It used the remainder of the fee, along with other corporate resources, for capital equipment purchases, real and leasehold property improvements, and other unreimbursed expenditures. In fiscal year 1993, Aerospace spent about $11.5 million, or 74 percent, of the Air Force fee for sponsored research. A 1962 report to the President on government contracting for research and development, known as the Bell report, supported the continuation of fee payments for research because most nonprofit organizations must conduct some independent, self-initiated research if they are to attract and retain staff.On the other hand, an August 1965 congressional report on Aerospace noted that some research would normally be a reimbursable expense and therefore all of the research could be provided under reimbursement.Similarly, in December 1994, the DOD Inspector General concluded that FFRDC-sponsored research should be reimbursed as contract costs to the extent that is allowable and reasonable. Most recently, in May 1995, a DOD study, completed at the direction of the Congress, focused on ways to limit the use of fee. Unreimbursed Expenses

In fiscal year 1993, Aerospace spent $1.9 million from fee and other corporate funds on unreimbursed costs, that it considered ordinary and necessary to the FFRDC. Although the Air Force and Aerospace discuss Aerospace’s need for fee and planned use of fee by cost category, Aerospace exercises some discretion in spending the fee and determining what expenditures funded from fee are ordinary and necessary. Since Aerospace’s fee is based on its need, the manner in which Aerospace uses its corporate resources, including fee, in any one year may affect its need for an Air Force fee in the following year. Implementing this recommendation should provide the Air Force with a better basis for negotiating fee award. Further, DOD said it was actively working to improve the fee management process based on the findings and recommendations made in DOD’s May 1995 report on fee management, as well as work done by us and the DOD Inspector General. To determine the regulatory requirements governing the determination and use of fee, we reviewed applicable Office of Federal Procurement Policy guidance; FAR and DFARS provisions; Air Force operating instructions and procedures; and Air Force correspondence, contracts, and sponsoring agreement with Aerospace.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed how the Aerospace Corporation used a $15.5-million contract fee provided by the Air Force in fiscal year 1993 to operate a federally funded research and development center (FFRDC), focusing on the regulatory requirements governing the determination and use of this fee.

What GAO Found

GAO found that: (1) Aerospace spent $11.5 million, or 74 percent, of its $15.5-million fee for research; (2) Aerospace spent the remaining $4 million for capital equipment purchases, real and leasehold property improvements, and unreimbursed expenses; (3) even though the Air Force and Aerospace discuss Aerospace's specific fee needs and intended use as a basis for fee award, the contract contains the total fee amount; (4) once the Air Force awards the fee, Aerospace exercises some discretion over how to spend it and other sources of corporate funds, such as interest income and fee from other contracts; (5) the manner in which Aerospace spends its corporate funds in a given year can affect how much Air Force fee is needed in the following year; (6) in May 1995, the Department of Defense (DOD) issued a report to the Congress on fee management at defense FFRDCs; (7) the report focused on ways to limit the use of fee and recommended, among other things, that: (a) defense FFRDC fee amounts be based on the contracting officer's determination of fee need and not on the application of weighted guidelines; (b) all allowable and allocable costs be moved from fee to the cost reimbursement portion of the contract; and (c) guidance be developed regarding what costs are to be considered ordinary and necessary to the operation of an FFRDC; and (8) DOD has indicated that it is working to improve the fee management process based on these recommendations, as well as the most recent GAO and DOD Inspector General work on this issue.