Government Contracting: Assessment of the Study of Defense Contractor Profitability
NSIAD-87-50
Published: Dec 23, 1986. Publicly Released: Dec 23, 1986.
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Highlights
In response to a congressional request, GAO evaluated the Department of Defense's (DOD) Defense Financial and Investment Review (DFAIR) to determine its adequacy, the validity of its findings, and the appropriateness of its recommendations.
Recommendations
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| Congress should establish a legislative requirement for a Profitability Reporting Program and periodic profit studies. |
Closed – Implemented
|
Two pieces of legislation have been passed which would indicate that this recommendation may be implemented. The 1989 Defense Authorization Act of 1989 contains a requirement for DOD to recommend a financial analysis methodology for any return on investment study. OFPP Act Amendments of 1988 contains a requirement for OFPP to conduct a profit methodology study. |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Department of Defense | The Secretary of Defense should: (1) initiate, on an expedited basis, new analyses using conventional methods to evaluate profitability; (2) based on these analyses, make appropriate modifications as soon as possible to the interim policy; and (3) develop a means to show in contract negotiations, the effect of government contract financing (for example, rate of progress payments, payment frequency, and speed of payment) and the use of interim/milestone payments on contractors' returns on assets. |
Closed – Not Implemented
DOD remains unconvinced of the GAO position on the methodology to be used in evaluating contractor profitability. DOD did revise its profit policy, but it is not clear on what the new policy is based. GAO will continue to monitor the results of this new policy and report its findings on the results in the future in a separate report. DOD implemented a final rule on profit policy.
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Topics
Contract performanceContractor paymentsDepartment of Defense contractorsFederal procurement policyProfitsInterest ratesMilitary forcesInventoriesContract costsDefense industry