A rule being proposed by the Defense Department regarding a uniform way to evaluate internal research and investment (IRAD) in competitive source selections is drawing concern from a pair of industry trade groups.
DoD is proposing a rule that would ensure that substantial IRAD expenses, as a means to reduce evaluated bid prices in competitive source selections, are evaluated in a uniform way during such competitive source selections. According to a Nov. 4 notice in the Federal Register, DoD is specifically proposing to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to require contracting officers to adjust the total evaluated price of major defense acquisition programs and major automated information systems proposals, for evaluation purposes only, to include the amount by which the offerors proposed that future IRAD investments reduce the price of proposals. 
The Federal Register notice said Pentagon acquisition czar Frank Kendall, in early 2015, noted a concern when promised future IRAD expenditures are used to substantially reduce the bid price in competitive procurements. In these cases, Kendall said development price proposals are reduced by using a separate source of government funding (allowable IRAD overhead expenses spread across the total business) to gain a price advantage in a specific competitive bid. Kendall is quoted as saying this is not the intended purpose of making IRAD an allowable cost.
Andrew Hunter, director of the defense-industrial initiatives group and senior fellow for the international security program at the Center for Strategic and International Studies (CSIS) think tank, said the problem is that companies are playing accounting games with their IRAD to win competitive source selections based on cost. As an example, Hunter said Company X may bid $10 for a program, but would ultimately charge DoD $15 while Company Y would bid $15 for a program while ultimately charging DoD $15. In this example, Hunter said Company X would win based on cost.
“The cost to the government is the same, but they’re gaining a competitive advantage by calling a portion of the cost IRAD,” Hunter said Tuesday.
Hunter said the proposed rule deals with reimbursable IRAD. He said if a company wants to take its shareholders’ money and essentially enter a joint investment position with DoD, that is fine. But what concerns Hunter is that companies are using IRAD to be reimbursed by DoD.
In the end, Hunter said the debate over the use of IRAD in source selection hinges on what the government and industry wants IRAD to be. Hunter believes since IRAD is ultimately coming from the government, in an era when DoD is trying to reestablish technology advantages, IRAD would be more fruitful if it was not being used specifically to win competitions that are up for solicitation in the near term. Hunter would be more comfortable if IRAD was being used to win competitions three to five years down the road.
Alan Chvotkin, executive vice president and counsel for the Professional Services Council (PSC) trade group, said Tuesday while DoD’s aim with the proposed rule is laudable, it is fraught with danger for two reasons. One, he said, is that every company’s IRAD program is different and is devoted to what a company sees as the value to its long-term initiatives. Chvotkin said comparing one company’s IRAD program to another’s is difficult, if not impossible, and is unproductive.
The second reason, Chvotkin said, is how companies approach individual contracting opportunities varies based on where they are in the development lifecycle of that research and development (R&D) work. Chvotkin believes it is almost impossible to develop a uniform methodology, which seems almost formula-based, for contracting officers to be able to understand how far a company is in development and whether, and to what extent, its IRAD costs should be taken into account evaluating a price for future work.
Dan Stohr, spokesman for the Aerospace Industries Association (AIA), said Tuesday the trade group’s main concern is understanding the underlying problem DoD is trying to address with this proposed rule. Stohr said IRAD, in its very nature, is an investment designed to capture business and, thus, reducing costs is a good way to capture business. Stohr questioned how widespread the use of IRAD to reduce bid costs is being used.
Another question Stohr raised is how far down the supply chain would this proposed rule travel. He said IRAD is performed not just at the original equipment manufacturer (OEM) or system integrator level. Stohr wondered who would be responsible for reporting that.
Stohr is also concerned about unintended consequences as a result of this proposed rule, if it was to go into effect. He said proposed DoD rules are often written vaguely and that if IRAD is disincentivized, it would be an unintended consequence. Stohr also thinks this proposed rule could increase the number of bid protests if the rule is not written clearly.
Stohr said AIA has been engaging with DoD on this as a regular topic of conversation. AIA, he said, has biannual meetings with Kendall and that the group has lower level meetings with Acquisition, Technology and Logistics (AT&L) staff, Kendall’s deputies, on a more regular basis. This problem comes up repeatedly, Stohr said.
“DoD has been very clear and very upfront that they want industry to increase IRAD and the whole point of doing IRAD is to gain more business,” Stohr said. “Industry wants more certainty that if they invest in IRAD, that it will result in a contract award.”
DoD, also on Nov. 4, issued a final rule which it believes will improve the effectiveness of IRAD investments by the defense industrial base. The final rule requires contractors to engage in technical interchanges with DoD before costs are generated. Chvotkin called this final rule troubling as it requires companies to report on their IRAD projects before they initiate them.
DoD on Feb. 8 published an advanced notice of proposed rule making on IRAD in source selection in the Federal Register seeking information to assist in this proposed uniform IRAD evaluation. A public hearing was held March 3. DoD did not respond to a request for comment by press time Tuesday.
Comments to the proposed IRAD rule should be submitted in writing by Jan. 3. Comments can be made at http://www.regulations.gov/ under “DFARS Case 2016-D017”; via email at [email protected] with the email subject as “DFARS Case 2016-D017”; or fax at 571-372-6094.