Acquisition Reform: DOD Faces Challenges in Reducing Oversight Costs

Published by the Government Accountability Office on 1997-01-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to Congressional Committees

January 1997
                  DOD Faces Challenges
                  in Reducing Oversight

             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division


             January 29, 1997

             Congressional Committees

             The Department of Defense (DOD) has made acquisition reform one of its
             highest priorities as it attempts to reduce the cost of acquiring weapon
             systems in an era of constrained defense budgets. Savings from acquisition
             reforms are, in part, expected to provide funds for DOD’s planned
             modernization efforts. As one element of its acquisition reform efforts, DOD
             has focused considerable attention on reducing oversight costs, which are
             considered to be a significant factor in influencing the price DOD pays for
             goods and services.1

             This report deals with our review of the Reducing Oversight Costs
             reinvention laboratory that DOD established in September 1994 as a result
             of the National Performance Review. The laboratory had as its overall
             objective the reduction of nonvalue added oversight requirements with the
             intent of reducing the contractors’ compliance costs and the government’s
             cost of performing oversight activities. The focus of our review was to
             determine (1) the laboratory’s success in effecting changes to DOD
             oversight requirements and reducing oversight costs, (2) any obstacles to
             achieving these benefits, and (3) lessons learned from laboratory
             experiences. We conducted this review under our basic legislative
             responsibilities and are addressing this report to the committees that
             foster acquisition reform.

             The National Performance Review is a major reform initiative begun by
Background   the President in 1993 and was placed under the direction of the Vice
             President. A key part of that initiative has been the establishment of
             agency “reinvention laboratories,” which are designed to test ways that
             agencies can improve their performance by reengineering their work
             processes and eliminating unnecessary regulations. We reported in
             March 1996 that more than 2 dozen agencies and other federal entities had
             developed a total of 185 reinvention laboratories.2

             DOD’s Reducing Oversight Costs reinvention laboratory consists of
             10 participating defense contractor sites, as well as cognizant Defense

             For additional information on DOD’s efforts, see Acquisition Reform: Efforts to Reduce the Cost to
             Manage and Oversee DOD Contracts (GAO/NSIAD-96-106, Apr. 18, 1996).
             For additional information on reinvention laboratories, see Management Reform: Status of Agency
             Reinvention Lab Efforts (GAO/GGD-96-69, Mar. 20, 1996).

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Contract Management Command (DCMC) and Defense Contract Audit
Agency (DCAA) offices, as shown in figure 1. Each site established a
management council generally comprised of representatives from the
contractor, DCAA, DCMC, and selected DOD program offices. The reinvention
laboratory’s concept of operations was to have participants conduct
cost-benefit analyses of oversight requirements, eliminate requirements
that drive nonvalue added oversight, and use the regulatory relief authority
granted to designated reinvention laboratories to deviate from the Federal
Acquisition Regulation (FAR) or the Defense Federal Acquisition
Regulation Supplement to experiment and test new approaches to

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Figure 1: Reducing Oversight Costs Reinvention Laboratory Participants



                                                                                                          8                             9



                                                                          4   5,6

     Participating contractors
     1. Boeing Defense and Space Group, Seattle, Wash.                         6.   Texas Instruments Defense Systems and Electronics Group, Dallas, Tex.
     2. Northrop Grumman Military Aircraft Division, Hawthorne, Calif.         7.   McDonnell Douglas Aerospace, St. Louis, Mo.
     3. Hughes Missile Systems Company, Tucson, Ariz.                          8.   Magnavox Electronics System, Fort Wayne, Ind.
     4. Lockheed Martin Tactical Aircraft Systems, Fort Worth, Tex.            9.   Lockheed Martin Government Electronic Systems, Moorestown, N.J.
     5. Loral Vought Systems, Grand Prairie, Tex.                             10.   Raytheon Electronics Systems, Bedford, Mass.

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

                                                      To measure the laboratory’s progress, DOD requested that participants
                                                      report on the projects that were being pursued, their potential savings, and
                                                      the actual savings achieved. The participants were requested to group
                                                      their results according to the cost drivers identified by the management
                                                      consulting firm of Coopers & Lybrand in its December 1994 study. This
                                                      study, which was prepared with the assistance of TASC, Inc., estimated
                                                      that government acquisition regulations and oversight requirements added

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                       18 percent to the cost of goods and services DOD buys.3 In total, the report
                       covered more than 120 cost drivers. The report concluded that the
                       following top 10 cost drivers accounted for almost half of the 18-percent
                       cost impact:

                   •   DOD quality program requirements,
                   •   Truth in Negotiations Act (TINA),
                   •   cost/schedule control system requirements,
                   •   configuration management requirements,
                   •   contract specific requirements,
                   •   DCAA/DCMC interface,
                   •   Cost Accounting Standards,
                   •   material management and accounting system,
                   •   engineering drawings, and
                   •   government property administration.

                       Appendix I provides more information about the 10 cost drivers.

                       Many laboratory participants are also involved in the Single Process
                       Initiative announced by the Secretary of Defense in December 1995. This
                       initiative is aimed at reducing or eliminating multiple, government-unique
                       management or manufacturing requirements to enable the establishment
                       of common, facility-wide systems.

                       While the reinvention laboratory was an effort limited to only 10 locations,
Results in Brief       its results highlight some of the challenges that DOD faces in attempting to
                       reduce oversight costs. Overall, the reinvention laboratory has made only
                       limited progress in implementing changes to reduce contractors’ costs of
                       complying with government regulations and oversight requirements. In
                       particular, laboratory participants reported little success in addressing 9 of
                       the top 10 cost drivers. Several factors, according to DOD and contractor
                       officials, limited the ability of laboratory participants to make changes and
                       achieve significant cost reductions. DOD officials noted that on a more
                       general level, the reinvention laboratory tended not to get the highest level
                       of support from other components within DOD and from service
                       components. Other factors tended to affect specific projects, including
                       statutory and non-DOD regulatory requirements, disagreements between
                       DOD and contractor personnel on the value of certain oversight

                         The DOD Regulatory Cost Premium: A Quantitative Assessment, Coopers & Lybrand/TASC, Inc.,
                       Dec. 1994. Two of the 10 contractors participating in the reinvention laboratory were among those
                       included in the Coopers & Lybrand study.

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                     requirements, and difficulties in coordinating and obtaining approval for
                     proposed changes where multiple customers were involved.

                     While the laboratory results highlight the challenges faced by DOD, the
                     results should not deter DOD from continuing its efforts to reduce nonvalue
                     added oversight requirements. Rather, the lessons learned from the
                     reinvention laboratory suggest that DOD leadership needs to continue
                     support of oversight reform. While DOD is in the process of closing the
                     reinvention laboratory, DOD officials noted that many of the lessons
                     learned have been reflected in structuring its Single Process Initiative. DOD
                     officials noted that the initiative is open to all defense contractors and
                     believe that it will provide a more effective means for addressing many of
                     the technically oriented issues such as manufacturing and quality
                     assurance processes. DOD officials cited the use of management councils
                     as a key element in the initiative, as well as using a more structured
                     approach to reviewing and approving projects and designating senior DOD
                     and service officials to serve as facilitators. In doing so, DOD anticipates
                     that proposals submitted under the Single Process Initiative will be
                     reviewed and approved in a more timely fashion.

                     From a budgetary perspective, the laboratory results also suggest that
                     caution must be used in estimating cost reductions from oversight reform.
                     Only a small portion of the projected potential cost reductions from
                     laboratory projects had been realized as of July 31, 1996. DOD officials
                     noted that it may be some time before it is known whether the remaining
                     projects will be approved and implemented, and many of the projects may
                     incur implementation costs that would partially offset cost reductions in
                     the near term. Finally, the amount of cost reduction that can actually be
                     achieved from oversight reform remains in question as participants
                     generally found the cost impact identified by Coopers & Lybrand as being
                     overstated at their companies. For example, 5 participants prepared
                     estimates for the top 10 cost drivers and their estimates ranged from 1.2 to
                     6.1 percent compared to the study’s estimate of 8.5 percent.

                     Through July 31, 1996—the date of the last status report—laboratory
Limited Laboratory   participants estimated that if all their projects are approved and fully
Success in Making    implemented, annual cost reductions of about $159 million could be
Change               achieved. As shown in appendix I, about $145 million, or 91 percent of the
                     total amount, would be in the form of reduced contractor compliance
                     costs. Of the $145 million in potential annual cost reductions, about
                     $11 million has been reported as being realized from actions already

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                     implemented. Laboratory participants identified modest reductions—about
                     $14 million—in direct government oversight costs.4 Finally, while both
                     DCMC and DCAA are generally planning further reductions to its staff at the
                     reinvention sites, DOD officials acknowledge these reductions are primarily
                     due to overall budget constraints rather than laboratory efforts.

                     Laboratory participants reported little success in addressing 9 of the top
                     10 cost drivers identified by Coopers & Lybrand, with the majority of the
                     projected savings expected to come from changes in the contractors’
                     quality assurance systems. Changes in quality assurance processes
                     generally reflect decisions to convert from a military to a commercially or
                     internationally accepted standard that contractors believe improved their
                     long-term competitiveness.5 These changes were greatly facilitated by the
                     Secretary of Defense’s June 1994 decision to allow the use of commercial
                     specifications or standards in lieu of military requirements unless no
                     practical alternative existed.

                     Participants identified a variety of factors as to why changes to the other
Factors Inhibiting   nine cost drivers were not more successful. Some factors affected the
Change               laboratory at a more general level, while others had a more direct effect on
                     individual projects. Requirements imposed by statute and non-DOD
                     regulatory requirements precluded participants from pursuing some
                     projects, while the inability to obtain approval from other federal agencies
                     to test new processes also proved formidable. On other projects,
                     differences in views between DOD and contractor personnel on the merits
                     of certain oversight requirements slowed down or otherwise limited
                     opportunities to make meaningful changes. Coordinating and obtaining
                     approval for proposed changes among multiple customers—while
                     generally not precluding a project from being pursued—also tended to be

                     On a more general level, participants voiced frustration at delays in having
                     projects or waivers reviewed and approved. Participants also noted that
                     successfully implementing reform efforts requires high level attention and

                      The estimate for the government oversight cost reduction was based on the latest data as of
                     December 31, 1995. Laboratory participants reported that one project, for example, could reduce
                     contractor system audit costs by 50 percent. Local DOD representatives will prepare an annual
                     government audit schedule and share it with the program offices who will be offered an opportunity to
                     join local audit teams instead of sending their own teams. Laboratory participants estimate this change
                     will save DOD about $1.2 million annually in staff costs, while the contractor’s cost to support such
                     reviews will be reduced by an estimated $1.1 million annually.
                     For more information on commercial quality assurance practices, see Best Practices: Commercial
                     Quality Assurance Practices Offer Improvements for DOD (GAO/NSIAD-96-162, Aug. 26, 1996).

                     Page 6                                                       GAO/NSIAD-97-48 Acquisition Reform

                             support within DOD. One participant noted, for example, that depending on
                             the issue, there were relatively few officials that were empowered to
                             approve a change, while many could reject or delay a proposal. Further,
                             DCMC officials told us that the reinvention laboratory, a joint DCMC/DCAA
                             initiative, tended not to get the highest level of support from other
                             components within DOD and from service components. They said that the
                             laboratory was not a “big attention grabber” for many of the military
                             commands and buying offices. One senior official noted, for example, that
                             when he would visit a command or buying office to talk about the
                             laboratory and its potential, the response was often that they had other
                             priorities. In contrast, this official noted that the Single Process Initiative
                             has the attention and support of both the Secretary of Defense and the
                             Under Secretary of Defense for Acquisition and Technology. Accordingly,
                             the Single Process Initiative is receiving the type of attention where
                             commands and buying offices are more cognizant of and receptive to
                             reform proposals.

Legislative and Regulatory   Laboratory participants found that legislative and regulatory requirements
Requirements                 affected their efforts on several cost drivers. Legislative requirements
                             generally cannot be unilaterally waived unless an agency has specific
                             legislative authority to do so. Similarly, federal agencies have promulgated
                             regulations to accomplish their assigned responsibilities. Regulations
                             under the control of non-DOD agencies cannot be waived by DOD without
                             the approval of cognizant agencies. Participants noted that 3 of the top 10
                             cost drivers identified by the Coopers & Lybrand study—the requirements
                             of TINA, government property administration and Cost Accounting
                             Standards—fell into this category.

                             Participants considered addressing the cost of complying with TINA by
                             increasing the threshold over which they were required to submit certified
                             cost and pricing data. While teams often disagreed on the merits of raising
                             the threshold, the proposals generally could not be pursued since the
                             threshold is legislatively established. Consequently, participants chose to
                             pursue changes in the processes that they use to comply with the
                             legislation’s requirements. For example, one team agreed to eliminate
                             formal proposals for ordering production spares, while another laboratory
                             site is evaluating the expanded use of parametric estimating techniques in

                             Page 7                                         GAO/NSIAD-97-48 Acquisition Reform

lieu of preparing detailed cost data.6 A senior DCAA official stated that
addressing the way in which contractors comply with TINA’s requirements
can lead to reduced compliance costs while still providing the government
the benefits associated with TINA’s requirement to have contractors submit
current, complete, and accurate pricing data.

Participants’ proposed changes to government property requirements
encountered a combination of legislative and regulatory requirements.
Nine of the 10 participants proposed efforts addressing requirements
pertaining to government property in the possession of contractors.
Several of the proposals involved requesting a waiver to increase the
threshold to account for government property from $1,500 to $5,000 or to
eliminate certain screening requirements for excess property. However,
DOD generally disapproved these requests, in part because the waivers
involved legislative requirements implemented through regulations under
the control of the General Services Administration. DOD officials indicated
that DOD did not have the authority to waive the regulatory requirements
unilaterally and that the General Services Administration stated that it was
precluded from law from approving the waivers.

Overall, laboratory participants generally found that obtaining waivers to
requirements controlled by other federal agencies was difficult. In addition
to the 12 government property waiver requests disapproved by DOD, an
additional 3 requests to waive requirements controlled by the Department
of Labor were also disapproved. In notifying DOD that the Department of
Labor would not approve the requests, a senior Labor official indicated
that the proposed changes would hamper Labor’s efforts to enforce
certain executive order provisions. Participants had some success in
obtaining waivers from regulations that DOD had authority to waive
unilaterally, as participants are implementing 13 waivers to various FAR or
DOD regulations. However, these waivers—which DOD estimates could
result in cost avoidances of about $2.3 million annually—account for only
a small portion of the laboratory’s potential cost reductions.

The third legislatively based cost driver—Cost Accounting Standards—was
not addressed by laboratory participants. DCAA officials told us that none
of the reinvention laboratory participants had identified any specific

 Parametric techniques involve the use of cost estimating relationships and mathematical algorithms to
estimate various costs. For example, if historical cost data have demonstrated that the cost to test an
item is generally 25 percent of the item’s manufacturing cost, then a parametric estimate would simply
compute test costs as one-fourth of the item’s manufacturing cost. In contrast, a detailed, grass roots
estimate could involve using very precise Industrial Engineering standards, in which an estimator
assigns a time value to each of the planned tasks, calculates the cost associated with each task, and
then builds up the final estimate by summing the tasks’ respective costs.

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                            improvements or any nonvalue added oversight requirements that related
                            to Cost Accounting Standards. One DCMC official noted that, in his opinion,
                            the annual cost of maintaining a system that complies with the standards
                            is relatively small for defense contractors. The official noted, however,
                            that the cost for a company to establish a system that is in compliance may
                            be significant and therefore may pose a barrier to do so.

Disagreement on Merits of   Given the nature of the defense industry, there are often differing views on
Changes                     the degree of oversight needed. We found examples of such differences in
                            views over both cost and schedule control systems and government
                            property requirements. For example, participants’ efforts to revise their
                            organizations’ cost/schedule control systems, used by government officials
                            to monitor contractor progress, illustrate the challenges of overcoming
                            different perspectives on the merits of changing oversight practices and
                            processes. Two contractors proposed implementing new systems that, in
                            their view, were more reflective of the information they used to manage
                            their production efforts. In one case, contractor officials told us that
                            concerns raised by DCMC, DCAA, and their primary customers led them to
                            withdraw the proposal and focus on less “radical” changes, such as
                            reducing the amount or type of information provided. However, according
                            to contractor officials, even these proposed changes met with resistance
                            from their program office customers. A program official explained that the
                            proposed changes would not have provided sufficient data to manage the
                            affected programs.

                            In the second case, a contractor participant presented a concept for an
                            alternative system in March 1995 and submitted a formal proposal in May
                            1995. However, DOD participants expressed concerns about various
                            elements of the proposal. For example, both DCMC and DCAA officials
                            expressed concern that this alternative would not provide information on
                            indirect costs and would limit DOD’s ability to audit the system and identify
                            any corrective actions needed. Consequently, they considered the
                            proposal to be “very risky” for the government. Although the contractor
                            and DOD have been working to resolve the concerns—resulting in at least
                            four revised proposals between May 1995 and March 1996—a DCMC official
                            told us that in her view, the proposed system still does not adequately
                            protect the government’s interests. Agreement on moving to an alternative
                            system had still not been reached by September 1996.

                            Similarly, DOD and contractor views on the merits of accounting for
                            government property reflect fundamental differences of opinion. As noted

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                          previously, DOD generally disapproved the participants’ waiver requests,
                          citing legislative and regulatory requirements. However, DOD officials also
                          expressed skepticism about proposals to increase the dollar threshold for
                          tracking government property from $1,500 to $5,000. One senior official
                          within the Office of the Secretary of Defense noted that while DOD had
                          recently raised the threshold to $1,500 based on industry input, DOD did not
                          have sufficient information to support a higher threshold. Consequently, in
                          this official’s view, relaxing controls over millions of dollars of
                          government property was not justified. Accordingly, DOD conditionally
                          approved waivers requesting a higher accountability threshold by limiting
                          it to 1 year and requiring contractors to perform a physical inventory
                          validated by the government’s property administrator. In addition,
                          contractors would have to provide detailed information on various
                          categories of property before the test period, with 6- and 12-month status
                          reports to follow. According to DOD, this information would assist DOD in
                          pursuing a potential threshold increase.

                          Contractor officials, however, viewed the additional information requested
                          in a different light. According to contractor officials, they believed that
                          they could significantly reduce administrative costs without substantially
                          increasing the government’s risk. In their view, the additional
                          requirements imposed as a condition of the waiver defeated the intent of
                          the original waiver to reduce costs. According to one contractor official,
                          none of the contractors chose to implement it. Officials at two contractors
                          stated the failure of virtually all attempts to reform what they perceived to
                          be a relatively low-risk area significantly contributed to their loss of
                          interest in laboratory efforts.

Coordinating and          Participants stated that since defense contractors produce items for more
Obtaining Approval From   than one military service or federal agency, or serve as both prime and
Multiple Customers        subcontractors, changing systems or processes is often complicated
                          simply by the need to coordinate and receive approval from multiple
                          customers. Participants noted that having multiple customers can slow
                          down efforts to change and lessen potential cost reductions from process

                          Participants at one site provided the following example of a reinvention
                          effort that fell into this category. In early 1996, DCMC approved a proposal
                          combining 11 common process projects. However, some program offices
                          did not fully accept the proposed changes. As a result, revisions were
                          required to the approved process changes for 5 of the 11 projects. For

                          Page 10                                       GAO/NSIAD-97-48 Acquisition Reform

example, contracts for two program offices will include process changes
related to eliminating the annual certification of contractor test stations,
but the changes will also require the contractor to develop additional test
procedures for approval by the government. In addition, one program
office’s contracts were excluded from all process changes. Accordingly,
existing contracts involving these program offices will contain oversight
requirements beyond those applicable to other program offices. The
participants credited the involvement of senior level DOD officials as being
instrumental in achieving as much as was accomplished. They said that
without that involvement, this entire reinvention effort would not have
been possible.

The difficulty of reaching agreement on reforms is increased when the
contractor making a process change is both a prime contractor and a
subcontractor to other prime contractors, or when it contracts with
federal agencies other than DOD. For example, one laboratory participant
explained that even when DOD approves changes to a process or a
manufacturing standard for its prime contracts, that approval would not
automatically extend to the subcontracts it performs for other prime
contractors or to its contracts with non-DOD agencies. These changes
would have to be negotiated separately with the other prime contractors
or agencies.

Participants indicated that an important element in successfully changing
practices is assuring that the affected program offices are involved early in
the project and are kept fully informed. One program official noted, for
example, that the lack of involvement by the program office and poor
communication from the laboratory participants led the program office to
be taken aback when the participant submitted several contract cost
proposals that made substantial use of parametric estimating techniques,
rather than the traditional detailed approach, and failed to submit other
documentation as believed agreed to by the program office. As a result, the
program office nearly rejected the contract cost proposals. According to
the program official, the contractor had to dispatch several representatives
to the program office to address the office’s concerns and agreed to
submit detailed estimates to support their proposed costs.7

 In commenting on a draft of this report, DCAA officials noted that the parametrics estimating project
was being pursued under a separate initiative and suggested that we delete our discussion on the
project. We note, however, that the project was clearly identified as being tracked under the
reinvention laboratory by the cognizant management council in laboratory status reports. Similarly,
the management council members we spoke with discussed its progress in our discussion of
reinvention laboratory projects under their purview and made no distinction between initiatives.
Finally, as we use the project as an example of the need to communicate rather than to evaluate the
merits of parametric estimating, we feel its inclusion in the report remains appropriate.

Page 11                                                      GAO/NSIAD-97-48 Acquisition Reform

                  On October 30, 1996, DOD announced it was in the process of ending the
Lessons Learned   reinvention laboratory. Despite the limited cost reductions achieved, and
From Laboratory   the fact that it has decided to end the laboratory, DOD officials said they
Experiences       considered the effort—when taken in the context of a laboratory—to be
                  successful. These officials noted that many of the lessons learned from the
                  reinvention laboratory are being employed in the Single Process Initiative,
                  including the use of management councils, the designation of senior
                  service officials to facilitate the review and approval of proposals, the
                  establishment of a 120-day goal to have proposals approved, and an
                  improved mechanism for processing waiver requests. In particular, DOD
                  believes that the laboratory’s management councils provided a valuable
                  forum for raising and discussing issues and has issued guidance to
                  encourage their use at all field offices. DOD officials also noted that the
                  current status of the Single Process Initiative is provided on a weekly basis
                  to the Under Secretary of Defense for Acquisition and Technology.
                  Overall, DOD officials believe that these factors will allow proposals
                  submitted under the initiative to be reviewed and approved in a timely

                  Additionally, DOD officials noted that while the reinvention laboratory was
                  limited to only 10 participants, participation in the Single Process Initiative
                  is open to all DOD contractors. Given the broader base of potential
                  participants and the more structured approach to reviewing and approving
                  proposals, DOD officials believe the initiative will provide a more effective
                  means for addressing many of the technically oriented issues such as
                  manufacturing and quality assurance processes. These officials
                  acknowledged, however, that they were less certain that it will be able to
                  change administrative oversight requirements involving legislative and
                  regulatory issues.

                  From a budgetary perspective, the laboratory’s results, as well as our
                  discussions with contractor and DOD officials, suggest that caution must be
                  exercised in estimating cost reductions that can be achieved from
                  oversight reform initiatives and using those reductions for budgetary
                  purposes. DOD reports that through July 31, 1996, only $11 million of the
                  $145 million in potential annual contractor cost reductions has been
                  achieved from actions already implemented. DOD officials noted that it may
                  be some time before it is known whether the remaining projects will be
                  approved and implemented. Further, according to DOD and laboratory
                  participants, implementation costs may partially offset cost reductions
                  from proposed changes. One laboratory participant’s analysis, for
                  example, indicated that the $11.5 million projected cost to implement a

                  Page 12                                       GAO/NSIAD-97-48 Acquisition Reform

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

                  Further, the amount of cost reduction that can actually be achieved from
                  oversight reforms remains in question. While Coopers & Lybrand
                  estimated that government acquisition regulations and oversight
                  requirements added 18 percent to the cost of goods and services DOD buys,
                  it cautioned about projecting the study’s results to the entire defense
                  industry since it had collected data from only 10 defense contractors and
                  that it had made no attempt to measure the benefits of DOD’s oversight
                  requirements. While participants agreed the study was useful in focusing
                  DOD’s attention on specific cost drivers, they generally found the study’s
                  estimate on the impact of regulation and oversight requirements to be
                  overstated at their companies. For example, 5 participants prepared
                  estimates for the top 10 cost drivers and their estimates ranged from 1.2 to
                  6.1 percent compared to the study’s estimate of 8.5 percent. DOD
                  anticipates that more definitive assessments of the effects of regulatory
                  reform and the costs associated with implementing new processes would
                  be provided as the Single Process Initiative matures. DOD officials noted,
                  however, that it is uncertain as to how much cost savings will be generated
                  from this relatively new initiative.

                  Overall, while the laboratory results highlight the challenges faced by DOD,
                  the results should not deter DOD from continuing its efforts to reduce
                  nonvalue added oversight requirements. Rather, the reinvention laboratory
                  suggests that continued commitment by senior DOD leadership is needed to
                  make meaningful changes in DOD’s culture and processes.

                  DOD concurred with the report. DOD’s comments are reprinted in
Agency Comments   appendix II. DOD also provided technical comments on a draft of this
                  report, which have been incorporated in the report where appropriate.

                  To determine the laboratory’s success in effecting changes to DOD
Scope and         oversight requirements and reducing oversight costs, and to identify any
Methodology       obstacles to achieving these benefits, we reviewed the laboratory’s
                  December 1995 and July 1996 status reports and pertinent supporting
                  documentation. These reports were prepared from data provided by DCAA,
                  DCMC, and contractor participants. The reports’ estimated cost reduction
                  figures were generally rough order of magnitude estimates rather than
                  detailed cost estimates. We did not independently verify the basis for or

                  Page 13                                      GAO/NSIAD-97-48 Acquisition Reform

    the accuracy of the information. Further, we interviewed participants at
    7 of the 10 laboratory sites to discuss the projects pursued under the
    laboratory, the factors affecting the laboratory’s progress, and the
    participants’ overall views on the laboratory. The laboratory sites we
    visited were

•   Boeing Defense and Space Group, Seattle, Washington;
•   Lockheed Martin Government Electronic Systems, Moorestown, New
•   Lockheed Martin Tactical Aircraft Systems, Fort Worth, Texas;
•   Loral Vought Systems, Grand Prairie, Texas;
•   McDonnell Douglas Aerospace, St. Louis, Missouri;
•   Raytheon Electronics Systems, Bedford, Massachusetts; and
•   Texas Instruments Defense Systems & Electronics Group, Dallas, Texas.

    During these visits, we generally met with senior contractor, DCMC, and
    DCAA officials and reviewed pertinent documents relative to the status of
    cost reduction activities. Further, we obtained the views on selected
    laboratory projects from four of the services’ participating program
    offices, including the Air Force’s F-15, F-16, and F-22 system program
    offices and the Navy’s AEGIS program office. We also discussed various
    issues concerning the laboratory’s progress and the lessons learned from
    the laboratory with senior officials from the DCMC and DCAA headquarters
    at Fort Belvoir, Virginia. We also reviewed documentation for the waivers
    proposed by laboratory participants, including the waiver request,
    cost/benefit analyses, and DOD’s final decision memoranda.

    We conducted our work from March 1996 to December 1996 in accordance
    with generally accepted government auditing standards.

    We are sending copies of this report to the Secretary of Defense; the
    Commander, Defense Contract Management Command; and the Director,
    Defense Contract Audit Agency. Copies will be provided to other
    interested parties upon request.

    Page 14                                     GAO/NSIAD-97-48 Acquisition Reform

Please contact me at (202) 512-4841 if you or your staff any questions
concerning this report. Major contributors to this report are listed in
appendix III.

David E. Cooper
Associate Director,
Defense Acquisitions Issues

Page 15                                      GAO/NSIAD-97-48 Acquisition Reform

List of Congressional Committees

The Honorable Strom Thurmond, Chairman
The Honorable Carl Levin, Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Fred Thompson, Chairman
The Honorable John Glenn, Ranking Minority Member
Committee on Governmental Affairs
United States Senate

The Honorable Christopher Bond, Chairman
The Honorable John F. Kerry, Ranking Minority Member
Committee on Small Business
United States Senate

The Honorable John R. Kasich, Chairman
The Honorable John M. Spratt, Jr., Ranking Minority Member
Committee on the Budget
House of Representatives

The Honorable Dan Burton, Chairman
The Honorable Henry A. Waxman, Ranking Minority Member
Committee on Government Reform and Oversight
House of Representatives

The Honorable Floyd D. Spence, Chairman
The Honorable Ronald V. Dellums, Ranking Minority Member
Committee on National Security
House of Representatives

Page 16                                   GAO/NSIAD-97-48 Acquisition Reform
Page 17   GAO/NSIAD-97-48 Acquisition Reform

Letter                                                                                            1

Appendix I                                                                                       20

Potential Cost
Reductions From
Laboratory Efforts
Appendix II                                                                                      22

Comments From the
Department of
Appendix III                                                                                     23

Major Contributors to
This Report
Figure                  Figure 1: Reducing Oversight Costs Reinvention Laboratory                 3


                        DCAA      Defense Contract Audit Agency
                        DCMC      Defense Contract Management Command
                        DOD       Department of Defense
                        FAR       Federal Acquisition Regulation
                        TINA      Truth in Negotiations Act

                        Page 18                                   GAO/NSIAD-97-48 Acquisition Reform
Page 19   GAO/NSIAD-97-48 Acquisition Reform
Appendix I

Potential Cost Reductions From
Reinvention Laboratory Efforts

Dollars in millions
                                                                               Coopers &                                      Percent of
                                                                                Lybrand’s       Number of                           total
                                                                           estimated cost     participants      Estimated      estimated
                                                                                   impacta   with potential      potential      potential
Cost driver              Description                                             (percent)      reductions    reductionsb    reductionsc
Quality program          An umbrella military specification
requirements             (MIL-Q-9858A) requiring contractors to
                         establish quality assurance programs to
                         ensure compliance with contract
                         requirements.                                                 1.7               9          $86.5           59.7
Truth in Negotiations    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.                                        1.3               6            9.1            6.3
Cost/schedule control    A requirement that contractors have an
system requirements      integrated management control system to
                         plan and control the execution of
                         cost-reimbursable contracts.                                  0.9               6            6.1            4.2
Configuration            A military standard (MIL-STD-973) for DOD
management               approval of all contractor configuration
requirements             changes to technical data packages.                           0.8               2            2.2            1.5
Contract specific        DOD-imposed requirements that are not
requirements             codified in statutes, regulations, military
                         specifications, or standards.                                 0.7               5           16.8           11.6
Defense Contract Audit   Cost 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.                          0.7               3            2.4            1.7
Cost Accounting          Requirements for ensuring consistent and
Standards                equitable allocation of costs and for
                         disclosing accounting practices and
                         contractor interpretation of certain standards.               0.7               0              0              0
Material management   A requirement (Defense Federal Acquisition
and accounting system Regulation Supplement part 242.72) for
                      certain contractors to establish and maintain
                      a system that accurately forecasts material
                      usage and ensures that costs of all materials
                      are appropriately allocated to specific
                      contracts.                                                       0.6               5            5.8            4.0
Engineering drawings     A guideline (MIL-STD-100E) for preparing
                         engineering drawings.                                         0.6               2            3.8            2.7

                                               Page 20                                              GAO/NSIAD-97-48 Acquisition Reform
                                          Appendix I
                                          Potential Cost Reductions From
                                          Reinvention Laboratory Efforts

Dollars in millions
                                                                               Coopers &                                           Percent of
                                                                                Lybrand’s           Number of                            total
                                                                           estimated cost         participants       Estimated      estimated
                                                                                   impacta       with potential       potential      potential
Cost driver           Description                                                (percent)          reductions     reductionsb    reductionsc
Government property   A requirement (Federal Acquisition
administration        Regulation part 45) that contractors assume
                      responsibility for maintaining and
                      accounting for government-owned property.                          0.5                   7           2.5              1.7
Other                                                                                      •                   7           9.7              6.7
Total                                                                                      •                  •         $144.9          100.0

                                            Measured as a percentage of the contractor’s compliance costs compared to its value-added
                                          costs. Value-added costs are the contractor’s total costs less the costs of material purchases,
                                          including subcontracts.
                                              Potential contractor cost reductions as of July 31, 1996.
                                              Totals may not add due to rounding.

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

Comments From the Department of Defense

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

Major Contributors to This Report

                        Charles W. Thompson, Assistant Director
National Security and   Timothy J. DiNapoli, Senior Evaluator
International Affairs
Division, Washington,
                        Paul M. Greeley, Evaluator-in-Charge
Boston Field Office
                        Gretchen E. Bornhop, Senior Evaluator
Los Angeles Field

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