Contract Pricing:

Economy and Efficiency Audits Can Help Reduce Overhead Costs

NSIAD-92-16: Published: Oct 30, 1991. Publicly Released: Oct 30, 1991.

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GAO reviewed the Department of Defense's (DOD) use of overhead should-cost reviews, cost monitoring reviews, and operations audits to reduce overhead costs, focusing on the extent to which DOD evaluated the economy and efficiency of contractors' overhead costs.

GAO found that: (1) since 1985, the number of overhead should-cost reviews decreased, while the number of less comprehensive reviews increased; (2) from 1987 to 1990, the number of cost-monitoring reviews of overhead costs conducted at the nine contractor sites visited decreased by over 50 percent; (3) from 1985 to 1990, the number of operations audits of overhead costs performed at the nine contractors visited decreased by 37 percent; (4) although those analytical methods have identified significant unnecessary overhead costs, DOD believes that it did not sustain its review effort because of inadequate staffing and a shift in priorities; (5) although essential DOD assessments indicated that overhead should-cost reviews were viable, DOD did not revise its regulations to ensure that the reviews were performed; (6) since 1987, overhead rates at many major DOD contractors have increased while the value of DOD contracts has decreased; (7) anticipated work-force reductions required by recent legislation may further decrease DOD use of economy and efficiency audits; (8) overhead costs may continue to increase if the cost of DOD acquisitions continues to decline; and (9) unless DOD renews its emphasis on reducing overhead costs, those reviews may decline further as the DOD acquisition workforce is reduced.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: On June 17, 1994, DOD issued a proposed rule to the DOD FAR Supplement containing criteria and guidance for performing overhead should-cost reviews (Defense FARS case 92-D010).

    Recommendation: The Secretary of Defense should revise DOD procurement regulations to provide guidance for the use of overhead should-cost reviews. The regulations should include guidance similar to that currently provided for contract should-cost reviews, including criteria to select review sites.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: By memorandum dated March 31, 1992, DOD directed the Defense Contract Management Command (DCMC) carry out overhead should-cost reviews. In May 1993, DCMC established an agencywide program to analyze, evaluate, assess, and negotiate contractor overhead costs. This effort included overhead should-cost reviews as well as increased emphasis in the areas of cost monitoring plans and forward pricing rate agreements. These actions should satisfy the recommendations.

    Recommendation: The Secretary of Defense should direct the Directors of the Defense Logistics Agency and the Defense Contract Audit Agency to increase the priority of significant cost reduction measures, such as overhead should-cost reviews, cost monitoring reviews, and operations audits.

    Agency Affected: Department of Defense


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