Disclosure of IR&D Projects Prior to Incurring Costs

Earlier this week we discussed DoD's recent "white paper" describing its plans to require contractors, as a condition of IR&D (Independent Research and Development) cost allowability, to notify the Government prior to expending any funds on the project. If you missed that posting, click here. Similar provisions already exist for "major contractors". Major contractors are those allocating more than $11 million of IR&D/B&P costs per year to DoD contracts. Regulatory coverage is found in DFARS (DoD FAR Supplement) 231.205-18, Independent research and development and bid and proposal costs. Section (c)(3)(C) of that cost principle states:

For a contractor's annual IR&D costs to be allowable, the IR&D projects generating the costs must be reported to the Defense Technical Information Center (DTIC) ... The inputs must be updated annually and when the project is completed. Copies of the input and updates must be made available for review by the cognizant administrative contracting officer (ACO) and the cognizant Defense Contract Audit Agency auditor to support the allowability of the costs.

Additionally, the ACO must determine whether IR&D/B&P projects are of potential interest to DoD and provide the results of the determination to the contractor.

The existing regulation differs from the proposed regulation in two major areas. First, the new regulations will apply to all DoD contractors; not just those allocating more than $11 million of IR&D costs to DoD contracts (and subcontracts). Second, the existing provision does not include a requirement to notify the Government prior to the expenditure of funds. It only requires annual reporting of projects and costs incurred.

Although the annual reporting is currently a condition for allowability and copies of inputs must be made available to DCAA, the Agency has not revised its guidance for auditing IR&D/B&P costs to require auditors to request such information. Since the $11 million threshold is very high, the reporting requirements affect relatively few contractors and DCAA management can ensure adequate audit coverage with a few phone calls. However, if the threshold is taken away so that all contractors must report, corresponding audit guidance might be needed.