Need to Improve Reviews of Royalty Charges Included in Air Force Contracts

PSAD-77-153: Published: Aug 16, 1977. Publicly Released: Aug 16, 1977.

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The Armed Services Procurement Regulation permits a defense contractor to include in his proposed contract price royalties he must pay a patent owner. The contracting officer must submit the information about royalties received from the contractor to a patent office for advice on the propriety of the royalties.

A review of patent royalty files indicated a general lack of documentation necessary to determine the propriety of royalties approved. About 40 percent of the files examined did not contain documents showing that the Patent Division: (1) determined if the government had rights to the patent; (2) obtained engineers' comments; or (3) reviewed engineering drawings. The Patent Division recommended approval of about $106,000 under nine license agreements for which there was no evidence that the patents covered items procured. There were several instances in which royalty approvals were questionable. Contracting officers were not familiar with general guidelines for processing royalty requests, and some Air Force contracts included royalty charges without identification by the contractor. A review of four cases showed that conflicting opinions on the propriety of royalty approvals went unresolved for several years. Failure to obtain and review necessary information on royalty requests can lead to improper contract payments.

Recommendation for Executive Action

  1. Status: Closed

    Comments: Please call 202/512-6100 for additional information.

    Recommendation: Procedures should be established to ensure that necessary documentation is obtained, reviewed, and maintained to support royalty approval action. Such procedures could involve requiring a statement or certification from the contractor regarding the amount of royalties included in a price proposal and the use of a checklist by the contracting officer. Steps should be taken to reevaluate those cases identified where royalties may have been improperly approved and, if appropriate, take measures to recover improper payments.

    Agency Affected:


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