GAO

United States General Accounting Office

Report to the Chairman and Ranking 

Minority Member, Committee on Armed 

Services, Subcommittee on Readiness 

and Management Support, U.S. Senate

April 2000 ACQUISITION 

REFORM

DOD’s Guidance on 

Using Section 845 

Agreements Could be 

Improved

GAO/NSIAD-00-33

Page 1 GAO/NSIAD-00-33 Section 845 Agreements

Contents

Letter 3

Appendixes Appendix I: Treatment of Selected Issues Under

Section 845 Agreements 38

Appendix II: Comments From the Department of Defense 51

Appendix III: GAO Contacts and Staff Acknowledgments 55

Tables Table 1: DOD’s Use of Section 845 Agreements Through Fiscal 

Year 1998 8

Table 2: Ten Largest Section 845 Agreements Measured by DOD 

Financial Commitment as of December 1998 11

Table 3: Accounting Requirements 40

Table 4: Pricing-Related Issues 41

Table 5: Audit Approaches 42

Table 6: Financing Approaches 43

Table 7: Financing-Related Issues 44

Table 8: Termination Procedures 45

Table 9: Dispute Procedures 46

Table 10: Patent and Data Right Approaches 48

Table 11: Government Property Approaches 49

Table 12: Subcontractor-Related Requirements 50

Figures Figure 1: Distribution of Section 845 Agreements by Total Agreement 

Dollar Value 10

Figure 2: Reasons Cited by DOD Components for Using Section 845 

Agreements 13

Figure 3: Composition of Prime Contractors Awarded Section 845 

Agreements 15

Abbreviations

DARPA Defense Advanced Research Projects Agency

DOD Department of Defense
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United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-281276 Letr

April 7, 2000

The Honorable James M. Inhofe

Chairman

The Honorable Charles S. Robb

Ranking Minority Member

Subcommittee on Readiness and Management Support

Committee on Armed Services

United States Senate

To help meet the national security challenges of the 21st century, the 

Department of Defense (DOD) funds a vast array of research and 

development activities to exploit emerging technologies, develop advanced 

weapon systems, and improve the capabilities of fielded weapon systems. 

Over the past decade, Congress and DOD expressed concern that 

government-unique procurement requirements—often implemented 

through specified contract provisions—inhibited DOD’s ability to take 

advantage of technological advances made by the private sector and 

increased the costs of goods and services DOD acquired.

One effort to address these concerns was enacted under Section 845 of the 

National Defense Authorization Act for Fiscal Year 1994. Section 845 

provided the Defense Advanced Research Projects Agency1

 with temporary 

authority to enter into agreements for prototype projects2 using 

nonstandard contracting approaches referred to as “other transactions.” 

Other transactions are generally not subject to the federal laws and 

regulations governing standard procurement contracts. Consequently, 

when using Section 845 authority, DOD contracting officials are not 

required to include standard contract provisions that typically address such 

issues as financial management or intellectual property rights, but rather 

may structure the agreements as they consider appropriate. In 1996, 

Congress extended the use of Section 845 agreements to the military 

1

 The Defense Advanced Research Projects Agency is DOD’s central research and 

development organization.

2

 There is no common definition of a prototype project; however, definitions provided by 

DOD ranged from products that evaluated the technical feasibility or operational utility of a 

concept or system, to lesser projects involving subsystems, components, technology 

demonstrations, and other technology development efforts.
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services and other defense agencies. Section 845 authority expires on 

September 30, 2001.

You asked us to provide information regarding DOD’s use of Section 845 

agreements to assist you in deciding whether to make the authority 

permanent. Specifically, we identified (1) the extent to which DOD has 

used Section 845 agreements, (2) the benefits reported from their use, 

(3) how DOD tailored these agreements to address issues normally 

governed by standard contract provisions, and (4) recent DOD efforts to 

provide additional guidance on their use.

Results in Brief DOD has awarded 97 Section 845 agreements as of October 1998. These 

agreements have varied widely in type and dollar value. They were most 

frequently used to support studies of future weapon systems or to design 

and develop subsystems or components. DOD’s financial commitment was 

concentrated on 10 agreements that accounted for about $2.1 billion, or 

more than 80 percent, of the $2.6 billion awarded under Section 845 

agreements. This financial commitment constituted a relatively small 

percentage of DOD’s overall research and development spending. For 

example, DOD awarded about $100 billion in research and development 

contracts over approximately the same time period.

In a February 1999 report to Congress, DOD cited numerous benefits from 

using Section 845 authority. These benefits included attracting firms that 

typically did not contract with DOD,3

 enabling use of commercial products 

or processes, providing more flexibility to negotiate agreement terms and 

conditions, and reducing program costs. However, the report provided only 

limited data to assess the agreements’ usefulness. For one of the key 

benefits expected from using Section 845 agreements—attracting 

commercial firms—data showed mixed results. For example, in our review, 

traditional DOD prime contractors attracted commercial firms as 

subcontractors in 24 out of 84 agreements, according to agreement officers.

Section 845 agreements covered most of the areas typically addressed by 

standard contract provisions in the five areas we evaluated. However, the 

terms and conditions found in Section 845 agreements provided 

contractors more flexibility in the business processes and practices they 

3

 In this report, unless otherwise specified, we use the term “commercial firm” to identify 

those business entities that typically do not contract with DOD.
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employed than typically provided by standard contract provisions. Among 

Section 845 agreements, we found little variation in the approaches to 

financial management, subcontractor management, and termination and 

disputes processes. In two other areas—intellectual property and 

government property—DOD officials made greater use of the standard 

contract clauses in agreements awarded to traditional defense contractors, 

while using tailored clauses in agreements with commercial firms. The use 

of a model agreement contributed to this uniformity, but DOD officials 

often did not address why they selected either the standard contract 

provision or a tailored approach or discuss the anticipated benefits of their 

choice of approach in the analysis justifying the award of the agreement.

DOD has recently proposed new guidance to assist its personnel in 

determining when to use a Section 845 agreement and how to structure key 

provisions. The guidance also calls for additional information that would 

provide senior acquisition executives better insight on selected terms and 

conditions for agreements involving major weapon systems. It requires that 

DOD personnel establish metrics to evaluate the benefits from using 

Section 845 agreements, but does not provide examples or guidelines to 

help them develop metrics that are measurable and directly related to the 

agreement’s use. Experience has shown that DOD components have not 

developed such metrics in the past. Consequently, it is not clear that 

establishing this requirement without providing guidelines will lead to 

appropriate assessments of the benefits of using Section 845 agreements. 

The proposed guidance generated extensive comments within DOD and 

industry, which may be difficult to reconcile.

We have included recommendations in the report that are intended to assist 

DOD personnel in determining whether to use a Section 845 agreement and 

provide more useful indicators of the benefits obtained from their use.

Background DOD obligated over $100 billion for fiscal years 1994 through 1998 for 

research and development activities under various types of contracts. The 

policies and procedures that govern the solicitation, negotiation, and 

management of DOD contracts are contained in the Federal Acquisition 

Regulation and the Defense Federal Acquisition Regulation Supplement. 

Depending on such factors as the contract type and dollar value, a DOD 

contract could incorporate more than 100 contract clauses. These clauses 

implement statutory or regulatory requirements covering such issues as 

financial management and intellectual property, among others. While these 

requirements are intended to protect the government’s or suppliers’ 
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interests, concerns have been raised about the costs or impact of 

complying with the requirements. For example, traditional defense 

contractors report that they require additional personnel to comply with 

government financial management requirements, while commercial 

companies reportedly decline to accept DOD research contracts to protect 

their intellectual property. Many requirements can be waived or tailored, 

but DOD officials indicated this can be difficult and time consuming.

The origins of Section 845 authority began in 1989, when Congress enacted 

legislation—codified at 10 U.S.C. 2371—to provide the Defense Advanced 

Research Projects Agency (DARPA) temporary authority to enter into 

“other transactions” for advanced research projects. The legislation did not 

define “other transactions,” thus giving DARPA flexibility to deal with 

unique situations encountered when fostering technology development, 

especially technology with both commercial and military applications. In 

1991, Congress made this authority permanent and subsequently extended 

it to the military services. Other transactions entered into under 

10 U.S.C. 2371 are assistance instruments, which are instruments used by 

DOD when the principal purpose is to stimulate or support research and 

development activities for both public and government, versus 

government-unique, purposes.4

In 1993, Congress enacted Section 845 of the National Defense 

Authorization Act for Fiscal Year 19945 to provide DARPA additional 

authority for a 3-year period to use “other transactions” to carry out 

prototype projects directly relevant to weapons or weapon systems 

proposed to be acquired or developed by DOD; that is, for governmentunique purposes. The legislation did not provide specific objectives to be 

achieved from using the authority, nor did it define what constituted a 

prototype project. Further, the legislation did not require participants to 

share in the costs of the project or require that the agreements be used 

when a standard contract, grant or cooperative agreement was not 

appropriate or feasible, two conditions required to use an assistance-type 

other transaction. Congress required DOD to report annually on its use of 

other transactions.

4

 We discussed various issues regarding DOD’s initial use of assistance-type other 

transactions in our report, DOD Research: Acquiring Research by Nontraditional Means

(GAO/NSIAD-96-11, Mar. 29, 1996).

5

 P. L. 103-160, Nov. 30, 1993.
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In 1996, Congress extended Section 845 authority to the military services 

and other defense agencies. At that time, senior DOD officials indicated 

that extending the authority to the military services and defense agencies 

would, among other things, assist their efforts to attract firms that 

traditionally did not perform research for the government and reduce the 

time necessary to field new weapon systems. Congress has twice extended 

the authority’s expiration date, most recently until September 30, 2001.

DOD has issued limited guidance to defense components on using Section 

845 agreements. For example, DOD’s initial guidance on Section 845 

agreements consisted of a memorandum issued by the Under Secretary of 

Defense for Acquisition and Technology in December 1996.6

 Although it 

encouraged defense components to take advantage of the flexibility 

provided by Section 845 authority, the memorandum did not provide 

specific objectives or criteria for using it, define what constituted a 

prototype project, or specifically require components to establish metrics 

to assess whether the expected benefits were actually achieved. 

Guidance issued at the component level mirrored DOD’s approach in 

providing only broad parameters. For example, the Air Force encouraged 

its acquisition community to use Section 845 authority in situations where a 

standard contract discouraged cutting-edge, high-technology commercial 

firms from participating in DOD-funded programs; the Navy guidance 

encouraged its use to facilitate innovation; and the Army’s guidance stated 

that the authority could enhance its ability to acquire new technology in a 

better, faster, and cheaper manner. The components’ guidance also offered 

various definitions of prototype projects. For example, Air Force and Army 

guidance note that a prototype can generally be described as an end 

product that reasonably evaluates the technical feasibility or operational 

utility of a concept or system. DARPA described prototypes as not only 

including systems, but also lesser projects involving subsystems, 

components, technology demonstrations, and other technology 

development efforts. The Navy’s guidance does not address what 

constitutes a prototype project.

6

 The position was recently redesignated as the Under Secretary of Defense for Acquisition, 

Technology, and Logistics.
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Agreements Varied in 

Project Type and 

Dollar Value, but 

Support a Small 

Percentage of DOD 

Research Efforts

As of October 1998, DOD has awarded 97 agreements that vary in type and 

dollar value. Before fiscal year 1997, only DARPA was authorized to use 

Section 845 agreements, awarding 15 agreements during fiscal years 1994 

through 1996 (see table 1). Over the next 2 years, the military services and 

the National Imagery and Mapping Agency7

 awarded 61—or nearly twothirds—of the agreements awarded by DOD through fiscal year 1998. The 

military services’ initial use of Section 845 agreements was largely 

associated with the Commercial Operations and Support Savings Initiative, 

a DOD initiative intended to reduce maintenance costs of fielded weapon 

systems by using commercial products and processes. DOD made the use 

of Section 845 agreements a requirement for this initiative. In total, 30 of 

the 38 agreements awarded by the military services in fiscal year 1997 were 

made under this initiative.

Table 1: DOD’s Use of Section 845 Agreements Through Fiscal Year 1998 

Source: Our analysis.

7

 The National Imagery and Mapping Agency provides imagery, imagery intelligence, and 

other information that support national security objectives.

Number of agreements

Fiscal Year

Component 1994 1995 1996 1997 1998 Total

Army 10 3 13

Air Force 8 5 13

Navy 20 11 31

National Imagery and Mapping Agency 3 1 4

DARPA 1 6 8 4 15 34

Total 1 6 8 45 35 95
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In early fiscal year 1999, the Air Force awarded two agreements under its 

Evolved Expendable Launch Vehicle program that represented a significant 

departure from previous agreements in terms of dollar value and financial 

commitment by the contractors.8

 The Air Force committed $500 million on 

each of these agreements and expects each of the two prime contractors to 

commit roughly $1 billion. The contractors are to design and develop a 

family of launch vehicles capable of meeting both government and 

commercial requirements, and their cost-share is largely in recognition of 

the expected commercial demand for launch services.

Section 845 agreements support a wide range of projects. More than half of 

the projects involved either (1) studies to evaluate the feasibility or merits 

of future weapon system concepts or technologies or (2) the design and 

development of hardware-related subsystems and components. Section 845 

agreements also support the development of software or software 

applications, information systems, and various imaging and detection 

technologies. A few projects will result in the development and 

manufacture of a major end item, such as the Navy’s project to design and 

build a new oceanographic research ship. In this case, the Navy determined 

that because the ship incorporated numerous new technologies, including 

new hull and propeller designs, it could be considered a prototype for 

future efforts.

The agreements’ dollar values have also varied greatly, as shown in figure 1.

8

 DOD officials indicated that DOD awarded a total of 46 new Section 845 agreements in 

fiscal year 1999. We included the two Evolved Expendable Launch Vehicle agreements 

within the scope of our assignment due to their significance, but we did not obtain or 

analyze other agreements awarded in fiscal year 1999.
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Figure 1: Distribution of Section 845 Agreements by Total Agreement Dollar Value

Source: Our analysis of Section 845 agreements awarded through October 1998.

At the time of award, the 97 agreements had a median value of about 

$4 million, with individual awards ranging from a $170,000 Navy effort (to 

test the feasibility of using composite materials for the motor cases of 

projectiles used in its 5-inch fire support gun) to the two $500 million Air 

Force Evolved Expendable Launch Vehicle agreements. 

DOD’s initial financial commitment totaled about $1.8 billion; however, due 

to changes in the value of 29 agreements, DOD’s financial commitment 

experienced a net increase of about $0.8 billion to about $2.6 billion as of 

December 1998. Changes in the agreements’ value resulted from

(1) decisions to add work to the original agreement, (2) technical or 
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schedule problems that increased the effort’s cost, or (3) termination of the 

planned activity. As shown in table 2, the four largest agreements 

cumulatively account for about 66 percent of DOD’s commitment as of 

December 1998, while another six agreements account for an additional

16 percent. Of the 10 largest agreements, 9 involved traditional defense 

contractors, while the 10th involved a consortium comprised of both 

traditional defense contractors and commercial firms.

Table 2: Ten Largest Section 845 Agreements Measured by DOD Financial Commitment as of December 1998

Note: Totals may not add due to rounding.

a

Agreements awarded to consortia.

b

Agreements are reported at their not-to-exceed value.

Source: Our analysis.

DOD’s total financial commitment under Section 845 agreements 

represents a relatively small percentage of its overall research and 

Dollars in millions

DOD financial commitment

Fiscal 

year 

awarded

Prime 

contractor Project Amount Percent

Cumulative

percent

1999 Traditional Develop national space launch capability under Evolved Expendable 

Launch Vehicle program $500.0 19.2 19.2

1999 Traditional Develop national space launch capability under Evolved Expendable 

Launch Vehicle program 500.0 19.2 38.4

1995 Traditional Design, develop, and flight test Global Hawk unmanned aerial 

vehicle 425.5 16.3 54.8

1994 Traditional Design, develop, and flight test DarkStar unmanned aerial vehicle 283.1 10.9 65.7

1997 Traditional/

Commerciala

Evaluate use of commercial information processing, storage, 

transmission, compression, and display technologies for national 

security purposes 75.0b 2.9 68.6

1997 Traditional Evaluate use of commercial information processing, storage, 

transmission, compression, and display technologies for national 

security purposes 75.0b 2.9 71.4

1998 Traditional Develop a common cockpit for the CH-60 and SH-60R helicopters 74.5 2.9 74.3

1998 Traditional Prepare concept studies for DD-21 Land Attack Destroyer 70.0 2.7 77.0

1996 Traditional Develop a common ground communication system for Global Hawk 

and DarkStar unmanned aerial vehicles programs 62.7 2.4 79.4

1997 Traditionala Develop logistics system 58.2 2.2 81.7

Total $2,124.1 81.7
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development spending. For example, while DOD awarded $2.6 billion 

under Section 845 agreements over the 5-year period that we evaluated, it 

awarded about $100 billion under research and development contracts 

over approximately the same period. DOD’s financial commitment was 

augmented on more than half of the agreements by contractors’ costsharing. In 48 agreements, contractors were committed to provide about 

$178 million, in addition to the roughly $2 billion the two prime contractors 

on the Evolved Expendable Launch Vehicle program are expected to 

provide. DOD officials also indicated that on other agreements contractors 

had contributed or were expected to contribute additional resources 

although they were not required to do so under the terms of the agreement.

DOD Reported 

Numerous Benefits, 

but Data Show Mixed 

Results in Attracting 

Commercial Firms

In a recent report to Congress, DOD attributed numerous benefits to 

Section 845 agreements; however, the report provided only limited data to 

assess the usefulness of these agreements. Our analysis of data recently 

developed by the DOD Inspector General suggest mixed results in 

attracting commercial firms, one of the main benefits DOD expected from 

using Section 845 agreements. Other reported benefits include reducing 

program costs or overcoming various solicitation issues.

DOD Report Provides 

Limited Data to Assess 

Agreements’ Usefulness

In February 1999, DOD reported to Congress that Section 845 agreements 

provided numerous benefits, though DOD generally offered no quantified 

measures of the reported benefits or the extent that such benefits were 

derived from individual agreements. Our analysis of the information 

provided by the report on individual agreements found that, in most cases, 

DOD components cited more than one reason or expected benefit from 

using a Section 845 agreement. The top three reasons cited by DOD 

components were use of commercial products or processes, attracting 

commercial firms, and increased flexibility in negotiating terms and 

conditions (see fig. 2). To a lesser degree, DOD components cited such 

additional benefits as reducing program cost, attempting to effect cultural 

change by making the relationship between the government and contractor 

more like a partnership, trying new ways of doing business, streamlining 

the acquisition process, spurring technological innovation, or resolving 

various solicitation issues. These expected benefits were often interrelated. 

For example, flexibility in negotiating terms and conditions—particularly 

intellectual property and financial management clauses—was viewed as 

the key determinant in attracting commercial firms on several agreements. 

In turn, DOD personnel viewed attracting these firms as a means to 

leverage commercial technologies or practices.
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Figure 2: Reasons Cited by DOD Components for Using Section 845 Agreements

Note: DOD components often cited more than one reason for using a Section 845 agreement.

Source: Our analysis of DOD’s February 1999 report to Congress on Section 845 agreements.

Evidence on Attracting 

Commercial Firms Indicates 

Mixed Results

Our work, as well as work recently conducted by the DOD Inspector 

General, found that Section 845 agreements have achieved mixed results in 

attracting commercial firms at either the prime or subcontract level.

DOD officials told us they have been attempting to determine the extent 

that commercial firms were participating on Section 845 agreements since 

October 1997. At that time, DOD established a requirement for agreement 

officers to provide a report, which was to identify (among other things) 
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whether the prime contractor or consortium members had performed any 

prior research efforts for DOD. DOD officials told us that the data 

collection effort was not entirely successful, in part, because the definition 

that was provided to agreement officers of what constituted a commercial 

firm was too narrow, and the report did not provide information at the 

subcontractor level. 

At about the same time that DOD established its reporting requirement, the 

DOD Inspector General began collecting information on aspects of other 

transactions, including information on the participants. In December 1999, 

the DOD Inspector General issued a report that included information on 

the participation of commercial firms on Section 845 agreements.9

 For the 

purposes of their analysis, the Inspector General defined a commercial firm 

as one that had not performed research on cost-based contracts or that had 

been subject to an audit by the Defense Contract Audit Agency within the 

past 3 years. The Inspector General noted that while 34 Section 845 

agreements—or more than one-third—had at least one commercial firm 

participating at either the prime or subcontract level, most of the 

participants were traditional defense contractors.

Our analysis of the Inspector General’s data found that, at the prime 

contractor level, 84 of the 97 agreements were awarded to traditional 

defense contractors. Including participants that were members of 

consortium, we estimate that about 87 percent of the participants at the 

prime contractor level were traditional defense firms (see fig. 3). DOD 

officials told us the large number of traditional defense contractors at the 

prime contract level reflects the fact that Section 845 agreements are to be 

used on weapon or weapon systems-related projects. Nevertheless, DOD 

officials had hoped that the use of Section 845 agreements would attract 

more commercial firms.

9 Costs Charged to Other Transactions, Office of the Inspector General, Department of 

Defense, Report No. D-2000-065 (Dec. 27, 1999). The audit’s objective was to review the 

financial and cost aspects of five assistance-type agreements, two Section 845 agreements, 

and selected subcontracts. During the audit, the Inspector General also quantified the 

number of contractors participating on assistance-type other transactions and Section 845 

agreements awarded through October 1998.
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Figure 3: Composition of Prime Contractors Awarded Section 845 Agreements

Note: Percentages do not total to 100 percent due to rounding.

Source: Our analysis of DOD Inspector General data on prime contractors awarded Section 845 

agreements. The Inspector General defined commercial firms as those that had not performed 

research under a cost-based contract for DOD or had been subject to an audit by the Defense Contract 

Audit Agency in the last 3 years.

We found DOD personnel attributed the participation of commercial firms 

to the ability to tailor the agreement’s terms and conditions, particularly the 

intellectual property and financial management clauses. Examples of such 

tailoring include the following:

• In January 1997, the National Imagery and Mapping Agency solicited 

proposals to develop and exploit commercial information technologies 

for national security purposes. The solicitation indicated that the agency 

intended to award a standard contract. According to agency officials, 

contractor representatives suggested that using a Section 845 agreement 

would help their consortium attract commercial firms. The resulting 

Section 845 agreement, which has a potential value of $75 million, 

enabled participating contractors to use their standard accounting 

system, limited the government’s audit rights to a review by a certified 

public accounting firm, and provided more flexible intellectual property 

rights. Contractor officials indicated that while about half of the work is 

being performed by divisions that routinely accept defense work, the 

other half is being performed by divisions that for various reasons 

would not have participated under a standard contract.

• A small commercial firm submitted an unsolicited proposal to DARPA to 

develop and demonstrate an unmanned aerial vehicle capable of vertical 

take-off and landing based on the company’s existing proprietary 

technology. The company, however, was unwilling to work under a 
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standard contract, citing, among other factors, its concerns about 

accounting, auditing, and intellectual property requirements. The 

resulting $16.7 million agreement allowed the company to use its 

commercial accounting practices, limited the government’s review of its 

financial records, and limited the government’s rights to intellectual 

property and technical data.

At the subcontractor level, DOD agreement officers reported that 

traditional defense contractors attracted commercial firms in 24 of the 

84 agreements they were awarded. For the remaining agreements awarded 

to traditional defense firms, DOD agreement officers reported that either 

the prime contractor did not attract commercial firms at the subcontract 

level (20 agreements) or they did not know whether the prime contractors 

had attempted to do so (34 agreements). Agreement officers did not 

provide information on six agreements. In some cases, DOD and contractor 

personnel noted that because their projects were in the initial concept or 

design phase, the number of subcontractors actively involved was small. 

Once their projects matured and the need for subcontractors increased, 

they believed the use of Section 845 agreements might assist them in 

attracting commercial subcontractors.

Examples of Other Reasons 

Cited for Selecting a Section 

845 Agreement

While attracting commercial firms was among the principal reasons 

defense components cited for using Section 845 agreements in DOD’s 

February 1999 report, they also credited the use of Section 845 agreements 

with other benefits. The use of these agreements to reduce program costs 

or address solicitation issues illustrates some of the reasons offered by 

DOD components for using a Section 845 agreement.
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In 32 agreements, or about a third, DOD components cited the use of a 

Section 845 agreement as a means of reducing a program’s or technology’s 

estimated cost, though few provided any estimates of specific dollar 

savings. Rather, DOD components noted that agreements reduced 

negotiating, administrative, or overhead costs typically associated with a 

standard contract or provided contractors the flexibility to make 

performance trade-offs needed to achieve a specific price goal. In other 

cases, DOD officials also noted that the cost of their specific program was 

reduced due to the cost-sharing provided by the recipients. For example, 

they noted that Section 845 agreements allowed recipients to apply 

independent research and development funds to their specific program.10

Another means of reducing program costs involved using Section 845 

agreements to resolve funding shortfalls. For example, the Navy used a 

Section 845 agreement on its effort to develop a common cockpit for two 

helicopters. The Navy wanted to develop the cockpit in a 2-year time frame, 

but it could not do so because it did not have sufficient funds to pay for 

tasks that needed to be completed in the first year. Under the agreement, 

the contractor provided $11.1 million of the $29.2 million needed in fiscal 

year 1998, and the Navy provided the remaining $18.1 million. While the 

contractor anticipated being reimbursed the $11.1 million the following 

year, the agreement stated that the government’s obligation for 

performance of the agreement beyond the $18.1 million was contingent 

upon the availability of appropriated funds. Contractor officials told us 

they accepted the risk that they might not be reimbursed should the Navy 

decide to cancel the project because the effort was part of a high-priority 

Navy program and the Navy was one of their principal customers. By using 

a Section 845 agreement, Navy officials estimated they avoided over 

$50 million in future costs.11

10 Federal regulations provide that costs incurred by contractors in performing agreements 

such as Section 845 agreements may be treated as independent research and development 

expenses. If contractors elect to treat their contributions under Section 845 agreements as 

independent research and development expenses, the contractors may recover some 

portion of these costs as allowable overhead charges under other contracts they have with 

the government.

11 The other option Navy officials considered viable to a Section 845 agreement was to issue 

a value-engineering change proposal. Under this approach, while the development costs 

remained the same, the contractor would receive half of the estimated $105.8 million in cost 

savings attributed to the engineering change. A Navy official indicated they did not consider 

requesting that funds be reprogrammed from other sources—another option available to 

them—given the ability to use the Section 845 agreement.
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DOD officials also used Section 845 agreements to resolve issues 

encountered during the contract solicitation phase. During this phase, the 

government defines its requirements, advertises them, and solicits and 

evaluates responses from interested parties. Failure to follow the required 

procedures can result in a protest from an unsuccessful offeror, thereby 

delaying the effort or resulting in a need to repeat the process. According to 

DOD officials, using a Section 845 agreement allowed them to address 

issues arising from the various competition and source selection 

requirements of the Competition in Contracting Act of 1984.12 Examples of 

how DOD used agreements to address these issues follow:

• In one case, DARPA had solicited proposals to address DOD’s future 

transportation and logistics planning needs. DARPA subsequently 

selected proposals from two different defense contractors for funding. 

After completing the selection process, the DARPA program manager 

believed the research would prove more valuable if the two contractors 

worked collaboratively; consequently, the two companies agreed to 

form a joint venture. In anticipation of awarding a contract, DARPA 

authorized the contractors to incur more than $2 million in expenses. 

However, DARPA’s General Counsel objected that the proposed contract 

would violate the established competition and source selection 

requirements, and in doing so, violate the Competition in Contracting 

Act. DARPA officials changed the standard contract to a Section 845 

agreement—which is not subject to the act’s requirements—to avoid 

repeating the competition and terminating the effort that was under 

way.

• In another effort, the Navy wanted to increase the number of 

contractors capable of producing a tactical data and voice 

communication terminal. Early in their planning efforts, Navy officials 

recognized that the likely bidders had different technical experience. 

Consequently, while they wanted to award multiple contracts of varying 

dollar values—with more funds being awarded to contractors with less 

experience—to increase competition, they could not devise appropriate 

solicitation and selection procedures that would have enabled them to 

do so while complying with standard solicitation requirements. 

Consequently, these officials used Section 845 authority to devise a 

solicitation and selection strategy that enabled them to award four 

agreements with values ranging from $2.2 million to $9.2 million.

12 P. L. 98-369, July 18, 1984, as amended, generally codified in Chapter 137 of Title 10 of the 

United States Code.
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Approaches Used to 

Address Issues 

Normally Governed by 

Standard Contract 

Provisions

DOD contracting personnel confront a different set of factors when 

structuring the terms and conditions of a Section 845 agreement than when 

using a standard contract. Whereas statutes or federal acquisition 

regulations generally prescribe a standard contract’s terms and conditions 

in such areas as financial management or intellectual property, the clauses 

within a Section 845 agreement may be tailored to better address issues 

specific to a project. In his December 1996 memorandum, the Under 

Secretary of Defense for Acquisition and Technology acknowledged that 

DOD personnel would be operating in a relatively unstructured 

environment when negotiating Section 845 agreements and he set an 

expectation that the agreements incorporate good business sense and 

appropriate safeguards to protect the government’s interest.

Our analysis of DOD’s Section 845 agreements found that they generally 

addressed the areas typically governed by the standard contract provisions 

that we evaluated. In addressing financial management, termination and 

disputes processes, and subcontractor management issues, DOD personnel 

employed approaches that were generally less prescriptive or provided 

more generous terms than typically are provided to contractors in standard 

contract provisions. In these areas, the approaches employed varied little 

between agreements regardless of whether the recipients were commercial 

or traditional defense firms or whether the firms had provided a cost-share. 

In two other areas—intellectual property and government property—DOD 

personnel made more frequent use of the standard contract provision in 

agreements with traditional defense firms, while employing tailored 

clauses with commercial firms. The use of a model agreement contributed 

to this uniformity, but DOD officials often did not address why they 

selected either the standard contract provision or a tailored approach or 

discuss the anticipated benefits of their choice of approach in the analysis 

justifying the award of the agreement.

Agreements Adopted 

Similar Approaches in Most 

Areas 

Section 845 agreements used approaches that varied little in most areas we 

evaluated. These areas included financial management, termination and 

dispute processes, intellectual property, government property 

administration, and subcontractor management (our scope and 

methodology are provided in more detail starting on page 33; app. I 

summarizes our analysis of the approaches taken under Section 845 

agreements in addressing each of these areas). Regardless of the type of 

contractor, the agreement’s value, or the recipient’s contribution of 

financial resources, a typical Section 845 agreement
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• relied on means other than certified cost and pricing data13 to establish a 

fair and reasonable price for the effort undertaken;

• allowed contractors to use generally accepted accounting principles 

rather than government cost accounting standards, which are viewed as 

more complex and costly to administer; 

• limited the government’s audit rights, generally by omitting (1) the 

requirement that the clause be included in subcontracts and (2) the 

requirement that provided GAO access to the prime contractor’s and its 

subcontractors’ books and records;14

• paid contractors a specified amount based on the accomplishment of 

agreed to technical milestones, rather than on the basis of incurred 

costs;

• did not provide DOD a right to terminate an effort for default by the 

contractor; and

• authorized the use of an alternative dispute resolution process that 

provided for a more streamlined and shortened process.

The terms and conditions of Section 845 agreements also provided 

considerable flexibility to the prime contractors in subcontractor 

management-related issues. For example, only two agreements required 

the contractor to notify the government of the intent to award subcontracts 

exceeding a certain dollar threshold. Further, while 5 agreements required 

the contractor to select subcontractors competitively, 15 agreements 

specifically waived the requirement.

DOD Used a Mix of 

Standard and Tailored 

Clauses to Address 

Intellectual Property Issues

DOD personnel used a mix of approaches in addressing intellectual 

property issues, which include patent rights to inventions and rights to 

data. Our analysis found that DOD personnel incorporated standard 

contract clauses more frequently to address intellectual property issues 

than in any other area we evaluated, with almost a third of the agreements, 

including at least one of the standard clauses. In cases in which the 

13 With certain exceptions, the Truth-In-Negotiations Act (10 U.S.C. 2306a) requires 

contractors and subcontractors to submit cost or pricing data before the award of 

negotiated contracts exceeding $500,000 and to certify that the data are accurate, complete, 

and current. If such data are later found defective, the government may seek to reduce the 

contract’s price and, under certain conditions, seek civil or criminal penalties.

14 The National Defense Authorization Act for Fiscal Year 2000 included a provision that 

requires DOD to provide for GAO’s access to agreements that provide payments of 

$5 million or more. The act exempts agreements under certain circumstances and allows 

DOD to waive the requirement with prior notification to Congress and GAO.
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standard contract clauses were not used, DOD officials tailored the clauses 

by extending the time frames the contractor was given to provide DOD 

patent or data rights, accepting more limited rights, or in certain cases, 

declining the rights altogether. Only one of the agreements awarded to 

commercial firms included standard intellectual property contract clauses.

Allocation of Rights to 

Inventions

The government’s general policy regarding patent rights in inventions 

developed with federal assistance is to facilitate the commercialization and 

public availability of inventions by enabling contractors to obtain title to 

and profit from such inventions. To obtain these rights, a contractor must 

notify the funding agency of an invention, inform the agency that it intends 

to take title to the invention, file a patent application, and provide the 

government a royalty-free license.15 The government may acquire title to 

the invention if the contractor fails to follow these requirements.

Our analysis found that DOD personnel incorporated the applicable 

standard contract provision governing patent rights in 25 agreements. 

These agreements were generally awarded to traditional defense 

contractors. In the other 72 agreements, DOD incorporated language that 

varied widely. For example, DOD personnel often provided contractors 4 to 

12 months to notify the government of an invention under Section 845 

agreements, compared to 2 months provided in a standard contract. In 

some cases, the contractor was allowed to maintain inventions as trade 

secrets or the government declined patent rights altogether. Finally, some 

agreements clarified the definition of an invention to specifically exclude 

pre-existing inventions.

15 A royalty-free license allows the government to use the invention without compensating 

the owner of the patent.
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Rights to Technical Data DOD’s policy is to acquire only the technical data and the rights to that data 

necessary to satisfy agency needs. Toward that end, contracting officers, 

among other things, are to specify the data DOD needs at the beginning of 

an effort and to negotiate rights to that data commensurate with the 

government’s needs. In general, the government obtains unlimited rights 

when technical data were developed or created exclusively with 

government funds, government purpose rights when the data were created 

with mixed funding, and limited rights when the data were created 

exclusively at private expense.16

DOD employed a mix of approaches with regard to obtaining data rights 

under Section 845 agreements. For example, while most agreements used 

tailored clauses, DOD personnel cited standard contract clauses in 

19 agreements. Similar to what we found in patent rights, these agreements 

almost always involved traditional defense firms. These agreements were 

generally low dollar efforts without cost sharing. Tailoring could involve 

DOD declining any rights to data or accepting government purpose rights 

for 10 years.

Our review of the agreement officers’ analyses17 indicates that they 

generally believed acquiring the standard rights to such data would either 

hinder efforts to attract a commercial firm or was unnecessary for the 

current phase of the effort. The following examples illustrate the use of the 

agreements to provide more flexible data rights:

• DARPA agreed to not accept any technical data in the effort to develop 

the unmanned aerial vehicle capable of vertical take-off and landing. 

16 These rights differ in the degree to which DOD may provide or authorize parties outside of 

the government to use the data. Unlimited rights provide the government the ability to use, 

modify, reproduce, perform, display, release, or disclose technical data in whole or in part, 

in any manner, and for any purpose whatsoever, and to have or authorize others to do so. 

Government purpose rights enable the government to allow others to use the data for 

government purposes, while limited rights generally require the government to obtain the 

contractor’s written permission before doing so.

17 While requirements varied, defense components generally required agreement officers to 

document the rationale for using Section 845 agreements. For example, the Navy required 

its agreement officers, among other things, to discuss the rationale for using a Section 845 

agreement in terms of its expected benefits and establish that the use of the authority was 

legally appropriate as part of the initial planning process. They were to prepare a 

subsequent analysis that discussed the level of competition achieved, the agreement’s cost 

or price, the payable milestones used, data and patent rights, and issues relevant to the 

particular project, such as government furnished property.
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The agreement provided DARPA options to subsequently acquire 

government purpose rights to the data at a cost ranging from $20 million 

to $45 million or by purchasing 300 vehicles. According to the 

agreement, the rights would be sufficient to establish a second source 

for competition.

• The Navy agreed that it would not take any rights to data produced 

during the competitive concept development phases of the DD-21 Land 

Attack Destroyer program. For these phases, the Navy has awarded a 

single Section 845 agreement, under which two teams will initially 

develop their systems’ concepts and subsequently develop detailed 

designs. Further, the Navy indicated it would acquire only the technical 

data from the contractor team that was selected to design, construct, 

and support the vessel. Navy officials indicated they saw little value in 

obtaining technical data for a design they did not select and believed the 

teams and their suppliers would be more willing to utilize proprietary 

technology under the Navy’s approach.

Mix of Standard and 

Tailored Clauses Also 

Found in Agreements 

Involving Government 

Property

We identified 60 agreements involving government property, which 

includes property provided by the government for use by the contractor 

and property acquired with government funds during the course of an 

effort. In 11 agreements—all with traditional defense contractors—the 

contractors were required to comply with the standard property 

management requirements specified by federal acquisition regulations. In 

46 agreements, DOD personnel provided contractors discretion on the type 

of approaches they could use to manage government property or permitted 

contractors to retain title to property that had been acquired with 

government funds. For example, several agreements allowed traditional 

defense contractors the authority to maintain property in accordance with 

sound industrial practices. In other cases, the contractor was allowed to 

retain title to property acquired with government funds that had an 

acquisition value of up to $50,000. DOD personnel had to approve the 

purchase of property greater than $50,000, and the agreement included 

procedures for determining how such property was to be used or disposed 

of once the agreement was completed. We also found, however, that in 

three efforts involving government property, the agreement was silent on 

how such property was to be accounted for or managed.
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Use of Model Agreement 

Contributed to Uniformity 

in Approaches

Our review found that the basis for many of the agreements was a model 

developed by DARPA, which contributed to the uniformity observed in the 

approaches taken under Section 845 agreements. DARPA officials noted 

that this model was developed for use on their assistance-type other 

transactions that generally involved dual-use technologies being developed 

by commercial firms under a cost-shared arrangement. Consequently, 

DARPA officials structured the terms and conditions to reflect the nature of 

these agreements. For example, the use of payable milestones, the more 

limited government audit rights, and the flexibility to use generally 

accepted accounting principles were designed, in part, to allow commercial 

firms to use their standard accounting systems and allay their concerns 

over government auditors reviewing their commercial finances. Similarly, 

the more generous intellectual property provisions were intended to 

provide time for the companies to commercialize the technology. Providing 

the contractor an ability to terminate an effort was premised on the belief 

that contractors would be making significant financial contributions to the 

effort. Finally, the model agreement did not initially include a property 

provision, since it was not believed these types of efforts would involve 

government property.

The initial reliance on model agreements by the services for many of their 

agreements, while reasonable during this period, may have led to 

agreements that were not tailored to address all relevant issues and may 

have resulted in terms and conditions that are not appropriate for 

prototype projects where costs were not shared between DOD and the 

contractor. For example, our review of the agreement officers’ analyses 

found that the analyses often discussed only how the terms differed from 

the model agreement, rather than discussing the need for or expected 

benefits of employing a particular approach. Similarly, we found that in 

26 agreements in which DOD provided all of the funding, the agreements 

provided the contractors the right to terminate, which DOD officials 

indicate would generally not be appropriate.

Approach Taken Under 

Evolved Expendable 

Launch Vehicle Agreements 

Generally Found Adequate 

Except for Financial 

Management 

At the request of Congress, the DOD Inspector General evaluated whether 

the use of Section 845 authority was appropriate for the Evolved 

Expendable Launch Vehicle program and whether the agreements included 

adequate safeguards to monitor program performance and protect the 

government’s interests. Air Force officials indicated that they had used the 

authority because neither of the two contractors would sign a standard 

contract under which they were to contribute up to $1 billion in cost 

sharing. According to the Air Force, the contractors stated that in doing so 
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they would have had to treat their investment as a loss against their 

earnings, which was unacceptable. Further, the contractors believed that 

given their investment, requiring that they adhere to government cost 

accounting standards would require them to make their commercial books 

and corporate investment available to government auditors and would 

require that their subcontractors comply with these and other financial 

management requirements. Further, the contractors expressed concern for 

the need to protect their proprietary data to maintain their competitive 

positions in the commercial space launch market. Consequently, the 

agreements enabled the companies to use generally accepted accounting 

principles and limited the government’s access to financial records.

The Inspector General concluded that the use of Section 845 agreements 

was appropriate for the efforts as the agreements provided the best 

contracting instrument to allow DOD to develop a dual-use launch 

capability. Further, the Inspector General concluded that the agreements’ 

terms and conditions provided sufficient technical insights and other 

safeguards to protect the government’s interest. The Inspector General 

noted, for instance, that the agreements’ terms and conditions incorporated 

• payable milestones that tied payment of government funding to the 

completion of key program accomplishments and prohibited the 

contractors from receiving government funding if they were unable to 

demonstrate technical progress; 

• provisions that would require the contractors to refund government 

payments, plus interest, that they received should DOD terminate for 

default or if a contractor terminates the agreement for convenience; and

• an alternative disputes resolution clause that was intended to resolve 

disputes in a timely, fair, and cost-effective manner.
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However, the Inspector General faulted the Air Force for negotiating terms 

and conditions that provided it with only limited insight into the 

contractors’ financial progress, which could hinder DOD’s efforts to 

monitor program costs and reveal or provide insight into problems. The 

Inspector General noted that the Air Force included a clause providing the 

agreements officer, or a designee, direct access to sufficient records and 

information to ensure accountability for government funding, but only 

senior-level Air Force officials could request an executive-level briefing on 

the contractors’ total investment. According to the Inspector General, Air 

Force officials had not performed any reviews or requested any briefings 

about total program costs as of September 1999. Air Force officials 

indicated that such insight was not needed, in part, due to the use of 

payable milestones, Air Force personnel’s participation in program reviews 

and their access to the contractors’ information systems, and a firm price 

for the agreements. Air Force officials indicated that they have since met 

with contractor officials to discuss their total investment on the program.18

Additional Guidance 

Being Developed

DOD initially provided limited guidance on the use of Section 845 

agreements, in part because it did not want to unduly restrict their use. 

Over the past year, however, DOD began efforts to provide additional 

guidance to facilitate their use. In December 1998, DOD provided 

discretionary guidance on its Internet-based Defense Acquisition 

Deskbook.19 In turn, this discretionary guidance formed the basis for a 

document released for comment to industry groups and defense 

components in September 1999 by the Under Secretary of Defense for 

Acquisition, Technology, and Logistics. According to a DOD official, the 

Under Secretary wanted to obtain their comments and recommendations 

prior to issuing more formal guidance.

As proposed, the guidance would provide factors for DOD personnel to 

consider when deciding whether to use a Section 845 agreement and in 

18 In late 1999, DOD released the findings of an independent review team that had been 

tasked to assess the causes of five launch failures that occurred between August 1998 and 

May 1999. The report included recommendations to the Air Force that may affect the 

structure and cost of the Evolved Expendable Launch Vehicle agreements. According to 

DOD officials, the Air Force is currently developing strategies to implement these 

recommendations.

19 The Deskbook is intended to provide DOD personnel an automated reference tool on 

acquisition policy and practices.
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structuring key provisions. It would also provide senior acquisition 

executives better insight on selected terms and conditions for agreements 

used on high-dollar efforts. Further, the guidance would also require DOD 

personnel to establish metrics to measure whether the expected benefits 

from Section 845 agreements were actually achieved. A DOD official noted 

that the proposed guidance is being revised in response to the extensive 

comments they received, but anticipates that it will provide revised 

guidance in April 2000.

Factors Provided in 

Determining Whether to Use 

a Section 845 Agreement

The guidance provides various factors to consider to assist DOD personnel 

in determining whether to use a Section 845 agreement. These factors 

include whether using a Section 845 agreement would attract firms that 

normally would not do business with the government or that would not 

accept a specific requirement (such as cost accounting standards or 

intellectual property requirements) normally required by federal 

acquisition regulations. The guidance also provides factors that tend to be 

more general in nature, such as whether the use of the agreement would 

enable DOD to acquire more affordable technology, reduce program costs, 

improve performance, or increase competition.

Assistance Provided in 

Structuring Agreements

The proposed guidance provides various factors for DOD personnel to 

consider when structuring a Section 845 agreement. This guidance focuses 

on the most common approaches or clauses found in the 97 agreements we 

reviewed. For example, to appropriately structure agreements, the 

guidance advises that

• contractors should not be provided a right to terminate the agreement 

unless they were making considerable financial contributions. In 26 

agreements, the agreements provided contractors this right although 

they were not providing cost sharing.

• while DOD is not required to take title to property, agreements should 

contain a list of any property that the government does intend to take 

title and should discuss the procedures governing the accountability, 

control, and disposition of the property. We found that three agreements 

did not include a property clause although government property was 

provided or acquired.

• agreements should contain an audit clause that provides agreement 

officers or their representatives direct access to sufficient records and 

information to ensure accountability for the government’s funds. We 

found that five agreements did not contain any audit clause, while the 
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DOD Inspector General has expressed concern that the audit clauses 

that had been included in Section 845 agreements it reviewed did not 

clearly indicate whether DOD had access to contractor records to verify 

whether the terms and conditions of the agreement were satisfied. In 

particular, the Inspector General noted in its December 1999 report that 

agreements that involved large amount of funds, were cost-based, or 

involved contractors with poor past performance or inadequate 

business practices, required a more detailed audit clause.

The guidance further indicates that agreement officers may use the 

standard contract clauses to address intellectual property and government 

property provisions. The guidance omits reference to using standard 

clauses in other areas, though it does not prohibit their use, and it is silent 

with regard to subcontractor-related provisions.

Additional Analyses 

Expected for Agreements 

Involving Major Weapon 

Systems

DOD’s December 1996 guidance required DOD components intending to 

use agreements on projects that were to lead to major weapon systems to 

address how DOD’s policies and procedures governing these systems were 

to be subsequently applied.20 The proposed guidance would also require 

that analyses on the agreements’ key terms and conditions be provided to 

senior DOD officials for Section 845 agreements used on efforts that have 

transitioned to or were initiated as major weapon systems prototype 

projects. DOD officials indicated that because most major acquisition 

programs use standard contracts, only the terms and conditions unique to 

the program are discussed. For major acquisition programs using 

Section 845 agreements, the proposed guidance would require a summary 

of the government’s position on the provisions governing termination, 

payment method, audit requirements, technical data, patent rights, and 

government property, including the significance of the differences between 

the agreement term and the standard contract provision, and the rationale 

and benefit to the government of the agreement’s term.

20 DOD’s principal regulations governing acquisition programs are embodied in DOD 

Directive 5000.1 and DOD Regulation 5000.2-R. DOD defines a major defense acquisition 

program as one that is either so designated by the Under Secretary of Defense for 

Acquisition, Technology, and Logistics, or one that is expected to require an eventual 

expenditure for research, development, test, and evaluation of more than $355 million or for 

procurement of more than $2.135 billion (as measured in constant fiscal year 1996 dollars). 

These regulations require program managers to develop an acquisition strategy, which is to 

include a discussion of the type of contracts contemplated for each phase.
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Requirement to Establish 

Metrics May Not Result in 

Developing Meaningful 

Indicators of Expected 

Benefits

The proposed guidance would also require DOD personnel to establish 

metrics prior to the agreement’s award to be used to measure the extent to 

which expected benefits were actually achieved. This requirement, 

however, may not result in meaningful indicators of the expected benefits. 

To be meaningful indicators, metrics should reflect only those benefits 

directly related to using a Section 845 agreement and for which quantifiable 

measures can be developed.

DOD is currently evaluating how to measure whether the agreements 

enabled DOD to attract commercial firms, which would, in our opinion, 

provide a reasonable indicator as to whether Section 845 agreements were 

achieving one of the cited benefits from their use. However, to be an 

accurate indicator requires that DOD establish a common definition of 

what constitutes a commercial firm, which it has not yet done. For 

example, representatives from the Office of the Secretary of Defense 

believed that the Inspector General’s definition of a commercial firm—

firms that had not accepted a cost-type research contract or had not been 

subject to an audit by the Defense Contract Audit Agency within the last 

3 years—could result in counting as traditional defense contractors those 

firms that performed only a very small percentage of work for DOD or 

those that had both commercial and government divisions at the same 

location.21 DOD is also discussing the need for and means to collect 

information on the participation of commercial firms below the prime 

contractor level.

Further, the guidance does not provide guidelines for developing metrics 

that would serve as meaningful indicators. Our work indicates that 

establishing this requirement without providing guidelines may not result 

in the desired information. While recognizing that agreement officers were 

not specifically required to establish metrics, we surveyed them to 

determine whether they had done so on their own initiative. In 60 of 

97 agreements, they had not done so, while another 3 did not respond to 

our inquiries. In the remaining 34 cases, DOD officials reported that they 

had established metrics. However, our review of the metrics found that 

21 Determining which business unit performs the work seems critical to understanding 

whether the agreement attracts commercial firms. For example, a DOD component had 

cited attracting a cutting-edge, primarily commercial firm as a benefit in DOD’s report to 

Congress. Contractor officials told us that they had anticipated using their commercial 

divisions, but after being unable to agree on a labor rate that was acceptable to the firm’s 

commercial divisions and DOD, they decided to perform the research in their government 

division.
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most were related to a program’s performance, schedule, or cost goals. For 

example, one of the cited metrics was whether the contractor was able to 

reduce the cost of a particular material from $60 per pound to between 

$35 to $40 per pound. It was unclear whether achieving these objectives 

could be directly attributed to the use of the Section 845 agreement.

DOD and contractor personnel provided various opinions about whether 

metrics could be established to reasonably measure various types of 

benefits. For example, one Air Force agreement officer noted that the use 

of a Section 845 agreement reduced his program’s cost by reducing the 

negotiation and approval times typically encountered and that use of more 

flexible data rights encouraged technical innovation on the part of the 

contractor. While he had not established metrics, he believed that he could 

have measured (1) negotiation times compared to that required for a 

standard contract and (2) indirect cost savings directly attributable to the 

agreement’s reduced administrative requirements. On another project, 

officials at one defense contractor noted that while the time spent on 

administering agreements is considerably less than the time spent 

administering a standard contract, their management information system 

does not track administration time by instrument type.

Similarly, measuring benefits such as cultural change, new ways of doing 

business, or technological innovation—some of the broad objectives cited 

by DOD components—may prove difficult. For example, DARPA officials 

noted that Section 845 agreements, when used in conjunction with other 

acquisition reform initiatives, represent attempts to encourage contractors 

to look at problems in new ways. As such, DARPA officials viewed these 

techniques as a set of interrelated means to achieve an overall program 

objective. They acknowledged that measuring the extent to which these 

objectives were achieved, or specifically attributing their achievement to 

the use of a Section 845 agreement, would be difficult.
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Comments Reflected Desire 

to Maintain Flexibility, but 

Also Suggested Need for 

Further Clarification

DOD received comments from both defense components and industry 

groups22 on the proposed guidance. The comments reflected a desire to 

maintain the flexibility afforded by using Section 845 agreements, but also 

reflected a need to provide a better framework for identifying opportunities 

to use the agreements and for tailoring their terms and conditions to 

specific objectives. DOD officials told us that they hope to issue revised 

guidance by April 2000.

Industry representatives noted that their members found that agreement 

officers were reluctant to use Section 845 agreements on projects that did 

not appear to be “de facto” weapon systems; consequently, they believed 

that providing a broad definition of what constituted a prototype project 

would be useful. Further, these groups emphasized the value of Section 845 

agreements in attracting commercial firms; consequently, they believed 

that additional guidance on tailoring intellectual property provisions and 

clarifying financial management requirements may be useful for agreement 

officers who were unfamiliar with commercial practices or who may be 

reluctant to vary from the model agreements. 

Defense components generally concurred with the need for guidance, but 

did not agree on its role and content. The Inspector General, for example, 

suggested that the guidance define what constituted a prototype project or 

a commercial firm and clarify various administrative and financial 

management issues (such as the role of the Defense Contract Audit Agency 

and an appropriate access to records clause). Additionally, the Inspector 

General and DARPA officials believed examples of metrics should be 

included. On the other hand, Navy officials noted that the strength of the 

instrument was that there was little or no prescribed format or form and 

that there was still much to be learned from experimenting with the 

authority. Consequently, the Navy believed that while the guidance was 

useful in an advisory role, making it mandatory may diminish or negate the 

benefits derived from using Section 845 agreements.

Conclusions Having gained experience in using Section 845 agreements, a new tool that 

embodies alternative approaches to standard contracts, DOD is taking the 

22 DOD requested comments from the Council of Defense and Space Industry Associations 

(which is composed of 8 associations representing over 4,000 firms) and the Integrated 

Dual-Use Commercial Companies (a consortium of 8 predominately commercial firms).
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necessary step of developing additional guidance to enable its personnel to 

both take advantage of the flexibility afforded by the agreements and 

protect the government’s interests. DOD’s challenge is to reconcile 

conflicting perspectives to maximize the benefits of using Section 845 

agreements. Expediting this effort will help DOD personnel to identify 

opportunities to use and to better structure Section 845 agreements before 

the authority expires on September 30, 2001.

With experience that DOD has gained from the use of Section 845 

agreements to date, there is a need to conduct a more rigorous analysis of 

the benefits from using Section 845 agreements. Existing information 

offers little in the way of useful indicators. Relevant indicators should be 

readily measurable and directly attributable to the agreement’s use. Some 

of DOD’s cited benefits, such as effecting cultural change, may not meet 

this test; others, such as attracting commercial firms providing cutting-edge 

technologies, would. Establishing a targeted set of valid metrics for which 

reliable data can be readily collected may impose less of a burden on DOD 

and contractor personnel than DOD’s current approach, as well as provide 

useful information to DOD in its oversight responsibilities and Congress as 

it considers the authority’s future.

Recommendations To assist DOD personnel in determining whether to use a Section 845 

agreement, we recommend that the Secretary of Defense provide updated 

guidance that lays out the conditions for using Section 845 agreements and 

provides a framework to tailor the terms and conditions appropriate for 

each agreement. Further, the Secretary of Defense should establish and 

require the use of a set of metrics, including the number of commercial 

firms participating in Section 845 agreements, which are measurable and 

directly related to the agreement’s use. These requirements should be in 

place in time to assist in the deliberations on whether to extend the 

authority past September 30, 2001.

Agency Comments In commenting on a draft of this report, DOD concurred with the need for 

revised guidance to help determine when Section 845 agreements should 

be used. DOD plans to issue an updated guide by April 2000. While the 

substance of the guide is still being discussed, DOD stated that the 

guidance will refine the conditions for using Section 845 authority and will 

provide a framework for tailoring the terms and conditions for each 

agreement.
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DOD partially agreed with the recommendation to establish and require the 

use of a set of metrics. DOD noted that it will continue to track the 

participation of commercial firms on Section 845 agreements and 

participants’ cost-share, and provide information on the agreements’ 

impact on the technology and industrial base and new relationships and 

practices. As we note in the report, commercial firms participate in various 

levels of DOD projects. Consequently, it will be important that DOD 

continue to track the participation of such firms at both the prime and 

subcontractor levels.

DOD expressed some concern, however, about establishing additional 

metrics, citing the difficulty in doing so and the potential for relying too 

heavily on only what can be quantified. DOD noted that it will continue to 

explore whether there are additional metrics that could be established that 

are measurable and directly related to the agreements’ use. However, DOD 

did not establish any time frames for identifying these additional metrics. 

Without timely identification of these metrics, there may not be sufficient 

information that directly links the use of a Section 845 agreement to 

improved program outcomes before the authority expires on September 30, 

2001.

DOD’s comments are reprinted in appendix II. DOD also provided technical 

suggestions, which we have incorporated in the text where appropriate.

Scope and 

Methodology

To assess DOD’s use of Section 845 agreements, we determined

• the extent to which DOD has used Section 845 agreements, 

• the benefits reported from their use, 

• how DOD tailored these agreements to address issues normally 

governed by standard contract provisions, and 

• DOD’s efforts to provide additional guidance on their use.
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Page 34 GAO/NSIAD-00-33 Section 845 Agreements

To determine the extent to which DOD has used Section 845 agreements, 

we reviewed DOD’s annual reports for fiscal years 1994 through 1998 on its 

use of other transactions, as well as its February 1999 report that focused 

specifically on Section 845 agreements. From these reports, we identified 

95 agreements.23 We also included the two Section 845 agreements the Air 

Force awarded in October 1998 for the Evolved Expendable Launch 

Vehicle program. While these agreements were awarded in early fiscal year 

1999, we included them because (1) DOD’s financial commitment under 

these two agreements was significant and (2) we had expressed concern 

about the Air Force’s plan to use other transactions on the program in a 

June 1998 report.24 The conference report accompanying the DOD 

Appropriations Act, 1999, required the DOD Inspector General to certify 

that the use of other transaction authority was appropriate and that 

adequate safeguards exist to protect the government’s interest and monitor 

program performance. To minimize duplication of efforts, we relied on the 

Inspector General’s work.

We obtained copies of the 95 agreements awarded between fiscal year 1994 

and 1998, of the two Evolved Expendable Launch Vehicle agreements, of 

modifications that were awarded through December 1998, and of other 

pertinent data. Such data included the agreement officer’s analyses, legal 

reviews, and other pertinent information.

To determine the benefits that were expected from using Section 845 

agreements, we reviewed the legislative history concerning the creation 

and extension of the authority as well as testimony provided by senior DOD 

officials in 1996. We reviewed the annual reports submitted by DOD to 

Congress on its use of other transactions, concentrating our efforts on the 

report provided in February 1999 that focused specifically on Section 845 

agreements. We reviewed the data provided on each agreement to 

determine the benefits that DOD components ascribed to using Section 845 

agreements on that project. After reviewing the data, we judgmentally 

grouped the reported benefits into various categories. We discussed with 

selected agreement officers their views on the expected benefits or 

23 In its February 1999 report to Congress on Section 845 agreements, DOD reported it 

awarded 111 Section 845 agreements between fiscal year 1994 and 1998. DOD’s number is 

higher because it reported 16 options or task orders awarded under existing agreements 

separately.

24 Evolved Expendable Launch Vehicle: DOD Guidance Needed to Protect Government’s 

Interests (GAO/NSIAD-98-151, June 11, 1998).
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Page 35 GAO/NSIAD-00-33 Section 845 Agreements

potential risks in using a Section 845 agreement. We also surveyed 

agreement officers to obtain their views on using Section 845 agreements, 

including whether they had established metrics.

To determine how the agreements addressed various issues normally 

governed by standard contract provisions, we used the matrix contained in 

Part 52.301 of the Federal Acquisition Regulation to determine the clauses 

that would typically be included in either a fixed-price or cost-reimbursable 

research and development contract. We eliminated those clauses that were 

required only during the solicitation phase, were alternate versions of other 

clauses, or were optional, resulting in a universe of 169 clauses. Our final 

analysis focused on 25 clauses we considered the principal ones governing 

such areas as financial management, termination and dispute processes, 

intellectual property, government property, and subcontractor 

management. For each clause, we reviewed the legislative or regulatory 

background and assessed whether the pertinent statute or regulation was 

applicable to Section 845 agreements. We analyzed each of the 

97 agreements to determine whether the agreement included any of the 

25 clauses or contained language that addressed the area governed by the 

clause. We compared the agreement’s language with the standard contract 

clause to assess whether and how they differed.

There is no consensus within DOD on what constitutes a commercial firm. 

Consequently, we relied on the DOD Inspector General’s classification of 

recipients as either a traditional defense contractor or a commercial firm 

for our analyses. The Inspector General defined a commercial firm as one 

that had not performed research on cost-based contracts or been subject to 

an audit by the Defense Contract Audit Agency within the past 3 years. We 

did not provide agreement officers a definition of a commercial firm when 

we asked whether traditional defense contractors attracted commercial 

firms at the subcontract level.

To determine DOD’s efforts to provide guidance on the use of Section 845 

agreements, we reviewed DOD and defense component guidance, including 

discretionary guidance issued by DOD in December 1998 on DOD’s 

Acquisition Deskbook and the guidance proposed by DOD in September 

1999.

We also reviewed agreement files and discussed various issues with 

cognizant officials at the following locations:
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Page 36 GAO/NSIAD-00-33 Section 845 Agreements

• U.S. Army Communications - Electronics Command, Fort Monmouth, 

New Jersey;

• Defense Advanced Research Projects Agency, Arlington, Virginia;

• National Imagery and Mapping Agency, Bethesda, Maryland;

• U.S. Navy Naval Air Systems Command, Patuxent River, Maryland; 

• U.S. Navy Naval Sea Systems Command, Arlington, Virginia; and

• U.S. Navy Space and Warfare Systems Command, San Diego, California.

To obtain the views on the benefits and risks of using Section 845 

agreements from the contractors’ perspective, we interviewed contractor 

officials at the following locations:

• Autometric, Incorporated, Springfield, Virginia; 

• California Microwave, Incorporated, Belcamp, Maryland;

• Eastman Kodak Commercial and Government Systems, Rochester, New 

York;

• Lockheed Martin Federal Systems, Owego, New York;

• Raytheon Company, Falls Church, Virginia; 

• Rochester Photonics Corporation, Rochester, New York;

• Signal Processing Systems, San Diego, California;

• ThermoTrex Corporation, San Diego, California; 

• ViaSat, Incorporated, Carlsbad, California; and

• VisiCom, San Diego, California.

We also discussed the use of Section 845 agreements with representatives 

from the National Media Laboratory Strategic Alliance, a consortium of six 

contractors. We also discussed various issues with officials from the Office 

of the Director, Defense Procurement, Washington, D.C.

We performed our review from September 1998 through January 2000 in 

accordance with generally accepted government auditing standards.

We are sending copies of this report to the Honorable William S. Cohen, 

Secretary of Defense; the Honorable Louis Caldera, Secretary of the Army; 

the Honorable Richard Danzig, Secretary of the Navy; the Honorable 

F. Whitten Peters, Secretary of the Air Force; Dr. Fernando L. Fernandez, 

Director, Defense Advanced Research Projects Agency; Major General 

Timothy P. Malishenko, Commander, Defense Contract Management 

Command; Lieutenant General James C. King, Director, National Imagery 

and Mapping Agency; and the Honorable Jacob J. Lew, Director, Office of 
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Page 37 GAO/NSIAD-00-33 Section 845 Agreements

Management and Budget. Copies will also be made available to other 

interested parties upon request.

Please contact me at (202) 512-4841 if you or your staff have any questions 

concerning this report. Additional points of contact and key contributors to 

this report are listed in appendix III.

Katherine V. Schinasi

Associate Director

Defense Acquisitions
Page 38 GAO/NSIAD-00-33 Section 845 Agreements

Appendix I

Treatment of Selected Issues Under Apendxies

Section 845 Agreements ApendxiI

Depending on such factors as the contract type1 and dollar value, a 

Department of Defense (DOD) contract could incorporate more than 100 

Federal Acquisition Regulation and Defense Federal Acquisition Regulation 

Supplement clauses. These clauses implement statutory or regulatory 

requirements involving financial management, termination and dispute 

processes, intellectual property rights, government property 

administration, and subcontractor management, among others. These 

requirements are intended to protect the government’s and suppliers’ 

interests and to delineate each party’s respective rights and 

responsibilities. DOD agreement officers indicated that in most cases a 

standard contract could have been used to execute efforts performed using 

a Section 845 agreement. However, as Section 845 agreements are generally 

not subject to the federal laws and regulations governing standard 

contracts, DOD contracting officials need not include the standard contract 

clauses that address these issues. We compared how the 97 Section 845 

agreements entered into by DOD through October 1998 addressed these 

issues in comparison to the approaches required by standard contract 

clauses.

Financial Management Contractors are subject to a variety of statutes and regulations governing 

pricing and negotiation under standard DOD contracts. Three 

requirements—cost accounting standards, the cost principles specified 

under the Federal Acquisition Regulation, and the requirements prescribed 

under the Truth-In-Negotiations Act—are among the government’s primary 

means of attempting to assure itself that it acquires goods and services at a

1

 Contracts are grouped into two broad categories—fixed-price and cost-reimbursement—

which differ according to the degree of responsibility assumed by the contractor for the 

costs of performance and the amount and nature of profit incentive offered to the 

contractor for achieving or exceeding specified standards or goals. Fixed-price contracts 

are typically used when the risk involved is minimal or can be predicted with an acceptable 

degree of certainty; conversely, cost-reimbursement contracts are used when the 

uncertainties involved in contract performance do not permit costs to be estimated with 

sufficient accuracy. Measured by dollar value, about 80 percent of DOD’s research contracts 

are cost-reimbursement.
Appendix I

Treatment of Selected Issues Under Section 

845 Agreements

Page 39 GAO/NSIAD-00-33 Section 845 Agreements

fair and reasonable price on a cost-based contract.2 The government 

reserves the right to audit a contractor’s books, records, accounting 

procedures, and other data to ensure compliance with these requirements, 

and to adjust a contract’s price for noncompliance.

We found that the financial management provisions typically used in 

Section 845 agreements provided contractors more flexibility in their 

business processes and were less prescriptive than standard contract 

clauses. With regard to accounting principles, 66 of the 77 agreements that 

would have been subject to cost accounting standards if a standard 

contract had been used were instead allowed to comply with generally 

accepted accounting principles, which are accounting principles widely 

used in commercial practice (see table 3).

2

 There are 19 cost accounting standards that deal with (1) overall cost accounting matters; 

(2) classes, categories, and elements of cost; and (3) the treatment of indirect costs. The 

rules were intended to achieve, among other things, more uniform and consistent practices, 

reduce the likelihood of the government being mischarged, and increase the reliability of 

contractor cost data. Part 31 of the Federal Acquisition Regulation articulates the cost 

principles and procedures for pricing contracts and subcontracts and their modifications. 

With certain exceptions, such as for commercial items, the Truth-In-Negotiations Act 

requires contractors and subcontractors to submit cost or pricing data before the award of 

negotiated contracts exceeding $500,000 and certify that the data are accurate, complete 

and current. If such data are later found to be defective, the government may seek to reduce 

the contract’s price, and under certain conditions seek civil or criminal penalties.
Appendix I

Treatment of Selected Issues Under Section 

845 Agreements

Page 40 GAO/NSIAD-00-33 Section 845 Agreements

Table 3: Accounting Requirements

Note: Number of agreements may not total to 97 as information was not available to make a 

determination in all cases.

a

GAAP stands for generally accepted accounting principles.

b

Cost accounting standards would not have applied even if a standard contract had been used due to 

various exemptions.

Source: Our analysis.

Similarly, 46 agreements in which agreement officers indicated that the 

contractor would have been required to submit certified cost or pricing 

data had they used a standard contract did not include the provisions 

requiring such data. As these data were not required, the agreements did 

not include clauses that would enable DOD to reduce the contract’s price if 

the data proved defective (see table 4). DOD personnel reported that 

among the techniques they used to evaluate the contractor’s proposed 

prices included

• comparing a contractor’s proposed labor rates with industrywide 

averages obtained from commercial sources;

• comparing the contractor’s proposed price with its published catalogue 

price and other sources, for similar services; and 

• obtaining cost and pricing data from the contractor and then, with the 

assistance of Defense Contract Management Command, Defense 

Contract Audit Agency or military personnel, evaluated the proposed 

cost and technical effort.

Number of agreements by approach

FAR clause Intent

Cited FAR

clause

Used tailored

clause

Allowed use of

GAAPa

Did not

address

Would not

apply

52.230-2: Cost 

accounting 

standards

Prescribes accounting 

requirements to protect 

government from the risk of 

overpaying on cost-based 

contracts. Requires contractors to 

disclose and consistently follow 

accounting practices, permits 

government access to documents 

to assure compliance, and 

enables the government to adjust 

contract prices for failure to 

comply with disclosed practices.

3 7 66 1 18b
Appendix I

Treatment of Selected Issues Under Section 

845 Agreements

Page 41 GAO/NSIAD-00-33 Section 845 Agreements

DOD personnel rarely used two other pricing-related clauses, which are 

intended to discourage contractors from including unallowable costs in 

DOD contracts or which provide the policy and procedures for disallowing 

such costs (see table 4).

Table 4: Pricing-Related Issues

Note: Number of agreements may not total to 97 as information was not available to make a 

determination in all cases.

a

DOD agreement officers reported that the clauses would not have been applicable even if a standard 

contract had been used, usually because the effort’s dollar value fell below the threshold or there was 

adequate price competition.

Source: Our analysis.

Number of agreements by approach

FAR clause Intent

Cited

FAR

clause

Used

tailored

clause

Did not

address

Did not

apply

52.215-10: Price 

reduction for 

defective cost or 

pricing data

52.215-12: 

Subcontractor cost or 

pricing data

Provisions implement the Truth-In-Negotiations Act

(10 U.S.C. 2306a). The act requires that prime contractors and 

subcontractors submit cost or pricing data supporting their 

proposed price for negotiated contracts exceeding certain 

thresholds and certify that the data were accurate, complete, 

and current. The clauses enable the government to reduce a 

contract’s price if the submitted data were defective. 

0 0 46 51a

52.242-1: Notice of 

intent to disallow 

costs

Prescribes policy and procedures for disallowing costs. 1 1 76 18

52.242-3: Penalties 

for unallowable costs

Clause discourages contractors from including unallowable 

costs in indirect cost rate proposals by providing notice that 

contractors including such costs may be subject to penalties.

1 0 77 18
Appendix I

Treatment of Selected Issues Under Section 

845 Agreements

Page 42 GAO/NSIAD-00-33 Section 845 Agreements

Almost all of the agreements—92 of 97—provided some form of audit 

capability, either by including the standard clause or employing a tailored 

clause (see table 5). Tailored clauses generally indicated that the recipient’s 

records were to be made available to the agreement officer or a designee; 

however, the tailored clauses generally did not include a requirement that 

the clause be included in subcontracts or provide GAO access to either the 

prime contractor’s or its subcontractors’ books and records.3

 Five 

agreements did not include a provision providing for audits.

Table 5: Audit Approaches

Source: Our analysis.

DOD currently provides contract financing on research contracts by two 

general means. On cost-type contracts, DOD generally reimburses 

contractors for costs they have incurred. These costs must comply with 

federal cost principles. Under fixed-price contracts, contractors may 

receive progress payments, whereby they are partially reimbursed by DOD 

for the work they have performed. Both financing methods enable the 

government to audit the contractor’s request for payment. In contrast, 

nearly all Section 845 agreements used some form of milestone payments, 

similar to a performance-based progress payment4

 (see table 6). Under this 

method, the government and the contractor establish various milestones 

(usually based on achievement of a technical event) and negotiate a price. 

3

 The National Defense Authorization Act for Fiscal Year 2000 included a provision that 

requires DOD to provide for GAO’s access to agreements that provide payments of 

$5 million or more. The act exempts agreements under certain circumstances and allows 

DOD to waive the requirement with prior notification to Congress and GAO.

Number of agreements by approach

FAR clause Intent

Cited FAR

clause

Used

tailored

clause

Did not

address

52.215-2: Audit and 

records—negotiation

Enables the government to exercise oversight on contracts. 

Requires contractors and subcontractors to maintain 

adequate records and to provide access to such records 

by the contracting officer and GAO.

4 88 5

4

 Performance-based payments are not currently authorized for research contracts. In 

February 1999, however, DOD proposed a change to the Federal Acquisition Regulation to 

make such payments available for use on fixed-price research contracts. 
Appendix I

Treatment of Selected Issues Under Section 

845 Agreements

Page 43 GAO/NSIAD-00-33 Section 845 Agreements

Upon successful completion of the milestone, and review and approval by a 

designated DOD official, DOD generally pays the contractor the amount 

specified for the milestone.

Table 6: Financing Approaches

Source: Our analysis.

The Federal Acquisition Regulation also provides several financing-related 

clauses that are intended to protect the government against violations of 

the Antideficiency Act (31 U.S.C. §1341), which prohibits government 

officials from creating or authorizing an obligation in excess of funds 

available or in advance of appropriations. Agreements generally did not 

include language that notified the contractor that not all funds were 

available to execute the agreement, as would a standard contract; on the 

other hand, most agreements included language that limited the 

government’s obligation to the amount of funds DOD had obligated on the 

contract (see table 7).

Number of agreements by approach

FAR clause Intent

Cited FAR

clause

Used

tailored

clause

Used

milestone

payments

52.232-16: Progress payments

52.216-7: Allowable cost and 

payment 

Prescribes rules and procedures for invoicing and 

payment. Progress payment clauses are used on 

fixed-price contracts, while allowable cost and 

payment clauses are used on cost-reimbursement 

contracts.

6 5 86
Appendix I

Treatment of Selected Issues Under Section 

845 Agreements

Page 44 GAO/NSIAD-00-33 Section 845 Agreements

Table 7: Financing-Related Issues

Note: Number of agreements may not total to 97 as information was not available to make a 

determination in all cases.

a

The clause would not have applied on 29 agreements because all funds were available at the time of 

agreement award.

b

Agreement officers indicated that they would have used a fixed-price type contract in 18 agreements; 

consequently, neither of the limitation clauses would have been applicable.

Source: Our analysis.

Termination and 

Dispute Procedures

The Federal Acquisition Regulation provides the policies and procedures 

for terminating standard contracts and for resolving claims arising from 

those contracts. The regulation prescribes the use of clauses that provide 

DOD a right to terminate a contract, either for its own convenience or for 

default on the contractor’s part; discusses the rights and responsibilities of 

each party; and prescribes various procedures for audits, property 

inventories, and disposition, among other contract close-out procedures.5

While the government’s policy is to try to resolve disputes at the 

contracting officer’s level, the regulation also provides that upon failure to 

reach a mutual agreement, the parties can seek further remedy as provided 

Number of agreements by approach

FAR clause Intent

Cited

FAR

clause

Used

tailored

clause

Did not

address

Did not

apply

52.232-18: Availability 

of funds

Provides notice that the government’s liability under the 

contract is contingent upon the availability of funds to be 

subsequently appropriated.

0 9 59 29a

52.232-20: Limitation of 

cost

52.232-22: Limitation of 

funds

Requires contractor to notify the government when costs to 

be incurred through the next 60 days will exceed 75% of a 

contract’s estimated costs. Clauses are used on costreimbursement contracts, with specific clause depending on 

whether the contract is incrementally or fully funded.

6 72 0 18b

5

 Under a termination for convenience, the contractor is compensated for the work done, 

including a reasonable profit. In a default termination, the government determines that the 

contractor has, or will, fail to perform its contractual obligations. Consequently, the 

government is not liable for the contractor’s costs on undelivered work and is entitled to 

repayment of funds provided for that work. However, DOD infrequently terminates research 

contracts. For example, DOD terminated only 24 research contracts in fiscal year 1998.
Appendix I

Treatment of Selected Issues Under Section 

845 Agreements

Page 45 GAO/NSIAD-00-33 Section 845 Agreements

under the Contract Disputes Act of 1978, as amended.6 This act provides 

the procedures and requirements for asserting and resolving claims arising 

under or related to a standard contract. For example, under the act, the 

contractor must submit claims in writing to the contracting officer within

6 years after the events precipitating the dispute were known or should 

have been known.

All 97 Section 845 agreements contained termination provisions (see 

table 8). Unlike a standard contract, however, 64 of the 97 agreements 

provided both DOD and the contractor the option of terminating an 

agreement, while 20 agreements provided DOD a right to terminate for 

convenience only. The agreements generally called for both sides to 

negotiate in good faith without detailing the specific procedures or steps.

Table 8: Termination Procedures

a

Other includes agreements that provided some other combination of termination rights.

Source: Our analysis.

Nearly all agreements called for an alternative dispute resolution process 

to resolve claims, which could include disagreements over termination 

6

 41 U.S.C. § 601-613.

Number of agreements by approach

FAR clauses Intent

Cited

FAR

clause

Provided DOD

right to

terminate for

convenience or

default

Provided DOD

right to

terminate only

for

convenience

Provided both

contractor and

DOD right to

terminate for

convenience Othera

52.249-6: Termination 

(used on costreimbursement contracts)

52.249-2: Termination for the 

convenience of the 

government (used on fixedprice contracts) 

52.249-9: Default 

(used on fixed-price 

contracts)

Provide DOD the right to 

terminate a contract for 

convenience or default, 

and specify termination 

processes and 

procedures. 

0 4 20 64 8
Appendix I

Treatment of Selected Issues Under Section 

845 Agreements

Page 46 GAO/NSIAD-00-33 Section 845 Agreements

expenses or other breach-of-contract issues (see table 9). This approach 

generally provided for more limited time frames for making a claim than 

under a standard contract and provided that the final decision authority 

resided with a senior official within the DOD component making the 

award. While agreements noted that the decision was not subject to further 

administrative review, each party could seek further legal remedy.

Table 9: Dispute Procedures

Source: Our analysis.

Intellectual Property Maximizing the value and usefulness of intellectual property (which 

includes patents and technical data) often requires a balancing of 

competing interests. For example, DOD may need to obtain or to have 

access to data produced or used during the performance of its contracts to 

carry out its mission and programs. However, contractors have expressed 

concerns that providing the government rights to certain data could 

decrease their competitive advantage and have cited intellectual property 

provisions as a reason for not accepting government research funding. 

The government’s general policy regarding patent rights in inventions 

developed with federal assistance is reflected in legislation commonly 

referred to as the Bayh-Dole Act.7

 To facilitate the commercialization and 

public availability of inventions, this act enables small businesses, 

nonprofit organizations, and certain contractors operating governmentowned laboratories to obtain title to and profit from inventions created 

under federally funded research projects. In 1987, Executive Order 12591 

essentially extended these privileges to large businesses. To obtain these 

rights, a contractor must follow certain reporting requirements, including 

Number of agreements by approach

FAR clause Intent

Cited FAR

clause

Used

tailored

clause

Did not

address

52.233-1: Disputes Clause implements the Contracts Disputes Act, which establishes 

procedures and requirements for asserting and resolving 

contractor claims against the government.

1 96 0

7

 35 U.S.C. § 200 et seq.
Appendix I

Treatment of Selected Issues Under Section 

845 Agreements

Page 47 GAO/NSIAD-00-33 Section 845 Agreements

notifying the funding agency of an invention, informing the agency that it 

intends to take title to the invention, filing a patent application, and 

providing the government a royalty-free license. The government may 

acquire title to the invention if the contractor fails to follow these 

requirements.

DOD’s policy is to acquire only the technical data, and the rights in that 

data, necessary to satisfy DOD’s needs. Toward that end, contracting 

officers, among other things, are to specify the data DOD needs at the 

beginning of an effort and negotiate rights to that data commensurate with 

the government’s needs. In general, the government obtains unlimited 

rights when technical data were developed or created exclusively with 

government funds, government purpose rights when the data were created 

with mixed funding, and limited rights when the data were created 

exclusively at private expense.

DOD personnel used the standard intellectual property clauses more 

frequently than any other clauses we evaluated. Overall, DOD personnel 

included the standard patent clause in 25 agreements and included the 

standard data rights clause in 19 agreements (see table 10). The standard 

clauses were generally incorporated in agreements awarded to traditional 

defense contractors; only one of the agreements awarded to commercial 

firms included the standard contract provisions. For agreements that used 

tailored clauses, DOD generally extended the time frames for the 

contractor to provide such rights, acquired more limited rights, or in 

certain cases, declined the rights altogether.

The government encourages the use of inventions in performing its 

contracts and may allow the contractor to infringe upon patents if it is 

believed necessary. To ensure that work under a contract is not stopped by 

allegations of patent infringement, the use of an authorization and consent 

clause enables a contractor to use patented inventions in executing the 

contract; in turn, the patent owner may seek monetary compensation in the 

U.S. Court of Federal Claims from the government. In 23 agreements, DOD 

personnel included the standard provision or a tailored clause providing 

such authorization.
Appendix I

Treatment of Selected Issues Under Section 

845 Agreements

Page 48 GAO/NSIAD-00-33 Section 845 Agreements

Table 10: Patent and Data Right Approaches

a

Includes agreements that cited applicable Defense Federal Acquisition Regulation Supplement 

provisions.

Source: Our analysis.

Government Property 

Administration

Government property includes not only that property directly furnished by 

the government to the contractor, but also the property acquired by the 

contractor to which the government has title. The DOD Inspector General 

Number of agreements by approach

FAR clause Intent

Cited FAR

clause

Used

tailored

clause

Did not

address

Patent rights

52.227-11: Patent rights—

retention by contractor (applies to 

small business and nonprofit 

organizations)

52.227-12: Patent rights—

retention by contractor (applies to 

firms that are not small 

businesses or nonprofit 

organizations) 

52.227-13: Patent rights—

Acquisition by the government 

(generally applies to work 

performed outside of the United 

States)

Clauses implement the Bayh-Dole Act, the purpose of 

which is to promote the use of inventions arising in 

federally funded research in the commercial 

marketplace and to provide the government with 

licenses to such inventions. Small businesses are 

generally provided more time to elect whether to retain 

title to inventions and are subject to fewer reporting 

requirements.

25 71 1

Data rights

52.227-14: Rights in data−general Provides for the allocation of data rights under a 

contract. If the government funds the effort, the 

government generally is provided unlimited data rights. 

Clause may be tailored when the contractor 

contributes substantial funds or resources. DOD 

components are generally required to use the related 

Defense Federal Acquisition Regulation Supplement 

clauses.

19a 78 0

Other related clauses

52.227-1: Authorization and 

consent

Clause authorizes the contractor to use patented 

inventions and protects the government from work 

stoppage due to claims of patent infringement. The 

government generally assumes liability for patent 

infringement. 

20 3 74
Appendix I

Treatment of Selected Issues Under Section 

845 Agreements

Page 49 GAO/NSIAD-00-33 Section 845 Agreements

reported that contractors had custody of about $91 billion of government 

property in fiscal year 1997. The Federal Acquisition Regulation prescribes 

the policies and procedures for providing government property to 

contractors, including the contractor’s use, management, and disposal of 

the property. Contractors have expressed concerns that DOD’s approach to 

government property administration involves excessive documentation 

and oversight, thereby increasing the cost of performing DOD contracts. 

DOD, the General Services Administration, and the National Aeronautics 

and Space Administration, proposed a change to the regulations in January 

2000 that is intended to simplify procedures, reduce recordkeeping, and 

eliminate requirements related to government property administration. 

Under this change, contractors will be provided the option of managing 

government property using the same practice the contractors use to 

manage their own property.

In Section 845 agreements, DOD personnel used a mix of standard and 

tailored clauses to address government property administration (see 

table 11). Eleven agreements with traditional defense firms included the 

standard contract provision. Forty-six agreements, representing a mix of 

traditional defense contractors and commercial firms, included a tailored 

provision allowing contractors to use best commercial practices. In three 

agreements in which government property was provided or acquired, the 

agreement officer did not include a property clause.

Table 11: Government Property Approaches

Note: Number of agreements may not total to 97 as information was not available to make a 

determination in all cases.

Source: Our analysis.

Number of agreements by approach

FAR clause Intent

Cited

FAR

clause

Used

tailored

clause

No

property

provided or

acquired

Did not

address

52.245-2: Government property 

(fixed-price contracts)

52.245-5: Government property 

(cost-reimbursement contracts)

Prescribes policy and procedures for providing 

government property to contractors and for the 

contractor’s use, management, accounting, and 

disposition of such property.

11 46 34 3
Appendix I

Treatment of Selected Issues Under Section 

845 Agreements

Page 50 GAO/NSIAD-00-33 Section 845 Agreements

Subcontractor 

Requirements

DOD subcontractors often face the same type of government-unique 

requirements as prime contractors. Certain requirements, such as those 

aimed at increasing competition or providing the government the authority 

to approve a subcontract, are mainly imposed upon prime contractors. 

Other requirements, such as those requiring the submission of certified 

cost and pricing data or audits, require the prime contractor to include a 

similar provision in its subcontracts, if applicable. 

We found that DOD’s Section 845 agreements generally relaxed 

subcontractor-related requirements. For example, only two agreements 

included a clause that enables the government to review the contractor’s 

selection of certain subcontractors. Similarly, only 5 agreements required 

that the prime contractor use competitive procedures to select and award 

subcontracts, while 15 agreements specifically authorized the prime 

contractors to waive competition requirements (see table 12). Unless the 

agreement incorporated the standard contract clause, the agreements 

generally did not require prime contractors to require subcontractors to 

comply with standard audit requirements.

Table 12: Subcontractor-Related Requirements

Note: Number of agreements may not total to 97 as information was not available to make a 

determination in all cases.

a

Includes 15 agreements in which competition requirements were specifically waived.

Source: Our analysis.

Number of agreements by approach

FAR clause Intent

Cited

FAR

clause

Used

tailored

clause

Did not

address

Not

applicable

52.209-6: Protecting the 

government’s interest when 

subcontracting with contractors 

debarred, suspended, or 

proposed for debarment 

Prohibits federal agencies from allowing a 

party to participate in any procurement or 

nonprocurement activity if the party is 

debarred, suspended, or otherwise excluded.

1 0 96 0

52.244-2: Subcontracts

(cost-reimbursement contracts) 

Requires contractor to obtain government 

consent before awarding subcontracts, 

depending on the complexity of the effort and 

subcontract type and value.

2 0 75 18

52.244-5: Competition in 

subcontracting

Generally requires contractors to select 

subcontractors on a competitive basis.

0 5 87a 5
Page 51 GAO/NSIAD-00-33 Section 845 Agreements

Appendix II

Comments From the Department of Defense ApendxiI
Appendix II

Comments From the Department of Defense

Page 52 GAO/NSIAD-00-33 Section 845 Agreements
Appendix II

Comments From the Department of Defense

Page 53 GAO/NSIAD-00-33 Section 845 Agreements
Appendix II

Comments From the Department of Defense

Page 54 GAO/NSIAD-00-33 Section 845 Agreements
Page 55 GAO/NSIAD-00-33 Section 845 Agreements

Appendix III

GAO Contacts and Staff Acknowledgments ApendxiI

Contact Timothy J. DiNapoli (202) 512-3665

Acknowledgments John K. Harper, Dwight D. Rowland, Clifton E. Spruill, John P. K. Ting, 

John Van Schaik, and William T. Woods also made significant contributions 

to this report.

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