Section 813 required DOD to review its profit guidelines to consider whether modifications to the guidelines—such as placing increased emphasis on technical risk as a factor for determining appropriate profit margins—would provide an incentive for contractors to develop and produce complex and innovative new technologies. After completing its review, DOD reported to Congress that it planned to make two changes to the guidelines. On December 13, 2000, DOD published a final rule in the Federal Register to implement the two changes. Contracting officers have available another contracting mechanism— award fees—to reward innovation in research and development. Conclusions

The new profit policy may reward contractors for existing levels of innovation rather than incentivize additional innovation. Recommendations for Executive Action

To assure that the technology incentive is appropriately interpreted and applied, we recommend that the Secretary of Defense   clarify the definition of innovation contained in the profit policy rule;   define how long contractors should be rewarded for innovations introduced during research and development phases; and reconcile the relationship of the technology incentive with DOD’s new acquisition process, including the emphasis on technology maturation. Scope and Methodology

To determine whether the new profit policy is likely to achieve its objective of stimulating increased innovation, we selected programs at some of DOD’s highest dollar buying commands to review how contracting and acquisition officials would apply the new policy to various programs. Appendix II: Comments From the Department of Defense
Why GAO Did This Study

In negotiating profit on contracts, the Department of Defense (DOD) requires contracting officers to set negotiating objectives by relying on guidelines in defense regulations. Congress mandated that DOD review its profit guidelines and consider whether modifying them would provide more incentive for contractors to develop and produce complex and innovative new technologies for weapon systems. After completing its review, DOD issued a final rule in December 2000 that added a technology incentive to its guidelines for setting profit objectives on negotiated defense contracts. This report reviews whether the new policy is (1) likely to achieve its intended objective of stimulating increased innovation and (2) consistent with the revised policies for acquiring weapons systems.

What GAO Found

GAO found that the new profit policy may have limited effect on incentivizing additional innovation because the policy has limited reach during research and development and it does not provide adequate guidance on when to apply the incentive. The policy may not reinforce DOD's emphasis on technology maturity in its guidance on the system acquisition process.