Contractor Overhead Costs:

Money Saving Reviews Are Not Being Done As Directed

NSIAD-94-205: Published: Aug 3, 1994. Publicly Released: Aug 3, 1994.

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GAO reviewed the Department of Defense's (DOD) actions in response to a March 1992 DOD directive to increase its should-cost reviews.

GAO found that: (1) should-cost reviews are cost-effective and save hundreds of millions of dollars; (2) DOD has performed only 4 should-cost reviews, and all have been initiated by the Air Force; (3) the Defense Contract Management Command (DCMC) has not initiated any reviews because of the time involved in developing regulations and a review methodology; (4) DCMC customers have identified 17 candidates for fiscal year 1994 should-cost reviews in response to a DCMC request, and DCMC plans to initiate one review in July 1994 and another one after a contractor completes a restructuring action; (5) DCMC decided not to perform should-cost reviews of the other 15 candidates because of their low risk or the lack of DCMC jurisdiction; and (6) DCMC has directed its district offices to conduct risk assessments of 78 contractors to determine the need for future should-cost reviews.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: DCMC established a structured approach for determining where overhead should-cost reviews should be performed based on specific risk assessment criteria. DCMC assessed 86 contractors for overhead should-cost reviews, including 17 contractors recommended as candidates by the military departments and the National Aeronautics and Space Administration. DCMC determined that it would perform comprehensive overhead should-cost reviews at 2 of these 17 contractors and make in-depth reviews of selected overhead cost drivers at the remaining 15 contractors. Of the additional 69 contractors, DCMC's tentative plans provide for making 5 comprehensive overhead should-cost reviews and 22 in-depth tailored reviews.

    Recommendation: Because DCMC has not responded to the March 1992 instruction on performing overhead should-cost reviews, the Secretary of Defense should re-emphasize the instruction and establish appropriate mechanisms for ensuring that it is carried out in a timely manner.

    Agency Affected: Department of Defense


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