Contractor Overhead Costs

Money Saving Reviews Are Not Being Done As Directed Gao ID: NSIAD-94-205 August 3, 1994

Should-cost reviews are a special form of cost analysis used to evaluate the economy and efficiency of a contractor's overhead operations. Since being told in 1992 to conduct more should-cost reviews, the Defense Department has only done four of them. Furthermore, all four were done by the Air Force rather than the Defense Contract Management Command, the organization primarily responsible for conducting the reviews. Since 1992, the Command has acknowledged the importance of reviews but has not begun any because of the time involved in developing regulations and an approach for performing those reviews. In June 1993, it asked its customers to identify potential candidates for should-cost reviews; they listed 17 candidates. The Command plans to begin one should-cost review in July 1994 and another one after a contractor completes a restructuring action. The Command did not consider the other 15 good candidates for should-cost reviews because of steps these contractors have taken to cut overhead costs.

GAO found that: (1) should-cost reviews are cost-effective and save hundreds of millions of dollars; (2) DOD has performed only 4 should-cost reviews, and all have been initiated by the Air Force; (3) the Defense Contract Management Command (DCMC) has not initiated any reviews because of the time involved in developing regulations and a review methodology; (4) DCMC customers have identified 17 candidates for fiscal year 1994 should-cost reviews in response to a DCMC request, and DCMC plans to initiate one review in July 1994 and another one after a contractor completes a restructuring action; (5) DCMC decided not to perform should-cost reviews of the other 15 candidates because of their low risk or the lack of DCMC jurisdiction; and (6) DCMC has directed its district offices to conduct risk assessments of 78 contractors to determine the need for future should-cost reviews.

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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