Proposed rule change to DFARS allowable IR&D costs effective in FY2017

A proposed rule by the Defense Acquisition Regulations System on Feb. 16, 2016

The long anticipated proposed rule change to allowable Independent Research and Development (IR&D) under Defense Federal Acquisition Regulation (DFARS) 231.205-18 was released on February 16, 2016. Effective in FY2017, contractors who have already surpassed the Defense Technical Information Center (DTIC) reporting threshold for IR&D, will need to have a “technical interchange with a technical or operational DoD Government employee" for all new IR&D projects before they are initiated to be allowable under the proposed rule. First introduced in Better Buying Power 3.0, these proposed changes are intended to better align contractor IR&D investments with DoD's long-range technology needs by improving the communications with department technical or operational personnel. Contractors will be required to document the name of the government party when a "technical interchange" took place prior to the initiation of the IR&D project.

Specifically the proposed rule requires:

• For IR&D projects initiated in the contractor's fiscal year 2017 and later, as a prerequisite for the subsequent determination of allowability, major contractors must—
  
• Engage in a technical interchange with a technical or operational DoD Government employee before IR&D costs are generated so that contractor plans and goals for IR&D projects benefit from the awareness of and feedback by a DoD employee who is informed of related ongoing and future potential interest opportunities;
• Use the online input form for IR&D projects reported to DTIC to document the technical interchange, which includes the name of the DoD Government employee and the date the technical interchange occurred.

Thoughts / questions for contractors

The Defense industry has already voiced its concerns about this next wave of proposed rule changes regarding allowable IR&D, particularly with the requirement for a technical interchange prior to initiating a new IR&D project. Although the federal register announcement and the Better Buying Power 3.0 Implementation Memorandum both state that the intent for technical interchanges “is not to reduce the independence of IR&D investment selection, nor to establish a bureaucratic requirement for government approval prior to initiating an IR&D project”, it certainly seems like we are on a slippery slope in that direction.    

Without clarification during the rule-making process, the proposed DFARS language has already found its way onto DCAA’s “expressly unallowable” cost list and become yet another point of unnecessary contention between contractors and auditors. Additionally, contractors who are already required to report IR&D projects in DTIC (or will soon meet the threshold), may want to consider accelerating as many new IR&D projects in fiscal year 2016 as possible. The proposed rule only requires a technical interchange for projects initiated in fiscal year 2017 and later. Another administrative challenge for contractors with a mix of DoD and non-DoD contracts will be the possibility of multiple indirect rates if an IR&D project is determined to be unallowable under the proposed DFARS rule, but otherwise allowable under FAR 31.205-18. 

And finally, what constitutes a “technical interchange?” Is this a casual “oh, by the way…” conversation, or is it a more in-depth review of technical details? Will this be an area ripe for second-guessing? If these technical interchanges are deep discussions, does DoD have sufficient technical and operational personnel who are both interested and available within DoD to handle this new requirement? If technical interchanges are short presentations, not burdensome and do not put much additional strain on either DoD or contractor personnel, one could argue that perfunctory reviews are the last things that both DoD and industry needs. 

The government contract advisory services (GCAS) team at Baker Tilly is monitoring changes to DFARS for allowable IR&D / B&P costs and other releases of revisions resulting from Better Buying Power 3.0.

For more information on this topic, or to learn how Baker Tilly government contractor specialists can help, contact our team.