If you are a government contractor, you may be wondering if your research and development expenses are allowable under the Federal Acquisition Regulations (FAR). The answer is maybe – it depends on the nature of your project and how the expenses are incurred. In this blog post, we’ll take a look at what types of research and development expenses can be considered allowable under the FAR, as well as some tips for ensuring that your expenses meet the criteria.
The FAR is a set of far-reaching rules and regulations that govern the procurement of goods and services by the United States federal government. The FAR governs every aspect of government procurement, from publishing solicitations in the Federal Register to executing contracts and resolving differences between contractors, buyers, and sellers. All contracts made with United States federal agencies must comply with FAR rules, which establish a single system for determining acceptable performance, cost levels, delivery terms, and other key items under FAR Contracts. With its far-reaching scope, it’s easy to see why the FAR is so fundamental when it comes to protecting taxpayers’ money spent on purchasing goods or services from US entities.
FAR Part 31 lays out the guidelines for what expenses related to research and development are allowable. Independent research and development (IR&D) cost includes the costs of work, which falls into any of the following four areas:
- Basic research,
- Applied research,
- Development, or
- Systems and other concept formulation studies.
FAR 31.205-18 in reference to independent research and development costs, states that,
“The term does not include the costs of effort sponsored by a grant or required in the performance of a contract. IR&D effort shall not include technical effort expended in developing and preparing technical data specifically to support submitting a bid or proposal.”
Therefore, for research to be considered IR&D, it should not be tied to or required by a Grant or a Specific Contract. In addition, FAR 31.205-18 states that IR&D is allowable as an indirect expense on contracts to the extent that those costs are allocable and reasonable.
The FAR classifies allowable costs as ones that are both reasonable and allocable to the specific contract at hand, in accordance with Cost Accounting Standards and the Federal Acquisition Regulation. Although this is a broad definition, many types of contractor costs are addressed by FAR Section 31.
An important factor in assessing a cost’s allowability is reasonableness.
A reasonable cost must:
- Be the typical kind of expenditure incurred when conducting business or performing the contract
- Conform to sound business practices, normal bargaining procedures, and federal/state laws and regulations
- Be aligned with the contractor’s responsibilities to the government, other customers, company owners employees, and society in general
- Not represent a significant departure from the contractor’s established practices
There is no precise response to the reasonableness of IR&D costs, as it can be quite subjective. However, here are a few general tips:
- You should have some preexisting expertise in the area you’re conducting research in
- It’s also important that you have justification for your costs; this includes documentation like timekeeping records detailing how much effort was put into the project, receipts or invoices relating to any expenses incurred, and Statements of Work if you hired subcontractors or consultants.
- Your research should always aim towards achieving a defined goal, with clear measurement criteria set up beforehand so that you can track your progress and determine whether or not the efforts were successful.
There are two aspects to allowability compliance: reasonableness and allocable. The cost needs to be capable of being allocated. To have IR&D costs be allocable, you generally need to have an accounting system that handles the distribution of those costs systematically among all contracts.
In order to ensure that your independent research and development expenses are allowable under FAR Part 31, it’s important to understand the criteria set forth by the regulation. IR&D should meet the criteria in FAR Part 31.205.18 and be reasonable and allocable, to be allowable. By understanding what is allowable under FAR Part 31, you can focus on conducting valuable IR&D that will help your business grow.