Today we are finishing up our discussion of patents, royalties, and related costs. Essentially, if patents are required by your contract, you can claim the costs. If you must go out and pay royalties to support your contract, you can claim the royalty costs as an expense.
Because patents and royalties are often contentious areas between contractors and the Government, FAR 31.109(h) lists royalties and other costs for use of patents as an example for which advance agreements may be particularly important. Advance agreements are used when the reasonableness, the allocability, and the allowability under the specific cost principles (i.e. FAR 31.205) are difficult to determine. To avoid possible subsequent disallowance or dispute, contractors and the Government are encouraged to seek an advance agreement on how such costs will be treated. This effectively takes the auditor our the the determination process.
FAR 31.205-47, costs related to legal and other proceedings, is also relevant to our discussion on patent/royalty costs. The cost of patent infringement litigation are unallowable (unless, of course, provided for in the contract). This means that the Government is happy to use your patents but it will not pay to help defend those patents. I guess the logic here is that there is no adverse consequence to the Government when someone violates a contractor's patent rights.
The final aspect of this subject we want to highlight is the requirement to document your costs. Many costs related to patents fall under the broad category of professional and consultant service costs (FAR 31.205-33). That cost principle requires specific documentation to support the allowability; consulting agreement, invoice, and work product (or evidence of services rendered). Be sure that when you claim costs associated with patents, you also maintain the basic documentation required by this cost principle.
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