Defense Restructuring Costs:

Payment Regulations Are Inconsistent with Legislation

NSIAD-95-106: Published: Aug 10, 1995. Publicly Released: Aug 10, 1995.

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Pursuant to a legislative requirement, GAO reviewed the Department of Defense's (DOD) regulations regarding payments for contractors' business restructuring costs, focusing on whether the regulations: (1) are consistent with the Defense Authorization Act for Fiscal Year 1995 and other applicable procurement laws and regulations; and (2) ensure that restructuring costs are paid only when in the best interests of the United States.

GAO found that: (1) the DOD regulations do not comply with the authorization act's requirements because they do not require that all restructuring costs meet the certification requirements; (2) DOD makes a distinction in the types of restructuring activities and excludes so-called internal activity costs from the certification requirements; (3) internal activity costs are excluded from the act's certification requirements even if they are associated with the business combination; (4) the act does not distinguish between restructuring activities that are the result of the business combination; (5) DOD cannot ensure that payment of these restructuring costs are in the nation's best interest; (6) the regulations do not require contractor cost and savings data needed for DOD annual congressional reports to ensure that overall savings are obtained; and (7) DOD plans to pay restructuring costs up to the amount of the projected savings from the business restructuring, which will result in negligible savings to DOD.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Office of Defense Procurement, Office of the Under Secretary of Defense (Acquisition & Technology), revised the definitions of internal and external restructuring activities. The revisions are intended to make it clear that activities that affect the operations of both previously separate companies are external restructuring activities.

    Recommendation: The Secretary of Defense should revise the regulations to make clear that all restructuring costs associated with a business combination, whether involving internal or external activities, are subject to section 818 certification requirements.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: The Office of Defense Procurement, Office of the Under Secretary of Defense (Acquisition & Technology), by letter dated July 24, 1995, provided guidance for compiling data and information for the Department of Defense's first report to Congress on defense contractor restructuring activities.

    Recommendation: The Secretary of Defense should determine how DOD will comply with the annual congressional reporting requirement, and if contractor data are necessary for compliance, incorporate such data collection requirements in DOD regulations.

    Agency Affected: Department of Defense

 

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