Government Contracting:

Compensation of Defense Contractors' Working Capital Financing Costs

NSIAD-90-33: Published: Jan 31, 1990. Publicly Released: Jan 31, 1990.

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Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) profit policy, used by contracting officials to establish a profit objective for contract negotiating purposes, to determine whether it appropriately considered the important factors that affected contractors' working capital costs.

GAO found that: (1) although DOD use of the working capital profit factor was generally accurate over a sample of 425 contracts, there were differences of at least 10 percent in working capital cost estimates in 87 percent of the individual contracts within the sample; (2) the profit factor did not account for individual contracts' variations in the timing of cost expenditures and delivery payments or for how those variations could affect working capital costs; and (3) DOD guidance did not specifically instruct contracting officials regarding when or how to adjust working capital cost estimates to account for those variations. GAO believes that application of the profit policy without adjustments for the specific circumstances of each individual contract could result in significant underestimation or overestimation of working capital costs.

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