Contract Management:

DOD's Profit Policy Provision to Stimulate Innovation Needs Clarification

GAO-01-801: Published: Jul 26, 2001. Publicly Released: Aug 30, 2001.

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In negotiating profit on contracts, the Department of Defense (DOD) requires contracting officers to set negotiating objectives by relying on guidelines in defense regulations. Congress mandated that DOD review its profit guidelines and consider whether modifying them would provide more incentive for contractors to develop and produce complex and innovative new technologies for weapon systems. After completing its review, DOD issued a final rule in December 2000 that added a technology incentive to its guidelines for setting profit objectives on negotiated defense contracts. This report reviews whether the new policy is (1) likely to achieve its intended objective of stimulating increased innovation and (2) consistent with the revised policies for acquiring weapons systems. GAO found that the new profit policy may have limited effect on incentivizing additional innovation because the policy has limited reach during research and development and it does not provide adequate guidance on when to apply the incentive. The policy may not reinforce DOD's emphasis on technology maturity in its guidance on the system acquisition process.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: On October 25, 2002, the Director of Defense Procurement requested that the military services and defense agencies survey contracting professionals regarding the use of the technology incentive. The survey did not identify the need for additional guidance.

    Recommendation: To assure that the technology incentive is appropriately interpreted and applied, the Secretary of Defense should clarify the definition of innovation contained in the profit policy rule.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: On October 25, 2002, the Director of Defense Procurement requested that the military services and defense agencies survey contracting professionals regarding the use of the technology incentive. The survey did not identify the need for additional guidance.

    Recommendation: To assure that the technology incentive is appropriately interpreted and applied, the Secretary of Defense should define how long contractors should be rewarded for innovations introduced during research and development phases.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: On October 25, 2002, the Director of Defense Procurement requested that the military services and defense agencies survey contracting professional regarding the use of the technology incentive. The survey did not identify the need for additional guidance.

    Recommendation: To assure that the technology incentive is appropriately interpreted and applied, the Secretary of Defense should reconcile the relationship of the technology incentive with DOD's new acquisition process, including the emphasis on technology maturation.

    Agency Affected: Department of Defense

 

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