Defense Contractor Restructuring

The National Defense Authorization Act for Fiscal Year 1995 restricts Defense Department (DOD) payments to contractors for costs associated with business combinations. Specifically, the law prohibits payment of restructuring costs, such as those associated with closing facilities and eliminating jobs, until a senior DOD official certifies that projected savings from the restructuring are based on audited data and should reduce DOD's overall costs. This report discusses whether the certification process (1) was carried out in accordance with the interim regulations and (2) reduced DOD's contract prices. GAO focuses on the United Defense, Limited Partnership business combination of FMC Corporation's Defense Systems Group and Harsco Corporation's BMY-Combat Systems Division--two manufacturers of tracked combat vehicle for the Army. This business combination is particularly significant because restructuring at United Defense could be a model for future DOD restructuring efforts.

GAO found that: (1) DOD's actions in reviewing and certifying the United Defense combination generally complied with the interim restructuring regulations; (2) as required, the Defense Contract Audit Agency reviewed United Defense's restructuring proposal, and in May 1995, a senior DOD official certified that the restructuring should result in overall reduced costs; (3) the projected net cost reduction certified by DOD represents less than 15 percent of the savings FMC and Harsco projected to DOD 2 years earlier when they sought approval for the proposed partnership; (4) subsequent to restructuring, DOD awarded United Defense a major contract to remanufacture combat vehicles at a price less that the price charged prior to restructuring; and (5) company officials believe that most of the savings resulted from the restructuring.