PROGRAM COSTING AND FUNDING The Federal procurement system is often faulted for cost overruns or cost growths. This criticism is not limited to defense procurement. Our experience demonstrates that most, if not all, such instances result from a lack of realism about estimated program costs, impact of inflation and funding. The practices of estimating program costs to "sell" or support a program, as well as projecting program costs on the basis of inflation assumptions that are less than realistic, often result in inappropriate funding. This, in turn, often results in cutting back weapons and spares quantities, thereby increasing unit cost and contractor risk. The current practice of single-year Congressional authorizations and appropriations also causes program stretch-outs, increases costs and heightens contractor risk. Industry is loath to make capital investments for programs funded on a one-year basis, and thus both business and government planning suffer. It is essential, therefore, to go to multi-year procurement where appropriate. Multi-year funding would enable contractors to provide production tooling more efficiently and to achieve significant economies by buying materials and components in larger quantities. We, therefore, recommend consideration of: o Fully funding early stages of acquisition (concept and demonstration) and basing such funding on more realistic projections of costs and o Providing progress payments to assure appropriate cash flow to contractor; o Implementing uniform and realistic price adjustment procedures to allow for the real impact of inflation; o Adopting multi-year procurement, with multi-year funding, along with proper termination protection for the contractor and establish ment of a higher cancellation ceiling, perhaps 20 to 30 percent of o Extending the Defense Production Act of 1950 for at least five o Prohibiting use of firm fixed-price contracts in initial stages of o Establishing a separate DOD funding category for unanticipated DEFENSE PROFITS The driving force behind American industry is the opportunity to earn a fair profit commensurate with the risk undertaken. In doing business with the government, however, the profit motive is inhibited in many ways. For example, the Vinson-Trammell Act, if implemented, will place a statutory limitation on earnings in the procurement of naval vessels and aircraft. In addition, certain agencies do not reimburse contractors for ordinary, necessary and reasonable costs of doing business; ceilings are sometimes placed on certain costs. For example, under DOD contracts contributions and interest are unallowable, while costs for independent research and development bid and proposal, patents and relocation and others are limited by arbitrary ceilings. Such policies, practices and procedures inhibit private firms from seeking DOD contracts, thus reducing competition. Finally, the profit available is insufficient to foster investment in R&D and improved productivity. We suggest, therefore, that consideration be given to: O Removing restrictions on the recovery, under government contracts, of necessary costs of doing business such as interest and independent research and development costs; and o Recognizing contractors' productivity improvement and cost-cutting efforts by rewarding them in follow-on contracts based on past performance. COST ACCOUNTING STANDARDS Another problem of defense contracting is the cost of complying with statutory requirements such as cost accounting standards and laws designed to effectuate socio-economic goals, e.g., Public Law 95-507. After ten years of experience, industry has yet to find that cost accounting standards are either necessary or cost effective. compliance far exceeds any benefits to the public. The cost of The use of the Federal procurement system to attain socio-economic goals is laudable and in the case of certain agencies may be appropriate. However, the procurement system that provides our nation's defense should not be burdened with either the unnecessary costs or problems such efforts require. We recommend, therefore, that consideration be given to: o Delegating authority for maintaining cost accounting standards to an appropriate government agency, such as the Office of Federal Procurement Policy; o Providing for review of existing cost accounting standards with o Eliminating or reducing the burden of achieving socio-economic DEFENSE INDUSTRIAL BASE A special panel of the House Committee on Armed Services recently found that "the general condition of the defense industrial base has deteriorated and is in danger of further deterioration in coming years." Among the reasons cited by the panel were aging facilities and machinery, declining productivity growth, increasing lead times and shortages of critical materials and skilled labor. Other reasons included inadequate defense funding, inflexible contracting procedures and burdensome government regulations. The defense industry is suffering from the same basic problems confronting industry in general a decline in investment capability due to inadequate capital formation and overzealous regulation. But the defense industry is further handicapped by problems rooted in the unique relationship that exists between the government and producers of defense equipment. Defense contractors need more assurance of a sustained national effort, and they must be provided greater incentives to invest their energies and capital in high-risk development and production of defense systems. We recommend that to encourage productivity, improve technology and achieve a strong, revitalized and competitive industry, Congress should: Provide tax incentives, such as more rapid capital depreciation and increased credit for R&D expenditures; O Revise federal income tax laws to eliminate taxation of "paper" profits; o Recognize the need for adequate protection of industry's proprietary information; O Revise regulations which unnecessarily increase industry's cost of doing defense business and which divert investment from R&D, technology development and productivity improvement; and o Provide tax-free treatment of reinvested capital gains. PROPRIETARY DATA The cost of complying with government regulations is significantly high for many industries. Changes in legislation or regulations can have major and wide-ranging effects on individual companies, on their customers, on fuel consumption, employment and exports that must be balanced against the benefits resulting from such changes. While increased costs are eventually passed on to consumers, there is a cost to the nation as well in terms of slower growth in innovation and productivity. The Aerospace Industries Association |