Summary: GAO reviewed Department of Defense (DOD) efforts to recover nonrecurring costs of major defense equipment sold abroad and reported on: (1) problems with the current pro rata system of cost recovery; and (2) an alternative flat rate method for improving cost recovery.
The Arms Export Control Act requires DOD to charge major defense equipment buyers a proportionate share of nonrecurring research, development, and production costs. The DOD pro rata system of calculating charges by estimating total nonrecurring costs and dividing that by an estimate of the total production quantity results in inaccuracy because of: (1) DOD inability to accurately predict future costs; (2) DOD inability to accurately predict future U.S. and foreign quantity requirements; (3) errors in calculating and applying common costs to old and new generation weapon systems; (4) inconsistencies in establishing a pro rata charge for weapon systems components; and (5) DOD policy not to revise charges unless they increase or decrease by at least 30 percent. GAO noted that, to improve the pro rata system's accuracy, DOD would have to constantly accumulate, review, and update cost and quantity information to make the necessary charge adjustments. GAO found that, by using an alternative flat rate system, DOD could establish a percentage recoupment rate to apply to the acquisition price of all equipment sold abroad. A flat rate approach: (1) would simplify the existing complex administrative review process; (2) could be applied to all defense equipment sales; and (3) would not be subject to the adjustments required by pro rata calculations. DOD believes that, because this approach does not attempt to recover a proportionate share of investment on individual items, it would require an amendment to the act.
