On January 31, 2023, the Department of Defense (“DoD”) issued a final rule to amend the Defense Federal Acquisition Regulation Supplement (“DFARS”) to implement Section 824 of the National Defense Authorization Act (“NDAA”) for Fiscal Year (“FY”) 2017. Section 824 included amendments regarding the treatment of independent research and development (“IR&D”) costs and a requirement for the Defense Contract Audit Agency (“DCAA”) to submit a report to Congress regarding IR&D and bid and proposal (“B&P”) expenditures.

The January 31st final rule follows a September 29, 2021, proposed rule, which among other notable proposed DFARS amendments, included a provision that would require a contractor’s chief executive officer (“CEO”) to determine that IR&D expenses will advance DoD’s needs for “future technology and advanced capability.”

Notable elements of the January 31st final rule include the following:

• Designed to allow contractors to choose technologies that will advance DoD’s needs;
• DFARS 231.205-18(c)(iii)(B) is revised and establishes as a condition of allowability that IR&D costs shall not exceed the lesser of i) contracts’ allocable share of total incurred IR&D costs or ii) IR&D that the CEO determines is consistent with technologies communicated by DoD to industry;
• Removes the list that limits the allowability of IR&D to seven activities of potential interest to DoD;
• Does not adopt the proposed rule requiring a contractor’s CEO to state that the IR&D expenditures will advance the needs of DoD;
• Decouples IR&D and B&P expenses;
• Clarifies that DFARS 231.205-18(c)(iii) only applies to major contractors (covered segment allocated at total of more than $11 million in IR&D/B&P costs to covered contracts during preceding fiscal year);
• Removes proposed clause at DFARS 252.242- 70XX that would have required contractors with noncommercial awards to separately report IR&D and B&P;
• Eliminates retroactive application to October 1, 2017; and
• Encourages non-major contractors to use Defense Technical Information Center (“DTIC”) to report annual IR&D costs.

The January 31st final rule also requires DCAA to submit an annual report to Congress addressing IR&D and B&P costs incurred under DoD contracts during the preceding fiscal year.

The January 31st final rule can be found here.

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