FAR 27.202-4—Refund of royalties.
Plain-English Summary
FAR 27.202-4 explains how the government handles royalty costs when the contract includes the clause at 52.227-9, Refund of Royalties. In practical terms, this section covers two related subjects: paying royalties that are properly due under the contract and recovering royalties that were included in the contractor’s fixed price but were not actually paid by the contractor. Its purpose is to prevent the government from overpaying for intellectual property rights-related costs and to make sure royalty charges are handled consistently with the contract terms. This matters most in fixed-price contracting, where royalty amounts may be embedded in the price and later need to be verified, adjusted, or refunded. The section also signals that royalty treatment is not automatic; it depends on the contract clause and on whether the contractor actually incurred and paid the royalty obligation. In practice, contracting officers and contractors need to track royalty claims carefully, document what was included in price, and reconcile what was truly paid versus what was only estimated or embedded in the negotiated price.
Key Rules
Clause controls royalty treatment
The clause at 52.227-9, Refund of Royalties, is the mechanism that governs royalty payment and recovery under the contract. If the clause is included, the parties must follow its procedures rather than treating royalty amounts as ordinary fixed-price costs with no later adjustment.
Royalties may be paid under contract
The clause establishes procedures for the government to pay the contractor royalties when they are properly due under the contract. This means royalty reimbursement is not automatic; it must be handled according to the contract terms and supporting documentation.
Unpaid royalties can be recovered
If royalties were included in the contractor’s fixed price but the contractor did not actually pay them, the government may recover those amounts. The rule prevents the contractor from retaining price amounts for royalty costs that were never incurred.
Fixed-price inclusion matters
This section specifically addresses royalties that were built into the contractor’s fixed price. The key issue is whether the contractor’s price included royalty costs and whether those costs were later paid, not merely whether the contractor expected to pay them.
Documentation and reconciliation are essential
Because the government may need to pay or recover royalty amounts, the contractor must be able to show what royalties were included in the price and what royalties were actually paid. Accurate records are necessary to support any adjustment under the clause.
Responsibilities
Contracting Officer
Ensure the contract includes the appropriate clause when royalty issues are expected, administer the clause procedures, and verify whether claimed royalties are properly payable or recoverable. The contracting officer must also make sure any adjustment reflects the contractor’s actual royalty payment status.
Contractor
Identify royalty costs included in the fixed price, maintain records showing royalties actually paid, and submit or support royalty claims in accordance with the clause. The contractor must not retain amounts for royalties that were included in price but never paid.
Agency
Use the clause framework to protect the government from paying unsupported royalty amounts and to ensure any royalty reimbursement or recovery is handled consistently. The agency should support oversight and auditability of royalty-related pricing and payments.
Practical Implications
Contractors should track royalty obligations separately from other price elements so they can prove what was actually paid if the government asks for a refund or adjustment.
A common pitfall is pricing in expected royalties and then failing to pay the licensor; under this section, that can lead to government recovery of the embedded amount.
Contracting officers should not assume every royalty included in a fixed price is payable later; they need evidence that the royalty was actually incurred and paid under the contract terms.
This section is especially important in negotiated fixed-price contracts involving patented technology, software, or other intellectual property where royalty charges may be embedded in the price.
Poor documentation is the biggest risk: if the contractor cannot show the royalty basis, the amount included in price, and the amount actually paid, disputes and repayment issues are likely.
Official Regulatory Text
The clause at 52.227-9 , Refund of Royalties, establishes procedures to pay the contractor royalties under the contract and recover royalties not paid by the contractor when the royalties were included in the contractor’s fixed price.