Defense Restructuring Costs

Section 818 of the National Defense Authorization Act for Fiscal Year 1995 governs payments made by the Defense Department (DOD) to contractors for costs associated with business combinations, including mergers and acquisitions. Normally, after a business combination, a new company will undertake restructuring activities, such as closing plants, eliminating jobs, and relocating workers. Section 818 prohibits payment of restructuring costs until DOD officials certify that projected savings from the business combination are based on audited cost data and should reduce costs to DOD. DOD regulations do not comply with section 818 requirements because all restructuring costs associated with defense contractor business combinations, for which contractors may be reimbursed, will not be subject to the section's certification requirements. By excluding some restructuring costs that should be subject to section 818 certification requirements, DOD cannot ensure that payment of these costs are made only when in the best interests of the United States. Further, the regulations cannot ensure that DOD will be able to meet the section's annual reporting requirements to Congress. Moreover, DOD plans to pay restructuring costs up to the amount of savings projected to result from a business combination, which would result in the payment of those costs without significant projected savings to DOD.

GAO found that: (1) the DOD regulations do not comply with the authorization act's requirements because they do not require that all restructuring costs meet the certification requirements; (2) DOD makes a distinction in the types of restructuring activities and excludes so-called internal activity costs from the certification requirements; (3) internal activity costs are excluded from the act's certification requirements even if they are associated with the business combination; (4) the act does not distinguish between restructuring activities that are the result of the business combination; (5) DOD cannot ensure that payment of these restructuring costs are in the nation's best interest; (6) the regulations do not require contractor cost and savings data needed for DOD annual congressional reports to ensure that overall savings are obtained; and (7) DOD plans to pay restructuring costs up to the amount of the projected savings from the business restructuring, which will result in negligible savings to DOD.

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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