DOD's Profit Policy and GAO's Proposal for a Program To Study the Profitability of Government Contractors

Gao ID: T-NSIAD-87-11 March 18, 1987

GAO discussed changes in the Department of Defense's (DOD) profit policy and a GAO proposal to study the profitability of government contractors. GAO found that the new DOD profit policy: (1) increases the potential profit for contractors that invest in facilities and equipment and reduces the emphasis placed on cost in determining negotiated profit; and (2) will probably achieve one of its principal objectives of reducing overall negotiated profit levels by 1 percent. GAO agreed that the DOD profit policy needs to stimulate efficient contract performance by placing increased emphasis on the use of capital investments. However, GAO questioned: (1) the method DOD used to calculate return on assets in its Defense Financial and Investment Review, which resulted in the understatement of defense industry profitability; (2) whether a 1-percent reduction in defense contractor profit will be sufficient to achieve comparability with other durable goods manufacturers; and (3) the lack of any requirement for periodic study to determine whether the profit policy is achieving its objectives. GAO believes that the government needs: (1) better and more timely assurance that profit policies are producing intended results; (2) access to actual contractor results and more frequent profitability studies; and (3) a consistent and generally accepted methodology to analyze data provided by government contractors.

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