Summary

The Navy ordnance business area increased prices 78 percent from fiscal years 1994 through 1996 and incurred about $212 million in losses during that same period. Most of these losses were due to actual overhead costs exceeding budgeted overhead costs. This situation has led to significant price increase that ultimately reduce purchasing power for the military services' operations and maintenance appropriation dollars. GAO is concerned that excessive operating costs may exist in many of the Defense Department's (DOD) logistics business activities and may be causing operations and maintenance appropriations to be used inefficiently. GAO will be examining additional DOD business activities to determine the extent of the problem.

GAO noted that: (1) the business area's price increased from $50.02 per direct labor hour in fiscal year (FY) 1994 to $89.03 per direct labor hour in FY 1996, a 78-percent increase; (2) a large part of this price increase was due to the inclusion of significant overhead costs in the prices charged customers, costs that were previously paid for through direct appropriations or by Navy major commands; (3) even though the prices increased, the business area reported it lost about $212 million during fiscal years 1994 through 1996, and would have lost more if it had not been allowed to increase its prices in order to recoup prior year losses; (4) these losses primarily occurred because: (a) actual overhead costs that the business area was responsible for exceeded budget projections; and (b) the business area received lower-than-expected workload levels which prevented it from generating enough revenue to recover its budgeted overhead costs; (5) these rising prices and consistent losses ultimately reduce the purchasing power of the customers' appropriations; (6) the Navy's implementation of DBOF and its reorganization to consolidate ordnance functions have resulted in more costs being identified and included in the prices charged customers; (7) this has helped to identify areas of inefficient operations within the business area that contribute to the price increases, principally overhead costs; (8) however, the Navy ordnance business area still needs to take a number of actions to ensure that accurate and consistent information is available to effectively manage the business operations; and (9) specifically, GAO found that the business area: (a) did not accurately forecast the amount of work to be performed; (b) used a pricing structure that did not allow individual ordnance activities to charge prices that represented their estimated cost of doing business; and (c) did not accurately budget and account for costs.