From that conclusion, DCAA sometimes will state that if a contractor classifies costs of performing an “other transaction” or a cooperative arrangement as direct costs to the extent reimbursed and as indirect IR&D costs to the extent not reimbursed, the contractor is in violation of CAS 402.ĭCAA’s conclusion is incorrect because it is founded upon an incorrect assumption. CAS 402 requires that costs incurred for like purposes in similar circumstances be accounted for consistently, so that the relevant costs are either direct or indirect. Here’s the explanation from an IRAD Guide. Now how does this get even more wonky in the case of Other Transactions, which are non-FAR agreements?īasically, defense primes can perform IRAD, compete for an OT, and if they win, they can move those costs out of IRAD and into the Direct base - i.e., those costs can be billed against the specific OT contract as a direct cost and no longer burden the G&A rate. That gives the primes “free money” to do R&D, and position themselves for future contract competitions. OK - defense primes get IRAD reimbursed by government while nontraditionals do not. Even if they did have the cost accounting systems to separately identify and allocate IRAD, they couldn’t expense it against current contract efforts because it would unfairly burden their rates and make them non-competitive.
They could be spending millions on product development, but only have a couple small contracts with government. Second, startups and non-traditionals do not have the luxury of IRAD. In other words, when Lockheed spends $1.5 billion on IRAD in 2021 to posture their technology to compete on future contracts, that $1.5 billion goes to an indirect cost pool, and then gets spread across all their government contracts as an allowable expense as though it were facilities or business IT investment. These costs can be deferred to future periods to be an allowable cost when the future product is sold, but usually contractors expense IRAD costs to their indirect rates (specifically, General & Administrative).
Lockheed Martin, for example, spent $1.5 billion in IRAD in 2021. Defense contractors that are compliant with the Cost Accounting Standards are allowed to perform IRAD on promising tech/system areas that are not currently funded by the government. I was tipped off recently that there’s a weird loophole in contractor independent research and development (IRAD) that gives them a significant advantage when it comes to competing for Other Transactions (OT) awards.įirst, a little background.
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