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Acquisition Reform: DOD Faces Challenges in Reducing Oversight Costs (Letter Report, 01/29/97, GAO/NSIAD-97-48).

The Pentagon considers acquisition reform (lowering the cost of
acquiring weapon systems) to be one of its highest priorities. In an era
of shrinking military budgets, the Defense Department (DOD) plans to use
the savings from acquisition reform to pay for forces modernization. DOD
established a reinvention laboratory in September 1994 to help reduce
nonvalue added oversight requirements, thereby lowering contractors'
compliance costs and the government's oversight costs. Overall, the
reinvention laboratory has made only limited progress in reducing the
cost of contractors' compliance with government regulations and
oversight requirements. In particular, laboratory participants reported
little success in addressing nine of the top 10 cost drivers. DOD
officials said that the reinvention laboratory tended to receive little
top-level support from elsewhere in DOD. Other factors that limited
various projects included statutory and non-DOD regulatory requirements,
disagreements between DOD and contractors over the value of some
oversight requirements, and difficulties coordinating and obtaining
approval for proposed changes that involved multiple customers. These
results, however, should not deter DOD from continuing its efforts to
reduce nonvalue added oversight requirements. Sustained support from DOD
leadership is essential. From a budgetary perspective, the laboratory
results underscore the need for caution in estimating cost savings from
oversight reform.

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

 REPORTNUM:  NSIAD-97-48
     TITLE:  Acquisition Reform: DOD Faces Challenges in Reducing 
             Oversight Costs
      DATE:  01/29/97
   SUBJECT:  Defense cost control
             Defense budgets
             Defense procurement
             Department of Defense contractors
             Contract costs
             Defense contracts
             Reengineering (management)
             Cost analysis
IDENTIFIER:  DOD Single Process Initiative
             F-15 Aircraft
             F-16 Aircraft
             F-22 Aircraft
             Navy Aegis Shipbuilding Program
             National Performance Review
             
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Cover
================================================================ COVER


Report to Congressional Committees

January 1997

ACQUISITION REFORM - DOD FACES
CHALLENGES IN REDUCING OVERSIGHT
COSTS

GAO/NSIAD-97-48

Acquisition Reform

(707154)


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

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

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


B-272650

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. 


--------------------
\1 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). 


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

The National Performance Review is a major reform initiative begun by
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 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 oversight. 

   Figure 1:  Reducing Oversight
   Costs Reinvention Laboratory
   Participants

   (See figure in printed
   edition.)

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 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. 


--------------------
\2 For additional information on reinvention laboratories, see
Management Reform:  Status of Agency Reinvention Lab Efforts
(GAO/GGD-96-69, Mar.  20, 1996). 

\3 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. 


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

While the reinvention laboratory was an effort limited to only 10
locations, 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 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. 


   LIMITED LABORATORY SUCCESS IN
   MAKING CHANGE
------------------------------------------------------------ Letter :3

Through July 31, 1996·the date of the last status report·laboratory
participants estimated that if all their projects are approved and
fully implemented, annual cost reductions of about $159 million could
be 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 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. 


--------------------
\4 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. 

\5 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). 


   FACTORS INHIBITING CHANGE
------------------------------------------------------------ Letter :4

Participants identified a variety of factors as to why changes to the
other nine cost drivers were not more successful.  Some factors
affected the 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 difficult. 

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 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
      REQUIREMENTS
---------------------------------------------------------- Letter :4.1

Laboratory participants found that legislative and regulatory
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 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 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. 


--------------------
\6 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. 


      DISAGREEMENT ON MERITS OF
      CHANGES
---------------------------------------------------------- Letter :4.2

Given the nature of the defense industry, there are often differing
views on 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 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 OBTAINING
      APPROVAL FROM MULTIPLE
      CUSTOMERS
---------------------------------------------------------- Letter :4.3

Participants stated that since defense contractors produce items for
more than one military service or federal agency, or serve as both
prime and 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 standardization. 

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 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


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


   LESSONS LEARNED FROM LABORATORY
   EXPERIENCES
------------------------------------------------------------ Letter :5

On October 30, 1996, DOD announced it was in the process of ending
the reinvention laboratory.  Despite the limited cost reductions
achieved, and the fact that it has decided to end the laboratory, DOD
officials said they 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 fashion. 

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 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. 


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

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


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

To determine the laboratory's success in effecting changes to DOD
oversight requirements and reducing oversight costs, and to identify
any 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 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
     Jersey;

  -- 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. 


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

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. 

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

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


POTENTIAL COST REDUCTIONS FROM
REINVENTION LABORATORY EFFORTS
=========================================================== Appendix I

                              (Dollars in millions)

                                                                         Percent
                                                                        of total
                                       Coopers &              Estimate  estimate
                                       Lybrand's   Number of         d         d
                                       estimated  participan  potentia  potentia
                                            cost     ts with         l         l
                                        impact\a   potential  reductio  reductio
Cost driver     Description            (percent)  reductions      ns\b      ns\c
--------------  --------------------  ----------  ----------  --------  --------
Quality         An umbrella military         1.7           9     $86.5      59.7
 program         specification (MIL-
 requirements    Q-9858A) requiring
                 contractors to
                 establish quality
                 assurance programs
                 to ensure
                 compliance with
                 contract
                 requirements.
Truth in        A statute (P.L. 87-          1.3           6       9.1       6.3
 Negotiations    653) requiring
 Act             contractors to
                 justify cost
                 proposals and
                 proposed contract
                 prices with
                 detailed cost or
                 pricing data that
                 must be certified
                 as accurate,
                 complete, and
                 current.
Cost/schedule   A requirement that           0.9           6       6.1       4.2
 control         contractors have an
 system          integrated
 requirements    management control
                 system to plan and
                 control the
                 execution of cost-
                 reimbursable
                 contracts.
Configuration   A military standard          0.8           2       2.2       1.5
 management      (MIL-STD-973) for
 requirements    DOD approval of all
                 contractor
                 configuration
                 changes to
                 technical data
                 packages.
Contract        DOD-imposed                  0.7           5      16.8      11.6
 specific        requirements that
 requirements    are not codified in
                 statutes,
                 regulations,
                 military
                 specifications, or
                 standards.
Defense         Cost deriving from           0.7           3       2.4       1.7
 Contract        daily interaction
 Audit Agency/   of contractor
 Defense         personnel with
 Contract        auditors from the
 Management      Defense Contract
 Command         Audit Agency and
 interface       quality inspectors
                 and functional
                 experts from the
                 Defense Contract
                 Management Command.
Cost            Requirements for             0.7           0         0         0
 Accounting      ensuring consistent
 Standards       and equitable
                 allocation of costs
                 and for disclosing
                 accounting
                 practices and
                 contractor
                 interpretation of
                 certain standards.
Material        A requirement                0.6           5       5.8       4.0
 management      (Defense Federal
 and             Acquisition
 accounting      Regulation
 system          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.
Engineering     A guideline (MIL-            0.6           2       3.8       2.7
 drawings        STD-100E) for
                 preparing
                 engineering
                 drawings.
Government      A requirement                0.5           7       2.5       1.7
 property        (Federal
 administratio   Acquisition
 n               Regulation part 45)
                 that contractors
                 assume
                 responsibility for
                 maintaining and
                 accounting for
                 government-owned
                 property.
Other                                          ¸           7       9.7       6.7
================================================================================
Total                                          ¸           ¸    $144.9     100.0
--------------------------------------------------------------------------------
\a 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. 

\b Potential contractor cost reductions as of July 31, 1996. 

\c Totals may not add due to rounding. 




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


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

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

Charles W.  Thompson, Assistant Director
Timothy J.  DiNapoli, Senior Evaluator

BOSTON FIELD OFFICE

Paul M.  Greeley, Evaluator-in-Charge

LOS ANGELES FIELD OFFICE

Gretchen E.  Bornhop, Senior Evaluator


*** End of document. ***

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