Acquisition Reform: Efforts to Reduce the Cost to Manage and Oversee DOD
Contracts (Letter Report, 04/18/96, GAO/NSIAD-96-106).

Pursuant to a legislative requirement, GAO reviewed the Department of
Defense's (DOD) attempts to address the impact of its acquisition
regulations and oversight requirements, known as cost drivers, on the
costs of its purchases.

GAO found that: (1) an independent study identified over 120 regulatory
and statutory cost drivers that increased the price of DOD purchased
goods and services by 18 percent; (2) as a result of this study, DOD
created a working group to coordinate DOD-wide efforts to identify and
address the cost drivers; (3) DOD has begun several reforms to reduce
regulatory and oversight costs on its contractors; (4) in 1994, DOD
established a reinvention laboratory to identify oversight cost drivers,
assess the necessity of oversight, and establish process improvements to
reduce oversight costs; and (5) while DOD expects some savings from its
management and oversight requirements reforms, the actual savings may be
substantially less than the 18-percent premiums and pays.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-96-106
     TITLE:  Acquisition Reform: Efforts to Reduce the Cost to Manage 
             and Oversee DOD Contracts
      DATE:  04/18/96
   SUBJECT:  Management consultants
             Defense contracts
             Defense procurement
             Contract costs
             Procurement regulation
             Defense cost control
             Cost analysis
             Contract monitoring
             Reengineering (management)

             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** 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.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to Congressional Committees

April 1996

ACQUISITION REFORM - EFFORTS TO
REDUCE THE COST TO MANAGE AND
OVERSEE DOD CONTRACTS

GAO/NSIAD-96-106

Acquisition Reform

(705120)


Abbreviations
=============================================================== ABBREV

  DOD - Department of Defense
  RW - RWAGNER

Letter
=============================================================== LETTER


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
------------------------------------------------------------ Letter :1

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 (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
------------------------------------------------------------ Letter :2

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. 

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
------------------------------------------------------------ Letter :3

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 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 Reducing Oversight Costs Reinvention
Laboratory, and we will issue a separate report on the results of
that review later this year. 


--------------------
\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. 


   SAVINGS MAY BE LESS THAN
   ESTIMATED
------------------------------------------------------------ Letter :4

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."


--------------------
\2 The value-added base of the contracts represents total contract
costs less the associated costs of material purchases, including
subcontracts. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :5

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 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
------------------------------------------------------------ Letter :6

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 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. 


---------------------------------------------------------- Letter :6.1

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


DEPARTMENT OF DEFENSE'S TOP 10
COST DRIVERS
=========================================================== Appendix I

Cost driver             Description
----------------------  ----------------------------------------------
DOD quality program     An umbrella military specification (MIL-Q-
requirements            9858A) requiring contractors to establish
                        quality assurance programs to ensure
                        compliance with contract requirements.

Truth in Negotiations   A statute (P.L. 87-653) requiring contractors
Act                     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   A requirement that contractors have an
system                  integrated management control system to plan
                        and control the execution of cost-
                        reimbursable contracts.

Configuration           A military standard (MIL-STD-973) for DOD
management              approval of all contractor configuration
requirements            changes to technical data packages.

Contract-specific       DOD-imposed requirements that are not codified
requirements            in statutes, regulations, military
                        specifications, or standards.

Defense Contract Audit  Costs deriving from daily interaction of
Agency/Defense          contractor personnel with auditors from the
Contract Management     Defense Contract Audit Agency and quality
Command interface       inspectors and functional experts from the
                        Defense Contract Management Command.

Cost accounting         Requirements for ensuring consistent and
standards               equitable allocation of costs and for
                        disclosing accounting practices and contractor
                        interpretation of certain standards.

Material management     A requirement (DFARS-242.72) for certain
and accounting system   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     A requirement (FAR part 45) that contractors
administration          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. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

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


*** End of document. ***