Proposed Legislation To Revise and Reinstate the Renegotiation Act of 1951

GAO was asked to comment on proposed legislation which would revise and reinstate the Renegotiation Act of 1951. The bill requires contractors to report renegotiable business on the basis of division and product line. The prior method of renegotiation appeared to favor large diversified corporations, but use of a product line approach would be more effective in reducing the number of large firms that were previously escaping renegotiation. GAO believes that reporting procedures could be established by a reinstated Renegotiation Board that would minimize any significant administrative or reporting burden for contractors. In the past, the Renegotiation Board's primary basis for measuring excessive profits was to consider profit as a percentage of cost or price. GAO believes that this is a simplistic approach which is not in accordance with the way business and financial communities measure corporate results. The reasonableness of a contractor's profit should be assessed on the basis of return on investment, with appropriate adjustments to recognize the statutory factors that are embodied in the Renegotiation Act. Clear and specific written guidelines are needed to assist review officials in applying and weighing statutory factors and to allow all review levels to arrive at essentially the same decision. In 1972, the Act was amended to shift appeals of the Board's excessive profit determinations from the Tax Court to the Court of Claims, and GAO noted that the Court of Claims tends to disagree with many of the Board's determinations of excessive profit. With this pattern of decisions, more contractors are likely to avail themselves of the appeal process. Unless the appeals are shifted back to the Tax Court or the Government can produce the type of proof demanded by the Court, the benefits to be derived from the renegotiation process will be greatly diminished.