percentage of the total 
overhead rate ranged from 46 percent at the Tobyhanna Army Depot to 61 
percent at the Letterkenny Army Depot. By fiscal year 2005, these 
percentages ranged from 48 percent at the Red River Army Depot to 72 
percent at the Anniston Army Depot. Some maintenance mission overhead 
costs involve payments to organizations external to the depots, such as 
payments to the Defense Finance and Accounting Service for accounting 
and financial services. We also found that from fiscal year 2001 to 
fiscal year 2005, the maintenance mission overhead rate increased at 
only two of the depots--those that had the lowest rates in fiscal year 
2001. An official at Anniston Army Depot stated that increased quality 
assurance operations that required hiring additional engineers and 
higher subordinate command management fees primarily caused the 
maintenance mission rate increase. An official at Tobyhanna Army Depot 
stated that increased LMP, Defense Logistics Agency, and Defense 
Finance and Accounting Service fees caused part of the increase in its 
maintenance mission rate. Further, in fiscal year 2002, the Army 
Materiel Command directed the depots to reclassify certain base 
operations costs as maintenance mission to properly allocate overhead 
costs to maintenance mission. 

Method of Allocating Gains and Losses Does Not Provide Incentive For 
Depots to Set Prices Correctly: 

In setting future prices to break even, the Army spread depot 
maintenance reported gains and losses across all depots, rather than 
allocating reported losses or gains incurred by a specific depot to 
that depot. While DOD policy does not specify how to allocate gains and 
losses at the depot level, this practice does not provide the right 
incentives to the depots to set prices correctly in the budget. If one 
depot consistently incurred losses, the Army would increase the prices 
at other depots to help recoup the losses. As a result, the depot 
incurring the losses is not held accountable for operating on a break 
even basis. For example, the Red River Army Depot reported an 
accumulated loss for 4 of the past 5 years, including fiscal years 
2002, 2003, and 2004. For these 3 fiscal years, the reported 
accumulated losses ranged from $18 million to about $48 million, 
indicating that Red River's customers were not charged enough for the 
goods and services provided to them. Because of the continual reported 
losses, the Tank-automotive and Armaments Command--the major 
subordinate command that directs Red River--sent a team to Red River to 
determine why the depot reported $29 million of losses during fiscal 
year 2003. The team found that Red River did not develop accurate 
budget estimates and underestimated various costs that it incurred 
including salaries, material, and overhead. 

On the other hand, the Tobyhanna Army Depot--which had a reported 
revenue that ranged from $259 million to $406 million from fiscal years 
2000 to 2004--reported an accumulated gain for each fiscal year from 
fiscal year 2000 through fiscal year 2004, ranging from $31 million to 
$169 million.[Footnote 10] Likewise, the Anniston Army Depot reported 
an accumulated gain for fiscal years 2002 through 2004 ranging from $30 
million to $123 million, indicating that it has been charging its 
customers too much for goods and services. Tobyhanna officials stated 
that over the last few years, they wanted to reduce their prices more 
than was allowed by the Army Materiel Command to return these gains to 
customers. Tobyhanna officials said that their sales prices were 
inflated to offset losses at other depots. 

Due to its recent business merger of depot maintenance and ordnance 
activity groups beginning in fiscal year 2005, it is even more 
important for the Army to allocate gains and losses incurred by a 
specific activity to that activity. This new activity group is called 
the industrial operations activity group. In the past, the depot 
maintenance activity group did a much larger business than the ordnance 
activity group. The Army depot maintenance activity group received $2.6 
billion in new orders in fiscal year 2003, while the ordnance activity 
group received $832 million of new orders. These orders were financed 
with appropriations in different proportions. For example, in fiscal 
year 2003, 41 percent and 7 percent of the depot maintenance orders 
were financed with operation and maintenance appropriations and 
procurement appropriations, respectively. On the other hand, 58 percent 
and 15 percent of the ordnance orders were financed with operation and 
maintenance and procurement appropriations, respectively. If the Army 
continues its current practice of allocating gains and losses across 
all activities, customers of activities that make a gain will continue 
to subsidize customers of activities that incur a loss. Further, 
because ordnance activities are financed with several appropriations in 
different proportions than depot maintenance activities, spreading 
gains and losses across all activities could result in an inequitable 
allocation of the gains and losses to and from these appropriations. 

Army Has Consistently Exceeded Carryover Threshold: 

In addition, the Army did not comply with DOD's carryover policy. We 
found that the Army depot maintenance activity group's actual reported 
carryover (1) consistently exceeded DOD's 3-month carryover standard 
from fiscal year 1996 through fiscal year 2001 and (2) continued to 
exceed the allowable amount of carryover as calculated under DOD's 
revised carryover policy for fiscal years 2002 and 2003. The activity 
group's reported actual carryover did not exceed the allowable amount 
for fiscal year 2004. We reviewed the Army's fiscal year 2004 carryover 
calculation and validated that the Army's calculation was done in 
accordance with DOD's new carryover policy. 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 or subsequent fiscal years. In the past, the Congress has reduced 
the services' budgets because of excessive carryover, including a $48 
million reduction in the Army's fiscal year 2003 Operation and 
Maintenance appropriation. Factors contributing to carryover exceeding 
the ceilings included depots receiving new orders at fiscal year-end 
and depots not being able to obtain material needed to perform repair 
work in a timely manner. Furthermore, although the Army's reported 
carryover amount exceeded the ceilings, we found that the Army 
understated its reported actual carryover for fiscal years 2002 and 
2003. For example, fiscal year 2003 carryover was understated by $95 
million. According to Army officials, the understatement occurred 
because DOD's verbal guidance was unclear. Based on its interpretation 
of this guidance, the Army only included actual carryover on orders 
received in the current year but did not include carryover related to 
orders received in prior years in calculating its reported actual 
carryover for fiscal years 2002 and 2003. 

What Is Carryover and Why Is It Important: 

Carryover is the dollar value of work that has been ordered and funded 
(obligated) by customers but not completed by working capital fund 
activities at the end of the fiscal year. Carryover consists of both 
the unfinished portion of work started but not completed, as well as 
requested work that has not yet commenced. Some carryover is necessary 
at fiscal year-end if working capital funds are 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 the working capital fund activities have 
enough work to ensure a smooth transition between fiscal years. 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 or subsequent years. By minimizing the amount 
of carryover, DOD can use its resources in the most effective manner 
and minimize the "banking" of funds for work and programs to be 
performed in subsequent years. 

In 1996, DOD established a 3-month carryover standard for all working 
capital fund activities except for the contract portion of the Air 
Force depot maintenance activity group.[Footnote 11] In May 2001, we 
reported[Footnote 12] that DOD did not have a basis for its carryover 
standard and recommended that DOD determine the appropriate carryover 
standard for the depot maintenance, ordnance, and research and 
development activity groups. According to the Office of the Under 
Secretary of Defense (Comptroller) and Army officials, based on our 
recommendation, in December 2002, DOD provided verbal guidance 
concerning its new carryover policy for working capital fund 
activities. Subsequently, DOD included its revised carryover policy in 
its DOD Financial Management Regulation 7000.14-R, Volume 2B, Chapter 
9, dated June 2004, which eliminated the 3-month standard for allowable 
carryover. Under the new policy, the allowable amount of carryover is 
to be based on the outlay rate[Footnote 13] of the customers' 
appropriations financing the work. This meant that in determining 
allowable carryover, the first year outlay rate would be used for new 
orders received in the current year (first year of the work order). 
According to the DOD regulation, this new metric allows for an 
analytical-based approach that holds working capital fund activities to 
the same standard as general fund execution and allows for more 
meaningful budget execution analysis. 

Army Reports Showed That the Depot Maintenance Activity Group 
Consistently Exceeded Carryover Ceiling: 

Tables 4 and 5 show that the Army depot maintenance activity group's 
actual reported carryover (1) consistently exceeded DOD's 3-month 
carryover standard from fiscal year 1996 through fiscal year 2001 and 
(2) continued to exceed the allowable amount of carryover as calculated 
under DOD's revised carryover policy for fiscal years 2002 and 2003. 

Table 4: Fiscal Year-End Actual Reported Carryover from Fiscal Year 
1996 through 2001 Consistently Exceeded DOD's 3-month Standard: 

Fiscal year: 1996; 
Reported actual months of carryover: 3.6. 

Fiscal year: 1997; 
Reported actual months of carryover: 3.2. 

Fiscal year: 1998; 
Reported actual months of carryover: 3.4. 

Fiscal year: 1999; 
Reported actual months of carryover: 4.4. 

Fiscal year: 2000; 
Reported actual months of carryover: 4.2. 

Fiscal year: 2001; 
Reported actual months of carryover: 3.4. 

Source: [Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-01-559] and 
fiscal year 2003 Army Working Capital Fund budget estimate dated 
February 2002. 

[End of table]

Table 5: Dollar Amount of Reported Actual Carryover for Fiscal Years 
2002 and 2003 That Exceeded Allowable Amounts: 

Dollars in millions. 

Allowable carryover; 
FY 2002: $548.2; 
FY 2003: $854.4. 

Reported actual carryover; 
FY 2002: $584.3; 
FY 2003: $981.5. 

Carryover above allowable amount; 
FY 2002: $36.1; 
FY 2003: $127.1. 

Source: Fiscal years 2004 and 2005 Army Working Capital Fund budget 
estimates dated February 2003 and February 2004, respectively. 

[End of table]

Officials at the four depots that exceeded their carryover ceilings 
informed us that reported actual year-end carryover exceeded the 
allowable amount because some depots received and accepted work late in 
the fiscal year and some depots could not obtain the material needed in 
a timely manner, so that less work was performed than planned. While 
other work can be substituted for items awaiting parts, this shifting 
of the repair work does have a negative effect on the amount of work 
accomplished. The following examples illustrate these two reasons 
regarding why work was not performed by fiscal year-end. 

* On September 26, 2003--the last week of the fiscal year--the Red 
River Army Depot accepted a customer work order for $17.9 million to 
overhaul 41 Bradley Fighting Vehicles. Because the depot did not begin 
work on this order until October 2003, the entire $17.9 million had to 
be carried over into fiscal year 2004 and was included in the depot's 
fiscal year-end 2003 reported actual carryover amount. According to Red 
River Army Depot officials, their command told them to accept this 
order to enable the obligation of operation and maintenance funds 
before they expired at year-end. 

* In January 2002, the Red River Army Depot accepted a customer work 
order financed with about $3.1 million of operation and maintenance 
funds to overhaul 25 25-ton cranes. Upon starting the work, depot 
officials said they discovered that many of the parts needed for the 
overhaul were no longer readily available, thus requiring the depot to 
research where the parts could be obtained. This delayed the overhaul 
work, which caused about $3.1 million to be included in the depot's 
fiscal year-end 2002 reported actual carryover and was carried over 
into fiscal year 2003. At the end of fiscal year 2003, almost $1.4 
million of the work was still not completed and was carried over into 
fiscal year 2004. In fact, at the start of fiscal year 2004, none of 
the 25 cranes had been completed. In November 2003, the first 2 cranes 
were completed, with 16 more being completed by the end of fiscal year 
2004. The remaining 9 cranes, with about $470,000 of work, were carried 
over into fiscal year 2005 and finally completed by November 2004. 
Thus, due to the unavailability of repair parts, uncompleted work on 
this order was included in the depot's carryover balance at the end of 
fiscal years 2002, 2003, and 2004. 

* On September 26, 2003, the Tobyhanna Army Depot accepted an order for 
about $2.7 million that was financed by operation and maintenance funds 
to repair a ground mobile navigation radar. Since the depot accepted 
the order late in the fiscal year, the depot was unable to schedule and 
begin the repair work until November 2003. As a result, this $2.7 
million order was carried over into fiscal year 2004. In addition, 
because of delays in completing a modification upgrade to a component 
on the radar, not all repair work on the radar was completed in fiscal 
year 2004, resulting in about $1.2 million of the order, or 44 percent, 
being carried over into fiscal year 2005. 

* In May 2003, the Tobyhanna Army Depot accepted a $3.6 million order 
that was financed by operation and maintenance funds to repair three 
Firefinder radar antennas. The depot received the radar antennas in 
June 2003 but was unable to complete the repair work by the end of the 
fiscal year because it did not receive the other necessary repair 
parts. For example, the depot did not receive completed sets of 
sentinel components and beam steering units from the parts supplier 
until June 2004. As a result, the depot reported over $3 million in 
fiscal year 2003 carryover and about $2.3 million in fiscal year 2004 
carryover. 

* On August 24, 2004, the Corpus Christi Army Depot accepted an order 
totaling about $3.1 million that was financed by operation and 
maintenance funds to repair a Black Hawk helicopter. Even though the 
depot did not have the material needed to repair the helicopter, it 
accepted the work order late in the fiscal year. In September 2004, the 
depot ordered the material to make the repairs. Although the depot 
accepted the order and ordered the material in fiscal year 2004, it did 
not begin the repair work until November 2004, when it received the 
material. As a result, the depot reported almost the entire $3.1 
million as carryover at the end of fiscal year 2004. 

* On September 5, 2003, the Letterkenny Army Depot accepted a $5 
million order that was financed by operation and maintenance funds for 
the repair of the Patriot Missile Air Defense System launching stations 
in support of the war in Iraq and Afghanistan. During the week of 
September 19, 2003, the depot began repairing the stations. Since the 
launching stations were received during the last month of the fiscal 
year, the depot was unable to complete repairs on the stations by the 
end of fiscal year 2003. This resulted in the depot reporting about 
$3.7 million as carryover at the end of fiscal year 2003. The depot 
completed its repair on the launching stations in September 2004. 

Reported Actual Carryover Was Understated in Fiscal Years 2002 and 2003 
Because Prior Year Orders Were Not Included: 

The Army understated its reported actual carryover for fiscal years 
2002 and 2003 because it interpreted DOD's new carryover guidance as 
requiring only the inclusion of customer orders received in the current 
year when calculating carryover. As a result, the Army did not include 
customer orders received in prior years. For example, the dollar amount 
of reported actual carryover was understated by $95 million at the end 
of fiscal year 2003 because carryover related to orders received in 
fiscal year 2002 and prior years was not included. Army officials at 
headquarters, the Army Materiel Command, and the depots acknowledged 
that the actual carryover figures did not include carryover related to 
prior year orders. As a result, the Army reported to the Congress that 
its actual carryover exceeded the allowable amount by $127 million in 
fiscal year 2003 as shown in table 5, when it actually exceeded the 
allowable amount by $222 million. 

DOD changed its carryover policy in December 2002 and stated that the 
revised carryover methodology would be adopted for the first time in 
the fiscal year 2004 budget, which affected the way the fiscal year 
2002 reported actual carryover amount, as well as the fiscal years 
2003, 2004, and 2005 budgeted amounts, were to be calculated. However, 
DOD did not issue detailed written procedures for calculating actual 
carryover until June 2004. Army headquarters officials stated that 
prior to the issuance of the written guidance in June 2004, the new 
carryover calculation was based on verbal instructions that the Army 
received from the Office of the Under Secretary of Defense 
(Comptroller). The Army interpreted the new guidance to include only 
actual carryover on orders received in the current year and instructed 
the Army Materiel Command to calculate carryover accordingly. The Army 
Materiel Command then provided this guidance to the depots. For 
example, on March 4, 2003, the Army Materiel Command provided carryover 
guidance for the development of the fiscal year 2005 budget and 
specified that the amount of actual carryover was to be based on new 
orders only and not to include actual carryover related to prior year 
orders. When DOD issued the revised DOD regulation in June 2004, Army 
officials realized that they were not calculating reported actual 
carryover correctly and changed their methodology in developing the 
fiscal year 2006 depot maintenance budget so that the actual carryover 
calculation would include prior year orders and be in accordance with 
DOD's written guidance. 

Current DOD Policy on Calculating Allowable Carryover Unclear: 

In addition to the problem of not including work related to prior year 
orders when reporting actual carryover, problems also existed with 
determining the amount of allowable carryover. As previously stated, in 
June 2004, DOD revised the DOD Financial Management Regulation 7000.14- 
R, Volume 2B, Chapter 9 to formalize the December 2002 carryover 
policy. However, this regulation did not contain specific instructions 
for determining allowable carryover for work not completed on prior 
year orders. To clarify its June 2004 written guidance, DOD again 
provided the Army verbal guidance on calculating the allowable 
carryover amount for work not completed on prior year orders. Based on 
the verbal guidance, the Army used the first year outlay rate for both 
(1) current year orders and (2) work not completed on prior year 
orders. We questioned this methodology for calculating allowable 
carryover with officials from the Army and the Office of the Under 
Secretary of Defense (Comptroller), and why they were applying the 
first year outlay rates to prior year orders instead of the applicable 
second or third year outlay rates. By using only the first year rates, 
the Army was allowed more carryover. After discussing our concerns with 
Office of the Under Secretary of Defense (Comptroller) and Army depot 
maintenance officials, they changed the way they were calculating 
allowable carryover. Specifically, the Army calculated the allowable 
amount of carryover that was included in the Army Working Capital Fund 
fiscal year 2006 budget by applying the first year outlay rate of the 
appropriation financing the order for current year orders only. For 
illustrative purposes, if the Army depot maintenance activity group 
received $100 of new orders in fiscal year 2006 and the outlay rate was 
60 percent, then the allowable amount of carryover would be $40. 

In discussing this matter with officials from the Office of the Under 
Secretary of Defense (Comptroller), they acknowledged that the current 
written guidance on calculating allowable carryover was unclear. They 
stated that they have since provided verbal guidance to the Army on how 
to calculate the allowable amount. Specifically, the allowable amount 
of carryover is to be calculated by applying the first year outlay rate 
of the appropriation financing the current year orders. The officials 
also stated that work not completed in the first year of the order is 
not to be included in the calculation because it is expected to be 
completed by the end of the second year of the order for the Army depot 
maintenance activity group. The officials informed us that they plan to 
issue written guidance on this matter. 

Tobyhanna Army Depot Continues to Experience Difficulty With LMP: 

Since its implementation in July 2003, LMP has not been able to provide 
timely and accurate information needed for the economical and efficient 
operations of the Tobyhanna Army Depot. As we reported in May 
2004,[Footnote 14] the Army's inadequate management of its requirements 
and system testing activities before LMP was fielded were the primary 
contributing factors to the problems experienced at Tobyhanna since 
fiscal year 2003. These problems are continuing to prevent the 
Tobyhanna Army Depot from accurately reporting on its financial 
operations, which, in turn, adversely impacts the depot's ability to 
accurately set customer sales prices. While the Army developed a 
reasonable approach that was to be followed in addressing system 
problems that must be resolved for LMP to provide the intended 
capabilities, the Army has not been able to effectively implement those 
processes. As a result, the Army was unable to provide evidence to show 
that the corrective actions adequately address the problems experienced 
during LMP implementation. Until the Army effectively implements its 
stated management processes to address the numerous problems impeding 
the efficient and effective operation of LMP at the Tobyhanna Army 
Depot, future deployments can expect to experience similar, significant 
disruptions in their depot maintenance operations. 

Prior GAO Report Identified LMP Problems: 

In our May 2004 report, we pointed out that the Army had not 
effectively managed its implementation of LMP. This report noted that 
after LMP was deployed in July 2003, operational difficulties at the 
Tobyhanna Army Depot resulted in inaccurate financial management 
information. More specifically, the depot was not (1) producing 
accurate workload planning information, (2) generating accurate 
customer bills, and (3) capturing all repair costs, which impeded the 
Army's ability to calculate accurate future repair prices. As noted in 
the report, Army program officials acknowledged that requirements and 
testing defects were factors contributing to the operational problems. 

Requirements represent the blueprint that system developers and program 
managers use to design, develop, and acquire a system. Improperly 
defined or incomplete requirements have been commonly identified as a 
cause of system failure, resulting in systems not meeting their costs, 
schedules, or performance goals. Further, because requirements provide 
the foundation for system testing, requirement defects, such as those 
noted during our review relating to specificity and the ability to 
determine the relationship between requirements (commonly referred to 
as traceability), preclude an entity from implementing a disciplined 
testing process. That is, requirements must be complete, clear, and 
well documented to design and implement an effective testing program. 
Absent this, an organization is taking a significant risk that its 
testing efforts will not detect significant defects until after the 
system is placed into production. Industry experience indicates that 
the sooner a defect is recognized and corrected, the cheaper it is to 
fix. 

In our May 2004 report, we noted that LMP's requirements (1) lacked the 
specific information necessary to understand the required functionality 
that was to be provided and (2) did not describe how to determine 
quantitatively, through testing or other analysis, whether the systems 
would meet the Army's needs. We continue to believe that one reason 
that users have not been provided with the intended systems 
capabilities is because of the breakdown in the requirements management 
process. As a consequence, the Army has implemented error-prone, time- 
consuming manual workarounds as a means to minimize disruption to 
critical operations. As discussed in the next section, our current work 
demonstrated that Tobyhanna's financial management operations continued 
to be affected by LMP system problems. 

LMP Adversely Affected Tobyhanna Army Depot's Financial Management 
Operations: 

Since the Army has not corrected LMP's system problems, the Tobyhanna 
Army Depot continues to experience financial management challenges. 
These system problems include the depot's inability to (1) report net 
operating results that are reliable, (2) properly recognize revenue and 
bill customers, (3) reconcile balances that were converted from the 
depot's legacy finance and accounting system, the Standard Depot System 
(SDS), to LMP, and (4) produce reliable cost information because LMP 
contains incorrect unit prices and unit of issue data. These problems 
adversely affected Tobyhanna's ability to accurately set customer sales 
prices and develop reliable budgets for its depot maintenance 
operations. 

Net Operating Results Reported by LMP Were Not Reliable: 

According to an Army headquarters budget official, the fiscal year-end 
2003 and 2004 net operating results were overstated by $74.7 million 
and $50 million, respectively, due to problems with the implementation 
of LMP. Research performed by Tobyhanna finance and accounting 
personnel showed that the fiscal year 2003 net operating result was 
overstated for a number of reasons including (1) the recording of $35.2 
million of miscellaneous gains in LMP that did not occur and (2) an 
overstatement of $39.5 million of revenue in LMP. For example, the 
$35.2 million of gains recorded in LMP should have been reversed 
because LMP did not correctly (1) account for material charged to jobs 
($10.4 million), (2) process transactions related to the movement of 
assets and material at the depot ($11.8 million), (3) account for 
inventory variance account balances ($12 million), and (4) account for 
material returned for credit ($1 million). In the Army Working Capital 
Fund budget for fiscal year 2006/2007, the Army plans to revise the 
accumulated operating results for fiscal year 2005 by adjusting it 
downward by the $124.7 million overstatement. Since the accumulated 
operating result is one factor used in developing prices, this 
adjustment will affect future prices. 

LMP Did Not Always Properly Recognize Revenue and Bill Customers: 

Shortly after LMP was implemented in July 2003, Tobyhanna officials 
began identifying problems related to the system's ability to 
accurately recognize revenue and bill customers for goods and services 
provided. As of January 2005, the Army had not corrected the problems 
associated with revenue recognition and billing of customers. For 
example, Tobyhanna officials identified 837 work orders with 
accumulated costs for work performed totaling over $44.8 million in 
September 2004. However, no revenue was recognized for the work 
performed and, as a result, customers were not billed for the 
corresponding amount. For one of the 837 work orders, our analysis 
showed that the depot began incurring costs in May 2004 and had total 
accumulated costs of $2.6 million as of September 2004. Tobyhanna 
officials informed the contractor of this problem in September 2004. In 
December 2004, the contractor told depot officials that it had 
corrected the problem. However, the contractor corrected the problem 
for the one order but did not correct the problems with the remaining 
836 orders. Further, the contractor did not determine the root cause of 
the problem, and the depot continued to find the same problem with 
other orders. Once a problem is identified, it is critical that it be 
investigated, the root cause identified in order for a systematic 
solution to be developed, and that the solutions be effectively tested 
to ensure that they address the fundamental problem and do not 
introduce additional problems. 

Another problem related to billing customers involves the Defense 
Finance and Accounting Service (DFAS) and the process used to close 
customer work orders. As part of this process, Tobyhanna sends 
completed work orders to DFAS to be closed out so DFAS can bill 
customers for any authorized funds (customer's orders) that remain 
unbilled. DFAS uses LMP data to perform this final billing. On 
September 16, 2004, Tobyhanna identified 38 orders where the work was 
completed and sent this information to DFAS for final billing and to 
close out the orders. However, DFAS was not able to perform the final 
billings and close out these orders because no sales order data 
(commonly referred to as a customer order) were recorded in LMP for 
these 38 orders. In September 2004, the Army told the contractor and 
DFAS about the problem of closing out orders. Rather than fixing the 
root cause of the problem, DFAS agreed to manually bill the customers 
and close the orders. According to Tobyhanna officials, the problem 
will continue since the root cause of the problem was not identified 
and fixed. 

Account Balances Were Not Reconciled When Tobyhanna Converted to LMP: 

Tobyhanna Army Depot encountered problems in converting data from the 
legacy system to LMP. Specifically, when Tobyhanna converted from its 
legacy finance and accounting system, SDS, to LMP in July 2003, the 
June 30, 2003, ending account balances in SDS did not reconcile to the 
beginning account balances in LMP. According to Tobyhanna officials, 
the account balances should have been the same. However, the officials 
did not perform a detailed analysis to determine why the account 
balances did not reconcile because they (1) were too busy identifying 
other problems with the implementation of LMP and (2) lacked the 
detailed information to do the analysis. Tobyhanna officials informed 
the contractor that the balances were not reconciling in September 
2003. However, as of January 2005--about 18 months after the 
implementation of the system--the account balances in the two systems 
still could not be reconciled. Table 6 provides the account balances 
shown in SDS and LMP for five selected accounts that should have been 
the same but were different as of June 30, 2003. 

Table 6: Differences in Selected Account Balances Reported in SDS and 
LMP as of June 30, 2003: 

Dollars in millions. 

Accounts receivable - government; 
SDS: $15.6; 
LMP: ($4.6); 
Difference: $20.2. 

Operating material and supplies, net; 
SDS: $3.8; 
LMP: $69.6; 
Difference: ($65.8). 

Accounts payable - public; 
SDS: ($9.9); 
LMP: ($24.9); 
Difference: $15.0. 

Obligations - funds received; 
SDS: $716.9; 
LMP: $804.9; 
Difference: ($88.0). 

Reimbursements earned (revenue); 
SDS: $218.7; 
LMP: $206.8; 
Difference: $11.9. 

Source: SDS and LMP general ledger balances as of June 30, 2003. 

[End of table]

Accurate account balances are important because the amounts are used to 
produce official financial reports such as the income statement--which 
include revenues, expenses, and annual and accumulated operating 
results--that are used to prepare future budgets. For example, the 
fiscal year 2004 operating result is one factor used in developing the 
fiscal year 2006 prices. If the information on revenue, costs, and net 
operating results is unreliable, this could adversely affect the 
reliability of Tobyhanna's customer sales prices. Tobyhanna officials 
told us that in the past, they were able to reconcile the information 
contained in SDS to the DFAS official financial reports, including the 
income statement. This provided them some assurance that the financial 
reports were correct. However, since the implementation of LMP, they 
have not been able to reconcile the data in LMP to the DFAS official 
reports. 

DFAS officials acknowledged that there should not be differences 
between ending account balances in SDS and beginning account balances 
in LMP. However, because of unreconciled differences between the two 
systems, DFAS included a footnote in the depot maintenance activity 
group's fiscal years 2003 and 2004 year-end financial reports and 
stated that LMP conversion problems affected revenue earned, orders 
received from customers, and billings. As of the end of fiscal year 
2004--over 1 year after conversion--DFAS was still unable to quantify 
the effect on revenue. 

LMP Contained Erroneous Unit Prices and Unit of Issue: 

LMP did not always contain the correct unit price or unit of 
issue[Footnote 15] for certain materials, resulting in excess material 
being ordered and incorrect prices being charged to jobs. Since LMP 
contained the wrong values for the quantity of issue and price, 
Tobyhanna received quantities of parts and supplies for use in 
repairing military assets that were far greater than intended. Further, 
these parts and supplies were charged to jobs at higher prices than the 
depot officials thought were being charged. Tobyhanna officials 
informed us that they have experienced unit-price and unit-of-issue 
problems with LMP since its implementation in July 2003 and that these 
problems continued as of January 2005, causing erroneous cost 
information that distorts the depot's financial reports, including net 
operating results. The following are two examples illustrating problems 
that Tobyhanna experienced while using LMP to place orders for parts 
and supplies. 

* LMP did not contain the correct price for screws, wing nuts, and 
locking washers. According to the officials, if depot maintenance 
personnel had not identified these errors, the customer requesting this 
work would have been charged over $2.8 million for the wing nuts, 
screws, and locking washers, which were actually worth about $400. In 
fiscal year 2002, Tobyhanna received a work order from the Army to 
repair High Mobility Multipurpose Wheeled Vehicles. In reviewing the 
work on this order in May 2004, Tobyhanna officials determined that the 
job had been assessed with costs totaling $2,846,686 for plain wing 
nuts, screws, and locking washers instead of costs totaling $411.04 as 
shown in table 7. 

Table 7: Example of Incorrect Unit Costs in New System: 

Item description: Wing nuts; 
Quantity: 449; 
Costs assessed to job: Unit costs: $4,214; 
Costs assessed to job: Total: $1,892,086; 
Actual costs: Unit costs: $0.42; 
Actual costs: Total: $188.58. 

Item description: Screws; 
Quantity: 5,000; 
Costs assessed to job: Unit costs: $138; 
Costs assessed to job: Total: $690,000; 
Actual costs: Unit costs: $0.0392; 
Actual costs: Total: $196.00. 

Item description: Locking washers; 
Quantity: 900; 
Costs assessed to job: Unit costs: $294; 
Costs assessed to job: Total: $264,600; 
Actual costs: Unit costs: $0.0294; 
Actual costs: Total: $26.46. 

Total; 
Costs assessed to job: Total: $2,846,686; 
Actual costs: Total: $411.04. 

Source: Tobyhanna Army Depot. 

[End of table]

These officials informed us that they identified the problem with this 
order because they knew that the wing nuts, screws, and locking washers 
could not possibly cost $2.8 million. The officials stated that they 
were aware of only two possible reasons for these errors: (1) the 
contractor who developed LMP input incorrect unit-of-issue and/or price 
data into the system or (2) the unit-of-issue and/or price data did not 
transfer correctly from the SDS legacy system to LMP. 

* In another case, Tobyhanna officials stated that they did not realize 
until June 2004--almost 1 year after LMP was implemented--that LMP 
contained the wrong unit of issue for washers, which resulted in the 
system multiplying each order for washers placed with DLA by a factor 
of 100. This occurred because when the data were converted, the lowest 
unit of issue for the item was 100, while the shop floor employees 
requisitioned the items by individual item. For example, when a 
requisition for 800 washers was processed by the system, the system 
converted the 800 to 80,000 by multiplying the number ordered (800) 
times the unit of issue applicable for that order (100). Tobyhanna 
officials informed us that they had so many flat washers in inventory 
that it took about three truckloads to return the excess to the Defense 
Logistics Agency. 

The Army and the contractor acknowledged that there is a unit-of-issue 
and unit-price problem. In January 2005, they identified over 7,600 
items in LMP whose base unit of measure was incorrect. According to the 
officials, correcting this problem is not simple in all cases. For 
example, once the inventory item has been used in the system, those 
transactions for the item need to be reversed before the change can be 
made in the system that shows the correct base unit-of-issue value. The 
officials also noted that some of these items have literally thousands 
of transactions against them, since these problems have been present 
since the system was deployed in July 2003. 

To avoid the unit-of-issue and unit-price problem that occurred at 
Tobyhanna Army Depot, Army and contractor officials stated that it is 
critical to clean up the base unit-of-issue problems before the system 
is deployed at other sites. Accordingly, they have undertaken a program 
for the second deployment sites to help ensure that the items they will 
be adding to LMP that are not presently in the system have the proper 
base unit-of-issue values. Based on reports provided by the project 
office, a great deal of progress has been made on this initiative. For 
example, between August and November 2004, the number of items at 
Corpus Christi Army Depot with base unit-of-issue problems had dropped 
by 67 percent from 180 items to 60 items. It will be critical for Army 
to ensure that this activity is completed prior to converting the 
legacy data into LMP. 

Army's Efforts to Resolve LMP Problems Have Been Ineffective: 

We found that the significant flaws in requirements and testing 
management that adversely affected the initial development and 
implementation of LMP also hampered efforts to correct the operational 
difficulties experienced at Tobyhanna. To address these recurring 
problems, the Army and its contractor, Computer Sciences Corporation 
(CSC), developed a reasonable approach that was to be followed in 
addressing 722 stabilization items--system problems identified by the 
Army that must be resolved for LMP to provide the intended 
capabilities. The ability to effectively implement the necessary 
project management processes (commonly referred to as disciplined 
processes)[Footnote 16] is a key factor in reducing the project risks 
to acceptable levels[Footnote 17] and is the best indicator of a 
project's ability to meet its cost, schedule, and performance 
objectives. However, the Army has not been able to effectively 
implement those processes. Accordingly, the Army lacks reasonable 
assurance that (1) system problems experienced during the initial 
deployment and causing the delay of future deployments have been 
corrected and (2) LMP is capable of providing the promised system 
functionality. 

The Army and its contractor developed specific steps that were to be 
followed in addressing the stabilization items. From an overall 
perspective, the Army's described approach is aligned with steps one 
would anticipate to see in a project such as LMP. For the most part, 
each corrective action was to include the following steps: 

* Developing and documenting the requirements that were needed to 
resolve the problem being corrected and the test steps that should be 
followed to validate that a corrective action had been properly 
implemented, where appropriate. 

* Requiring an Army and CSC official to sign off on each corrective 
action. This sign off was used to help provide assurance that (1) the 
corrective action adequately addressed the problem identified in the 
stabilization item and was defined in the requirements document and (2) 
adequate testing had been performed. 

* Establishing an oversight board to review the corrective actions and 
ensure the stated processes had been followed, such as ensuring (1) 
proper documentation had been developed and (2) adequate testing had 
been conducted to provide reasonable assurance that the corrective 
action addressed the problem. Based on a review of the actions taken to 
address the problem, the oversight board would make a decision on 
whether the corrective action should be loaded into the production 
system. The oversight board included Army and CSC personnel. 

To ascertain if the Army's stated corrective action processes were 
being adhered to, we selected 80 of the 276 stabilization items for 
review that were shown as completed as of May 2004. Of the 80 items, we 
found that 32 items had been either merged with another corrective 
action or cancelled--meaning they should not have been included in the 
stabilization item inventory. For the remaining items,[Footnote 18] our 
analysis identified numerous instances in which the stated processes 
were not being followed. As a result, the Army was unable to provide 
evidence to show us that the stabilization items had been corrected. 
Our analysis disclosed the following: 

* The requirements documentation was inadequate or nonexistent for 24 
items. As previously noted, the lack of adequately defined requirements 
was one of the primary reasons LMP experienced problems when it was 
initially deployed in July 2003. Further, since requirements represent 
the blueprint that system developers and program managers use, it is 
unclear how the individuals assigned to correct a given problem would 
know exactly what needed to be fixed, e.g., the detailed business rules 
that needed to be implemented. 

* Testing documentation was insufficient for 33 items. In some cases, 
while there was documentation related to testing, the requirement had 
not been properly defined. Therefore, one could not ascertain if 
testing was properly conducted. For example, without documentation 
defining the business rules that should be used, a tester cannot 
develop the types of tests to ensure those business rules are 
implemented. As discussed previously, we found numerous problems with 
the implementation of the business rules that should be used for 
recognizing revenue and billing. 

Documentation is one means available to indicate that the stated 
processes are being followed. Without the appropriate documentation, 
the Army does not have reasonable assurance that all of the required 
steps are being followed and cannot validate that a stabilization item 
has been corrected. Further, if a planned corrective action does not 
resolve a stated problem, the documentation, particularly for 
requirements and testing, can be used to ascertain if the requirement 
was properly defined. In terms of testing, the documentation would help 
indicate if the test was properly designed based upon the stated 
requirement and if all of the attributes were tested as required. 

The following are specific examples of cases in which the problem 
resolution process was not followed and, therefore, the Army did not 
have reasonable assurance and could not demonstrate to us that these 
stabilization items were resolved: 

* One corrective action related to labor charges was shown as completed 
in July 2004. However, the Army could not provide documentation to 
substantiate that (1) requirements were developed, (2) government 
approval was received, and (3) oversight board approval was obtained. 
Although a testing document was provided, it was impossible to 
determine its adequacy since a corresponding requirements document was 
not available for review. 

* Another corrective action designed to resolve inaccurate entries in 
the general ledger was shown as completed on July 30, 2004. However, 
the Army could not provide documentation that indicated that the 
requirements were developed, testing was performed, and government 
approval was received. In addition, we found a note that indicated 
approval by the oversight board was not necessary, but no one could 
explain why the board's approval was not needed. 

In discussing these issues with Army officials, they acknowledged that 
although the problem resolution process was documented in May 2004, it 
was not until October 2004 that all items that were submitted to the 
oversight board were required to contain the requisite documentation. 
To ascertain if the project had effectively implemented the disciplined 
processes over other corrective actions subsequent to this later time 
frame, we reviewed 14 "trouble tickets"--specific LMP output problems 
identified by Tobyhanna users--that were reported as completed from 
October 2004 through January 2005. These trouble tickets were be 
resolved with essentially the same process used for stabilization items 
discussed previously. For example, the problems identified by Tobyhanna 
were expected to be reviewed to determine the causes and, if the 
problems were caused by the system, the following steps should be taken 
and documented: (1) identify the cause of the problem and the 
corrective action that needed to be taken (requirements), (2) perform 
adequate testing to ensure that the problem was fixed and did not 
adversely affect other LMP functionality, and (3) obtain approval by 
the contractor and LMP staff. In each case, we found that documentation 
was not available to validate that the process had been followed and 
the problem resolved. Examples are discussed below. 

* In October 2004, a program was developed and placed into operation to 
address billing problems reported by Tobyhanna. However, it did not fix 
the problem and generated so many errors that the resulting bills could 
not be released to the customers. In fact, because of the number of 
errors produced by this "fix," a stabilization item to clean up the 
erroneous data was generated. LMP officials stated they were unsure why 
this happened. Because of the large number of errors generated, it was 
clear that adequate testing had not been performed on this program 
before it was placed into production. 

* As noted previously, one of the major problems with LMP is its 
inability to properly recognize revenue and bill customers. One cause 
of this problem is that, in some cases, the system did not include an 
estimated value for the planned costs of customer orders that were 
being processed by Tobyhanna. When this condition occurred, improper 
amounts of revenue were being recognized and improper bills prepared. 
The Army recognized this problem early in the LMP deployment and 
developed a "fix" in September 2003. However, we found the problem was 
still continuing as late as January 2005, and the Army did not know why 
the September 2003 corrective action was not working as planned. If the 
Army had implemented the necessary disciplined processes, it would have 
likely been able to (1) identify the cause of the initial problem and 
(2) determine why the September 2003 corrective action was not working. 
In one case, this problem generated revenue of over $2.8 million that 
should not have been recognized, and in another case a customer was 
improperly billed for over $1 million. 

Conclusions: 

The Army depot maintenance group has not always achieved the goals 
envisioned under the working capital fund concept--that is, to operate 
like a business by developing and using effective methods to control 
operating costs, charging customers prices that result in break-even 
status at year-end, and ensuring that accurate and timely information 
is available to manage and report on financial management operations. 
Specific examples of management weaknesses in this area include the 
lack of proactive steps to control rising material costs, overcharging 
certain depot maintenance customers, and excessive amounts of year-end 
carryover, which could result in an activity group receiving funds from 
customers in one fiscal year but not performing the work until well 
into subsequent fiscal years, thus tying up funds for lengthy periods 
that could otherwise be put to more beneficial near-term use. Finally, 
DOD's inability to develop and implement systems solutions on time and 
with the promised capability appears to be a critical impediment in the 
planned transformation of depot operations. Flaws in the early stages 
of system development, including inadequate requirements management and 
system testing, are now manifested in significant LMP implementation 
problems at Tobyhanna. The failure to resolve these problems will 
continue to impede operations at Tobyhanna, and future deployment 
locations can expect to experience similar significant disruptions in 
their operations. 

Recommendations for Executive Action: 

To improve the business operations of the Army Working Capital Fund, we 
are making the following nine recommendations--two recommendations to 
the Secretary of Defense and seven recommendations to the Secretary of 
the Army: 

Analyzing Cost Increases: 

We recommend that the Secretary of the Army direct the Commander, Army 
Materiel Command, to develop and implement a systematic process for 
analyzing the depot maintenance activity group's material cost 
increases due to the price paid for material and material usage that 
would enable the Army to specifically identify and quantify all 
material cost drivers and take proactive steps to control these rapidly 
increasing material costs. 

Allocating Gains or Losses: 

We recommend that the Secretary of the Army direct the Commander, Army 
Materiel Command, to allocate depot gains and/or losses to the 
individual depots if a several-year trend shows that an individual 
depot consistently realizes gains or incurs losses. 

Reducing Excessive Carryover: 

We recommend that the Secretary of Defense take the following actions: 

* Direct the Under Secretary of Defense (Comptroller) to clarify DOD's 
written guidance for calculating carryover so that the actual amount of 
carryover associated with current and prior year orders is required to 
be included in the reported amount provided to the Congress and DOD. 

* Direct the Under Secretary of Defense (Comptroller) to issue written 
guidance that specifies that only current year orders are used in 
calculating the allowable amount of carryover for the Army depot 
maintenance activity group. 

We recommend that the Secretary of the Army direct the Commander, Army 
Materiel Command, to continue to comply with DOD's policy on not 
exceeding the year-end ceilings on the amount of year-end carryover 
ceilings. 

Improving LMP Implementation: 

We recommend that the Secretary of the Army direct the Commander, Army 
Materiel Command to take the following actions: 

* Delay implementation of LMP at the four remaining depots until the 
problems encountered by the Tobyhanna Army Depot with the system are 
resolved. 

* Implement the existing management procedures for ensuring the 
complete resolution of identified problems resulting from the 
implementation of LMP. 

* Reconcile all general ledger account balances between the legacy 
systems and LMP as of the date the Army deploys the system at the four 
depots that have not yet implemented the system. 

* Correct unit of issue and material pricing errors in LMP. 

Agency Comments and Our Evaluation: 

DOD provided written comments on a draft of this report. While DOD 
concurred with all the recommendations, it noted that our report did 
not fully address the effects of the Global War on Terrorism and the 
impact it had on maintenance workload at the Army depots. According to 
DOD, support for the war more than doubled the depot workload driving 
up personnel and material costs. As stated in our report, we agree that 
the war on terrorism has affected the depots' workload and impacted 
material and personnel costs. However, the war on terrorism does not 
affect the Army's (1) practice of spreading gains and losses across all 
depots, (2) calculation of reported actual carryover and the allowable 
amount of carryover, and (3) development of LMP. Regarding increasing 
material costs, we agree that the war does affect overall material 
costs. However, material costs per direct labor hour more than doubled 
from $29.09 in fiscal year 2000 to $65.23 in fiscal year 2005 and 
accounted for over 100 percent of the sales price increase that 
occurred during this same time period. Because of this significant 
increase, we still believe that the Army needs to identify all material 
cost drivers and take proactive steps to control them. 

In its comments, DOD concurred with the nine recommendations in the 
draft report. For most of the recommendations, DOD identified specific 
actions it will take to implement them. For example, DOD believes the 
Army should make every effort to control the growth of material costs. 
While DOD believes the increase in material costs are, in part, related 
to wartime demand increases, the Army will determine the factors 
affecting pricing. Also, the Army indicated that it has updated its 
budget formulation guidance stating that gains and losses should be 
allocated to the individual industrial installations if a several year 
trend shows that an installation has consistently realized gains or 
losses. Further, the Under Secretary of Defense (Comptroller) will 
issue guidance clarifying the present carryover policy concerning the 
calculation of actual carryover as well as the allowable amount of 
carryover. Finally, the Army concurred with our recommendations on LMP 
and recognized that it cannot move forward with future deployments to 
other depots until critical problems identified at the Tobyhanna Army 
Depot are corrected. 

We are sending copies of this report to the Chairmen and Ranking 
Minority Members of the Senate Committee on Armed Services; the 
Subcommittee on Readiness and Management Support, Senate Committee on 
Armed Services; the Subcommittee on Defense, Senate Committee on 
Appropriations; the House Committee on Armed Services; the Subcommittee 
on Readiness, House Committee on Armed Services; and the Ranking 
Minority Member, Subcommittee on Defense, House Committee on 
Appropriations. We are also sending copies to the Secretary of Defense, 
Secretary of the Army, and other interested parties. Copies will be 
made available to others upon request. Should you or your staff have 
any questions concerning this report, please contact Gregory D. Kutz, 
Managing Director, at (202) 512-9505 or [Hyperlink, kutzg@gao.gov], or 
William M. Solis, Director, at (202) 512-8365 or [Hyperlink, 
solisw@gao.gov], or Keith Rhodes, Director, at (202) 512-6412 or 
[Hyperlink, rhodesk@gao.gov]. Key contributors to this report are 
listed in appendix III. 

Sincerely yours,

Signed by: 

Gregory D. Kutz: 
Managing Director, Forensic Audits and Special Investigations: 

Signed by: 

William M. Solis: 
Director, Defense Capabilities and Management: 

Signed by: 

Keith A. Rhodes: 
Chief Technologist, Applied Research and Methodology: 
Center for Engineering and Technology: 

[End of section]

Appendixes: 

Appendix I: Scope and Methodology: 

To determine if the prices charged by the Army depot maintenance 
activity group have increased and, if so, why, we obtained and analyzed 
budget documents that provided information on cost factors such as 
material costs, overhead costs, and labor costs used in developing the 
prices from fiscal year 2000 to fiscal year 2005. We determined the 
reasonableness of the figures by reviewing and analyzing the cost 
factor data at each depot and the Army Materiel Command. We determined 
which factors caused the prices to increase the most and discussed the 
reasons for the price increases with officials at the Army Materiel 
Command and the five Army depots. In addition, we met with Army 
Materiel Command and depot officials to determine what actions they 
were taking to identify the causes for increasing material costs--a 
significant factor causing the majority of the prices to increase from 
fiscal year 2000 to fiscal year 2005. We also obtained information on 
the impact of increasing material costs on repairing certain weapon 
systems such as the Patriot missile, Chinook helicopter, and Bradley 
fighting vehicle. To assess the reliability of the data, we (1) 
reviewed and analyzed the factors used in determining the prices and 
(2) interviewed Army officials knowledgeable about the data. We 
determined that the data were sufficiently reliable for the purposes in 
this report. 

To determine how the Army depot maintenance activity group allocated 
reported gains or losses from fiscal year 2000 through fiscal year 
2004, we obtained and analyzed budget documents and accounting reports 
that provided information on prices, revenue, costs, annual operating 
results, and accumulated operating results for the depot maintenance 
activity group as well as the individual depots. When the activity 
group or depots reported gains or losses, we met with officials to 
determine (1) why the prices charged customers resulted in a reported 
gain or a loss and (2) whether the activity group allocated reported 
gains or losses incurred by a specific depot to that depot. When 
reported gains or losses were not allocated to the specific depot 
incurring them, we met with Army officials to determine why not. 

To determine if the Army depot maintenance activity group exceeded its 
carryover ceilings in the past and the reasons for exceeding the 
ceiling, we obtained and analyzed (1) the allowable amount of carryover 
for fiscal years 1996 through 2004 and (2) reported actual year-end 
carryover data for fiscal years 1996 through 2004. We also reviewed our 
prior report ([Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-01-
559]) on carryover, which provided information on the allowable amount 
of carryover as well as reported actual year-end carryover data. When 
the reported actual carryover exceeded the carryover ceiling, we met 
with responsible budgeting and/or accounting officials at the Army 
depots and the Army Materiel Command to ascertain why. We also reviewed 
customer orders to determine why the work was not completed on these 
orders by the end of the fiscal year. Further, through a review of 
documentation and discussions with officials at Army headquarters, the 
Army Materiel Command, the depots, and the Office of the Under 
Secretary of Defense (Comptroller), we determined (1) whether the Army 
was implementing DOD's new carryover policy and (2) how allowable 
carryover and actual reported carryover were being calculated under the 
new carryover policy. 

To determine if the Army encountered problems with the implementation 
of LMP at the Tobyhanna Army Depot, we (1) identified problems reported 
by system users at the Tobyhanna Army Depot to the system developers 
and implementers (Army Materiel Command and CSC), (2) analyzed actions 
taken by the Army and its contractor to resolve reported system 
problems, (3) analyzed system stabilization plan to determine whether 
system problems were sufficiently identified and understood to allow 
proper problem resolution, (4) analyzed Army's project management 
processes to determine whether underlying root causes of system 
problems were identified and appropriate system solutions were 
developed to resolve reported system problems, and (5) analyzed 
Tobyhanna's financial reports produced by the legacy system and LMP at 
the time of conversion to LMP to determine whether differences in 
account balances were identified and reconciled. We also met with 
officials from Tobyhanna Army Depot, Defense Finance and Accounting 
Service, CSC, and Army Materiel Command to discuss LMP problems we 
found with the implementation of LMP. We also reviewed our prior report 
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-615], which 
provided information on problems found with LMP's development and 
implementation at Tobyhanna and at the Communications and Electronics 
Command. 

We performed our work at the headquarters, Office of the Under 
Secretary of Defense (Comptroller) and the Office of the Secretary of 
the Army, Washington, D.C; Army Materiel Command, Virginia; the 
Tobyhanna Army Depot, Tobyhanna, Pennsylvania; the Letterkenny Army 
Depot, Chambersburg, Pennsylvania; the Corpus Christi Army Depot, 
Corpus Christi, Texas; the Anniston Army Depot, Anniston, Alabama; and 
the Red River Army Depot, Texarkana, Texas. We also visited Computer 
Sciences Corporation, Moorestown, New Jersey, the contractor 
responsible for developing and implementing LMP, to discuss with 
company officials the problems being experienced with the 
implementation of LMP at the Tobyhanna Army Depot. Most of the 
financial information in this report is budget data obtained from 
official Army budget documents. The accounting data used in this report 
were obtained from official Army accounting reports. We conducted our 
work from June 2004 through April 2005 in accordance with U.S. 
generally accepted government auditing standards. We requested comments 
on a draft of this report from the Secretary of Defense or his 
designee. DOD provided written comments, and these comments are 
presented in the Agency Comments and Our Evaluation section of this 
report and are printed in appendix II. 

[End of section]

Appendix II: Comments from the Department of Defense: 

OFFICE OF THE UNDER SECRETARY OF DEFENSE: 
COMPTROLLER (Program/Budget): 
1100 DEFENSE PENTAGON: 
WASHINGTON, DC 20301-1100: 

JUN 13 2005: 

Mr. Gregory Kutz, Director, Financial Management and Assurance: 
Mr. William Solis, Director, Defense Capabilities and Management: 
U.S. General Accounting Office: 
Washington DC 20548: 

Dear Mr. Kutz and Mr. Solis: 

This is the Department of Defense (DoD) response to the General 
Accounting Office (GAO) report, "ARMY DEPOT MAINTENANCE: INEFFECTIVE 
OVERSIGHT OF DEPOT MAINTENANCE OPERATIONS AND SYSTEM IMPLEMENTATION 
EFFORTS," dated, May 11, 2005 (GAO Code 05-441). The Department concurs 
with comment regarding the recommendations identified in the report and 
is taking action to comply with them. Additional comments are provided 
in the enclosure. 

While the Department concurs with the recommendations, we note in our 
comments that the report does not fully address the effects of the 
Global War on Terrorism and the significant impact it has had on 
maintenance workload at the Army depots. Support for the war has more 
than doubled depot workload driving significant cost increases in 
personnel and direct material. The Department has identified these war- 
related factors and realizes that these unusual circumstances generate 
abnormal conditions that must be considered during budget formulation, 
budget execution or any performance evaluation. The Department 
recognizes the challenges the Army is confronting during this time of 
war. Consideration of these realities is included when our management 
decisions are made. 

Sincerely, 

John P. Roth: 
Deputy Comptroller: 

Enclosure: As stated: 

GAO DRAFT REPORT DATED MAY 11, 2005 GAO-05-441 (GAO CODE 192134): 

"ARMY DEPOT MAINTENANCE: INEFFECTIVE OVERSIGHT OF DEPOT MAINTENANCE 
OPERATIONS AND SYSTEM IMPLEMENTATION EFFORTS"

DEPARTMENT OF DEFENSE COMMENTS TO THE GAO RECOMMENDATIONS: 

RECOMMENDATION 1: The GAO recommended that the Secretary of the Army 
direct the Commander, Army Materiel Command, to develop and implement a 
systematic process for analyzing the depot maintenance activity group's 
material cost increases due to the price paid for material and material 
usage that would enable the Army to specifically identify and quantify 
all material cost drivers and take proactive steps to control these 
rapidly increasing material costs. (p. 48/Draft Report): 

DOD RESPONSE: Concur with comment. The Department believes the Army 
should make every effort to control the growth of materiel costs. 
However, the Department believes the increases in materiel costs in 
depot repair are in part related to wartime demand increases. Hence, 
increased workload, degraded condition of the components that are being 
repaired, and accelerated delivery schedules required under wartime 
operations are the main factors for increased materiel costs. The Army 
will determine the factors affecting pricing. 

RECOMMENDATION 2: The GAO recommended that the Secretary of the Army 
direct the Commander, Army Materiel Command, to allocate depot gains 
and/or losses to the individual depots if a several year trend shows 
that an individual depot consistently realizes gains or incurs losses. 
(p. 49/Draft Report): 

DOD RESPONSE: Concur. The Army has added guidance to the FY 2007 Budget 
Estimate Submission Resource Formulation Guidance for use by the U.S. 
Army Materiel Command stating that gains and losses should be allocated 
to the individual industrial installation incurring the gains and 
losses if a several year trend shows that an installation has 
consistently realized gains or losses. OUSD(C) will review gain and 
loss allocation during the upcoming budget review. 

RECOMMENDATION 3: The GAO recommended that the Secretary of Defense 
direct the Under Secretary of Defense (Comptroller) to clarify DoD's 
written guidance for calculating carryover so that the actual amount of 
carryover associated with current and prior year orders is required to 
be included in the reported amount provided to the Congress and DoD. 
(p. 49/Draft Report): 

DOD RESPONSE: Concur. The Under Secretary of Defense (Comptroller) will 
issue revised guidance that will clarify the present carryover policy 
stating that both current and prior year orders should be included in 
the reported carryover amount. 

RECOMMENDATION 4: The GAO recommended that the Secretary of Defense 
direct the Under Secretary of Defense (Comptroller) to issue written 
guidance that specifies that only current year orders are used in 
calculating the allowable amount of carryover for the Army depot 
maintenance activity group. (p. 49/Draft Report): 

DOD RESPONSE: Concur. The Under Secretary of Defense (Comptroller) will 
include clarification of the present carryover policy stating that only 
current orders should be included when calculating the allowable amount 
of carryover for each business area in its written guidance related to 
recommendations 3 and 4. 

RECOMMENDATION 5: The GAO recommended that the Secretary of the Army 
direct the Commander, Army Materiel Command, to continue to comply with 
DoD's policy on not exceeding the year-end ceilings on the amount of 
year-end carryover ceilings. (p. 49/Draft Report): 

DOD RESPONSE: Concur with comment. It is Department policy to not 
exceed the year-end carryover target. Excessive carryover can indicate 
a production limitation, or that the work may be funded ahead of need. 
However, because the Department is waging a War on Terrorism, 
circumstances not normally experienced at the Army depots have 
transpired and must be considered when analyzing carryover. 

The Department closely monitors the Army depot maintenance carryover. 
The Army did not exceed their carryover ceiling in FY 2004 and is 
projected to be under the carryover ceiling in FY 2005 It is important 
to note that strict application of carryover constraints, particularly 
during wartime, can be disruptive to operations at industrial 
facilities and can ultimately impact equipment readiness. 

RECOMMENDATION 6: The GAO recommended that the Secretary of the Army 
direct the Commander, Army Materiel Command (AMC) to delay 
implementation of the Logistics Modernization Program at the four 
remaining depots until the problems encountered by the Tobyhanna Army 
Depot with the system are resolved. (p. 50/Draft Report): 

DOD RESPONSE: Concur. Army recognizes that it can not move forward with 
future deployment to other depots until critical problems identified at 
Tobyhanna Army Depot (TYAD) are corrected. Logistics Modernization 
Program (LMP) is currently in pilot deployment phase and is undergoing 
stabilization and transition. As part of the stabilization process, 
exit criteria for the pilot deployment are being developed and will be 
approved by Commanding General, AMC. AMC will not deploy LM? beyond the 
pilot phase until exit criteria are met and LMP is certified by the 
Army Audit Agency as Federal Financial Management Improvement Act 
(FFMIA) compliant. 

RECOMMENDATION 7: The GAO recommended that the Secretary of the Army 
direct the Commander, Army Materiel Command, to implement the existing 
management procedures for ensuring the complete resolution of 
identified problems resulting from the implementation of its Logistics 
Modernization Program. (p. 50/Draft Report): 

DOD RESPONSE: Concur. Army agrees with GAO's findings and acknowledges 
that process compliance is crucial. In October 2004, the LMP program 
management office initiated actions to ensure that acceptable 
management controls were in place and processes are adhered to. 

RECOMMENDATION 8: The GAO recommended that the Secretary of the Army 
direct the Commander, Army Materiel Command, to reconcile all general 
ledger account balances between the legacy systems and its Logistics 
Modernization Program as of the date the Army deploys the system at the 
four depots that have not yet implemented the system. (p. 50/Draft 
Report): 

DOD RESPONSE: Concur. The Army agrees that all general ledger account 
balances will be reconciled between the legacy systems and the LMP 
solution as of the date LMP is deployed to the remaining Army depots. 

RECOMMENDATION 9: The GAO recommended that the Secretary of the Army 
direct the Commander, Army Materiel Command, to correct unit of issue 
and material pricing errors in the Logistics Modernization Program. (p. 
50/Draft Report): 

DOD RESPONSE: Concur. Actions are underway to resolve/fix existing 
errors. 

[End of section]

Appendix III: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Gregory D. Kutz, (202) 512-9505; 
William M. Solis, (202) 512-8365; 
Keith Rhodes, (202) 512-6412: 

Acknowledgments: 

Staff who made key contributions to this report were Richard Cambosos, 
Francine DelVecchio, Chris Martin, Keith McDaniel, Mike Peacock, Janine 
Prybyla, Greg Pugnetti, Chris Rice, Hal Santarelli, Darby Smith, and 
Ron Tobias. 

(192134): 

FOOTNOTES

[1] DOD policy establishes a ceiling for the amount of work that can be 
carried over from one fiscal year to the next. 

[2] Using the Gross Domestic Product price index updated in January 
2004, if the fiscal year 2000 composite sales price is converted to 
fiscal year 2005 dollars, the composite sales price would be $121.15 
and the increase would be 21 percent. 

[3] The composite sales price is the average price that customers must 
pay for a direct labor hour of work and is used for budgeting purposes. 
The average price includes labor, material, and overhead costs. For 
actual work performed, the activity group develops individual sales 
prices, such as the price per hour to perform work on the Apache 
helicopter, and bills customers based on those individual prices. 

[4] Other cost factors included in developing the sales price decreased 
resulting in material costs accounting for over 100 percent of the 
sales price increase. 

[5] GAO, DOD Business Systems Modernization: Billions Continue to Be 
Invested with Inadequate Management Oversight and Accountability, GAO- 
04-615 (Washington, D.C.: May 27, 2004). 

[6] Using the Gross Domestic Product price index updated in January 
2004, if the fiscal year 2000 composite sales price is converted to 
fiscal year 2005 dollars, the composite sales price would be $121.15 
and the increase would be 21 percent. 

[7] The composite sales price is the average price that customers must 
pay for a direct labor hour of work and is used for budgeting purposes. 
The average price includes labor, material, and overhead costs. For 
actual work performed, the activity group develops individual sales 
prices, such as the price per hour to perform work on the Apache 
helicopter, and bills customers based on those individual prices. 

[8] Recapitalization is the rebuild and selected upgrade of currently 
fielded weapons systems to ensure operational readiness and rebuild to 
like-new condition. The objectives of this program are to (1) extend 
the service life of selected weapon systems; (2) reduce the rate of 
growth of operation and support costs for recapitalized weapon systems; 
(3) improve the reliability, maintainability, safety, and efficiency of 
the weapon systems; and (4) enhance the warfighting capabilities of 
recapitalized weapon systems where needed. 

[9] Fiscal year 2000 base operations and maintenance mission overhead 
data were not available for all depots. 

[10] LMP implementation problems at the Tobyhanna Army Depot affected 
its fiscal year 2003 and 2004 AOR. LMP problems are discussed later in 
this report. 

[11] The Air Force is the only military service that included its 
contract depot maintenance operation in its working capital fund. To 
reflect this difference, DOD established a 4.5-month carryover standard 
to account for the additional administrative functions associated with 
awarding contracts. The Air Force is currently taking its contract 
depot maintenance operation out of the working capital fund and plans 
to complete this action by the end of fiscal year 2007. 

[12] GAO, Defense Working Capital Fund: Improvements Needed for 
Managing the Backlog of Funded Work, GAO-01-559 (Washington, D.C.: May 
30, 2001). 

[13] The amount of allowable carryover using the outlay rate follows. 
For example, customers order $100 of work, which is financed with a 
specific appropriation. If the outlay rate for this appropriation at 
the appropriation level is 60 percent, then this would result in the 
depot maintenance activity group being allowed to carry over $40 ($100 
- $60 [$100 x 60 percent] = $40). 

[14] GAO, DOD Business Systems Modernization: Billions Continue to Be 
Invested with Inadequate Management Oversight and Accountability, GAO- 
04-615 (Washington, D.C.: May 27, 2004). 

[15] DOD defines unit of issue as the quantity of an item, such as each 
number, dozen, gallon, pair, pound, ream, set, or yard. 

[16] Disciplined processes include a wide range of activities including 
project planning and management, requirements management, risk 
management, quality assurance, and testing. 

[17] Acceptable levels refer to the fact that any systems acquisition 
effort will have risks and will suffer the adverse consequences 
associated with defects in the processes. However, effective 
implementation of disciplined processes reduces the possibility of the 
potential risks actually occurring and prevents significant defects 
from materially affecting the cost, timeliness, and performance of the 
project. 

[18] Five of the remaining 48 items related to training, documentation, 
and data issues and, therefore, there were no requirements or testing 
related to these items. Our analysis is based on a review of 43 
stabilization items. 

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