In public comments submitted earlier this month, the defense industry and the public contract bar called upon the Department of Defense (DoD) to withdraw or significantly revise a proposed rule altering how independent research and development (IR&D) costs are treated.  These public comments reflect the defense industry’s growing concern that DoD is moving to constrain the industry’s ability to utilize IR&D projects as a tool for furthering technical innovation.

The proposed DFARS rule change would require contracting officers managing procurements for major defense acquisition programs and major automated information systems in a development phase to adjust the total evaluated cost/price of a proposal to account for the contractor’s proposed reliance on government-funded IR&D projects. The goal of the rule is to address the concern in the Better Buying Power 3.0 Implementation Directive that contractors may use IR&D such that “development price proposals are reduced by using a separate source of government funding (allowable IR&D overhead expenses spread across the total business) to gain a price advantage in a specific competitive bid.”

Public comments were submitted by the American Bar Association Section of Public Contract Law (SPCL) and the Council of Defense and Space Industry Association (CODSIA), as well as several private law firms. These comments uniformly oppose the proposed rule, raising a range of concerns, such as the following:

  • The proposed rule conflicts with the statutory framework governing IR&D, which encourages contractors to administer IR&D programs independently to encourage IR&D investment by contractors.
  • The proposed rule disadvantages contractors undertaking research that is directly relevant and applicable to current government needs, and the proposed rule instead favors contractors that have not invested in innovation.
  • The proposed rule addresses a problem that has not been clearly identified or articulated. As the SPCL comments observe, the Department of Defense has failed to articulate a basis for differentiating between IR&D and other indirect costs.
  • The propose rule ignores relevant case law that already determined that burdening a single contract with underlying R&D costs related to contract performance is unreasonable and would curtail innovation.

These concerns from industry come within the context of a changing and uncertain landscape for IR&D funding. At the same time this proposed rule was published, DoD published a separate final rule requiring contractors to hold technical interchange meetings with the government officials concerning IR&D projects.  As part of that new rule, DoD has recently launched a new web form for contractors to report on their IR&D projects.  DoD appears focused on placing guard-rails for IR&D funding.

These recent attempts to direct and cabin IR&D investment appear contrary both to long-established practice and the law, and they come at a time when DoD is attempting to interest the technology industry to independently engage in investment that aligns with government needs.

We will continue to monitor changes to the IR&D funding rules, including whether and how this proposed rule appears in final form.

 

 

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Photo of Nooree Lee Nooree Lee

Nooree advises government contractors and financial investors regarding the regulatory aspects of corporate transactions and restructurings. His experience includes preparing businesses for sale, negotiating deal documents, coordinating large-scale diligence processes, and navigating pre- and post-closing regulatory approvals and integration. He has advised on…

Nooree advises government contractors and financial investors regarding the regulatory aspects of corporate transactions and restructurings. His experience includes preparing businesses for sale, negotiating deal documents, coordinating large-scale diligence processes, and navigating pre- and post-closing regulatory approvals and integration. He has advised on 35+ M&A deals involving government contractors totaling over $30 billion in combined value. This includes Veritas Capital’s acquisition of Cubic Corp. for $2.8 billion; the acquisition of Perspecta Inc. by Veritas Capital portfolio company Peraton for $7.1 billion; and Cameco Corporation’s strategic partnership with Brookfield Renewable Partners to acquire Westinghouse Electric Company for $7.8+ billion.

Nooree also counsels clients navigating the Foreign Military Sales (FMS) program and Foreign Military Financing (FMF) arrangements. Nooree has advised both U.S. and ex-U.S. companies in connection with defense sales to numerous foreign defense ministries, including those of Australia, Israel, Singapore, South Korea, and Taiwan.

Recently, Nooree’s practice has expanded to include advising on the intersection of government procurement and artificial intelligence. Nooree counsels clients on the negotiation of AI-focused procurement and non-procurement agreements with the U.S. government and the rollout of procurement regulations and policy stemming from the Executive Order on Safe, Secure, and Trustworthy Artificial Intelligence.

Nooree maintains an active pro bono practice focusing on appeals of denied industrial security clearance applications and public housing and housing discrimination matters. In addition to his work within the firm, Nooree is an active member of the American Bar Association’s Section of Public Contract Law and has served on the Section Council and the Section’s Diversity Committee. He also served as the firm’s Fellow for the Leadership Council on Legal Diversity program in 2023.