United States: DoD's Public Meeting Concerning a Proposed Rulemaking Related to Independent Research & Development Revealed Numerous Issues and Concerns

In the February 8, 2016 Federal Register, DoD published an Advanced Notice of Proposed Rulemaking ("ANPR") indicating that DoD is considering a proposed approach requiring offerors to describe in detail the nature and value of prospective independent research & development ("IR&D") projects on which the offeror would rely to perform the resultant contract; DoD would then evaluate proposals in a manner that would take into account that reliance by adjusting the total evaluated price to the Government, for evaluation purposes, to include the value of related future IR&D projects. DoD held a public meeting on March 3, 2016 to discuss the ANPR, and several attendees raised numerous issues and concerns with the ANPR. Comments on the ANPR are due April 8, 2016. This article summarizes some of the more important issues and concerns expressed.

The meeting lasted close to 90 minutes. There were three DoD representatives who moderated the meeting. One representative began the meeting by stating that the DFARS Case is very preliminary and is a concept in development. The representative said that DoD is looking for additional approaches and ways to solve perceived issues concerning IR&D.

Representatives from certain organizations made presentations, raising a multitude of issues and concerns, including:

  • How will this work?
  • What is the underlying problem being addressed?
  • How widespread is the use of IR&D to reduce bid amounts in proposals?
  • Are there examples where DoD improperly evaluated IR&D in source selections?
  • Are there examples where current procedures and rules would prohibit a source selection team from considering future IR&D as part of a technical evaluation?
  • How would risk associated with the project be evaluated and priced, if at all?
  • Will there be subcontractor IR&D evaluations?
  • There is an issue concerning consistent, publicly available evaluation criteria that will apply to all proposals.
  • How will DoD distinguish/evaluate IR&D used for multiple programs?
  • What about leveraging prior IR&D, particularly commercial R&D – how do you make distinctions?
  • Will there be a threshold procurement amount that will trigger application of any new rule?
  • Will the rule prohibit adjusting a total evaluated price from non-reimbursed IR&D and technology developed outside of Government participation?
  • It will be possible to give source selection preference to a higher cost, lower performing proposal.
  • The rule could cause contractors to conclude that they may receive less business, which could result in more conservative base forecasts that would increase rates across all programs.
  • Bid protests could increase.
  • This "cure" could do more harm that what is trying to be "fixed."
  • DoD's approach may stifle industry investment.
  • The approach penalizes contractors for making IR&D investment to reduce technical risk.
  • The approach encourages contractors to propose solutions that have lower performance risk via existing technology, thus discouraging innovation. It is unusual to add cost to a proposal as compared to a proposal that does not make these investments and may offer less value. Contractors can try to win competitions based on efficiencies and innovation, and it seems odd to penalize that approach.
  • How will DoD train the acquisition workforce, and how will DoD ensure that costly mistakes are not made, which could generate protests?
  • How is DoD's approach consistent with 10 U.S.C. § 2372(f), which states: "Regulations prescribed pursuant to subsection (c) may not include provisions that would infringe on the independence of a contractor to choose which technologies to pursue in its independent research and development program"?

After the presentations, attendees asked questions and/or made points. One attendee noted the comment by a DoD representative, that DoD is asking for solutions, and said that it would really help if DoD could further identify the problem. One of the DoD representatives responded that Frank Kendall's Better Buying Power 3.0 memo indicates that IR&D projects are pursued often based on near-term solutions. He seemed to indicate that the DoD approach arose from a fairness perspective, and to encourage companies to focus on the next-generation of solutions.  He acknowledged the possibility of addressing this on a case-by-base basis, but said that DoD's thinking is to have a consistent rule. He indicated that there is a problem: the philosophical question of IR&D as an investment in the future, while not wanting to infringe on contractors' independence. He said that the ANPR is designed for companies to reach for the next generation.

The same attendee asked if DoD is therefore less enamored with what it sees as short-term solutions in competitions than longer-term solutions. The DoD representative said that they were seeing examples of bid amounts using short-term IR&D compared to offerors that do not have IR&D programs. Another attendee then noted that companies without IR&D programs have lower rates.

Someone asked about the nature of the problem, asking if it was an IR&D or source selection question. A DoD representative replied that it is a little bit of both, but is really an IR&D issue – some companies have had the benefit of IR&D to be competitive; he then acknowledged that that is a reason to have an IR&D program.

Someone asked why the current rules, which require a benefit to DoD, do not work. A DoD representative responded by referring to consideration of the fact that not everything will have a 20-year benefit. But this is not about cost allowability, and DoD does not want to infringe on companies' ability to pursue IR&D programs.

Someone said that the term "future" is not clear. He asked if there is data indicating that longer-term investment is not occurring. And if there is such data, he indicated he is not sure that source selection is the way to deal with that. One reason for IR&D – the company wants the IP, and can use it in the commercial marketplace. If DoD is trying to level the playing field, why would a company invest in IR&D? Instead of a disincentive, DoD should use incentives. A DoD representative said those were good points, and referred to a companion proposed rule (which requires proposed new IR&D efforts be communicated to DoD prior to the initiation of those investments).

A DoD representative said that we should not focus so much on DoD's proposed approach – involving evaluation of proposals – but instead should propose other solutions. DoD would like concrete solutions on how to address the proposal mix. DoD takes the data it has and (apparently) would like better insight into contractors' portfolios. DoD is looking for ways to incentivize the portfolio mix. An attendee asked if, by incentivizing the portfolio mix, DoD means long-term versus short-term investments. A DoD representative said: No, we want you to have a mix, because the view now is there is not much of a mix. DoD wants clarity on the mix and thoughts about how to incentivize it.

A DoD representative then said they are trying to be collaborative, and asked if it would be beneficial to have a further discussion on ways forward. Would another public meeting provide benefits in the form of tangible solutions to work through, or should DoD wait and look at the written comments? Someone from the audience said that it would help to have another meeting prior to a proposed rule. Someone suggested that DoD publish an amendment to the ANPR concerning the problem DoD is trying to resolve, and use that as a basis for another public meeting.

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