JPL is NASA’s only Federally Funded Research and Development Center (FFRDC) and is operated under contract by Caltech. JPL is NASA’s field installation for solar system exploration and is a major operating division of Caltech. Together, these overlapping roles contribute to unique JPL management and oversight challenges. FFRDCs are operated under agreements funded by sponsoring federal agencies to provide for research or development needs that cannot readily be met by the agencies or contractors. JPL work is primarily funded by NASA; however, other sponsors can fund JPL efforts under reimbursable arrangements with NASA. JPL’s total 1994 business base was just over $1 billion. JPL receives work projects directly from NASA program offices. It can also submit proposals to, or respond to non-competitive requests from, other work sponsors using up to 25 percent of the JPL direct workforce. Both the NASA-directed work and the non-NASA work must be determined to be appropriate for JPL to perform based on the scope of the sponsoring contract. Caltech has operated JPL for NASA since NASA became an agency in 1958 and conducted work at the same site for other federal entities as early as the 1930s. The current contract is in effect from September 20, 1993, to September 30, 1998. It provides a framework of procedures, regulations, and other guidance for funding specific tasks. Rather than signing separate contracts for individual work projects, funding for JPL is provided under “task orders” for specific work. Cost allowability is governed by the contract and by the Office of Management and Budget’s (OMB) Circular A-21, “Cost Principles for Educational Institutions.” In our first report to the Committee, we discussed JPL’s fixed fee, selected cost controls, scope of work, food and beverage charges, and tuition payments for dependents. Our second report discussed the management of NASA equipment by JPL, particularly loaning it to employees and controlling it at Caltech’s campus. Changes have been made to address the concerns raised in our July 1993 report. First, the fixed fee under NASA’s previous contract with Caltech was replaced with a fee structure that bases two-thirds of the fee award on NASA’s assessment of JPL’s performance. Also, new reporting and review procedures could provide control over selected costs comparable to that at commercial contractors. Similarly, although the scope of work was not substantively modified for NASA tasks, it was narrowed and oversight was increased for non-NASA work performed by JPL. Finally, the total number of deviations from the Federal Acquisition Regulation (FAR) in the contract was reduced. In addition, our concern regarding the tuition asistance benefit will be addressed as part of NASA’s recent request to DCAA for a review of JPL’s compensation package. The previous contract provided Caltech with a fee range of between $11.4 million and $15.4 million, based solely on the volume of work conducted at JPL. This arrangement was contrary to NASA’s goal of considering performance in awarding fee to contractors and counter to the agency’s policy of not paying fee or profit on contracts with universities. We recommended that NASA authorize a deviation from its policy against paying fee to educational institutions only if its purpose and amount was adequately justified and, if a fee was authorized, to base the amount on performance. For the new contract, NASA approved a policy deviation allowing fee payment to a university and created a new fee structure. Under the contract’s “Management Performance Incentive Plan,” Caltech is paid $6 million plus an additional performance-based amount of up to $12 million. The incentive criteria for the performance-based fee is specified in the contract, with assigned weights of 65 for technical performance, 25 for institutional management, and 10 for outreach programs. Two evaluation boards and an award official will determine the fee amount, based on ratings by individuals familiar with JPL’s work for NASA and non-NASA sponsors. NASA’s award decision is not subject to the contract’s dispute clause and no incentive fee is paid if performance is less than satisfactory. NASA awarded a total fee of $16.5 million for 1994. NASA may also indicate emphasis areas prior to each rating period. For 1994, no areas were emphasized due to extended contract negotiations. Eight areas have been identified for 1995—including cost containment, improved compliance with JPL policies, increased cultural and gender diversity in senior management, and effective social and educational outreach programs consistent with overall NASA and federal government initiatives in these areas. According to NASA officials, efforts pursued under any emphasis area must still fall within the contract’s scope of work. We noted in our July 1993 report that Caltech received a higher fee than any of the other large FFRDCs administered by educational institutions that receive fees. Based on past ratings, Caltech is unlikely to receive less fee under the new fee structure. For example, Caltech could be scored one point above a poor/unsatisfactory rating—61 out of 100—and still receive an incentive payment of $7.3 million on top of the $6 million fixed fee. This is more than the $13.1 million fee paid for the last year of the previous contract. Justifying and paying fee is an issue for all FFRDCs, not just JPL. NASA officials believe that JPL is the only FFRDC receiving a fee linked to performance and intend the $12 million performance-based fee as a strong incentive. If the incentive award fee concept is successful at JPL, performance-based fees could be considered for other FFRDCs that receive fees. Its success will depend largely on NASA applying a rigorous scoring system to help ensure a fair evaluation clearly reflecting performance. In our July 1993 report we noted that selected costs, called “burden” costs at JPL, were not being thoroughly reviewed by NASA. The current contract identifies DCAA as the responsible organization for reviewing JPL’s annual submission of such costs and includes new reporting requirements for them as proposed by Caltech. According to NASA, these new reporting requirements improve the visibility of such costs. DCAA also believes the current contract language and the new reporting requirements could improve NASA’s control of these costs. The key is the “auditability” of JPL’s cost submission and the supporting documentation. DCAA has asked for specific cost data similar to that it requests from commercial contractors. JPL officials intend to provide the requested data. “Conducting (i) a program of supporting research and (ii) a program of advanced technical development, designed to make contributions to space science, space transportation, practical applications, technology and exploration.” The basic broad content and lack of specificity in the prior contract remains in the current contract for NASA work. However, there was a change in the scope of non-NASA work. The contract previously specified that tasks undertaken for non-NASA agencies at JPL would “focus on” efforts applying JPL developed technologies. The new contract replaces the words “focus on” with “be confined to.” However, the contract guidelines for non-NASA work remain broad. Therefore, the NASA Management Office at JPL—which reviews and approves non-NASA task orders—becomes the key control for ensuring the unique contribution of JPL to the work. Beginning last year, that office increased its oversight of the appropriateness of non-NASA task orders, particularly for those involving computer purchases. The Management Office has delayed approving tasks until further justifications have been provided and has asked JPL to notify potential non-NASA task sponsors early in the process of the need to document why JPL should do the work. NASA has reduced the number of contract deviations from standard clauses established in the FAR and NASA’s FAR supplements. The number of FAR and NASA FAR deviations that were in the old research and development contract were decreased from 22 to 15, and the total number of standard clauses incorporated in the contract have increased from 74 to 98. For example, the standard “Payment of Overtime Premiums” clause was restored. As a result, a request for overtime premiums must document factors associated with the request, the effects of denial, and why other options would not be appropriate. NASA’s current contract with Caltech contains two new deviations from prescribed cost allowability provisions. The FAR defers to OMB’s Circular A-21, “Cost Principles for Educational Institutions,” to prescribe which costs incurred by educational institutions may be recovered under government contracts and which may not. Under the Circular, costs incurred under an employee lawsuit under Section 2 of the Major Fraud Act of 1988, including amounts paid to the employee, are unallowable. The Circular also provides that, in general, fines and penalties resulting from violations of the law are unallowable costs. NASA’s contract with Caltech, however, provides that if Caltech litigates a third party suit and is found to have violated federal law, Caltech’s legal and judgment costs will be allowed if Caltech can demonstrate that it had a reasonable expectation of prevailing on the merits. A-21 also limits payment for advertising and public relations costs. The contract provides that this A-21 restriction does not apply to JPL disseminating public information on NASA programs or activities. For example, costs associated with JPL public events marking NASA accomplishments or the printing of program-related materials are expressly allowable. Similarly, the contract specifically allows costs for promoting technology transfer to the private sector—a NASA mandate—stating these costs are not a “cost of selling and marketing,” which A-21 does not allow. Dependents of JPL employees accepted at Caltech attend the university tuition free, with the annual per student tuition—$15,900 in fiscal year 1994—charged to NASA.