Government Contracting:

Selected Review of Defense Contractor Profitability

NSIAD-87-195BR: Published: Sep 2, 1987. Publicly Released: Sep 23, 1987.

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In response to a congressional request, GAO: (1) provided data on the profitability of specific product categories within the defense industry; (2) assessed the Department of Defense's (DOD) interim profit policy; and (3) assessed the proposed Profitability Reporting Program.

GAO found that: (1) DOD profit calculation and asset valuation were inconsistent with conventional accounting and finance methods; (2) this inconsistency resulted in the underestimation of defense contractors' profits; and (3) the DOD interim profit policy to reduce overall profit by 1 percent would not achieve the goal of approaching comparability with durable goods. GAO also found that: (1) the improper DOD accounting and finance methodology would actually defeat its objective of reducing contract profits; and (2) profit margins on defense contracts in 1985 jumped to 13 percent of costs rather than the intended 11.3 percent. GAO noted that its proposal for a Profitability Reporting Program would: (1) provide reliable data to monitor contractor projects and investments; (2) provide a basis for comparative studies; and (3) establish a reliable basis for modifying profit policy.

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