Defense Restructuring Costs: Information Pertaining to Five Business
Combinations (Letter Report, 04/01/97, GAO/NSIAD-97-97).

Pursuant to a legislative requirement, GAO provided information on
restructuring costs of defense contractors involved in business
combinations since 1993, including: (1) specific costs associated with
workforce reductions and the services provided to workers affected by
business combinations; (2) other funds used to help laid-off workers
find new employment; (3) why the effectiveness of restructuring costs
used to assist laid-off workers in gaining new employment cannot be
determined; and (4) the extent of savings achieved from the business
combinations relative to restructuring costs paid by the Department of
Defense (DOD).

GAO noted that: (1) the five business combinations had spent about +$849
million at the time of GAO's review for such restructuring activities as
the disposal and relocation of facilities and equipment, consolidation
of operations and systems, employee relocation, and workforce
reductions; (2) of this amount, the business combinations spent about
$89 million, or 10 percent, on workforce reductions; (3) about 15,000
workers left the companies as a result of the business combinations; (4)
severance pay represented about 89 percent of total worker benefits; (5)
expenditures for services to assist laid-off workers totalled $4
million; (6) in addition to those services provided from restructuring
costs, GAO identified about $48 million in Department of Labor (DOL)
grants made either directly to the contractors or to locations where
workers were laid off as a result of the business combinations or normal
downsizing; (7) the business combinations were also providing some
services that were not included in restructuring costs, but rather were
paid as normal overhead costs; (8) GAO was unable to determine the
effectiveness of services for workers laid off specifically as a result
of the business combinations because information critical to making such
a determination is not maintained by the business combinations and is
not readily available from other sources; (9) little empirical
information is available on specific services that are the most useful
and cost-effective; (10) the Defense Contract Audit Agency (DCAA)
estimated that, as of September 30, 1996, DOD had reimbursed these
business combinations about $179 million toward its share of the $849
million the combinations had incurred for restructuring activities, and
that DOD realized restructuring savings totalling $347 million from the
business combinations during the same period; (11) therefore, for every
$1.00 DOD has paid so far in restructuring costs, DOD has realized
savings of $1.93; (12) DOD officials believe that additional savings
have been realized, but they did not document those savings; (13) the
estimates also do not reflect any costs that may be incurred in
subsequent periods; (14) these estimates do not reflect DOL grant
expenditures or any assistance from other federal programs or funding
streams; (15) of the $179 million paid to the business combinations,
DCAA determined that $18 million, or about 10 percent, represented addi*

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

 REPORTNUM:  NSIAD-97-97
     TITLE:  Defense Restructuring Costs: Information Pertaining to Five 
             Business Combinations
      DATE:  04/01/97
   SUBJECT:  Department of Defense contractors
             Severance pay
             Defense cost control
             Reductions in force
             Employment or training programs
             Property disposal
             Aid for education
             Formula grants
             Discretionary grants
IDENTIFIER:  DOD Defense Diversification Program
             DOD Defense Conversion Assistance Program
             
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Cover
================================================================ COVER


Report to Congressional Committees

April 1997

DEFENSE RESTRUCTURING COSTS -
INFORMATION PERTAINING TO FIVE
BUSINESS COMBINATIONS

GAO/NSIAD-97-97

Defense Restructuring Costs

(707219)


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

  AIA - Aerospace Industries Association
  DCAA - Defense Contract Audit Agency
  DCAP - Defense Conversion Adjustment Program
  DCMC - Defense Contract Management Command
  DDP - Defense Diversification Program
  DOL - Department of Labor
  DOD - Department of Defense
  EDWAA - Economic Dislocation and Worker Adjustment Assistance
  FAR - Federal Acquisition Regulation
  UDLP - United Defense Limited Partnership

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


B-276318

April 1, 1997

The Honorable Ted Stevens
Chairman
The Honorable Daniel K.  Inouye
Ranking Minority Member
Subcommittee on Defense
Committee on Appropriations
United States Senate

The Honorable C.  W.  Bill Young
Chairman
The Honorable John P.  Murtha
Ranking Minority Member
Subcommittee on National Security
Committee on Appropriations
House of Representatives

Section 8115 of the Fiscal Year 1997 Department of Defense (DOD)
Appropriations Act\1 requires us to examine restructuring costs\2 of
defense contractors involved in business combinations since 1993.  In
response, this report provides information on restructuring costs,
including specific costs associated with workforce reductions and the
services provided to workers affected by business combinations.  It
also identifies other funds used to help laid-off workers find new
employment and describes why the effectiveness of restructuring costs
used to assist laid-off workers in gaining new employment cannot be
determined.  In addition, the report discusses the extent of savings
achieved from the business combinations relative to restructuring
costs paid by DOD. 

To accomplish our work, we focused on five defense contractor
business combinations:  (1) Hughes Aircraft Company's acquisition of
General Dynamics Corporation's Missile Operations, (2) the United
Defense Limited Partnership (UDLP) between FMC Corporation's Defense
Systems Group and Harsco Corporation's BMY Combat Systems Division,
(3) Martin Marietta Corporation's acquisition of General Electric
Company's aerospace and other business segments, (4) Northrop
Corporation's acquisitions of the Grumman Corporation and the Vought
Aircraft Company to form the Northrop Grumman Corporation, and (5)
the merger of the Lockheed Corporation and the Martin Marietta
Corporation to form the Lockheed Martin Corporation. 


--------------------
\1 Public Law 104-208, September 30, 1996. 

\2 Restructuring costs cover a wide range of expenses, such as
personnel relocations, severance pay, early retirement incentives,
equipment relocations, plant rearrangements, and facility closures. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The five business combinations had spent about $849 million at the
time of our review for such restructuring activities as the disposal
and relocation of facilities and equipment, consolidation of
operations and systems, employee relocation, and workforce
reductions.  Of this amount, the business combinations spent about
$89 million, or 10 percent, on workforce reductions, which consisted
of severance pay, temporary continuation of health benefits, and
outplacement services.  About
15,000 workers left the companies as a result of the business
combinations.  Severance pay represented about 89 percent of total
worker benefits.  Expenditures for services to assist laid-off
workers find reemployment totaled $4 million. 

In addition to those services provided from restructuring costs, we
identified about $48 million in Department of Labor (DOL) grants made
either directly to the contractors or to locations where workers were
laid off as a result of the business combinations or normal
downsizing.  Moreover, there were at least 163 federally funded
programs and funding streams that provided employment training
assistance, of which 9 are targeted specifically for laid-off
workers.  During fiscal year 1996, funding for one of the nine
programs totaled about $1.1 billion; however, no readily available
means exist to determine the extent to which the majority of these
funds, which are distributed at the state and local levels, were used
to assist workers affected by the five business combinations.  The
business combinations were also providing some services that were not
included in restructuring costs, but rather were paid as normal
overhead costs. 

We were unable to determine the effectiveness of services for workers
laid off specifically as a result of the business combinations
because information critical to making such a determinationï¿½including
reemployment rates, workers' previous and current salaries, and
satisfaction with their new jobsï¿½are not maintained by the business
combinations and are not readily available from other sources.  In
general, little empirical information is available on specific
services that are the most useful and cost-effective. 

The Defense Contract Audit Agency (DCAA) estimated that, as of
September 30, 1996, DOD had reimbursed these business combinations
about $179 million toward its share of the $849 million the
combinations had incurred for restructuring activities.  DCAA also
estimated that DOD realized restructuring savings totaling $347
million from the business combinations during the same period. 
Therefore, for every $1.00 DOD has paid so far in restructuring
costs, DOD has realized savings of $1.93.  DOD officials believe that
additional savings have been realized, but they did not document
those savings.  An industry representative also commented that these
estimates cover only the period through September 1996, and
therefore, do not reflect savings that may be realized in future
periods.  It should be noted, however, that the estimates also do not
reflect any costs that may be incurred in subsequent periods. 
Finally, these estimates do not reflect DOL grant expenditures or any
assistance from other federal programs or funding streams. 

Of the $179 million paid to the business combinations, DCAA
determined that $18 million, or about 10 percent, represented
additional costs to DOD as a result of the July 1993 decision to pay
for restructuring costs on certain contracts transferred from one
company to another after a business combination.  The percentage of
additional costs relative to the total amount paid may not be the
same for future business combinations. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Prior to July 1993, DOD had a long-standing practice of not
permitting defense contractors to charge restructuring costs to
flexibly priced\3 contracts that were transferred\4 from one
contractor to another as a result of a business combination.  The
rationale for this practice was that DOD should not have to pay
increased costs merely because one contractor is combined with
another contractor. 

In July 1993, DOD changed its long-standing practice and uniformly
began permitting defense contractors to charge restructuring costs to
transferred flexibly priced contracts after a business combination,
provided (1) the restructuring costs were allowable under the Federal
Acquisition Regulation (FAR)\5 and (2) a DOD contracting officer
determined the business combination would result in overall reduced
costs to DOD or preserve a critical defense capability.  According to
DOD officials, this action was consistent with the flexibility
provided by federal regulations.  However, when asked, DOD officials
stated that they were unaware of any instances where DOD had
previously allowed restructuring costs to be charged to transferred
contracts. 

As a result of its concerns over the payment of these costs, the
Congress enacted section 818 of the National Defense Authorization
Act for Fiscal Year 1995,\6 which prohibited payment of restructuring
costs to a defense contractor until a senior DOD official certified
that projections of restructuring savings from the business
combinations were based on audited cost data and should result in
overall reduced costs to DOD.  Section 818 also required the
Secretary of Defense to report to the Congress on DOD's experience
with defense contractor business combinations, including whether
savings associated with each restructuring actually exceed
restructuring costs.\7

The Congress modified authority for paying restructuring costs in
section 8115 of the Department of Defense Appropriations Act for
Fiscal Year 1997 by prohibiting payment of those costs for business
combinations occurring after September 30, 1996, unless (1)
restructuring savings for DOD were projected to exceed allowed costs
by a factor of at least two to one or (2) the projected savings to
DOD exceeded the costs allowed and the Secretary of Defense
determined the business combination would result in the preservation
of a critical capability, and (3) the DOD restructuring report for
1996 was submitted. 

As of December 31, 1996, the Under Secretary of Defense (Acquisition
and Technology) had certified five business combinations for
restructuring payments.\8 Table 1 shows the certification dates for
the business combinations in our review.  We also included in our
review the Hughes-General Dynamics business combination because DOD
has included the combination in its restructuring reports to the
Congress.  However, the Hughes-General Dynamics combination did not
go through the certification process because the combination occurred
prior to enactment of the Defense Authorization Act for Fiscal Year
1995. 



                                Table 1
                
                Business Combination Certification Dates

Business combination                      Date certified
----------------------------------------  ----------------------------
UDLP                                      May 15, 1995

Martin Marietta-General Electric:\a

5 projects                                September 19, 1995

3 projects                                February 14, 1996

5 projects                                September 17, 1996

Northrop Grumman                          February 14, 1996

Lockheed Martin\b                         November 26, 1996
----------------------------------------------------------------------
\a One additional project is nearing certification. 

\b Additional projects are expected to enter the certification
process. 

The Defense Contract Management Command (DCMC) has lead
responsibility for implementing DOD's restructuring regulations. 
According to DCMC officials, they are tracking an additional 10
defense contractor business combinations that are currently in or
expected to enter the various stages of the certification process. 


--------------------
\3 Flexibly priced contracts are a family of contracts under which
the total amount paid to the contractor is dependent on the allowable
costs the contractor incurs in performing the contract. 

\4 The transfer of contracts from one contractor to another involves
a process called novation.  The novation process requires a written
agreement executed by the seller, buyer, and government, in which the
government agrees to the transfer of its contracts. 

\5 The FAR contains guidelines for determining whether a particular
restructuring cost is an allowable charge to a government contract. 
It also describes certain organization costs, such as legal and
consulting fees applicable to business combinations, that cannot be
charged to a government contract. 

\6 Public Law 103-337, October 5, 1994. 

\7 Section 818 required DOD to submit reports to the Congress on
defense contractor restructuring activities for fiscal years 1995,
1996, and 1997.  DOD transmitted the required reports for fiscal
years 1995 and 1996 on June 18 and December 23, 1996, respectively. 
We subsequently refer to these reports as DOD restructuring reports. 

\8 We examined four of the five certified business combinations.  We
did not examine Martin Marietta Corporation's acquisition of General
Dynamics Corporation's Space System Division because we were already
examining two other business combinations involving Martin Marietta
Corporation. 


   RESTRUCTURING COSTS
------------------------------------------------------------ Letter :3

For the five business combinations we examined, certified
restructuring costs totaled about $1.4 billion.  At the time of our
review, the companies had spent about $849 million (see table 2).  To
reflect the uncertainty in the cost estimates and reduce the need for
recertification if the costs increased, ceilings ranging from 104
percent to 142 percent of certified costs were established for the
restructuring projects.  The contractors will not be permitted to
charge DOD costs in excess of the portion of these ceilings
applicable to DOD.\9



                                Table 2
                
                  Certified Costs, Cost Ceilings, and
                 Incurred Cost, by Business Combination

                         (Dollars in millions)

Business combination                 Certified     Ceiling    Incurred
----------------------------------  ----------  ----------  ----------
Hughes-General Dynamics               $366.1\a      $370.0      $327.3
UDLP                                      36.4        38.0        38.6
Martin Marietta-General Electric         214.5       226.3       193.4
Northrop Grumman                          70.4       100.1      75.1\b
Lockheed Martin                          686.5       724.0       214.9
======================================================================
Total                                 $1,373.9  $1,458.4\c      $849.3
----------------------------------------------------------------------
\a Certified costs for the Hughes-General Dynamics combination are
estimated rather than certified because the business combination was
not subject to the certification process. 

\b Incurred costs for the Northrop Grumman combination include an
estimate of cost-to-complete the restructuring. 

\c DOD indicated that its projected share of the cost ceiling totaled
$809.3 million. 

Restructuring after a business combination includes a wide range of
activities, such as the disposal and modification of facilities,
consolidation of operations and systems, relocation of workers and
equipment, and workforce reductions.  We grouped incurred
restructuring costs for the five business combinations into broad
categories (see table 3).  Disposal and relocation of facilities and
equipment was the largest category of total incurred restructuring
costs. 



                                Table 3
                
                Incurred Restructuring Costs by Category

                         (Dollars in millions)

Category                                                      Incurred
------------------------------------------------------------  --------
Disposal and relocation of facilities and equipment             $452.7
Relocation of employees                                          100.0
Benefits and services for laid-off workers                        88.9
Consolidation of operations and systems                           81.4
Restructuring planning and implementation                         57.8
Other                                                             68.5
======================================================================
Total                                                           $849.3
----------------------------------------------------------------------

--------------------
\9 Restructuring costs and cost ceilings are allocated to all of a
contractor's customers.  DOD's portion of restructuring costs and
ceilings, therefore, depends on its share of the contractor's total
business base. 


   COSTS ASSOCIATED WITH WORKFORCE
   REDUCTIONS
------------------------------------------------------------ Letter :4

In total, the five companies projected that about 19,000 workers
would leave as a result of the business combinations and, at the time
of our review, about 15,000 had left (see table 4). 



                                Table 4
                
                 Projected and Actual Number of Workers
                Leaving Organizations as a Result of the
                          Business Combination

Business combination                          Projected         Actual
----------------------------------------  -------------  -------------
Hughes-General Dynamics                           6,600          6,441
UDLP                                                483            500
Martin Marietta-General Electric                  1,171          1,222
Northrop Grumman                                    450            450
Lockheed Martin                                  10,678        6,312\a
======================================================================
Total                                            19,382         14,925
----------------------------------------------------------------------
\a This number will increase as Lockheed Martin completes its planned
restructuring projects. 

The wide variation in the number of job losses reflects differences
in the nature of the restructurings.  For instance, Northrop
Grumman's largest restructuring project involved closing the former
Grumman corporate headquarters in Bethpage, New York, resulting in
the loss of about
250 employees.  By contrast, the Lockheed Martin restructuring
involved closing facilities in New Jersey, Pennsylvania, and Texas,
and consolidating various launch operations, radar and microwave
operations, and corporate laboratories. 

Of the nearly $1.4 billion in projected restructuring costs, the five
business combinations estimated they would spend about $175 million
for benefits associated with workforce reductions.  The costs
included severance pay, temporary continuation of health benefits,
and outplacement services.  The estimated costs for worker benefits
and services varied among the combinations, ranging from 8.6 percent
to 23.9 percent of total certified restructuring costs as shown by
table 5. 



                                Table 5
                
                    Estimated Costs for Benefits and
                    Services for Laid-Off Workers by
                          Business Combination

                         (Dollars in millions)

                                                   Estimated
                                         Total     costs for
                                      certifie  benefits and
Business combination                   d costs      services   Percent
------------------------------------  --------  ------------  --------
Hughes-General Dynamics                 $366.1         $31.5       8.6
UDLP                                      36.4           8.7      23.9
Martin Marietta-General Electric         214.5          24.0      11.2
Northrop Grumman                          70.4           9.3      13.2
Lockheed Martin                          686.5         101.1      14.7
======================================================================
Total                                 $1,373.9        $174.6      12.7
----------------------------------------------------------------------
Of the $849.3 million already incurred for restructuring costs, the
five contractors had expended $88.9 million, or about 10 percent, for
benefits and services for workers that left the corporations because
of the business combinations (see table 6).  However, Lockheed Martin
has not completed its restructuring activities.  Some of these
activities are projected to involve additional workforce reductions,
which will lead to additional severance and outplacement costs. 



                                Table 6
                
                 Incurred Costs for Worker Benefits and
                    Services by Business Combination

                         (Dollars in millions)

                                                       Costs
                                         Total  incurred for
                                      incurred  benefits and
Business combination                     costs      services   Percent
------------------------------------  --------  ------------  --------
Hughes-General Dynamics                 $327.3         $31.3       9.6
UDLP                                      38.6           5.3      13.7
Martin Marietta-General Electric         193.4          22.5      11.6
Northrop Grumman                          75.1           8.8      11.7
Lockheed Martin                          214.9          21.0       9.8
======================================================================
Total                                   $849.3         $88.9      10.5
----------------------------------------------------------------------
Severance pay was by far the largest worker benefit and comprised
about 88 percent and 89 percent of the estimated and incurred costs
for worker benefits and services, respectively (see table 7).  Each
of the five business combinations provided severance pay to workers,
and four provided for the temporary continuation of health benefits
and other services to assist laid-off workers find new employment. 



                                Table 7
                
                 Costs Associated With Worker Benefits
                        and Services by Category

                         (Dollars in millions)

                                                    Estimate
Benefit or service                                         d  Incurred
--------------------------------------------------  --------  --------
Severance pay                                         $153.3     $79.5
Continuation of health benefits                         13.4       5.6
Reemployment assistance                                  7.8       4.0
======================================================================
Total\a                                               $174.5     $88.9
----------------------------------------------------------------------
\a Totals may not add due to rounding. 

Severance pay varied with such factors as whether the workers were
salaried or hourly employees and the length of time they had been
with the corporations.  Additional differences were the result of the
individual contractor's worker benefit packages before the business
combinations.  For example, in the Hughes-General Dynamics
combination, former Hughes workers received severance pay, but former
General Dynamics workers did not.  Also, neither the Northrop nor
Vought Corporations had severance benefits for its workers, but the
Grumman Corporation did.  After the business combination, therefore,
former Northrop and Vought workers received no severance benefits,
but former Grumman workers received the severance benefits they would
have received had there been no business combination. 


   SERVICES PROVIDED TO ASSIST
   LAID-OFF WORKERS FIND NEW
   EMPLOYMENT
------------------------------------------------------------ Letter :5

The four business combinations that provided services to help workers
laid off find new employment estimated they would spend $7.8 million
for such services.  At the time of our review, the four companies had
expended $4 million for these services (see table 8).  The cost of
these services represents less than 1 percent of both the total
certified and incurred restructuring costs. 



                                Table 8
                
                 Costs for Services to Assist Laid-Off
                Workers Find New Employment by Business
                              Combination

                         (Dollars in millions)

                                                    Estimate
Business combination                                       d  Incurred
--------------------------------------------------  --------  --------
Hughes-General Dynamics                                 $1.0      $1.0
UDLP                                                     0.7       0.2
Martin Marietta-General Electric                         1.4       1.6
Northrop Grumman                                           0         0
Lockheed Martin                                          4.7       1.2
======================================================================
Total                                                   $7.8      $4.0
----------------------------------------------------------------------
The services provided to help laid-off workers find new employment
fell into two categoriesï¿½educational and outplacement services (see
table 9).  In the Martin Marietta-General Electric business
combination, retraining services were provided in accordance with the
General Electric layoff benefits plan.  Under plant closing
provisions, all former General Electric employees were eligible for
up to $5,000 tuition reimbursement for any licensed or accredited
occupational or educational courses up to 3 years from the date of
layoff.  There was a requirement, however, that an employee start at
least one course within the first year after layoff.  Former Hughes
employees were also provided educational benefits up to $5,000 for
attendance at an accredited college or university and the successful
completion of classes that started within 1 year of the time the
worker was laid off. 



                                Table 9
                
                 Cost of Services to Help Workers Find
                       New Employment by Category

                         (Dollars in millions)

                                                    Estimate
Benefit or service                                         d  Incurred
--------------------------------------------------  --------  --------
Retraining and educational assistance                   $2.0      $1.7
Outplacement services                                    5.8       2.3
======================================================================
Total                                                   $7.8      $4.0
----------------------------------------------------------------------
In addition to providing educational assistance, Martin Marietta also
provided various outplacement services.  As a result of a plant
closing at Bridgeport, New Jersey, for example, Martin Marietta
operated an on-site employment transition center for a 9-month period
in 1994.  Designed to serve 392 employees affected by the plant
closing, the center provided career transition workshops, resume
development, telephone and interviewing skill practice, salary
negotiations, career counseling, job support groups, and job fairs. 
Martin Marietta incurred about $326,000 in restructuring costs to
operate the center.  Martin Marietta established a similar center to
assist workers affected by the closing of a facility in Conklin, New
York.  Restructuring costs for this center amounted to $177,000,
which included the salary costs for the center's director and
counselor, equipment rentals, and telephone expenses. 


   OTHER FUNDS USED TO ASSIST
   LAID-OFF WORKERS FIND NEW
   EMPLOYMENT
------------------------------------------------------------ Letter :6

In addition to services being paid through restructuring costs,
services were also funded by DOL grants and through normal overhead
charges at the business combinations.  Services funded by DOL were
available to laid-off workers regardless of whether they were
terminated as a result of a defense contractor business combination
or normal downsizing, and some services were made available to
workers from other companies.  However, neither DOL, the business
combinations, nor the grant recipients maintained records showing how
many workers who used these services were terminated as a result of
the combination. 


      SERVICES FUNDED BY DOL
      GRANTS
---------------------------------------------------------- Letter :6.1

Many federally funded programs exist to assist laid-off workers find
new employment.  We reported, for example, in February 1995 that at
least
163 federally funded programs and funding streams existed that
provided employment training assistance, of which 9 are targeted
specifically for laid-off workers.\10 Among the most significant
programs are those authorized by the Economic Dislocation and Worker
Adjustment Assistance (EDWAA) Act.  In total, the Congress
appropriated about $1.1 billion in fiscal year 1996 EDWAA grants to
help dislocated workers.  Funds provided under EDWAA are allocated by
a formula in which 80 percent of the appropriated funds are provided
directly to the states, with the remaining 20 percent reserved for
the Secretary's discretion.  The discretionary funds may be awarded
to projects for workers dislocated due to mass layoffs, plant
closures, disasters, and federal government actions. 

In addition, the Congress appropriated $150 million in fiscal year
1991 for Defense Conversion Adjustment Program (DCAP) grants, which
are available to address the training and employment needs of workers
dislocated by defense downsizing, including consolidation actions
subsequent to cutbacks in defense budgets.  DCAP grants can be
awarded to states or directly to defense contractors.  The Congress
also appropriated $75 million in fiscal year 1993 for Defense
Diversification Program (DDP) grants to provide training, adjustment
assistance, and employment services to members of the armed forces
and DOD and defense contractor employees who were either
involuntarily separated or laid off as a result of reductions in
defense spending. 

DOL officials told us they do not collect information on whether
EDWAA, DCAP, or DDP funds were used to assist workers specifically
laid off as a result of defense contractor business combinations. 
These officials indicated that some grant requests contain
information that may make it possible to relate the layoffs to
specific factors such as plant closings.  However, they noted that
service providers are not required to maintain information or report
on the reasons why the workers were laid off.  These officials
acknowledged that because defense contractor business combinations
can result from decreases in defense spending, some of the funds may
have been used to assist workers dislocated as a result of these
business combinations. 

We identified about $48 million in discretionary, DCAP, or DDP grants
made either directly to defense contractors involved in the business
combinations or to locations affected by those combinations.  DOL
awarded Hughes two grants totaling $16 million to assist workers
affected by downsizing in southern California, and another two grants
totaling $1.2 million to Martin Marietta to assist workers in central
Florida.  Another 10 grantsï¿½totaling about $31.1 millionï¿½were awarded
to 8 states that were affected by restructuring activities of the
business combinations.  Three of these grants, totaling $21 million,
were targeted to assist a group of 22 defense and defense-related
companies or facilities in southern California, including Northrop
Grumman.  A New York grant, totaling about $5.3 million, was targeted
to assist former Grumman employees.  Various outplacement services
were provided under these grants, including vocational and career
guidance, job search assistance, and basic skills training. 

Although the amount of grant funds are significant for the five
business combinations we examined, DOD's guidance for preparation of
the annual reports to the Congress on defense contractor
restructuring activities does not require reporting any information
on DOL grants.  Because these grants are related to defense
contractor restructuring activities, including grant information in
the reportsï¿½especially on those grants made directly to
contractorsï¿½would give the Congress useful information on funding
available to assist workers affected by defense contractor business
combinations. 


--------------------
\10 Multiple Employment Training Programs:  Major Overhaul Needed to
Create a More Efficient, Customer-Driven System (GAO/T-HEHS-95-70,
Feb.  6, 1995) and Multiple Employment Training Programs: 
Information Crosswalk on 163 Employment Training Programs
(GAO/HEHS-95-85FS, Feb.  14, 1995). 


      SERVICES FUNDED THROUGH
      CONTRACTOR OVERHEAD
---------------------------------------------------------- Letter :6.2

Several of the business combinations operated outplacement facilities
where workers could obtain assistance in finding new employment and
charged the operational costs to overhead expenses rather than
restructuring costs.  For example, UDLP operated a center during the
period 1994 through 1996 and all terminated employeesï¿½regardless of
whether they were laid off as a result of the business combination or
normal downsizingï¿½could obtain assistance at the center in writing
resumes, arranging for job interviews, reviewing job listings, and
other related outplacement services.  UDLP expended $205,000 in
operating this center during the 3-year period and paid an additional
$109,000 to a consulting firm to assist middle- and senior-level
management officials find new employment.  UDLP charged these costs
to overhead rather than restructuring costs.  Similarly, Northrop
Grumman and Lockheed Martin also provided counseling and/or
outplacement assistance to help workers find new employment and
charged the costs to overhead expenses rather than restructuring
costs. 


   EFFECTIVENESS OF SERVICES
   PROVIDED TO HELP TERMINATED
   WORKERS FIND NEW EMPLOYMENT
   COULD NOT BE DETERMINED
------------------------------------------------------------ Letter :7

We were unable to determine the effectiveness of the services
provided to help laid-off workers find new employment.  Like most
organizations, the five business combinations we examined did not
have a comprehensive system in place to evaluate outplacement
effectiveness.  Officials cited various difficulties that prevent
them from implementing such a system.  Similarly, information needed
to determine the effectiveness of these services is not readily
available from DOL. 

Two basic elements are required in a comprehensive system for
assessing the effectiveness of outplacement services:  (1) criteria
against which to make the assessment and (2) a tracking system to
collect relevant performance information.  Our work and work by DOL
shows that most organizations do not evaluate outplacement services
in terms of such criteria as whether those who received services are
reemployed faster, received higher salaries, or were more satisfied
with the jobs they found than a control group of those individuals
who did not receive such assistance.\11 Participants at a recent
workshop conducted by the Office of the Deputy Assistant Secretary of
Defense (Civilian Personnel Policy) and the National Academy of
Sciences concluded that no empirical work has been able to identify
the aspects of outplacement programs that are the most cost-effective
and useful in terms of these criteria.\12

The business combinations we examined did not have a comprehensive
system in place to track the effectiveness of services they provided
to laid-off workers.  Officials from Lockheed Martin, for example,
told us that comprehensive tracking is difficult, especially in cases
of a plant closure as there would then be no company representative
on location to do the tracking.  In addition, some laid-off workers
do not want further contact with their former employer, making
tracking difficult.  Officials noted, moreover, that former employees
have no obligation or incentive to report information regarding their
subsequent employment status or salary information. 

Similarly, information needed to determine the effectiveness of
services provided to workers laid off as a result of the business
combinations is not readily available from DOL.  DOL does not collect
certain critical information, such as participant satisfaction with
the position obtained or the relative success of control groups who
do not participate in the programs.  DOL officials stated that they
did maintain information that reflects various measures of the
effectiveness of DOL-funded programs at the aggregate level, such as
whether program participants obtained a new position and
participants' average wages before and after receiving the services. 
DOL officials expressed concern, however, about using their data,
noting that the service providers do not always submit accurate or
complete information.  Finally, these officials noted that they could
not provide information pertaining specifically to any of the
business combinations in our review. 


--------------------
\11 Multiple Employment Training Programs:  Most Federal Agencies Do
Not Know If Their Programs Are Working Effectively (GAO/HEHS-94-88,
Mar.  2, 1994); Multiple Employment Training Programs:  Major
Overhaul Needed to Reduce Costs, Streamline the Bureaucracy, and
Improve Results (GAO/T-HEHS-95-53, Jan.  10, 1995); Workforce
Reductions:  Downsizing Strategies Used in Selected Organizations
(GAO/GGD-95-54, Mar.  13, 1995); Employment Training:  Successful
Projects Share Common Strategies (GAO/HEHS-96-108, May 7, 1996); and
A Guide to Well-Developed Services for Dislocated Workers, U.S. 
Department of Labor, Employment and Training Administration. 

\12 Issues in Civilian Outplacement Strategies:  Proceedings of a
Workshop, National Academy Press, Washington, D.C., 1996. 


   COMPARING RESTRUCTURING COSTS
   AND ESTIMATED SAVINGS
------------------------------------------------------------ Letter :8

Defense contractors are required to maintain accounting records
showing the actual amount and nature of costs charged to government
contracts.  These costs are generally billed to government contracts
during the same period they are incurred.  As discussed earlier,
however, the section 818 prohibition against payment of restructuring
costs until certification of net savings creates a requirement for
the contractor to segregate restructuring costs in its accounting
records and to exclude these costs from any billings, final contract
price settlements, and overhead settlements until the certification
is made.  After the certification, the contractor is then permitted
to begin charging restructuring costs to DOD contracts.  The
contractor generally recovers restructuring costs over a 5-year
period but the recoupment period may be shorter, depending on the
terms of the advance agreement negotiated between DOD and the
contractor. 

Restructuring savings, on the other hand, are not recorded in a
contractor's accounting records.  Therefore, neither the amount nor
the nature of the savings can be determined by reviewing the
accounting records.  Consequently, savings have to be estimated.  For
example, Northrop Grumman estimated 5-year savings from closing the
Grumman corporate headquarters of about $215 million, of which about
$100 million represents the labor and fringe costs that would be
avoided over the 5-year period by laying off approximately 250
workers.  These savings are therefore an estimate of a cost avoidance
over the 5 yearsï¿½the costs of the additional people that would have
been needed had the headquarters not been closed.  Savings from
restructuring activities we examined were generally in the form of
such future cost avoidances. 

The initial estimate of restructuring savings is simple in concept
because it makes the critical assumption that everything else, except
for the restructuring, is the same after a business combination as
before.  Because things are never the same, it is difficult to
precisely identify actual savings several years after the initial
estimate is prepared.  The December 1996 DOD restructuring report
acknowledges this problem.  It points out that restructuring is not
the only factor that has an impact on actual costs.  Other factors
affecting costs include changes in the rate of inflation,
fluctuations in the business base, and subsequent reorganizations. 

At the request of DCMC, DCAA did a study of the estimated amount of
restructuring costs paid and the estimated amount of savings realized
as of September 30, 1996, for the business combinations for which DOD
had allowed restructuring costs.  DCAA estimated that DOD had paid
$179.2 million in restructuring costs and realized estimated
restructuring savings of $346.7 million as of September 30, 1996, for
a net savings of $167.5 million (see table 10). 



                                Table 10
                
                 Estimates of Paid Restructuring Costs
                  and Experienced Savings by Business
                              Combination

                         (Dollars in millions)

                                                    Experien
                                              Paid       ced       Net
Business combination\a                       costs   savings   savings
----------------------------------------  --------  --------  --------
Hughes-General Dynamics\b                   $124.3    $147.9     $23.6
UDLP                                           9.9      22.9      13.0
Martin Marietta-General Electric\c            36.7     108.2      71.5
Northrop Grumman\d                             8.3      67.7      59.4
======================================================================
Total                                       $179.2    $346.7    $167.5
----------------------------------------------------------------------
\a Lockheed Martin was not included in the DCAA study because it was
certified after September 30, 1996. 

\b Represents savings on only eight contracts. 

\c Represents restructuring costs and savings from the first eight
certified restructuring projects.  DCAA did not project costs and
savings for the five projects certified on September 17, 1996,
because actual experience through September 30, 1996, would have been
minimal. 

\d Estimated savings are based on two of the six projects certified. 
These two projects accounted for 90 percent of total projected
savings. 

Measured another way, the figures shown in table 10 indicate that DOD
has realized $1.93 in savings for each $1.00 of restructuring cost
paid.  DOD officials acknowledged that while their estimates reflect
$1.93 in savings for each dollar reimbursed, they believed additional
savings were being realized.  They explained that DOD had based its
estimate of savings for the Hughes-General Dynamics business
combination on only eight contracts that demonstrated savings in
excess of costs.  They noted that documenting higher savings was not
considered a prudent use of resources.  An industry representative
also commented that the estimates covered only the period through
September 1996 and therefore do not consider savings that may be
realized in future periods.  It should be noted that the estimates in
table 10 also do not reflect any costs that may be incurred in
subsequent periods.  Finally, the estimates do not reflect DOL grant
expenditures or any assistance from the other federal programs or
funding streams. 

Of the $179.2 million DOD has paid to these four business
combinations for restructuring costs, DCAA determined that $18
million, or about 10 percent, was charged to novated flexibly priced
contracts.  The $18 million, therefore, represents the amount of
additional costs to DOD as a result of its decision in July 1993 to
allow contractors to charge restructuring costs to novated flexibly
priced contracts.  It should be noted that the 10 percent in
additional costs for these four business combinations may not be
representative of the percentage for future business combinations
because of differences in factors that determine the percentage,
including the mix of flexibly priced and firm fixed-price contracts
and the period of time required for certification. 


   RECOMMENDATION
------------------------------------------------------------ Letter :9

Because direct federal grant funds can be substantial, as in the
Hughes-General Dynamics and Martin Marietta-General Electric business
combinations, we recommend that the Secretary of Defense obtain
information about significant federal direct grants to defense
contractors involved in business combinations and include this
information in the DOD annual restructuring reports to the Congress. 
Such information could include the grants' dollar values, purposes,
and periods of performance. 


   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10

In commenting on a draft of this report, DOD generally concurred. 
DOD suggested several technical clarifications, and we have
incorporated them in the text where appropriate.  DOD's comments are
presented in its entirety in appendix I.  DOL did not indicate any
overall assessment of the report, but did provide several technical
clarifications, which we have incorporated in the text where
appropriate.  DOL's comments are presented in their entirety in
appendix II. 

The Aerospace Industries Association (AIA) provided comments on a
draft of this report on behalf of the business combinations we
reviewed.  AIA noted that, on balance, the report was objective.  AIA
offered several technical changes to clarify the information
provided, which we have incorporated in the text where appropriate. 
AIA's comments are provided in their entirety in appendix III. 


   SCOPE AND METHODOLOGY
----------------------------------------------------------- Letter :11

To respond to the requirements of section 8115 of Public Law 104-208,
we selected the three business combinations for which the Under
Secretary of Defense (Acquisition and Technology) had issued a letter
of certification as of September 30, 1996.  Two additional business
combinations were certified by the Under Secretary of Defense
(Acquisition and Technology) on November 26, 1996, involving the
Lockheed-Martin Marietta business combination and Martin Marietta's
May 1994 acquisition of General Dynamics Corporation's Space System
Division.  We included the Lockheed-Martin Marietta combination
because of the large amount of restructuring costs and savings
involved in this combination, but excluded the Martin
Marietta-General Dynamics combination because we were already
examining two other combinations involving Martin Marietta.  While
the Hughes-General Dynamics business combination did not have to
undergo the certification process, we included it in our review
because DOD has included the combination in its restructuring reports
to the Congress. 

To determine the amount and nature of restructuring costs, we
obtained information from each of the business combinations and DOD
showing the amount and nature of certified and incurred restructuring
costs at the time of our review.  We analyzed the information
provided by the business combinations along with DCAA audit reports
and pertinent DOD and DCMC records to determine the amount and nature
of restructuring costs incurred for workforce reductions and to
identify the cost and nature of services provided to assist laid-off
workers find reemployment.  However, we did not independently verify
the information provided. 

We also met with DOL officials and obtained information on federal
grants made to assist displaced defense contractor workers find new
employment.  We reviewed files for grants awarded under the DOL
Secretary's discretion or under the DCAP and DDP programs that DOL
officials identified as being targeted to locations in which
restructuring activities were occurring.  To address the issue
concerning the effectiveness of outplacement services in assisting
displaced workers find reemployment, we obtained and reviewed
information provided from DOL, DOD, academia, and each of the
business combinations.  In assessing restructuring savings realized
from the business combinations relative to the restructuring cost
paid by DOD, we examined the methodology DCAA used to estimate the
amount of restructuring costs paid by DOD and the amount of estimated
savings.  We generally found their approach and methodology to be
reasonable and relied on their work to determine the estimated amount
of savings realized and costs paid by DOD as of September 30, 1996. 

We discussed various aspects of the restructuring costs and savings
with officials from each of the business combinations, DOD, DCMC,
DCAA, the DOD Inspector General, and DOL.  Additionally, we provided
summaries of our work to the contractors' representatives to review
for accuracy. 

We performed our review between October 1996 and March 1997 in
accordance with generally accepted government auditing standards. 


--------------------------------------------------------- Letter :11.1

We are sending copies of this report to the Secretaries of Defense
and Labor; the Commander, DCMC; the Director, DCAA; the Director,
Office of Management and Budget; 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.  The major contributors to this
report are listed in appendix IV. 

David E.  Cooper
Associate Director
Defense Acquisitions Issues




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



(See figure in printed edition.)



(See figure in printed edition.)




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



(See figure in printed edition.)



(See figure in printed edition.)




(See figure in printed edition.)Appendix III
COMMENTS FROM THE AEROSPACE
INDUSTRIES ASSOCIATION
============================================================== Letter 



(See figure in printed edition.)



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

John K.  Harper
Timothy J.  DiNapoli
Paula J.  Haurilesko
John D.  Heere
Rosa M.  Johnson

ATLANTA FIELD OFFICE

George C.  Burdette
Erin B.  Baker

LOS ANGELES FIELD OFFICE

Ambrose A.  McGraw
Kenneth H.  Roberts
Thaddeus S.  Rytel, Jr. 

SAN FRANCISCO FIELD OFFICE

Ruth A.  Hijazi
Donald Y.  Yamada

*** End of document. ***