Acquisition Reform: DOD's Guidance on Using Section 845 Agreements Could
be Improved (Letter Report, 04/07/2000, GAO/NSIAD-00-33).

Pursuant to a congressional request, GAO provided information on the
Department of Defense's (DOD) authority, which was established under
Section 845 of the Fiscal Year 1994 National Defense Authorization Act,
to use nonstandard contracting approaches to procure research and
development services, focusing on: (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.

GAO noted that: (1) DOD has awarded 97 Section 845 agreements as of
October 1998; (2) these agreements were most frequently used to support
studies of future weapon systems or to design and develop subsystems or
components; (3) 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; (4)
this financial commitment constituted a relatively small percentage of
DOD's overall research and development spending; (6) in a February 1999
report to Congress, DOD cited numerous benefits from using Section 845
authority; (6) these benefits included attracting firms that typically
did not contract with DOD, enabling use of commercial products or
processes, providing more flexibility to negotiate agreement terms and
conditions, and reducing program costs; (7) however, the report provided
only limited data to assess the agreements' usefulness; (8) however, the
terms and conditions found in Section 845 agreements provided
contractors more flexibility in the business processes and practices
they employed than typically provided by standard contract provisions;
(9) among Section 845 agreements, GAO found little variation in the
approaches to financial management, subcontractor management, and
termination and disputes processes; (10) in two other areas, 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; (11) 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; (12) 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; (13) 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; (14) 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; and
(15) it is not clear that establishing metrics without providing
guidelines will lead to appropriate assessments of the benefits of using
Section 845 agreements.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-33
     TITLE:  Acquisition Reform: DOD's Guidance on Using Section 845
	     Agreements Could be Improved
      DATE:  04/07/2000
   SUBJECT:  Defense procurement
	     Research and development costs
	     Cooperative agreements
	     Research and development contracts
	     Defense cost control
	     Department of Defense contractors
	     Technology transfer
	     Weapons systems
	     Procurement regulations
	     Intellectual property
IDENTIFIER:  DOD Evolved Expendable Launch Vehicle Program

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GAO/NSIAD-00-33

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

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

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

DARPA Defense Advanced Research Projects Agency

DOD Department of Defense

National Security and
International Affairs Division

B-281276

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 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.

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 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.

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'
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 government-unique 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.

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.

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
two-thirds--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

                                            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

Source: Our analysis.

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.

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
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

                            Dollars in millions
                                                DOD financial commitment
 Fiscal
 year      Prime         Project                                Cumulative
 awarded   contractor                         Amount   Percent  percent
                         Develop national
                         space launch
 1999      Traditional   capability under     $500.0   19.2     19.2
                         Evolved Expendable
                         Launch Vehicle
                         program
                         Develop national
                         space launch
 1999      Traditional   capability under     500.0    19.2     38.4
                         Evolved Expendable
                         Launch Vehicle
                         program
                         Design, develop,
                         and flight test
 1995      Traditional   Global Hawk          425.5    16.3     54.8
                         unmanned aerial
                         vehicle
                         Design, develop,
 1994      Traditional   and flight test      283.1    10.9     65.7
                         DarkStar unmanned
                         aerial vehicle
                         Evaluate use of
                         commercial
                         information
                         processing,
           Traditional/  storage,
 1997                    transmission,        75.0b    2.9      68.6
           Commerciala   compression, and
                         display
                         technologies for
                         national security
                         purposes
                         Evaluate use of
                         commercial
                         information
                         processing,
                         storage,
 1997      Traditional   transmission,        75.0b    2.9      71.4
                         compression, and
                         display
                         technologies for
                         national security
                         purposes
                         Develop a common
 1998      Traditional   cockpit for the      74.5     2.9      74.3
                         CH-60 and SH-60R
                         helicopters
                         Prepare concept
 1998      Traditional   studies for DD-21    70.0     2.7      77.0
                         Land Attack
                         Destroyer
                         Develop a common
                         ground
                         communication
 1996      Traditional   system for Global    62.7     2.4      79.4
                         Hawk and DarkStar
                         unmanned aerial
                         vehicles programs

 1997      Traditionala  Develop logistics    58.2     2.2      81.7
                         system
 Total                                        $2,124.1 81.7

Note: Totals may not add due to rounding.

aAgreements awarded to consortia.

bAgreements 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 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' cost-sharing. 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.

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.

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.

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.

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) 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.

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:

ï¿½ 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.

ï¿½ 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 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.

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.

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

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:

ï¿½ 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.

ï¿½ 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.

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.

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

ï¿½ relied on means other than certified cost and pricing data13 to establish
a fair and reasonable price for the effort undertaken;

ï¿½ allowed contractors to use generally accepted accounting principles rather
than government cost accounting standards, which are viewed as more complex
and costly to administer;

ï¿½ 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

ï¿½ paid contractors a specified amount based on the accomplishment of agreed
to technical milestones, rather than on the basis of incurred costs;

ï¿½ did not provide DOD a right to terminate an effort for default by the
contractor; and

ï¿½ 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.

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 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.

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:

ï¿½ DARPA agreed to not accept any technical data in the effort to develop the
unmanned aerial vehicle capable of vertical take-off and landing. 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.

ï¿½ 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.

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.

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.

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 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

ï¿½ 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;

ï¿½ 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

ï¿½ an alternative disputes resolution clause that was intended to resolve
disputes in a timely, fair, and cost-effective manner.

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

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
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.

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.

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

ï¿½ 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.

ï¿½ 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.

ï¿½ 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 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.

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.

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 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.

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.

Having gained experience in using Section 845 agreements, a new tool that
embodies alternative approaches to standard contracts, DOD is taking the
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.

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.

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.

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.

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

ï¿½ the extent to which DOD has used Section 845 agreements,

ï¿½ the benefits reported from their use,

ï¿½ how DOD tailored these agreements to address issues normally governed by
standard contract provisions, and

ï¿½ DOD's efforts to provide additional guidance on their use.

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 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:

ï¿½ U.S. Army Communications - Electronics Command, Fort Monmouth, New Jersey;

ï¿½ Defense Advanced Research Projects Agency, Arlington, Virginia;

ï¿½ National Imagery and Mapping Agency, Bethesda, Maryland;

ï¿½ U.S. Navy Naval Air Systems Command, Patuxent River, Maryland;

ï¿½ U.S. Navy Naval Sea Systems Command, Arlington, Virginia; and

ï¿½ 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:

ï¿½ Autometric, Incorporated, Springfield, Virginia;

ï¿½ California Microwave, Incorporated, Belcamp, Maryland;

ï¿½ Eastman Kodak Commercial and Government Systems, Rochester, New York;

ï¿½ Lockheed Martin Federal Systems, Owego, New York;

ï¿½ Raytheon Company, Falls Church, Virginia;

ï¿½ Rochester Photonics Corporation, Rochester, New York;

ï¿½ Signal Processing Systems, San Diego, California;

ï¿½ ThermoTrex Corporation, San Diego, California;

ï¿½ ViaSat, Incorporated, Carlsbad, California; and

ï¿½ 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 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

Treatment of Selected Issues Under
Section 845 Agreements

Depending on such factors as the contract type25 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.

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

fair and reasonable price on a cost-based contract.26 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).

Table 3: Accounting Requirements

                                     Number of agreements by approach
                               Cited    Used      Allowed           Would
 FAR clause   Intent           FAR      tailored  use of   Did not  not
                               clause   clause    GAAPa    address  apply
              Prescribes
              accounting
              requirements to
              protect
              government from
              the risk of
              overpaying on
              cost-based
              contracts.
              Requires
              contractors to
              disclose and
              consistently
 52.230-2:    follow
 Cost         accounting
 accounting   practices,       3        7         66       1        18b
 standards    permits
              government
              access to
              documents to
              assure
              compliance, and
              enables the
              government to
              adjust contract
              prices for
              failure to
              comply with
              disclosed
              practices.

Note: Number of agreements may not total to 97 as information was not
available to make a determination in all cases.

aGAAP stands for generally accepted accounting principles.

bCost 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

ï¿½ comparing a contractor's proposed labor rates with industrywide averages
obtained from commercial sources;

ï¿½ comparing the contractor's proposed price with its published catalogue
price and other sources, for similar services; and

ï¿½ 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.

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

                                          Number of agreements by approach
                                         Cited   Used                Did
 FAR clause      Intent                  FAR     tailored   Did not  not
                                         clause  clause     address  apply
                 Provisions implement
                 the
                 Truth-In-Negotiations
                 Act
 52.215-10:      (10 U.S.C. 2306a). The
 Price reduction act requires that prime
 for defective   contractors and
 cost or pricing subcontractors submit
 data            cost or pricing data
                 supporting their
                 proposed price for      0       0          46       51a
                 negotiated contracts
 52.215-12:      exceeding certain
 Subcontractor   thresholds and certify
 cost or pricing that the data were
 data            accurate, complete, and
                 current. The clauses
                 enable the government
                 to reduce a contract's
                 price if the submitted
                 data were defective.
 52.242-1:
 Notice of       Prescribes policy and
 intent to       procedures for          1       1          76       18
 disallow costs  disallowing costs.
                 Clause discourages
                 contractors from
 52.242-3:       including unallowable
 Penalties for   costs in indirect cost
 unallowable     rate proposals by       1       0          77       18
 costs           providing notice that
                 contractors including
                 such costs may be
                 subject to penalties.

Note: Number of agreements may not total to 97 as information was not
available to make a determination in all cases.

aDOD 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.

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.27 Five agreements did not include a provision providing for audits.

Table 5: Audit Approaches

                                                  Number of agreements by
                                                         approach
                                                Cited     Used
       FAR clause               Intent           FAR    tailored   Did not
                                               clause   clause     address
                          Enables the
                          government to
                          exercise oversight
                          on contracts.
                          Requires contractors
 52.215-2: Audit and      and subcontractors
 records--negotiation     to maintain adequate 4      88          5
                          records and to
                          provide access to
                          such records by the
                          contracting officer
                          and GAO.

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 payment28 (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. 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

                                           Number of agreements by approach
                                            Cited     Used         Used
  FAR clause             Intent              FAR    tailored    milestone
                                           clause    clause     payments
 52.232-16:    Prescribes rules and
 Progress      procedures for invoicing
 payments      and payment. Progress
               payment clauses are used
               on fixed-price contracts,   6       5           86
               while allowable cost and
 52.216-7:     payment clauses are used
 Allowable coston cost-reimbursement
 and payment   contracts.

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. sect.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).

Table 7: Financing-Related Issues

                                         Number of agreements by approach
                                         Cited     Used
  FAR clause            Intent            FAR    tailored   Did not Did not
                                        clause    clause   address   apply
                Provides notice that
                the government's
 52.232-18:     liability under the
 Availability   contract is contingent 0        9          59       29a
 of funds       upon the availability
                of funds to be
                subsequently
                appropriated.
                Requires contractor to
                notify the government
                when costs to be
 52.232-20:     incurred through the
 Limitation of  next 60 days will
 cost           exceed 75% of a
                contract's estimated
                costs. Clauses are     6        72         0        18b
                used on
 52.232-22:     cost-reimbursement
 Limitation of  contracts, with
 funds          specific clause
                depending on whether
                the contract is
                incrementally or fully
                funded.

Note: Number of agreements may not total to 97 as information was not
available to make a determination in all cases.

aThe clause would not have applied on 29 agreements because all funds were
available at the time of agreement award.

bAgreement 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.

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.29 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

under the Contract Disputes Act of 1978, as amended.30 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

                                           Number of agreements by approach
                                                                    Provided
                                         Provided DOD                 both
                                                      Provided DOD
                                  Cited    right to     right to   contractor
    FAR clauses        Intent      FAR    terminate    terminate     and DOD   Othera
                                 clause      for        only for    right to
                                         convenience                terminate
                                         or default   convenience      for
                                                                  convenience
 52.249-6:
 Termination

 (used on
 cost-reimbursement
 contracts)
                    Provide DOD
                    the right to
                    terminate a
 52.249-2:          contract for
 Termination for theconvenience
 convenience of the or default,  0       4            20          64           8
 government (used onand specify
 fixed-price        termination
 contracts)         processes
                    and
                    procedures.

 52.249-9: Default

 (used on
 fixed-price
 contracts)

aOther 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
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

                                         Number of agreements by approach
                                                       Used
 FAR clause            Intent           Cited FAR    tailored     Did not
                                         clause                   address
                                                     clause
              Clause implements the
              Contracts Disputes Act,
              which establishes
 52.233-1:    procedures and
 Disputes     requirements for          1          96           0
              asserting and resolving
              contractor claims against
              the government.

Source: Our analysis.

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.31 To facilitate the commercialization and
public availability of inventions, this act enables small businesses,
nonprofit organizations, and certain contractors operating government-owned
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
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.

Table 10: Patent and Data Right Approaches

                                                 Number of agreements by
                                                        approach
                                               Cited      Used
        FAR clause              Intent          FAR     tailored   Did not
                                              clause    clause     address
 Patent rights
 52.227-11: Patent        Clauses implement
 rights--retention by     the Bayh-Dole Act,
 contractor (applies to   the purpose of
 small business and       which is to
 nonprofit organizations) promote the use of
                          inventions arising
                          in federally
                          funded research in
 52.227-12: Patent        the commercial
 rights--retention by     marketplace and to
 contractor (applies to   provide the
 firms that are not small government with     25       71         1
 businesses or nonprofit  licenses to such
 organizations)           inventions. Small
                          businesses are
                          generally provided
                          more time to elect
 52.227-13: Patent        whether to retain
 rights--Acquisition by   title to
 the government           inventions and are
 (generally applies to    subject to fewer
 work performed outside   reporting
 of the United States)    requirements.
 Data rights
                          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
 52.227-14: Rights in     tailored when the
 data−general       contractor          19a      78         0
                          contributes
                          substantial funds
                          or resources. DOD
                          components are
                          generally required
                          to use the related
                          Defense Federal
                          Acquisition
                          Regulation
                          Supplement
                          clauses.
 Other related clauses
                          Clause authorizes
                          the contractor to
                          use patented
                          inventions and
                          protects the
                          government from
 52.227-1: Authorization  work stoppage due
 and consent              to claims of        20       3          74
                          patent
                          infringement. The
                          government
                          generally assumes
                          liability for
                          patent
                          infringement.

aIncludes agreements that cited applicable Defense Federal Acquisition
Regulation Supplement provisions.

Source: Our analysis.

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
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

                                        Number of agreements by approach
                                                            No
                                       Cited     Used    property
      FAR clause           Intent       FAR    tailored  provided   Did not
                                      clause   clause       or     address
                                                         acquired
                       Prescribes
                       policy and
 52.245-2: Government  procedures for
 property (fixed-price providing
 contracts)            government
                       property to
                       contractors
                       and for the    11      46        34         3
 52.245-5: Government  contractor's
 property              use,
 (cost-reimbursement   management,
 contracts)            accounting,
                       and
                       disposition of
                       such property.

Note: Number of agreements may not total to 97 as information was not
available to make a determination in all cases.

Source: Our analysis.

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

                                        Number of agreements by approach
                                      Cited     Used
     FAR clause          Intent        FAR    tailored  Did not     Not
                                     clause   clause   address  applicable
                     Prohibits
                     federal
 52.209-6:           agencies from
 Protecting the      allowing a
 government's        party to
 interest when       participate in
 subcontracting with any procurement
 contractors         or              1       0         96       0
 debarred,           nonprocurement
 suspended, or       activity if the
 proposed for        party is
 debarment           debarred,
                     suspended, or
                     otherwise
                     excluded.
                     Requires
                     contractor to
                     obtain
                     government
 52.244-2:           consent before
 Subcontracts        awarding
 (cost-reimbursement subcontracts,   2       0         75       18
 contracts)          depending on
                     the complexity
                     of the effort
                     and subcontract
                     type and value.
                     Generally
                     requires
 52.244-5:           contractors to
 Competition in      select          0       5         87a      5
 subcontracting      subcontractors
                     on a
                     competitive
                     basis.

Note: Number of agreements may not total to 97 as information was not
available to make a determination in all cases.

aIncludes 15 agreements in which competition requirements were specifically
waived.

Source: Our analysis.

Comments From the Department of Defense

GAO Contacts and Staff Acknowledgments

Timothy J. DiNapoli (202) 512-3665

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.

(707381)

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

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
  

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.

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.

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.

6. The position was recently redesignated as the Under Secretary of Defense
for Acquisition, Technology, and Logistics.

7. The National Imagery and Mapping Agency provides imagery, imagery
intelligence, and other information that support national security
objectives.

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.

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.

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.

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

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.

15. A royalty-free license allows the government to use the invention
without compensating the owner of the patent.

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.

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.

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.

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.

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).

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).

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.

30. 41 U.S.C. sect. 601-613.

31. 35 U.S.C. sect. 200 et seq.
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