Federally Funded R&D Centers: Use of Fee by the MITRE Corporation (Letter
Report, 11/27/95, GAO/NSIAD-96-26).

Pursuant to a congressional request, GAO examined the use of Department
of Defense (DOD) management fees provided to the Mitre Corporation,
focusing on: (1) the adequacy of federal guidance on how fees may be
used; (2) ways to reduce contractor management fees and strengthen DOD
management fee oversight; and (3) DOD efforts to improve the fee
management process for its federally funded research and development
centers (FFRDC).

GAO found that: (1) FFRDC may incur some necessary but nonreimbursable
costs, but there is insufficient federal guidance on negotiating FFRDC
contract fees; (2) Mitre plans to use its management fee to cover
interest expenses due to DOD funding delays; (3) DOD has not ensured
that fee awards to Mitre are equitable and consistent, indicating that
it may need to further refine its fee-granting methodology; and (4) DOD
needs to clarify FFRDC fee guidance, provide stronger audit oversight of
FFRDC costs, and limit the discretionary funding provided to FFRDC
through fees.

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

 REPORTNUM:  NSIAD-96-26
     TITLE:  Federally Funded R&D Centers: Use of Fee by the MITRE 
             Corporation
      DATE:  11/27/95
   SUBJECT:  Research and development contracts
             Cost plus award fee contracts
             Contract monitoring
             Department of Defense contractors
             Administrative costs
             Funds management
             Federal regulations
             Allotment
             Defense cost control

             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Subcommittee on Oversight of
Government Management and the District of Columbia, Committee on
Governmental Affairs, U.S.  Senate

November 1995

FEDERALLY FUNDED R&D CENTERS - USE
OF FEE BY THE MITRE CORPORATION

GAO/NSIAD-96-26

Federally Funded R&D Centers

(705085)


Abbreviations
=============================================================== ABBREV

  DCAA - Defense Contract Audit Agency
  DOD - Department of Defense
  FAA - Federal Aviation Administration
  FFRDC - federally funded research and development center
  OMB - Office of Management and Budget

Letter
=============================================================== LETTER


B-259371

November 27, 1995

The Honorable Carl Levin
Ranking Minority Member
Subcommittee on Oversight of
 Government Management
 and the District of Columbia
Committee on Governmental Affairs
United States Senate

Dear Senator Levin: 

The Department of Defense (DOD) spent about $1.25 billion in fiscal
year 1995 for research, development, engineering, and analytical
services from the 10 federally funded research and development
centers (FFRDCs) it sponsors.  The MITRE Corporation is one of the
largest FFRDCs, with fiscal year 1995 DOD funding of about $374
million.  A 1992 report by your Committee\1 raised concerns about
whether government agencies effectively managed the FFRDCs they
sponsored.  Among the concerns was whether the contract fees provided
to FFRDCs--in addition to reimbursement of incurred costs--were
adequately justified.  As you requested, we examined DOD's management
of fees provided to MITRE.  More specifically, we reviewed (1) the
manner in which MITRE spends its DOD management fee, (2) the adequacy
of federal guidance on how fees may be used, (3) opportunities to
reduce management fees at MITRE, (4) ways to strengthen DOD
management oversight of MITRE's use of fees, and (5) DOD's efforts to
improve the fee management process for its FFRDCs.  In September
1995, we issued a report on the use of management fees at The
Aerospace Corporation.\2


--------------------
\1 Inadequate Federal Oversight of Federally Funded Research and
Development Centers, July 1992. 

\2 Federally Funded R&D Centers:  Use of Contract Fee by The
Aerospace Corporation (GAO/NSIAD-95-174, Sept.  28, 1995). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Neither the Office of Management and Budget (OMB) nor DOD has
prepared sufficient guidance on negotiating FFRDC contract fees. 
Consequently, recurring questions are raised about MITRE's use of
fees, as well as the use of fees by other DOD FFRDCs.  For example,
the Defense Contract Audit Agency (DCAA) recently questioned MITRE's
use of fees to pay for entertainment, personal expenses for company
officers, and benefits for employees.  MITRE plans to continue to use
its management fee for some of these questioned expenses. 

The services have delayed providing contract funding at the start of
a fiscal year.  Consequently, MITRE has needed large amounts of fee
to cover interest expense.  MITRE cannot bill the government for
unfunded work and therefore borrows to pay the costs incurred until
DOD funds are allotted to its contracts.  Largely because of funding
delays, MITRE borrowed $85.6 million at one point during fiscal year
1994--about 73 percent of the company's net worth--and incurred
interest costs of $866,000 during the year. 

DOD oversight of contract fees has not ensured that fee awards to
MITRE are equitable and consistent.  For example, Army and Air Force
contracting officers have not noted that MITRE often underestimated
the fee revenue it will receive from non-DOD customers, thus
overstating the fees it will need from the Army and the Air Force. 
Further, Army and Air Force contracting officers provided MITRE
widely differing fee rates for fiscal year 1995, indicating that DOD
may need to further refine its fee-granting methodology. 

DOD acknowledges the need for stronger oversight of FFRDC management
fees.  It recently reviewed its process for granting fees as required
by the Conference Report of the DOD Appropriations Act for Fiscal
Year 1995 and concluded that fee guidance should be clarified.  DOD
also recommended changes to provide stronger audit oversight of
FFRDC's costs and to limit the discretionary funding provided FFRDCs
through fees. 


   BACKGROUND
------------------------------------------------------------ Letter :2

FFRDCs are federally sponsored entities--operated by universities,
nonprofit institutions, or industrial firms under contract with the
federal government--that provide research, development, systems
engineering, and analytical services to federal government agencies. 
In awarding these contracts, the government need not seek open
competition, and it traditionally has undertaken a commitment to
provide a sufficient, stable body of work to maintain the essential
core of scientific and engineering talent at an FFRDC.  The Director
of Defense Research and Engineering oversees DOD's FFRDCs. 

MITRE, a nonprofit company, operates an FFRDC for DOD under contracts
with the Air Force and the Army.  It also operates an FFRDC under a
contract with the Federal Aviation Administration (FAA).  In
addition, through its non-FFRDC divisions, MITRE provides services to
DOD agencies, federal civilian agencies, and state and foreign
governments. 

Payment of contract fees to organizations that operate FFRDCs is
addressed in DOD regulations.  The regulations instruct contracting
officers to first examine an organization's retained earnings to
determine whether a fee is needed.  If a fee is needed, contracting
officers must consider the organization's needs to purchase capital
equipment, to rebuild working capital, and to pay certain ordinary
and necessary business expenses that are not reimbursable under
procurement regulations.  The Air Force has expanded on this guidance
by instructing contracting officers to consider such items as
depreciation charges, investment earnings, and fees earned on non-DOD
contracts as sources of funds to offset the need for fees, a process
that the Army also follows.  Once a fee is awarded, its use is left
to an FFRDC's discretion. 

Each year, MITRE submits a fee proposal to the Army and the Air Force
outlining its anticipated needs to purchase capital equipment,
rebuild working capital, and pay nonreimbursable expenses for the
coming year.  The proposal includes estimates of the depreciation
charges, investment earnings, and fees on non-DOD contracts that will
provide sources of funds to meet these needs as well as a proposed
fee for its DOD contracts.  Generally, MITRE uses historical trends
to estimate its anticipated funding needs and the sources of funds
available to meet these needs. 

For fiscal year 1994, the Army provided MITRE a fixed fee of $7.6
million, representing 4.4 percent of estimated contract costs, and
the Air Force provided a fee of $10.2 million, or 4.5 percent of
estimated contract costs.  These amounts included a traditional 3
percent of estimated contract costs--$5.2 million for the Army and
$7.2 million for the Air Force--to support MITRE's independent
research program.  Beginning in fiscal year 1995, both services are
funding MITRE's independent research through charges to
overhead--comparable to the treatment of independent research for
commercial contractors.  This change has allowed the Army and the Air
Force to significantly reduce fees awarded MITRE. 


   LACK OF GUIDANCE ON PAYMENT OF
   NONREIMBURSABLE COSTS RESULTS
   IN RECURRING DISPUTES
------------------------------------------------------------ Letter :3

Neither OMB nor DOD has issued guidance that specifies the
nonreimbursable costs contracting officers should consider in
negotiating contract fees, as we recommended in our 1969 report.\3 In
that report, we concluded that some fees were appropriate because
some necessary business expenses may not be reimbursed under
government procurement regulations but questioned whether some costs
paid from fee were necessary.  Thus, to assist contracting officers
in negotiating fees, we recommended that guidance be developed
providing examples of costs that could appropriately be considered in
negotiating fees.  DOD's current guidance notes that FFRDCs may incur
some necessary but nonreimbursable costs but provides no examples of
costs contracting officers may consider as ordinary and necessary. 

In the absence of specific guidelines, the use of a fee for
nonreimbursable costs has stimulated continuing controversy.  During
the late 1980s, the Air Force became concerned that MITRE used its
contract fees for excessive and unnecessary expenditures and urged
MITRE to reduce these expenses.  MITRE agreed to various actions to
reduce expenses.  For example, MITRE agreed to limit the size of
holiday parties and to reduce their costs.  Further, MITRE instructed
company officers to use first-class air travel only when they needed
to perform work during a trip that could not be done in the coach
cabin.  Recognizing the potential for controversy regarding fee
expenditures, Army and Air Force contracting officers said they have
strengthened oversight of fee use and have challenged expenditures
they considered inappropriate.  For example, in fiscal year 1995, the
Army and Air Force contracting officers began using detailed
quarterly expenditure reports to monitor fee usage.  Among the
proposed expenses the contracting officers challenged during
negotiations on fiscal year 1995 fees were costs for social functions
and meals provided at business meetings. 

DCAA has also raised questions about MITRE's use of fees.\4 During
its review of MITRE's fiscal year 1993 fee expenditures, DCAA
concluded that fees were used to pay for lavish entertainment,
personal expenses for company officers, and generous employee
benefits.  In addition, DCAA concluded that MITRE charged expenses to
fees that would ordinarily be considered allowable, thereby avoiding
the routine audit oversight normally accorded such costs.  DCAA
concluded that only 11 percent of the expenditures reviewed were
"ordinary and necessary" business expenses.  MITRE made similar
expenditures during fiscal year 1994, and it plans to continue such
expenditures--at a reduced level in some cases--during fiscal year
1995. 

DCAA reported on numerous instances where MITRE used fees for
entertainment expenses.  For example, during fiscal year 1993, MITRE
used fees to pay for a holiday party for company executives held in
McLean, Virginia.  This party cost $37,719, or about $110 for each of
the 342 guests attending.  During fiscal year 1994, MITRE held a
similar holiday party at the McLean Hilton that cost $33,177.  DCAA
also cited use of fees to pay for a reception and dinners for the
Board of Trustees during May 1993 at a cost of $21,208, or $118 per
person, as well as $2,500 for a luncheon and tour of Washington,
D.C., for spouses of the Trustees during the spring Trustees meeting. 
During fiscal year 1994, MITRE used fees to pay for a similar
reception and dinners held in connection with the fall Trustees
meeting; the cost was $18,778. 

DCAA also reported that MITRE used fees to pay personal expenses for
company officers.  For example, MITRE used $5,547 in fees during
fiscal year 1993 to install a home security system in the company
president's residence.  During fiscal year 1994, MITRE used fees to
pay the
$22 monthly monitoring fee for the president's home security system. 
Similarly, DCAA questioned the practice of paying for personal use of
company-furnished automobiles with fees, which totaled $28,605 during
fiscal year 1994. 

DCAA also noted generous benefits for employees during its review. 
For example, DCAA noted that during fiscal year 1993 MITRE used fees
to pay the company president a miscellaneous relocation allowance of
$31,292.  MITRE continued to use fees for these allowances during
fiscal year 1994, charging $689,265 or an average of $5,696 per
employee relocated. 

In response to concerns raised by the services, and direction from
the Congress, MITRE has reduced some fee expenditures.  For example,
MITRE has suspended the holiday party for executives.  Consistent
with restrictions in the Fiscal Year 1995 National Defense
Authorization Act, MITRE no longer uses fees to match employees'
contributions to educational institutions and is not making corporate
contributions to civic and service organizations.  On the other hand,
MITRE plans to continue using fees for some expenses DCAA criticized,
such as providing officers company cars for personal use and generous
miscellaneous allowances for employees who are relocated.  MITRE
maintains that its fee expenditures are comparable to the costs
commercial concerns incur and are necessary to attract and retain
top-quality technical and management personnel. 


--------------------
\3 Need for Improved Guidelines in Contracting for Research With
Government-Sponsored Nonprofit Contractors, February 1969, B-146810. 

\4 Report on Audit of Fee, Audit Report No.  2184-94A17900002,
September 1994. 


   DOD COULD REDUCE NEED TO FUND
   NONREIMBURSABLE INTEREST COSTS
------------------------------------------------------------ Letter :4

Because the Army and the Air Force delay providing contract funding
at the start of a fiscal year, MITRE needs discretionary
funding--provided through fees--to cover estimates of nonreimbursable
interest costs.  MITRE operates under a series of annual contract
options awarded by the Army and the Air Force, and funds allotted to
one fiscal year's contract may not be carried over to a following
fiscal year.  Further, funding comes from the various program offices
for which MITRE does work, rather than from a single Army- or Air
Force-wide source.  Once the various program offices transfer funds
to the contracting officer, the contracting officer issues contract
changes to allot the funds.  MITRE's contracts with the two services
provide for reimbursement of allowable costs incurred, limited to the
amount of funds allotted to the contracts.  Thus, MITRE cannot submit
bills for the cost of the work it has started until the funds have
been allotted. 

During fiscal year 1994, delays in providing funding for MITRE's Army
and Air Force contracts were significant.  The Army, for example,
first allotted funds to MITRE's contract on November 30, 1993--2
months after work on the contract began.  As of January 1994,
allotments amounted to only 16 percent of estimated cost and did not
reach 95 percent of estimated costs until August 1994.  For several
large projects, no funds were allotted until March 1994--almost 6
months after work started. 

Funding delays affect MITRE's finances.  MITRE records costs incurred
for which no billings have been submitted as "unbilled costs." The
level of unbilled costs carried on MITRE's books varied through
fiscal year 1994 and reached $85.6 million at the end of January
1994--about 73 percent of the company's net worth.  Unbilled costs on
Army and Air Force contracts accounted for $66.6 million of the $85.6
million total.  MITRE had $47.6 million in loans outstanding at the
end of January 1994 and incurred $866,000 in interest costs during
the year.  We estimate that, if unbilled costs on Army and Air Force
contracts had been due only to normal bill processing delays, average
unbilled costs for the contracts would have been reduced from $38.2
million to $15.1 million during fiscal year 1994.  Reducing average
unbilled costs by $23.1 million would significantly reduce MITRE's
financing burden.  Since MITRE's average borrowings during fiscal
year 1994 were $21.7 million, the need to provide fees to cover
nonreimbursable interest costs would have been substantially reduced
or eliminated. 

Several military program management personnel cited a desire to
retain funds to deal with contingencies as a reason for having
delayed funding MITRE's work.  One said that he was unaware that
funding delays adversely affected the company.  Another program
management official, however, stated that they have a good idea of
how much MITRE support they will use during a year; thus, there is no
excuse for delaying funds.  In fiscal year 1995, the Air Force placed
a high priority on obtaining prompt funding of MITRE projects.  By
January 1995, the Air Force had allotted funds representing about 85
percent of the estimated contract costs.  Other options for reducing
MITRE's financing requirements include the advance payment pool
mechanism that some university-sponsored FFRDCs use and the revolving
budget authority account that the Air Force uses to provide advance
funding to The Aerospace Corporation. 


   OVERSIGHT AND NEGOTIATION OF
   FEES COULD BE IMPROVED
------------------------------------------------------------ Letter :5

DOD's oversight of MITRE's fee expenditures does not ensure that
negotiated fee awards are equitable and consistent.  Army and Air
Force contracting officers generally analyze past MITRE fee
expenditures to estimate fee needs for future years.  However,
because MITRE has contracts with many other federal agencies and
state and foreign governments, we believe it is important that each
customer bear an equitable share of fee expenditures.  Since
contracting officers do not routinely screen fee expenditures for
nonrecurring costs, we are concerned that estimates of future fee
needs may be distorted.  Finally, we noted that lack of clear
guidance on using fee to provide financing led the Army to award
MITRE a fee for fiscal year 1995 that was higher than the Air Force
contracting officer's. 

Army and Air Force contracting officers have not determined if
MITRE's estimates of fees on non-DOD contracts, which reflect
anticipated fee rates and volumes of business, are reasonable.  As
shown in table 1, in 3 of the last 4 years, MITRE underestimated
non-DOD fee earnings. 



                                Table 1
                
                  Estimated and Actual Fee Earnings on
                Non-DOD Contracts--Fiscal Years 1991-94

                         (Dollars in thousands)


Fiscal year\a                            Estimated              Actual
------------------------------  ------------------  ------------------
1991                                        $8,251              $8,439
1992                                         9,778              10,151
1993                                        10,899              10,332
1994                                         9,882              11,043
----------------------------------------------------------------------
\a For fiscal years 1991 and 1992, data are for MITRE's August 1 to
July 31 fiscal year.  In fiscal year 1993, MITRE changed its fiscal
year to align with the federal fiscal year; 1993 and 1994 data are
from October 1 to September 30. 

In fiscal year 1994, the underestimate amounted to about $1.2
million, or almost 12 percent of estimated non-DOD fee earnings. 
Contracting officers, in some cases, have analyzed past trends in
non-DOD fee earnings but have not reviewed the reasonableness of
estimates for future years.  Thus, MITRE was able to obtain larger
fees from combined DOD and non-DOD sources than contemplated in the
Army and the Air Force fee negotiations. 

Army and Air Force contracting officers have only occasionally
determined whether fee expenditures related to DOD and non-DOD work
were proportional to the work performed.  This is partly due to
MITRE's accounting system commingling fee expenditures, making it
difficult to identify fee expenses that relate primarily to non-DOD
customers.  For example, in fiscal year 1994, MITRE recorded $79,181
in costs incurred for first-class airfare and similar nonreimbursable
travel expenses in a single company account.  One individual, the
chief of the MITRE division that does air traffic control work for
FAA, incurred $21,000, or about 27 percent, of these charges.  In one
instance, the chief spent $6,486 for a first-class flight to London,
England, to attend an air traffic control conference.  MITRE claimed
reimbursement for the $2,471 cost of a coach ticket and charged the
additional $4,015 cost of a first-class ticket to the commingled fee
account even though MITRE acknowledged that these trips were related
to MITRE's air traffic control system work for foreign governments. 
MITRE has recently changed its accounting system to account for fee
expenditures by division--roughly representing major
customers--providing an opportunity to more readily determine what
customer benefits from particular expenses. 

In addition, contracting officers have not analyzed the relative
needs for working capital related to different customers.  Payment
cycles on MITRE's non-DOD contracts are typically longer than those
on DOD contracts.  Both the Army and the Air Force contracts provide
for biweekly billings, and timeliness of payment is routinely
discussed during fee negotiations.  Many non-DOD contracts, however,
provide for monthly, rather than biweekly, billings, and payments on
these contracts are generally less prompt.  Consequently, non-DOD
customers have made proportionately heavier demands on MITRE's
working capital than the Army and the Air Force.  During fiscal year
1994, accounts receivable due from non-DOD customers represented an
average of 60 days of revenue, compared to 12.7 days for the Army and
the Air Force.  The unbilled costs for both DOD and non-DOD customers
each averaged roughly 35 days of revenue.  Thus, the total financing
burden for non-DOD customers of
94.3 days of revenue was almost twice the financing burden for the
Army and the Air Force, which was 48.2 days. 

Contracting officers did not routinely analyze MITRE fee expenditures
to identify nonrecurring costs that would distort projections of
future fee needs.  Major categories of nonrecurring expenses have
been occasionally identified.  DCAA, for example, identified several
nonrecurring items in its review of 1993 fee expenditures.  We noted
several expenditures that appeared to be nonrecurring in nature
during our review of 1994 fee expenditures, as the following shows. 

  A charge of $507,000 to reconcile MITRE's accounting records to its
     property management records.  During fiscal year 1994, MITRE
     undertook a major effort to identify discrepancies between its
     property and accounting record-keeping systems because
     independent auditors had criticized it for not reconciling the
     two systems regularly. 

  A charge of $270,000 to record anticipated costs of providing meals
     and refreshments at meetings.  MITRE accounting staff told us
     that at the end of fiscal year 1994, costs incurred for meals
     and refreshments at meetings were substantially less than in
     previous years.  This charge was recorded because the accounting
     staff anticipated that these costs would eventually equal those
     of previous years, but the anticipated costs did not
     materialize. 

  A charge of $310,845 to write off losses on contracts with the
     German government.  These losses were written off as part of an
     agreement to resolve payment disputes on work performed between
     1979 and 1992. 

Lack of sufficient guidance on use of fee to provide financing for
FFRDCs led Army and Air Force contracting officers to award
significantly different fee rates.  In 1993, MITRE obtained a 3-year
term loan to take advantage of favorable, fixed interest rates rather
than the fluctuating rates on its short-term borrowing.  In fee
negotiations for fiscal year 1995, MITRE proposed that it obtain
another term loan during 1995.  The Air Force considered the proceeds
of this loan as a source of cash, offset by a need to make principal
payments on the term loan, and awarded a fee of $2 million, or about
0.9 percent of estimated contract costs.  The Army, on the other
hand, excluded both loan proceeds and principal payments from its
analysis of 1995 fee requirements because it was unwilling to make a
commitment to provide fee to cover principal payments in future
years.  Consequently, the Army awarded a fee of $3.7 million on its
somewhat smaller contract, amounting to 2.3 percent of estimated
costs.  DOD guidance provides no suggestions on how contracting
officers should treat financing transactions in analyzing fee needs. 


   DOD RECOGNIZES FEE GUIDANCE
   SHOULD BE STRENGTHENED
------------------------------------------------------------ Letter :6

In the Conference Report of the DOD Appropriations Act for Fiscal
Year 1995, the Congress directed DOD to review how its FFRDCs have
used fees and provide recommendations for revising the DOD FFRDC fee
structure.  The results of that review, reported in May 1995,\5 are
consistent with the findings of our current work and recommendations
we made in 1969 regarding fees granted sponsored nonprofit research
organizations. 

DOD's report identified a need for stronger guidance on FFRDC fees
and more consistent fee awards.  In its report, DOD concludes that
because the Weighted Guidelines Method\6 normally results in a fee
greater than demonstrated need, some contracting officers have
awarded unneeded fees.  DOD recommended that the guidance be revised
to (1) make it clear that need will be the criterion for awarding
fees to FFRDCs, (2) avoid using undefined and ambiguous terms to
describe fee needs, and (3) identify specific costs that are
inappropriate to pay from fees.  We found that Army and Air Force fee
analysis procedures are intended to limit MITRE's fee to demonstrated
need.  The lack of a clear description of costs that fees can be used
to cover, however, has complicated contracting officers' efforts to
ascertain MITRE's fee needs. 

DOD's report also identified a need for greater audit oversight of
costs FFRDCs have historically paid from fees, such as the costs for
independent research programs, contract termination, and capital
equipment.  In its report, DOD recommends, as we did in 1969, that
independent research be treated as a reimbursable cost so that
expenditures will be subject to routine audit oversight.  The Army
and the Air Force have implemented this treatment of independent
research costs at MITRE. 

DOD's report also recommended that termination costs should be
audited and reimbursed directly when and if an FFRDC's contract is
terminated; fees should not be provided for such costs.  We have
opposed using fees to build contingency reserves, and MITRE has not
requested fees to build termination cost reserves. 

As to financing capital equipment with fees, DOD recommends that the
FFRDCs capital acquisition plans be thoroughly audited.  We have
recommended that FFRDC sponsors fund capital equipment purchases
directly through contract charges rather than through fee.  We noted
that the capital equipment acquisition plan MITRE proposed during
fiscal
year 1994 fee negotiations differed markedly from MITRE's actual
purchases for the year. 


--------------------
\5 Comprehensive Review of the Department of Defense's Fee-Granting
Process for Federally Funded Research & Development Centers, May
1995. 

\6 This method is normally used to determine contract fees for
commercial firms and is one test for determining reasonable FFRDC
fees. 


   RECOMMENDATIONS TO THE
   SECRETARY OF DEFENSE
------------------------------------------------------------ Letter :7

We recommend that the Secretary of Defense

  issue guidance that, to the extent practicable, specifically
     identifies the nature and extent of nonreimbursable costs that
     may be covered by fee and the costs for which fees should not be
     provided;

  consider the feasibility of issuing guidance specifying the
     circumstances in which each of the various funding and payment
     methods devised by the services should be used; and

  assign responsibility to the Director of Defense Research and
     Engineering for routinely surveying the services' fee-granting
     processes for FFRDCs, identifying and promoting the use of
     effective or innovative analytical practices, and recommending
     needed changes to eliminate inconsistencies in awarding fees. 


   DOD AND MITRE COMMENTS
------------------------------------------------------------ Letter :8

DOD generally concurred with a draft of this report.  It stated that
the report would be helpful to ongoing DOD efforts to strengthen its
procedures for the oversight and use of management fees by
DOD-sponsored FFRDCs.  However, DOD pointed out that none of the data
in the report represented improper activity, as currently defined by
contract or regulation, on the part of either the Air Force, the
Army, or the MITRE Corporation. 

DOD also agreed with our recommendations and indicated it would take
steps to address them.  It added that (1) in fiscal year 1996 DOD
will address inappropriate use of fees during the contract
negotiation process and (2) beginning in fiscal year 1995, fee
expenditures are being associated directly with the cost centers
(i.e., contracts) benefiting from the expenses.  DOD said that these
steps will result in reductions in the amount of fee paid to an FFRDC
and help ensure that it pays only its fair share of fee expenses. 
DOD's comments are presented in their entirety in appendix I. 

MITRE agreed with our recommendation on the need for strengthened
guidance on the nature and extent of nonreimbursable costs that may
be covered by fee and the costs for which fees should not be
provided.  It also agreed with our observation regarding interest
costs incurred as a result of delays in funding, as well as in
billing and payment cycles and said it would welcome some form of
advance funding/payment mechanism.  MITRE's comments are presented in
their entirety in appendix II. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :9

We reviewed documentation relating to company organization and
management and interviewed MITRE officials at the company's Bedford,
Massachusetts, and McLean, Virginia, locations.  We also reviewed
accounting records and supporting documentation relating to fee
expenditures during fiscal year 1994.  We selected fiscal year 1994
because it was the most recently competed fiscal year at the time of
our review and because expenditures for fiscal year 1993 had been
reviewed by DCAA. 

We interviewed officials and reviewed documentation maintained at the
Director of Defense Research and Engineering, the DOD Inspector
General, and DCAA.  We also interviewed officials and reviewed
documentation relating to contract fee awards at the three agencies
that contract with MITRE for FFRDC operations:  the U.S.  Army
Communications-Electronics Command, Fort Monmouth, New Jersey; the
Air Force Electronic Systems Center, Hanscom Air Force Base,
Massachusetts; and FAA, Washington, D.C.. 

We conducted our review from October 1994 to August 1995 in
accordance with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :9.1

Unless you publicly announce its contents earlier, we plan no further
distribution of this report until 30 days from the date of this
letter.  At that time, we will send copies to other interested
congressional committees, the Secretary of Defense, the Director of
the Office of Management and Budget, and the President of the MITRE
Corporation.  We will also make copies available to others on
request. 

Please contact me at (202) 512-4587 if you or your staff have any
questions concerning this report.  Other major contributors to this
report are listed in appendix III. 

Sincerely yours,

David E.  Cooper
Director, Acquisition Policy,
 Technology, and Competitiveness Issues




(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
============================================================== Letter 



(See figure in printed edition.)




(See figure in printed edition.)Appendix II
COMMENTS FROM THE MITRE
CORPORATION
============================================================== Letter 



(See figure in printed edition.)


The following is GAO's comment on the MITRE Corporation's letter
dated October 26, 1995. 

GAO COMMENT

1.  During the period covered by our review, MITRE did not have
accounting mechanisms in place to track fee expenditures separately
for each contract or customer.  Consequently, data was not available
to perform a structured analysis of whether contracts or customers
paid a fair share of fees.  As we note in our report, MITRE has
changed its accounting system to account for fee expenditures by
division or major customer.  This data should facilitate analyses to
determine whether fees are equitable among customers. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Charles W.  Thompson

OFFICE OF GENERAL COUNSEL,
WASHINGTON, D.C. 

Ernie E.  Jackson

BOSTON FIELD OFFICE

Thorton L.  Harvey
Monty Peters

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