31.205-18
Independent research and development and bid and proposal costs
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.