Recent changes to the Federal Acquisition Regulation (FAR) allow contractor the option of prefunding retiree medical and life insurance benefits (known as PRB) on an actuarially determined accrual basis, rather than continuing with the traditional pay-as-you-go funding method. The net result of this change for government contracts is a potential four to ten- fold increase in these costs for the near term, as contractor's who elect to prefund arc allowed to amortize the accumulated unfunded liability over a period of 20 years or less. This paper will focus on the practical experience of the Headquarters, U.S. Army Armament, Munitions and Chemical Command (HQ, AMCCOM) Cost Analysis Directorate with the government-owned, contractor-operated (GOCO) ammunition industrial base during the current era of sharply declining defense spending. The paper's scope will span the treatment of prefunding at all stages of the acquisition process, including planning, budgeting, technical evaluation of contractor proposals, preparation of independent government positions, pricing, contract negotiations, and adoption of source selection evaluation criteria. Particular emphasis will be placed on PRB-related policy, actuarial principles (including valuation techniques), as well as key issues and problems related to this sometimes controversial, but generally little understood, component of contractor overhead.