United States General Accounting Office

GAO Report to Congressional Committees

April 1996 ACQUISITION

REFORM

Efforts to Reduce the

Cost to Manage and

Oversee DOD

Contracts

G O A

years

1921 - 1996

GAO/NSIAD-96-106

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-271570 

April 18, 1996

The Honorable Strom Thurmond

Chairman

The Honorable Sam Nunn

Ranking Minority Member

Committee on Armed Services

United States Senate

The Honorable Floyd Spence

Chairman

The Honorable Ronald V. Dellums

Ranking Minority Member

Committee on National Security

House of Representatives

The Department of Defense (DOD) contracted with the management

consulting firm of Coopers and Lybrand to study the impact of DOD’s

acquisition regulations and oversight requirements on its contractors. In

its December 1994 report, The DOD Regulatory Cost Premium: A

Quantitative Assessment, Coopers and Lybrand identified over 120

regulatory and statutory “cost drivers” that, according to the contractors

surveyed, increase the price DOD pays for goods and services by

18 percent.

As directed by section 363 of the National Defense Authorization Act for

Fiscal Year 1996 (P.L. 104-106), we reviewed DOD’s efforts to address the

cost drivers. Specifically, we developed information on (1) DOD’s initiatives

to reduce the impact of the cost drivers and (2) the extent to which cost

reductions have resulted from DOD’s initiatives. We limited our review to

the top 10 cost drivers, which accounted for nearly 50 percent of the cost

premium identified in the Coopers and Lybrand study.

Background Coopers and Lybrand, with the assistance of TASC, Inc., performed its

study at 10 contractor sites that represented a cross section of the defense

industry in terms of size, region, industry sector, degree of participation in

the commercial market, and other factors. The study’s objectives were to

(1) develop and employ an empirically based approach to assess the

industry cost impact of specific DOD regulations, (2) measure the overall

impact of the DOD regulatory environment on contractors’ costs, and

Page 1 GAO/NSIAD-96-106 Acquisition Reform
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(3) identify key regulatory cost drivers and their impact on contractors’

business processes.

The Coopers and Lybrand study used an activity-based costing approach

in calculating the impact of DOD’s regulations and oversight requirements

on industry. Using this approach, Coopers and Lybrand developed cost

estimates for the activities and functions resulting from the regulations

and oversight requirements instead of generally used cost accounting

categories, such as salaries, benefits, and supplies. Coopers and Lybrand

determined costs by asking managers at contractor sites to estimate the

impact on specific activities of substituting best commercial practices for

DOD regulations and oversight.

The top 10 cost drivers identified in the Coopers and Lybrand study were

• DOD quality program requirements (MIL-Q-9858A),

• Truth in Negotiations Act (P.L. 87-653),

• cost/schedule control system,

• configuration management requirements,

• contract-specific requirements,

• Defense Contract Audit Agency/Defense Contract Management Command

interface,

• cost accounting standards,

• material management and accounting system,

• engineering drawings, and

• government property administration.

Appendix I describes each of these cost drivers.

According to DOD officials, the Coopers and Lybrand study reinforced the

need to continue acquisition reform efforts and served as the framework

for specific DOD efforts to reduce the cost of DOD’s contract management

and oversight requirements.

Results in Brief In response to the Coopers and Lybrand study, DOD established the

Regulatory Cost Premium Working Group to coordinate DOD-wide efforts

to address the cost drivers. The working group is tracking many reforms

initiated by DOD to reduce the cost of managing and overseeing DOD’s

contracts.

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B-271570 

Although DOD expects substantial savings from reforming its management

and oversight requirements, the savings resulting from current DOD

initiatives may be significantly less than the 18-percent cost premium

identified by Coopers and Lybrand. As of December 31, 1995, contractors

seeking to address the cost drivers through DOD’s Reducing Oversight

Costs Reinvention Laboratory had identified actions that would achieve

targeted savings totaling only about 1 percent.

DOD stated that the 1-percent cost savings reported by the reinvention

laboratory is based on “work-in-progress” results and that it would be

inappropriate to use these results to draw conclusions about DOD’s ability

to reduce the cost premium. DOD fully expects the savings from laboratory

activities to exceed the level reported in December 1995.

DOD Efforts to

Address Oversight

Cost Drivers

In response to the Coopers and Lybrand study, DOD established the

Regulatory Cost Premium Working Group in 1994 to identify and

coordinate efforts to address the cost drivers. The working group is

addressing the top 24 cost drivers and intends to expand its work to

include the top 59 cost drivers identified in the study. The working group

finalized an action plan in March 1995 and assigned primary responsibility

for addressing the top 24 cost drivers to specific offices within DOD.

DOD initiated a number of reforms, both before and after the Coopers and

Lybrand study, to reduce the impact of its regulations and oversight

requirements on industry. For example, DOD formed several process action

teams to address critical acquisition reform issues. The teams, which

consisted of personnel from different DOD functions, military services, and

agencies, were responsible for analyzing current practices; identifying

costs and alternate approaches; recommending options; and developing

measures of success, implementation plans, and new legislative,

regulatory, or administrative changes required to implement proposed

options. The following teams have issued final reports: Automated

Acquisition Information (Apr. 1995), Contract Administration Reform

(Feb. 1995), Procurement Process Reform (Jan. 1995), Acquisition Reform

Oversight and Review (Dec. 1994), Military Specifications and Standards

(Apr. 1994), and Electronic Commerce in Contracting (Dec. 1993).

Some of the recommendations made by the process action teams directly

address the cost drivers identified by Coopers and Lybrand. For example,

DOD’s process action team report on military specifications and standards

focused on their impacts on industry and the need to reduce costs

Page 3 GAO/NSIAD-96-106 Acquisition Reform
B-271570 

associated with military-unique specifications and standards. In response

to the process action team’s recommendations, the Secretary of Defense,

in June 1994, directed (1) the use of commercial and performance-based

specifications and standards instead of military-unique specifications and

standards to the maximum extent practicable and (2) the development of a

streamlined procurement process to modify existing contracts to

encourage contractors to propose nongovernment specifications and

industrywide practices. In February 1995, DOD inactivated MIL-Q-9858A

(DOD quality program requirements) for new systems. The quality

specification is slated for cancellation by October 1996. In the meantime,

DOD is encouraging flexibility in allowing contractors to use their own

quality systems, which may be modeled on military, commercial, or

international standards.

In further emphasizing the need to move away from military-unique

requirements, the Secretary of Defense directed DOD in December 1995 to

change the management and manufacturing requirements of existing

contracts and to unify them within a facility, where appropriate. This

initiative is known as the block change or single process initiative.

DOD believes that allowing defense contractors to use a single process in

its facilities is a natural progression from the contract-by-contract process

of removing military-unique specifications and standards initiated in 1994.

DOD expects that moving to common, facilitywide requirements will reduce

both DOD and contractor costs in the long term. However, DOD believes that

most contractors will incur transition costs that equal or exceed savings in

the near term.

In September 1994, DOD established the Reducing Oversight Costs

Reinvention Laboratory. This laboratory, which includes the Defense

Contract Audit Agency, the Defense Contract Management Command,1

DOD buying commands, and several DOD contractors, was formed to

identify oversight cost drivers, assess if oversight is appropriate based on

risk, and identify and implement process improvements to reduce

oversight costs. The contractors involved in the reinvention laboratory

have proposed a number of changes to DOD’s acquisition management and

oversight requirements. The areas identified for process improvements

include contract cost performance reporting, quality assurance, and

government property administration. We are currently reviewing the

1

The Defense Contract Audit Agency provides DOD with contract auditing services at various stages of

the acquisition process. The Defense Contract Management Command provides DOD with

assessments of a contractor’s operational performance required by contractual terms, conditions, and

statement of work.

Page 4 GAO/NSIAD-96-106 Acquisition Reform
B-271570 

Reducing Oversight Costs Reinvention Laboratory, and we will issue a

separate report on the results of that review later this year.

Savings May Be Less

Than Estimated

Although substantial savings are expected from DOD’s acquisition reform

efforts, the savings from ongoing initiatives to address the cost drivers

may be significantly less than the 18-percent cost premium identified by

Coopers and Lybrand. As of December 31, 1995, the 10 contractors

involved in DOD’s Reducing Oversight Costs Reinvention Laboratory had

targeted actions to reform DOD’s requirements that would, in total, achieve

a 1-percent savings. Specifically, even though the value-added base of the

contracts at the 10 contractor sites was about $9.6 billion, the contractors

estimated that savings of only about $119 million could be achieved by

addressing selected DOD regulations and oversight requirements.2

One explanation for the disparity between Coopers and Lybrand’s

18-percent cost premium and the reinvention laboratory results is that

Coopers and Lybrand did not attempt to assess the benefits resulting from

the cost drivers it identified. Rather, the Coopers and Lybrand study

analyzed only the cost impact of DOD’s regulations and oversight

requirements on contractors. DOD’s Reducing Oversight Costs Reinvention

Laboratory identified a significantly lower cost savings potential because

some of the cost drivers made good business sense. In addition,

contractors would have similar self-imposed requirements in the absence

of some of DOD’s regulatory requirements. Thus, when the benefits of DOD’s

management and oversight requirements are considered, the potential to

reduce the 18-percent cost premium identified in the Coopers and Lybrand

study is significantly reduced.

The Coopers and Lybrand study stated that it did not consider the benefits

resulting from DOD’s regulatory requirements. It also stated that “those

seeking to project the study results to the entire defense industrial base or

to estimate in a precise fashion the budgetary savings likely to result from

reform of the DOD acquisition environment should exercise caution when

interpreting the study results.”

Agency Comments

and Our Evaluation

In commenting on a draft of this report, DOD stated that the 1-percent cost

savings reported by DOD’s Reducing Oversight Costs Reinvention

Laboratory is based on “work-in-progress results” and that to draw

2

The value-added base of the contracts represents total contract costs less the associated costs of

material purchases, including subcontracts.

Page 5 GAO/NSIAD-96-106 Acquisition Reform
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conclusions about DOD’s ability to reduce the costs of managing and

overseeing DOD contracts from such early projections is “pure

speculation.” In addition, DOD stated that since the Coopers and Lybrand

study did not attempt to validate the existence of any benefits that DOD

may receive from its regulatory requirements, or to quantify the value of

such benefits, DOD would not expect that the entire 18-percent cost

premium could be reduced to zero. DOD added that it fully expects that

laboratory activities will result in cost savings that exceed the 1-percent

reported in December 1995. DOD stated that cost savings have not been

quantified for many of the process improvement projects currently being

worked by the laboratory and that, as laboratory activities mature, other

projects will be added.

Our work shows that the actions taken by the reinvention laboratory

contractors as of December 1995 have had little success in addressing the

cost drivers identified by the Coopers and Lybrand study. We explain in

the report that one reason for the difference between the 18-percent cost

premium reported by Coopers and Lybrand and the December 1995 results

of DOD’s Reducing Oversight Costs Reinvention Laboratory is that Coopers

and Lybrand did not consider any benefits that DOD may receive form DOD’s

regulatory requirements. In addition, our discussions with laboratory

participants, including DOD and contractor officials in March 1996, indicate

that substantially increasing the savings resulting from reinvention

laboratory efforts will be difficult in the near term. In fact, 4 of the 10

contractors involved in the laboratory are not actively pursuing

development of additional cost savings ideas that would substantially

increase currently targeted oversight cost savings.

DOD also suggested we cite the results of one laboratory participant that

reported a cost premium of 9 percent and targeted annual savings of

5 percent. Citing the results of only one laboratory while ignoring the other

nine would give an inaccurate and distorted picture of the reinvention

laboratory’s success in addressing the cost drivers identified by the

Coopers and Lybrand study.

DOD’s comments are presented in their entirety in appendix II.

Scope and

Methodology

To develop information on DOD’s efforts to reduce the cost of management

and oversight requirements, we analyzed DOD’s Compendium of Office of

Primary Responsibility Reports, which documents the results of research

and analyses undertaken by DOD to address cost drivers identified in the

Page 6 GAO/NSIAD-96-106 Acquisition Reform
B-271570 

Coopers and Lybrand study. We focused our work on the top 10 cost

drivers because they represented nearly 50 percent of the total cost

premium identified in the Coopers and Lybrand study. We did not evaluate

the quality of the data or analytical work that formed the basis of the

Coopers and Lybrand study.

We interviewed and obtained supporting documentation from officials in

the Office of the Under Secretary of Defense for Acquisition and

Technology, Defense Contract Audit Agency, and Defense Contract

Management Command. We also obtained information from

representatives of Coopers and Lybrand and TASC to gain insight on the

work they performed.

In addition, we obtained information from representatives of the

Aerospace Industries Association, Electronic Industries Association, and

National Security Industrial Association. These trade associations

represent companies that manufacture weapon systems and components

for DOD. We also reviewed studies conducted by several public and private

organizations on the impact of DOD regulation and oversight on industry.

We performed our review from October 1995 to March 1996 in accordance

with generally accepted government auditing standards.

We are sending copies of this report to the Secretaries of Defense, the

Army, the Navy, and the Air Force and interested congressional

committees. Copies will also be made available to others upon request.

Please contact me at (202) 512-4841 if you or your staff have any questions

concerning this report. Major contributors to this report are listed in

appendix III.

Louis J. Rodrigues

Director, Defense Acquisitions Issues

Page 7 GAO/NSIAD-96-106 Acquisition Reform
Contents

Letter 1

Appendix I 

Department of

Defense’s Top 10 Cost

Drivers

10

Appendix II 

Comments From the

Department of

Defense

11

Appendix III 

Major Contributors to

This Report

13

Abbreviations

DOD Department of Defense

Page 8 GAO/NSIAD-96-106 Acquisition Reform
Page 9 GAO/NSIAD-96-106 Acquisition Reform
Appendix I 

Department of Defense’s Top 10 Cost

Drivers

Cost driver Description

DOD quality program

requirements

An umbrella military specification (MIL-Q-9858A)

requiring contractors to establish quality assurance

programs to ensure compliance with contract

requirements.

Truth in Negotiations Act A statute (P.L. 87-653) requiring contractors to justify cost

proposals and proposed contract prices with detailed

cost or pricing data that must be certified as accurate,

complete, and current.

Cost/schedule control system A requirement that contractors have an integrated

management control system to plan and control the

execution of cost-reimbursable contracts.

Configuration management

requirements

A military standard (MIL-STD-973) for DOD approval of all

contractor configuration changes to technical data

packages.

Contract-specific

requirements

DOD-imposed requirements that are not codified in

statutes, regulations, military specifications, or standards.

Defense Contract Audit

Agency/Defense Contract

Management Command

interface

Costs deriving from daily interaction of contractor

personnel with auditors from the Defense Contract Audit

Agency and quality inspectors and functional experts

from the Defense Contract Management Command.

Cost accounting standards Requirements for ensuring consistent and equitable

allocation of costs and for disclosing accounting

practices and contractor interpretation of certain

standards.

Material management and

accounting system

A requirement (DFARS-242.72) for certain contractors to

establish and maintain a system that accurately forecasts

material usage and ensures that costs of all materials are

appropriately allocated to specific contracts.

Engineering drawings A guideline (MIL-STD-100E) for preparing engineering

drawings.

Government property

administration

A requirement (FAR part 45) that contractors assume

responsibility for maintaining and accounting for

government-owned property.

Note: DOD, Department of Defense; MIL-STD, military standard; DFARS, Defense Federal

Acquisition Regulation Supplement; FAR, Federal Acquisition Regulation.

Page 10 GAO/NSIAD-96-106 Acquisition Reform
Appendix II 

Comments From the Department of Defense

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Now on p. 5.

Page 11 GAO/NSIAD-96-106 Acquisition Reform
Appendix II 

Comments From the Department of Defense

Now on pp. 1-2.

Now on p 5.

Page 12 GAO/NSIAD-96-106 Acquisition Reform
Appendix III 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

David E. Cooper

Clifton E. Spruill

Maria J. Santos

Frederick E. Lundgren

William M. McPhail

Arnett Sanders

(705120) Page 13 GAO/NSIAD-96-106 Acquisition Reform
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