CHAPTER 1

Research and development (R&D) is an innovative process of scientific and technological preparation for change. Representing about six percent of the Federal budget for fiscal 1972, Government-funded R&D has helped to attain important national goals, particularly in the fields of defense, space exploration, nuclear energy, and health and to provide a broad base of scientific knowledge and trained manpower.

The R&D spectrum is being broadened in new efforts to enhance the quality of life, to support economic growth, and to improve the U.S. position in foreign trade. These new vistas challenge the R&D procurement process. There is still much room for improvement in defining the role and nature of R&D and in the understanding of R&D procurement within the Federal Government and other public sectors. In the procurement of R&D, the Government has the dual objective of (1) supporting the Nation's technological base and (2) acquiring the capability for producing new products and rendering new services. Major problems in the R&D procurement process often have resulted from losing sight of this dual objective.

There is also a continuing need to maximize the effectiveness and efficiency of all Federal R&D activity. A step in this direction would be the clear definition of specific roles and missions for the three major performers of R&D: universities, in-house laboratories, and private industry.

Objectives and Organization

We conclude that the increasing complexity and cost of R&D has made it difficult for some

newer agencies to find the resources needed to fulfill their R&D objectives. Such problems can sometimes be solved by seeking help from the older agencies which often possess resources that can be used to fulfill an R&D need of the new agency. It is important that this type of interagency cooperation be encouraged, especially in solving important national problems that are not within the purview of a single agency.

In order for one Federal agency to evaluate the R&D potential of another agency's inhouse laboratory, specific information is needed as to the laboratory's capability. We therefore recommend that Federal in-house laboratory directors be given some discretionary funds for demonstrating the laboratory's capability for contributing to the solution of problems outside the mission of its parent agency.

The increase in the scope and magnitude of Federal R&D over the past 25 years has been accompanied by a similar increase in basic research programs. Unfortunately, such programs have been concentrated in a few agencies, principally those with large R&D programs in areas of high technology. We conclude that a basic research program conducted side-by-side with an ongoing R&D program will invariably benefit one another if there is an effective exchange of information between the programs. We recommend that every Federal agency that has an R&D program in direct support of its missions should support an associated program in long-range basic research.

Performers

As a result of our study of R&D roles and missions, we have concluded that the universi

ties should continue to be the primary performers of basic research and that industry should be the primary source of applied research and product development. In-house laboratories must maintain strong technical competence in order to properly sponsor and manage R&D programs and perform required tests and evaluations.

As a result of our study of Federally funded research and development centers (FFRDCs), including Federal contract research centers (FCRCs) as they are called in the Department of Defense, we conclude that such centers have provided unique technical and management assistance to the Government. We recommend that the option to use such resources should be continued and offer specific guidelines for their initiation and termination.

To achieve progress in certain areas, particularly in the social sector, it has been necessary to develop R&D programs and projects that transcend traditional disciplinary or departmental boundaries. Most recently, there has arisen a compelling need to improve interaction between institutions and organizations in order to accomplish special goals and the primary response has been to form consortia of interacting institutions. We believe increased multi-institutional effort is necessary to improve industrial technology and generally to provide special resources for use by the entire national R&D community. New multi-institutional organizations might be formed from a mix of several types of performers (for example, academic, industrial, and nonprofit), depending on the requirements of the activity to be supported. Multi-institutional organizations might, however, introduce new problems, such as how to deal with questions of restraint of trade and protection of proprietary rights if industrial organizations are involved and how best to administer the programs so as to stimulate R&D. The existing National Science Foundation/National Bureau of Standards experimental incentives programs with consortia of organizations should be closely followed, and the positive results of the programs should be promptly applied.

Procurement Policy

We conclude that Government-wide and uniform regulations for R&D procurement are

needed and that competitive negotiation should be an acceptable alternative to formal advertising and the requirement for Secretarial level determination and findings for R&D should be eliminated. These subjects, with specific recommendations, are also discussed in Part A, Chapters 3 and 4.

In other policy considerations, we conclude that unsolicited proposals are a primary method of obtaining creative ideas from the private sector. Some agencies make very effective use of unsolicited proposals in their R&D procurement, but many other agencies do not avail themselves of this very useful technique. Our studies found a trend toward reduced use of this valuable technique, primarily because of recent administrative and legislative actions. This trend should be reversed and restraints that discourage the use of unsolicited proposals should be eliminated.

From our study of cost sharing policy, we conclude that cost sharing in R&D procurement normally serves no useful purpose and it creates unnecessary administrative requirements and costs for both the Government and the performers. We recommend the elimination of cost sharing on R&D projects unless the performer would clearly benefit through commercial sales.

In our study of cost recovery policy, we found two kinds of situations wherein the Government seeks to recover part of its costs for R&D from the performer who directly benefits from the Government-sponsored work. The first involves cost recovery from commercial sales of new products and the second involves cost recovery from foreign military sales. Our studies have led us to the conclusion that it would be in the national interest to remove cost recovery requirements because they interfere with the early application of R&D results. We believe that a more realistic approach would be to establish a cooperative Government-industry effort to maximize the competitive position of U.S. suppliers, and we therefore recommend the elimination of recovery of R&D costs from Government contractors and grantees except under circumstances approved by the agency head.

Our major policy recommendation concerns independent research and development (IR&D). In a price-competitive, firm-fixed

price procurement the type and amount of costs included in the quoted price are not usually questioned since the competitive situation supplies an automatic control on the amount of reimbursement for direct and indirect costs. However, there are many Government procurement situations where commercial, price-competitive, firm-fixed-price procurements are not suitable, and the matter of cost reimbursement then becomes a problem. The necessity of cost constraints in such situations has led to the development of "substitute" controls to replace those inherent in the price-competitive environment. The application of one of these "substitute" controls-cost principles to govern reimbursement of direct and indirect costs in the cost-type environment-is the key factor involved in the recovery of independent research and development (IR&D) and bid and proposal (B&P) costs. We recommend that IR&D and B&P expenditures be recognized as necessary costs of doing business. We also recommend that such costs receive uniform, Government-wide treatment and that all contractor cost centers with 50 percent or more fixed-price Government contracts and commercial sales should have such costs accepted without question and with no relevancy restriction; all other contractors should be subject to the existing Department of Defense procedures. Two dissenting positions to the above are presented in Chapter 4 of this part of the report.

Procurement Procedures

We conclude that improvements in the procurement process could be realized by reducing the excessive number of proposals often received in answer to a solicitation and by recognizing that the type of contract used should be selected primarily on the basis of the level of uncertainty in program specifications. Recommendations addressing these issues are presented in Part A, Chapters 3 and 4, and Part C. One procedure which we have considered for reducing the time required to initiate R&D work and simultaneously produce substantial cost savings is the negotiation of master agree

ments with performer organizations. Once a master agreement is negotiated, all agencies would be able to authorize work by simply negotiating a work order containing the new statement of work without the necessity of negotiating other standard terms and conditions.

It is apparent that the agencies could agree on a master agreement only if there were a high degree of uniformity in the R&D procurement regulations; we believe such agreements are one of the benefits which could be gained from uniform R&D procurement regulations. We recommend the use of such agreements, one type for grants and another for contracts, insofar as possible, for all types of performers.

Not infrequently the Government needs contractor expertise in formulating its plans and, in some cases, writing specifications for goods or services to be purchased. Contractors so employed inevitably gain a unique insight into the proposed program and, in the extreme cases, could theoretically write specifications that only they could satisfy. In the bidding for the resulting contracts, these contractors would have an unfair advantage.

The Department of Defense (DOD) and the National Aeronautics and Space Administration (NASA) have attempted to correct such situations by excluding contractors who gain privileged information. The difficulty in using the "hardware exclusion" clause lies in determining when it is warranted. The best contractors will not normally waive their rights to sales simply for the privilege of helping the Government. We conclude that the concept is sound; however, overzealous use of the clause unnecessarily denies the Government access to invaluable assistance. We recommend that when a potential organizational conflict of interest exists and use of a hardware exclusion clause is proposed, a senior official of the procurement agency should be required to examine the circumstances for benefits and detriments to both the Government and the potential contractors and reach and justify his decision to contract with no restraint, partial restraint, or strict hardware exclusion provisions.