Defense Management: Observations on DOD's Business Reform Efforts and Plan

DOD spends billions of dollars each year to maintain key business operations intended to support the warfighter. The John S. McCain National Defense Authorization Act for Fiscal Year 2019 established requirements for DOD to reform its enterprise business operations. Section 921 of the act required the Secretary of Defense, acting through the Chief Management Officer, to submit to the congressional defense committees by February 1, 2019, a plan, schedule, and cost estimate for reforms of DOD's enterprise business operations to increase effectiveness and efficiency of mission execution.

Section 921 also requires GAO to provide a report assessing the feasibility of the plan. GAO's objectives were to assess (1) DOD's 921 plan, including its feasibility in reforming DOD's business operations, and (2) the extent to which DOD has made progress in implementing the plan and its broader reform efforts.

GAO reviewed DOD's plan and associated documentation and interviewed DOD officials on efforts to reform business operations of the department, including the development and implementation of the plan. GAO also reviewed its past work on DOD reform efforts and the specific subject areas covered by DOD's reform initiatives.

GAO has previously made eight recommendations related to DOD's reform initiatives from three prior reports. DOD concurred with those recommendations and is working to address them, in part through the initiatives GAO discusses.

The Department of Defense's (DOD) April 2019 plan for business reform identifies eight initiatives related to civilian resources management, logistics management, services contracting, and real estate management. According to the plan, these initiatives will cost at least $116 million to implement through fiscal year 2021. GAO found that the plan generally contains the elements required under section 921—a schedule and cost estimate—and that several initiatives address aspects of GAO's prior recommendations. However, because many of the planned initiatives entail collecting information that will lay the groundwork for later reforms, assessing the feasibility of DOD's reform effort is difficult. For example, one logistics reform initiative plans to identify opportunities to improve processes, make recommendations, and develop an implementation plan for the recommendations by the end of fiscal year 2019.

Although DOD officials told GAO that the department is making progress implementing the plan's initiatives and achieving cost savings on its broader efforts, DOD provided limited documentation of that progress. As a result, GAO could not independently assess and verify this progress. For example:

Office of the Chief Management Officer (OCMO) officials provided briefing charts on the status of milestones for DOD's three human resource–related initiatives stating that those initiatives are progressing according to the schedule, but did not provide underlying documentation for each milestone.

According to DOD, its broader reform efforts have saved or are expected to save about $18.4 billion between fiscal years 2017 and 2020. According to Under Secretary of Defense (Comptroller) officials, they have validated these savings. However, DOD did not provide any supporting documentation that would allow GAO to independently validate these savings. GAO's prior work has found repeated shortcomings in DOD's ability to demonstrate that it has achieved its goals for savings from reform efforts. DOD is taking steps to address these challenges, including establishing cost baselines for DOD's major lines of business and incorporating Comptroller input into estimates of the costs and potential savings from initiatives as they are developed.

Further, according to the plan, DOD has provided funding through its annual budget process for four of the eight initiatives included in its plan. For the four remaining initiatives, OCMO has identified a source of funding but not obtained that funding for two initiatives, is awaiting a cost estimate for one initiative, and has identified only partial funding for one initiative, which is designed to review contracts and categories of goods or services on a quarterly basis to identify savings. OCMO anticipates that savings identified in earlier rounds of this initiative will fully fund later rounds. However, in January 2019, GAO reported that, according to OCMO, DOD initially planned to fund its reform initiatives in part with savings generated by other initiatives, but recognized that this approach did not work because additional funding was needed. GAO recommended that DOD establish a process to identify and prioritize funding for implementing its initiatives. OCMO has updated its processes for managing its reform efforts in part to address this issue, but the effects of this update at this time are unclear.

The Department of Defense (DOD) spends billions of dollars each year to  maintain key business operations intended to support the warfighter,  including systems and processes related to the management of contracts,  finances, the supply chain, support infrastructure, and weapon systems  acquisition. DOD’s National Defense Strategy identifies reforming the  department’s business practices as one of three distinct lines of effort  within the strategy. In addition, DOD’s approach to business  transformation is among the areas identified in our High-Risk report,  which calls attention to agencies and program areas that are high risk  because of their vulnerabilities to fraud, waste, abuse, and  mismanagement, or are most in need of transformation.

The John S. McCain National Defense Authorization Act (NDAA) for  Fiscal Year 2019 established requirements for DOD to reform its  enterprise business operations, which include, among other things,  aspects of financial management, health care, acquisition and  procurement, and human resources operations. Section 921 of the act  requires the Secretary of Defense, acting through the Chief Management  Officer (CMO), to reform DOD’s enterprise business operations to  increase effectiveness and efficiency of mission execution. DOD is  required to accomplish this reform through, among other things, reductions or improvements across all organizations and elements of the  department with respect to certain covered activities: civilian resources  management, logistics management, services contracting, and real estate  management. These reforms are required to achieve savings of at least  25 percent of the cost of performing the covered activities in fiscal year  2019 by the end of fiscal year 2020. Further, the CMO is required to do  one of the following:  If the CMO believes achieving the required savings will create overall  inefficiencies for the department, the CMO must provide notice and  justification to the congressional defense committees by October 1,  2019, specifying a lesser percentage of savings the CMO determines  to be necessary to achieve efficiencies in the covered activities and a  description of the efficiencies to be achieved.

If the CMO believes the required savings can be achieved in fiscal  year 2020, then the CMO must certify to the defense committees by  January 1, 2020, that these reforms will achieve the required  savings.

The CMO was required to submit to the congressional defense  committees a plan, schedule, and cost estimate for conducting these  reforms by February 1, 2019. DOD submitted that plan, titled Initial Plan  for Reforming the Business Operations of the Department of Defense for  Efficiency and Effectiveness, referred to hereafter as the “921 plan,” on  April 24, 2019.

Section 921 also includes a provision for us to provide a report assessing  the feasibility of the plan within 90 days of DOD’s submission. In addition,  section 921 has other provisions for us to assess DOD’s progress in  implementing the reforms required by that section. In January 2019, we  provided our assessment of DOD’s actions pursuant to section 921, as  required by one of these provisions. We reported that DOD’s enterprise  business reform efforts were driven by nine cross-functional teams, but  those teams’ progress had been uneven, in part because some teams  lacked resources to fully implement their approved initiatives. We  recommended, and DOD concurred, that DOD establish a process to  identify and prioritize funding for implementing its cross-functional teams’  business reform initiatives. We discuss the status of DOD’s efforts to  implement this recommendation later in the report. In addition, since our  January 2019 report, an Office of the CMO (OCMO) official responsible  for OCMO’s management of the reform efforts told us OCMO has made  changes to the teams and processes related to these efforts, including  changes to the composition of the teams and the framework it is using to  manage the efforts. We discuss these changes further in appendix I.

For this review, our objectives were to assess (1) DOD’s 921 plan,  including its feasibility in reforming DOD’s business operations, and (2)  the extent to which DOD has made progress in implementing the plan  and its broader reform efforts.

To address our first objective, we reviewed DOD’s 921 plan and  associated documentation and interviewed OCMO and other DOD  officials regarding the development of the plan. We compared this  information to the elements required under section 921. We also reviewed  our past work on DOD reform efforts and the specific subject areas  covered by DOD’s initiatives, and identified findings and  recommendations from that work that are applicable to DOD’s plan and  overall business reform effort.

To address our second objective, we reviewed documentation and  interviewed OCMO officials regarding implementation of the 921 plan,  including the extent to which the plan’s initiatives are proceeding  according to the schedules contained in the plan and any challenges  DOD is facing in implementation. We also reviewed documentation and  interviewed OCMO and other DOD officials on the extent to which DOD’s  reform efforts have produced documented cost savings. Further, we  assessed the extent to which DOD addressed selected key questions that  we identified in our June 2018 report on agency reform efforts. In that  report, we identified key questions that decision makers should consider  for assessing the development and implementation of agency reforms  based on our prior work and leading practices on organizational mergers  and transformations, collaboration, government streamlining, and  efficiency. We used the term “reforms” to broadly include any  organizational changes—such as major transformations, mergers,  consolidations, and other reorganizations—and efforts to streamline and improve the efficiency and effectiveness of government operations. We  identified key questions across four categories related to (1) goals and  outcomes; (2) the process for developing reforms; (3) implementing the  reforms; and (4) strategically managing the federal workforce. Because  some of the questions were not applicable to DOD’s plan, we did not  compare the plan against all of the key questions, but did note when  aspects of the plan related to any of the key questions.

We conducted this performance audit from May 2019 to September 2019  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

DOD’s Plan Generally Addresses Requirements of Section 921, but Assessing Feasibility of Reforms Is Difficult

DOD’s 921 plan identifies eight initiatives across the covered activities  and generally addresses most of the elements required under section  921. Specifically, section 921 required the CMO to provide a plan,  schedule, and cost estimate for conducting its reforms of the covered  activities. DOD’s plan provides a schedule for all eight efforts, and  provides a cost estimate for all but one, which OCMO officials indicated  was still under development. The plan identifies costs of at least $116.3  million to $116.8 million to implement these initiatives through fiscal year  2021. We discuss DOD’s funding of these costs later in this report.  According to DOD’s plan, the eight initiatives have the following  objectives:

Civilian hiring improvement. Shorten the time needed to hire civilian  employees, improve the matching of enterprise needs to employee  competencies, and establish standard metrics and reports on  performance of an improved hiring process.

Human resources regulatory reform. Develop a new proposed legal  authority that allows the department to simplify, streamline, and  standardize civilian personnel policies. In addition, use regulatory  reform to better recruit, compensate, and retain a qualified civilian  workforce at DOD.

Human resources service delivery. Establish a common human  resources business and service delivery model, a standard set of  performance measures, and a cost accountability structure that will be  applied to all human resources service providers, with a focus on  certain defense agencies and field activities.

Strategic sourcing of sustainment and commodity procurement.

Improve the buying power of the department, increasing data  transparency related to sustainment and commodity procurement, and  apply best-in-class cost and contract management practices with  suppliers to drive higher performance and lower cost.

Maintenance work packages and bills of material. Improve the  accuracy of depot maintenance work packages and related bills of  material and develop recommendations for process improvements.

Munitions readiness. Produce an integrated tool capable of  providing senior leaders with an effective assessment of all the  variables associated with the health and readiness of the munitions  inventory and the ability to assess options for correcting negative  trends.

Service requirements review boards. Expand the use of service  requirement review boards—which review, validate, prioritize, and  approve contracted services requirements to accurately inform the  budget and acquisition process.

Category management. Implement best practices for purchasing  goods and services, such as consolidating separate requirements into  single contracts, allowing DOD to achieve savings from volume  discounts and develop tools aimed at focusing spending on contracts  that meet certain best practices for management.

Several of these initiatives address aspects of our prior recommendations  related to the objectives of the initiatives. How findings and  recommendations from GAO and agency inspectors general have been  addressed in proposed reforms is among the key questions GAO has  previously identified for assessing agency reform efforts. We found that  DOD’s initiatives address aspects of our findings and recommendations,  but in some cases do not fully address them. For example:  In September 2018, we reported that at least six organizations within  DOD, including three defense agencies and field activities and the  three military departments, provide human resources services to other  defense agencies or organizations. All perform the same types of  human resources services, such as those related to civilian workforce  hiring across DOD. We also reported that there is fragmentation and  overlap within the defense agencies and field activities that provide  human resources services to other defense agencies or organizations  within DOD. This fragmentation and overlap has resulted in negative  effects, such as inconsistent performance information regarding  hiring, fragmented information technology systems, and inefficiencies  associated with overhead costs. We recommended, and DOD  concurred, that DOD collect consistent performance information and  comprehensive overhead cost information as well as establish time  frames and deliverables for key reform efforts. DOD’s human  resource service delivery initiative is intended, in part, to address our  recommendations. This initiative, however, is focused only on the  defense agencies and field activities responsible for human resources  service delivery, and does not include all human resources service  providers we highlighted in our September 2018 report.

In June 2016, we reported that the Defense Logistics Agency and the  military services have some internal efficiency measures for supply  and depot operations; however, they generally have not adopted  metrics that measure the accuracy of planning factors that are  necessary to plan efficient and effective support of depot  maintenance. Additionally, the Defense Logistics Agency and the  services do not track the potentially significant costs to supply and  depot maintenance operations that are created by backorders.  Further, we reported that without relevant metrics on cost and  planning factors, DOD, the Defense Logistics Agency, and the  services are unable to optimize supply and maintenance operations  and may miss opportunities to improve the efficiency and  effectiveness of depot maintenance. We recommended, and DOD  concurred, that DOD, the Defense Logistics Agency, and the services  develop metrics to monitor costs and accuracy of demand planning  factors. DOD’s initiative on maintenance work packages and bills of  material includes steps that may, in part, address these  recommendations. Specifically, the initiative plans to assess the  accuracy of bills of material, one of the planning factors we  recommended DOD develop and implement metrics for, but does not  include assessing the accuracy of other planning factors.

In August 2017, we reported that DOD’s service requirement review  boards were intended to prioritize and approve contracted services in  a comprehensive portfolio-based manner to achieve efficiencies, but  the military commands we reviewed did not do so. Instead,  commands largely leveraged existing contract review boards that  occurred throughout the year and focused on approving individual  contracts. As a result, the review boards at these commands had  minimal effect on supporting decisions within and across service  portfolios or capturing efficiencies that could inform the commands’  programming and budgeting decisions. We recommended, and DOD  concurred, that DOD clarify policies concerning the purpose and  timing of the review board process. DOD’s initiative on service  requirements review boards expands the use of these boards, and  indicates that they are timed to inform budgets for the following fiscal  year, but does not indicate whether guidance to do so has been  provided. In its concurrence, DOD stated it would update the relevant  DOD instruction to include this guidance, but, as of June 2019, DOD  has not issued an updated instruction that includes this guidance.

Although these initiatives intend to address aspects of our prior  recommendations, assessing the feasibility of DOD’s reform effort is  difficult because many of the planned initiatives entail collecting  information that will lay the groundwork for later reforms. For example, the  human resources service delivery initiative tasks the reform team to draft  a project charter, collect and analyze information on human resources  service providers within DOD, and eventually develop recommended  courses of action for reform by fiscal year 2020. Similarly, the initiative on  maintenance work packages and bills of material tasks the reform team to  identify opportunities to improve processes, make recommendations to  address deficiencies, improve efficiency, and improve material availability  and then to develop an implementation plan for the recommendations by  the end of fiscal year 2019, with implementation beginning in fiscal year  2020.

DOD Provided Limited Documentation of Progress in Implementing Its 921 Plan and Achieving Cost Savings, and Has Not Fully Funded Some Plan Initiatives

OCMO officials told us that DOD is making progress in implementing the  921 plan’s initiatives according to the schedules contained in the plan,  and they provided summary documentation stating that progress has  been made on five of the eight initiatives. However, OCMO did not  provide sufficiently detailed documentation for us to independently assess  progress on any of the initiatives. Specifically, OCMO provided us some  documentation on the progress of the eight initiatives, but this information  varied by initiative and was limited. As a result, we were unable to  independently assess and verify DOD’s progress in implementing its  initiatives. Specifically:

For the human resources regulatory reform, civilian hiring  improvement, and human resources service delivery initiatives,  OCMO provided briefing materials on the status of each milestone  under the initiatives, indicating that those initiatives are progressing  according to the schedule in the plan. However, DOD did not provide  separate underlying documentation for each milestone. For example,  under the plan, the teams conducting these initiatives were to have  established by June 2019 a common DOD process and metrics for  civilian hiring, prepared drafts of updated DOD policies and fiscal year  2020–2021 talent management guidance, and collected and mapped  different human resources service delivery models. However, OCMO  did not provide documentation of the common DOD process and  metrics for civilian hiring, drafts of updated policies and guidance, or  human resources service delivery model maps.

For the service requirements review boards initiative, OCMO provided  documentation stating that the service requirements review boards  had largely been completed on schedule, but did not provide  information on the outcomes of these boards. OCMO officials told us  that delays in completing 3 of 69 boards had prevented them from  fully meeting planned deadlines.

For the category management initiative, OCMO officials told us that  the first two quarterly “sprints”—reviews of different contracts or  categories of goods or services to identify savings—for fiscal year  2019 had been completed and the third was in progress, but did not  provide documentation to support this assertion. For example, OCMO  did not provide information on the outcomes of the sprints.

For the strategic sourcing of sustainment and commodity resources,  maintenance work packages and bills of material, and munition  readiness initiatives, DOD did not provide any documentation on the  progress of the initiatives.

While most of DOD’s initiatives included in its plan identify either  performance metrics or targets, five of the eight initiatives also state that  part of the work of the initiatives will be to establish such metrics or  targets. Among our key questions for assessing agency reform efforts is  the extent to which the agency has established clear outcome-oriented  goals and performance measures for the proposed reforms, and whether  the agency has put processes in place to collect the needed data and  evidence that will effectively measure the reform’s goals. Identifying and  collecting this information can lay the groundwork for further reform  efforts.

Moreover, we found that objectives for some of the initiatives in DOD’s  plan are similar to those presented in prior plans with deadlines that have  already passed, suggesting that progress on some initiatives is going  more slowly than the department originally anticipated. For example,  DOD’s August 2017 report to Congress on restructuring the CMO  organization included an initiative to create a single civilian personnel  system and rating system for certain employees by the middle of fiscal  year 2018. DOD’s 921 plan contains a similar initiative on human  resources regulatory reform, which aims to develop standardized civilian  personnel policies and processes. Development of the initiative is not  scheduled to be completed until the end of fiscal year 2019, and  implementation would not occur until fiscal year 2020, at the earliest,  compared to the original fiscal year 2018 deadline for the initiative.

DOD Reported Cost Savings from Broader Reform Efforts but Provided Limited Documentation of Those Savings

DOD has stated that its business operations reform efforts—which are not  limited to the covered activities under section 921—will produce cost  savings; however, DOD did not provide underlying documentation to  allow us to independently validate the savings. Specifically, in its budget  materials for fiscal year 2020, released in March 2019, DOD reported that  its reform efforts had saved $4.7 billion in fiscal years 2017 and 2018, and  are expected to save $6.0 billion in fiscal year 2019 and $7.7 billion in  fiscal year 2020, the first year of required savings under section 921. Of  those $7.7 billion in expected savings for fiscal year 2020, about $2.6  billion were in business process and systems improvements.

According to OCMO and Office of the Under Secretary of Defense  (OUSD) (Comptroller) officials, the OUSD (Comptroller) has validated  these savings and the savings have been programmed or budgeted in the  fiscal years reported. Specifically, according to OUSD (Comptroller)  officials, all of the savings reported in DOD’s budget materials have been  validated against OUSD Comptroller’s own systems that record budget  information and decisions that are incorporated into DOD’s programming  and budgeting process. OUSD (Comptroller) provided a spreadsheet  detailing the various reforms and savings DOD cited in its budget  materials, but did not provide the underlying support to allow us to  independently validate the savings, such as documentation of budgetary  decisions that reflect the savings.

Our prior work over the past 7 years has found repeated shortcomings in  DOD’s ability to demonstrate that it has achieved its goal for savings from  reform efforts. Most recently, in September 2018, we reported that DOD  could not demonstrate that it met several cost savings requirements  mandated by the NDAA for Fiscal Year 2016, in part because there were  no baseline costs established to measure any reductions against and  documentation supporting cost savings estimates from other efficiencies  was not detailed enough.

DOD is taking steps to address this challenge and report on its cost  baseline to perform all covered activities by January 1, 2020, as required  by section 921. Specifically, in March 2019, we reported that OCMO is  taking steps to establish cost baselines for DOD’s major lines of business  through the fiscal year 2019–2020 timeframe. According to OCMO  officials, they are also regularly adjusting the fiscal year 2019 baseline to  reflect savings identified during the fiscal year. As of June 2019, OCMO is  reviewing its approach for reporting the savings required by section 921  and plans to complete the review by October 2019. OCMO is coordinating  with OUSD (Comptroller) on both establishment of the baseline and  reporting of savings.

DOD Has Not Fully Funded Some of the Initiatives in Its 921 Plan

While DOD has already funded some of the initiatives included in its plan  through its annual budget request process, it continues to face challenges  obtaining funding for others. According to DOD’s plan, four of the eight  initiatives had no costs associated with them or the initiative has been  funded to date using existing resources through the regular budget  process, and DOD does not anticipate any additional costs for the  initiatives. Funding needs for the remaining four initiatives have not  been fully determined or met. Specifically:  1.  Funding needs for the human resources service delivery  initiative have not yet been determined. OCMO expects to fund the  cost of this initiative as a part of the initial stand-up costs for OCMO’s  Office of Fourth Estate Management in fiscal year 2020. OCMO  officials told us they are reviewing baseline needs for the office and  anticipate realigning resources to support the new office.  2.  Funding needs for the human resources regulatory reform  initiative have been determined, but OCMO has not confirmed  that funding has been obtained. DOD’s plan states that future costs  for the initiative may include approximately $500,000 for research and  studies. To the extent possible, the plan states, DOD will use funds  from the OUSD for Personnel and Readiness for studies, but DOD  has not indicated that those funds have been obtained.  3.  Funding needs for the strategic sourcing of sustainment and  commodity procurement initiative have not been determined.  According to OCMO, the Defense Logistics Agency and the military  services are developing a detailed cost estimate for this initiative.  However, neither the plan nor OCMO officials we spoke with identified  where any funding that may be needed will come from once the costs  are determined.  4.  Funding needs for the plan’s category management initiative to  conduct reviews of contracts and categories of goods and  services have not been fully met. The initiative includes quarterly  “sprints” reviewing different contracts or categories of goods or  services to identify savings. According to DOD’s plan, each sprint is  assisted by consulting firms and industry analyses and is estimated to  cost about $11 million. DOD plans to complete a total of 10 sprints, at  a total cost of $110 million. According to OCMO, limited funding has  hindered execution of two of the sprints so far. OCMO has requested  $12 million in its budget request for fiscal year 2020 to support this  effort and expects the remaining sprints to be funded by savings  identified through earlier sprints. However, in January 2019, we  reported on problems associated with this approach. Specifically, we  reported that OCMO officials told us the department initially planned  to use available funding from OCMO or the savings generated by  reform initiatives to fund development of other initiatives, but has  since recognized that additional funding is needed.

Among the key questions we previously identified for assessing agency  reform efforts is the extent to which the agency has considered how the  upfront costs of proposed reforms will be funded. In January 2019, we  reported that some reform teams lacked resources to fully implement  approved initiatives. We recommended, and DOD concurred, that DOD  establish a process to identify and prioritize funding for implementing its  cross-functional teams’ business reform initiatives. An OCMO official told  us OCMO updated its reform management framework—the process it  uses for managing its business reform efforts—in part to address this  recommendation. However, in light of the continued challenges related to  funding that we identified as part of this review, the effectiveness of  changes to this framework at this time is unclear. As a result, we will  continue to monitor the extent to which OCMO’s adjustments to its  processes have addressed this recommendation as OCMO continues to  implement its business reforms.

We provided a draft of this report to DOD for review and comment. In  response, DOD officials told us they concurred and had no comments on  the report.

We are sending copies of this report to the appropriate congressional  committees and to the Secretary of Defense and Deputy Chief  Management Officer. In addition, the report is available at no charge on  the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-2775 or fielde1@gao.gov. Contact points for our Offices  of Congressional Relations and Public Affairs may be found on the last  page of this report. GAO staff who made key contributions to this are  listed in appendix III.

Appendix I: Changes to DOD’s Reform Teams and Processes

Since we last reported on the Department of Defense’s (DOD) business  reform efforts in January 2019, the Office of the Chief Management  Officer (OCMO) has, among other things, changed the composition of the  teams and the framework it is using to manage the efforts. Specifically,  OCMO has disestablished the teams on real property management,  human resources, and testing and evaluation, split the team on  information technology and business systems into two separate teams for  information technology and business systems, and made changes to the  leadership or composition of each of the remaining teams. See table 1 for  a summary of these changes.

According to an OCMO official responsible for OCMO’s management of  the reform efforts, OCMO has not removed any initiatives from the  business reform efforts as a result of the changes to these teams, but  some teams’ initiatives were absorbed into other business reform teams  or organizations that OCMO believed were more appropriate for leading  the initiatives, such as the relevant DOD principal staff assistant. For  example, the category management team assumed responsibility for the  real property management team’s initiatives. According to the same  official, OCMO’s new Fourth Estate Management Office and components  of the Office of the Under Secretary of Defense (OUSD) for Personnel  and Readiness assumed responsibility for some of the human resources  team’s initiatives.

In addition, an OCMO official told us OCMO revised its business reform  management framework—the process it uses for managing its business  reform efforts. According to an overview of the new framework provided  by OCMO, the new process is designed to establish a simplified,  standardized, and repeatable process for managing these reforms and  identifying and prioritizing funding for reform initiatives. An OCMO official  told us that one of the goals of the updated process is to improve the  uniformity of documentation across business reform teams and initiatives.  That official told us the updated process also reduced the number of  decision points—through which reform teams receive approval from  DOD’s Reform Management Group to proceed with an initiative—from  five to two.

Further, OCMO introduced new processes for estimating and tracking the  costs and potential savings resulting from reform initiatives. Among other things, the updated framework includes input from the OUSD  (Comptroller). Specifically, according to OCMO documentation and  OUSD (Comptroller) officials, OUSD (Comptroller) officials review  estimates of the costs and potential savings recorded in OCMO’s reform  management portal—a database OCMO uses to monitor business reform  initiatives. OUSD (Comptroller) assigns a confidence score based on the  degree to which each initiative has been developed. According to an  OUSD (Comptroller) official, initiatives that are less developed will have a  lower confidence score because they are further from full implementation  and subject to more unknowns than those that are closer to  implementation. OUSD (Comptroller) officials told us OUSD (Comptroller)  uses confidence scores to adjust estimates of potential savings, and to  lower potential savings associated with newer initiatives. According to  OUSD (Comptroller) officials, these estimates of potential savings are not  included in any savings amounts the department reports externally, such  as in DOD budget materials, until they are actually programmed or  budgeted.

Appendix II: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Margaret Best (Assistant  Director), Daniel Ramsey (Analyst-in-Charge), Sierra Hicks, Alexa Kelly,  and Richard Powelson made key contributions to this report. Other  contributors included Bonnie Anderson, Tracy Barnes, Arkelga Braxton,  Timothy J. DiNapoli, Michael Holland, Richard Larsen, Ned Malone, Ron  Schwenn, Anne Stevens, John Van Schaik, and Sarah Veale.

Congress required the Department of Defense to develop a plan to increase efficiency and effectiveness by reforming certain business operations, such as logistics, human resources, and contracting.

We reviewed DOD’s reform plan and found that it contained the required schedule and cost estimates. However, many of its initiatives are preliminary—intended to collect information for later reforms. This makes it hard to assess the feasibility of future reforms. In addition, we could not validate DOD’s claims of cost savings related to business reforms it has already made.

DOD continues to work on the recommendations we made in 3 prior reports.


Cost Accounting Standards: Board Has Taken Initial Steps to Meet Recent Legislative Requirements

Each year, the federal government obligates billions of dollars on contracts for which the final costs depend, in part, on the amount of overhead and other costs charged to the contract.

Congress created the Board in 1970. The standards it created ensure contractors appropriately charge costs to government contracts. In contrast, GAAP is a set of financial reporting principles that commercial firms may use in preparing financial statements and which include the basis for recognizing and measuring costs in such statements . Industry representatives and others have raised concerns that complying with CAS may be burdensome and questioned whether the government could rely on GAAP.

In 2016, Congress included a provision in law that the Board, among other things, conform CAS with GAAP, where practicable. Congress also included a provision for GAO to assess Board efforts. This report assesses the extent to which the Board is taking steps to meet legislative requirements and describes the Board's efforts to conform CAS to GAAP.

GAO reviewed applicable laws, regulations and guidance, Federal Register notices and other documentation on the Board's activities. GAO also examined the Board's methodology for comparing CAS to GAAP and its preliminary analysis of two of the cost accounting standards. Finally, GAO interviewed Board members and federal procurement officials.

The Cost Accounting Standards Board (the Board) is generally meeting recent legislative requirements and has taken initial steps to assess the extent to which the government's Cost Accounting Standards (CAS) can be conformed with a set of 12commercial financial reporting principles known as Generally Accepted Accounting Principles (GAAP).

Comprising five members representing the government and industry, the Board issued 19 standards between 1972 and 1980. After that point, the Board met intermittently until 2016. At that time, Congress included a provision in the National Defense Authorization Act for Fiscal Year 2017 to require the Board to meet quarterly, to review CAS-related disputes, to conform CAS with GAAP where practicable, and to report annually to Congress on its efforts, among other things.

Since the legislation went into effect, the Board has met regularly, has been briefed on CAS-related disputes, and is preparing its initial report to Congress. The Board has also taken initial steps to assess the extent to which CAS can be conformed with GAAP. The Board summarized its approach in a March 2019 staff discussion paper, which it released for public comment. In it, the Board:

outlined a set of five guiding principles to assess whether proposed CAS changes are necessary and whether those changes would reduce the burden on contractors while protecting the government's interests,

identified a roadmap that prioritized the Board's proposed review of the standards, and

included a preliminary comparison of two of the seven standards identified as having the most overlap with GAAP (see figure).

Some comments submitted in response to the discussion paper by industry groups stated that each of the 19 CAS should be eliminated unless proven to be absolutely necessary. Board members told GAO they were considering all options for refining CAS but noted that GAAP and CAS are focused on two separate goals—GAAP on businesses' high-level financial performance, CAS on allocating costs to individual government contracts. The Board and other government officials said that eliminating CAS requirements to rely purely on GAAP would limit the government's ability to protect its interests.

The federal government spends hundreds of billions of dollars each year  to acquire goods and services that support agency needs. Agencies have  flexibilities in how they acquire these goods and services, including the  use of cost-based contracts. Since at least 1949, the government has  recognized the need to ensure that contractors’ costs were allowable.  However, while commercial financial accounting standards have been in  place since the 1930s, those standards were developed for different  purposes—financial statement reporting—and did not require contractors  to allocate their costs (such as overhead expenses) to specific contracts.  These commercial standards eventually became known as Generally  Accepted Accounting Principles (GAAP). Following hearings in which  potential overcharges on defense contracts were discussed, in 1970  Congress created the Cost Accounting Standards Board (the Board) to  issue Cost Accounting Standards (CAS). These 19 standards, which went  into effect between 1972 and 1980, defined, among other things, how  contractors should properly allocate costs to certain defense contracts.  Congress subsequently made these standards applicable to all  government contracts, as determined by the Board.

While the CAS have served to protect the government’s interests,  industry representatives and others have raised concerns that CAS may  impose compliance burdens on companies that have not done business  with the Department of Defense (DOD) and may deter them from doing  business with the federal government. For example, in 2017 we reported  that a number of companies chose not to develop products for DOD due  to contract terms and conditions that would be expensive to implement,  including establishing a government-unique cost accounting system that  would be needed to comply with the standards.

Section 820 of the National Defense Authorization Act for Fiscal Year  2017 directed the Cost Accounting Standards Board, among other things,  to conform CAS with GAAP, where practicable. Section 820 also  required that, effective October 1, 2018, the Board: meet at least quarterly and publish notices and agendas in the  Federal Register in advance of the meetings; annually review disputes involving CAS brought to various federal  contract appeals boards or federal courts, and consider whether  greater clarity in the standards could avoid such disputes; and annually submit a report to congressional committees describing the  actions the Board has taken during the prior year to conform CAS to  GAAP and to minimize the burden on contractors while protecting the  interests of the federal government.

Further, Section 820 included a provision for us to assess and report on  certain efforts undertaken by the Board. This report assesses the extent  to which the Board is meeting the administrative and reporting  requirements prescribed by Section 820 and the steps taken by the Board  to conform CAS to GAAP.

To conduct this work, we reviewed applicable laws, regulations, and  guidance; reviewed Federal Register rules and notices and other  documentation on the Board’s activities from the enactment of the  National Defense Authorization Act for Fiscal Year 2017 in December  2016 to November 2019; and discussed the Board’s activities and future  plans with Board members and officials from the Office of Federal  Procurement Policy (OFPP), as the OFPP Administrator chairs the Board.  We then compared these activities and plans with the Section 820  requirements. We also reviewed the Board’s March 2019 staff discussion  paper, which included the Board’s methodology for comparing CAS to  GAAP, as well as its preliminary analysis of two of the 19 CAS. We  discussed that approach with Board members, OFPP officials, and  representatives from the Defense Contract Audit Agency (DCAA) and the  Defense Contract Management Agency (DCMA). We also reviewed  public responses to the staff discussion paper to identify common  themes. Finally, we reviewed relevant GAO reports and the relevant  section of a report prepared by a congressionally chartered panel that  was tasked with simplifying acquisition regulations.

We conducted this performance audit from April 2019 to February 2020 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

The federal government has long recognized the need to protect itself by  ensuring contractors have appropriately allocated costs on cost-based  contracts. In terms of what is potentially covered by CAS, cost-based  contracts include cost-type contracts and certain fixed-price contracts  where the contractor’s estimated or actual costs play a role in determining  the amount the government pays. The total amount obligated annually by  the government on these types of contracts is significant. For example, in  fiscal year 2018, the federal government obligated approximately $172  billion on cost-type contracts alone, according to our analysis of Federal  Procurement Data System information.

Need for Uniform Cost Accounting Standards

In 1968, the House Banking and Currency Committee held hearings to  determine whether to renew the Defense Production Act of 1950. A  witness at the hearings, U.S. Navy Admiral Hyman G. Rickover, testified  that defense suppliers could make excessive profits and disguise them as  overhead costs or hide them in other ways in the absence of a set of  uniform cost accounting standards. Witnesses at the time testified that it  was difficult to compare costs among prospective contractors’ cost  estimates or even to assess costs incurred on contracts with the same  contractor without a set of uniform and consistent standards. Congress  subsequently directed us to study the feasibility of establishing such  standards. In January 1970, we reported one of many examples of  mischarges involving a contractor that had charged the government for  costs above the allowed cost ceiling by moving them under a separate  contract cost category. We concluded that then-existing financial  reporting standards were neither created nor adequate for contract cost  purposes. In addition, we concluded that it was feasible to create a set of  cost accounting standards and recommended doing so.

Creation of Board and Cost Accounting Standards

In August 1970, Congress created the Board as an independent board  within the legislative branch. The Board was initially chaired by the  Comptroller General, who appointed four other members. The Board was  authorized to promulgate standards designed to achieve uniformity and  consistency in cost accounting practices used by federal contractors on  defense contracts in excess of $100,000.

The Board issued 19 cost accounting standards that went into effect  between 1972 and 1980 for applicable DOD contracts. These standards  covered areas such as consistency between how actual and estimated  costs are calculated and reported, and ensuring that costs are not double- counted. The standards were intended to ensure that incurred costs were  appropriately allocated to government contracts.

Generally Accepted Accounting Principles

In contrast, GAAP is a set of U.S. accounting standards, conventions, and  rules focused on measuring companies’ financial performance. GAAP is  meant to establish and improve financial accounting and reporting to  provide useful information to investors and other users of financial  reports, including measurement and recognition of costs in financial  statements. Federal endorsement of generally accepted accounting  practices or principles dates back to the Securities Act of 1933. Then, the  Securities Exchange Act of 1934 created the Securities and Exchange  Commission and gave it authority to oversee accounting and auditing  methods for publicly traded companies. Subsequently, various  professional accounting groups, with oversight by the Securities and  Exchange Commission, began working to establish standards and  practices for consistent and accurate financial reporting, which became  known as GAAP. In 1973, the Securities and Exchange Commission  recognized the Financial Accounting Standards Board (FASB) as the  designated accounting standard setter for public companies in the United  States, and FASB is responsible for GAAP.

History of the Cost Accounting Standards Board

In fiscal year 1981, Congress stopped funding the Board. However, after  a number of disputes arose as to how to interpret various standards,  Congress reestablished the Board in 1988. Congress placed the Board  under OFPP, which is part of the Office of Management and Budget  (OMB) within the executive branch. Congress also broadened the Board’s  authority by applying CAS to all federal contracts—they were previously  applicable only to defense contracts.

Table 1 provides more information on the differences between CAS and  GAAP.

The Board met intermittently to address issues associated with  interpretations of the standards after it was reestablished in 1988. In the  late 2000s, the Board revised two of the standards related to pension  contributions by government contractors for their employees. Effective  in 2008, Congress changed the minimum contributions required to fund  pension plans. This change caused pension contributions to greatly  exceed CAS pension costs reflected in contract prices. The Board  updated the CAS effective in 2012 to harmonize CAS pension costs with  statutory changes to the pension funding requirements. However, the  Board’s changes did not address how costs were settled when pension  plans were curtailed. In January 2013, we recommended that the Board  set a schedule to revise parts of the CAS dealing with settlement of  pension plan curtailments. Citing our recommendation, the Board began  efforts to resolve this issue in July 2013 and the work is on-going.

While Board staff have been working to resolve these pension issues, the  Board went several years without holding official meetings of the full  board. Figure 1 illustrates the Board’s activities over time.

The current Board is comprised of five members. The Administrator of  OFFP is a member and serves as Board Chair. The other members  include representatives from DOD, the General Services Administration,  industry, and another private sector representative with cost accounting  expertise. According to OFPP officials, the Board is also assisted by two  OFPP staff—one on a full-time basis and one on a part-time basis—and a  detailee from DCAA. In addition, OFPP officials said that the Board forms  interagency working groups to address specific issues, such as pension  harmonization. The Board receives its funding from OMB and does not  have a separate funding source. According to OFPP officials, the Board’s  main expenses were salary reimbursement for the non-government  employees who serve on the Board and publication costs for Federal  Register notices.

Other federal agencies also have responsibilities to help administer the  standards. For example, according to OFPP officials, most CAS-covered  contracts are defense related. As such, DCAA reviews federal  contractors’ disclosure statements for adequacy and compliance—that is,  whether the statements are current, accurate, and complete. Disclosure  statements describe the company’s actual or proposed cost accounting  practices, including how they distinguish between costs, and how costs  are allocated to contracts. DCAA also conducts audits to ensure  contractors comply with CAS and with the contractors’ disclosed and  established cost accounting practices and procedures. In addition, DCMA  monitors contractor performance and the contractor’s business  management systems, among other things, to ensure that the contractor  is consistently following its cost accounting practices for contracts that are  subject to CAS.

There is no definitive list of the companies, business segments or units,  or contracts that are subject to CAS. Whether a contractor’s business  segment is required to comply with the standards on a particular contract  depends largely on the value of the government contracts it is awarded  during the year that are cost-based. Once a contractor’s business  segment exceeds a certain dollar threshold of these “CAS-covered  contracts,” the business segment is required to comply with either (1) all  19 standards (termed “full CAS-coverage”) or (2) four standards (termed  “modified CAS-coverage”). Full coverage applies to business segments  with CAS-covered contracts with a combined value of $50 million or more.  Modified coverage may apply to business segments with a single CAS- covered contract of $7.5 million or more, and combined CAS-covered  contracts valued at less than $50 million. Table 2 below lists all 19 CAS  required under full coverage and the four CAS required under modified  coverage.

Prior GAO Reports and Recent Studies Related to the Board and Cost Accounting Standards

We and congressionally established review panels have previously  studied the potential impact of CAS on industry as well as possible  changes to the CAS and the Board. For example:  In April 1994, we reported that seven of eight companies we reviewed  either kept their government contracting work separate from their  commercial contracting or assigned additional staff to their  government contracting segments due to the increased demands of  government contracting, citing, among other things, CAS as a factor in  that decision.

In January 1997, we reported on DOD’s efforts to address acquisition  cost drivers based, in part, on a prior DOD-directed study that  identified CAS as one of the 10 largest cost drivers on DOD  contracts. In that report, a DCMA official noted that, in his opinion,  while the annual cost of maintaining a CAS-compliant system is  relatively small, the cost to establish a CAS-compliant system may be  significant.

Congress asked us to lead a panel of experts to assess the future role  of the Board. In April 1999, we issued the panel’s report focused on  the Board and CAS in light of acquisition reforms and the evolution of  GAAP. The panel concluded that, among other things, the Board  should review CAS and its attendant requirements to determine  whether standards could be streamlined to reduce unnecessary  burden on affected contractors. In addition, the panel made several  recommendations, including moving the Board out of OFPP to ensure  autonomy. Congress did not act on this recommendation. The panel  also recommended reviewing contract applicability and full-coverage  thresholds for CAS. Congress subsequently set the modified  coverage ceiling at $7.5 million in October 1999.

In July 2017, most of the 12 companies we spoke with that had not  done business with DOD told us they chose not to do so because it  might trigger a large number of contract terms and conditions that  would be expensive to implement. One reason provided by the  companies for not competing for certain types of DOD contracts was  the requirement to establish a government-unique cost accounting  system and to disclose and follow cost accounting practices  consistently.

In June 2018, the Section 809 Panel—having been established to  advise Congress on streamlining defense acquisition regulations— released the second of three volumes of its report. In its report, the  panel made two recommendations related to CAS, which largely  reiterated what the GAO-led panel recommended in 1999. In this  regard, the Section 809 panel recommended that the Board should be  relocated to the General Services Administration as an independent  board with a budget sufficient to support at least three full-time,  permanent staff. The panel also recommended raising CAS  applicability threshold levels again to further reduce burden on  contractors. Subsequently, in 2019, OMB submitted a legislative  proposal on raising the CAS applicability threshold from $2 million to  $15 million. OMB officials also indicated that they would continue  analyzing the effects of additional threshold changes. Congress had  not enacted the proposal into law at the time of this report.

Board Efforts Generally Comply with Recent Legislative Requirements

The CAS Board generally has complied or is in the process of complying  with the administrative and reporting requirements prescribed by Section  820 of the National Defense Authorization Act for Fiscal Year 2017,  including initial efforts to assess the extent to which CAS can be  conformed with GAAP. To do so, the Board is taking steps to follow its  statutorily prescribed four-step rulemaking process. The Board’s initial  efforts focus on the extent to which two of the 19 standards might be  modified or eliminated; however, Board members indicated that these  efforts may take several more years to complete.

CAS Board Has Generally Complied with Administrative and Reporting Requirements

The Board has generally complied with the administrative requirements  prescribed under Section 820 thus far, including meeting regularly,  generally publishing notices and agendas in advance of meetings, and  reviewing disputes involving cost accounting-related matters. According  to officials from the Office of Federal Procurement Policy, the Board is  working on the first of its annual reports on its efforts, including those  associated with efforts to conform the standards with GAAP where  practicable. Table 3 highlights the steps the Board is taking to address  some of the administrative and reporting requirements mandated by  Section 820.

Board Has Undertaken Initial Efforts to Assess How CAS Can Be Conformed with GAAP

The Board has also taken initial steps to address Section 820’s  requirement that the Board review the standards and conform them to  GAAP, where practicable (see table 4).

In carrying out this work, the Board is taking steps to follow a statutorily  prescribed four-step rulemaking process for promulgating CAS or  interpretations. Figure 2 below outlines these requirements.

In line with this process, between March and November 2018, the Board  discussed the opportunities and methods available for conforming CAS to  GAAP. The Board held informal discussions with its staff, industry  representatives, and government agencies, such as DCAA. One of the  messages coming from the feedback was for the Board to focus first on  those standards that offered the greatest potential for change. By the end  of 2018, the Board had completed development of the staff discussion  paper. The Board expected to release this document in the Federal  Register for public comment in January 2019; however, a partial  shutdown of the federal government due to lapsed funding delayed its  release until March 2019.

The March 2019 staff discussion paper (1) outlined a set of five guiding  principles that the Board would use to assess whether proposed CAS  changes are necessary and whether those changes would reduce the  burden on contractors while protecting the government’s interests, (2)  identified a roadmap that prioritized the Board’s proposed review of  standards, and 3) included a preliminary comparison of two standards to  GAAP.

Guiding Principles. The guiding principles outlined in the staff  discussion paper describe the elements the Board will consider when  determining whether changes to the CAS will reduce burden on  contractors while continuing to protect the interests of the federal  government. As stated in the staff discussion paper, the Board will:  1)  reduce CAS requirements where practicable;  2)  consider whether the proposed action would reduce burden on  3)  consider whether other CAS or federal rules would protect the  government’s interests in case of any gaps created by relying on  GAAP;  4)  monitor future changes to GAAP and the Federal Acquisition  Regulation (FAR) to identify and evaluate their impact on CAS and  revise CAS, as necessary; and  5)  monitor future significant disputes related to the conformance to  GAAP and evaluate whether the Board should address them  through clarifying guidance or rulemaking.

Prioritization. The Board grouped the 19 CAS into four categories  based on the Board’s assessment of which standards are most likely  to have overlap with GAAP (see figure 3).

The Board plans to focus its initial efforts on the seven standards in  the first group, which focus on cost measurement and assigning costs  to accounting periods. According to its staff discussion paper, the  Board’s proposed approach is to assess the standards by developing  side-by-side comparisons of CAS requirements to corresponding  GAAP requirements and identifying any gaps between the two. The  Board will then evaluate the potential risk of any gaps identified,  taking into account coverage by other CAS requirements and related  regulations; for example, the FAR. The Board will also assess  whether there is a history of compliance issues for those standards.  According to OFPP officials, such assessments will help the Board  determine whether they need to update guidance related to a  particular CAS. Lastly, the Board plans to assess changes that have  occurred in GAAP relative to CAS and to evaluate the need to  conform CAS to the updated GAAP. For example, the Board has  identified two recent changes in GAAP that it states may not align with  CAS.

Comparison. The Board has begun this effort by looking at two  standards focused on measuring and assigning costs (CAS 408 and  CAS 409), since it believes that GAAP potentially provided additional  coverage compared to when the two CAS were established in 1975.  OFPP officials stated that these two standards provided a good  opportunity to modify and potentially eliminate duplicative coverage  while testing the soundness of the Board’s approach to conform CAS  to GAAP where practicable.

Public Response to the Board’s Approach Has Been Mixed

The Board received seven separate comment letters on the staff  discussion paper from five industry organizations, one commercial  business, and one private individual. Our review of the comments found  that they were largely supportive of the Board’s guiding principles, but  some commenters raised concerns regarding the Board’s approach to its  conformance effort and questioned whether it would ease the burden on  contractors. For example, four respondents commented that the Board  should not limit its focus to only revising or eliminating particular CAS  when it was clear that GAAP provided adequate coverage. Instead, these  industry groups stated that each CAS should be eliminated unless proven  to be absolutely necessary due to the barriers to contractors that these  groups believe the CAS create.

The Board members we met with stated that all options for refining CAS  requirements were on the table. However, they also stated that GAAP  and CAS are focused on two separate goals—the former on a business’s  high-level financial statement, the latter on individual contract costs.  Board members, as well as DCAA and DCMA officials, noted that  eliminating CAS requirements to rely purely on GAAP standards would  limit the government’s ability to compare contract proposals, assess  actual costs to avoid overcharges by contractors, and protect its interests.  For example, DCMA officials stated that the government has $3.1 billion  in pending litigation for identified CAS noncompliances. Recovery of increased costs is accomplished in part through contract clauses that  entitle the government to recover specific cost increases on affected  CAS-covered contracts. Were CAS and the associated contract clauses  eliminated, DCAA and DCMA officials noted that the government’s ability  to recover these costs would be greatly reduced. In addition, the Board is  concerned that in modifying or perhaps even eliminating certain CAS  requirements, and instead using GAAP, there is the risk that future GAAP  changes would no longer cover the areas of CAS concern. This would  leave the government vulnerable to the issues that the modified or  eliminated CAS were originally created to address.

Members of the Board and staff we spoke with indicated that the Board is  reviewing and assessing the public comments on the staff discussion  paper to determine whether the Board needs to make changes to the  paper’s guiding principles or methodology going forward. According to the  Board members, the Board will issue a Federal Register notice explaining  any changes resulting from public input and its own additional  deliberations. Additionally, they said the Board will consult with the  Financial Accounting Standards Board—which is responsible for GAAP— to answer technical questions and ensure that the Board has an accurate  understanding of GAAP coverage as they continue to perform side-by- side comparisons of CAS and GAAP. Further, the Board stated that it will  publish a notice to address public comments on CAS to GAAP  conformance projects and that additional staff discussion papers and  associated notices will be published in the Federal Register for public  comment as they are completed.

In addition to streamlining or eliminating CAS standards, some of the  comments in response to the staff discussion paper pointed to other  areas that the Board may want to consider to reduce the burden on  government contractors. For example, some comments encouraged the  Board to consider increasing CAS full-compliance dollar thresholds.  Reassessing the CAS full-compliance threshold aligns with findings from  congressionally established panel reports from 1999 and 2018.  According to both panels’ findings, increasing compliance thresholds is a  way to decrease burden on many government contractors while still  protecting the bulk of the government’s contracting dollars. As previously  noted, OMB recently submitted a legislative proposal to raise the  threshold from $2 million to $15 million. OMB also indicated that it intends  to continue studying available data to understand the costs and benefits  of CAS threshold changes and whether additional changes to the  threshold need to be made.

We provided a draft of this report to DOD, the Office of Management and  Budget, and the Cost Accounting Standards Board for their review and  comment. DOD had no comments on the report. The Office of  Management and Budget and the Board provided technical comments,  which we incorporated where appropriate.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense; the Director, Defense  Procurement and Contracting; the Director, Defense Contract Audit  Agency; the Director, Defense Contract Management Agency; the  Director, Office of Management and Budget; and the Administrator, Office  of Federal Procurement Policy. In addition, this report will be available at  no charge on the GAO website at https://www.gao.gov.

If you or your staff have any questions concerning this report, please  contact me at (202) 512-4841 or by e-mail at dinapolit@gao.gov. Contact  points for our Office of Congressional Relations and Public Affairs may be  found on the last page of this report. GAO staff who made major  contributions to this report are listed in appendix III.

Appendix I: Description of the 19 Cost Accounting Standards and Their Purpose

Appendix II: Cost Accounting Standards Applicability, Exemptions, and Compliance

Cost Accounting Standards Applicability. In general, a business  segment is not subject to Cost Accounting Standards (CAS) until it  receives a non-exempt contract of $7.5 million or more from the federal  government. Generally, a non-exempt contract is a contract that does not  meet any of the exemptions listed below. Typically, once a business  segment receives a non-exempt contract of $7.5 million or more, all of its  prospective non-exempt contracts or subcontracts over $2 million are  considered CAS-covered.

Summary of Exemptions. The following categories of contracts and  subcontracts are exempt from all CAS requirements:

Negotiated contracts and subcontracts not in excess of the Truth in  Negotiations Act (TINA) threshold, as adjusted for inflation (41 U.S.C.  1908 and 41 U.S.C. 1502(b)(1)(B)). For purposes of this exemption,  an order issued by one segment to another segment shall be treated  as a subcontract;

Contracts and subcontracts with small businesses (Federal  Acquisition Regulation (FAR) Subpart 19.3 addresses determination  of status as a small business.);

Contracts and subcontracts with foreign governments or their agents  or instrumentalities or, insofar as the requirements of CAS other than  CAS 401 and CAS 402 are concerned, any contract or subcontract  awarded to a foreign concern;

A contract or subcontract where the price is set by law or regulation;

A contract or subcontract authorized in FAR § 12.207 for the  acquisition of a commercial item;

A contract or subcontract with a value of less than $7,500,000 if, at  the time of award, the business segment of the contractor or  subcontractor that will perform the work has not been awarded at  least one contract or subcontract with a value of $7,500,000 or more  that is covered by the standards.

Subcontracts under the North Atlantic Treaty Organization’s Patrol  Missile Hydrofoil Ship programs to be performed outside of the United  States by a foreign concern;

A firm-fixed price contract or subcontract awarded on the basis of  adequate price competition without submission of certified cost or  pricing data.

In addition, in cases where the prime contract is exempt from CAS under  any of the exemptions at 48 C.F.R. § 9903.201-1 any subcontract under  that prime is always exempt from CAS. Also, Title 41 of the U.S. Code  was amended effective in 2018 to allow executive agency heads can  waive CAS requirements for a contract or subcontract with a value of less  than $100 million if the business segment is primarily engaged in  commercial work and would not otherwise be subject to CAS, or for  exceptional circumstances where waiving CAS is necessary to meet  agency needs.

Compliance. There are two levels of CAS coverage—full and modified.  Full coverage applies to business segments with CAS-covered contracts  valued at $50 million or more; those business segments must comply with  all 19 standards. Modified coverage may apply to business segments with  CAS-covered contracts valued less than $50 million. Business segments  that have contracts awarded with modified coverage must comply with  four of the standards.

Business segments with full CAS-covered contracts are also required to  submit disclosure statements describing the company’s actual or  proposed cost accounting practices and procedures, including how they  distinguish direct costs from indirect costs and the basis used for  allocating indirect costs. The Defense Contract Audit Agency (DCAA)  reviews disclosure statements for adequacy and compliance—that is,  whether the statement is current, accurate, and complete—prior to  contract award and during contract performance. DCAA may also  complete CAS compliance audits at the request of the cognizant federal  agency official after contract award. In some circumstances, the Defense  Contract Management Agency (DCMA) will review disclosure statements  that are not audited by DCAA. According to officials, both DCAA and  DCMA provide audit findings to the cognizant federal agency official, who  then disposes the audit findings by making the final determination of  adequacy and compliance.

The purpose of disclosure statement audits is to determine whether  the contractor’s disclosed or established practices are in compliance  with CAS rules, regulations, and standards, as well as appropriate  acquisition regulations. A CAS-related noncompliance may be found if  a contractor with a CAS-covered contract proposes a practice that will  violate CAS or a government acquisition regulations cost principle, or  if the contractor’s actual practices are either inconsistent with their  own disclosure statement or noncompliant with the cost standards or  principles. For example, in 1970, we, along with DCAA auditors, found  instances where contractors charged costs as both direct and indirect  costs to the same contract, resulting in the contractors recovering the  same charge twice.

If an auditor discovers a noncompliance issue, the auditor will submit  an advisory report to the cognizant federal agency official who makes  the final determination. The consequences of a CAS noncompliance  can range from a contract adjustment to litigation. According to the  DCMA’s Contract Dispute Resolution Center, there were 15 judicial  decisions issued in CAS-related board and court cases in the last five  years.

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Bruce H. Thomas, Assistant  Director; Peter Anderson; Jennifer Baker; Miranda Riemer; Jenny Shinn;  Ryan Stott; and Roxanna T. Sun made key contributions to this report.

When contracting for goods and services, the government uses Cost Accounting Standards to help ensure contractors accurately represent their costs and make contract cost information more comparable.

But Congress and others are concerned that the burden of a separate cost accounting system, on top of the accepted industry standard system, may deter some companies from competing for federal contracts.

Congress directed the Cost Accounting Standards Board to explore ways to make the federal standards more like the industry standards. We looked at the Board’s initial steps, which include figuring out where the federal and industry standards overlap.