United States General Accounting Office

GAO Report to the Ranking Minority Member,

Subcommittee on Oversight of

Government Management and the

District of Columbia, Committee on

Governmental Affairs, U.S. Senate

November 1995 FEDERALLY FUNDED

R&D CENTERS

Use of Fee by the

MITRE Corporation

GAO/NSIAD-96-26

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-259371 

November 27, 1995

The Honorable Carl Levin

Ranking Minority Member

Subcommittee on Oversight of

 Government Management

 and the District of Columbia

Committee on Governmental Affairs

United States Senate

Dear Senator Levin:

The Department of Defense (DOD) spent about $1.25 billion in fiscal year

1995 for research, development, engineering, and analytical services from

the 10 federally funded research and development centers (FFRDCs) it

sponsors. The MITRE Corporation is one of the largest FFRDCs, with fiscal

year 1995 DOD funding of about $374 million. A 1992 report by your

Committee1

 raised concerns about whether government agencies

effectively managed the FFRDCs they sponsored. Among the concerns was

whether the contract fees provided to FFRDCs—in addition to

reimbursement of incurred costs—were adequately justified. As you

requested, we examined DOD’s management of fees provided to MITRE.

More specifically, we reviewed (1) the manner in which MITRE spends its

DOD management fee, (2) the adequacy of federal guidance on how fees

may be used, (3) opportunities to reduce management fees at MITRE,

(4) ways to strengthen DOD management oversight of MITRE’s use of fees,

and (5) DOD’s efforts to improve the fee management process for its

FFRDCs. In September 1995, we issued a report on the use of management

fees at The Aerospace Corporation.2

Results in Brief Neither the Office of Management and Budget (OMB) nor DOD has prepared

sufficient guidance on negotiating FFRDC contract fees. Consequently,

recurring questions are raised about MITRE’s use of fees, as well as the

use of fees by other DOD FFRDCs. For example, the Defense Contract Audit

Agency (DCAA) recently questioned MITRE’s use of fees to pay for

entertainment, personal expenses for company officers, and benefits for

employees. MITRE plans to continue to use its management fee for some

of these questioned expenses.

1

Inadequate Federal Oversight of Federally Funded Research and Development Centers, July 1992.

2

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

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

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B-259371 

The services have delayed providing contract funding at the start of a

fiscal year. Consequently, MITRE has needed large amounts of fee to cover

interest expense. MITRE cannot bill the government for unfunded work

and therefore borrows to pay the costs incurred until DOD funds are

allotted to its contracts. Largely because of funding delays, MITRE

borrowed $85.6 million at one point during fiscal year 1994—about

73 percent of the company’s net worth—and incurred interest costs of

$866,000 during the year.

DOD oversight of contract fees has not ensured that fee awards to MITRE

are equitable and consistent. For example, Army and Air Force contracting

officers have not noted that MITRE often underestimated the fee revenue

it will receive from non-DOD customers, thus overstating the fees it will

need from the Army and the Air Force. Further, Army and Air Force

contracting officers provided MITRE widely differing fee rates for fiscal

year 1995, indicating that DOD may need to further refine its fee-granting

methodology.

DOD acknowledges the need for stronger oversight of FFRDC management

fees. It recently reviewed its process for granting fees as required by the

Conference Report of the DOD Appropriations Act for Fiscal Year 1995 and

concluded that fee guidance should be clarified. DOD also recommended

changes to provide stronger audit oversight of FFRDC’s costs and to limit

the discretionary funding provided FFRDCs through fees.

Background FFRDCs are federally sponsored entities—operated by universities,

nonprofit institutions, or industrial firms under contract with the federal

government—that provide research, development, systems engineering,

and analytical services to federal government agencies. In awarding these

contracts, the government need not seek open competition, and it

traditionally has undertaken a commitment to provide a sufficient, stable

body of work to maintain the essential core of scientific and engineering

talent at an FFRDC. The Director of Defense Research and Engineering

oversees DOD’s FFRDCs.

MITRE, a nonprofit company, operates an FFRDC for DOD under contracts

with the Air Force and the Army. It also operates an FFRDC under a

contract with the Federal Aviation Administration (FAA). In addition,

through its non-FFRDC divisions, MITRE provides services to DOD agencies,

federal civilian agencies, and state and foreign governments.

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Payment of contract fees to organizations that operate FFRDCs is addressed

in DOD regulations. The regulations instruct contracting officers to first

examine an organization’s retained earnings to determine whether a fee is

needed. If a fee is needed, contracting officers must consider the

organization’s needs to purchase capital equipment, to rebuild working

capital, and to pay certain ordinary and necessary business expenses that

are not reimbursable under procurement regulations. The Air Force has

expanded on this guidance by instructing contracting officers to consider

such items as depreciation charges, investment earnings, and fees earned

on non-DOD contracts as sources of funds to offset the need for fees, a

process that the Army also follows. Once a fee is awarded, its use is left to

an FFRDC’s discretion.

Each year, MITRE submits a fee proposal to the Army and the Air Force

outlining its anticipated needs to purchase capital equipment, rebuild

working capital, and pay nonreimbursable expenses for the coming year.

The proposal includes estimates of the depreciation charges, investment

earnings, and fees on non-DOD contracts that will provide sources of funds

to meet these needs as well as a proposed fee for its DOD contracts.

Generally, MITRE uses historical trends to estimate its anticipated funding

needs and the sources of funds available to meet these needs.

For fiscal year 1994, the Army provided MITRE a fixed fee of $7.6 million,

representing 4.4 percent of estimated contract costs, and the Air Force

provided a fee of $10.2 million, or 4.5 percent of estimated contract costs.

These amounts included a traditional 3 percent of estimated contract

costs—$5.2 million for the Army and $7.2 million for the Air Force—to

support MITRE’s independent research program. Beginning in fiscal year

1995, both services are funding MITRE’s independent research through

charges to overhead—comparable to the treatment of independent

research for commercial contractors. This change has allowed the Army

and the Air Force to significantly reduce fees awarded MITRE.

Lack of Guidance on

Payment of

Nonreimbursable

Costs Results in

Recurring Disputes

Neither OMB nor DOD has issued guidance that specifies the

nonreimbursable costs contracting officers should consider in negotiating

contract fees, as we recommended in our 1969 report.3

 In that report, we

concluded that some fees were appropriate because some necessary

business expenses may not be reimbursed under government procurement

regulations but questioned whether some costs paid from fee were

necessary. Thus, to assist contracting officers in negotiating fees, we

3

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

Contractors, February 1969, B-146810.

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B-259371 

recommended that guidance be developed providing examples of costs

that could appropriately be considered in negotiating fees. DOD’s current

guidance notes that FFRDCs may incur some necessary but

nonreimbursable costs but provides no examples of costs contracting

officers may consider as ordinary and necessary.

In the absence of specific guidelines, the use of a fee for nonreimbursable

costs has stimulated continuing controversy. During the late 1980s, the Air

Force became concerned that MITRE used its contract fees for excessive

and unnecessary expenditures and urged MITRE to reduce these

expenses. MITRE agreed to various actions to reduce expenses. For

example, MITRE agreed to limit the size of holiday parties and to reduce

their costs. Further, MITRE instructed company officers to use first-class

air travel only when they needed to perform work during a trip that could

not be done in the coach cabin. Recognizing the potential for controversy

regarding fee expenditures, Army and Air Force contracting officers said

they have strengthened oversight of fee use and have challenged

expenditures they considered inappropriate. For example, in fiscal year

1995, the Army and Air Force contracting officers began using detailed

quarterly expenditure reports to monitor fee usage. Among the proposed

expenses the contracting officers challenged during negotiations on fiscal

year 1995 fees were costs for social functions and meals provided at

business meetings.

DCAA has also raised questions about MITRE’s use of fees.4 During its

review of MITRE’s fiscal year 1993 fee expenditures, DCAA concluded that

fees were used to pay for lavish entertainment, personal expenses for

company officers, and generous employee benefits. In addition, DCAA

concluded that MITRE charged expenses to fees that would ordinarily be

considered allowable, thereby avoiding the routine audit oversight

normally accorded such costs. DCAA concluded that only 11 percent of the

expenditures reviewed were “ordinary and necessary” business expenses.

MITRE made similar expenditures during fiscal year 1994, and it plans to

continue such expenditures—at a reduced level in some cases—during

fiscal year 1995.

DCAA reported on numerous instances where MITRE used fees for

entertainment expenses. For example, during fiscal year 1993, MITRE used

fees to pay for a holiday party for company executives held in McLean,

Virginia. This party cost $37,719, or about $110 for each of the 342 guests

attending. During fiscal year 1994, MITRE held a similar holiday party at

4

Report on Audit of Fee, Audit Report No. 2184-94A17900002, September 1994.

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the McLean Hilton that cost $33,177. DCAA also cited use of fees to pay for

a reception and dinners for the Board of Trustees during May 1993 at a

cost of $21,208, or $118 per person, as well as $2,500 for a luncheon and

tour of Washington, D.C., for spouses of the Trustees during the spring

Trustees meeting. During fiscal year 1994, MITRE used fees to pay for a

similar reception and dinners held in connection with the fall Trustees

meeting; the cost was $18,778.

DCAA also reported that MITRE used fees to pay personal expenses for

company officers. For example, MITRE used $5,547 in fees during fiscal

year 1993 to install a home security system in the company president’s

residence. During fiscal year 1994, MITRE used fees to pay the 

$22 monthly monitoring fee for the president’s home security system.

Similarly, DCAA questioned the practice of paying for personal use of

company-furnished automobiles with fees, which totaled $28,605 during

fiscal year 1994.

DCAA also noted generous benefits for employees during its review. For

example, DCAA noted that during fiscal year 1993 MITRE used fees to pay

the company president a miscellaneous relocation allowance of $31,292.

MITRE continued to use fees for these allowances during fiscal year 1994,

charging $689,265 or an average of $5,696 per employee relocated.

In response to concerns raised by the services, and direction from the

Congress, MITRE has reduced some fee expenditures. For example,

MITRE has suspended the holiday party for executives. Consistent with

restrictions in the Fiscal Year 1995 National Defense Authorization Act,

MITRE no longer uses fees to match employees’ contributions to

educational institutions and is not making corporate contributions to civic

and service organizations. On the other hand, MITRE plans to continue

using fees for some expenses DCAA criticized, such as providing officers

company cars for personal use and generous miscellaneous allowances for

employees who are relocated. MITRE maintains that its fee expenditures

are comparable to the costs commercial concerns incur and are necessary

to attract and retain top-quality technical and management personnel.

DOD Could Reduce

Need to Fund

Nonreimbursable

Interest Costs

Because the Army and the Air Force delay providing contract funding at

the start of a fiscal year, MITRE needs discretionary funding—provided

through fees—to cover estimates of nonreimbursable interest costs.

MITRE operates under a series of annual contract options awarded by the

Army and the Air Force, and funds allotted to one fiscal year’s contract

Page 5 GAO/NSIAD-96-26 Federally Funded R&D Centers
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may not be carried over to a following fiscal year. Further, funding comes

from the various program offices for which MITRE does work, rather than

from a single Army- or Air Force-wide source. Once the various program

offices transfer funds to the contracting officer, the contracting officer

issues contract changes to allot the funds. MITRE’s contracts with the two

services provide for reimbursement of allowable costs incurred, limited to

the amount of funds allotted to the contracts. Thus, MITRE cannot submit

bills for the cost of the work it has started until the funds have been

allotted.

During fiscal year 1994, delays in providing funding for MITRE’s Army and

Air Force contracts were significant. The Army, for example, first allotted

funds to MITRE’s contract on November 30, 1993—2 months after work on

the contract began. As of January 1994, allotments amounted to only

16 percent of estimated cost and did not reach 95 percent of estimated

costs until August 1994. For several large projects, no funds were allotted

until March 1994—almost 6 months after work started.

Funding delays affect MITRE’s finances. MITRE records costs incurred for

which no billings have been submitted as “unbilled costs.” The level of

unbilled costs carried on MITRE’s books varied through fiscal year 1994

and reached $85.6 million at the end of January 1994—about 73 percent of

the company’s net worth. Unbilled costs on Army and Air Force contracts

accounted for $66.6 million of the $85.6 million total. MITRE had

$47.6 million in loans outstanding at the end of January 1994 and incurred

$866,000 in interest costs during the year. We estimate that, if unbilled

costs on Army and Air Force contracts had been due only to normal bill

processing delays, average unbilled costs for the contracts would have

been reduced from $38.2 million to $15.1 million during fiscal year 1994.

Reducing average unbilled costs by $23.1 million would significantly

reduce MITRE’s financing burden. Since MITRE’s average borrowings

during fiscal year 1994 were $21.7 million, the need to provide fees to

cover nonreimbursable interest costs would have been substantially

reduced or eliminated.

Several military program management personnel cited a desire to retain

funds to deal with contingencies as a reason for having delayed funding

MITRE’s work. One said that he was unaware that funding delays

adversely affected the company. Another program management official,

however, stated that they have a good idea of how much MITRE support

they will use during a year; thus, there is no excuse for delaying funds. In

fiscal year 1995, the Air Force placed a high priority on obtaining prompt

Page 6 GAO/NSIAD-96-26 Federally Funded R&D Centers
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funding of MITRE projects. By January 1995, the Air Force had allotted

funds representing about 85 percent of the estimated contract costs. Other

options for reducing MITRE’s financing requirements include the advance

payment pool mechanism that some university-sponsored FFRDCs use and

the revolving budget authority account that the Air Force uses to provide

advance funding to The Aerospace Corporation.

Oversight and

Negotiation of Fees

Could Be Improved

DOD’s oversight of MITRE’s fee expenditures does not ensure that

negotiated fee awards are equitable and consistent. Army and Air Force

contracting officers generally analyze past MITRE fee expenditures to

estimate fee needs for future years. However, because MITRE has

contracts with many other federal agencies and state and foreign

governments, we believe it is important that each customer bear an

equitable share of fee expenditures. Since contracting officers do not

routinely screen fee expenditures for nonrecurring costs, we are

concerned that estimates of future fee needs may be distorted. Finally, we

noted that lack of clear guidance on using fee to provide financing led the

Army to award MITRE a fee for fiscal year 1995 that was higher than the

Air Force contracting officer’s.

Army and Air Force contracting officers have not determined if MITRE’s

estimates of fees on non-DOD contracts, which reflect anticipated fee rates

and volumes of business, are reasonable. As shown in table 1, in 3 of the

last 4 years, MITRE underestimated non-DOD fee earnings.

Table 1: Estimated and Actual Fee

Earnings on Non-DOD

Contracts—Fiscal Years 1991-94 Fee earnings

Dollars in thousands

Fiscal yeara Estimated Actual

1991 $8,251 $8,439

1992 9,778 10,151

1993 10,899 10,332

1994 9,882 11,043

aFor fiscal years 1991 and 1992, data are for MITRE’s August 1 to July 31 fiscal year. In fiscal year

1993, MITRE changed its fiscal year to align with the federal fiscal year; 1993 and 1994 data are

from October 1 to September 30.

In fiscal year 1994, the underestimate amounted to about $1.2 million, or

almost 12 percent of estimated non-DOD fee earnings. Contracting officers,

in some cases, have analyzed past trends in non-DOD fee earnings but have

Page 7 GAO/NSIAD-96-26 Federally Funded R&D Centers
B-259371 

not reviewed the reasonableness of estimates for future years. Thus,

MITRE was able to obtain larger fees from combined DOD and non-DOD

sources than contemplated in the Army and the Air Force fee negotiations.

Army and Air Force contracting officers have only occasionally

determined whether fee expenditures related to DOD and non-DOD work

were proportional to the work performed. This is partly due to MITRE’s

accounting system commingling fee expenditures, making it difficult to

identify fee expenses that relate primarily to non-DOD customers. For

example, in fiscal year 1994, MITRE recorded $79,181 in costs incurred for

first-class airfare and similar nonreimbursable travel expenses in a single

company account. One individual, the chief of the MITRE division that

does air traffic control work for FAA, incurred $21,000, or about 27 percent,

of these charges. In one instance, the chief spent $6,486 for a first-class

flight to London, England, to attend an air traffic control conference.

MITRE claimed reimbursement for the $2,471 cost of a coach ticket and

charged the additional $4,015 cost of a first-class ticket to the commingled

fee account even though MITRE acknowledged that these trips were

related to MITRE’s air traffic control system work for foreign

governments. MITRE has recently changed its accounting system to

account for fee expenditures by division—roughly representing major

customers—providing an opportunity to more readily determine what

customer benefits from particular expenses.

In addition, contracting officers have not analyzed the relative needs for

working capital related to different customers. Payment cycles on

MITRE’s non-DOD contracts are typically longer than those on DOD

contracts. Both the Army and the Air Force contracts provide for biweekly

billings, and timeliness of payment is routinely discussed during fee

negotiations. Many non-DOD contracts, however, provide for monthly,

rather than biweekly, billings, and payments on these contracts are

generally less prompt. Consequently, non-DOD customers have made

proportionately heavier demands on MITRE’s working capital than the

Army and the Air Force. During fiscal year 1994, accounts receivable due

from non-DOD customers represented an average of 60 days of revenue,

compared to 12.7 days for the Army and the Air Force. The unbilled costs

for both DOD and non-DOD customers each averaged roughly 35 days of

revenue. Thus, the total financing burden for non-DOD customers of 

94.3 days of revenue was almost twice the financing burden for the Army

and the Air Force, which was 48.2 days.

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Contracting officers did not routinely analyze MITRE fee expenditures to

identify nonrecurring costs that would distort projections of future fee

needs. Major categories of nonrecurring expenses have been occasionally

identified. DCAA, for example, identified several nonrecurring items in its

review of 1993 fee expenditures. We noted several expenditures that

appeared to be nonrecurring in nature during our review of 1994 fee

expenditures, as the following shows.

• A charge of $507,000 to reconcile MITRE’s accounting records to its

property management records. During fiscal year 1994, MITRE undertook

a major effort to identify discrepancies between its property and

accounting record-keeping systems because independent auditors had

criticized it for not reconciling the two systems regularly.

• A charge of $270,000 to record anticipated costs of providing meals and

refreshments at meetings. MITRE accounting staff told us that at the end

of fiscal year 1994, costs incurred for meals and refreshments at meetings

were substantially less than in previous years. This charge was recorded

because the accounting staff anticipated that these costs would eventually

equal those of previous years, but the anticipated costs did not materialize.

• A charge of $310,845 to write off losses on contracts with the German

government. These losses were written off as part of an agreement to

resolve payment disputes on work performed between 1979 and 1992.

Lack of sufficient guidance on use of fee to provide financing for FFRDCs

led Army and Air Force contracting officers to award significantly

different fee rates. In 1993, MITRE obtained a 3-year term loan to take

advantage of favorable, fixed interest rates rather than the fluctuating

rates on its short-term borrowing. In fee negotiations for fiscal year 1995,

MITRE proposed that it obtain another term loan during 1995. The Air

Force considered the proceeds of this loan as a source of cash, offset by a

need to make principal payments on the term loan, and awarded a fee of

$2 million, or about 0.9 percent of estimated contract costs. The Army, on

the other hand, excluded both loan proceeds and principal payments from

its analysis of 1995 fee requirements because it was unwilling to make a

commitment to provide fee to cover principal payments in future years.

Consequently, the Army awarded a fee of $3.7 million on its somewhat

smaller contract, amounting to 2.3 percent of estimated costs. DOD

guidance provides no suggestions on how contracting officers should treat

financing transactions in analyzing fee needs.

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DOD Recognizes Fee

Guidance Should Be

Strengthened

In the Conference Report of the DOD Appropriations Act for Fiscal Year

1995, the Congress directed DOD to review how its FFRDCs have used fees

and provide recommendations for revising the DOD FFRDC fee structure.

The results of that review, reported in May 1995,5

 are consistent with the

findings of our current work and recommendations we made in 1969

regarding fees granted sponsored nonprofit research organizations.

DOD’s report identified a need for stronger guidance on FFRDC fees and

more consistent fee awards. In its report, DOD concludes that because the

Weighted Guidelines Method6

 normally results in a fee greater than

demonstrated need, some contracting officers have awarded unneeded

fees. DOD recommended that the guidance be revised to (1) make it clear

that need will be the criterion for awarding fees to FFRDCs, (2) avoid using

undefined and ambiguous terms to describe fee needs, and (3) identify

specific costs that are inappropriate to pay from fees. We found that Army

and Air Force fee analysis procedures are intended to limit MITRE’s fee to

demonstrated need. The lack of a clear description of costs that fees can

be used to cover, however, has complicated contracting officers’ efforts to

ascertain MITRE’s fee needs.

DOD’s report also identified a need for greater audit oversight of costs

FFRDCs have historically paid from fees, such as the costs for independent

research programs, contract termination, and capital equipment. In its

report, DOD recommends, as we did in 1969, that independent research be

treated as a reimbursable cost so that expenditures will be subject to

routine audit oversight. The Army and the Air Force have implemented

this treatment of independent research costs at MITRE.

DOD’s report also recommended that termination costs should be audited

and reimbursed directly when and if an FFRDC’s contract is terminated; fees

should not be provided for such costs. We have opposed using fees to

build contingency reserves, and MITRE has not requested fees to build

termination cost reserves.

As to financing capital equipment with fees, DOD recommends that the

FFRDCs capital acquisition plans be thoroughly audited. We have

recommended that FFRDC sponsors fund capital equipment purchases

directly through contract charges rather than through fee. We noted that

5

Comprehensive Review of the Department of Defense’s Fee-Granting Process for Federally Funded

Research & Development Centers, May 1995.

6

This method is normally used to determine contract fees for commercial firms and is one test for

determining reasonable FFRDC fees.

Page 10 GAO/NSIAD-96-26 Federally Funded R&D Centers
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the capital equipment acquisition plan MITRE proposed during fiscal 

year 1994 fee negotiations differed markedly from MITRE’s actual

purchases for the year.

Recommendations to

the Secretary of

Defense

We recommend that the Secretary of Defense

• issue guidance that, to the extent practicable, specifically identifies the

nature and extent of nonreimbursable costs that may be covered by fee

and the costs for which fees should not be provided;

• consider the feasibility of issuing guidance specifying the circumstances in

which each of the various funding and payment methods devised by the

services should be used; and

• assign responsibility to the Director of Defense Research and Engineering

for routinely surveying the services’ fee-granting processes for FFRDCs,

identifying and promoting the use of effective or innovative analytical

practices, and recommending needed changes to eliminate inconsistencies

in awarding fees.

DOD and MITRE

Comments

DOD generally concurred with a draft of this report. It stated that the report

would be helpful to ongoing DOD efforts to strengthen its procedures for

the oversight and use of management fees by DOD-sponsored FFRDCs.

However, DOD pointed out that none of the data in the report represented

improper activity, as currently defined by contract or regulation, on the

part of either the Air Force, the Army, or the MITRE Corporation.

DOD also agreed with our recommendations and indicated it would take

steps to address them. It added that (1) in fiscal year 1996 DOD will address

inappropriate use of fees during the contract negotiation process and

(2) beginning in fiscal year 1995, fee expenditures are being associated

directly with the cost centers (i.e., contracts) benefiting from the

expenses. DOD said that these steps will result in reductions in the amount

of fee paid to an FFRDC and help ensure that it pays only its fair share of fee

expenses. DOD’s comments are presented in their entirety in appendix I.

MITRE agreed with our recommendation on the need for strengthened

guidance on the nature and extent of nonreimbursable costs that may be

covered by fee and the costs for which fees should not be provided. It also

agreed with our observation regarding interest costs incurred as a result of

delays in funding, as well as in billing and payment cycles and said it

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would welcome some form of advance funding/payment mechanism.

MITRE’s comments are presented in their entirety in appendix II.

Scope and

Methodology

We reviewed documentation relating to company organization and

management and interviewed MITRE officials at the company’s Bedford,

Massachusetts, and McLean, Virginia, locations. We also reviewed

accounting records and supporting documentation relating to fee

expenditures during fiscal year 1994. We selected fiscal year 1994 because

it was the most recently competed fiscal year at the time of our review and

because expenditures for fiscal year 1993 had been reviewed by DCAA.

We interviewed officials and reviewed documentation maintained at the

Director of Defense Research and Engineering, the DOD Inspector General,

and DCAA. We also interviewed officials and reviewed documentation

relating to contract fee awards at the three agencies that contract with

MITRE for FFRDC operations: the U.S. Army Communications-Electronics

Command, Fort Monmouth, New Jersey; the Air Force Electronic Systems

Center, Hanscom Air Force Base, Massachusetts; and FAA, Washington,

D.C..

We conducted our review from October 1994 to August 1995 in accordance

with generally accepted government auditing standards.

Unless you publicly announce its contents earlier, we plan no further

distribution of this report until 30 days from the date of this letter. At that

time, we will send copies to other interested congressional committees,

the Secretary of Defense, the Director of the Office of Management and

Budget, and the President of the MITRE Corporation. We will also make

copies available to others on request.

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Please contact me at (202) 512-4587 if you or your staff have any questions

concerning this report. Other major contributors to this report are listed in

appendix III.

Sincerely yours,

David E. Cooper

Director, Acquisition Policy,

 Technology, and Competitiveness Issues

Page 13 GAO/NSIAD-96-26 Federally Funded R&D Centers
Contents

Letter 1

Appendix I 

Comments From the

Department of

Defense

16

Appendix II 

Comments From the

MITRE Corporation

18

Appendix III 

Major Contributors to

This Report

21

Table Table 1: Estimated and Actual Fee Earnings on Non-DOD

Contracts—Fiscal Years 1991-94

7

Abbreviations

DCAA Defense Contract Audit Agency

DOD Department of Defense

FAA Federal Aviation Administration

FFRDC federally funded research and development center

OMB Office of Management and Budget

Page 14 GAO/NSIAD-96-26 Federally Funded R&D Centers
Page 15 GAO/NSIAD-96-26 Federally Funded R&D Centers
Appendix I 

Comments From the Department of Defense

Page 16 GAO/NSIAD-96-26 Federally Funded R&D Centers
Appendix I 

Comments From the Department of Defense

Page 17 GAO/NSIAD-96-26 Federally Funded R&D Centers
Appendix II 

Comments From the MITRE Corporation

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

See comment 1.

Page 18 GAO/NSIAD-96-26 Federally Funded R&D Centers
Appendix II 

Comments From the MITRE Corporation

Page 19 GAO/NSIAD-96-26 Federally Funded R&D Centers
Appendix II 

Comments From the MITRE Corporation

The following is GAO’s comment on the MITRE Corporation’s letter dated

October 26, 1995.

GAO Comment 1. During the period covered by our review, MITRE did not have

accounting mechanisms in place to track fee expenditures separately for

each contract or customer. Consequently, data was not available to

perform a structured analysis of whether contracts or customers paid a

fair share of fees. As we note in our report, MITRE has changed its

accounting system to account for fee expenditures by division or major

customer. This data should facilitate analyses to determine whether fees

are equitable among customers.

Page 20 GAO/NSIAD-96-26 Federally Funded R&D Centers
Appendix III 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Charles W. Thompson

Office of General

Counsel, Washington,

D.C.

Ernie E. Jackson

Boston Field Office Thorton L. Harvey

Monty Peters

(705085) Page 21 GAO/NSIAD-96-26 Federally Funded R&D Centers
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