DOD's Defense Financial and Investment Review

Testimony was given on the Department of Defense's (DOD) Defense Financial and Investment Review (DFAIR), which recommended changes in DOD policy concerning contractors' profits. GAO noted that DFAIR: (1) recognized that profit policy, contract financing, and contractor investment are related; (2) used return on assets to compare profitability; and (3) showed that reporting and evaluating contractor profitability is possible. However, GAO also found that: (1) DOD increased the asset base by adding government progress payments to contractor inventories and using a unique methodology to calculate economic profit; (2) DFAIR-proposed revisions to the weighted guidelines will not lower the average profit objective; and (3) DFAIR has not supported its conclusion that contractors incur a 2-percent financing cost. GAO believes that: (1) legislation to ensure consistency and creditability in the profitability reporting system is necessary; and (2) the repository for this data should be an executive branch entity with the resources to protect proprietary data.