The Department of Defense intends to issue a proposed rule to ensure that substantial future independent research and development (“IR&D” or “IRAD”) expenses, which can be used as a means to reduce bid prices in competitive source selections, are evaluated in a uniform way during the competitive process. 81 Fed. Reg. 6488 (February 8, 2016). However, interested parties and industry leaders can help formulate this regulation before the DoD issues the proposed rule.
In his April 2015 memorandum, entitled “Implementing Directive for Better Buying Power 3.0 – Achieving Dominant Capabilities through Technical Excellence and Innovation,” Under Secretary of Defense for Acquisition, Technology and Logistics Frank Kendall, explained that IR&D conducted by defense companies as an allowable overhead expense is an important source of innovation for both defense corporations and the DoD. Memo at 11. However, the Under Secretary explained that a problem has developed in how those allowable costs affect other competitions:
A problematic form of this use of IRAD is in cases where promised future IRAD expenditures are used to substantially reduce the bid price on competitive procurements. In these cases, development price proposals are reduced by using a separate source of government funding (allowable IRAD overhead expenses spread across the total business) to gain a price advantage in a specific competitive bid. This is not the intended purpose of making IRAD an allowable cost.
Memo at 11-12. To solve this problem, the DoD is seeking a way to evaluate proposals that would take into account that reliance by adjusting the total evaluated price to the Government, for evaluation purposes only, to include the value of related future IR&D projects. The DoD wants the public’s assistance in developing this solution. DoD will be holding a public meeting on March 3, 2016 and will be seeking public comments by April 8, 2016. More details are available in the Federal Register notice.