NASA Procurement:

Approach to Sharing Risk Under Certain Research and Development Contracts Is Starting to Change

T-NSIAD-92-12: Published: Mar 18, 1992. Publicly Released: Mar 18, 1992.

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GAO discussed the National Aeronautics and Space Administration's (NASA) distribution of contract risk, focusing on: (1) how NASA allocates risk for research and development contracts; (2) how the Department of Defense (DOD) uses warranties; (3) how NASA uses defect warranties; and (4) the availability of insurance to cover contractors' materials and workmanship defects. GAO noted that: (1) although NASA has typically accepted all of the cost risk by using cost-reimbursement contracts without cost-sharing provisions, NASA has been advocating shifting some of the risk to contractors in two proposed multiple-unit contracts where a production phase can be reasonably defined; (2) DOD satellite contracts typically include on-orbit performance warranties under which the contractor pays the government a negative incentive fee in case of a warranted performance failure or the contractor earns a positive incentive fee for successful performance; and (3) NASA generally uses the standard inspection and correction of defects warranty for its cost-reimbursement research and development contracts, which gives the government the authority to require contractors to replace or correct defects for up to 6 months after acceptance. GAO believes that, over time, warranty insurance: (1) will cost the government or its contractors more than correcting defects under the standard warranty; and (2) may dilute the value of on-orbit performance-related incentives by allowing contractors to offset their risk exposure.

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