DEPARTMENT OF DEFENSE FUNDING OF CONTRACTORS' INDEPENDENT TECHNICAL EFFORTS MONDAY, MARCH 2, 1970 U.S. SENATE, AD HOC RESEARCH AND DEVELOPMENT SUBCOMMITTEE Washington, D.C. The subcommittee met, pursuant to notice, at 9:30 a.m., in room 212, Old Senate Office Building, Senator Thomas J. McIntyre (chairman of the subcommittee), presiding. Present: Senators McIntyre, Murphy, and Brooke. Also present: Senator Symington of the full committee; Hyman Fine, professional staff member, Subcommittee on Preparedness. INDEPENDENT TECHNICAL EFFORT Senator MCINTYRE. The subcommittee will come to order. This morning the ad hoc Research and Development Subcommittee of the Senate Armed Services Committee begins its hearings into Department of Defense funding of its contractors' independent technical effort. This is, I must say, one of the most complicated subjects I have ever encountered. "Independent technical effort" can be defined broadly as that technical effort undertaken by a company on its own initiative rather than according to the terms of a direct contract with a customer. Such effort is classified at present into three different categories: Independent research and development (I.R. & D.), bid and proposal (B. & P.), and other technical effort (OTÈ). DEPARTMENTAL FUNDING The Defense Department's share of the cost of a company's independent technical effort is generally determined by the ratio of the company's sales to the Department as compared with its overall sales, The Department of Defense is not the only agency of the Federal Government which participates in the funding of its contractors' independent technical effort. The National Aeronautics and Space Administration (NASA) has a very similar program, while the Atomic Energy Commission (AEC) and several civilian agencies have rather different ones. Department of Defense spending in this area, however, is far greater than that of other agencies; and it has been rising steadily in recent years. Between 1963 and 1968 the Department's funding of the independent technical effort of its major contractors rose from $459 million to $685 million. How many additional such funds the Department has disbursed in recent years to its smaller contractors may not be accurately known. INCREASING IMPORTANCE OF PROGRAM Because of this steady rise in costs, as well as more basic doubts about the importance of the program to our defense posture, independent technical effort has been the subject of considerable attention in recent years not only in Congress but also in the executive branch. It is noteworthy that there has been no previous specific statutory authority supporting these elements of cost, except as covered by section 403, Public Law 91-121. It was first brought to the attention of the Senate during the course of last year's debate on the fiscal year 1970 military procurement authorization bill when Senator Proxmire, who will be our leadoff witness this morning, introduced an amendment which would have prohibited Department of Defense funding of any contractor-initiated research not related to the work being performed under the contract through which research funds were provided. Senator Proxmire later withdrew his amendment pending hearings on the measure in conjunction with the fiscal year 1971 military procurement authorization bill. But the Senate did agree last year, as an interim measure, to legislation calling for a 20-percent cut from the prior year's Defense Department spending in this area. This was later reduced to a 7-percent cut in planned expenditure during the course of last year's conference with the House. Senator Proxmire has modified his amendment of last year and reintroduced it as a separate bill, S. 3003. One of the main purposes of these hearings will be to give this bill the careful consideration which, for reasons of time, it was impossible to afford the amendment introduced last year. This subcommittee also intends to examine several alternative proposals for legislation in this area. A number of such alternatives are set forth in a recent report to Congress by the Comptroller General of the United States. This report which is entitled "Allowances for Independent Research and Development Costs in Negotiated Contracts Issues and Alternatives," was issued on February 16 of this year. We also expect to hear in the next several weeks from those most directly familiar with the subject matter of these hearings-the Defense Department and those contractors who presently rely on it for a partial funding of their independent technical effort. Our objective is the development of a policy in this complex area which will assure the sound technological base essential to our national security at the lowest possible cost both to the American taxpayer and to the long line of domestic programs urgently in need of funding at this time. Senator Murphy? Senator MURPHY. I have a statement, Mr. Chairman, that I would not take up the time of the committee to read. I would ask of the chairman that it be made a part of the record at this time. Senator MCINTYRE. Without objection it shall be made a part of the record. STATEMENT OF HON. GEORGE MURPHY, U.S. SENATOR FROM CALIFORNIA Senator MURPHY. Mr. Chairman, I think it is very important that, in our deliberations on this bill, we remain free from confusion as to what independent research and development really is and what it in fact does. Independent research and development is greatly misunderstood and, as in the case of anything new or unknown or not understood, the whole idea has been painted as some sort of monster or ogre which devours the taxpayers' dollars with relish and offers little or nothing in return. Nothing could be further from the truth, I.R. & D. in fact is a legitimate part of a supplier's or manufacturer's overhead, a part of the indirect cost of doing business. The example of the doorknob manufacturer certainly applies. He has his research people working on various matters including better doorknobs but not necessarily limited thereto. For instance, he may not sell hinges, but his engineers are working on a superior hinge. He does not pay for this work on the hinge out of profits, however. To the contrary, his cost of research on a better hinge is passed on to the customer as part of the price of doorknobs. There is nothing unusual about this as it is practiced in accordance with the widely accepted principles of accounting. I.R. & D. is handled in much the same way-and, I might add, to the great benefit of the Government and the taxpayer. There have been numerous great technological moves forward as the result of I.R. & D. I have researched this matter very thoroughly in my State where much of our I.R. & D. is carried out and believe it would be enlightening to point out some of the successes of just one of the contracting firms located there. This company is large, but is by no means the largest such contractor in California. I.R. & D. resulted in a great leap forward in propulsion for manned space and lunar flight with a great deal of the work already accomplished prior to the award of any contract. Propulsion systems for manned space and lunar flight were of course developed and produced under NASA and Air Force contract funding. However, the selection of the company and its propulsion techniques, both for the Gemini man-in-space program and the Apollo Lunar Module, was based on a wide range of I.R. & D. generated capabilities going back to the TITAN missile and other early rocket propulsion programs. Key abilities which help make possible the flawless performance of these manned space propulsion systems, included many small but vital exploratory I.R. & D. investigations on rocket motors, injectors, fuels, and advanced structures and materials. Combustion research and the critical problem of combustion instability is but one of the many specific areas where understanding generated in prior years I.R. & D. actively reduced the time and cost of motor development—and helped insure the high reliability required for manned space flight. I.R. & D. was responsible for one of our major civil benefits through water purification by reverse osmosis which was undertaken under company funded research (I.R. & D.) initially in 1962 and 1963. As the feasibility and potential usefulness of new membrane materials was demonstrated, it was possible to then serve the Department of Interior and others on numerous contract development programs in this field. Continuing progress, spurred in part by forward-looking I.R. & D., has lead to demonstration units under both Government and nonGovernment sponsorship. Growing needs and interests by the Department of Interior and elsewhere have prompted the company to establish a separate Environmental Systems Division to facilitate the extension of its defense and space generated technologies to the growing problems of water supply, environmental pollution and waste disposal. One of our growing list of transportation problems also was a beneficiary of I.R. & D. Air Cushion Vehicles for High Speed Marine Transport is an area in which company-initiated R. & D. and conceptual studies have been successfully used to explore basically new and improved transportation principles for Navy and marine use. This work was initiated as a company sponsored I.R. & D. program-portions of which were conducted by the company's Oceanics, Space and Propulsion Divisions. This has since been brought together into a separate Surface Effect Vehicles Division, serving in the development of amphibious air cushion vehicles for the military as well as civilian marine vehicles. For the ocean transport application, vital hydrodynamics, structural dynamics, and control information was obtained under I.R. & D. effort using extensive existing test facilities and instruments. This along with other previously generated capabilities in pertinent areas of propulsion, fluid mechanics, structures, and materials, made possible the company's present contract services to the joint Navy-Maritime Commission for the development of a 100-ton, 80-100 knot ocean transport vehicle. Test and demonstration of the vehicle is scheduled for July 1971. It is expected that these efforts will help point the way to basically new ocean transport vehicles for both military and nonmilitary application. Whether it happens tomorrow or not, mankind and specifically Americans will go and are going further and further into space. The most promising form of propulsion so far is nuclear rocket systems for space propulsion. This company was selected as prime contractor by NASA and AEC to develop the Nation's first nuclearrocket propulsion capability. This selection was based largely on already available in-house and contract-generated abilities in propulsion and nuclear technologies that were backed up in depth by a wide range of supporting disciplines (gas dynamics, heat transfer, chamber and nozzle design, fluid mechanics), and the broad instrumentation and test capabilities to support the design work. |