Summary: Testimony was given on the Department of Defense's (DOD) Defense Financial and Investment Review (DFAIR), which recommended changes in DOD policy concerning contractors' profits. GAO noted that DFAIR: (1) recognized that profit policy, contract financing, and contractor investment are related; (2) used return on assets to compare profitability; and (3) showed that reporting and evaluating contractor profitability is possible. However, GAO also found that: (1) DOD increased the asset base by adding government progress payments to contractor inventories and using a unique methodology to calculate economic profit; (2) DFAIR-proposed revisions to the weighted guidelines will not lower the average profit objective; and (3) DFAIR has not supported its conclusion that contractors incur a 2-percent financing cost. GAO believes that: (1) legislation to ensure consistency and creditability in the profitability reporting system is necessary; and (2) the repository for this data should be an executive branch entity with the resources to protect proprietary data.
