Contract Pricing

Economy and Efficiency Audits Can Help Reduce Overhead Costs Gao ID: NSIAD-92-16 October 30, 1991

The Defense Department's (DOD) use of overhead should-cost reviews, cost-monitoring reviews, and operations audits has decreased to the point that the agency's efforts no longer reflect the Deputy Secretary of Defense's emphasis on the importance of these analytical tools. Although these tools have uncovered significant unnecessary overhead costs, DOD officials said that they have not sustained their review effort because of inadequate staffing or a shift in emphasis to other types of work. At the same time, overhead rates may continue to increase, as they have since 1987, if the cost of DOD acquisitions continue to decline in the 1980s. Unless DOD renews emphasis, these reviews may decline further as the agency's acquisition work force is cut.

GAO found that: (1) since 1985, the number of overhead should-cost reviews decreased, while the number of less comprehensive reviews increased; (2) from 1987 to 1990, the number of cost-monitoring reviews of overhead costs conducted at the nine contractor sites visited decreased by over 50 percent; (3) from 1985 to 1990, the number of operations audits of overhead costs performed at the nine contractors visited decreased by 37 percent; (4) although those analytical methods have identified significant unnecessary overhead costs, DOD believes that it did not sustain its review effort because of inadequate staffing and a shift in priorities; (5) although essential DOD assessments indicated that overhead should-cost reviews were viable, DOD did not revise its regulations to ensure that the reviews were performed; (6) since 1987, overhead rates at many major DOD contractors have increased while the value of DOD contracts has decreased; (7) anticipated work-force reductions required by recent legislation may further decrease DOD use of economy and efficiency audits; (8) overhead costs may continue to increase if the cost of DOD acquisitions continues to decline; and (9) unless DOD renews its emphasis on reducing overhead costs, those reviews may decline further as the DOD acquisition workforce is reduced.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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