Comments on Proposed Changes to Profit Policy (DFARS Case
2000-D018) (20-NOV-01, GAO-02-227R).
In July 2000, the Department of Defense published a proposed
revision of its guidelines for developing profit objectives used
in contract negotiations. The existing profit policy guidelines
consist of: (1) investment in facilities and equipment, (2)
performance risk, and (3) contract type risk. For each profit
factor, the contracting officer determines an appropriate value
and applies it against a specified base to develop the profit
objectives. The proposed revision to would make the following
changes to the profit guidelines: (1) inclusion of a fourth
element--cost efficiency, which would allow the contracting
officer to reward cost reduction efforts; (2) elimination of
profit on investment in buildings and a reduction in the amount
of profit derived from equipment investment; (3) the amount of
profit based on performance risk would be increased; and (4)
general and administrative expenses would be included in the cost
base used for computing profit for performance risk, contract
type risk, and cost efficiency. The decrease in profit for
investment in facilities would be offset by the increased profit
derived from performance risk and the inclusion of general and
administrative expenses.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-227R
ACCNO: A02490
TITLE: Comments on Proposed Changes to Profit Policy (DFARS Case
2000-D018)
DATE: 11/20/2001
SUBJECT: Contract negotiations
Profits
Policy evaluation
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO Testimony. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
******************************************************************
GAO-02-227R
GAO- 02- 227R DOD Profit Policy
United States General Accounting Office Washington, DC 20548
November 20, 2001 Defense Acquisition Regulations Council Department of
Defense
Re: Comments on Proposed Changes to Profit Policy (DFARS Case 2000- D018) On
July 24, 2000, the Department of Defense (DOD) published a proposed revision
of its guidelines for developing profit objectives used in contract
negotiations. After reviewing comments on the proposed rule, DOD published,
on September 21, 2001, a revised proposal. This letter provides our comments
on the September 21 proposal.
The existing profit policy guidelines consist of three factors: (1)
investment in facilities and equipment (called ?facilities capital
employed?), (2) performance risk, and (3) contract type risk. For each
profit factor, the contracting officer determines an appropriate value and
applies this value against a specified base to develop the profit objectives
for a contract. For example, the normal value for contract type risk on a
firm, fixed- priced contract (with progress payments) is 3 percent, while
the normal value for facilities (buildings) is 15 percent. The base for
facilities capital employed is the investment that the contractor has made
in buildings and equipment. For performance risk and contract type risk, the
base is the estimated costs of performing the contract, excluding general
and administrative expenses.
The proposed revision to profit policy would make the following changes in
the profit guidelines:
! A fourth element- cost efficiency- would be added. The cost efficiency
factor would allow the contracting officer to add up to 4 percent in profit
to reward cost reduction efforts.
! Profit on investment in buildings would be eliminated and the amount of
profit derived from investment in equipment reduced.
! The amount of profit based on performance risk would be increased.
! General and administrative expenses would be included in the cost base.
This base is used in computing profit for performance risk, contract type
risk, and cost efficiency.
The decrease in profit for investment in facilities would be offset by the
increased profit derived from performance risk and the inclusion of general
and administrative expenses. According to the Federal Register notice, these
changes are not intended to increase or decrease average profit objectives.
The cost efficiency factor represents an additional amount of profit than is
available under the existing profit guidelines.
GAO- 02- 227R DOD Profit Policy Page 2 These changes represent a significant
restructuring of DOD profit policy. The
importance of contractor investment in facilities and equipment would
decline significantly and a new profit factor- cost efficiency- would be
added. According to DOD, the current profit structure rewards contractors
for investment in facilities at a time when the defense industry has excess
capacity and under- utilized facilities, acting as a disincentive to the
further rationalization of the defense industry.
In implementing the cost efficiency factor, we believe that DOD should
consider developing metrics to aid in assessing cost efficiency gains. For
example, examining loaded labor hours (i. e., cost per labor hour, including
all direct and indirect costs) along with productivity measures could
provide a basis for assessing contractor cost efficiencies over time. Such
metrics could also be used to compare relative costs from one contractor to
another for similar types of work. Measures of the cost efficiencies of
contractors would help the Department determine whether the purpose of the
proposed regulatory change is being achieved.
We appreciate your consideration of our comments. If you have questions or
would like to discuss our comments further, please call me at (202) 512-
4841.
Sincerely yours, William T. Woods Acting Director Acquisition and Sourcing
Management
(120103)
*** End of document. ***