Defense Restructuring Costs:

Projected and Actual Savings From Martin Marietta Acquisition of GE Aerospace

NSIAD-96-191: Published: Sep 5, 1996. Publicly Released: Sep 5, 1996.

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Pursuant to a legislative requirement, GAO provided information on 17 restructuring projects proposed for payment by the Martin Marietta Corporation, focusing on whether: (1) the Department of Defense's (DOD) certification process for the first 5 of 8 certified projects complies with DOD regulations; (2) projected savings are in line with original estimates; and (3) project restructuring has resulted in lower DOD contract prices.

GAO found that: (1) its review indicated DOD's actions to review and certify the first five projects complied with the restructuring regulations; (2) as required by those regulations, the contractor submitted restructuring proposals for the projects, which were then audited; a senior DOD official certified that the audited projects should result in overall reduced costs to DOD; and finally, advance agreements were executed on the projects; (3) documented savings from business combinations have not always been as great as initially expected; (4) in the case of Martin Marietta Corporation's acquisition of General Electric business units, estimated restructuring savings for the eight certified projects are less than half of the contractor's initial rough-order-of-magnitude estimates; (5) this difference exists primarily because the contractor lowered its estimated savings at the time it prepared detailed restructuring proposals and DOD negotiated reductions in the proposed savings during the certification process; (6) although certified savings are less than initially estimated, the contractor's overhead costs are lower as a result of savings from these projects; and (7) consequently, the government official responsible for negotiating overhead costs and rates provided procuring activities with lower overhead rates for use in pricing DOD contracts.

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