DATE: January 26, 2000

FROM: Barry McVay, CPCM

SUBJECT: Federal Acquisition Regulation (FAR); Deferred Research and Development Costs

SOURCE: Federal Register, January 26, 2000, Vol. 65, No. 17, page 4327

AGENCIES: Department of Defense (DOD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA)

ACTION: Proposed Rule

SYNOPSIS: It is proposed that FAR 31.205-48, Deferred Research and Development Costs, be clarified and simplified by (1) deleting the second sentence addressing precontract costs, and (2) revising the last sentence to more clearly indicate that incurred costs in excess of the contract price or grant amount for research and development (R&D) effort are unallowable.

DATES: Submit comments on or before March 27, 2000.

ADDRESS: Send comments to General Services Administration, FAR Secretariat (MVRS), 1800 F Street, NW, Room 4035, ATTN: Laurie Duarte, Washington, DC 20405, e-mail: farcase.1999-013@gsa.gov. Cite FAR case 1999-013 in all correspondence related to this proposed rule.

FOR FURTHER INFORMATION CONTACT: Ms. Linda Nelson, Procurement Analyst, 202-501-1900.

SUPPLEMENTAL INFORMATION: This proposed rule was initiated to consider whether the cost principle in FAR 31.205-48 was duplicative of FAR 31.205-32, Precontract Costs, and FAR 31.205-23, Losses on Other Contracts. It was concluded that the second sentence could be deleted since precontract costs are already addressed in FAR 31.205-32 (the second sentence reads, "Research and development costs (including amounts capitalized) that were incurred before the award of a particular contract are unallowable except when allowable as precontract costs."). However, it was concluded that the last (third) sentence, which disallows the reimbursement of R&D costs in excess of the contract price and grant amount, was not duplicative of FAR 31.205-23 and should be retained (the last sentence reads, "In addition, when costs are incurred in excess of either the price of a contract or amount of a grant for research and development effort, such excess may not be allocated as a cost to any other government contract.").

The conclusion to keep the last sentence (with some editorial revisions) was based on a review of certain rulings in the 1950's and 1960's in which the Court of Claims and the Armed Services Board of Contract Appeals (ASBCA) regarded the excess costs incurred over the contract price in R&D contracts not as losses but as amounts that could be capitalized and amortized over future contracts under certain circumstances. Since the courts ruled that these excess costs did not represent losses, they were not covered by the Armed Services Procurement Regulation (ASPR) 15-205.19, Losses on Other Contracts, which later became FAR 31.205-23. (EDITOR'S NOTE: The ASPR was the precursor, along with the Federal Procurement Regulation (FPR), to the FAR, which came into existence on April 1, 1984.) Therefore, ASPR 15.205-49, Deferred Research and Development Costs, which later became FAR 32.205-48, was added to the ASPR in 1971, and it explicitly made these types of deferred R&D costs unallowable. The last sentence of FAR 31.205-48 currently reflects this policy. Based on the review, it was concluded that the elimination of the last sentence could permit contractors to recover excess R&D costs under certain conditions, so the essence of the last sentence should remain in the FAR.

The proposed restatement of FAR 31.205-48 would be as follows:

"Research and development, as used in this subsection, means the type of technical effort described in 31.205-18 [Independent Research and Development and Bid and Proposal Costs] but sponsored by a grant or required in the performance of a contract. When costs are incurred in excess of either the price of a contract or amount of a grant for research and development effort, such excess is unallowable under any other government contract."

FOR FURTHER INFORMATION CONTACT: Barry McVay at 703-451-5953 or by e-mail to BarryMcVay@FedGovContracts.com.

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