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    1. What is the definition of Centrally Managed/Asset Controlled Item as it pertains to investment/expense cost determination? 2. The second If/Then on the decision tree says if the item is purchase from DWCF, then, is the item part of a full funding effort? Is a major structural replacement always considered a modification, or are there circumstances where replacement of structural components would be appropriately funded with O&M? (ie. during Programmed Depot Maintenance)


    Answer

    Preliminary Information:  As so many of the DoD weapon systems continue to age, the required repairs to keep them operational continue to rise.  As you are experiencing, the question of the correct appropriation to use to pay for these repairs can have a major impact on the weapon system, program office, service and DoD.  Ultimately the question boils down to, “Is a structural repair an expense or an investment and does it matter?”  The answer to that question will determine the correct appropriation that should be used to pay for these repairs.  Fortunately, DoD Financial Management Regulation 7000.14-R (FMR) has an entire section that deals with that issue.

    DoD Financial Management Regulation (FMR) 7000.14-R, Volume 2A, Chapter 1, paragraph 010201, section B says:

    B. Basic Distinctions Between Expense and Investment Costs. The criteria for cost definitions consider the intrinsic or innate qualities of the item such as durability in the case of an investment cost or consumability in the case of an operating cost and the conditional circumstances under which an item is used or the way it is managed. In all cases where the definitions appear to conflict, the conditional circumstances will prevail. The following guidance is provided to determine whether a cost is either an expense or an investment. All costs are classified as either an expense or an investment.
    Paragraph 010201, section D.1.f says:
     
    Assemblies, spares and repair parts, and other items of equipment that are not designated for centralized item management and asset control and which have a system unit cost less than the currently approved dollar threshold of $250,000 for expense and investment determinations.
     
    Paragraph 010201, section D.2.a says:
     
    D.2. Investments. Investments are costs to acquire capital assets such as real property and equipment. The following criteria shall be used to determine those costs to be classified as investments:
    a. All items of equipment, including assemblies, ammunition and explosives, modification kits (the components of which are known at the outset of the modification), spares and repair parts not managed by the Defense Working Capital Funds, that are subject to centralized item management and asset control.
     
    Finally, Paragraph 010201, section F provides a decision matrix which does an excellent job of helping us to determine if a cost is an expense or an investment.
     
    However, it appears that you already knew all of that.
     
    Discussion:  So, to answer your specific questions: 1.) A Centrally Managed/Asset Controlled Item is one that has a serial number or some other means of tracking it for the purposes of inventory control and/or maintenance scheduling.  An M16 rifle is a Centrally Managed/Asset Controlled Item and therefore must be purchased with procurement funds, even though the cost of one of these weapons is clearly below $250,000.  Modification kits are routinely put in this group because the service will want to know that the kit was installed on a specific weapon system (i.e. a particular tail number for aircraft).  However, an individual structural repair part is most likely not going to fall into this category.  2.) The Defense Working Capital Fund (DWCF) is a fancy way of naming the normal supply system that the services use to requisition parts for repair when the weapon system is in need of them.  The DWCF buys certain parts that are required regularly by a weapon system so that they are available at the time and place of need.  Then, the service reimburses the DWCF for the part.  My hope is that these major structural components are needed so infrequently that they are not held by the DWCF.  3.) As to the question of whether the item is part of a full funding effort, the note at the bottom of the section F decision matrix is pretty clear that unless it is part of a modification kit or major service life extension it does not satisfy that criteria.
    Still, your final question, “Is a major structural replacement always considered a modification, or are there circumstances where replacement of structural components would be appropriately funded with O&M? (i.e. during Programmed Depot Maintenance)?” is the one that really matters!  From the section F decision tree, it is possible to come away with the impression that these types of major structural repairs always have to be paid for with procurement funds.  However, that would be WRONG!  Look back at the fourth and fifth lines of section B where it says: In all cases where the definitions appear to conflict, the conditional circumstances will prevail.  So, where do we see these conditional circumstances addressed?  Paragraph 010201, section D.3 gives specific cases that take precedence over the Expense discussion in D.1 and the Investment discussion in D.2.  Specifically, paragraph 010201, section D.3.c says:
     
    D.3. c. Maintenance, repair, overhaul, and rework of equipment are funded in the operation and maintenance appropriations.
     
    Answer:  DoD Financial Management Regulation (FMR) 7000.14-R, Volume 2A, Chapter 1, paragraph 010201, section D.3.c clearly leads to the interpretation that repairs are to be paid for with O&M funds.  This makes sense if you recognize that the intent of the regulation is to allow O&M funds for the repair of aircraft for things that could not be foreseen (even if those repairs are in excess of the $250,000 threshold for an investment).  A good example is a training aircraft that does a “gear up” landing and the repair will cost in excess of $1 million. Per FMR, Volume 2A, Chapter 1, paragraph 010201, section D.3.c, that bill to put that aircraft back in service would be paid for using O&M funds.

    However, a dilemma arises if it is determined that the major structural “repairs” that you are concerned about are not one time fixes on one aircraft, but rather are required by every (or a significant number) of the aging aircraft that are going through the Depot!  The question becomes, did the service know, or should the service have known, that there was a problem prior to the Depot induction?  If this is the case, then by the intent (if not the letter) of FMR, Volume 2A, Chapter 1, paragraph 010201, it is no longer a “repair” and a modification should be planned and funded (with procurement funds) so that as the aircraft pass through the Depot they get the needed modification.  An excellent example of this scenario is an aircraft that went into Depot where it was discovered that the main spar was cracked and the carry-through box would have to be replaced.  The service did a onetime inspection of the rest of the fleet and determined that in excess of 60% of the fleet would need the same “repair.”  A modification was designed and funded (with procurement funds) and over the next several years the entire remaining fleet got new carry-through boxes.


    Suggestion:
      Read DoD Financial Management Regulation 7000.14-R, Volume 2A, Chapter 1, paragraph 010201, paying particular attention to sections D.1, D.2, D.3, and F. Second, since your email address indicates that you are assigned to an Air Force organization, we most strongly recommend that you contact your local Air Force comptroller organization for more information and their policy interpretation of this issue.

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