Contracts, grants, cooperative agreements, and other transactions are among the tools DOD has to support or acquire research. The instruments are not interchangeable, but rather are to be used according to the nature of the research and the type of government-recipient relationship desired. Contracts are procurement instruments and, as such, are governed by the Federal Acquisition Regulation (FAR) and DOD procurement regulations. Contracts are to be used when the principal purpose of the project is the acquisition of goods and services for the direct benefit of the federal government. In contrast, grants, cooperative agreements, and other transactions are assistance instruments used by DOD when the principal purpose is to stimulate or support research and development efforts for more public purposes. Assistance instruments are generally not subject to the FAR or DOD procurement regulations, thereby providing DOD a considerable degree of flexibility in negotiating terms and conditions with the recipients. Between fiscal years 1990 and 1994, DOD cited the authority provided under 10 U.S.C. 2371 to enter into 72 agreements, of which 56 were categorized as other transactions and 16 as cooperative agreements. At time of award, the planned contributions by DOD and recipients totaled about $1.5 billion. DARPA has been the primary user of the authority, entering into all 56 agreements that were identified as other transactions. The Air Force and Navy entered into a total of 16 cooperative agreements, while through fiscal year 1994 the Army had not entered into any agreements using this authority. For various policy and implementation reasons, DOD generally did not enter into assistance relationships with commercial organizations prior to the enactment of 10 U.S.C. 2371 in 1989. However, 59—or about 82 percent—of the agreements entered into under the authority of 10 U.S.C. 2371 were with consortia comprised primarily of for-profit firms. This high number of consortia-led projects was due in part to the fact that most of the programs under which the agreements were entered into—such as the Technology Reinvestment Project (TRP)—required or expected that some type of partnership arrangement be formed. Nearly all of the remaining agreements were entered into with single commercial firms. Appendix I provides additional information on various recipient characteristics. The use of cooperative agreements and other transactions appears to provide some opportunities to remove barriers between the defense and civilian industrial bases, in particular by attracting firms that traditionally did not perform research for DOD. In a previous report, we pointed out that government acquisition requirements have caused some companies to separate their defense and commercial research and development organizations or to decline accepting government research and development funds. The flexibility inherent in these instruments has enabled DOD to attract firms that have historically declined to participate in research projects sponsored under a contract—such as Cray Research, Hewlett-Packard, and the commercial division of IBM—to participate in one or more projects either as a consortium member or as a single party. Overall, based on information provided by DOD and recipient officials, we estimate that about 42 percent of the 275 commercial firms that participated in 1 or more agreements were firms that traditionally had not performed research for DOD. DOD officials stressed that a contracting officer cannot elect to use a cooperative agreement or other transaction to attract a nontraditional firm when the principal purpose of the research is for the direct benefit of the government. However, they indicated that for projects in which the use of such instruments was appropriate, the ability to attract such firms was a significant benefit, especially in those areas in which these firms’ technological capabilities exceed those possessed by traditional defense firms. For example, in 1 Air Force agreement, 14 firms, including 5 that traditionally had not performed research for DOD, entered into a $60 million cooperative agreement to develop computer interface standards. The consortium manager told us that the commercial firms involved would not have participated had DOD imposed standard FAR clauses for certified cost and pricing data or intellectual property provisions. The Air Force program manager noted that the consortium has both large, multinational firms like IBM, as well as small, specialized companies working together. Representatives from the consortia and the Air Force believed that the mix of participants facilitated information exchange and consensus building on the interface standards. Discussions with DOD officials and recipients indicated that the specific terms and conditions that led to the decision to participate varied from company to company. For some, such as IBM, it was the ability to use their commercial accounting systems rather than establish systems or practices that complied with government-unique requirements; for others, such as Hewlett Packard, it was the ability to limit the government’s access to and audits of the firm’s financial records or the increased flexibility in the allocation of intellectual property rights that were key factors in their decision to do business with DOD. A 1994 other transaction with a Hewlett-Packard-led consortium provides insights into how the authority was used to negotiate terms and conditions affecting both financial management and intellectual property matters that are atypical of contracts, grants, or standard cooperative agreements. We had previously reported that Hewlett-Packard declined to accept government research and development funds to protect its technical data rights. In this case, however, Hewlett-Packard responded to a DARPA announcement soliciting proposals to advance the state of the art in the manufacture of more affordable optoelectronics systems and components. According to DARPA, this technology will enable data transmissions at high rates from high performance parallel processors at far lower costs than current technology allows. Under the agreement, the financial management provisions require consortium members to maintain adequate records to account for federal funds received under the agreement, and account for the members’ contributions toward the project. The members are required to have an accounting system that complies with generally accepted accounting principles, but commercial firms do not have to follow the accounting requirements specified by the FAR. The agreement does not require an annual audit and does not specifically provide DARPA or our office direct access to these records. Rather, for up to 3 years after the agreement is completed, these records may be subject to an audit by an independent auditor, who will provide a report to DARPA. In comparison, under a cost-reimbursement research contract, a traditional defense contractor would be typically required to (1) follow the FAR accounting requirements, (2) undergo audits, and (3) provide the federal contracting agency and our office with access to the contractors’ pertinent records. Similarly, the intellectual property provisions were structured to provide Hewlett-Packard more flexible provisions than typically allowed under contracts, grants, or standard cooperative agreements, all of which are governed by the provisions of Public Law 96-517, as amended. The provisions of this act, commonly referred to as the Bayh-Dole Act, provide the government’s general policy regarding patent rights in inventions developed with federal assistance and are intended, in part, to facilitate the commercialization and public availability of inventions. In general, the government’s policy is to allow the contractor to elect to retain title to the subject invention while providing the government a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced for or on behalf of the United States any subject invention throughout the world. Recipients must comply with certain administrative requirements. For example, under a research contract, a contractor is required to notify the government of an invention within 2 months after it has been disclosed to contractor personnel responsible for such matters. Large contractors are required to notify the government in writing whether they intend to retain rights to that invention within 8 months after disclosing the invention to the government, while small businesses are provided up to 24 months. Failure to comply with these administrative requirements provides the government the right to obtain title to an invention. Under the Hewlett-Packard agreement, the intellectual property provisions were structured so that the consortium has up to 4 months after the inventor discloses a subject invention to his company to notify the government; the consortium has up to 24 months to inform DARPA whether it intends to take title to inventions arising from the agreement after its disclosure to the government; DARPA agreed to delay exercising its government purpose license rights to inventions in which the consortium retains title until 5 years after the agreement is completed; and the consortium has the authority to maintain inventions and data as trade secrets for an unspecified period of time under certain conditions. Further, under the agreement, DARPA does not receive any rights to any technical data produced under the agreement unless DARPA invokes its “march-in” rights. These rights can be invoked only if the consortium fails to reduce an invention to practical application or for other specified reasons, such as in the case in which the consortium grants another firm an exclusive right to use or sell the invention in a product that is substantially manufactured outside of the United States or Canada. In combination, these terms provide the consortium additional time to commercialize the technology, while somewhat limiting the government’s rights to that technology. These clauses illustrate the trade-offs that DOD may face as it attempts to attract firms that have not traditionally performed research for the government or move toward more commercial-like practices. Many of the oft-cited barriers to integrating the defense and civilian industrial bases, such as government cost accounting and auditing requirements, rights in technical data, and other government unique requirements, were instituted to safeguard or protect the government’s and taxpayer’s interests, assist suppliers, or help achieve a variety of national goals. In the Hewlett-Packard example, two of the government’s traditional methods of oversight—audits and access to records—were not included, while the government’s standard rights to information developed under federally sponsored research are somewhat constrained. DARPA and service program management and contracting officials acknowledged that there may be some added risks to the government due to the less stringent oversight requirements.