Defense Contractor Restructuring: Benefits to DOD and Contractors (Letter
Report, 09/10/98, GAO/NSIAD-98-225).

Pursuant to a congressional request, GAO provided information on seven
defense contractor business combinations to determine whether the
Department of Defense (DOD) is realizing savings as a result of such
restructuring activities, focusing on: (1) the amount of restructuring
savings expected by DOD from the seven business combinations; (2) the
impact of selected restructuring activities on the contractors' cost of
operations; and (3) whether savings could be traced to contract prices.

GAO noted that: (1) for the seven business combinations GAO reviewed,
DOD expects that it will save about $3.3 billion from contractor
restructuring activities, such as laying off workers, closing
facilities, and relocating employees and equipment; (2) GAO's assessment
of selected restructuring activities showed that they had lowered the
cost of operations at the seven business combinations by hundreds of
millions of dollars; (3) such reductions benefited DOD because the costs
of defense contracts were lower than they would have been if the
restructuring activities had not occurred; (4) determining the precise
impact of restructuring on specific contract prices requires isolating
the impact of these activities from nonrestructuring-related factors,
such as changes in business volume, quantities purchased, and accounting
practices; and (5) DOD, selected business segments, and GAO were
generally not able to isolate the effects of restructuring from those of
other factors.

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

 REPORTNUM:  NSIAD-98-225
     TITLE:  Defense Contractor Restructuring: Benefits to DOD and 
             Contractors
      DATE:  09/10/98
   SUBJECT:  Department of Defense contractors
             Defense cost control
             Defense procurement
             Defense economic analysis
             Human resources utilization
             Reductions in force
             Contract costs
             Cost analysis
IDENTIFIER:  Air Force Titan Launch Vehicle Program
             B-2 Aircraft
             
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Cover
================================================================ COVER


Report to Congressional Requesters

September 1998

DEFENSE CONTRACTOR RESTRUCTURING -
BENEFITS TO DOD AND CONTRACTORS

GAO/NSIAD-98-225

Defense Restructuring Savings

(707249)


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

  AIA - Aerospace Industries Association
  DCAA - Defense Contract Audit Agency
  DCMC - Defense Contract Management Command
  DOD - Department of Defense
  TOW - Tube-launched Optically-tracked Wire-guided

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


B-278554

September 10, 1998

The Honorable Charles E.  Grassley
United States Senate

The Honorable Peter A.  DeFazio
The Honorable Carolyn B.  Maloney
The Honorable Bernard Sanders
The Honorable Christopher H.  Smith
House of Representatives

As a result of declining defense expenditures, contractors have been
consolidating and restructuring their operations to reduce costs
through activities such as disposing of facilities, combining
operations and systems, relocating workers and equipment, and
reducing workforce personnel.  As you requested, we reviewed seven
defense contractor business combinations to determine whether the
Department of Defense (DOD) is realizing savings as a result of such
restructuring activities.  Specifically, we (1) identified the amount
of restructuring savings expected by DOD from the seven business
combinations, (2) assessed the impact of selected restructuring
activities on the contractors' cost of operations, and (3) determined
if savings could be traced to contract prices.  Our report is based
on data from 10 individual contractor business segments, including at
least 1 segment from each of the 7 business combinations. 


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

To encourage defense contractor consolidations, DOD announced in July
1993 that it would pay for restructuring costs on transferred
flexibly priced contracts in certain circumstances.\1 These
circumstances were that (1) the restructuring costs were allowable
under the Federal Acquisition Regulation and (2) a DOD contracting
officer determined that the business combination was expected to
result in overall reduced costs to DOD or preserve a critical defense
capability. 

Concerns over the payment of restructuring costs led Congress in 1994
to pass section 818 of Public Law 103-337, requiring that certain
conditions be met before DOD could reimburse defense contractors for
restructuring-related expenses.  The legislation required that a
senior DOD official certify that projections of restructuring savings
were based on audited cost data and that the projected savings should
result in overall reduced costs to DOD.  The legislation also
required the Secretary of Defense to report annually to Congress on
DOD's experience with defense contractor business combinations,
including whether savings associated with each restructuring actually
exceeded restructuring costs. 

In 1996, Congress passed section 8115 of Public Law 104-208, which
stipulated that for business combinations occurring after September
30, 1996, projected savings had to (1) be at least twice the amount
of costs allowed or (2) exceed the costs allowed, provided the
Secretary of Defense determined that the combination would result in
the preservation of a critical capability.  In November 1997, section
804 of Public
Law 105-85 made these requirements permanent.  None of the seven
business combinations we examined were subject to the two-to-one
ratio requirement because they occurred before this requirement was
established. 

We have issued several products on defense contractor restructuring. 
See Related GAO Products for specific references. 


--------------------
\1 After a business combination, contracts are transferred from one
contractor to another through written agreements executed by the
seller, buyer, and government.  These agreements cite the
government's approval to transfer its contracts.  Flexibly priced
contracts are those under which the total amount paid to the
contractor depends on the allowable costs the contractor incurs in
performing the work. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

For the seven business combinations we reviewed, DOD expects that it
will save about $3.3 billion from contractor restructuring
activities, such as laying off workers, closing facilities, and
relocating employees and equipment.  Our assessment of selected
restructuring activities showed that they had lowered the cost of
operations at the seven business combinations by hundreds of millions
of dollars.  Such reductions benefited DOD because the costs of
defense contracts were lower than they would have been if the
restructuring activities had not occurred. 

Determining the precise impact of restructuring on specific contract
prices requires isolating the impact of these activities from
nonrestructuring-
related factors, such as changes in business volume, quantities
purchased, and accounting practices.  DOD, selected business
segments, and we were generally not able to isolate the effects of
restructuring from those of other factors. 



   EXPECTED RESTRUCTURING SAVINGS
------------------------------------------------------------ Letter :3

DOD expects that it will save $3.3 billion between 1993 and 2000 as a
result of restructuring activities carried out by the seven business
combinations we examined.  Table 1 shows total projected
restructuring savings and DOD's share of these savings for each of
the seven business combinations. 



                                Table 1
                
                    Projected Restructuring Savings

                         (Dollars in millions)

                                                     DOD share\a
                                                ----------------------
                                         Total       Gross         Net
Business combination                   savings     savings     savings
----------------------------------  ----------  ----------  ----------
Hughes -General Dynamics missile        $832.9      $505.8      $373.3
 operations\b
United Defense Limited Partnership       110.8        79.7        50.6
Martin Marietta -General Electric        524.1       305.4       149.1
 Aerospace
Northrop -Grumman -Vought                440.2       263.4       216.7
Martin Marietta -General Dynamics        196.6       139.6        88.9
 Space Systems Division
Lockheed -Martin Marietta              4,224.8     2,675.8     2,269.9
Hughes -CAE-Link                         211.5       148.1       113.1
======================================================================
Total                                 $6,540.9    $4,117.8    $3,261.6
----------------------------------------------------------------------
Note:  With the exception of Hughes - General Dynamics, all savings
figures reflect the values used in DOD's certification decision. 

\a Restructuring savings are allocated to all of the contractors'
customers; accordingly, DOD's share of savings will depend on its
share of the contractors' business base.  Net savings are DOD's gross
savings less its share of restructuring costs. 

\b Because the Hughes - General Dynamics combination occurred before
the requirement for DOD to certify that savings will exceed costs,
Hughes did not initially prepare a comparable figure for total
restructuring savings.  The total amount and DOD share of savings
associated with this combination reflect a March 1997 estimate
prepared by Hughes.  We derived the net savings by subtracting
Hughes' original cost estimate from its March 1997 savings estimate. 

As part of the process to ensure that expected restructuring savings
exceed projected costs, DOD regulations require contractors to submit
a proposal that includes details on planned restructuring activities,
projected costs, and anticipated savings.  The regulations do not
require contractors to propose or demonstrate savings on individual
contracts or use any particular method or approach in estimating
restructuring savings.  As a result, the seven business combinations
used a variety of estimating methods.  These methods included

  -- estimating the savings on eight contracts and subsequently
     extrapolating the estimate across the contractor's entire
     business base (over 1,000 contracts),

  -- comparing incurred costs at two companies before their
     combination with the projected costs at the restructured
     company,

  -- computing average salary and fringe benefits for employees to be
     laid off due to restructuring activities and multiplying these
     averages by up to
     5 years,

  -- estimating reductions in operational costs from closing
     facilities and disposing of equipment, and

  -- projecting the impact that transferring work from the acquired
     company had on the overhead costs charged to the acquiring
     company's existing or anticipated contracts. 

The Defense Contract Audit Agency's (DCAA) guidance on reviewing
restructuring proposals states that the contractor is responsible for
establishing and supporting the reasonableness of the restructuring
savings estimates.\2 In April 1998, we reported that the broad
framework provided under this guidance may result in DOD accepting
proposed savings that are not directly attributable to
restructuring.\3 We noted that our work at Lockheed Martin's Space &
Strategic Missiles sector indicated that some of the operational
improvements and their associated savings could have been
accomplished without restructuring.  Subsequently, we found that
Lockheed Martin did not fully consider the impact of normal
downsizing activities when estimating restructuring savings.  For
example, Lockheed Martin attributed 1,153 support personnel
reductions at its Missiles & Space segment in 1995 to restructuring
activities.  However, before its merger with Martin Marietta was
complete, Lockheed had forecasted that its total personnel level at
this segment would decrease by 849 in 1995.  Because Lockheed Martin
did not consider reductions that were already planned, the amount of
savings that was directly attributed to restructuring for 1995 may be
overstated by $170 million.\4 Lockheed Martin officials pointed out
that this amount would not have affected DOD's decision to pay
restructuring costs because of the large amount of projected savings
from the business combination. 

DOD realizes benefits from restructuring when its contract prices are
lower than they would have been if restructuring had not occurred. 
The price of a typical government contract consists of indirect and
direct costs.\5 Restructuring activities that reduce indirect costs
generally result in lower forward pricing rates and lower contract
prices.\6 Similarly, restructuring activities that reduce direct
costs will be reflected in contract prices in the form of lower costs
for such elements as direct labor or material costs.  Five of the
contractor business segments we visited included only indirect cost
reductions in their estimated restructuring savings, whereas the
other five segments included both direct and indirect cost
reductions. 


--------------------
\2 DCAA is responsible for auditing contractors' restructuring
proposals and providing a report on the results of its audit to the
Defense Contract Management Command's (DCMC) contracting officers. 

\3 This report also noted that DCAA's guidance may not provide
sufficient criteria to evaluate restructuring savings, particularly
those that may have been achieved without restructuring.  Although we
recommended that DOD clarify DCAA guidance on evaluating
restructuring savings, DOD did not believe any changes to the
guidance were needed. 

\4 Lockheed's estimate did not identify how many of the 849 persons
that were expected to leave in 1995 were support personnel.  We
estimated this number by (1) taking the ratio of support personnel to
total personnel that actually left in 1995 (57.2 percent) and (2)
multiplying this ratio by 849.  We then multiplied the resulting
figure by the contractor's estimate of the average monthly salary and
fringe benefit costs to determine the overstated amount. 

\5 Indirect costs, also called overhead costs, cover general business
costs such as depreciation, maintenance, and general office expenses
that are applicable to a contractor's business.  These costs are
allocated to all contracts.  Conversely, direct costs are associated
with a specific program or contract and are charged directly to that
program or contract.  Examples of direct costs include expenses for
engineering and manufacturing labor, subcontractors, and raw
materials. 

\6 Forward pricing rate agreements are used by DOD and defense
contractors to facilitate the pricing of contracts.  Contractors
typically project the amount of indirect costs that are expected to
be incurred over the next several years and then compute forward
pricing or overhead rates, which are generally stated in percentages. 
To price a contract, the rates are applied against the contract's
direct cost elements to estimate the amount of overhead costs to be
allocated to that contract.  If no changes have occurred in the
contractor's projected business base, restructuring activities that
reduce indirect costs will result in lower forward pricing rates. 
Applying these lower rates to the contract's direct cost elements
will result in a lower contract price. 


   RESTRUCTURING ACTIVITIES
   LOWERED CONTRACTORS' OPERATING
   COSTS
------------------------------------------------------------ Letter :4

Restructuring activities have enabled contractors to reduce their
projected operating costs by hundreds of millions of dollars.  The
following four examples illustrate how restructuring enabled
reductions in projected operating costs: 

  -- The Hughes - CAE-Link business combination led to closing most
     of CAE-Link's Binghamton, New York, operations and terminating
     548 employees.  The projected savings resulting from these
     activitiesï¿½about $212 millionï¿½was computed by taking the total
     operating costs of the segments of the two companies that were
     to be combined and comparing that amount with the projected
     operational costs after restructuring.\7 For example, in the
     year before restructuring, the two segments had combined
     operating costs of $195.3 million.  Hughes subsequently
     projected that the operating costs for these segments would
     decrease to about $161.9 million in the first year of
     restructuring and about $150.8 million annually for the next 4
     years.  We verified that these lower costs were reflected in
     Hughes' forward pricing rates that were made available to DOD
     contracting officers to price contracts. 

  -- For the Northrop - Grumman - Vought business combination, we
     reviewed proposed savings from reductions in corporate overhead
     costs.  After the business combination, several restructuring
     activities were undertaken, including closing Grumman's
     headquarters in Bethpage, New York.  Northrop Grumman estimated
     that closing this facility would save about $215 million over a
     5-year period.  About $100 million of the savings represented
     the labor and fringe benefit costs associated with laying off
     approximately 250 workers.  Consequently, the amount of
     corporate overhead costs allocated to Northrop Grumman's B-2
     bomber program was less after restructuring than it would have
     been if restructuring had not occurred. 

  -- After its acquisition of General Electric Aerospace, Martin
     Marietta restructured the operations of its Electronics &
     Missiles segment, thereby reducing projected overhead costs by
     $101 million over a period of about
     5 years.  The reductions consisted of (1) $68 million for
     vacating facilities, consolidating activities, eliminating jobs,
     and obtaining concessions in property taxes; (2) $18 million in
     concessions for employee wages and benefits, water, sewage, and
     electricity charges; (3) $11 million for relocating data
     processing activities and personnel; and (4) about
     $4 million in concessions in long-distance telephone rates.  We
     traced these savings into the contractor's overhead expense
     pools and its forward pricing rates.  The lower rates were made
     available to DOD contracting officers to price contracts. 

  -- After the merger of Lockheed and Martin Marietta, Lockheed
     Martin's Missiles & Space business segment restructured its
     operations, including reducing overhead and support personnel
     and consolidating various administrative functions.\8 As a
     result, the contractor was able to reduce its projected indirect
     labor costs by $739 million.  Lockheed Martin reflected these
     indirect labor cost reductions in its August 1996 forward
     pricing rates. 


--------------------
\7 The savings figures used throughout this section refer to total
estimated restructuring savings. 

\8 Some of the personnel reductions may have been due to normal
downsizing rather than restructuring. 


   IMPACT OF RESTRUCTURING ON
   CONTRACT PRICES IS DIFFICULT TO
   DETERMINE
------------------------------------------------------------ Letter :5

Determining the impact that restructuring activities had on a
contract price requires isolating the effect of restructuring from
nonrestructuring-
related factors, such as changes in quantities or improvements in
manufacturing efficiencies.  In its annual reports to Congress, DOD
has acknowledged that other factors, such as inflation, business
fluctuations, accounting system changes, and subsequent
reorganizations, also impact the contractors' overall cost of
operations.  DOD noted that it is not feasible to precisely isolate
the impact of restructuring from the impact of these other factors. 
Our work substantiates DOD's position. 

United Defense provided the clearest example of a contract price
reduction related to restructuring.  For a fixed-price foreign
military sales contract for self-propelled howitzers, the contracting
officer had included a "reopener" clause,\9 requiring the contractor
to reduce the contract price after restructuring its operations.  The
contracting officer negotiated a $1.8 million reductionï¿½or about 4
percentï¿½to the contract's $48.5 million price.\10 This reduction was
negotiated based on a proposal developed by the contractor that
showed the impact of restructuring on the contract. 

Contractors offered other examples that they believed demonstrated
how contract prices were affected by restructuring.  However, we were
unable to isolate the impact of restructuring from the impact that
other factors had on the contract prices.  For example, our analysis
of Hughes Aircraft Company contract data showed the Army purchased
12,600 Tube-launched Optically-tracked Wire-guided (TOW) antiarmor
missiles at an average unit price of $16,800 before restructuring and
8,758 TOW missiles at a unit price of $15,677 after restructuring in
1993.  Despite the 30-percent decrease in quantities, the average
unit price of the missile was $1,123, or almost 7 percent, lower
after restructuring.  Hughes officials attributed the reduction in
part to lower overhead rates after Hughes' acquisition of General
Dynamics' missile operations.  However, Hughes officials pointed out
that other factors, such as changes in quantities and production
rates, learning curve efficiencies, and fluctuations in business
volume, also affected the unit price of the missile.  Neither we nor
the contractor could isolate the effect of restructuring from the
influence of these other factors on the unit price. 

After its acquisition of General Electric Aerospace, Martin Marietta
officials provided information showing that the Navy purchased 25
test equipment items at a unit price of $1,270,524 before
restructuring and 25 of the same test equipment items at a unit price
of $1,246,230 after restructuring.  Even though the unit price was
$24,294 lower after restructuring, we could not isolate the impact of
restructuring from the influence of other factors, such as learning
curve improvement and business volume changes.  Contractor officials
believe the reduction is attributable in part to restructuring
activities but acknowledged that the other factors also affected the
unit price. 

Similarly, United Defense's unit price for refurbishing the Bradley
Fighting Vehicle was between 8 and 16 percent lower after
restructuring than before restructuring.  The unit price range is
primarily due to differences in the number of items to be refurbished
and the inflation rate used to adjust the unit price before
restructuring.  Army procurement officials believe the lower unit
price resulted from both restructuring and normal downsizing, whereas
contractor officials believe most of the reduction resulted from
restructuring. 

Lockheed Martin officials reported that restructuring after the
Martin Marietta - General Dynamics Space Systems Division combination
resulted in significant savings to the Air Force's Titan launch
vehicle program.  After the combination, Martin Marietta closed
General Dynamics' San Diego-area manufacturing facilities and
relocated the Atlas and Centaur launch vehicle programs to its Titan
production facility in Denver.  According to contractor officials,
producing all three launch vehicles in Denver enabled Martin Marietta
to eliminate redundant engineering, manufacturing, and quality
assurance personnel.  Contractor officials reported that these
activities resulted in a total of $223 million in reductions to the
estimated cost to complete three Titan contracts.  These
reductionsï¿½which ranged between 3.7 and 5.6 percent of the cost to
complete the contractsï¿½were reflected in various contractor cost
performance reports submitted to the Air Force.  Titan program
officials agreed that restructuring reduced projected program costs
but noted that it was not possible to precisely quantify the impact
of restructuring separate from the impact of other factors.  The
officials explained that a number of changes were occurring
concurrently on the Titan program, including a reduction in the
number of launch vehicles and the implementation of various
acquisition reform initiatives. 

Contract prices may not always be lower after restructuring, even
though DOD benefited from restructuring.  For example, the Northrop -
Grumman - Vought business combination reduced the amount of corporate
overhead costs being charged to the B-2 bomber program.  We estimated
that the B-2's general and administrative overhead rateï¿½to which
corporate overhead costs are allocatedï¿½was about 1 percent less than
it would have been if restructuring had not occurred.  Nevertheless,
the B-2's general and administrative overhead rate rose significantly
from 1993 to 1996, principally due to decreases in the planned
procurement of B-2s.  Consequently, the nonrestructuring-related
changes to the B-2 program more than offset the benefit of
restructuring. 

In another case, even though savings from restructuring activities
contributed to a 7-percent reduction in the 1993 unit price of the
TOW missile, the 1994 unit price of $19,498 was actually $3,821 more
than the 1993 unit price of $15,677.  Although restructuring savings
associated with the acquisition of General Dynamics' missile
operations led to a lower amount of overhead costs being applied to
the contract, our analysis indicates that increases in material and
armament subcontract costs that were unrelated to restructuring more
than offset restructuring savings. 


--------------------
\9 A reopener clause permits a downward-only price adjustment to a
fixed-price contract whose price did not reflect the impact of
restructuring.  Once the contractor has determined the impact of
restructuring, DOD can use the clause to reduce the price of that
contract and thereby recoup its share of restructuring savings. 

\10 In our July 1998 report, we pointed out that, despite repeated
recommendations from DCAA and DCMC personnel, contracting officers
rarely included reopener clauses in contracts awarded before
contractors incorporated estimated restructuring savings into their
forward pricing rates. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

In commenting on a draft of this report, DOD concurred with our
findings.  DOD's comments are provided in appendix I.  The Aerospace
Industries Association (AIA) provided comments on our report on
behalf of the business combinations we reviewed.  AIA stated that the
report objectively and fairly attempted to trace restructuring
savings to individual programs or contracts.  AIA's comments are
provided in appendix II. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

To identify the amount of restructuring savings expected by DOD, we
identified each of the business combinations for which DOD had
certified that estimated restructuring savings should exceed
projected restructuring costs.  As of June 1, 1998, DOD had issued
nine certifications associated with six business combinations: 

  -- United Defense Limited Partnership, a joint venture between FMC
     Corporation's Defense Systems Group and Harsco Corporation's BMY
     Combat Systems Division;

  -- Martin Marietta Corporation's acquisition of General Electric
     Company's aerospace and other business segments;

  -- Martin Marietta's acquisition of General Dynamics Corporation's
     Space Systems Division;

  -- Northrop Corporation's acquisitions of the Grumman Corporation
     and the Vought Aircraft Company to form the Northrop Grumman
     Corporation;

  -- the merger of the Lockheed Corporation and Martin Marietta to
     form the Lockheed Martin Corporation; and

  -- Hughes Electronics' acquisition of CAE-Link Corporation. 

To determine the amount of savings expected for each of these
business combinations, we reviewed the information prepared during
DOD's certification process, including the contractor's restructuring
proposal, DCAA audit reports, negotiation memorandums, and other
pertinent information. 

We also reviewed restructuring savings associated with Hughes
Aircraft Company's August 1992 acquisition of General Dynamics'
missile operations.  Even though this business combination occurred
before the requirement for DOD to certify that savings should exceed
costs, DOD included the estimated savings and costs in its reports to
Congress on defense industry restructuring.  Hughes did not initially
prepare an estimate of total expected savings that was audited by
DCAA.  Consequently, we used data that was submitted to DOD by Hughes
in March 1997 that projected the overall impact of restructuring
activities.  This data was subjected to a limited review by DCAA,
which tested the mathematical accuracy of cost and savings
computations and assessed the reasonableness of the contractor's
estimating methods.  For each business combination, we also obtained
updated information on estimated restructuring savings from the
cognizant DCMC offices and reviewed DOD's reports to Congress on
defense industry restructuring. 

To assess the impact of restructuring activities on the contractors'
operational costs, we reviewed restructuring activities at 10
contractor business segments, including at least 1 segment from each
business combination.  We generally selected those business segments
with the largest projected amount of restructuring savings.  These 10
segments were expected to generate about $2.4 billion, or over 70
percent, of the projected $3.3 billion in net savings to DOD.  We did
not attempt to validate that the reported restructuring savings were
directly attributable to restructuring activities. 

We used multiple approaches to determine if restructuring had reduced
the contractors' cost of operations.  At Northrop Grumman, where a
large part of projected restructuring savings were generated at the
corporate level, we reviewed the corporate overhead costs to its B-2
business segment to determine if such charges were lower after
restructuring.  At other locations that proposed indirect cost
reductions, we determined how such estimates were developed and
whether such reductions had been reflected in overhead cost accounts. 

In assessing whether restructuring savings could be traced to
contract prices, we determined if DOD contracting officers had
included downward-only reopener clauses in fixed-price contracts
negotiated before the contractors had adjusted their forward pricing
rates to reflect the impact of restructuring.  For those contracts
containing such clauses, we determined whether the contracting
officer had exercised the clause and, if so, the amount by which the
contract's price was reduced.  For contractors whose savings
reflected reductions in indirect costs, we tried to compare the
overhead rates that were in effect before restructuring with the
rates that were in effect after restructuring.  We also determined
whether such rates were made available to contracting officers to
price contracts.  For those contractors that included direct costs as
restructuring savings, we examined contract-related documents to
determine if these costs were less than before restructuring. 

In addition, we requested that contractor officials identify
comparable items that DOD purchased before and after restructuring. 
We accepted the items the contractors identified and did not make an
independent evaluation to determine whether they identified all
available comparable items.  We compared the prices DOD paid for
these items before and after restructuring to determine if the prices
had been impacted by restructuring or other factors. 

Finally, we discussed the results of our analyses with officials from
the business combinations, DOD, DCMC, and DCAA. 

We performed our work between May 1997 and July 1998 in accordance
with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :7.1

Unless you publicly announce its contents earlier, we plan no further
distribution of this report until 7 days after its issue date.  At
that time, we will send copies of this report to the Secretary of
Defense; 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.  Major contributors to this report
are listed in appendix III. 

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.)Appendix II
COMMENTS FROM THE AEROSPACE
INDUSTRIES ASSOCIATION
============================================================== Letter 


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

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

John K.  Harper
Timothy J.  DiNapoli
Paula J.  Haurilesko
John D.  Heere

ATLANTA FIELD OFFICE

George C.  Burdette
Erin B.  Baker
Beverly A.  Breen

LOS ANGELES FIELD OFFICE

Dorian R.  Dunbar
Kenneth H.  Roberts
Thaddeus S.  Rytel, Jr. 

SAN FRANCISCO FIELD OFFICE

Ruth-Ann Hijazi
Donald Y.  Yamada

RELATED GAO PRODUCTS

Defense Contractor Restructuring:  DOD Risks Forfeiting Savings on
Fixed-Price Contracts (GAO/NSIAD-98-162, July 17, 1998). 

Defense Industry Restructuring:  Updated Cost and Savings Information
(GAO/NSIAD-98-156, Apr.  30, 1998). 

Defense Industry Restructuring:  Clarification of Cost and Savings
Issues (GAO/NSIAD-97-186R, June 17, 1997). 

Defense Industry Restructuring:  Cost and Savings Issues
(GAO/T-NSIAD-97-141, Apr.  15, 1997). 

Defense Restructuring Costs:  Information Pertaining to Five Business
Combinations (GAO/NSIAD-97-97, Apr.  1, 1997). 

Defense Restructuring Costs:  Projected and Actual Savings From
Martin Marietta Acquisition of GE Aerospace (GAO/NSIAD-96-191, Sept. 
5, 1996). 

Defense Contractor Restructuring:  First Application of Cost and
Savings Regulations (GAO/NSIAD-96-80, Apr.  10, 1996). 

Defense Restructuring Costs:  Payment Regulations Are Inconsistent
With Legislation (GAO/NSIAD-95-106, Aug.  10, 1995). 

Overhead Costs:  Defense Industry Initiatives to Control Overhead
Rates (GAO/NSIAD-95-115, May 3, 1995). 

Defense Industry Consolidation:  Issues Related to Acquisition and
Merger Restructuring Costs (GAO/T-NSIAD-94-247, July 27, 1994). 


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