From fiscal years 2006 through 2012, Industrial Operations’ total actual  carryover increased from $2.3 billion to $5 billion, reaching a high of   $5.8 billion—12.7 months of work—at the end of fiscal year 2011.1 shows the Army Industrial Operations actual adjusted carryover,  allowable carryover, and the amount over (or under) the allowable  carryover for fiscal years 2006 through 2012. Budgeted Information on Carryover Underestimated Actual Carryover Information, but the Army Began Taking Action to Align These in Fiscal Year 2012

The Army’s budget estimates for its Industrial Operations carryover were  consistently less than the actual carryover amounts each year from fiscal  years 2006 through 2012. For the 7-year period, the Industrial Operations  actual carryover exceeded budgeted carryover by at least $1.1 billion  each year. This was primarily because (1) the Army underestimated its  Industrial Operations new orders received from customers for each of the  7 years and (2) for fiscal year 2011, Industrial Operations performed over  $1 billion less work than budgeted. During fiscal year 2013, the Army plans to better align the customers’  budgets with the Industrial Operations budgets. However, the Army has not yet  developed a timetable for implementing the actions identified by the  working group. Army officials stated that the implementation of LMP at the Industrial  Operations activities in fiscal years 2009 and 2011 contributed to the  fiscal year 2011 actual revenue falling below the prior year and budgeted  amounts. Carryover grew in fiscal year 2011 because Industrial  Operations received more orders ($7.5 billion) than work it performed  ($5.5 billion). In analyzing these  workloads, we found three primary causes for the carryover: (1) the scope  of work was not well defined, (2) parts needed to perform the work were  not available, and (3) revenue recognition business rules were changed  as part of the implementation of LMP. As discussed previously, the implementation of LMP changed the  revenue recognition business rules and resulted in increased carryover in  fiscal years 2011 and 2012. Because of the size of the carryover at the end of fiscal year 2011, the  Army recognized that it needed to improve its management of carryover,  and in April 2012, the Army formed a working group. Implement the working group’s planned actions to improve the  budgeting for new orders to be received by Army Industrial  Operations. In its comments,  which are reprinted in appendix II, DOD concurred with the three  recommendations and cited actions planned or under way to address  them. To determine whether, and to what extent, Army Industrial Operations’  budget information on carryover from fiscal years 2006 through 2012  approximated actual information, and if not, whether the Army took  actions to align the two, we obtained and analyzed Industrial Operations  reports that contained information on budgeted and reported actual new  orders, revenue, and actual carryover data for fiscal years 2006 through  2012. To determine whether, and to what extent, Army Industrial Operations’  carryover increased during fiscal years 2011 and 2012, and causes for  the carryover for those 2 fiscal years, we met with responsible officials  from Army headquarters, AMC, the Office of the Assistant Secretary of  the Army (Acquisition, Logistics and Technology), the Life Cycle  Management Commands (LCMC), and four depots that had orders with  high dollar amounts of fiscal year 2011 carryover to identify contributing  factors that caused the carryover.
Why GAO Did This Study

The 13 Army Industrial Operations activities support combat readiness by providing depot maintenance and ordnance services to keep Army units operating worldwide. To the extent that Industrial Operations does not complete work at year-end, the work and related funding will be carried over into the next fiscal year. Carryover is the reported dollar value of work that has been ordered and funded by customers but not completed by Industrial Operations at the end of the fiscal year. As requested, GAO reviewed issues related to Army Industrial Operations carryover. GAOs objectives were to determine whether, and to what extent, Army Industrial Operations (1) actual carryover exceeded allowable carryover for fiscal years 2006 through 2012; (2) budget information on carryover approximated actual information for fiscal years 2006 through 2012, and if not, whether the Army took actions to align the two; and (3) carryover increased during fiscal years 2011 and 2012 and causes for the carryover. To address these objectives, GAO reviewed relevant carryover guidance, analyzed carryover and related data for Industrial Operations, and interviewed Army officials.

What GAO Found

From fiscal years 2006 through 2012, Army's Industrial Operations' actual carryover was under the allowable amounts in 5 of the 7 fiscal years. However, carryover more than doubled during that period, reaching a high of $5.8 billion in fiscal year 2011. Army officials stated that fiscal year 2011 was an abnormal year because Industrial Operations (1) received more orders than it had ever received--$7.5 billion in new orders--and (2) implemented a system called the Logistics Modernization Program (LMP) that changed the business rules for recognizing revenue and therefore resulted in carryover being higher than it would have been under the prior system. Army officials anticipate carryover decreasing in fiscal year 2013. According to the Army fiscal year 2014 budget, the Army expects carryover to be under $4 billion at the end of fiscal year 2013.
The Army's budget estimates for carryover were less than the actual carryover amounts each year beginning in fiscal year 2006--at least $1.1 billion each year. GAO's analysis showed that the actual amounts of carryover exceeded budgeted amounts primarily because (1) the Army underestimated new orders to be received from customers for all 7 years reviewed, particularly with respect to procurement funded orders, and (2) for fiscal year 2011, Industrial Operations performed over $1 billion less work than budgeted because Army officials were unaware of the impact that LMP would have on revenue when developing the fiscal year 2011 budget. The Army is taking actions intended to better align the customers' budgets with Industrial Operations' budgets.
Industrial Operations' carryover grew significantly in fiscal years 2011 and 2012 to represent about 12.7 and 9.5 months of work, respectively. GAO found three causes for the carryover: (1) the scope of requested work was not well defined, (2) parts were not available to perform the work, and (3) revenue recognition business rules were changed as part of the implementation of LMP. The Army formed a working group in April 2012 that identified actions to help reduce carryover. However, these actions have not been implemented and no timetable for implementation has been set.

What GAO Recommends

GAO is making three recommendations to the Department of Defense (DOD) that are aimed at implementing the planned actions identified by the Army's working group to improve the budgeting and management of carryover. DOD concurred with GAO's recommendations and cited related actions planned or under way.