FAR 27.202-3—Adjustment of royalties.
Plain-English Summary
FAR 27.202-3 explains how the Government should respond when royalties charged under a contract or subcontract may be inconsistent with Government rights, excessive, or otherwise improper. It covers the contracting officer’s duty to identify questionable royalty charges, promptly report them to the office with patent cognizance, and work in coordination with that office to protect the Government from paying royalties it does not owe. The section specifically addresses three problem situations: royalties for which the Government already has a royalty-free license, royalties charged above the licensed rate, and royalties that are otherwise improper in whole or in part. It also authorizes the contracting officer, in appropriate cases, to seek a refund under a contract’s refund-of-royalties clause or to negotiate a reduction in royalties. Finally, it points readers to FAR 31.205-37 for cost allowability guidance and FAR 31.109 for advance understandings on royalties, making this section important both for contract administration and for cost analysis.
Key Rules
Report questionable royalties
If the contracting officer believes royalties paid or to be paid are inconsistent with Government rights, excessive, or otherwise improper, the contracting officer must promptly report the facts to the office with patent cognizance for the contracting activity.
Coordinate before acting
The contracting officer must work in coordination with the cognizant patent office when taking action on royalty issues. This ensures patent-rights expertise is used before the Government pays or agrees to pay questionable charges.
Protect against unauthorized payment
The contracting officer must promptly act to prevent payment of royalties when the Government already has a royalty-free license, when the rate exceeds the Government’s licensed rate, or when the charge is otherwise improper.
Seek refunds or reductions
In appropriate cases, the contracting officer may demand a refund under a contract clause that provides for refund of royalties, or negotiate a reduction in the royalty amount.
Use cost guidance
When evaluating royalty information furnished under FAR 27.202-1, the contracting officer should consult FAR 31.205-37 for allowability guidance and FAR 31.109 for advance understandings on specific cost items, including royalties.
Responsibilities
Contracting Officer
Identify potentially improper royalty charges, promptly report the facts to the cognizant patent office, coordinate with that office, and take prompt action to prevent or reduce improper Government payment. When appropriate, the contracting officer must demand a refund under the contract clause or negotiate a lower royalty rate.
Office Having Cognizance of Patent Matters
Provide patent-rights expertise and coordinate with the contracting officer in evaluating whether royalties are consistent with Government rights, excessive, or otherwise improper, and in determining the appropriate protective action.
Agency/Contracting Activity
Maintain the patent cognizance function and support the contracting officer in resolving royalty issues, including review of patent-rights information and coordination on refunds or reductions.
Contractor/Subcontractor
Provide royalty information when required and ensure royalty charges claimed under the contract or subcontract are supportable, consistent with Government license rights, and not otherwise improper.
Practical Implications
This section is a trigger for early action: if royalty charges look questionable, the contracting officer should not wait until payment is made or the issue becomes a cost dispute.
A common pitfall is treating royalties as automatically allowable; the Government’s license rights may eliminate the charge entirely or limit it to a lower rate.
Contract language matters. If the contract includes a refund-of-royalties clause, the Government may have a direct remedy to recover overpayments.
The patent cognizance office is not optional in these cases; coordination helps avoid inconsistent decisions and protects the Government’s legal position.
Contractors should be prepared to document the basis for royalty charges, especially where Government-furnished rights, license terms, or subcontract pass-through charges may affect allowability.
Official Regulatory Text
(a) If at any time the contracting officer believes that any royalties paid, or to be paid, under a contract or subcontract are inconsistent with Government rights, excessive, or otherwise improper, the contracting officer shall promptly report the facts to the office having cognizance of patent matters for the contracting activity concerned. (b) In coordination with the cognizant office, the contracting officer shall promptly act to protect the Government against payment of royalties- (1) With respect to which the Government has a royalty-free license; (2) At a rate in excess of the rate at which the Government is licensed; or (3) When the royalties in whole or in part otherwise constitute an improper charge. (c) In appropriate cases, the contracting officer in coordination with the cognizant office shall demand a refund pursuant to any refund of royalties clause in the contract (see 27.202-4 ) or negotiate for a reduction of royalties. (d) For guidance in evaluating information furnished pursuant to 27.202-1 , see 31.205-37 . See also 31.109 regarding advance understandings on particular cost items, including royalties.