by Robert Antonio

July 5, 2001

The difference between the $23.6 billion and the $30.3 billion is caused by the use of product and service codes to classify contract dollars obligated on the Department of Energy's Federally Funded Research and Development Centers.  Since these government-owned Centers are managed under management and operating contracts, the contract dollars normally are classified as services for the management of a government-owned facility.  This classifies an estimated $6.7 billion in research and development as services.  Table 2 compares the Federal Procurement Data System dollars for 16 of the Department of Energy's  Federally Funded Research and Development Centers with revised estimates that reclassify the service dollars as research and development dollars.  

The Federal Procurement Data System

The Office of Federal Procurement Policy Act (41 U.S.C. 405 (d)) requires a computer-based Federal Procurement Data System (FPDS) to adequately collect, develop, and disseminate federal contracting statistics.  For Fiscal Year 2000, FPDS collected information on nearly 520,000 separate contract actions that each exceeded $25,000.  These actions include 12 possible actions ranging from a new contract award to a contract terminated for default.  When all the actions are summed, the federal government obligated nearly $204 billion to contracts that each exceeded $25,000 in Fiscal Year 2000.  To obtain this data from federal agencies, FPDS uses a Standard Form 279 to collect more than 40 different bits of information.   

One of the data items required for entry into the FPDS is a "principle product or service" code that is intended to identify the different items the federal government acquires.  These codes, provided in the "Product and Service Codes Manual (August 1998)," are grouped into three broad classes: research and development, services, and supplies and equipment.  The Standard Form 279 provides for only one code to be assigned to a contract action.  If more than one code is applicable, the code that describes the "predominant product or service procured" is to be provided.  These codes include 4 digits that include letters and numbers.

Research and Development Codes

Research and development is identified on the Standard Form 279 using two letters and two numbers.  The first digit is the letter "A" which designates work as research and development.  The last digit is a number that identifies five stages of research and development such as basic research, applied research, advanced research, etc.  There is a sixth number described as "Management and Support" which includes such things as 

"construction of a general nature unrelated to specific programs, maintenance and support of laboratories, operation and maintenance of test ranges, and maintenance of test aircraft, equipment, or ships."

However, the Manual explains that laboratory personnel, either in-house or contractor, are to be assigned to appropriate projects or program stages outlined in the first five categories.  The remaining letter and number in the code further defines the research and development work.  For example, 

• code "AG51" identifies basic energy research in the area of nuclear research and development.  
  
  

• code "AZ11" identifies other basic research and development.

As can be seen, the coding system provides for a worthwhile description of contract work in the area of research and development. 

Service Codes

For services, the Manual explains that "all services except research and development" are included in this class of item.  There are 23 categories of services with each category identified by a letter.  After the letter, three numbers are added for the 4-digit code.  Included in the service category is one identified with the letter "M" for "Operation of Government-Owned Facilities."  Included under these "M" services are

• code "M159" Operation of Other Government-Owned Industrial Buildings.
  
  

• code "M181" Operation of Government-Owned Contractor-Operated (GOCO) R&D Facilities.

The Management and Operating Contract

The Department of Energy (DOE) manages its massive research and development facilities through management and operating (M&O) contracts.  The M&O contract concept started in World War II with the development of nuclear weapons and was formally authorized by the Atomic Energy Act of 1946.  The M&O contracts and their processes make these contracts unique in the federal contract world. 

DOE's M&O contractors conduct some of the world's most important science.  They also maintain the nuclear arsenal of the United States and conduct environmental restoration of the facilities that were polluted by the development and production of nuclear weapons. 

DOE is justly proud of these science  facilities and provides a website dedicated to its research and development accomplishments.  That website also provides a map that identifies DOE's national laboratories.  Sixteen national laboratories managed by M&O contractors are designated as Federally Funded Research and Development Centers (FFRDC) for 2001.  To be designated as an FFRDC, an institution's primary activities must include basic research, applied research, development, or management of research and development.  Table 3 provides a list of 16 of these national laboratories and their fiscal year 2000 contract obligations.

One of the unique aspects of DOE's M&O contracts is that most, if not all, are integrated into DOE's accounting system.  DOE provides the account structure called Budget and Reporting Classification (B&R) Codes for the M&O contractors to use and DOE can monitor the M&O contractors' spending activities through its accounting system.

Classification of DOE FFRDC M&O Contracts

DOE is faced with a choice of product and service codes for the management and operation of an FFRDC under an M&O contract.  DOE can choose from a research and development category or a service category.  Table 4 shows the product and service codes that were used during fiscal year 2000 for the 16 FFRDCs operated under M&O contracts.

The majority of the FFRDCs were placed in a service category--ordinarily the "M181" category for the operation of a government-owned contractor-operated research and development facility.  

However, there is a difference of opinion in regard to the proper code to use.  Some contracts were given a research and development code.  In one case, an FFRDC was classified as a service in Fiscal Year 2000 and is classified as research and development in Fiscal Year 2001.  Each classification that DOE used seems appropriate.  Although the "M181" category is a service category, it does identify the managed facility as a research and development facility.  However, when this service category is used the FPDS users do not see the contract dollars spent on research and development.  

As noted above, an M&O contract may cover an assortment of work including such things as research and development, the maintenance of nuclear weapons, construction, the management of the site, the operation of the site, and the environmental restoration of the site.  To identify the specific work that the M&O contractor does, an accounting system that collects cost data on specific spending activities is needed.  DOE has such an accounting system for its M&O contractors and they report their costs in accordance with DOE's B&R Codes.  In 1995, the General Accounting Office (GAO) conducted a study in which it used DOE's accounting system and B&R Codes to identify the research and development spending of the FFRDCs.¹  Table 5 shows the amount spent on research and development as a percent of overall contract spending at the 16 FFRDCs in Fiscal Year 1994.

As shown in Table 5, all but 2 of the FFRDCs spent the majority of their funding on research and development.  If this spending ratio remained constant over the years since the GAO report, then it is clear that the majority of FFRDC spending is for research and development and not the maintenance of a government facility.  Under FPDS reporting instructions, when more than one product and service code is applicable, the code that describes the "predominant product or service procured" is to be provided.  Table 6 provides the revised estimates using this FPDS reporting instruction.   

The revised estimates show (1) a 100 percent allocation of obligations based on the predominant contract work and (2) an allocation based on the research and development spending percentages provided in the GAO report for Fiscal Year 1994.  Both of the revised estimates show a difference of billions of dollars from the amount included in the FPDS for Fiscal Year 2000.

Conclusions

This analysis and estimates assume that the spending patterns for the FFRDCs have not changed significantly over the past several years.  Even if there have been changes, it is reasonable to assume that DOE's FFRDC spending on research and  development is underestimated by billions of dollars in the FPDS.  For FPDS data to be useable, it must be more precise.    

Improving the precision of the FPDS is not difficult.  Since DOE's accounting system identifies the costs associated with its M&O contractors' various activities, DOE can use its accounting system to identify the predominant activity of its FFRDCs.  Once that is done, it can select the appropriate product and service code to use.  DOE and FPDS may wish to use the "M181" code as a research and development code instead of a service code.  This would require little effort.  If DOE wishes to use the research and development codes instead, its accounting system will help it identify the type of research and development being done.  Although this would take more effort, it would be more precise.