amounts budgeted for the fiscal year buy of a given system.

Such a procurement strategy tends to result in increased per unit production set-up costs, a more expensive labor mix (more senior employees are retained when production is decreased) and decreases in efficiency (with smaller production runs, some employees may work only part time on the system, and experience a loss of efficiency in continually switching tasks). To the extent systems are bought in decreasing quantities, then the per unit labor costs will tend to increase at a rate higher than the rate of economic escalation.

Ꭰ . Overhead

As mentioned in Section III, overhead costs are about twothirds labor, or labor related. Our view is that the labor component of overhead costs can be expected to increase at approximately the same rate as the CPI. Other overhead costs, particularly those which are affected by energy costs, such as utilities and transportation, can be expected to increase at rates commensurate with energy price increases.

Fringe benefits will likely continue to increase at a higher rate than labor costs. Employer FICA contribution base and percentage contribution are currently increased by law each year until 1989. Table V-1 shows the tax rates that have applied in previous years and the rates that are scheduled for the current and future years, as the law now stands. tax is also shown for the same period.

The wage base for the

Table V-2 illustrates the

impact these changes have had on the contribution an employer must

make to social security and hospital insurance for individuals at three selected wage levels. A given employer's total FICA tax burden will vary with the wage mix of his employees but these tables show that, in any case, his tax burden is steadily increasing.

Increases in individual components of overhead costs could be offset to a degree by increases in contractors' total business volume due to allocation of fixed and semivariable costs over a larger base. Current projections are for overall growth in the defense sector as a whole, so there will likely be some offset of overhead cost increases. Contractors with a narrow product line will, however, likely experience significant overhead rate increases as mature programs are bought out.

Old-age, survivors, disability (i.e., social security) and hospital insurance taxes imposed by the Federal Insurance Contributions Act (Subchapter B, Section 3111) are paid at the same rate by both the employer and the employee. It should be noted that the wage base for social security and hospital insurance tax purposes has also increased during this period, as follows:**

** After 1980, an automatic escalator stated in the Social Security Act (Section 230) takes over. Under the escalator, increases in the earnings base go into effect after a June escalator increase in benefits; and benefits are increased when the cost of living rises 3% or more between specified periods.

While the primary purpose of our review was to gauge the

impact of inflation on specific weapon systems, we also observed or received contractor views on certain problems which relate to overall acquisition strategy and policy. These include:

Single-year versus multi-year acquisition;

Contractors making commitments for long lead material
items without government funding or assumption of
termination liability.

Inconsistent application of economic price adjustment
policies.

Each of these problems is discussed below.

A. Single-Year Versus Multi-Year Contracting

While we did not solicit specific data on multi-year contracting, a number of contractors expressed the view that singleyear funding practices may be as significant a cost driver as inflation. Contractors who expressed this view felt that more favorable overall prices to the government would result from their making firm total program commitments for vendor and subcontractor supplied items, as opposed to making annual procurements of these items, with quantities and delivery schedules frequently not known until the last minute. It was felt that planning in advance, to a known production schedule at all tiers, would facilitate longer term price commitments, application of procurement and inventory practices to minimize overall material cost, and bring order to what is now a chaotic system.