Defense Restructuring Costs

The Pentagon is restricted from paying restructuring costs associated with defense contractor mergers. Restructuring costs cover a wide range of expenses, including personnel relocations, severance pay, early retirement incentives, equipment relocations, and plant closings. The law prohibits the payment of restructuring costs until a senior Defense Department official certifies in writing that projected savings from the restructuring are based on audited data and should reduce overall costs to DOD. This report discusses the 17 restructuring projects proposed for payment by Martin Marietta Corporation as a result of its acquisition of General Electric's aerospace business segments. DOD has certified eight of the 17 projects. GAO reviewed in detail the first five projects certified; the other three projects are similar. GAO discusses whether the (1) certification for the five projects was carried out in accordance with the regulations, (2) savings were in line with the original estimates, and (3) restructuring lowered DOD contract prices.

GAO found that: (1) its review indicated DOD's actions to review and certify the first five projects complied with the restructuring regulations; (2) as required by those regulations, the contractor submitted restructuring proposals for the projects, which were then audited; a senior DOD official certified that the audited projects should result in overall reduced costs to DOD; and finally, advance agreements were executed on the projects; (3) documented savings from business combinations have not always been as great as initially expected; (4) in the case of Martin Marietta Corporation's acquisition of General Electric business units, estimated restructuring savings for the eight certified projects are less than half of the contractor's initial rough-order-of-magnitude estimates; (5) this difference exists primarily because the contractor lowered its estimated savings at the time it prepared detailed restructuring proposals and DOD negotiated reductions in the proposed savings during the certification process; (6) although certified savings are less than initially estimated, the contractor's overhead costs are lower as a result of savings from these projects; and (7) consequently, the government official responsible for negotiating overhead costs and rates provided procuring activities with lower overhead rates for use in pricing DOD contracts.