Defense Working Capital Fund Pricing in the Defense Finance and Accounting Service

A Useful, but Limited, Tool

by Edward G. Keating, Ellen M. Pint, Christina Panis, Michael H. Powell, Sarah H. Bana

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Research Questions

  1. What are the advantages and disadvantages of funding DFAS through a DWCF versus using direct appropriations?
  2. Does the DWCF structure provide appropriate incentives to DFAS?
  3. Does the DWCF structure provide appropriate incentives to DFAS's customers?

This report assesses the advantages and disadvantages of continuing to fund the Defense Finance and Accounting Service (DFAS) using a Defense Working Capital Fund (DWCF) mechanism versus funding it through direct appropriations.

Abetted by reduced prices made possible by using automated approaches, DFAS has successfully induced its clients to evolve toward less costly approaches for paying Department of Defense (DoD) contractors and personnel. DFAS has also implemented customer-specific pricing for several outputs, thereby rewarding customers who put fewer burdens on DFAS with reduced prices. However, under DoD policy, DFAS must set prices to recover its full costs of operations. As a result, its prices are almost certainly greater than the organization's marginal costs of performing services. This means that DFAS's costs do not fall commensurably with decreases in workload.

Additionally, DWCF prices provide more incentives to DFAS customers than to DFAS itself. Customers are charged less when they adopt approaches that put less burden on DFAS. DFAS itself, however, remains a monopoly, so DWCF pricing, all by itself, does not provide any direct incentive for DFAS to reduce its costs. However, DFAS's constant dollar costs have fallen over time, even as overall DoD spending has increased.

On balance, we do not recommend that DFAS return to being funded solely by direct appropriation. However, it may be beneficial to reform DFAS (and, more generally, DWCF) pricing to allow nonlinear approaches, such as quantity discounts and direct funding of fixed costs.

Key Findings

Advantages of DWCF Pricing for DFAS

  • By rewarding customers with lower prices when they switch to automated approaches, DWCF pricing encourages customers to limit their burden on DFAS.
  • DWCF pricing encourages ongoing cost-related dialog both within DFAS and between DFAS and its customers.
  • Being a DWCF entity provides greater managerial flexibility to DFAS than if it were solely dependent on direct appropriations. For example, it can meet increased demands without requesting additional appropriations and can continue to operate during a budget sequester.

Disadvantages of DWCF Pricing for DFAS

  • The DWCF structure appears to impose greater cost accounting burden than would a direct appropriation mechanism, because DFAS has to attribute its costs to specific outputs.
  • DFAS customers may be developing skepticism about the actual consequences of their cost-saving steps, suspecting that DFAS simply recovers the costs in other ways.

Additional Options

  • An aggressive reform that would change DFAS's incentive structure considerably would be to modify DoD policy to allow other governmental or private-sector providers to compete with DFAS for DoD business.
  • DoD policy could allow the services themselves to create internal, within-service competition with DFAS. However, in light of DFAS's fixed costs, the current pricing structure cannot accommodate DFAS facing such competition.

Recommendations

  • A return to complete reliance on direct appropriations is probably an overreaction to DWCF pricing problems. The authors suggest, instead, that DFAS reform prices (e.g., nonlinear pricing) rather than eliminate them.
  • DoD decisionmakers and DFAS customers would benefit from greater visibility into DFAS's cost structure. DFAS was unable to provide the RAND research team with information about how indirect costs were allocated and how DFAS costs were divided by customer.
  • DFAS should experiment with pilot projects to better understand the implementation challenges, costs, and ultimate consequences of a nonlinear pricing approach.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    An Overview of DFAS Operations

  • Chapter Three

    Insights from DFAS Cost-Workload Data

  • Chapter Four

    Assessing DWCF Pricing in DFAS

  • Chapter Five

    Conclusions and Recommendations

  • Appendix

    RAND Subject-Matter Expert Questions

This research report was sponsored by OSD-CAPE and conducted within the Acquisition and Technology Policy Center of the RAND National Defense Research Institute, a federally funded research and development center sponsored by the Office of the Secretary of Defense, the Joint Staff, the United Combatant Commands, the Navy, the Marine Corps, the defense agencies, and the defense Intelligence Community.

This report is part of the RAND Corporation research report series. RAND reports present research findings and objective analysis that address the challenges facing the public and private sectors. All RAND reports undergo rigorous peer review to ensure high standards for research quality and objectivity.

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