IR&D Funds Used to Augment Development Contracts

In its "Implementation Directive for Better Buying Power 3.0 - Achieving Dominant Capabilities Through Technical Excellence and Innovation" the Defense Department noted a concern when "promised future IR&D (Independent Research and Development) expenditures are used to substantially reduce the bid price on competitive procurements. In some cases, the Government believes that price proposals for developmental work are reduced by using a separate source of Government funding - namely IR&D funds - to gain a price advantage in a specific competitive bid. IR&D costs are allowable under the Federal Acquisition Regulations (FAR) and the DoD FAR Supplement (DFARS) with a few exceptions and are spread across a contractor's total business (usually) through the application of the G&A (General and Administrative) rate. According to the Defense Department, using such activities to undercut the competition is not the intended purpose of making IR&D an allowable cost.

This concern is not new. Contractors have wide latitude on how to spend their IR&D funds and as long as their is some level of "relevance" to the Government, the projects and related costs are rarely questioned. For decades, the Government has known contractors use IR&D funds to augment their "funded" developmental contracts.

The Defense Department is now considering a proposed approach whereby solicitations would require offerors to describe in detail the nature and value of prospective IR&D projects on which the offeror would rely to perform the resultant contract. Then, as a standard approach, DoD would evaluate proposals in a manner that would take into account the reliance by adjusting the total evaluated price to the Government, for evaluation purposes only, to include the value of related future IR&D projects.

The Defense Department is seeking comments on such an approach in order to assist in the development of a proposed DFARS rule. Specifically, the department is

...interested in understanding whether the planned approach would achieve the objective of treating the proposed use of substantial future IR&D expenses as a means to reduce evaluated bid prices in competitive source selections in a uniform manner that is consistent with the objective of making IR&D an allowable cost.

We don't see how this will ever work. But, if you've got any ideas, you might want to attend DoD's meeting next month.