Defense Contractor Restructuring

The National Defense Authorization Act for Fiscal Year 1995 required GAO to report periodically on the implementation of the Defense Department's (DOD) policy on defense contractor restructuring. This report focuses on DOD's use of contract price adjustment clauses, also called reopener clauses, which can be used to ensure that DOD receives its fair share of contractor restructuring savings on fixed-price contracts awarded to companies involved in a business combination between the time a combination is announced and the time the restructuring savings are reflected in the mechanism used for pricing contracts. GAO found the time it takes for restructuring savings to be included in DOD contract prices can be considerable. For the contractor business segments GAO examined, it took an average of about 21 months from the announcement of the acquisition or merger to the time that contractors reflect the restructuring savings in reduced overhead rates.

GAO noted that: (1) the time it takes for restructuring savings to be included in DOD contract prices can be considerable; (2) for the contractor business segments GAO examined, it took an average of about 21 months from the announcement of the acquisition or merger to the time that contractors reflect the restructuring savings in reduced overhead rates; (3) during this period, DOD awarded over 600 fixed-price contracts or contract modifications worth about $3.9 billion; (4) however, despite repeated recommendations from the Defense Contract Audit Agency and Defense Contract Management Command, contracting officers rarely included reopener clauses for savings in fixed-price contracts awarded during this period; (5) with reopener clauses, contract prices that were negotiated before savings and were included in overhead rates used to price DOD contracts could be adjusted downward once savings were determined, thereby reducing contract costs; (6) without reopener clauses, DOD cannot recoup its share of restructuring savings; (7) DOD contracting officers cited various reasons for not using reopener clauses; (8) these reasons included the desire to have contracts with no loose ends and concerns that the use of the clauses would cause an excessive administrative burden in renegotiating contract price adjustments; (9) another factor that appeared to influence the use of reopener clauses is the level of contractor resistance; (10) also, one contractor commented that such a clause was not required by current DOD regulations; (11) the use of reopener clauses can result in substantial savings to DOD; (12) in one case in which a reopener clause was exercised, the contract price was reduced by almost 4 percent, or about $1.8 million; and (13) unless DOD takes steps to include reopener clauses in its fixed-price contracts with companies forming business combinations, it risks losing further substantial savings resulting from contractor restructuring.

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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