Defense Industry Restructuring:

Clarification of Cost and Savings Issues

NSIAD-97-186R: Published: Jun 17, 1997. Publicly Released: Jun 17, 1997.

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Louis J. Rodrigues
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GAO addressed several questions related to its reports on reimbursements to defense contractors for restructuring subsequent to their business combinations.

GAO noted that: (1) the savings from restructuring activities are generally in the form of future cost avoidances, which are not recorded in a contractor's accounting records; (2) the Department of Defense (DOD) has defined cost avoidances as cost reductions resulting in avoidance of costs that were not budgeted, and it has defined savings as cost reductions from an approved budget baseline that result in program funds being recouped or used elsewhere in the program; (3) the Defense Contract Audit Agency (DCAA) estimated that, as of September 30, 1996, DOD had reimbursed 4 business combinations about $179 million toward its share of the costs the combinations had incurred for restructuring activities; (4) statements made by DOD officials indicate that an important, if not key, premise behind which DOD's savings claims are based is that taxpayer reimbursement for restructuring costs will cause defense contractors to restructure sooner than they would otherwise; (5) the initial estimate of restructuring savings assumes that everything else, except for the restructuring, is the same after a business combination as before; (6) other factors, such as inflation, business fluctuations, accounting system changes, subsequent reorganizations, and unexpected events also affect actual costs; (7) the savings resulting from employee layoffs constitute a significant element of DOD's estimates of savings; (8) defense contractors used various methodologies for savings and cost estimates, which DOD certifies under DCAA audits; (9) DCAA estimated that $18 million, or about 10 percent of the $179.2 million that DOD had paid for restructuring costs as of September 1996, was charged to flexibly priced contracts transferred after business combinations; and (10) in previous testimony, GAO suggested that Congress may wish to consider extending, at least for the short term, the reporting requirement to provide further visibility into the actual savings resulting from restructuring activities.

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