Failure to Report IR&D Expenditures May Render Such Costs Expressly Unallowable

Last week we spent a couple of postings on a proposal by DoD to require contractors to coordinate their IR&D (Independent Research & Development) plans with the Government (see: DoD Wants Contractors to Disclose Their IR&D Activities Before Incurring Any Costs) and the current rules that require contractors allocating more than $11 million of IR&D expenditures to Government contracts to report their expenditures in an online database (see: Disclosure of IR&D Projects Prior to Incurring Costs). The current rules have just begun to come into play - the DoD gave contractors until the end of 2014 to submit their initial reports.

The data submitted in on-line reporting facility are estimates and there is no expectation that they reconcile to actual costs. However, there is an expectation that the projects be reported in the database and this database will be accessible to both DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Management Agency) for their review.

This reporting requirement should not be taken lightly. It is a condition for the allowability of those IR&D costs. DCAA, for one, will be testing contractor projects against the reporting database and will, at a minimum, question any costs not found in the database. DCAA's guidance on the matter reads as follows:

If the contractor fails to input the IR&D information into the DTIC database, the costs are expressly unallowable; audit teams should question the costs and recommend application of penalties. If the team identifies significant expressly unallowable costs, consider reporting a noncompliance with CAS 405, Accounting for unallowable costs. 

So, in addition to questioning unreported IR&D costs, DCAA will recommend that the Contracting Officer level penalties for claiming expressly unallowable costs and if the particular contractor is subject to full or modified CAS (Cost Accounting Standards), will cite them in non-compliance with CAS 405 (which will add interest to the amount disallowed).