Application of "Should Cost" Concepts in Reviews of Contractors' Operations

In May 1969, the Subcommittee on Economy in Government, Joint Economic Committee, reporting on "The Economics of Military Procurement," expressed concern that the traditional method of pricing negotiated contracts--primarily on the basis of past or historical costs--did not protect the interests of the Government adequately. The Subcommittee recommended that the General Accounting Office (GAO) "study the feasibility of incorporating into its audit and review of contractor performance the should cost method of estimating contractor costs on the basis of industrial engineering and financial management. The should-cost approach attempts to determine the amount that weapons systems or products ought to cost, given attainable efficiency and economy of operations. In May 1970, GAO reported to the Congress that it appeared to be feasible to apply should-cost concepts in its reviews. GAO also stated that it would perform trial reviews of this type to obtain additional information concerning benefits that could be realized and problems that might be encountered. This report presents GAO's findings and conclusions based on its trial applications of should-cost concepts