February 29, 2016

New Proposed Rules Affecting Allowability of Congressional Investigation and IR&D Costs

4 min

February 2016 brought contract cost principles and procedures to the forefront with two potential amendments to the Federal Acquisition Regulation (FAR) and the Defense Federal Acquisition Regulation Supplement (DFARS) to make certain costs associated with congressional investigations and inquiries unallowable and to enhance oversight of Independent Research and Development (IR&D) costs.

Prohibition on Reimbursement for Congressional Investigations and Inquiries

On February 17, 2016 the FAR Council proposed to amend the FAR to implement Section 857 of the National Defense Authorization Act for Fiscal Year 2015 (NDAA 2015). Section 857 of NDAA 2015 amended 10 U.S.C. § 2324(e)(1) to make unallowable "[c]osts incurred by a contractor in connection with a congressional investigation or inquiry into an issue that is the subject matter of a proceeding resulting in a disposition," such as a criminal conviction, a determination of contractor civil liability for fraud, a penalty for whistleblower reprisal, suspension or debarment, rescission of a contract, termination of a contract for default, or a settlement of an action that might have resulted in any of these penalties. 10 U.S.C. § 2324(e)(1)(Q), (k)(2).

The proposed rule would amend FAR 31.205-47 to add as unallowable those costs incurred in any congressional investigation or inquiry that is associated with a criminal conviction, suspension or debarment, termination for default, etc., the costs of which are already unallowable under FAR 31.205-47. The proposed rule would also amend FAR 31.603 (relating to the requirements of Contracts with State, Local, and Federally Recognized Indian Tribal Governments) to include the same prohibition on costs associated with congressional investigations or inquiries.

Even though Section 857 of NDAA 2015 applies only to Department of Defense (DoD), NASA, and Coast Guard contracts, the proposed rule would make Section 857 applicable to all agencies subject to the FAR.

Comments on the proposed FAR amendment are due April 18, 2016.

Enhancing Oversight of Independent Research and Development

On February 16, 2016 the DoD issued a proposed rule to amend the DFARS "to improve the effectiveness of independent research and development investments by the defense industrial base that are reimbursed as allowable costs." The proposed rule is based on the IR&D initiative outlined in Better Buying Power 3.0 of April 9, 2015, which sought a limited reversion back to the pre-early 1990s when IR&D was more heavily regulated and supervised by DoD.

The DoD is proposing to amend DFARS 231.205-18 to require that, "as a prerequisite for the subsequent determination of allowability," starting in Fiscal Year 2017 contractors must engage in discussions with a technical or operational DoD employee before IR&D costs are generated, "so that contractor plans and goals for IR&D projects benefit from the awareness and feedback by a DoD employee who is informed of related ongoing and future potential interest opportunities" (emphasis added). The stated intent behind this requirement is to increase awareness of the IR&D efforts between contractors and the DoD and "provide industry with some feedback on the relevance" (emphasis added) of their IR&D work, not to establish a necessity for DoD approval prior to commencing IR&D projects.

This requirement would apply only to major contractors, which are those whose covered segments allocated a total of more than $11 million in IR&D and bid and proposal costs to covered contracts during the preceding fiscal year. Contractors would still be required, as they are now, to use the Defense Technical Information Center (DTIC) online form to report IR&D costs, but they would also need to document the technical interchange on the DTIC form, including the name of the DoD employee with whom the contractor met and the date of the interchange.

The proposed rule is scarce on details as to how the technical interchanges would proceed. Questions that remain unanswered include:

  • What sort of "feedback" will the DoD employee provide?
  • Will the DoD employee be an expert in the technical field in which the contractor is operating?
  • How is "relevance" determined? Must the IR&D work be connected to some established DoD initiative?
  • What happens if the DoD employee determines that the contractor's IR&D work is not relevant? What if the contractor proceeds with the IR&D after learning from the DoD employee that it is not relevant? Is that a factor in determining the allowability of the subsequent IR&D costs?

Comments on the proposed DFARS amendment are also due April 18, 2016.

* * * * * * * * * *

For more information on how the proposed amendments might impact your business, or to better understand the requirements regarding the related cost principles and procedures, please contact any of the attorneys in Venable's Government Contracts Practice Group.