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:
- The total amount of IR&D costs applicable to the product can be identified;
- The proration of such costs to sales of the product is reasonable;
- 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
- 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.