31.205-18 Independent research and development and bid and proposal costs
Source: FAR 31.205-18 on acquisition.gov
IR&D and B&P costs are generally allowable only when they are properly classified, reasonably incurred, allocable under CAS 420/G&A rules, and not disguised contract performance or unsupported prior-period development costs.
Overview
- FAR 31.205-18 governs when independent research and development (IR&D) and bid and proposal (B&P) costs are allowable on Government contracts.
- Its purpose is to define these cost categories, tie their accounting treatment to CAS 420, and set the conditions under which such costs may be charged as allowable indirect expenses.
Key Rules
- Definitions and scope
- The section defines applied research, development, B&P costs, company, IR&D, and systems and concept formulation studies. IR&D includes basic research, applied research, development, and concept studies, but excludes work required by a contract, grant-sponsored effort, and technical effort specifically supporting a bid or proposal.
- Composition and allocation of costs
- For fully CAS-covered contracts, all of 48 CFR 9904.420 applies. For modified CAS-covered and non-CAS-covered contracts, CAS 420 generally applies except certain provisions, unless the contractor also has CAS-covered contracts requiring full compliance. IR&D and B&P normally must be allocated using the same base as the relevant G&A expense pool, unless another base is needed for equitable allocation and approved by the contracting officer.
- Allowability and exceptions
- IR&D and B&P costs are generally allowable as indirect expenses if they are allocable and reasonable, unless limited by paragraphs (d), (e), or agency regulations. Deferred IR&D from prior periods is generally unallowable, with a narrow exception for specific product development undertaken at the contractor’s own risk and recovered through product sales.
- Deferred IR&D and cooperative arrangements
- If deferred IR&D is recognized, certain non-fixed-price contracts must include a specific contract provision and the negotiation memorandum must explain the basis. IR&D performed under qualifying cooperative arrangements with non-Federal entities may be allowable if it would have been allowable absent the arrangement; proposal costs for such arrangements may also be allowable if allocable, reasonable, and not otherwise unallowable.
Responsibilities
- Contracting Officers: determine whether CAS 420 applies fully or with exceptions, evaluate whether allocations are equitable, approve alternate allocation bases when justified, and document/insert required provisions when deferred IR&D is accepted.
- Contractors: classify IR&D and B&P correctly, exclude contract-required and grant-sponsored effort, allocate costs using the proper G&A basis, and support allowability with evidence of reasonableness and allocability.
- Agencies: apply any agency-specific limitations and ensure negotiated treatment of deferred IR&D is properly documented.
Practical Implications
- This section exists to prevent contractors from misclassifying business development or product development costs and shifting them improperly to Government contracts.
- In practice, contractors must distinguish IR&D from B&P and from contract performance costs, especially where technical proposal support is involved.
- Common pitfalls include charging prior-period IR&D without meeting the narrow exception, using inequitable allocation bases, and failing to document cooperative arrangement costs or deferred IR&D treatment.
(a) Definitions. As used in this subsection-
Applied research means that effort which (1) normally follows basic research, but may not be severable from the related basic research, (2) attempts to determine and exploit the potential of scientific discoveries or improvements in technology, materials, processes, methods, devices, or techniques, and (3) attempts to advance the state of the art. Applied research does not include efforts whose principal aim is design, development, or test of specific items or services to be considered for sale; these efforts are within the definition of the term "development," defined in this subsection.
Basic research (see 2.101).
Bid and proposal (B&P) costs means the costs incurred in preparing, submitting, and supporting bids and proposals (whether or not solicited) on potential Government or non-Government contracts. The term does not include the costs of effort sponsored by a grant or cooperative agreement, or required in the performance of a contract.
Company means all divisions, subsidiaries, and affiliates of the contractor under common control.
Development means the systematic use, under whatever name, of scientific and technical knowledge in the design, development, test, or evaluation of a potential new product or service (or of an improvement in an existing product or service) for the purpose of meeting specific performance requirements or objectives. Development includes the functions of design engineering, prototyping, and engineering testing. Development excludes-
(1) Subcontracted technical effort which is for the sole purpose of developing an additional source for an existing product, or
(2) Development effort for manufacturing or production materials, systems, processes, methods, equipment, tools, and techniques not intended for sale.
Independent research and development (IR&D) means a contractor’s IR&D cost that consists of projects falling within the four following areas: (1) basic research, (2) applied research, (3) development, and (4) systems and other concept formulation studies. The term does not include the costs of effort sponsored by a grant or required in the performance of a contract. IR&D effort shall not include technical effort expended in developing and preparing technical data specifically to support submitting a bid or proposal.
Systems and other concept formulation studies means analyses and study efforts either related to specific IR&D efforts or directed toward identifying desirable new systems, equipment or components, or modifications and improvements to existing systems, equipment, or components.
(b) Composition and allocation of costs. The requirements of 48 CFR 9904.420, Accounting for independent research and development costs and bid and proposal costs, are incorporated in their entirety and shall apply as follows-
(1) Fully-CAS-covered contracts. Contracts that are fully-CAS-covered shall be subject to all requirements of 48 CFR 9904.420.
(2) Modified CAS-covered and non-CAS-covered contracts. Contracts that are not CAS-covered or that contain terms or conditions requiring modified CAS coverage shall be subject to all requirements of 48 CFR9904.420 except 48 CFR 9904.420-50(e)(2) and 48 CFR 9904.420-50(f)(2) , which are not then applicable. However, non-CAS-covered or modified CAS-covered contracts awarded at a time the contractor has CAS-covered contracts requiring compliance with 48 CFR 9904.420, shall be subject to all the requirements of 48 CFR 9904.420. When the requirements of 48 CFR 9904.420-50(e)(2) and 48 CFR 9904.420-50(f)(2) are not applicable, the following apply:
(i) IR&D and B&P costs shall be allocated to final cost objectives on the same basis of allocation used for the G&A expense grouping of the profit center (see 31.001) in which the costs are incurred. However, when IR&D and B&P costs clearly benefit other profit centers or benefit the entire company, those costs shall be allocated through the G&A of the other profit centers or through the corporate G&A, as appropriate.
(ii) If allocations of IR&D or B&P through the G&A base do not provide equitable cost allocation, the contracting officer may approve use of a different base.
(c) Allowability. Except as provided in paragraphs (d) and (e) of this subsection, or as provided in agency regulations, costs for IR&D and B&P are allowable as indirect expenses on contracts to the extent that those costs are allocable and reasonable.
(d) Deferred IR&D costs.
(1) IR&D costs that were incurred in previous accounting periods are unallowable, except 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-
(i) The total amount of IR&D costs applicable to the product can be identified;
(ii) The proration of such costs to sales of the product is reasonable;
(iii) 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
(iv) No costs of current IR&D programs are allocated to Government work except to prorate the costs of developing a specific product to the sales of that product.
(2) When deferred costs are recognized, the contract (except firm-fixed-price and fixed-price with economic price adjustment) will include a specific provision setting forth the amount of deferred IR&D costs that are allocable to the contract. The negotiation memorandum will state the circumstances pertaining to the case and the reason for accepting the deferred costs.
(e) Cooperative arrangements.
(1) IR&D costs may be incurred by contractors working jointly with one or more non-Federal entities pursuant to a cooperative arrangement (for example, joint ventures, limited partnerships, teaming arrangements, and collaboration and consortium arrangements). IR&D costs also may include costs contributed by contractors in performing cooperative research and development agreements, or similar arrangements, entered into under-
(i) Section 12 of the Stevenson-Wydler Technology Transfer Act of1980 (http://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title15-section3710(a)&num=0&edition=prelim" target="_blank">15 U.S.C. 3710(a));
(ii) Sections203(c)(5) and (6) of the National Aeronautics and Space Act of1958, as amended (http://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title42-section2473(c)(5)&num=0&edition=prelim" target="_blank">42 U.S.C. 2473(c)(5) and (6));
(iii) https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title10-section4021&num=0&edition=prelim" target="_blank">10 U.S.C. 4021 for the Defense Advanced Research Projects Agency; or
(iv) Other equivalent authority.
(2) IR&D costs incurred by a contractor pursuant to these types of cooperative arrangements should be considered as allowable IR&D costs if the work performed would have been allowed as contractor IR&D had there been no cooperative arrangement.
(3) Costs incurred in preparing, submitting, and supporting offers on potential cooperative arrangements are allowable to the extent they are allocable, reasonable, and not otherwise unallowable.