Section 31.205 of FARS addresses the allowability of IR&D and B&P. IR&D refers to indirect research and development costs. This refers to the costs for contractors R&D costs that fall within the areas of applied research, basic research, development, and systems and formulation studies. These projects must be for the purpose of developing an additional source for an existing product or for the development of manufacturing tools, materials, or equipment that are not intended for sale, but for advancement of an existing project. B&P costs refer to the costs incurred for preparing, submitting, or supporting bids and proposals for government contract projects.
IR&D and B&P costs are general allowable as indirect costs allocated through the G&A basis. Deferred IR&D costs are not usually allowable unless it meets certain criteria to be included as an exception. For deferred IR&D to be allowable it must meet the following criteria:
- The total amount of IR&D costs can be identified and applied to the specific product
- The costs can be prorated to sales at a reasonable rate
- The contractor did not have any government jobs at the time of development or did not allocate IR&D costs to a government contract except to prorate costs to a product
- None of the current IR&D programs are allocated to a government contract except to prorate the costs to the sale of the product.
If the deferred IR&D costs meet these criteria, then it can be allocated to the government contract. Here are a few examples of when deferred IR&D are allowable and unallowable.
A company hired a contractor last year to develop a piece of equipment to improve the design of one of their products. It is only useful for this product. The total cost to develop the tool was substantial so the company decided to defer the R&D costs and amortize it as part of the cost of the improved product. At the time of development, they didn’t have any government contract projects. The company is awarded a project that involves the product. In this case the company can assign a reasonable rate of the deferred IR&D costs to the government contract as it meets all the criteria.
On the other hand, the same company hired a contractor for another project that was intended to improve the efficiency of a few products that use the same parts. They can’t really assign a definitive cost for R&D used on the product involved with a newly assigned government contract. Although they didn’t have any contracts at the time of the research and can come up with a reasonable rate to prorate the costs, it is not allowable. In this case they don’t meet the criteria of being able to clearing define the total amount of costs applicable to the product. The deferred IR&D can still be recognized, but it can’t be assigned to the contract.Written by: Ashley Peth TGG Accounting