Defense Restructuring Costs:

Information Pertaining to Five Business Combinations

NSIAD-97-97: Published: Apr 1, 1997. Publicly Released: Apr 1, 1997.

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Pursuant to a legislative requirement, GAO provided information on restructuring costs of defense contractors involved in business combinations since 1993, including: (1) specific costs associated with workforce reductions and the services provided to workers affected by business combinations; (2) other funds used to help laid-off workers find new employment; (3) why the effectiveness of restructuring costs used to assist laid-off workers in gaining new employment cannot be determined; and (4) the extent of savings achieved from the business combinations relative to restructuring costs paid by the Department of Defense (DOD).

GAO noted that: (1) the five business combinations had spent about $849 million at the time of GAO's review for such restructuring activities as the disposal and relocation of facilities and equipment, consolidation of operations and systems, employee relocation, and workforce reductions; (2) of this amount, the business combinations spent about $89 million, or 10 percent, on workforce reductions; (3) about 15,000 workers left the companies as a result of the business combinations; (4) severance pay represented about 89 percent of total worker benefits; (5) expenditures for services to assist laid-off workers totalled $4 million; (6) in addition to those services provided from restructuring costs, GAO identified about $48 million in Department of Labor (DOL) grants made either directly to the contractors or to locations where workers were laid off as a result of the business combinations or normal downsizing; (7) the business combinations were also providing some services that were not included in restructuring costs, but rather were paid as normal overhead costs; (8) GAO was unable to determine the effectiveness of services for workers laid off specifically as a result of the business combinations because information critical to making such a determination is not maintained by the business combinations and is not readily available from other sources; (9) little empirical information is available on specific services that are the most useful and cost-effective; (10) the Defense Contract Audit Agency (DCAA) estimated that, as of September 30, 1996, DOD had reimbursed these business combinations about $179 million toward its share of the $849 million the combinations had incurred for restructuring activities, and that DOD realized restructuring savings totalling $347 million from the business combinations during the same period; (11) therefore, for every $1.00 DOD has paid so far in restructuring costs, DOD has realized savings of $1.93; (12) DOD officials believe that additional savings have been realized, but they did not document those savings; (13) the estimates also do not reflect any costs that may be incurred in subsequent periods; (14) these estimates do not reflect DOL grant expenditures or any assistance from other federal programs or funding streams; (15) of the $179 million paid to the business combinations, DCAA determined that $18 million, or about 10 percent, represented additional costs to DOD as a result of the July 1993 decision to pay for certain restructuring costs; and (16) the percentage of additional costs relative to the total amount paid may not be the same for future business combinations.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD included data on grants awarded by DOL directly to defense contractors in DOD's November 1997 restructuring report to Congress. According to a DOD representative, DOL indicated that the grants data DOD included in its report constituted all of the grants provided by DOL directly to defense contractors involved in restructuring. Further, DOL officials indicated that DOL did not intend to award additional grants directly to other defense contractors. Consequently, DOD considers its actions to have fully complied with the recommendation.

    Recommendation: Because direct federal grant funds can be substantial, as in the Hughes-General Dynamics and Martin Marietta-General Electric business combinations, the Secretary of Defense should obtain information about significant federal direct grants to defense contractors involved in business combinations and include this information in the DOD annual restructuring reports to the Congress. Such information could include the grants' dollar values, purposes, and periods of performance.

    Agency Affected: Department of Defense


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