Summary

The issue of whether the Defense Department (DOD) should be paying for restructuring costs associated with acquisitions and mergers has been a controversial one--and one that is not well understood. This testimony provides a brief overview of (1) DOD's decision to pay restructuring costs, (2) the process DOD uses to ensure that paying restructuring costs is in the government's best interest, and (3) the amount and the nature of costs that DOD has paid and estimates of savings that it has realized.

GAO noted that: (1) over the last several years, defense contractors have attempted to become more efficient and competitive by such activities as closing or combining facilities and eliminating jobs; (2) DOD has always paid for its share of the costs of these activities when they were undertaken as part of an internal restructuring by a single contractor; (3) until July 1993, however, DOD did not pay for restructuring costs on certain contracts transferred from one company to another company as a result of a business combination; (4) at that time, DOD changed its practice and began allowing restructuring costs to be charged to these contracts as long as certain conditions were met; (5) principally, such costs were allowed as long as projected savings exceeded projected costs; (6) the dollar impact of this decision may be less than some anticipated; (7) DOD estimates that only 10 percent of the costs DOD had paid through September 1996 resulted from the change in practice; (8) as of March 31, 1997, five combinations had gone through a certification process that is required before DOD pays restructuring costs; (9) GAO recently completed an evaluation of four of the five certified combinations, as well as one additional combination that DOD included in its reports to Congress: (10) overall, GAO found that DOD estimated its share of projected restructuring costs was about $755 million, while its estimated share of the savings resulting from these combinations was at least $3.3 billion; (11) at the time of GAO's review, the five business combinations had incurred about $849 million for a wide range of restructuring activities, with about 10 percent of these costs being for benefits and services to laid-off workers; (12) services for laid-off workers were also being funded by federal grants and through the contractors' normal overhead costs; (13) through September 1996, DOD reported that it had paid $179.2 million in restructuring costs while realizing $346.7 million in savings; (14) in other words, for every $1.00 DOD had paid in restructuring costs, it estimated savings of $1.93 had been realized; and (15) however, it is extremely difficult to trace restructuring savings into reduced contract prices because many factors other than restructuring activities affect contract prices.