Nonrecurring Costs:

Improvements Needed in DOD Cost Recovery Efforts

NSIAD-86-95: Published: Apr 18, 1986. Publicly Released: Apr 18, 1986.

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GAO reviewed Department of Defense (DOD) efforts to recover nonrecurring costs of major defense equipment sold abroad and reported on: (1) problems with the current pro rata system of cost recovery; and (2) an alternative flat rate method for improving cost recovery.

The Arms Export Control Act requires DOD to charge major defense equipment buyers a proportionate share of nonrecurring research, development, and production costs. The DOD pro rata system of calculating charges by estimating total nonrecurring costs and dividing that by an estimate of the total production quantity results in inaccuracy because of: (1) DOD inability to accurately predict future costs; (2) DOD inability to accurately predict future U.S. and foreign quantity requirements; (3) errors in calculating and applying common costs to old and new generation weapon systems; (4) inconsistencies in establishing a pro rata charge for weapon systems components; and (5) DOD policy not to revise charges unless they increase or decrease by at least 30 percent. GAO noted that, to improve the pro rata system's accuracy, DOD would have to constantly accumulate, review, and update cost and quantity information to make the necessary charge adjustments. GAO found that, by using an alternative flat rate system, DOD could establish a percentage recoupment rate to apply to the acquisition price of all equipment sold abroad. A flat rate approach: (1) would simplify the existing complex administrative review process; (2) could be applied to all defense equipment sales; and (3) would not be subject to the adjustments required by pro rata calculations. DOD believes that, because this approach does not attempt to recover a proportionate share of investment on individual items, it would require an amendment to the act.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Defense Security Assistance Agency (DSAA) chose to revise the current system by adding significant change factors covering a greater potential universe of charges. Guidance on calculating commonality was added to DOD Directive 2140.2.

    Recommendation: The Secretary of Defense should decide whether to improve the current system or develop a new approach to recover the nonrecurring costs of major defense equipment sold abroad. If the current pro rata system is continued, the Secretary of Defense should direct the Assistant Secretary of Defense (Comptroller) to revise DOD current guidance relative to recouping nonrecurring research, development, and production costs. The revisions should: (1) rescind the current policy of not revising charges unless they increase or decrease by at least 30 percent so that all pro rata charges are based on the most current cost and quantity estimates; and (2) include guidance for calculating a commonality factor between weapon system models and applying that factor when determining charges.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DSAA increased its monitoring of major component charges calculated by the services.

    Recommendation: The Secretary of Defense should direct DSAA to ensure that the military services calculate and recoup pro rata charges on the sale of components of major weapon systems, as required by DOD Directive 2140.2.

    Agency Affected: Department of Defense

 

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