Army Depot Maintenance
Ineffective Oversight of Depot Maintenance Operations and System Implementation Efforts Gao ID: GAO-05-441 June 30, 2005The 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.
GAO identified four management weaknesses that are impairing the efficiency and effectiveness of Army depot maintenance operations. The activity group's average sales price increased from $111.87 per hour for fiscal year 2000 to $147.07 per hour for fiscal year 2005--a 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 Army's 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 DOD's 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 Army's 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 depot's ability to accurately set prices. GAO's 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.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-05-441, Army Depot Maintenance: Ineffective Oversight of Depot Maintenance Operations and System Implementation Efforts
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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 group‘s average sales price increased from $111.87 per hour
for fiscal year 2000 to $147.07 per hour for fiscal year 2005”a 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
Army‘s 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 DOD‘s 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 Army‘s 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 depot‘s ability to accurately set
prices. GAO‘s 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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