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Show 23 DEFENSE tax profits, as a return capital, 21.1 percentage of costs, as an average 4.4 per cent; total capital, 11.2 per cent; as a return on equity a as on per cent. The GAO audit would rates in those respective categories and 56.1 per cent.n as point to very different 6.9 per cent, 28.3 per cent, 17, 1971, the GAO released a report on defense in In a study of 74 large Department of Defense con tractors, it discovered that profits on defense work over four years, from 1966 to 1969, as measured as a percentage of sales, was 4.3 per cent while profits in this category for commercial work came to 9.9 per cent. This difference decreased when the profit rate was judged as a percentage of total capital investment; defense work profits amounted to 11.2 per cent as opposed to 14 per cent for com mercial involvement. Finally, when profits were calculated as return on equity capital investment of stockholders, defense rates reached 21.1 per cent while commercial profit margins attained only 22.9 per cent, a very much narrowed gap. The Government Accounting Office has explained this small difference in returns on capital in defense and commercial business by the considerable degree of government-leased equipment virtually owned and operated by the large firms. Consequently, the contractor rarely invests much capi tal in defense projects, since profits are often negotiated on the basis of cost. Therefore, the large companies have little incentive to be efficient. The GAO has now recommended that profits be calcu lated on the basis of capital investment; Admiral Rickover has sec onded this suggestion heartlly.P " On March dustry profits. Under the Truth-In-Negotiations Act, defense contractors are obligated pricing data for negotiations of con tracts over $100,000. If this information proves inaccurate, incom plete, or outdated, the government has the right to adjust prices. Since January 1, 1970, the GAO has informed the Congress, on the basis of cost and pricing data used by the contractor at the time of negotiation, of overpricing worth $6 million spread over 56 con tracts, totalling $278 million, and awarded to 34 contractors.> • to submit cost and In fiscal 1970, the Renegotiation Board found that contractors had understated their profits by 27 per cent, and adjusted the re ported figures by $191.3 million. By the end of the year, only $33 million had been recovered. Lawrence Hartwig, chairman of the • Board, told the Joint Subcommittee on Priorities and Economy in Government that such erroneous reporting by the defense industry "might be our usual experience. "14 |
