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. 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; 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. This  resulted in an increase in material costs. 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. 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. Some carryover is necessary at fiscal  year-end if working capital funds are to operate efficiently and effectively. As we reported in May 2004,  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. 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. 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 customer  orders to determine why the work was not completed on these orders by  the end of the fiscal year. 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.
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.