A proposed Department of Defense rule is causing contractors to evaluate their independent research and development (IR&D) overhead rates and competitive bid strategies.

Understanding that it will punish innovative contractors for engaging in independent research and development (IR&D) and taking on risks that would otherwise be borne by the government, on November 4, 2016, the U.S. Department of Defense (DoD) proposed a rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to “ensure that substantial future independent research and development expenses, as a means to reduce evaluated bid prices in competitive sources selections, are evaluated in a uniform way during competitive source selections.”

In essence, DoD wants to ensure that the government’s possible reimbursement of allowable IR&D overhead costs is reflected in a contractor’s total evaluated offer price for competitively awarded contracts to create a level playing field where none, for good reason, has previously existed.

This proposed rule was issued after DoD had requested input on concepts for how to evaluate contracts that relied upon IR&D and the near universal industry condemnation of these concepts. Rejecting industry’s opposition, the proposed rule would significantly reduce contractor incentives to engage in IR&D by reducing the benefits contractors receive from successful IR&D projects. In light of these proposed changes, contractors should immediately evaluate their IR&D and competitive bid strategies on the assumption that this proposed rule will be made final in the near future.

For major defense acquisition programs and major automated information systems acquisitions, the proposed rule would require that contracting officers adjust upward a contractor’s total evaluated offer price to the extent the contractor is expected to rely upon future IR&D costs to reduce its proposed price. Accordingly, in order to support this objective, the proposed rule requires an offeror to “include documentation in its price proposal to support this proposed approach” of using IR&D to meet contract requirements. The rule would apply to contracts above the simplified acquisition threshold, but would not apply to contracts for commercial items.

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