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.