https://crsreports.congress.gov
Updated December 2, 2021
Defense Primer: Defense Working Capital Funds
Since 1870, the U.S. military has operated various types of
working capital funds to procure and provide materiel and
commercial products and services to its forces. Codified
today under Title 10, Section 2208, of the United States
Code (U.S.C.), a defense working capital fund (DWCF) is a
type of revolving fund that is intended to operate as a self-
supporting entity to fund business-like activities of the
Department of Defense (DOD) (e.g., acquiring parts and
supplies, maintaining equipment, transporting personnel,
conducting research and development). DWCF transactions
move hundreds of billions of dollars within DOD annually.
According to the DOD Financial Management Regulation
(FMR) 7000.14-R, revolving fund accounts finance a
continuing cycle of business-type operations by incurring
obligations and expenditures that generate receipts. These
funds are designed to break even over the long term through
fees charged for goods and services provided. DWCFs are
broadly categorized as intragovernmental revolving funds—
a type of revolving fund “whose receipts derive primarily
from other government agencies, programs, or activities”
(see 2021 Fiscal Law Deskbook). DWCFs and other types
of revolving funds are widely used in DOD to support
recurring requirements and to ensure the continuous
delivery of goods and services such as utilities, fuels, food,
clothing, and an assortment of industrial base capabilities.
DWFCs offer certain procurement benefits and flexibilities
to DOD. They generally operate without fiscal year
limitations (i.e., funds in a DWCF account do not expire);
facilitate the aggregation of orders, allowing DOD to
leverage its purchasing power; and allow for the
establishment of inventories that can reduce delivery times.
Fund Basics
When establishing a DWCF, Congress typically provides a
direct appropriation to the fund. This initial appropriation
and positive fund balance is called a cash corpus. Using the
cash corpus, fund managers purchase products and services,
usually in advance of an anticipated requirement (e.g., a
depot overhaul of an aircraft or ship), then establish a
product catalog (e.g., a parts and supplies catalog) for its
customers. Fund managers then set product prices and
stabilized rates for services that typically do not change
until the next fiscal year.
Once a DWCF-funded organization (e.g., a depot) is open
for business, the customer―normally a military unit or
DOD organization (though a private party can also be a
customer)―orders the product or service through a
reimbursable agreement. Upon receipt of the product and/or
service, the DOD customer then reimburses the DWCF
with funds appropriated for that specified purpose. Private-
party customers typically prepay for the products and
services.
Figure 1. How a DWCF Operates
Source: CRS Graphics.
Notes: The process illustrated above is a general example of how a
DWCF operates. Variations can exist (e.g., private party customers).
Rates and Budgeting
DWCFs are expected to be self-sustaining after the initial
cash corpus, and this is managed through rate setting and
budgeting. Fund managers typically establish rates 18-24
months in advance, locking in rates for a specified future
fiscal year. Fund managers establish each rate taking into
account all costs associated with each anticipated
transaction, including the cost of the goods and services and
a surcharge that includes overhead, operating costs, and any
other administrative expenses.
According to the DOD FMR, DWCFs are organized by
chartered activity groups (i.e., categories within each fund
that identify the purposes, projects, or types of activities
financed by the fund). In a supply-oriented activity group, a
surcharge is generally added to items provided to cover
management and other overhead expenses (e.g., shipping
costs). For activities that are service-oriented (e.g.,
equipment maintenance or information technology
services), fund managers establish surcharge rates based on
an estimated unit cost of the service provided, plus
overhead costs. In general, fund managers budget to recover
all operating expenses, including
direct costs (e.g., labor and materials);
indirect costs (e.g., facilities operation and
maintenance);
hardware costs (e.g., acquisition and repair of
equipment to support operations);
operations costs (e.g., labor, travel, training,
transportation of personnel); and
general and administrative costs.
