The Office of the Under Secretary of  Defense (Comptroller), in coordination with the Defense Logistics Agency  (DLA), estimates and sets a standard price for its fuel and other fuel- related commodities that endeavors to closely approximate the actual per  barrel price during budget execution, which occurs almost a year later. DOD utilizes its Defense-wide Working Capital Fund to purchase bulk fuel  for customers. The fund covers DLA’s costs for purchasing bulk fuel and is reimbursed  through its sale of fuel to the military services and other customers at a  standard price. Differences between Estimated and Actual Fuel Costs Were Largely Due to Fuel Price Fluctuations

We identified two primary factors that accounted for the difference  between estimated and actual costs—(1) fluctuations in the market price  of fuel and (2) differences between the services’ estimated and actual fuel  consumption. Our analysis showed that from fiscal years 2009 through  2013, the differences between the price DOD paid for fuel and the price it  charged its fuel customers—the standard price—accounted for, on  average, 74 percent of the difference between estimated and actual  costs. In fiscal years 2009 and 2010, differences in  the price of crude oil accounted for most of the difference between the  estimated and actual prices—in 2009 for 95 percent of the difference and  in 2010 for 72 percent. In fiscal years 2009  through 2012, the military services’ estimated fuel requirements were  within 5 percent of their actual consumption, as shown in figure 4. DOD Has Conducted Studies on Its Management of Working Capital Funds, but Has Not Reevaluated Its Approach or Documented Its Assumptions for Estimating Fuel Costs

DOD has studied various aspects of its bulk fuel program since 2004, but  it has not updated its current approach for setting the standard price to  reflect current market conditions or documented its rationale for the  assumptions it uses in estimating the standard price—even though the  differences between its estimated and actual costs have been  considerable since that time. DOD Has Not Reevaluated Its Approach or Documented its Assumptions for Setting the Standard Price

According to GAO’s Cost Estimating and Assessment Guide, a cost  estimate should be updated regularly to reflect significant changes—such  as changes to assumptions—and actual costs, so that it always reflects  current conditions. In  its comments, DOD concurred with the first recommendation and partially  concurred with the second recommendation. Reevaluating its approach for estimating the  components of the standard price would allow DOD to develop more- informed estimates and better position the department to minimize risks  and uncertainty resulting from changing market conditions. GAO’s Cost Estimating and Assessment Guide states that a cost  estimate should be supported by detailed documentation that describes  how it was derived. Documenting DOD’s  assumptions, including the rationale for each component of the standard  price, would provide greater transparency and clarify for fuel customers  and decision makers the process DOD uses to set the standard price. To  determine how estimated bulk fuel costs have compared with actual costs  since fiscal year 2009 and identify the factors that contributed to any  differences, we compared the estimated budget costs for fuel against  actual costs in the budget year of execution and identified any  differences. Next, we compared each of the three components of  the standard price (crude oil price, refinement markup, and nonproduct  costs—such as transportation and facilities maintenance) against the  actual costs for each component to determine which one contributed most  to the difference between the standard price and actual fuel costs. To determine the extent to which DOD has considered options for  adjusting its approach for estimating bulk fuel costs and managing  working capital funds, we reviewed related studies and recommendations  that we identified through interviews with DOD officials and literature  searches that discuss options available to DOD to adjust its approach to  managing bulk fuel costs and working capital funds.
Why GAO Did This Study

DOD purchases bulk fuel and sells it to customers, including the military services. Each fiscal year, DOD sets a standard price for budgeting purposes, endeavoring to closely approximate the price it will pay when it buys the fuel almost a year later. If this price is different than the standard price, DOD may need to take actions to manage its working capital funds—funds used to purchase fuel and other commodities that are reimbursed through sales.
Senate Report 113-44, accompanying a bill for the National Defense Authorization Act for FY 2014, mandated GAO to review DOD's approach for establishing its bulk fuel pricing. This report discusses, among other things, (1) how estimated bulk fuel costs have compared to actual costs since FY 2009 and the factors that have contributed to any differences; and (2) the extent to which DOD has considered options for adjusting its approach to estimating bulk fuel costs and managing working capital funds in light of any differences between estimated and actual fuel costs. GAO compared estimated and actual fuel costs for FY 2009 through 2013 and analyzed DOD actions to manage working capital funds.

What GAO Found

During fiscal years 2009 through 2013, the Department of Defense's (DOD) actual costs for bulk fuel differed considerably from its budget estimates, largely because of fluctuations in fuel price in the open market. During this period, DOD underestimated its costs for 3 years and overestimated them for 2 years as shown below. GAO identified two factors that contributed to the differences between estimated and actual costs—(1) fuel price fluctuations and (2) differences between the military services' estimated fuel requirements and their actual fuel consumption. GAO's analysis showed that the differences between the price DOD paid for fuel and the price it charged its fuel customers—the standard price—accounted for, on average, 74 percent of the difference between estimated and actual costs. Specifically, of the three components of the standard price that DOD sets each fiscal year—crude oil, refinement markup, and nonproduct costs, such as transportation and facilities maintenance costs—differences in the price of crude oil accounted for most of the difference between estimated and actual fuel costs in fiscal years 2009 and 2010. In fiscal years 2011 through 2013, the refinement markup accounted for most of the difference. Differences between the services' estimated fuel requirements and actual fuel consumption accounted for an average of 26 percent of the difference between estimated and actual fuel costs.
Since 2004, DOD has conducted reviews of aspects of its bulk fuel program to determine whether adjustments should be made, including managing acquisition strategies, managing working capital funds, and budgeting for cost fluctuations. However, it has not updated its approach to reflect current market conditions or documented its rationale for the assumptions it uses in estimating the standard price. GAO's Cost Estimating and Assessment Guide and Office of Management and Budget guidance state that a cost estimate should be updated regularly to reflect changes to assumptions and actual costs, so that it always reflects current conditions. Furthermore, cost estimates should be supported by detailed documentation that describes how they were derived. Reevaluating its approach for estimating the standard price would allow DOD to develop more informed estimates and better position it to minimize risks and uncertainty resulting from changing market conditions. Further, documenting the rationale for its assumptions would provide greater transparency and clarify for fuel customers and decision makers the process DOD uses to set the standard price.

What GAO Recommends

GAO recommends that DOD reevaluate its approach for estimating the components of the standard price and document the rationale for its assumptions. DOD agreed with the first recommendation and partially agreed with the second stating there is a closely-monitored, formal process. GAO continues to believe the recommendation remains valid as discussed in the report.