Government Contracting: Using Cost of Capital to Assess Profitability

Highlights

Pursuant to a congressional request, GAO: (1) evaluated the effectiveness of the government's current method of assessing contractors' profitability levels; and (2) identified other methods that might better identify appropriate levels of defense contractors' profitability.

Recommendations

Matter for Congressional Consideration

Matter	Status	Comments
Congress should enact legislation to require government contractors to annually report segment-level financial data to enable policymakers to measure the profitability and the cost of capital for assessing the financial health of the defense industry.	Closed – Not Implemented	There has been no indication that Congress plans to take action on the recommendation.

Recommendations for Executive Action

Agency Affected	Recommendation	Status
Department of Defense	The Secretary of Defense should develop procedures to add the cost-of-capital concept to its analytical framework for assessing the profitability levels of the defense industry over time. This implementation would require that the data, specific to the segment doing defense work in each company, be gathered on a recurring basis.	Closed – Not Implemented DOD has stated that it will not take action on this recommendation.

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Topics

Government Operations

Accounting proceduresCapitalCost accountingDefense industryDepartment of Defense contractorsFinancial analysisProfitsReporting requirementsContractorsDefense contractors