The Department of Defense (DoD) issued a final rule on November 4, 2016, seeking to improve the effectiveness of IR&D investments by the defense industrial base. This final rule implements a Better Buying Power (BBP) 3.0 initiative by requiring contractors to engage in technical interchanges with DoD before IR&D costs are generated.

The final DFARS rule, “Enhancing the Effectiveness of Independent Research and Development”makes changes to the proposed rule that was published in the Federal Register on February 16, 2016, to revise DFARS 231.205-18, “Independent Research and Development and Bid and Proposal Costs.” Key parts of the new rule are that proposed new IR&D efforts must be communicated to appropriate DoD personnel prior to being initiated and that the results also must be shared with appropriate DoD personnel. This new rule is effective November 4, 2016.

What is Required?

For a contractor’s annual IR&D costs to be allowable—

(1) The IR&D projects generating the costs must be reported to the Defense Technical Information Center (DTIC) using the DTIC’s online input form and instructions;

(2) The inputs must be updated at least annually and when the project is completed;

(3) Copies of the input and updates must be made available for review by the cognizant administrative contracting officer (ACO) and the cognizant Defense Contract Audit Agency (DCAA) auditor to support the allowability of the costs; and

(4) For IR&D projects initiated in the contractor’s fiscal year 2017 and later, as a prerequisite for the subsequent determination of allowability, the contractor shall—

(i) Engage in a technical interchange with a technical or operational DoD government employee before IR&D costs are generated so that contractor plans and goals for IR&D projects benefit from the awareness of and feedback by a DoD government employee who is informed of related ongoing and future potential interest opportunities. If the contractor does not have a point of contact for the technical interchange, the contractor may contact the Office of the Assistant Secretary of Defense for Research and Engineering (OASD R&E).

(ii) Use the online input form for IR&D projects reported to DTIC to document the technical interchange, which includes the name of the DoD government employee and the date the technical interchange occurred.

Technical Interchanges

The requirement for technical interchanges is new. According to DoD, an extension of DoD’s long-standing policy to engage in robust communication with all entities supporting the defense industrial base and promote engagement with IR&D participants regarding research and development. This policy is outlined in DoD Instruction 3204.01, ‘‘DoD Policy for Oversight of Independent Research and Development (IR&D).’’

The use of technical interchanges is also aligned with the Better Buying Power 3.0 IR&D initiative, which notes that to improve the effectiveness of IR&D investments that are reimbursed as allowable costs both the DoD and the defense industrial base need to work together and ensure that DoD has visibility into the opportunities created by government-reimbursed IR&D efforts performed by defense contractors. That said, questions remain on what an interchange is, how it should be conducted, and its role in steering IR&D investments.

For example, one comment submitted in response to the proposed rule asked if requiring technical interchange with Government employees before generating IR&D costs will result in defense contractors shifting toward IR&D projects that are of perceived interest to certain DoD officials. In response, DoD said that it anticipates that defense contractors will pursue IR&D projects intended to advance the contractors’ ability to develop and deliver superior and more competitive products to the warfighter. Importantly, the DoD noted that “the requirement to hold a technical interchange is not a de facto approval process and will not favor one company over another.” Instead, the DoD said, the technical interchanges are informal engagements designed to promote transparency, communication, and dialogue between the IR&D participants and the DoD, and “to provide industry with some feedback on the relevance of proposed and completed IR&D work.”

By law and DoD policy, contractor IR&D investments are independent and not directed by the DoD. IR&D investments are intended to assist a contractor’s ability to develop and deliver better products to the warfighter. The goal of the BBP initiative and of this rule is the enhancement of communication in order to increase the effectiveness of the IR&D costs incurred by contractors and treated as allowable costs by the DoD. Although this interchange is not supposed to be an approval process, contractors may still have concerns that the freedom to independently decide on these investments will be affected by the desire to achieve an increase in their “effectiveness.”