Last week, the Department of Defense (DoD) issued a white paper announcing that, beginning in FY2017, it will require contractors to notify DoD before undertaking any new Independent Research & Development (IR&D) projects. Contractors also will be required to inform DoD of “the results from these investments.” The white paper acknowledges that these requirements are a departure from current and historical practices for initiating IR&D investments, which typically are “not-directed by the government . . . [but] are identified by individual companies and are intended to advance a particular company’s ability to develop and deliver superior and more competitive products to the warfighter.”

As described below, DoD’s white paper is the latest sign that the Pentagon is working to redefine its relationship with the defense contracting community and puts contractors on notice that a significant overhaul of the regulations governing the allowability of IR&D costs may be on the horizon.

The white paper contains four items of information that will be of particular interest to defense contractors:

  1. Mandatory Pre-IR&D Communication with DoD Personnel: DoD’s has established a goal that, by FY2017, the initiation of “every new IR&D project will be preceded by an engagement with appropriate DOD technical operational staff to ensure that the department is aware of the goals and plans for the effort and that Industry is informed of related ongoing efforts and potential opportunities from the Department.” Importantly, DoD will require contractors to “document that this interchange is occurring” to “include the name of the government party with whom, and date when, a technical interchange took place prior to IR&D project initiation and to provide this information as part of the required IR&D submissions made to the Defense Technical [I]nformation Center [DTIC] IR&D electronic portal.”
  2. DCMA and DCAA Will Use Information About Pre-IR&D Communications to Determine the Allowability of IR&D Costs: Perhaps most alarming, DoD, without any elaboration, announces that the “Defense Contract[] Management Agency [DCMA] and Defense Contract[] Auditing Agency [DCAA] will use the[] DTIC inputs when making allowability determinations for IR&D costs.” At this point, there is no indication of what criteria DCMA and DCAA will use to determine whether a contractor has adequately satisfied the pre-IR&D communication requirement, or whether they (or some other DoD entity) will be tasked with judging the merit of a proposed IR&D investment for purposes of making cost allowability determinations.
  3. DoD Intends to Solicit Public Comments on New DFARS Provision(s): The white paper indicates that DoD will seek public comment on a Defense Federal Acquisition Regulation Supplement (DFARS) amendment that will implement the “procedural change[s]” describe above. Contractors would be well-served to closely monitor any proposed changes to the DFARS in this area and should pay particular attention to whether any such changes go beyond “procedural” matters.
  4. DoD’s White Paper Is Another Sign That DoD is Looking to Redefine its Relationship With Defense Contractors: According to DoD, the objective of requiring contractors to confer with agency personnel prior to initiating any IR&D investments “is to ensure that both IR&D performers and their potential DoD customers have sufficient awareness of each other’s efforts and to provide industry with some feedback on the relevance of proposed and completed IR&D work.” DoD also represents that “[t]he intent of such engagement is not to reduce the independence of IR&D investment selection, nor to establish a bureaucratic requirements for government approval prior to initiating an IR&D project.” Although DoD should be commended for acknowledging industry’s likely reaction to any significant changes in the IR&D space, it is both understandable and entirely reasonable for defense contractors to be wary of what lies ahead. And, while DoD’s plans for IR&D projects may not ultimately result in a major regulatory overhaul, the defense industry should recognize that any changes in IR&D contracting practices may be indicative of a broader effort to reform the relationship between the Pentagon and defense contractors.