Deferred Research and Development Costs

Yesterday we discussed a little-known, seldom invoked, and rarely controversial cost principle prohibiting losses on other contracts to be charged to a Government contract (read it here). Today we want to discuss a similarly obscure cost principle - this one concerning deferred research and development costs. The cost principle is found in FAR 31.205-48 and in some respects is similar to the losses on other contracts cost principle in that contractors may not charge overruns to any other Government contract.

Research and Development Costs (R&D) must be distinguished from Independent Research and Development Costs (IR&D). IR&D costs are paid for with company funds and the definition and other coverage is contained in FAR 31.205-18. R&D costs, on the other hand, are of the same type of technical effort described in FAR 31.205-18 but are paid for (sponsored) by a grant or required in the performance of a contract.

Deferred IR&D costs are allowable so long as the contractor meets the criteria listed in FAR 31.205-18(d)(1); when a contractor has developed a specific product at its own risk in anticipation of recovering the development costs in the sale price of the product provided that:

1. The total amount of IR&D costs applicable to the product can be identified;
2. The proration of such costs to sales of the product is reasonable;
3. The contractor had no Government business during the time that the costs were incurred or did not allocate IR&D costs to Government contracts except to prorate the cost of developing a specific product to the sales of that product; and
4. No cost of current IR&D programs are allocated to Government work except to prorate the cost s of developing a specific product to the sales of that product.

Deferred R&D costs, on the other hand, are never allowable under Government contracts. When costs are incurred in excess of either the price of a contract, or amount of a grant for research and development effort, the excess is unallowable under any other Government contract.