Government Contracting:

Effect of Changes in Procurement and Tax Policy on the Defense Industry

NSIAD-89-121: Published: May 17, 1989. Publicly Released: May 17, 1989.

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Pursuant to a congressional request, GAO reviewed a consultant's study on the financial and operating impact of selected changes in procurement and tax policies on the defense industry.

GAO found that the consultant used financial data from nine defense programs to compare program performance under prior acquisition and tax policies, and the profits and cash flows that would occur if tax law changes, new profit policies, lower progress payment rates, and lower cost recovery rates were in effect when each program began. The consultant reported that policy changes would effectively cause: (1) a 23-percent reduction in profits; (2) additional financing for nine contractors, totalling $8.5 billion; and (3) a low return on investment necessary to preserve shareholder value. GAO found that: (1) the study did not show the level of contractor profitability before or after policy changes or support the impact of the policies on the financial condition of government contractors; (2) the study did not recognize the Department of Defense's new profit policy which compensated contractors for financing contract costs; (3) the consultant's use of accrual data overstated cash outflows and produced incorrect conclusions concerning the return on investment; and (4) adequate data was not available to measure the impact that selected changes in procurement and tax policies had on the defense industry as a whole.

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