The Department of Defense (DoD) issued a proposed rule on November 4, 2016, to amend the Defense Federal Acquisition Regulation Supplement (DFARS) in order to evaluate the proposed use of substantial future independent research and development (IR&D) expenses that reduce proposal prices in certain competitive source selections. Comments on the proposed rule are due on or before January 3, 2017, in order to be considered in the formation of a final rule.

Implements Better Buying Power 3.0

This proposed rule seeks to implement the IR&D goals of Better Buying Power (BBP) 3.0, which is also the objective of the final rule, Enhancing the Effectiveness of Independent Research and Development, issued the same day. The Steptoe advisory on that final rule is available here. The BBP notes there is concern when “promised future IR&D expenditures are used to substantially reduce the bid price on competitive procurements. In such cases, development price proposals are reduced by using a separate source of government funding (allowable IR&D overhead expenses spread across the total business), to gain a price advantage in a specific competitive bid. The DoD feels this is not the intended purpose of making IR&D an allowable cost.’’

What is Required?

This proposed DFARS rule would require contracting officers to adjust, for evaluation purposes only, the total evaluated price of proposals for major defense acquisition programs and major automated information systems by the amount by which an offerors proposes a cost or price that is reduced in reliance on future IR&D investments. The proposed rule is intended to adjust the offeror’s total evaluated cost or price so that proposal prices are evaluated “in a uniform way” in competitive source selections for those programs and systems.

The proposed rule includes a new solicitation provision: DFARS 252.215–70XX, Notification of Inclusion of Evaluation Criteria for Reliance Upon Future Government-Reimbursed Independent Research and Development Investments, that states:

(a) This solicitation includes price evaluation criteria that consider the offeror’s intended use of future government reimbursed independent research and development (IR&D) projects if the offeror proposes a cost or price that is reduced due to reliance upon expected future government-reimbursed IR&D projects.

(b) If the offeror, in the performance of any contract resulting from this solicitation, intends to use IR&D to meet the contract requirements, the offeror’s proposal shall include documentation in its price proposal to support this proposed approach.

(c) For evaluation purposes only, the contracting officer will adjust the offeror’s total evaluated cost or price to include the amount that such future IR&D investments reduce the price of the proposal.

What Does It Mean?

The proposed rule may pose some interpretation and application issues, including those noted in comments submitted by the Council of Defense and Space Industries Associations (CODSIA) earlier this year in response to the DoD Advanced Notice of Proposed Rule Making on this rule. These issues include:

  • Valuation and allocation of IR&D expenses which, as BBP 3.0 effectively recognizes, benefit multiple contracts or programs (present and future), for purposes of price evaluation in connection with a particular competitive procurement
  • Implementation in the proposal and source selection process
  • Supply change impacts including subcontractor flowdowns and subcontractor IR&D evaluations

Another potential issue in the interpretation and application of this rule involves the intersection of the proposed rule with FAR 31.205-18 regarding the allowability of IR&D costs. FAR 31.205-18 provides that IR&D “does not include the costs of effort... required in the performance of a contract.” This interpretation has been construed to mean costs that are related to but not “specifically required” in the performance of a contract can be allowable as IR&D. See ATK Thiokol, Inc. v. U.S., 598 F.3d 1329, 1335-36 (Fed. Cir. 2010); see also Raytheon Co. v. United States, 2015 WL 3814370 (Fed. Cl. 2015), aff’d, 809 F.3d 590, 593 (Fed. Cir. 2015). As indicated above, the proposed rule applies where an offeror “intends to use IR&D to meet the contract requirement” in performance of the contract, and would provide for an adjustment of the offeror’s proposal price by the “amount that such future IR&D expenses reduce the price of its proposal.”

The proposed final rule should clarify these points and confirm that identification of anticipated use of IR&D to achieve price or cost reductions does not affect the allowability of those expenses as IR&D.