United States General Accounting Office

GAO Testimony

Before the Subcommittee on Military Research and

Development, Committee on National Security,

House of Representatives

For Release on Delivery

Expected at

2:00 p.m., EDT,

Tuesday,

March 5, 1996

FEDERALLY FUNDED

R&D CENTERS

Observations on DOD

Actions To Improve

Management

Statement for the Record by David E. Cooper,

Associate Director, Defense Acquisitions Issues,

National Security and International Affairs Division

G O A

years

1921 - 1996

GAO/T-NSIAD-96-117

Mr. Chairman and Members of the Committee:

I am pleased to be able to provide this statement for the record on the

results of our work on the Department of Defense’s (DOD) federally funded

research and development centers (FFRDC). In recent years, we, as well as

the DOD Inspector General, Defense Contract Audit Agency (DCAA),

Congressional Research Service, and Defense Science Board (DSB), have

reported on issues related to DOD’s management and use of its FFRDCs.

Appendix I lists these reports.

To address the issues discussed in these reports, DOD established an

internal advisory group to review and make recommendations for

improving DOD’s management of its FFRDCs. Its work resulted in an action

plan, which was provided to the Congress in May 1995. In February 1996,

DOD provided an update on the status of its action plan. My statement

focuses on four key issues presented in the plan and discussed in the

status update. These issues are (1) developing guidelines to ensure that

management fees provided to FFRDCs are based on need and detailed

justification, (2) defining core work appropriate for FFRDCs,

(3) establishing criteria for the acceptance of work outside the core by the

FFRDCs’ parent corporations, and (4) establishing an independent advisory

committee to review DOD’s management, use, and oversight of its FFRDCs.

We generally support the direction provided in the action plan and believe

it addresses some of the long-standing issues that have faced DOD and its

FFRDCs. We also support the potential value of establishing strategic

relationships between DOD and its contractors, a key factor that DOD

attaches to its association with FFRDCs. The only concern on our part is

that some of the proposed actions are still in draft form or early

implementation, and we have yet to see how well they will address

long-standing concerns and how effectively they will be implemented.

Background FFRDCs were first established during World War II to meet specialized or

unique research and development needs that could not be readily satisfied

by government personnel or private contractors. Additional and expanded

requirements for specialized services led to increases not only in the size

of the FFRDCs but also the number of FFRDCs, which peaked at 74 in 1969.

Today, 8 agencies, including DOD, fund 39 FFRDCs that are operated by

universities, nonprofit organizations, or private firms under long-term

contracts. Federal policy allows agencies to award these contracts

noncompetitively. The Office of Federal Procurement Policy within the

Page 1 GAO/T-NSIAD-96-117
Office of Management and Budget (OMB) establishes governmentwide

policy on the use and management of FFRDCs.

Within DOD, the Director of Defense Research and Engineering is

responsible for developing overall policy for DOD’s 11 FFRDCs. The Director

communicates DOD policy and detailed implementing guidance to FFRDC

sponsors through a periodically updated management plan, and

determines the funding level for each FFRDC based on the overall

congressional ceiling on FFRDC funding and FFRDC requirements. Total

funding for DOD’s FFRDCs was $1.25 billion in fiscal year 1995. DOD

categorizes each of its FFRDCs as a systems engineering and integration

center, a studies and analyses center, or a research and development

laboratory. Appendix II provides information on each FFRDC, including its

parent organization, primary sponsor, DOD funding, and staffing levels for

fiscal year 1995.

The military services and defense agencies sponsor individual FFRDCs and

award and administer the 5-year contracts, typically negotiated

noncompetitively, after reviewing the continued need for the FFRDC. Unlike

a private contractor, an FFRDC accepts restrictions on its ability to

manufacture products and compete for other government or commercial

business. These restrictions are intended to (1) limit the potential for

conflicts of interest when FFRDC staff have access to sensitive government

or contractor data and (2) allow the center to form a special or strategic

relationship with its DOD sponsor.

Developing Guidelines

on Management Fees

Management fees are discretionary funds provided to FFRDCs in addition to

reimbursement for incurred costs, and these fees are similar to profits

private contractors earn. Two issues that have remained unresolved for

many years are what should management fee be provided for and how

should FFRDCs use this fee. As far back as 1969, we concluded that

nonprofit organizations such as FFRDCs incur some necessary costs that

may not be reimbursed under the procurement regulations, and we

recommended that the Bureau of the Budget (now known as OMB), develop

guidance that specified the costs contracting officers should provide fees

to cover.1

 In 1993, the Office of Federal Procurement Policy agreed that

governmentwide guidance on management fees for nonprofit

organizations was needed, but it has not yet issued detailed guidance.

1

Need for Improved Guidelines In Contracting for Research With Government-Sponsored Nonprofit

Contractors (B-146810, Feb. 1969).

Page 2 GAO/T-NSIAD-96-117
In the absence of such governmentwide guidance, recurring questions

continue to be raised about how FFRDCs use their fees. In its 1994 report,

for example, the DOD Inspector General concluded that FFRDCs used

$43 million of the $46.9 million in fiscal year 1992 DOD fees for items that

should not have been funded from fees. The bulk of this $43 million

funded independent research projects that should have been charged to

overhead, according to the report. The remainder funded otherwise

unallowable costs and future requirements, which the report concluded

were not necessary for FFRDC operations. Similarly, as we recently

reported, DCAA reviewed fiscal year 1993 fee expenditures at the MITRE

Corporation and concluded that just 11 percent of the expenditures

reviewed were ordinary and necessary to the operation of the FFRDC. DCAA

reported that MITRE used fees to pay for items such as lavish

entertainment, personal expenses for company officers, and generous

employee benefits.2

 In our recent work at The Aerospace Corporation, we

found that the corporation used about $11.5 million of its $15.5 million

management fee for sponsored research.3

 Aerospace used the remainder

of its fee and other corporate resources for capital equipment purchases;

real and leasehold property improvements; and other unreimbursed

expenditures, such as contributions, personal use of company cars,

conference meals, trustee expenses, and new business development

expenses.

DOD’s action plan recommended implementation of revised guidelines for

management fee. Specifically, it recommended (1) moving allowable costs

out of fee and reducing fee accordingly, and (2) establishing consistent

policies on ordinary and necessary costs to be funded through fee. If

effectively implemented, these actions should help to resolve many of the

long-standing concerns over FFRDC use of management fee. Moving

FFRDC-sponsored research out of fee would result in a substantial

reduction of fee amount and should provide for more effective DOD

oversight of FFRDC expenditures. This action would also subject all

research to the Federal Acquisition Regulation cost principles applicable

to cost-reimbursable items.

Defining ordinary and necessary expenses which may be covered by fee is

a more challenging issue, which may explain why the issue has gone

unresolved for so long. However, until DOD issues specific guidance

2

Federally Funded R&D Centers: Use of Fee by the MITRE Corporation (GAO/NSIAD-96-26, Nov. 27,

1995).

3

Federally Funded R&D Centers: Use of Contract Fee by The Aerospace Corporation

(GAO/NSIAD-95-174, Sept. 28, 1995).

Page 3 GAO/T-NSIAD-96-117
regarding ordinary and necessary expenses, debate will likely continue on

whether fee can be used for such things as personal expenses for company

officers, entertainment, and new business development. Although DOD’s

action plan identifies the need for clarifying guidance, our understanding

is that such guidance has not been issued.

Defining Core Work As a robust private-sector professional services industry grew to meet the

demand for technical services, it became apparent that industry had the

capability to perform some tasks assigned to FFRDCs. As early as 1962, the

Bell Report noted criticism that nonprofit systems engineering contractors

had undertaken work traditionally done by private firms.4

 A 1971 DOD

report stated, “It is pointless to say that the [systems engineering FFRDCs’]

function could not be provided by another instrumentality....”5

 According

to this report, private contractors could also do the same type of work as

the studies and analyses FFRDCs. The report pointed to the flexibility of

using the centers and their broad experience with sponsors’ problems as

reasons for continuing their use. More recently, the DOD Inspector General

concluded that FFRDC mission statements did not identify unique

capabilities or expertise, resulting in FFRDCs being assigned work without

adequate justification.6

In a 1988 report, we pointed out that governmentwide policy did not

require that FFRDCs be limited to work that industry could not do; FFRDCs

could also undertake tasks they could perform more effectively than

industry.7 FFRDCs are effective, we observed, partly because of their special

relationship with their sponsoring agency. This special relationship

embodies elements of access and privilege as well as constraints to limit

their activities to those DOD deems appropriate.

In 1995, the DSB and DOD’s Action Plan elaborated on and refined the

concept of the FFRDC special relationship. According to DOD, FFRDCs

perform tasks that require a special or strategic relationship to exist

4

Report to the President on Government Contracting for Research and Development, U.S. Senate, 87th

Congress, 2nd Session, Document No. 94, May 17, 1962. This report, prepared by a presidentially

appointed committee led by Bureau of the Budget Director David Bell, is commonly referred to as the

“Bell Report.”

5

Report of the Special Study Group on Federal Contract Research Centers, Director of Defense

Research and Engineering, Office of the Secretary of Defense, August 30, 1971.

6

Contracting Practices for the Use and Operations of DOD-Sponsored Federally Funded Research and

Development Centers, Office of the Inspector General, Department of Defense (95-048, Dec. 2, 1994).

7

Competition: Issues on Establishing and Using Federally Funded Research and Development Centers

(GAO/NSIAD-88-22, Mar. 7, 1988).

Page 4 GAO/T-NSIAD-96-117
between the task sponsor and the organization performing the task. Table

1 shows DOD’s description of the characteristics of this special

relationship.

Table 1: Characteristics of the Relationship Between an FFRDC and Its DOD Sponsor

Characteristic Description

Long-term continuity. Uninterrupted, consistent support based on a continuing

relationship.

Comprehensive knowledge of sponsor needs and operations. Expertise on and institutional memory about issues of enduring

concern to the sponsor.

Adaptability. Ability to respond to emerging needs of their sponsors.

Objective, high-quality, current research. A highly educated and skilled professional staff that can produce

thorough, independent analyses to address complex technical

and analytical problems and maintain currency in their fields of

expertise.

Freedom from real or perceived conflicts of interest. Independence from commercial, shareholder, political, and other

associations and dedication to the public interest.

Broad access to sensitive government and commercial proprietary

information.

Lack of institutional interests that could lead to misuse of

information or cause contractor reluctance to provide such

information.

Quick response capability. Short-term assistance to help sponsors meet urgent and

high-priority requirements.

According to the DSB, this special relationship allows an FFRDC to perform

research, development, and analytical tasks that are integral to the mission

and operation of the DOD sponsor.

The DSB and an internal DOD advisory group concluded that there is a

continuing need for certain core work that requires the special

relationship previously described.8 DOD concluded that giving such tasks to

private contractors would raise numerous concerns, including questions

about potential conflicts of interest. Accordingly, DOD has defined an

FFRDC’s core work as tasks that (1) are consistent with the FFRDC’s purpose,

mission, capabilities, and core competencies and (2) require the FFRDC’s

special relationship with its sponsor. The DOD advisory group estimated

that this core work represented about 6 percent of DOD’s research,

development, and analytic effort. The DSB and the DOD advisory group also

concluded that FFRDCs performed some noncore work that did not require

a special relationship, and they concluded that this work should be

transitioned out of the FFRDCs and acquired competitively. On the basis of

these conclusions, DOD directed each sponsor to review its FFRDC’s core

8

Report of the DOD Internal Advisory Group on Federally Funded Research and Development Centers

(May 18, 1995).

Page 5 GAO/T-NSIAD-96-117
competencies, identify and prioritize the FFRDC’s core work, and identify

the noncore work that should be transitioned out of the FFRDC.

The core competencies the DOD sponsors identified appear to differ little

from the scope of work descriptions that were in place previously. In

several cases, sponsors seem to have simply restated the functions listed

in an FFRDC’s scope of work description. In other cases, the core

competencies summarized the scope of work functions into more generic

categories.

In February 1996, the Under Secretary for Defense (Acquisition and

Technology) reported that DOD sponsors had identified $43 million, or

about 4 percent of FFRDC funding, in noncore work being performed at the

FFRDCs. According to the Under Secretary, ongoing noncore work is

currently being transferred out of the FFRDCs.

Even though DOD states that it is important to ensure that tasks assigned to

the FFRDC meet the core work criteria, we believe it will continue to be

difficult to determine whether a task meets these criteria. FFRDC mission

statements remain broad, and core competencies appear to differ little

from the previous scope of work descriptions. As we stated in our 1988

report, the special relationship is the key to determining whether work is

appropriate for an FFRDC. However, determining whether one or more of

the characteristics of the special relationship is required for a task may be

difficult, since the need for an element of the special relationship is

normally relative rather than absolute. For example, we believe DOD would

expect objectivity in any research effort, but it may be difficult to

demonstrate that a particular task requires the special degree of

objectivity an FFRDC is believed to provide.

Uncertainty about whether an FFRDC’s special relationship allows it to

perform a task more effectively than other organizations also accompanies

decisions to assign work to an FFRDC. In our 1988 report, we stated that full

and open competition between all relevant organizations (FFRDCs and

non-FFRDCs) could provide DOD assurance that it has selected the most

effective source for the work. However, exposing FFRDCs to marketplace

competition would fundamentally alter the character of the special

relationship.

While DOD has initiated a department-wide effort to define more clearly the

work its FFRDCs will perform, the criteria DOD has developed remains

somewhat general. Applying this criteria requires the making of

Page 6 GAO/T-NSIAD-96-117
judgements about the relative effectiveness of various sources for work in

the absence of full information on capabilities which open competition

would provide. It is doubtful that DOD’s criteria will be satisfactory to those

critics who are seeking a simple and unambiguous definition of work

appropriate for FFRDCs.

Accepting

Non-FFRDC Work

The question of whether accepting work from organizations other than its

sponsor impairs an FFRDC’s ability to provide objective advice has long

been discussed. As early as 1962, the Bell Report raised this question but

noted that no clear consensus had developed as to whether concerns

about diversification were well founded. The report recognized that

studies and analyses FFRDCs could effectively serve multiple clients but

concluded that systems engineering organizations were primarily of value

when they served a single client. During the early 1970s, DOD encouraged

its FFRDCs to diversify into nonsponsor work. According to a 1976 DOD

report, FFRDCs that did not diversify suffered efficiency and morale

problems as their organizations shrank in the face of declining DOD

research and development budgets.9 Nonetheless, this report

recommended that the systems engineering FFRDCs limit themselves to DOD

work and adjust their work forces in line with changes in the DOD budget.

Regarding the MITRE Corporation, the report recommended that MITRE

create a separate affiliate organization to carry out its nonDOD work. In

1994, Congress raised the issue that non-FFRDC affiliate organizations

resulted in “...an ambiguous legal, regulatory, organizational, and financial

situation,” and directed that DOD prepare a report on non-FFRDC activities.10

 More recently, however, the DSB concluded that FFRDCs and their parent

companies should be allowed to accept work outside the core domain only

when doing so was in the best interests of the country; the DSB did not

propose criteria for determining when accepting nonsponsor work was in

the country’s best interests.

Acceptance of nonsponsor work is now common at DOD’s FFRDCs. Except

for the Institute for Defense Analyses, each parent organization performs

some non-DOD work either within the FFRDC or through an affiliate

organization created to pursue non-FFRDC work. Currently, six of the eight

parent organizations that operate FFRDCs also operate one or more

non-FFRDC affiliates. Some of these affiliates are quite small: the Center for

Naval Analyses Corporation’s Institute for Public Research accounts for

9

Management of the DOD Federal Contract Research Centers, Director of Defense Research and

Engineering, Office of the Secretary of Defense, June 1976.

10National Defense Authorization Act for Fiscal Year 1995, Senate Report 103-282.

Page 7 GAO/T-NSIAD-96-117
about 3 percent of the center’s total effort. Other affiliates are more

significant: the MITRE Corporation’s two non-FFRDC affiliates accounted for

about 11 percent of MITRE’s total effort, and the RAND Corporation’s 5

non-FFRDC divisions account for about 32 percent of its total effort. The

Massachusetts Institute of Technology and Carnegie-Mellon

University—parent organizations of the MIT Lincoln Laboratory and the

Software Engineering Institute, respectively—each pursue a diverse range

of non-FFRDC activities.

DOD has recently become more active in seeking to oversee work its FFRDCs

perform through non-FFRDC divisions. DOD sponsors have historically had

the opportunity to oversee nonsponsor work performed within the FFRDC

because the work is carried out under the FFRDC contracts that sponsors

administer. This contract oversight mechanism is not available for

non-FFRDC divisions. During 1995, for example, the Air Force expressed

great reluctance to support The Aerospace Corporation’s proposal to

establish a non-FFRDC affiliate, indicating that the Air Force was concerned

that it could not avoid the perception of a conflict of interest. Similarly, the

MITRE Corporation sought permission to create a separate corporate

division to perform non-FFRDC work. Recognizing that this arrangement

could create a potential for conflicts of interest, DOD required MITRE to spin

off a separate corporation to carry out its non-FFRDC activities. DOD

required this new corporation to have a separate board of trustees and its

own corporate officers. Further, DOD required that no work be

subcontracted between the two entities to preclude the sharing of

employees involved in DOD work—and knowledge developed in the course

of DOD work—with the new corporation.

DOD’s recent update of its action plan stated that a new policy requires the

use of stringent criteria for the acceptance of work outside the core by the

FFRDC’s parent corporation. According to DOD, this new policy will ensure

focus on FFRDC operations by the parent and eliminate concerns regarding

“unfair advantage” in acquiring of such work. Currently, DOD plans to

revise its FFRDC management plan, which would provide for greater

oversight of non-FFRDC affiliates at all centers. These changes would

require FFRDCs to agree to conduct non-FFRDC activities only if the activities

are (1) subject to sponsor review and approval, (2) in the national interest,

and (3) do not give rise to real or potential conflicts of interest.

Page 8 GAO/T-NSIAD-96-117
Establishing an

Independent Advisory

Committee

Even though it endorsed the need for organizations such as FFRDCs, a DSB

study recently concluded that the public mistrusted DOD’s use and

oversight of FFRDCs. A principal concern, according to the study, is that

DOD assigns work to FFRDCs that can be performed as effectively by private

industry and acquired using competitive procurement procedures. Further,

DSB found that the lack of opportunities for public review and comment on

DOD’s process for managing and assigning work to FFRDCs—available in the

competitive contracting process—invites mistrust. To address public

skepticism about DOD’s use and management of FFRDCs, DSB recommended

the creation of an independent advisory committee of highly respected

personnel from outside DOD. The committee would review the continuing

need for FFRDCs, FFRDC missions, and DOD’s management and oversight

mechanisms for FFRDCs. DOD’s action plan also recommended the

establishment of an independent advisory committee to review and advise

on FFRDC management.

In late 1995, an independent advisory committee was established. The six

committee members, who are either DSB members or consultants,

represent both industry and government. The committee is responsible for

reviewing and advising DOD on the management of its FFRDCs by

• providing guidelines on the appropriate scope of work, customers,

organizational structure, and size of the FFRDCs;

• overseeing compliance with DOD’s FFRDC Management Plan;

• reviewing sponsor’s management of FFRDCs;

• reviewing the level and appropriateness of non-DOD and nonsponsor work

performed by the FFRDCs;

• overseeing the comprehensive review process; and

• performing selected FFRDC program reviews.

In January 1996, the advisory committee began a series of panel

discussions at several FFRDCs, which were attended by DOD sponsor

personnel and FFRDC officials. Representatives of our office attended the

initial fact finding meetings and observed that the panel members appear

to approach their task with the utmost seriousness and challenged the

conventional wisdom by asking tough questions of both DOD and FFRDC

officials. The advisory group plans to produce its first report in

March 1996.

Mr. Chairman, this completes my statement for the record.

Page 9 GAO/T-NSIAD-96-117
Appendix I 

Related FFRDC Products

Defense Research and Development: Fiscal Year 1993 Trustee and Advisor

Costs at Federally Funded Centers (GAO/NSIAD-96-27, Dec. 26, 1995).

Federal Research: Information on Fees for Selected Federally Funded

Research and Development Centers (GAO/RCED-96-31FS, Dec. 8, 1995).

Federally Funded R&D Centers: Use of Fee by the MITRE Corporation

(GAO/NSIAD-96-26, Nov. 27, 1995).

Federally Funded R&D Centers: Use of Contract Fee by The Aerospace

Corporation (GAO/NSIAD-95-174, Sept. 28, 1995).

Defense Research and Development: Affiliations of Fiscal Year 1993

Trustees for Federally Funded Centers (GAO/NSIAD-95-135, July 26, 1995).

Department of Defense Federally Funded Research and Development

Centers, Office of Technology Assessment (OTA-BP-ISS-157, June 1995).

Compensation to Presidents, Senior Executives, and Technical Staff at

Federally Funded Research and Development Centers, DOD Office of the

Inspector General (95-182, May 1, 1995).

Comprehensive Review of the Department of Defense’s Fee-Granting

Process for Federally Funded Research and Development Centers,

Director for Defense Research and Engineering, May 1, 1995.

The Role of Federally Funded Research and Development Centers in the

Mission of the Department of Defense, Defense Science Board Task Force,

April 25, 1995.

Addendum to Final Audit Report on Contracting Practices for the Use and

Operations of DOD-Sponsored Federally Funded Research and

Development Centers, DOD Office of the Inspector General (95-048A,

Apr. 19, 1995).

DOD’s Federally Funded Research and Development Centers,

Congressional Research Service (95-489 SPR, Apr. 13, 1995).

Report on Department of Defense Federally Funded Research and

Development Centers and Affiliated Organizations, Director for Defense

Research and Engineering, April 3, 1995.

Page 10 GAO/T-NSIAD-96-117
Appendix I 

Related FFRDC Products

Federally Funded R&D Centers: Executive Compensation at The

Aerospace Corporation, (GAO/NSIAD-95-75, Feb. 7, 1995). Contracting

Practices for the Use and Operations of DOD-Sponsored Federally Funded

Research and Development Centers, DOD Office of the Inspector General

(95-048, Dec. 2, 1994).

Sole Source Justifications for DOD-Sponsored Federally Funded Research

and Development Centers, DOD Office of the Inspector General (94-012,

Nov. 4, 1993).

DOD’s Federally Funded Research and Development Centers,

Congressional Research Service (93-549 SPR, June 3, 1993).

Inadequate Federal Oversight of Federally Funded Research and

Development Centers, Subcommittee on Oversight of Government

Operations, Senate Governmental Affairs Committee (102-98, July 1992). 

DOD’s Federally Funded Research and Development Centers,

Congressional Research Service (91-378 SPR, Apr. 29, 1991).

Competition: Issues on Establishing and Using Federally Funded Research

and Development Centers (GAO/NSIAD-88-22, Mar. 7, 1988).

Page 11 GAO/T-NSIAD-96-117
Appendix II 

Information on DOD’s Federally Funded

Research and Development Centers

Fiscal year 1995 dollars in millions

FFRDC

Parent

organization Primary sponsor Obligations MTS

Systems engineering and integration centers

Aerospace The Aerospace

Corp.

Air Force

$335 1,910

MITRE C3I MITRE Corporation Assistant Secretary

of Defense (C3I) 374 2,109

Subtotal

Studies and analyses centers

Arroyo Center RAND Corporation Army 20 99

Project Air Force RAND Corporation Air Force 24 112

National Defense

Research Institute

RAND Corporation OSD

19 105

Center for Naval

Analyses

The CNA

Corporation

Navy

47 238

IDA-Studies and

Analyses/

Operational Test and

Eval. Ctr.

IDA OSD

68 377

Logistics

Management Institute

Logistics

Management

Institute

OSD

29 166

Subtotal

Research and development laboratories

Lincoln Laboratory Massachusetts

Institute of

Technology

Air Force

275 1,018

Software Engineering

Institute

Carnegie-Mellon

University

Advanced

Research Projects

Agency 29 170

IDACommunications and

Computing

IDA National Security

Agency

33 142

Subtotal

Total

Note: command, control, communication, and intelligence (C3I); Office of the Secretary of

Defense (OSD); and Institute for Defense Analyses (IDA).

Source: OSD.

(707160) Page 12 GAO/T-NSIAD-96-117
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