Defense Department's New Profit Policy

Under the Department of Defense's (DOD) new profit policy, higher aggregate profits were negotiated for contractors without any demonstrable reduction in costs to the Government. There was little indication that contractors responded positively to the attempt by DOD to encourage greater investment in new or upgraded plants and equipment which would lower production costs. Replies to a questionnaire sent to contractors confirmed that the chief motivating factor influencing their decisions to make capital investments was the desire to expand production capabilities rather than to reduce production costs. Although the new profit policy has not encouraged contractors to increase their investments in cost-reducing facilities, it has resulted in the negotiation of higher profit rates on an overall basis. By improving some contract review procedures, DOD has undertaken corrective action on several problem areas which contributed to the profit increases.