DOD's Profit '76 Study and New Profit Policy

PSAD-77-75: Published: Feb 17, 1977. Publicly Released: Feb 17, 1977.

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Data generated by the Department of Defense (DOD) Profit 76 Study were reviewed in terms of its impact on the development of the DOD new profit policy. The profit policy is designed to motivate defense contractors to make investments which will increase productivity and reduce contract costs.

The study was generally approached in a competent and professional manner. GAO agreed with the new profit policy concerning: (1) holding average negotiated profits to prior levels; (2) attempting to encourage contractor investments in cost-reducing facilities; and (3) offsetting the aggregate effect of imputed interest in facilities capital. The basis for profit comparison could be improved, however, and it was felt that there is too little incentive to encourage increased contractor capital investments. Imputed interest may not be completely eliminated from the profit element. The potential exists for an overall profit increase in the negotiated contracts.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: The Secretary of Defense should monitor the implementation of the new profit policy to prevent its intent from being circumvented by unjustified variations in the profit factor ranges or negotiation of rates higher than indicated by application of weighted guidelines. The Secretary should: (1) reduce the impact of cost input in establishing profit objectives; (2) issue additional guidance to promote reasonably consistent and uniform application of the productivity reward factor; and (3) focus future profit studies on a comparison of profits earned by defense contractors to specific industry profit rates.

    Agency Affected:

 

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