The Department of Defense ("DOD") recently announced a proposed rule that would tie the allowability of independent research and development ("IR&D") costs to a reporting requirement. The proposed rule would require major contractors to report IR&D projects that generate annual costs in excess of $50,000. (A "major contractor" is one whose covered segments allocated a total of more than $11 million in IR&D and bid and proposal costs to covered contracts during the preceding fiscal year.) Under the proposed rule, contractors would have to submit their reports online to the Defense Technical Information Center ("DTIC") and update the information annually and when projects are completed. A contractor's failure to properly report IR&D projects will make the costs unallowable.
The stated justification for the proposed rule is to correct the "loss of linkage between funding and technological purposes." Defense Federal Acquisition Regulation Supplement, 76 Fed. Reg. 11,414 (proposed Mar. 2, 2011). The reporting requirement is intended to "increase effectiveness by providing visibility into the technical content of industry IR&D activities to meet DOD needs and promote the technical prowess of the industry." Id. According to the rule's drafters, "[w]ithout the collection of this information, DOD will be unable to maximize the value of the IR&D funds [DOD] disburses without infringing on the independence of contractors to choose which technologies to pursue in IR&D programs." Id.
While DOD's stated intent may seem sound, government contractors with IR&D costs should be concerned about the proposed rule for a number of reasons, including the following:
- The proposed rule says nothing about the type of information
that contractors will have to submit. Instead, the proposed rule
merely states that contractors must provide data pursuant to
"the DTIC's on-line input form and instructions."
Id. at 11,415. It is not clear, for example, whether
contractors will be expected to submit company-sensitive
information. Contractors may find themselves forced to decide
whether the risk of disclosing sensitive information is outweighed
by the benefits of recovering IR&D costs. Furthermore, by
not stating data requirements within the rule, the government may
be in a position to change data requirements outside the normal
rulemaking process.
- The proposed rule would require contractors to submit copies of the data with administrative contracting officers and the Defense Contract Audit Agency ("DCAA") to support the allowability of the costs. Id. Contractors should assume that government auditors will review the data, looking for project costs that appear potentially unallowable.
With contractor IR&D information in hand, government auditors may take a close look at whether individual projects are of "potential interest" to DOD and declare unallowable the costs associated with projects that are deemed to be not of "potential interest." The DOD regulations provide that allowable IR&D costs are limited to projects that are of "potential interest" to DOD based upon seven identified objectives. In addressing these objectives, contractors should weigh the need for effective disclosure against any proprietary concerns they may have. Because it is unclear how secure the DTIC database will be, contractors should be careful about revealing information that is closely held. The DTIC website asserts that the database is only accessible to government scientists, engineers and researchers; however, the government uses contractor personnel extensively in performing such functions.
Public comments on the proposed rule are due on or before May 2, 2011. It is anticipated that interested industry and professional organizations will comment extensively and question the need for direct involvement of the DCAA.
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