On November 21, 2016, the Defense Contract Management Agency (DCMA) issued guidance to its contracting officers instructing them to refer contractors’ requests for information concerning their points of contact for technical interchange purposes to the Office of the Assistant Secretary of Defense (Research and Engineering) (OASD R&D) or their “buying commands.” The DCMA guidance comes on the heels of a final rule from the Department of Defense (DoD) requiring contractors to engage in technical interchanges with DoD technical or operational personnel prior to incurring independent research and development (IR&D) costs in fiscal year 2017 as a prerequisite to the allowability of these costs. See 81 Fed. Reg. 78,008 (Nov. 4, 2016).

While the DCMA guidance appears relatively unobjectionable on its face, it highlights unresolved issues relating to technical interchanges that create risk for contractors. Notably, the guidance fails to discuss the elephant in the room, namely that contractors have been reaching out to OASD R&D and requesting technical interchanges, but have not been receiving responses. Thus, with 30 days to go before many contractors begin their FY 2017, contractors are unsure whether they will be able to technically interchange with appropriate DoD technical or operational personnel prior to incurring FY 2017 IR&D costs. As a result, contractors are uncertain about the allowability of the costs of their 2017 IR&D projects because these projects may begin without a technical interchange. Potentially more concerning, some contractors’ FY 2017 began prior to November 4, 2016, the date the final rule was published. While the final rule is clear that the requirement to technically interchange does not apply prior to the date the final rule was published, it does not address whether IR&D costs incurred on November 5, 2016, are allowable costs, absent a technical interchange.

DCMA could have addressed these issues and provided guidance to its contracting officers on how to handle these issues by making exceptions where the contractor has reached out to appropriate DoD technical or operational personnel to schedule a technical interchange. Such exceptions would allow contractors to continue developing new technology and products through IR&D projects, without risk of future cost disallowances, while DoD figures out how to conduct thousands of technical interchanges with contractors in a very short period of time. So far, DCMA and DoD have chosen not to address these issues and, as a result, contractors remain uncertain how to proceed.

Going forward, we recommend that contractors: (i) immediately contact OASD R&D or their “buying commands” to schedule technical interchanges; and (ii) engage their cognizant administrative contracting officers about the possibility of an advance agreement regarding the allowability of any IR&D costs incurred in the interim period between the beginning of FY 2017 and the occurrence of a technical interchange.