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Defense Management: Defense-Wide Working Capital Fund Agencies Apply Most Key Operating Principles but Should Improve Pricing Transparency

GAO-20-65 Published: Nov 01, 2019. Publicly Released: Nov 01, 2019.
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Fast Facts

The Department of Defense tries to minimize costs by consolidating some services—such as IT or payroll—used by multiple DOD agencies. The Defense-Wide Working Capital Fund finances 3 agencies within DOD that charge their customers—including the military departments—when providing goods and services.

We found the agencies set prices designed to recover their costs and break even. However, their largest customers said they don’t receive detailed information about costs included in final prices they are charged or know how prices are determined.

We recommended the agencies share more pricing information with customers.

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Aerial view of the Pentagon

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Highlights

What GAO Found

The Defense Finance and Accounting Service (DFAS), Defense Information Systems Agency (DISA), and Defense Logistics Agency (DLA) use a combination of approaches to set rates that are intended to recover their costs and equitably allocate costs to customers. However, DFAS, DISA, and DLA have not provided transparent pricing to the military departments, which are their largest customers. Each agency annually develops budget proposals designed to recover projected costs and account for gains or losses from prior years. DFAS, DISA, and DLA have taken steps intended to establish an equitable pricing methodology. For example, DLA changed its pricing method for distribution services to align the rates customers pay with DLA's costs of providing the service. However, customers from the military departments said they lack visibility into the factors that determine their overall costs at one or more of the three defense agencies, including how indirect costs are allocated and included in the rates they are charged. GAO's review of cost and rate documentation provided to the military departments also found that they provide high-level information, such as the rates and estimated workloads, and did not include details about the types of costs included or how they are calculated. Specifically,

(1)  DFAS informational briefings do not describe the types of costs included in rates and how those costs are calculated and allocated. As a result, customers from the Army and Navy said they were confused about why declines in their use of DFAS's services have not resulted in reduced costs.

(2) DISA does not include in its documentation the methodology it uses to calculate its rates, making it difficult for officials from the Air Force to determine how they can manage their costs with DISA.

(3) DLA does not provide detailed information on the costs included in its rates, making it difficult for customers from the Navy and Air Force to determine how to lower their costs or, in the case of the Air Force, understand the cost implications of DLA's newly announced pricing initiative.

Because DFAS, DISA, and DLA share only high-level information on their rate-setting methodologies, the military departments have been limited in their abilities to understand and manage the costs they pay for the services they obtain. By providing more complete information on rate setting, including the calculation and use of costs, DFAS , DISA , and DLA could help their customers better manage their costs and make more informed budgeting decisions. Improved transparency could also help customers anticipate how potential changes to the assumptions underlying rates could affect future costs.

GAO also found that DFAS, DISA, and DLA clearly delineate roles and responsibilities, measure performance, and assess resource requirements and customer needs for goods and services, as called for by the three remaining key operating principles for effective working capital fund management. As a result, these agencies are positioned to promote a clear understanding of who will be held accountable for specific tasks or duties, reduce the risk of mismanaged funds, measure their operational performance and identify opportunities to improve performance, and use resources most effectively.

Why GAO Did This Study

As DOD continues to focus its resources on improving military readiness and modernizing its forces, it seeks to minimize costs associated with its business operations. DFAS, DISA, and DLA are financed through the Defense-Wide Working Capital Fund (DWWCF). Collectively, they provide shared services and goods to their customers, including finance and accounting services; information technology services; and fuel provision and inventory management.

Senate Report 115-262, accompanying a bill for the National Defense Authorization Act for Fiscal Year 2019, includes a provision that GAO evaluate the activities DWWCF agencies fund through overhead charges and fees collected from customers. This report evaluates the extent to which DFAS, DISA, and DLA (1) have a process for setting rates to recover costs and provide transparent pricing to customers and (2) clearly delineate roles and responsibilities, measure performance, and assess resource requirements and customer needs. GAO reviewed relevant sections of DOD's Financial Management Regulation and agency documentation and interviewed officials from DFAS, DISA, and DLA and the military departments in comparing the agencies' management practices to the key operating principles for effective management of working capital funds.

Recommendations

GAO recommends that DFAS, DISA, and DLA provide more complete information to customers on their rate-setting methodologies. DOD concurred with GAO's recommendations.

Recommendations for Executive Action

Agency Affected Recommendation Status
Defense Finance and Accounting Service The Secretary of Defense should ensure that the Director of the Defense Finance and Accounting Service provides customers with more complete information on the agency's rate-setting methodologies in rate documentation, briefings, and other forums where rates are discussed, including the costs included in rates, how those costs are calculated, and how changes in DFAS's workload affect customers' overall costs. (Recommendation 1)
Closed – Implemented
The Department of Defense (DOD) concurred with GAO's recommendation and stated that the Defense Finance and Accounting Service (DFAS) provides detailed cost and rate information to customers each year in multiple venues and would reach out to customers to obtain additional details to understand how to fill the information gap regarding rate transparency. In April 2020, DOD provided to GAO DFAS's corrective action plan, which stated that DFAS Client Executives would ask the Army, Navy, and Marine Corps lead Financial Managers for feedback on additional details needed to better plan for the DFAS bill. DFAS would then incorporate this additional detail into the customer bill briefings for the President's Budget Request for fiscal year 2022. DFAS also stated that the Air Force had indicated that DFAS provides appropriate transparency, but had requested that DFAS provide its bill estimate earlier, which DFAS had agreed to do. In August 2020, DFAS presented customer bill briefings for the fiscal year 2022 President's Budget Request to officials from the Departments of the Army and the Navy. GAO compared the format and contents of those briefing to earlier briefings from 2017 and 2018, respectively, and found that they provided more detailed information about billing rates and highlighted changes from previous years. DFAS also included documentation of interactions with officials from all three military departments that show outreach by Client Executives, efforts to incorporate feedback from Army and Navy on briefing content, and confirmation they provided the Air Force its bill earlier, as requested. As a result of these actions, DFAS has taken the steps needed to address GAO's recommendation.
Defense Information Systems Agency The Secretary of Defense should ensure that the Director of the Defense Information Systems Agency provides customers with more complete information on the agency's rate-setting methodologies in rate documentation, briefings, and other forums where rates are discussed, including the costs included in rates, how those costs are calculated, and how changes in DISA's workload affect customers' overall costs. (Recommendation 2)
Closed – Implemented
The Department of Defense (DOD) concurred with GAO's recommendation and stated that the Defense Information Systems Agency (DISA) will make every effort to improve dialogue with customers to ensure the correct people have a full understanding of DISA's methodologies used to develop its rates. In May 2020, DOD provided an updated status on this recommendation. It stated that part of the DISA Chief Financial Officer's (CFO) outreach entailed using the agency's regular and recurring "Drumbeat engagements" with the military departments to present detailed information on DISA's rates. Between May and October 2020, DISA conducted Drumbeat meetings with the Navy/Marine Corps, Air Force, and Army. Briefing slides and summaries from those meetings show that DISA discussed rates and other budget items with those customers. Additionally, the rate books for fiscal years 2020 and 2021 included more detailed information than the rate book for fiscal year 2019 regarding the different rates that DISA charges for its services and how rates are developed. As a result of these actions, DISA has taken the steps needed to address GAO's recommendation.
Defense Logistics Agency The Secretary of Defense should ensure that the Director of the Defense Logistics Agency provides customers with more complete information on the agency's rate-setting methodologies in rate documentation, briefings, and other forums where rates are discussed, including the costs included in its rates, how it calculates those costs, and how and when proposed changes to its rate-setting methodologies will affect customers' overall costs. (Recommendation 3)
Closed – Implemented
The Department of Defense (DOD) concurred with GAO's recommendation and stated that the Defense Logistics Agency (DLA) would include more detailed information in its annual rate briefing to the Office of the Under Secretary of Defense (Comptroller) and the services regarding what is in its costs, how it calculates costs, and how and when changes would impact customers' overall costs. In addition, DLA stated that it conducts semiannual Cost Summits and periodic DLA/Service Days with customers. In September 2020, DLA presented its annual rate briefing to officials representing the DOD Comptroller, the military services, and other defense agencies. This workload and pricing rates brief for DLA Program Budget Review (PBR) 2022 provided more information to customers about how DLA's budget is developed and details about how rates are developed as compared to the PBR 2020 briefing that GAO had previously reviewed. For example, DLA Energy presented information on the different components of the standard price for a barrel of oil, such as refined product and transportation costs, rather than just the price itself. DLA also reported that attendees requested and were provided additional information on some calculations and analyses at the meeting. As a result of these actions, DLA has taken the steps needed to address GAO's recommendation.

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Topics

Actual costsAdministrative costsClassified defense informationContract managementDefense agenciesDefense logisticsEnergy managementFinancial managementInformation technologyManagement reviewsMilitary departmentsMilitary materielOverhead costsPerformance measurementProgram transparencyStrategic goalsSupply chain managementTelecommunicationsWorking capital fund