On November 4, 2016, the Department of Defense ("DOD") published a proposed change to the Department of Defense Federal Acquisition Regulation Supplement ("DFARS") that would have significantly altered DOD's regulatory landscape regarding independent research and development ("IR&D") costs. On the same day, DOD also issued a final rule that required certain contractors to participate in a technical interchange before incurring IR&D costs. Both the proposed rule and the final rule met the same fate--each rule was withdrawn and abandoned. This is an appropriate outcome. Both the proposed rule and the final rule were counter-productive, vague and ambiguous, and carried significant risk of disincentivizing contractor investment in innovation.
The proposed rule would have required DOD contracting officers to adjust the total evaluated price of certain proposals, for evaluation purposes, to include the amount by which the offerors proposed that future IR&D investments reduce the price of the proposals. See 81 Fed. Reg. 78014. This proposed rule appeared to be a misguided DOD reaction to the Federal Circuit's decision in Raytheon Co. v. United States, 809 F.3d 590 (Fed. Cir. 2015). The proposed rule prompted significant industry concern and led to the submission of comments from a variety of industry associations, contractors, the American Bar Association, as well as a number of law firms, including Dentons.
Now, finally, we know the fate of DOD's proposed rule. On November 26, 2018, DOD published the updated listing of DFARS cases that have been closed without further action, which is available here. According to that list, on November 7, 2018, the DFARS case relating to the proposed IR&D rule (Case No. 2016-D017) was closed without further action. The explanation given was, simply, that the rule provided "minimal beneficial impact."
The fate of the proposed rule parallels the fate of the final rule in the DFARS. The final rule required certain contractors to engage in technical interchanges with DOD before incurring IR&D cost. See 81 Fed. Reg. 78008. This final rule also was controversial and created significant angst among contractors. Indeed, on December 1, 2016, DOD issued a class deviation in an attempt to address industry concerns and provide a phase-in period for compliance. Later, on January 4, 2017, Frank Kendall, the Undersecretary of Defense for Acquisition Technology and Logistics issued a memorandum that attempted to further assuage these concerns and provide further implementation guidance.
Ultimately, DOD came to the realization that the final rule regarding technical interchange meetings was fatally flawed. Accordingly, on September 14, 2017, DOD issued a class deviation suspending the technical interchange requirement. Then, recently, on August 24, 2018, a final rule published in the DFARS removed the technical interchange requirement entirely.
While both rules are now withdrawn, the DOD concerns expressed with respect to IR&D as part of Better Buying Power 3.0 likely remain unresolved. Thus, it is possible that DOD will explore other avenues of adjusting the IR&D landscape in the future. But for now, we're back where we started.
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