FFRDCs were first established during World War II to meet specialized or unique research and development needs that could not be readily satisfied by government personnel or private contractors. Additional and expanded requirements for specialized services led to increases not only in the size of the FFRDCs but also the number of FFRDCs, which peaked at 74 in 1969. Today, 8 agencies, including DOD, fund 39 FFRDCs that are operated by universities, nonprofit organizations, or private firms under long-term contracts. Federal policy allows agencies to award these contracts noncompetitively. The Office of Federal Procurement Policy within the Office of Management and Budget (OMB) establishes governmentwide policy on the use and management of FFRDCs. Within DOD, the Director of Defense Research and Engineering is responsible for developing overall policy for DOD’s 11 FFRDCs. The Director communicates DOD policy and detailed implementing guidance to FFRDC sponsors through a periodically updated management plan, and determines the funding level for each FFRDC based on the overall congressional ceiling on FFRDC funding and FFRDC requirements. Total funding for DOD’s FFRDCs was $1.25 billion in fiscal year 1995. DOD categorizes each of its FFRDCs as a systems engineering and integration center, a studies and analyses center, or a research and development laboratory. Appendix II provides information on each FFRDC, including its parent organization, primary sponsor, DOD funding, and staffing levels for fiscal year 1995. The military services and defense agencies sponsor individual FFRDCs and award and administer the 5-year contracts, typically negotiated noncompetitively, after reviewing the continued need for the FFRDC. Unlike a private contractor, an FFRDC accepts restrictions on its ability to manufacture products and compete for other government or commercial business. These restrictions are intended to (1) limit the potential for conflicts of interest when FFRDC staff have access to sensitive government or contractor data and (2) allow the center to form a special or strategic relationship with its DOD sponsor. Management fees are discretionary funds provided to FFRDCs in addition to reimbursement for incurred costs, and these fees are similar to profits private contractors earn. Two issues that have remained unresolved for many years are what should management fee be provided for and how should FFRDCs use this fee. As far back as 1969, we concluded that nonprofit organizations such as FFRDCs incur some necessary costs that may not be reimbursed under the procurement regulations, and we recommended that the Bureau of the Budget (now known as OMB), develop guidance that specified the costs contracting officers should provide fees to cover. In 1993, the Office of Federal Procurement Policy agreed that governmentwide guidance on management fees for nonprofit organizations was needed, but it has not yet issued detailed guidance. In the absence of such governmentwide guidance, recurring questions continue to be raised about how FFRDCs use their fees. In its 1994 report, for example, the DOD Inspector General concluded that FFRDCs used $43 million of the $46.9 million in fiscal year 1992 DOD fees for items that should not have been funded from fees. The bulk of this $43 million funded independent research projects that should have been charged to overhead, according to the report. The remainder funded otherwise unallowable costs and future requirements, which the report concluded were not necessary for FFRDC operations. Similarly, as we recently reported, DCAA reviewed fiscal year 1993 fee expenditures at the MITRE Corporation and concluded that just 11 percent of the expenditures reviewed were ordinary and necessary to the operation of the FFRDC. DCAA reported that MITRE used fees to pay for items such as lavish entertainment, personal expenses for company officers, and generous employee benefits. In our recent work at The Aerospace Corporation, we found that the corporation used about $11.5 million of its $15.5 million management fee for sponsored research. Aerospace used the remainder of its fee and other corporate resources for capital equipment purchases; real and leasehold property improvements; and other unreimbursed expenditures, such as contributions, personal use of company cars, conference meals, trustee expenses, and new business development expenses. DOD’s action plan recommended implementation of revised guidelines for management fee. Specifically, it recommended (1) moving allowable costs out of fee and reducing fee accordingly, and (2) establishing consistent policies on ordinary and necessary costs to be funded through fee. If effectively implemented, these actions should help to resolve many of the long-standing concerns over FFRDC use of management fee. Moving FFRDC-sponsored research out of fee would result in a substantial reduction of fee amount and should provide for more effective DOD oversight of FFRDC expenditures. This action would also subject all research to the Federal Acquisition Regulation cost principles applicable to cost-reimbursable items. Defining ordinary and necessary expenses which may be covered by fee is a more challenging issue, which may explain why the issue has gone unresolved for so long. However, until DOD issues specific guidance regarding ordinary and necessary expenses, debate will likely continue on whether fee can be used for such things as personal expenses for company officers, entertainment, and new business development. Although DOD’s action plan identifies the need for clarifying guidance, our understanding is that such guidance has not been issued. As a robust private-sector professional services industry grew to meet the demand for technical services, it became apparent that industry had the capability to perform some tasks assigned to FFRDCs. As early as 1962, the Bell Report noted criticism that nonprofit systems engineering contractors had undertaken work traditionally done by private firms. A 1971 DOD report stated, “It is pointless to say that the [systems engineering FFRDCs’] function could not be provided by another instrumentality....” According to this report, private contractors could also do the same type of work as the studies and analyses FFRDCs. The report pointed to the flexibility of using the centers and their broad experience with sponsors’ problems as reasons for continuing their use. More recently, the DOD Inspector General concluded that FFRDC mission statements did not identify unique capabilities or expertise, resulting in FFRDCs being assigned work without adequate justification. In a 1988 report, we pointed out that governmentwide policy did not require that FFRDCs be limited to work that industry could not do; FFRDCs could also undertake tasks they could perform more effectively than industry. FFRDCs are effective, we observed, partly because of their special relationship with their sponsoring agency. This special relationship embodies elements of access and privilege as well as constraints to limit their activities to those DOD deems appropriate. In 1995, the DSB and DOD’s Action Plan elaborated on and refined the concept of the FFRDC special relationship. According to DOD, FFRDCs perform tasks that require a special or strategic relationship to exist between the task sponsor and the organization performing the task. Table 1 shows DOD’s description of the characteristics of this special relationship. According to the DSB, this special relationship allows an FFRDC to perform research, development, and analytical tasks that are integral to the mission and operation of the DOD sponsor. The DSB and an internal DOD advisory group concluded that there is a continuing need for certain core work that requires the special relationship previously described. DOD concluded that giving such tasks to private contractors would raise numerous concerns, including questions about potential conflicts of interest. Accordingly, DOD has defined an FFRDC’s core work as tasks that (1) are consistent with the FFRDC’s purpose, mission, capabilities, and core competencies and (2) require the FFRDC’s special relationship with its sponsor. The DOD advisory group estimated that this core work represented about 6 percent of DOD’s research, development, and analytic effort. The DSB and the DOD advisory group also concluded that FFRDCs performed some noncore work that did not require a special relationship, and they concluded that this work should be transitioned out of the FFRDCs and acquired competitively. On the basis of these conclusions, DOD directed each sponsor to review its FFRDC’s core competencies, identify and prioritize the FFRDC’s core work, and identify the noncore work that should be transitioned out of the FFRDC. The core competencies the DOD sponsors identified appear to differ little from the scope of work descriptions that were in place previously. In several cases, sponsors seem to have simply restated the functions listed in an FFRDC’s scope of work description. In other cases, the core competencies summarized the scope of work functions into more generic categories. In February 1996, the Under Secretary for Defense (Acquisition and Technology) reported that DOD sponsors had identified $43 million, or about 4 percent of FFRDC funding, in noncore work being performed at the FFRDCs. According to the Under Secretary, ongoing noncore work is currently being transferred out of the FFRDCs. Even though DOD states that it is important to ensure that tasks assigned to the FFRDC meet the core work criteria, we believe it will continue to be difficult to determine whether a task meets these criteria. FFRDC mission statements remain broad, and core competencies appear to differ little from the previous scope of work descriptions. As we stated in our 1988 report, the special relationship is the key to determining whether work is appropriate for an FFRDC. However, determining whether one or more of the characteristics of the special relationship is required for a task may be difficult, since the need for an element of the special relationship is normally relative rather than absolute. For example, we believe DOD would expect objectivity in any research effort, but it may be difficult to demonstrate that a particular task requires the special degree of objectivity an FFRDC is believed to provide.