www.crs.gov | 7-5700
March 23, 2018
Defense Primer: Defense Working Capital Funds
A Department of Defense (DOD) working capital fund
(DWCF) is a type of revolving fund used to finance
operations that function like commercial business activities,
(e.g., equipment maintenance, supply and storage activities,
and transporting equipment and people). According to the
DOD Financial Management Regulation 7000.14-R,
revolving fund accounts finance a “continuing cycle of
business-type operations” by incurring obligations and
expenditures that generate receipts.
DWCFs are used throughout the department in an effort to
efficiently provide services or industrial capabilities.
Revolving funds are often considered to have several
benefits. First, they operate without fiscal year limitations
(i.e., amounts in a WCF do not expire). Second, they
facilitate the aggregation of orders, allowing the
government to leverage its purchasing power. Finally, they
allow for the establishment of supply inventories that can
lead to reduced delivery times.
How Do Working Capital Funds Work?
When establishing a WCF, Congress typically provides a
direct appropriation to the fund (the initial appropriation
and positive fund balance is often referred to as a cash
corpus). Fund managers can use the cash corpus to buy
parts and supplies in advance of an anticipated requirement
(such as a depot overhaul of an aircraft), or to contract for
services (such as commercial air transportation for a
deploying military unit). A customer―such as an Air Force
squadron―can then buy the good or service from the WCF-
funded organization (e.g., a depot), using operation and
maintenance funds appropriated to the squadron for that
purpose. These WCF transactions move hundreds of
billions of dollars within DOD accounts annually.
Rates
In general, DWCFs are expected to be self-sustaining after
the initial appropriation. Fund managers establish rates
charged by the fund, taking into account all costs associated
with each anticipated transaction. The rates cover the
commodity cost of materials as well as a surcharge, which
includes overhead, operating expenses, and administrative
requirements. Fund managers establish the rates 18-24
months ahead of schedule, and the rates are typically locked
in for a specific fiscal year.
WCFs are typically organized by budget activity (a category
within each fund that identifies the purposes, projects, or
types of activities financed by the fund). In a supply-
oriented budget activity, fund managers generally add a
surcharge to all items provided in order to cover
management and other overhead costs such as warehousing
and shipping. Non-supply budget activities (such as those
providing maintenance or information technology services)
establish surcharge rates based on the unit cost of the
service provided plus all overhead costs. Fund managers
generally budget to recover all operating expenses,
including
direct costs, such as labor and materials;
indirect costs, such as facilities operation and
maintenance;
hardware costs, such as acquisition and repair of
equipment needed to support warehouse operations;
operations costs, such as labor, travel, training,
transportation of personnel; and
other general and administrative costs.
Operating and Managing a WCF
DWCFs may realize gains or losses within each fiscal year.
Gains may be returned to customers by setting lower rates
for future fiscal years. Managers can recoup losses by
establishing higher rates in later years or seeking additional
appropriations from Congress. Regardless, DWCFs must
maintain a positive cash balance at all times to avoid Anti-
Deficiency Act violations.
DOD Financial Management Regulation (FMR) 7000.14-R
governs DWCFs. The FMR directs DWCFs to operate on a
break-even basis (revenue generated equals the cost
associated with receiving the revenue). Fund managers
track and report two main types of operating results in
managing a WCF. The net operating result (NOR) is the
net difference between expenses and funds received for a
single fiscal year. The accumulated operating result (AOR)
is the net difference between expenses and funds received
since the inception of the fund. Managers typically use
AOR in establishing the future rates to be charged to
customers.
History of DOD Working Capital Funds
Section 2208 of Title 10 was codified in 1962 and provides
the Secretary of Defense the authority to establish a variety
of working capital funds to support DOD operations. In
1991, the Secretary of Defense combined five industrial
funds, four stock funds, and multiple appropriated fund
support activities that had been established by the services
into the Defense Business Operations Fund (DBOF) to
streamline management and oversight responsibilities.
These operations included depot maintenance,
transportation, supply management, and finance and
accounting.
By 1996, the DOD recognized the difficulty in managing
one large WCF and associated challenges in setting rates
across the DOD. As a result, the Under Secretary of
Defense (Comptroller) disestablished the DBOF in 1997
and established five DWCFs.
