Summary

In response to a congressional request, GAO examined revisions to the Department of Defense's (DOD) profit policy to determine whether: (1) Cost Accounting Standard (CAS) 414, which establishes a method for measuring the cost of money for a contract, had continued relevance in light of current profit policy; and (2) the policy that permits the facilities investment value to be used twice in the computation of profit objectives results in double-dipping.

The profit policy provides contracting officers with a structured approach to calculating prenegotiation profit objectives through weighted guidelines. The profit objectives determined through the use of the weighted guidelines, coupled with the government's estimate of contract cost, produce the government target price that the contracting officers use in negotiating with potential contractors. GAO found that CAS 414 is relevant because it provides a means to measure and allocate the cost of money and consistently identifies the amount of facilities capital associated with a contract. GAO had previously recommended that investment be a significant element in profit determination, and current DOD policy makes use of investment for profit determination. If an investment is to be continued as a profit determinant, CAS 414 performs a necessary function. If the offset policy remains part of the profit policy, DOD should reevaluate the validity of assumptions used in its design of the policy and its decision not to adjust the offset as conditions change. GAO believes that adjustments should be made to the offset whenever there are changes in conditions on which the policy is based.