United States General Accounting Office

GAO Report to Congressional Committees

January 1997 ACQUISITION

REFORM

DOD Faces Challenges

in Reducing Oversight

Costs

GAO/NSIAD-97-48

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-272650 

January 29, 1997

Congressional Committees

The Department of Defense (DOD) has made acquisition reform one of its

highest priorities as it attempts to reduce the cost of acquiring weapon

systems in an era of constrained defense budgets. Savings from acquisition

reforms are, in part, expected to provide funds for DOD’s planned

modernization efforts. As one element of its acquisition reform efforts, DOD

has focused considerable attention on reducing oversight costs, which are

considered to be a significant factor in influencing the price DOD pays for

goods and services.1

This report deals with our review of the Reducing Oversight Costs

reinvention laboratory that DOD established in September 1994 as a result

of the National Performance Review. The laboratory had as its overall

objective the reduction of nonvalue added oversight requirements with the

intent of reducing the contractors’ compliance costs and the government’s

cost of performing oversight activities. The focus of our review was to

determine (1) the laboratory’s success in effecting changes to DOD

oversight requirements and reducing oversight costs, (2) any obstacles to

achieving these benefits, and (3) lessons learned from laboratory

experiences. We conducted this review under our basic legislative

responsibilities and are addressing this report to the committees that

foster acquisition reform.

Background The National Performance Review is a major reform initiative begun by

the President in 1993 and was placed under the direction of the Vice

President. A key part of that initiative has been the establishment of

agency “reinvention laboratories,” which are designed to test ways that

agencies can improve their performance by reengineering their work

processes and eliminating unnecessary regulations. We reported in

March 1996 that more than 2 dozen agencies and other federal entities had

developed a total of 185 reinvention laboratories.2

DOD’s Reducing Oversight Costs reinvention laboratory consists of 

10 participating defense contractor sites, as well as cognizant Defense

1

For additional information on DOD’s efforts, see Acquisition Reform: Efforts to Reduce the Cost to

Manage and Oversee DOD Contracts (GAO/NSIAD-96-106, Apr. 18, 1996).

2

For additional information on reinvention laboratories, see Management Reform: Status of Agency

Reinvention Lab Efforts (GAO/GGD-96-69, Mar. 20, 1996).

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Contract Management Command (DCMC) and Defense Contract Audit

Agency (DCAA) offices, as shown in figure 1. Each site established a

management council generally comprised of representatives from the

contractor, DCAA, DCMC, and selected DOD program offices. The reinvention

laboratory’s concept of operations was to have participants conduct

cost-benefit analyses of oversight requirements, eliminate requirements

that drive nonvalue added oversight, and use the regulatory relief authority

granted to designated reinvention laboratories to deviate from the Federal

Acquisition Regulation (FAR) or the Defense Federal Acquisition

Regulation Supplement to experiment and test new approaches to

oversight.

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Figure 1: Reducing Oversight Costs Reinvention Laboratory Participants

Participating contractors

1. Boeing Defense and Space Group, Seattle, Wash. 6. Texas Instruments Defense Systems and Electronics Group, Dallas, Tex.

2. Northrop Grumman Military Aircraft Division, Hawthorne, Calif. 7. McDonnell Douglas Aerospace, St. Louis, Mo.

3. Hughes Missile Systems Company, Tucson, Ariz. 8. Magnavox Electronics System, Fort Wayne, Ind.

4. Lockheed Martin Tactical Aircraft Systems, Fort Worth, Tex. 9. Lockheed Martin Government Electronic Systems, Moorestown, N.J.

5. Loral Vought Systems, Grand Prairie, Tex. 10. Raytheon Electronics Systems, Bedford, Mass.

Note: Names of participants were current at the time of our review, but may not reflect subsequent mergers, acquisitions or reorganizations.

1

10

8 9

7

4 5,6

3

2

To measure the laboratory’s progress, DOD requested that participants

report on the projects that were being pursued, their potential savings, and

the actual savings achieved. The participants were requested to group

their results according to the cost drivers identified by the management

consulting firm of Coopers & Lybrand in its December 1994 study. This

study, which was prepared with the assistance of TASC, Inc., estimated

that government acquisition regulations and oversight requirements added

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18 percent to the cost of goods and services DOD buys.3 In total, the report

covered more than 120 cost drivers. The report concluded that the

following top 10 cost drivers accounted for almost half of the 18-percent

cost impact:

• DOD quality program requirements,

• Truth in Negotiations Act (TINA),

• cost/schedule control system requirements,

• configuration management requirements,

• contract specific requirements,

• DCAA/DCMC interface,

• Cost Accounting Standards,

• material management and accounting system,

• engineering drawings, and

• government property administration.

Appendix I provides more information about the 10 cost drivers.

Many laboratory participants are also involved in the Single Process

Initiative announced by the Secretary of Defense in December 1995. This

initiative is aimed at reducing or eliminating multiple, government-unique

management or manufacturing requirements to enable the establishment

of common, facility-wide systems.

Results in Brief While the reinvention laboratory was an effort limited to only 10 locations,

its results highlight some of the challenges that DOD faces in attempting to

reduce oversight costs. Overall, the reinvention laboratory has made only

limited progress in implementing changes to reduce contractors’ costs of

complying with government regulations and oversight requirements. In

particular, laboratory participants reported little success in addressing 9 of

the top 10 cost drivers. Several factors, according to DOD and contractor

officials, limited the ability of laboratory participants to make changes and

achieve significant cost reductions. DOD officials noted that on a more

general level, the reinvention laboratory tended not to get the highest level

of support from other components within DOD and from service

components. Other factors tended to affect specific projects, including

statutory and non-DOD regulatory requirements, disagreements between

DOD and contractor personnel on the value of certain oversight

3

The DOD Regulatory Cost Premium: A Quantitative Assessment, Coopers & Lybrand/TASC, Inc.,

Dec. 1994. Two of the 10 contractors participating in the reinvention laboratory were among those

included in the Coopers & Lybrand study.

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requirements, and difficulties in coordinating and obtaining approval for

proposed changes where multiple customers were involved.

While the laboratory results highlight the challenges faced by DOD, the

results should not deter DOD from continuing its efforts to reduce nonvalue

added oversight requirements. Rather, the lessons learned from the

reinvention laboratory suggest that DOD leadership needs to continue

support of oversight reform. While DOD is in the process of closing the

reinvention laboratory, DOD officials noted that many of the lessons

learned have been reflected in structuring its Single Process Initiative. DOD

officials noted that the initiative is open to all defense contractors and

believe that it will provide a more effective means for addressing many of

the technically oriented issues such as manufacturing and quality

assurance processes. DOD officials cited the use of management councils

as a key element in the initiative, as well as using a more structured

approach to reviewing and approving projects and designating senior DOD

and service officials to serve as facilitators. In doing so, DOD anticipates

that proposals submitted under the Single Process Initiative will be

reviewed and approved in a more timely fashion.

From a budgetary perspective, the laboratory results also suggest that

caution must be used in estimating cost reductions from oversight reform.

Only a small portion of the projected potential cost reductions from

laboratory projects had been realized as of July 31, 1996. DOD officials

noted that it may be some time before it is known whether the remaining

projects will be approved and implemented, and many of the projects may

incur implementation costs that would partially offset cost reductions in

the near term. Finally, the amount of cost reduction that can actually be

achieved from oversight reform remains in question as participants

generally found the cost impact identified by Coopers & Lybrand as being

overstated at their companies. For example, 5 participants prepared

estimates for the top 10 cost drivers and their estimates ranged from 1.2 to

6.1 percent compared to the study’s estimate of 8.5 percent.

Limited Laboratory

Success in Making

Change

Through July 31, 1996—the date of the last status report—laboratory

participants estimated that if all their projects are approved and fully

implemented, annual cost reductions of about $159 million could be

achieved. As shown in appendix I, about $145 million, or 91 percent of the

total amount, would be in the form of reduced contractor compliance

costs. Of the $145 million in potential annual cost reductions, about

$11 million has been reported as being realized from actions already

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implemented. Laboratory participants identified modest reductions—about

$14 million—in direct government oversight costs.4

 Finally, while both

DCMC and DCAA are generally planning further reductions to its staff at the

reinvention sites, DOD officials acknowledge these reductions are primarily

due to overall budget constraints rather than laboratory efforts.

Laboratory participants reported little success in addressing 9 of the top

10 cost drivers identified by Coopers & Lybrand, with the majority of the

projected savings expected to come from changes in the contractors’

quality assurance systems. Changes in quality assurance processes

generally reflect decisions to convert from a military to a commercially or

internationally accepted standard that contractors believe improved their

long-term competitiveness.5

 These changes were greatly facilitated by the

Secretary of Defense’s June 1994 decision to allow the use of commercial

specifications or standards in lieu of military requirements unless no

practical alternative existed.

Factors Inhibiting

Change

Participants identified a variety of factors as to why changes to the other

nine cost drivers were not more successful. Some factors affected the

laboratory at a more general level, while others had a more direct effect on

individual projects. Requirements imposed by statute and non-DOD

regulatory requirements precluded participants from pursuing some

projects, while the inability to obtain approval from other federal agencies

to test new processes also proved formidable. On other projects,

differences in views between DOD and contractor personnel on the merits

of certain oversight requirements slowed down or otherwise limited

opportunities to make meaningful changes. Coordinating and obtaining

approval for proposed changes among multiple customers—while

generally not precluding a project from being pursued—also tended to be

difficult.

On a more general level, participants voiced frustration at delays in having

projects or waivers reviewed and approved. Participants also noted that

successfully implementing reform efforts requires high level attention and

4

The estimate for the government oversight cost reduction was based on the latest data as of

December 31, 1995. Laboratory participants reported that one project, for example, could reduce

contractor system audit costs by 50 percent. Local DOD representatives will prepare an annual

government audit schedule and share it with the program offices who will be offered an opportunity to

join local audit teams instead of sending their own teams. Laboratory participants estimate this change

will save DOD about $1.2 million annually in staff costs, while the contractor’s cost to support such

reviews will be reduced by an estimated $1.1 million annually.

5

For more information on commercial quality assurance practices, see Best Practices: Commercial

Quality Assurance Practices Offer Improvements for DOD (GAO/NSIAD-96-162, Aug. 26, 1996).

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support within DOD. One participant noted, for example, that depending on

the issue, there were relatively few officials that were empowered to

approve a change, while many could reject or delay a proposal. Further,

DCMC officials told us that the reinvention laboratory, a joint DCMC/DCAA

initiative, tended not to get the highest level of support from other

components within DOD and from service components. They said that the

laboratory was not a “big attention grabber” for many of the military

commands and buying offices. One senior official noted, for example, that

when he would visit a command or buying office to talk about the

laboratory and its potential, the response was often that they had other

priorities. In contrast, this official noted that the Single Process Initiative

has the attention and support of both the Secretary of Defense and the

Under Secretary of Defense for Acquisition and Technology. Accordingly,

the Single Process Initiative is receiving the type of attention where

commands and buying offices are more cognizant of and receptive to

reform proposals.

Legislative and Regulatory

Requirements

Laboratory participants found that legislative and regulatory requirements

affected their efforts on several cost drivers. Legislative requirements

generally cannot be unilaterally waived unless an agency has specific

legislative authority to do so. Similarly, federal agencies have promulgated

regulations to accomplish their assigned responsibilities. Regulations

under the control of non-DOD agencies cannot be waived by DOD without

the approval of cognizant agencies. Participants noted that 3 of the top 10

cost drivers identified by the Coopers & Lybrand study—the requirements

of TINA, government property administration and Cost Accounting

Standards—fell into this category.

Participants considered addressing the cost of complying with TINA by

increasing the threshold over which they were required to submit certified

cost and pricing data. While teams often disagreed on the merits of raising

the threshold, the proposals generally could not be pursued since the

threshold is legislatively established. Consequently, participants chose to

pursue changes in the processes that they use to comply with the

legislation’s requirements. For example, one team agreed to eliminate

formal proposals for ordering production spares, while another laboratory

site is evaluating the expanded use of parametric estimating techniques in

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lieu of preparing detailed cost data.6 A senior DCAA official stated that

addressing the way in which contractors comply with TINA’s requirements

can lead to reduced compliance costs while still providing the government

the benefits associated with TINA’s requirement to have contractors submit

current, complete, and accurate pricing data.

Participants’ proposed changes to government property requirements

encountered a combination of legislative and regulatory requirements.

Nine of the 10 participants proposed efforts addressing requirements

pertaining to government property in the possession of contractors.

Several of the proposals involved requesting a waiver to increase the

threshold to account for government property from $1,500 to $5,000 or to

eliminate certain screening requirements for excess property. However,

DOD generally disapproved these requests, in part because the waivers

involved legislative requirements implemented through regulations under

the control of the General Services Administration. DOD officials indicated

that DOD did not have the authority to waive the regulatory requirements

unilaterally and that the General Services Administration stated that it was

precluded from law from approving the waivers.

Overall, laboratory participants generally found that obtaining waivers to

requirements controlled by other federal agencies was difficult. In addition

to the 12 government property waiver requests disapproved by DOD, an

additional 3 requests to waive requirements controlled by the Department

of Labor were also disapproved. In notifying DOD that the Department of

Labor would not approve the requests, a senior Labor official indicated

that the proposed changes would hamper Labor’s efforts to enforce

certain executive order provisions. Participants had some success in

obtaining waivers from regulations that DOD had authority to waive

unilaterally, as participants are implementing 13 waivers to various FAR or

DOD regulations. However, these waivers—which DOD estimates could

result in cost avoidances of about $2.3 million annually—account for only

a small portion of the laboratory’s potential cost reductions.

The third legislatively based cost driver—Cost Accounting Standards—was

not addressed by laboratory participants. DCAA officials told us that none

of the reinvention laboratory participants had identified any specific

6

Parametric techniques involve the use of cost estimating relationships and mathematical algorithms to

estimate various costs. For example, if historical cost data have demonstrated that the cost to test an

item is generally 25 percent of the item’s manufacturing cost, then a parametric estimate would simply

compute test costs as one-fourth of the item’s manufacturing cost. In contrast, a detailed, grass roots

estimate could involve using very precise Industrial Engineering standards, in which an estimator

assigns a time value to each of the planned tasks, calculates the cost associated with each task, and

then builds up the final estimate by summing the tasks’ respective costs.

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improvements or any nonvalue added oversight requirements that related

to Cost Accounting Standards. One DCMC official noted that, in his opinion,

the annual cost of maintaining a system that complies with the standards

is relatively small for defense contractors. The official noted, however,

that the cost for a company to establish a system that is in compliance may

be significant and therefore may pose a barrier to do so.

Disagreement on Merits of

Changes

Given the nature of the defense industry, there are often differing views on

the degree of oversight needed. We found examples of such differences in

views over both cost and schedule control systems and government

property requirements. For example, participants’ efforts to revise their

organizations’ cost/schedule control systems, used by government officials

to monitor contractor progress, illustrate the challenges of overcoming

different perspectives on the merits of changing oversight practices and

processes. Two contractors proposed implementing new systems that, in

their view, were more reflective of the information they used to manage

their production efforts. In one case, contractor officials told us that

concerns raised by DCMC, DCAA, and their primary customers led them to

withdraw the proposal and focus on less “radical” changes, such as

reducing the amount or type of information provided. However, according

to contractor officials, even these proposed changes met with resistance

from their program office customers. A program official explained that the

proposed changes would not have provided sufficient data to manage the

affected programs.

In the second case, a contractor participant presented a concept for an

alternative system in March 1995 and submitted a formal proposal in May

1995. However, DOD participants expressed concerns about various

elements of the proposal. For example, both DCMC and DCAA officials

expressed concern that this alternative would not provide information on

indirect costs and would limit DOD’s ability to audit the system and identify

any corrective actions needed. Consequently, they considered the

proposal to be “very risky” for the government. Although the contractor

and DOD have been working to resolve the concerns—resulting in at least

four revised proposals between May 1995 and March 1996—a DCMC official

told us that in her view, the proposed system still does not adequately

protect the government’s interests. Agreement on moving to an alternative

system had still not been reached by September 1996.

Similarly, DOD and contractor views on the merits of accounting for

government property reflect fundamental differences of opinion. As noted

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previously, DOD generally disapproved the participants’ waiver requests,

citing legislative and regulatory requirements. However, DOD officials also

expressed skepticism about proposals to increase the dollar threshold for

tracking government property from $1,500 to $5,000. One senior official

within the Office of the Secretary of Defense noted that while DOD had

recently raised the threshold to $1,500 based on industry input, DOD did not

have sufficient information to support a higher threshold. Consequently, in

this official’s view, relaxing controls over millions of dollars of

government property was not justified. Accordingly, DOD conditionally

approved waivers requesting a higher accountability threshold by limiting

it to 1 year and requiring contractors to perform a physical inventory

validated by the government’s property administrator. In addition,

contractors would have to provide detailed information on various

categories of property before the test period, with 6- and 12-month status

reports to follow. According to DOD, this information would assist DOD in

pursuing a potential threshold increase.

Contractor officials, however, viewed the additional information requested

in a different light. According to contractor officials, they believed that

they could significantly reduce administrative costs without substantially

increasing the government’s risk. In their view, the additional

requirements imposed as a condition of the waiver defeated the intent of

the original waiver to reduce costs. According to one contractor official,

none of the contractors chose to implement it. Officials at two contractors

stated the failure of virtually all attempts to reform what they perceived to

be a relatively low-risk area significantly contributed to their loss of

interest in laboratory efforts.

Coordinating and

Obtaining Approval From

Multiple Customers

Participants stated that since defense contractors produce items for more

than one military service or federal agency, or serve as both prime and

subcontractors, changing systems or processes is often complicated

simply by the need to coordinate and receive approval from multiple

customers. Participants noted that having multiple customers can slow

down efforts to change and lessen potential cost reductions from process

standardization.

Participants at one site provided the following example of a reinvention

effort that fell into this category. In early 1996, DCMC approved a proposal

combining 11 common process projects. However, some program offices

did not fully accept the proposed changes. As a result, revisions were

required to the approved process changes for 5 of the 11 projects. For

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example, contracts for two program offices will include process changes

related to eliminating the annual certification of contractor test stations,

but the changes will also require the contractor to develop additional test

procedures for approval by the government. In addition, one program

office’s contracts were excluded from all process changes. Accordingly,

existing contracts involving these program offices will contain oversight

requirements beyond those applicable to other program offices. The

participants credited the involvement of senior level DOD officials as being

instrumental in achieving as much as was accomplished. They said that

without that involvement, this entire reinvention effort would not have

been possible.

The difficulty of reaching agreement on reforms is increased when the

contractor making a process change is both a prime contractor and a

subcontractor to other prime contractors, or when it contracts with

federal agencies other than DOD. For example, one laboratory participant

explained that even when DOD approves changes to a process or a

manufacturing standard for its prime contracts, that approval would not

automatically extend to the subcontracts it performs for other prime

contractors or to its contracts with non-DOD agencies. These changes

would have to be negotiated separately with the other prime contractors

or agencies.

Participants indicated that an important element in successfully changing

practices is assuring that the affected program offices are involved early in

the project and are kept fully informed. One program official noted, for

example, that the lack of involvement by the program office and poor

communication from the laboratory participants led the program office to

be taken aback when the participant submitted several contract cost

proposals that made substantial use of parametric estimating techniques,

rather than the traditional detailed approach, and failed to submit other

documentation as believed agreed to by the program office. As a result, the

program office nearly rejected the contract cost proposals. According to

the program official, the contractor had to dispatch several representatives

to the program office to address the office’s concerns and agreed to

submit detailed estimates to support their proposed costs.7

7

In commenting on a draft of this report, DCAA officials noted that the parametrics estimating project

was being pursued under a separate initiative and suggested that we delete our discussion on the

project. We note, however, that the project was clearly identified as being tracked under the

reinvention laboratory by the cognizant management council in laboratory status reports. Similarly,

the management council members we spoke with discussed its progress in our discussion of

reinvention laboratory projects under their purview and made no distinction between initiatives.

Finally, as we use the project as an example of the need to communicate rather than to evaluate the

merits of parametric estimating, we feel its inclusion in the report remains appropriate.

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Lessons Learned

From Laboratory

Experiences

On October 30, 1996, DOD announced it was in the process of ending the

reinvention laboratory. Despite the limited cost reductions achieved, and

the fact that it has decided to end the laboratory, DOD officials said they

considered the effort—when taken in the context of a laboratory—to be

successful. These officials noted that many of the lessons learned from the

reinvention laboratory are being employed in the Single Process Initiative,

including the use of management councils, the designation of senior

service officials to facilitate the review and approval of proposals, the

establishment of a 120-day goal to have proposals approved, and an

improved mechanism for processing waiver requests. In particular, DOD

believes that the laboratory’s management councils provided a valuable

forum for raising and discussing issues and has issued guidance to

encourage their use at all field offices. DOD officials also noted that the

current status of the Single Process Initiative is provided on a weekly basis

to the Under Secretary of Defense for Acquisition and Technology.

Overall, DOD officials believe that these factors will allow proposals

submitted under the initiative to be reviewed and approved in a timely

fashion.

Additionally, DOD officials noted that while the reinvention laboratory was

limited to only 10 participants, participation in the Single Process Initiative

is open to all DOD contractors. Given the broader base of potential

participants and the more structured approach to reviewing and approving

proposals, DOD officials believe the initiative will provide a more effective

means for addressing many of the technically oriented issues such as

manufacturing and quality assurance processes. These officials

acknowledged, however, that they were less certain that it will be able to

change administrative oversight requirements involving legislative and

regulatory issues.

From a budgetary perspective, the laboratory’s results, as well as our

discussions with contractor and DOD officials, suggest that caution must be

exercised in estimating cost reductions that can be achieved from

oversight reform initiatives and using those reductions for budgetary

purposes. DOD reports that through July 31, 1996, only $11 million of the

$145 million in potential annual contractor cost reductions has been

achieved from actions already implemented. DOD officials noted that it may

be some time before it is known whether the remaining projects will be

approved and implemented. Further, according to DOD and laboratory

participants, implementation costs may partially offset cost reductions

from proposed changes. One laboratory participant’s analysis, for

example, indicated that the $11.5 million projected cost to implement a

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new quality assurance system would offset any cost reduction for at least

18 months.

Further, the amount of cost reduction that can actually be achieved from

oversight reforms remains in question. While Coopers & Lybrand

estimated that government acquisition regulations and oversight

requirements added 18 percent to the cost of goods and services DOD buys,

it cautioned about projecting the study’s results to the entire defense

industry since it had collected data from only 10 defense contractors and

that it had made no attempt to measure the benefits of DOD’s oversight

requirements. While participants agreed the study was useful in focusing

DOD’s attention on specific cost drivers, they generally found the study’s

estimate on the impact of regulation and oversight requirements to be

overstated at their companies. For example, 5 participants prepared

estimates for the top 10 cost drivers and their estimates ranged from 1.2 to

6.1 percent compared to the study’s estimate of 8.5 percent. DOD

anticipates that more definitive assessments of the effects of regulatory

reform and the costs associated with implementing new processes would

be provided as the Single Process Initiative matures. DOD officials noted,

however, that it is uncertain as to how much cost savings will be generated

from this relatively new initiative.

Overall, while the laboratory results highlight the challenges faced by DOD,

the results should not deter DOD from continuing its efforts to reduce

nonvalue added oversight requirements. Rather, the reinvention laboratory

suggests that continued commitment by senior DOD leadership is needed to

make meaningful changes in DOD’s culture and processes.

Agency Comments DOD concurred with the report. DOD’s comments are reprinted in 

appendix II. DOD also provided technical comments on a draft of this

report, which have been incorporated in the report where appropriate.

Scope and

Methodology

To determine the laboratory’s success in effecting changes to DOD

oversight requirements and reducing oversight costs, and to identify any

obstacles to achieving these benefits, we reviewed the laboratory’s

December 1995 and July 1996 status reports and pertinent supporting

documentation. These reports were prepared from data provided by DCAA,

DCMC, and contractor participants. The reports’ estimated cost reduction

figures were generally rough order of magnitude estimates rather than

detailed cost estimates. We did not independently verify the basis for or

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the accuracy of the information. Further, we interviewed participants at 

7 of the 10 laboratory sites to discuss the projects pursued under the

laboratory, the factors affecting the laboratory’s progress, and the

participants’ overall views on the laboratory. The laboratory sites we

visited were

• Boeing Defense and Space Group, Seattle, Washington;

• Lockheed Martin Government Electronic Systems, Moorestown, New

Jersey;

• Lockheed Martin Tactical Aircraft Systems, Fort Worth, Texas;

• Loral Vought Systems, Grand Prairie, Texas;

• McDonnell Douglas Aerospace, St. Louis, Missouri;

• Raytheon Electronics Systems, Bedford, Massachusetts; and

• Texas Instruments Defense Systems & Electronics Group, Dallas, Texas.

During these visits, we generally met with senior contractor, DCMC, and

DCAA officials and reviewed pertinent documents relative to the status of

cost reduction activities. Further, we obtained the views on selected

laboratory projects from four of the services’ participating program

offices, including the Air Force’s F-15, F-16, and F-22 system program

offices and the Navy’s AEGIS program office. We also discussed various

issues concerning the laboratory’s progress and the lessons learned from

the laboratory with senior officials from the DCMC and DCAA headquarters

at Fort Belvoir, Virginia. We also reviewed documentation for the waivers

proposed by laboratory participants, including the waiver request,

cost/benefit analyses, and DOD’s final decision memoranda.

We conducted our work from March 1996 to December 1996 in accordance

with generally accepted government auditing standards.

We are sending copies of this report to the Secretary of Defense; the

Commander, Defense Contract Management Command; and the Director,

Defense Contract Audit Agency. Copies will be provided to other

interested parties upon request.

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

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

appendix III.

David E. Cooper

Associate Director,

Defense Acquisitions Issues

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List of Congressional Committees

The Honorable Strom Thurmond, Chairman

The Honorable Carl Levin, Ranking Minority Member

Committee on Armed Services

United States Senate

The Honorable Fred Thompson, Chairman

The Honorable John Glenn, Ranking Minority Member

Committee on Governmental Affairs

United States Senate

The Honorable Christopher Bond, Chairman

The Honorable John F. Kerry, Ranking Minority Member

Committee on Small Business

United States Senate

The Honorable John R. Kasich, Chairman

The Honorable John M. Spratt, Jr., Ranking Minority Member

Committee on the Budget

House of Representatives

The Honorable Dan Burton, Chairman

The Honorable Henry A. Waxman, Ranking Minority Member

Committee on Government Reform and Oversight

House of Representatives

The Honorable Floyd D. Spence, Chairman

The Honorable Ronald V. Dellums, Ranking Minority Member

Committee on National Security

House of Representatives

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Contents

Letter 1

Appendix I 

Potential Cost

Reductions From

Reinvention

Laboratory Efforts

20

Appendix II 

Comments From the

Department of

Defense

22

Appendix III 

Major Contributors to

This Report

23

Figure Figure 1: Reducing Oversight Costs Reinvention Laboratory

Participants

3

Abbreviations

DCAA Defense Contract Audit Agency

DCMC Defense Contract Management Command

DOD Department of Defense

FAR Federal Acquisition Regulation

TINA Truth in Negotiations Act

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Appendix I 

Potential Cost Reductions From

Reinvention Laboratory Efforts

Dollars in millions

Cost driver Description

Coopers &

Lybrand’s

estimated cost

impacta

(percent)

Number of

participants

with potential

reductions

Estimated

potential

reductionsb

Percent of

total

estimated

potential

reductionsc

Quality program

requirements

An umbrella military specification

(MIL-Q-9858A) requiring contractors to

establish quality assurance programs to

ensure compliance with contract

requirements. 1.7 9 $86.5 59.7

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. 1.3 6 9.1 6.3

Cost/schedule control

system requirements

A requirement that contractors have an

integrated management control system to

plan and control the execution of

cost-reimbursable contracts. 0.9 6 6.1 4.2

Configuration

management

requirements

A military standard (MIL-STD-973) for DOD

approval of all contractor configuration

changes to technical data packages. 0.8 2 2.2 1.5

Contract specific

requirements

DOD-imposed requirements that are not

codified in statutes, regulations, military

specifications, or standards. 0.7 5 16.8 11.6

Defense Contract Audit

Agency/Defense

Contract Management

Command interface

Cost 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. 0.7 3 2.4 1.7

Cost Accounting

Standards

Requirements for ensuring consistent and

equitable allocation of costs and for

disclosing accounting practices and

contractor interpretation of certain standards. 0.7 0 0 0

Material management

and accounting system

A requirement (Defense Federal Acquisition

Regulation Supplement part 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. 0.6 5 5.8 4.0

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

engineering drawings. 0.6 2 3.8 2.7

(continued)

Page 20 GAO/NSIAD-97-48 Acquisition Reform
Appendix I 

Potential Cost Reductions From

Reinvention Laboratory Efforts

Dollars in millions

Cost driver Description

Coopers &

Lybrand’s

estimated cost

impacta

(percent)

Number of

participants

with potential

reductions

Estimated

potential

reductionsb

Percent of

total

estimated

potential

reductionsc

Government property

administration

A requirement (Federal Acquisition

Regulation part 45) that contractors assume

responsibility for maintaining and

accounting for government-owned property. 0.5 7 2.5 1.7

Other • 7 9.7 6.7

Total • • $144.9 100.0

aMeasured as a percentage of the contractor’s compliance costs compared to its value-added

costs. Value-added costs are the contractor’s total costs less the costs of material purchases,

including subcontracts.

bPotential contractor cost reductions as of July 31, 1996.

cTotals may not add due to rounding.

Page 21 GAO/NSIAD-97-48 Acquisition Reform
Appendix II 

Comments From the Department of Defense

Page 22 GAO/NSIAD-97-48 Acquisition Reform
Appendix III 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Charles W. Thompson, Assistant Director

Timothy J. DiNapoli, Senior Evaluator

Boston Field Office Paul M. Greeley, Evaluator-in-Charge

Los Angeles Field

Office

Gretchen E. Bornhop, Senior Evaluator

(707154) Page 23 GAO/NSIAD-97-48 Acquisition Reform
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