The Federal Circuit in its March 19, 2010 decision in ATK Thiokol, Inc. v. United States (.PDF), expanded the definition of allowable Independent Research and Development (IR&D) costs. Now, research and development costs are allowable as IR&D costs unless specifically required by the contract.
In ATK, the Federal Circuit addressed the “required in the performance of a contract” phrase in the FAR and CAS definition of IR&D costs. Costs that otherwise meet the definition of IR&D are allowable costs, unless they are “required in the performance of a contract.” This phrase has been the subject of debate for over 35 years. The only other court to specifically address the meaning of this phrase found that the phrase included research and development efforts both expressly required by the contract and implicitly necessary for contract performance. (United States v. Newport News Shipbuilding, Inc.)
In reaching its decision in ATK, the Federal Circuit rejected the Newport News decision and instead ruled that the phrase applies only to efforts “specifically required” by the contract. Thus, costs incurred in performing research and development efforts that might be necessary for successful performance of the contract but are not specifically required by the contract will now be allowable IR&D costs.
How will the ATK decision affect contractors going forward?
- CAS-covered contractors should review their Disclosure Statements to understand their current accounting treatment of IR&D costs and consider whether changes should be made;
- When entering into a contract (whether commercial or government), discuss the research and development efforts associated with performing the contract;
- To the extent possible, draft the contract to expressly address the research and development efforts that are required by the contract and those that are not.
Mentioned case citations:
– ATK Thiokol, Inc. v. United States, 2010 WL 987007 (Fed. Cir. 2010)
– United States v. Newport News Shipbuilding, Inc., 276 F.Supp. 2d 539 (E.D. Va. 2003)