DoD issued a DFARS Final Rule on Treatment of Incurred Independent Research and Development Costs (DFARS Case 2017-D019). The rule is effective January 31, 2023.
The DFARS final rule contains multiple requirements but the most significant is that the Chief Executive Officer “CEO” of a company needs to make a determination that the IR&D projects advance the needs of DoD future technology and advanced capability. This determination is required for “major” contractors. Refer to Redstone’s blog Does Your Company Qualify as a “Major Contractor” for IR&D Reporting on whether your company meets the definition of a “major” contractor and has covered segments.
Prior to this change, the ACO or corporate ACO was required to determine whether IR&D/B&P projects were of potential interest to DoD and provide the results to the contractor. The DFARS final rule changed this and now the requirement is for the CEO of a company to make a determination that the IR&D projects will advance the needs of DoD future technology and advanced capability. But what if your company does not have a CEO? Well, you do not get a pass from performing this determination. This was addressed in public comments to the proposed rule, to which DoD responded that the NDAA requiring the change said CEO so CEO it is. We believe if you do not have a CEO the determination requirement would fall to the highest official of your company (e.g., President).
DFARS 231.205–18(c)(iii)(B)(2) also added a requirement that the amount of IR&D costs allowable under DoD contracts shall not exceed the lesser of—
(1) Such contracts' allocable share of total incurred IR&D costs; or
(2) The total amount of incurred IR&D costs that the chief executive officer of the contractor has determined will advance the needs of DoD for future technology and advanced capability.
So, it is important that this determination is documented real time, preferably when the IR&D projects are established or at the beginning of each year. If there is no CEO determination, we are fairly certain DCAA will question the IR&D costs based on the specific requirement for the determination. Additionally, DCAA may not accept a CEO determination of the projects at year end after the costs have been incurred, as it raises questions as to the reliability of the determination (i.e., after the fact).
What Does This Mean?
If you qualify as a “major” contractor and are on a calendar year basis, you have already established your IR&D projects for the year, and you are behind the eight ball. We strongly recommend that the CEO or senior official at the company review the IR&D projects and compare them to the Defense Innovation Marketplace website and align your company’s IR&D projects with the projects that are of potential interest to DoD and document the determination. The Defense Innovation Marketplace Website includes a “Communities of Interest” section that addresses technology areas. This determination should be made contemporaneously as it will be difficult to support or explain to an auditor after the fact when you submit your incurred cost submission. The regulation does not state the amount of detail required in the determination. In addition, we recommend you screenshot the website to support your determination. In some cases, websites have been updated and the link you used may not be accessible when the incurred cost audit is later performed.
There were other minor clarifications in DFARS 231.205-18 to indicate that “major” contractors had to report IR&D costs into Defense Technical Information Center (DTIC) and also clarified the requirement to update DTIC at least annually and added no later than 3 months after the contractor’s fiscal year end for the required reporting. Both of these were existing expectations of DoD, which are now clear requirements in the DFARS.
Redstone GCI recommends you review the criteria in DFARS 231.205–18 to see if you qualify as a major contractor. More importantly if you do meet the definition of a “major” contractor and you have IR&D projects in process, we recommend the CEO/senior official of the company document the determination sooner rather than later. This is important so that your IR&D projects are not questioned as unallowable because a documented determination does not exist.
Redstone GCI is available to assist contractors in assessing their IR&D reporting requirements as well as assist in reviewing the IR&D determinations by the CEO. Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations in applying FAR Part 31, Cost Principles and completing incurred cost proposal requirements.
Lynne is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to Commercial Item Determinations and support, Cost Accounting Standards, DFARS Business System Audits, Proposals, and Incurred Cost. Prior to joining Redstone Government Consulting, Lynne served in several capacities with DCAA and DCMA for over 35 years. Professional Experience Lynne began her career working with DCAA in the Honeywell Resident Office, Clearwater, FL in 1984. Lynne’s experience included various positions which involved conducting or reviewing forward proposals or rate audits, financial capability audits, progress payments, accounting and estimating systems, cost accounting standards, claims and disclosure statement reviews. She is an expert in FAR, DFARS, CAS and testified as an expert witness. Lynne assisted in drafting the commercial item guidance for DCAA Headquarters. Lynne was assigned as a Regional Technical Specialist where she provided guidance to 20 field offices on highly complex or technical issues relative to forward pricing, financial capability or progress payment issues. As an Assistant for Quality, she was involved in reviewing and ensuring audit reports were in compliance with policy and GAGAS as well as made NASBA certified presentations to the staff including but not limited to billing reviews, CAS, unallowable cost and progress payments. To enhance her experience in government contracting, Lynne accepted a position with DCMA in 2015 as part of the newly organized DCMA Cadre of Experts in the Commercial Item Group. This included performing reviews of prime contractor’s assertions and/or commercial item determinations as well as performing price analyses. Lynne was a project lead and later became a lead analyst where she engaged with the buying commands on requests and reviewed price analysis reviews performed by a team of 5 analysts. She also assisted the DCMA CPSR team relative to commercial items and co-instructed the Commercial Item Training presented to DCMA. Education Lynne earned a Bachelor of Science Degree in Accounting from the University of Central Florida. Certifications State of Florida Certified Public Accountant State of Alabama Certified Public Accountant Defense Acquisition Workforce Improvement Act (DAWIA) Level III- Auditing DAWIA Level III – Contracting