The existing capabilities resulted from earlier contract and I.R. & D. work with which the contracting office had no prior concern-even though they provided the necessary foundation for the new effort. For example, I.R. & D. and contract capabilities and concepts generated throughout the company made possible its successful efforts to provide the highly advanced turboprops, nozzles, structures, and controls, needed for the development of the rocket motors, which now operate successfully in the ultrahigh-temperature nuclear environments.

Infrared systems for space and nighttime surveillance are areas in which the company has been making important contributions to strategic defense, as well as to tactical requirements. Numerous I.R. & D. investigations, over the past 8 years, have been directed at obtaining fundamental information and exploring new concepts on infrared detectors, special preamplifiers, optics, and microelectronic techniques. These early and continuing company-initiated R. & D. efforts, complementing and looking beyond contract development work, have made it possible to successfully serve the Air Force and Army in developing and providing basically new and advanced surveillance systems for space platforms and for aircraft vehicles. Delivery has started on prototype equipment to meet the requirement for night operation of helicopters and other aircraft, and I need not point out their importance to the members of this subcommittee.

The Office of the Director of Defense Research and Engineering leaves no doubts that it concurs, saying that "I.R. & D. is essentially the homework a company producing new products has to do to keep itself in the forefront of technology."

We should note carefully that this work is done by all technically oriented concerns with contracts with the three agencies we are discussing. These firms are small and large with the small ones predominating. I do not want to take the committee's time discussing one factor which is important to them—that is, the thousands of jobs that would be lost and the small manufacturers who would go out of business should S. 3003 be enacted. Profoundly serious as this is, the end result of a severe curtailment in I.R. & D. would, in the long run, literally jeopardize our safety in the 1970's an occurrence of broad significance to all citizens.

As I read this legislation, I, for one, cannot conceive of how it could be administered, since we would necessarily have to be quite selective and even the Department of Defense admits it could not easily develop the capacity to direct such an immense field. I have questioned many on this matter and the answer is always the same: "No one has the foggiest notion of how to administer it."

I.R. & D., we must remember, is an indirect cost of doing business and is necessary as the technological lifeblood of national defense. It must be conducted as independent to insure that our best scientific and engineering brains can be applied to defense problems.

As we proceed on these hearings I hope we will bear the foregoing in mind. I do not presume to lecture my colleagues on definitions, but did feel the record should show an understanding of the subject and a perspective on the matter as we get deeper into it.

Thank you, Mr. Chairman.

S. 3003

Senator MCINTYRE. At this time, if there is no objection, the bill S. 3003 will be made part of the record and we will also introduce into the record the report to the Congress by the Comptroller General of the United States dated February 16, 1970, entitled, as I have said in my opening statement, "Allowances for Independent Research and Development Costs and Negotiated Contracts Issues and

Alternatives."

We will make this part of the record at this time.

(The report to the Congress by the Comptroller General is entered as Appendix I.)

(S. 3003 follows:)

[S. 3003, 91st Cong., first sess.]

A BILL To provide for more effective control over the expenditure of funds by the Department of Defense and the National Aeronautics and Space Administration for independent research and development, and for other purposes

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That section 2301 of title 10, United States Code, is amended by adding at the end thereof the following:

"(4) 'Agency concerned' means the Department of Defense and the military departments thereof or the National Aeronautics and Space

Administration."

SEC. 2. Chapter 137 of title 10, United States Code, is amended by adding at the end thereof the following new sections:

"§ 2315. Research and development costs

"(a) No costs for research and development shall be allowable under any negotiated contract entered into by the agency concerned unless provision for such costs are specifically provided for in the contract; and no research and development costs shall be allowable under any such contract unless such costs provide a direct or indirect benefit to the work being performed under the contract.

"(b) Whenever funds are authorized under any negotiated contract for carrying out one or more independent research and development projects, the contractors or subcontractor shall be required to submit to the agency concerned a technical appraisal of each such project. A technical appraisal submitted pursuant to this subsection shall be prepared in accordance with regulations issued by the agency concerned.

"(c) Any research and development costs determined not to be of direct or indirect benefit to the work being performed under the contract may not be allowed as an overhead expense under the contract.

"(d) As used in this section the term 'research and development' includes (1) either research or development, or both, and (2) any other work or service generally identified or classified as 'other technical effort'.

"§ 2316. Bid and proposal expenses

"The cost of preparing bids or proposals, successful or unsuccessful, shall be an allowable expense of a contractor or subcontractor under any negotiated contract if the subject matter of the bids and proposals is applicable to the program of the agency concerned. The cost of preparing bids or proposals shall be allocated only as indirect costs of the contractor or subcontractor. In no case may the amount allowed for bid and proposal expenses under any negotiated contract (1) exceed 1 per centum of the direct material (exclusive of capital equipment) and the direct labor costs of the contract performed or to be performed, or (2) include negotiating or promotional expenses, expenses properly allocable to research and development, or the expense of salesmen, representatives, or agents who do not provide technical services in connection with the bid or proposal."

SEC. 3. The table of sections at the beginning of chapter 137 of title 10, United States Code, is amended by adding at the end thereof the following:

"2315. Research and development costs.

"2316. Bid and proposal expenses."

SEC. 4. The amendments made by this Act shall be effective with respect to contracts entered into on and after the date of enactment of this Act.

Senator MCINTYRE. Now, I am very happy to see my good friend, the distinguished and very able Senator from Wisconsin.

Senator Proxmire, on behalf of the subcommittee, we welcome you here. As you know, at the time that your amendment came up last year, it was very difficult for us to give the whole subject the real going over it needed, and so this subcommittee is really meeting today as a result of the agreement between you and the distinguished chairman of the full committee, pursuant to which you withdrew your amendment with an understanding that you could present it to the Senate as a bill this year so that we could really find out what I.R. & D. is all about.

You may proceed in any fashion you would like.

STATEMENT OF HON. WILLIAM E. PROXMIRE, U.S. SENATOR FROM WISCONSIN

Senator PROXMIRE. Thank you very much, Mr. Chairman, and I want to thank you and the distinguished chairman of the full committee, Senator Stennis, for having made this arrangement in agreeing to go into this matter in this detail. I think, if nothing else comes from this hearing, the fact that we are exploring this area where so much money has been spent, hundreds of millions of dollars a year, with so little knowledge on the part of Congress and so little control, I think the fact that we are inquiring into it alone represents real progress.

Senator MURPHY. May I ask a question, Mr. Chairman?

Senator MCINTYRE. Yes.

Senator MURPHY. Have you ever had an experience of negotiating a contract with the Government?

Senator PROXMIRE. Senator Murphy, I have not. I have not had that experience.

Senator MURPHY. I just wondered about that. I have had such experience often in the past and, as we go along in the colloquy, I will be able to tell you first hand some of the problems that are not always recognized.

Senator PROXMIRE. Fine. I would like to hear it.

Mr. Chairman, I appreciate very much the opportunity to testify on the subject of independent research and development (I.R. & D.) and I want to congratulate the Senator from New Hampshire, Mr. McIntyre, and the chairman of the Armed Services Committee, Mr. Stennis, for holding these hearings. Until now, independent research and development has been a little known and mysterious subject.

Independent research and development is a new subject and a new issue to almost everyone in Congress. I was flabbergasted when in a conference with the Comptroller General last summer I found out that the Defense Department was picking up the tab of $685 million and NASA $131 million a year in private defense contractors research and development costs which were (1) not the subject of a contract or grant or other specific arrangement for research and development between the Government and a company, which (2) need not bear any direct or even indirect relationship to any military or space need of the Government and (3) over which the Government had no control That is why I have introduced S. 3003, which is the subject of these hearings today.

1.R. & D. is unlike a procurement contract where the Government agrees to buy a tank, and gets a tank.

It is unlike regular R. & D. contracts where the Government works out the specific research it needs done and then supports that research. It is unlike a "basic" research contract where, even though the Government does not know what specific scientific or technological information it may receive, it nonetheless funds the research under formal authorization procedures for the advancement in human knowledge which may take place. Under I.R. & D., such a result would occur by accident at best.

I.R. & D. is unlike any of these in another aspect as well. The Government not only receives no direct or specific product or benefit related to its needs a plane, a tank, a new prototype, et cetera-but under DOD and NASA regulations receives no license, patent, royalty, or right whatsoever for the money it expends.

The Government pays companies for work which is designed to benefit the company. And in addition to reaping the benefits on the I.R. & D. work itself, the company also retains the right to all future benefits from licenses and royalties.

Even though it is one of the biggest single items of expense, I.R. & D. has never been directly authorized by the Congress. To my knowledge, it is the subject of no legislative authority. There is no item in the annual procurement bill which authorizes it. Nor is there any item in the appropriations bill which legitimatizes it.

It is a back door boondoggle now amounting to just short of a billion dollars a year over which Congress has had no control and whose benefits to the Government and the taxpayers of the United States are, at best, indirect, transitory and evanescent and, at worse, nonexisent. From time to time in the past Congress has been accused of providing a blank check for the so-called military-industrial complex. I have made that charge myself. But here is a case where the militaryindustrial complex has not received a blank check from Congress. They have printed the checks and filled in the blanks themselves.

What is co-called Independent Research and Development? Basically, it is the amount of money which Defense and NASA military contractors expend to pay the salaries of engineers and other technical employees for work unrelated to any contract they have with the Government. And incidentally, it is limited to those firms who already have negotiated contracts with the Government. It is not an item which industry as a whole receives.

I.R. & D. is an item in addition to the sums directly expended for the procurement of weapons. I.R. & D. is an item paid for by the Government in addition to any direct research and development contract which a firm has with the Defense Department. It is an amount paid to firms in addition to the amount paid for the R. & D. portion of a major weapons procurement contract.

For example, when the Air Force bought the C-5A from Lockheed, it paid or pays for the planes it receives under the production contract. It also pays for the huge R. & D. work associated with the development of the plane, which in this case amounted to $1,002,700,

000. That is a part of its contract. But, the Air Force also picks up, as an overhead cost, Lockheed's expenditures for engineers, who do not work whatsoever on the C-5A or other military contracts. The Air Force picks up the tab for a part of the company's commercial work, and even for a part of the expense the company has in making proposals and bids for its nonmilitary work.

I say this practice-whether at Lockheed or elsewhere-is improper, unauthorized, and, under the provisions of section 203 of the 1969 authorized bill, is not only wrong but actually illegal. It is now contrary to a specific provision of the law.

Section 203 states, "None"-none, none "of the funds authorized to be appropriated by this act may be used to carry out any research project or study unless such project or study has a direct and apparent-and an apparent I stress-"relationship to a specific military function or operation."

Nothing could be clearer or more explicit than that.

I would like to give you some examples because I think one of the shortcomings in going over the basis of R. & D. is a lack of clear cut examples. When I asked the General Accounting Office for examples they told me companies had vigorously objected to making public the kinds of items developed by them on the grounds that the research and its results were proprietary data.

Now think of that. The Defense Department pays out $685 million for work which not only benefits the companies but which they refuse to make public on the grounds that the public has no right even to know about it.

EXAMPLES OF I.R. & D.

I think a great service could be performed if this committee would require the DOD and NASA to give the specific items in research for which I.R. & D. was paid. Nevertheless, I was able to get some examples both from the GAO records and from the Army Audit Report. I would like to insert the example given me by the GAO in the record at the present time.

(The example follows:)

Mr. HAROLD H. RUBIN,

AEROJET-GENERAL CORP.,

El Monte, Calif., February 20, 1970,

Associate Director, Research and Development,
U.S. General Accounting Office, Washington, D.C.

DEAR HAROLD: As promised yesterday, I'll try to give you a brief historical recap of at least the main facts in our long efforts to generate and provide new reverse osmosis technology and equipment for economical water purification, Mr. Ruggiero from your L.A. office will visit us tomorrow morning for a firsthand discussion, which will help provide a comprehensive picture of the work, the progress and the underlying objectives of these complex efforts. Also, Dr. Laufer and Dr. Marcus at ONR have looked into this in their on-site IR&D reviews, and should be able to provide additional observations.

As general observations, while we are pleased with the acceptance and progress to date, there have been many typical developmental difficulties. We still look forward to wide spread demands for these new water purification techniques and to the time when the venture as a whole can be considered a profitable one, In particular, we are gratified with the contributions made by our technical staff to these new water purification techniques, and their potential for serving nas