Defense Industry Restructuring:

Cost and Savings Issues

T-NSIAD-97-141: Published: Apr 15, 1997. Publicly Released: Apr 15, 1997.

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Louis J. Rodrigues
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GAO discussed the costs and savings associated with defense industry restructuring, focusing on the: (1) Department of Defense's (DOD) decision to pay restructuring costs; (2) process DOD uses to ensure that paying restructuring costs is in the government's best interest; and (3) amount and nature of costs that DOD has paid and estimates of savings it has realized.

GAO noted that: (1) over the last several years, defense contractors have attempted to become more efficient and competitive by such activities as closing or combining facilities and eliminating jobs; (2) DOD has always paid for its share of the costs of these activities when they were undertaken as part of an internal restructuring by a single contractor; (3) until July 1993, however, DOD did not pay for restructuring costs on certain contracts transferred from one company to another company as a result of a business combination; (4) at that time, DOD changed its practice and began allowing restructuring costs to be charged to these contracts as long as certain conditions were met; (5) principally, such costs were allowed as long as projected savings exceeded projected costs; (6) the dollar impact of this decision may be less than some anticipated; (7) DOD estimates that only 10 percent of the costs DOD had paid through September 1996 resulted from the change in practice; (8) as of March 31, 1997, five combinations had gone through a certification process that is required before DOD pays restructuring costs; (9) GAO recently completed an evaluation of four of the five certified combinations, as well as one additional combination that DOD included in its reports to Congress: (10) overall, GAO found that DOD estimated its share of projected restructuring costs was about $755 million, while its estimated share of the savings resulting from these combinations was at least $3.3 billion; (11) at the time of GAO's review, the five business combinations had incurred about $849 million for a wide range of restructuring activities, with about 10 percent of these costs being for benefits and services to laid-off workers; (12) services for laid-off workers were also being funded by federal grants and through the contractors' normal overhead costs; (13) through September 1996, DOD reported that it had paid $179.2 million in restructuring costs while realizing $346.7 million in savings; (14) in other words, for every $1.00 DOD had paid in restructuring costs, it estimated savings of $1.93 had been realized; and (15) however, it is extremely difficult to trace restructuring savings into reduced contract prices because many factors other than restructuring activities affect contract prices.

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