For those of you who have responsibility for oversight of contractor Independent Research and Development (IR&D) costs and rates, make sure you understand DFARS Deviation 2017-O0002 Enhancing the Effectiveness of IR&D (01 December 2016). This changes an important detail in a relatively new requirement that must be met for IR&D costs to be allowable.

As background, determination of cost allowability in Federal contracts falls within agency purview and is regulated by the FAR.   FAR Part 31 Contract Cost Principles and Procedures, applies whenever a contracting officer performs cost analysis or a contract clause governs the allowance of cost (e.g., FAR 52.216-7, Allowable Cost and Payment (Jun 2013) clause).

The Department of Defense has special requirements for IR&D costs to be allowable. DFARS 231.205-18 Independent Research and Development and Bid and Proposal Costs, in subsection (c)(iii)(C)(4) states “For IR&D projects initiated in the contractor’s fiscal year 2017 and later, as a prerequisite for the subsequent determination of allowability, the contractor shall—(i) Engage in a technical interchange with a technical or operational DoD Government employee before IR&D costs are generated…” [Emphasis added]. DFARS Deviation 2017-O0002 replacing “before IR&D costs are generated” with “sometime during the contractor’s fiscal year 2017.” While effective, this deviation offers contractors opportunity to initiate IR&D projects while they are phasing in new processes and procedures. This supports Departments goals of encouraging contractor research and development in areas of importance to DoD.

On Jan 4, 2017 the Undersecretary of Defense for Acquisition, Testing, and Logistics, Mr. Frank Kendall issued a implementation memorandum in which he stressed that the new IR&D rule merely codifies long-standing practices and there is no added Government approval expected or required. The memo in full text can be referenced at: http://www.acq.osd.mil/dpap/policy/policyvault/Implementation_of_DFARS_Final_Rule_2016-D002,_Enhancing_the_Effectiveness_of_Independent_Research_and_Development.pdf

Class Deviation 2017-O0002 Enhancing the Effectiveness of IR&D can be referenced at: http://www.acq.osd.mil./dpap/policy/policyvault/CD_2017_O0002_enhancing_effectiveness_of_IRAD-updated.pdf

If you would like in-depth understanding of how to determine the allowability of independent research & development costs and subsequent effects on allocation of these cost, you may want to consider registering for CON 232 Overhead Management of Defense Contracts.