1 for the locations of Corps civil works divisions and  districts. Administrative offices, such as resource management, security, and  general counsel, provide general administrative support. Technical  offices, such as engineering, construction, and real estate, provide  technical services to customers on specific projects. Corps districts vary widely in the number of full-time equivalents they  employ for civil works activities. Only district overhead is charged to projects; headquarters and division  overhead is not. The Corps Uses a MultiStep Process to Build Overhead Costs into Its Projects

The Corps uses a multistep process to build overhead costs into projects. Second, the Corps calculates annual overhead rates for the  two cost categories as part of its annual budget process. Third, the Corps  bills projects for overhead costs based on the number of hours its staff  charge to projects. Finally, the Corps monitors overhead costs and makes  any necessary adjustments to overhead rates. Corps Policy Establishes Two Categories of Costs to Calculate Overhead

Corps policy establishes two categories of costs to calculate overhead— general and administrative (G&A) overhead expenses associated with  district administrative offices and technical overhead expenses  associated with district technical offices. These two categories serve as  the foundation for building district overhead into projects. 2. Overhead charges are  applied to each project based on the hours charged by Corps staff;  overhead charges are not applied to hours worked by contracted labor,  which can represent a substantial amount of work. The Corps reports that  it contracts out most of its design work and all of its construction work to  private sector entities, such as architectural and engineering firms and  construction companies. Based on these reviews, division  commanders are responsible for ensuring that appropriate action is taken,  such as adjusting overhead rates, reducing expenditures, or providing  rebates to customers. The Corps is able to monitor overhead because it tracks overhead costs  separately from other project costs in its financial management system by  using specific accounting codes to identify overhead. Half of the 16 highest paying customers we  interviewed said overhead information is generally accessible and  understandable; 1 of the 16 said overhead information is not accessible  and understandable; and the remaining 7 had no opinion on accessibility  and/or understandability. For those customers who offered no opinion on  one aspect of overhead information, such as accessibility, they generally  offered a positive opinion on the other aspect of information,  understandability. In addition, customers we  interviewed provided some common views on overhead information,  stating that overhead information is important, but that overall project  costs are more important than overhead costs. Customers’ Views Varied on Whether Overhead Information Is Accessible and Understandable

Customers’ views fell into three broad categories: (1) overhead  information is generally accessible and understandable, (2) overhead  information is not accessible and understandable, and (3) no opinion on  whether overhead information is accessible and/or understandable. For example, one nonfederal customer said overhead  information is accessible and easy to understand because the information  is included in its project agreement with the Corps, which is signed prior  to the start of a project. Another federal customer we interviewed said that  the Corps provides overhead information in monthly bills and that this  information was also understandable. Three of the seven highest paying customers stated that overhead  information is accessible but had no opinion on whether the  information is understandable. Another nonfederal customer told us that he has  requested and received overhead information from the Corps, but he  offered no opinion on understanding overhead information. For example, one federal customer said that  while he has not requested overhead information, the Corps explained  how it builds overhead into its projects during project meetings and  that he understood this information. Good communication is important to understanding overhead  information. Because the report does not contain any  recommendations, the department did not provide written comments. We received a  demonstration on how the Corps’ financial management system is  designed to track overhead separately from other project costs, reviewed  examples of Corps billings to customers provided by the Corps and some  Corps customers, reviewed Corps financial management system  documentation, interviewed selected Corps customers, and interviewed  Corps officials knowledgeable about how the Corps tracks and bills  overhead costs. Appendix II: Structured Interview Administered to U.S. Army Corps of Engineers’ Customers

We conducted structured interviews with 16 Corps customers that the  Corps identified as the highest paying federal and highest paying  nonfederal customers in fiscal year 2012—one in each category from all  eight Corps divisions. 4. 8.
Why GAO Did This Study

The Corps spends billions of dollars annually on projects in its Civil Works program. Part of the cost of doing business with the Corps involves paying for overhead--costs that do not directly relate to a specific project or activity but more generally support agency operations. Overhead costs are included in the amount that Congress appropriates for specific Corps projects and the amount that customers pay for Corps' services. The Corps provides services to customers including other Department of Defense units, federal agencies, state and local governments, Indian tribes, and foreign governments. The Corps' Civil Works program is organized around its headquarters, 8 divisions, and 38 districts nationwide. Only district overhead is charged to projects; overhead for headquarters and divisions is not.
GAO was asked to review the Corps' process for building overhead costs into projects. This report examines (1) how the Corps builds overhead costs into its projects and (2) customers' views on overhead information. To accomplish this, GAO reviewed Corps' documentation of its overhead and billing processes, interviewed officials at Corps headquarters, 2 divisions, and 4 districts based on geographic location, and interviewed 16 of the highest paying federal and nonfederal Corps' customers in fiscal year 2012. The results of these interviews cannot be generalized to all customers but provided insights.
GAO is not making recommendations in this report. The Department of Defense did not provide comments.

What GAO Found

The U.S. Army Corps of Engineers (Corps) uses a multistep process to build overhead costs into projects. At the foundation of this process, Corps policy establishes two categories of costs to calculate overhead--general and administrative overhead expenses associated with district administrative offices, such as resource management, and technical overhead expenses associated with district technical offices, such as engineering. Using these two categories as a starting point, the Corps next calculates overhead rates as part of its annual budget process. Specifically, each district administrative and technical office develops operating budgets with overhead estimates, which are then consolidated and routed through district and division management, resulting in a final division-wide operating budget and overhead rates. The Corps then bills projects for overhead costs based on the number of hours its staff charge to projects. Overhead charges are not applied to hours worked by contracted labor, which represent a substantial amount of work. The Corps reports that it contracts out most of its design work and all of its construction work to private sector entities, such as architectural and engineering firms and construction companies. Finally, the Corps periodically monitors overhead costs and makes any necessary adjustments such as changing overhead rates, reducing expenditures, or providing rebates to customers. The Corps is able to monitor overhead because it tracks overhead costs separately from other project costs in its financial management system through specific overhead accounting codes.
Corps customers' views varied on whether overhead information is accessible and understandable. Half of the 16 highest paying customers GAO interviewed said overhead information is generally accessible and understandable. For example, one federal customer said that the Corps provides overhead information in monthly bills, and the information is understandable. One of the 16 highest paying customers said overhead information is not accessible and understandable. For example, this nonfederal customer and the Corps could not agree on whether overhead information requested by the customer had been provided, leaving the customer unable to understand Corps costs, including overhead information. The remaining 7 highest paying customers had no opinion on accessibility and/or understandability. While offering no opinion on one aspect of overhead information, such as accessibility, they generally offered a positive opinion on the other aspect, understandability. For example, one federal customer had no opinion on whether the information was accessible but said that the information was understandable because the Corps explains how it builds overhead into its projects during project meetings. Conversely, a nonfederal customer told GAO that he has requested and received overhead information from the Corps--stating that overhead information is accessible, but he offered no opinion on understanding it. Among customers GAO interviewed, there were common views about overhead information. Specifically, some customers indicated that overhead information is important, but that overall project costs are more important than overhead costs. They also said that good communication is important to understanding overhead information.