FAR 31.205-18—Independent research and development and bid and proposal costs.
Plain-English Summary
FAR 31.205-18 addresses the allowability, allocation, and treatment of independent research and development (IR&D) and bid and proposal (B&P) costs. It defines the key terms used in the rule, including applied research, basic research, development, systems and other concept formulation studies, company, and B&P costs, and it explains what counts as IR&D versus effort that is really contract performance or proposal support. The section then ties cost accounting for these costs to CAS 9904.420, with different treatment depending on whether a contract is fully CAS-covered, modified CAS-covered, or non-CAS-covered. It also explains when IR&D and B&P are allowable as indirect expenses, when deferred IR&D from prior periods may be recognized, and how cooperative arrangements can affect IR&D treatment. In practice, this section matters because IR&D and B&P are often significant overhead-type costs, and improper classification or allocation can lead to unallowable costs, pricing disputes, or defective cost submissions. Contractors need to distinguish internal research from product development and proposal support, while contracting officers need to verify that the contractor’s accounting treatment and contract clauses match the applicable CAS and FAR requirements.
Key Rules
Key definitions control treatment
The section defines applied research, development, IR&D, B&P, company, and systems/concept formulation studies. These definitions determine whether a cost is treated as IR&D, B&P, development, or contract-required effort, which directly affects allowability and allocation.
IR&D excludes proposal support
IR&D does not include technical effort spent preparing technical data specifically to support a bid or proposal. That type of effort belongs in B&P or another appropriate cost category, not IR&D.
CAS 9904.420 governs allocation
The accounting and allocation rules in CAS 9904.420 are incorporated into FAR 31.205-18. Fully CAS-covered contracts must follow all of CAS 420, while modified CAS-covered and non-CAS-covered contracts follow most of it, with specific exceptions.
Allocation follows G&A base
For modified CAS-covered and non-CAS-covered contracts, IR&D and B&P are generally allocated to final cost objectives using the same basis as the G&A expense pool of the profit center where the costs are incurred. If the costs benefit other profit centers or the whole company, they must be routed through those profit centers’ G&A or corporate G&A as appropriate.
Different base may be approved
If using the G&A base does not produce equitable allocation, the contracting officer may approve another allocation base. This is an exception, not the default, and it requires a judgment that the alternative better matches cost causation.
Allowable if allocable and reasonable
IR&D and B&P are allowable as indirect expenses unless a specific exception applies, including the deferred-cost rule, agency regulations, or other limitations. Even when allowable in principle, the costs still must be allocable and reasonable.
Deferred IR&D is tightly limited
IR&D from prior accounting periods is generally unallowable, except in a narrow case where the contractor developed a specific product at its own risk and can identify and reasonably prorate the costs to sales of that product. The contractor must also meet the no-Government-business and no-current-IR&D-to-Government-work conditions.
Recognized deferred costs need documentation
When deferred IR&D is recognized, the contract must include a specific provision stating the amount allocable to the contract, except for firm-fixed-price and fixed-price with economic price adjustment contracts. The negotiation memorandum must explain the circumstances and why the deferred costs were accepted.
Cooperative arrangements may qualify
IR&D may be incurred through cooperative arrangements such as joint ventures, limited partnerships, teaming arrangements, and consortiums with non-Federal entities. The section recognizes that collaborative structures can still produce IR&D costs, but the costs must still fit the IR&D definition and accounting rules.
Responsibilities
Contractor
Classify research, development, and proposal-support costs correctly; exclude contract-required effort from IR&D and B&P; allocate IR&D and B&P in accordance with CAS 9904.420 and the applicable G&A base; ensure deferred IR&D is only claimed when the narrow exception is met; and maintain documentation supporting allocability, reasonableness, and any cooperative arrangement treatment.
Contracting Officer
Determine whether the contract is fully CAS-covered, modified CAS-covered, or non-CAS-covered; review whether the contractor’s allocation method is equitable; approve an alternate allocation base when justified; and, when deferred IR&D is recognized, ensure the contract includes the required specific provision and that the negotiation memorandum explains the basis for acceptance.
Agency
Apply any agency-specific regulations that further limit or condition the allowability of IR&D and B&P costs; ensure internal policy aligns with FAR 31.205-18 and CAS 9904.420; and oversee consistent treatment across procurements and contractor relationships.
Auditors/Cost Monitors
Test whether costs labeled IR&D or B&P are actually allowable under the definitions; verify that allocation follows the applicable CAS/FAR rules; and identify misclassified proposal, development, or contract-performance costs that should not be charged as IR&D or B&P.
Practical Implications
Contractors should expect close scrutiny of whether technical work is truly independent research or is really product development, prototype work, or proposal support. Mislabeling these costs is a common audit finding.
The allocation method matters as much as the label. Even allowable IR&D/B&P costs can become problematic if they are spread using a base that does not reflect where the benefit is received.
Deferred IR&D is an exception, not a routine accounting practice. Contractors should not assume prior-period research costs can be recovered later unless they fit the narrow product-specific rule and are well documented.
For mixed portfolios and corporate groups, the phrase "company" is broad and can pull in divisions, subsidiaries, and affiliates under common control. That makes intercompany benefit and G&A routing especially important.
Contracting officers should pay attention to contract type. The rule treats fully CAS-covered contracts differently from modified or non-CAS-covered contracts, and the contract file should show why the chosen treatment is appropriate.
Official Regulatory Text
(a) Definitions. As used in this subsection- Applied research means that effort which (1) normally follows basic research, but may not be severable from the related basic research, (2) attempts to determine and exploit the potential of scientific discoveries or improvements in technology, materials, processes, methods, devices, or techniques, and (3) attempts to advance the state of the art. Applied research does not include efforts whose principal aim is design, development, or test of specific items or services to be considered for sale; these efforts are within the definition of the term "development," defined in this subsection. Basic research (see 2.101 ). Bid and proposal (B&P) costs means the costs incurred in preparing, submitting, and supporting bids and proposals (whether or not solicited) on potential Government or non-Government contracts. The term does not include the costs of effort sponsored by a grant or cooperative agreement, or required in the performance of a contract. Company means all divisions, subsidiaries, and affiliates of the contractor under common control. Development means the systematic use, under whatever name, of scientific and technical knowledge in the design, development, test, or evaluation of a potential new product or service (or of an improvement in an existing product or service) for the purpose of meeting specific performance requirements or objectives. Development includes the functions of design engineering, prototyping, and engineering testing. Development excludes- (1) Subcontracted technical effort which is for the sole purpose of developing an additional source for an existing product, or (2) Development effort for manufacturing or production materials, systems, processes, methods, equipment, tools, and techniques not intended for sale. Independent research and development (IR&D) means a contractor’s IR&D cost that consists of projects falling within the four following areas: (1) basic research, (2) applied research, (3) development, and (4) systems and other concept formulation studies. The term does not include the costs of effort sponsored by a grant or required in the performance of a contract. IR&D effort shall not include technical effort expended in developing and preparing technical data specifically to support submitting a bid or proposal. Systems and other concept formulation studies means analyses and study efforts either related to specific IR&D efforts or directed toward identifying desirable new systems, equipment or components, or modifications and improvements to existing systems, equipment, or components. (b) Composition and allocation of costs. The requirements of 48 CFR 9904.420 , Accounting for independent research and development costs and bid and proposal costs, are incorporated in their entirety and shall apply as follows- (1) Fully-CAS-covered contracts. Contracts that are fully-CAS-covered shall be subject to all requirements of 48 CFR 9904.420 . (2) Modified CAS-covered and non-CAS-covered contracts. Contracts that are not CAS-covered or that contain terms or conditions requiring modified CAS coverage shall be subject to all requirements of 48 CFR9904.420 except 48 CFR 9904.420-50(e)(2) and 48 CFR 9904.420-50(f)(2) , which are not then applicable. However, non-CAS-covered or modified CAS-covered contracts awarded at a time the contractor has CAS-covered contracts requiring compliance with 48 CFR 9904.420 , shall be subject to all the requirements of 48 CFR 9904.420 . When the requirements of 48 CFR 9904.420-50(e)(2) and 48 CFR 9904.420-50(f)(2) are not applicable, the following apply: (i) IR&D and B&P costs shall be allocated to final cost objectives on the same basis of allocation used for the G&A expense grouping of the profit center (see 31.001 ) in which the costs are incurred. However, when IR&D and B&P costs clearly benefit other profit centers or benefit the entire company, those costs shall be allocated through the G&A of the other profit centers or through the corporate G&A, as appropriate. (ii) If allocations of IR&D or B&P through the G&A base do not provide equitable cost allocation, the contracting officer may approve use of a different base. (c) Allowability. Except as provided in paragraphs (d) and (e) of this subsection, or as provided in agency regulations, costs for IR&D and B&P are allowable as indirect expenses on contracts to the extent that those costs are allocable and reasonable. (d) Deferred IR&D costs. (1) IR&D costs that were incurred in previous accounting periods are unallowable, except when a contractor has developed a specific product at its own risk in anticipation of recovering the development costs in the sale price of the product provided that- (i) The total amount of IR&D costs applicable to the product can be identified; (ii) The proration of such costs to sales of the product is reasonable; (iii) The contractor had no Government business during the time that the costs were incurred or did not allocate IR&D costs to Government contracts except to prorate the cost of developing a specific product to the sales of that product; and (iv) No costs of current IR&D programs are allocated to Government work except to prorate the costs of developing a specific product to the sales of that product. (2) When deferred costs are recognized, the contract (except firm-fixed-price and fixed-price with economic price adjustment) will include a specific provision setting forth the amount of deferred IR&D costs that are allocable to the contract. The negotiation memorandum will state the circumstances pertaining to the case and the reason for accepting the deferred costs. (e) Cooperative arrangements. (1) IR&D costs may be incurred by contractors working jointly with one or more non-Federal entities pursuant to a cooperative arrangement (for example, joint ventures, limited partnerships, teaming arrangements, and collaboration and consortium arrangements). IR&D costs also may include costs contributed by contractors in performing cooperative research and development agreements, or similar arrangements, entered into under- (i) Section 12 of the Stevenson-Wydler Technology Transfer Act of1980 ( 15 U.S.C. 3710(a) ); (ii) Sections203(c)(5) and (6) of the National Aeronautics and Space Act of1958, as amended ( 42 U.S.C. 2473(c)(5) and (6)); (iii) 10 U.S.C. 4021 for the Defense Advanced Research Projects Agency; or (iv) Other equivalent authority. (2) IR&D costs incurred by a contractor pursuant to these types of cooperative arrangements should be considered as allowable IR&D costs if the work performed would have been allowed as contractor IR&D had there been no cooperative arrangement. (3) Costs incurred in preparing, submitting, and supporting offers on potential cooperative arrangements are allowable to the extent they are allocable, reasonable, and not otherwise unallowable.