Reopener Clauses for Savings Have Been Rarely Used

The Defense Contract Audit Agency (DCAA) and the Defense Contract Management Command (DCMC) have repeatedly recommended that contracting officers use reopener clauses for savings when negotiating fixed-price contracts with business combinations. One of those reopener clauses has been successfully exercised, resulting in $1.8 million in recouped restructuring savings, or about 4 percent of the contract price. During this period, DOD continued to negotiate noncompetitive fixed-price contracts with the contractors involved in business combinations. DOD awarded the contractor business segments we reviewed over 600 noncompetitive fixed-price contracts worth about $3.9 billion. Contracting officers and negotiation records cited various reasons for not using reopener clauses, including the preference to have contracts without loose ends and concerns about the administrative burden of reopening a contract. Another factor that appears to influence the use of reopener clauses is contractor resistance. However, the use of these clauses is still limited. Unless DOD takes steps to include reopener clauses in its noncompetitive fixed-price contracts for companies forming business combinations, it risks losing further substantial savings resulting from contractor restructuring. Therefore, we recommend that the Secretary of Defense revise DFARS to require that contracting officers (1) include reopener clauses for savings in noncompetitive fixed-price contracts negotiated before the benefits of restructuring savings are reflected in reduced overhead rates used to price contracts or (2) provide a written justification in the negotiation records as to why a reopener clause is not needed. DOD agrees that the use of reopener clauses will ensure that it receives its share of restructuring savings on non-competitive fixed-price contracts awarded to defense contractors involved in business combinations. Even though DOD contracting officers may be adjusting forward pricing rates (the mechanism used to price new contracts) as quickly as possible, our work shows it is taking an average of 21 months from the announcement of an acquisition or merger to the time that contractors reflect the restructuring savings in reduced overhead rates. DOD’s comments appear in appendix II.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO provided information related to defense contractor restructuring, focusing on: (1) the Department of Defense's (DOD) use of contract price adjustment clauses, also called reopener clauses; (2) DOD's limited use of reopener clauses for fixed-price contracts; and (3) the potential benefits of using reopener clauses in future business combinations.

What GAO Found

GAO noted that: (1) the time it takes for restructuring savings to be included in DOD contract prices can be considerable; (2) for the contractor business segments GAO examined, it took an average of about 21 months from the announcement of the acquisition or merger to the time that contractors reflect the restructuring savings in reduced overhead rates; (3) during this period, DOD awarded over 600 fixed-price contracts or contract modifications worth about $3.9 billion; (4) however, despite repeated recommendations from the Defense Contract Audit Agency and Defense Contract Management Command, contracting officers rarely included reopener clauses for savings in fixed-price contracts awarded during this period; (5) with reopener clauses, contract prices that were negotiated before savings and were included in overhead rates used to price DOD contracts could be adjusted downward once savings were determined, thereby reducing contract costs; (6) without reopener clauses, DOD cannot recoup its share of restructuring savings; (7) DOD contracting officers cited various reasons for not using reopener clauses; (8) these reasons included the desire to have contracts with no loose ends and concerns that the use of the clauses would cause an excessive administrative burden in renegotiating contract price adjustments; (9) another factor that appeared to influence the use of reopener clauses is the level of contractor resistance; (10) also, one contractor commented that such a clause was not required by current DOD regulations; (11) the use of reopener clauses can result in substantial savings to DOD; (12) in one case in which a reopener clause was exercised, the contract price was reduced by almost 4 percent, or about $1.8 million; and (13) unless DOD takes steps to include reopener clauses in its fixed-price contracts with companies forming business combinations, it risks losing further substantial savings resulting from contractor restructuring.