FAR 52.227-9—Refund of Royalties.
Plain-English Summary
FAR 52.227-9, Refund of Royalties, addresses how the Government treats royalty-related costs that are included in the contract price and later turn out to be lower than expected, not payable, or otherwise not properly chargeable. It covers the definition of “royalties” for this clause, the contractor’s duty to report royalties paid or owed before final payment, the Government’s right to pay only those royalties that were included in the price and are properly allocable and chargeable, the requirement to reduce the contract price or refund/credit the Government when royalties are not actually paid or are disallowed, the contractor’s post-final-payment duty to notify the Government if it is later relieved from paying those royalties within three years, and the flowdown requirement to certain subcontracts. In practice, the clause protects the Government from paying for royalty costs that were estimated into the price but never incurred, or that should not have been charged to the contract. It also creates a continuing post-closeout obligation for the contractor to monitor royalty relief and return money if the basis for the price changes. For contractors, the clause requires careful tracking of patent and license-related charges, timely disclosure, and subcontract management; for contracting officers, it provides a mechanism to verify, adjust, and recover amounts tied to royalties.
Key Rules
Royalties are broadly defined
For this clause, “royalties” includes not only direct royalty payments but also license fees, patent or license amortization costs, and similar charges for using patents or patent applications. The definition applies to costs connected with performance of the contract or any subcontract under it.
Reported royalty amounts are part of price
The contract price is understood to include royalty amounts that the contractor or subcontractors reported to the contracting officer during pricing. This means royalty costs are treated as a priced element, not an open-ended reimbursement item.
Pre-final-payment disclosure is required
Before final payment, the contractor must provide the contracting officer a statement identifying royalties paid or required to be paid for the contract and subcontracts, along with the reasons. This gives the Government a chance to verify the amounts before closing out the contract.
Payment only for allowable, allocable royalties
The contractor is compensated for reported royalties only to the extent they were included in the contract price and the contracting officer determines they are properly chargeable to the Government and allocable to the contract. If royalties were included in price but not actually paid, or are later found unallowable or not allocable, the contract price must be reduced.
Refunds are required after final payment
If within three years after final payment the contractor is relieved, in whole or in part, from paying royalties that were included in the final adjusted contract price, the contractor must promptly notify the contracting officer and reimburse the Government the corresponding amount.
Flowdown to certain subcontracts is mandatory
The substance of the clause, including the flowdown paragraph, must be included in any subcontract where the amount of royalties reported during subcontract negotiation exceeds $250. This ensures the Government can recover overpayments tied to subcontract-level royalty changes.
Responsibilities
Contracting Officer
Review the contractor’s royalty statement before final payment, determine whether reported royalties are properly chargeable and allocable, direct any contract price reduction or repayment/credit, and receive notice and reimbursement if the contractor later obtains royalty relief within three years after final payment.
Contractor
Report royalty amounts during pricing, furnish a pre-final-payment statement of royalties paid or required to be paid and the reasons, ensure only allowable and allocable royalty costs are included in the price, notify the contracting officer if royalty obligations are later reduced or eliminated within three years after final payment, and reimburse the Government as directed.
Subcontractor
When applicable, disclose royalty-related costs during subcontract negotiation and comply with the flowed-down substance of the clause if the reported royalty amount exceeds $250.
Agency/Government
Protect the public fisc by paying only royalty costs that were included in the negotiated price and are properly attributable to the contract, and recover amounts when royalties are not paid or are later forgiven or reduced.
Practical Implications
Contractors need a reliable system to track patent, license, and similar intellectual property charges across both prime contracts and subcontracts; missing or poorly documented royalty data can delay final payment.
The clause can reduce the contract price if estimated royalties were included but never actually paid, so contractors should reconcile estimated versus actual royalty obligations before closeout.
The three-year post-final-payment refund obligation means closeout is not the end of the contractor’s duty; any later waiver, settlement, expiration, or reduction in royalty liability may trigger repayment.
Subcontract flowdown is easy to overlook, especially when royalty amounts are embedded in pricing discussions rather than separately identified; failure to include the clause can create compliance and recovery problems.
Contracting officers should look for clear support showing that royalty costs are both included in the price and properly allocable to the contract, because the clause does not automatically make every reported royalty reimbursable.
Official Regulatory Text
As prescribed in 27.202-5 (c) , insert the following clause: Refund of Royalties (Apr 1984) (a) The contract price includes certain amounts for royalties payable by the Contractor or subcontractors or both, which amounts have been reported to the Contracting Officer. (b) The term "royalties" as used in this clause refers to any costs or charges in the nature of royalties, license fees, patent or license amortization costs, or the like, for the use of or for rights in patents and patent applications in connection with performing this contract or any subcontract hereunder. (c) The Contractor shall furnish to the Contracting Officer, before final payment under this contract, a statement of royalties paid or required to be paid in connection with performing this contract and subcontracts hereunder together with the reasons. (d) The Contractor will be compensated for royalties reported under paragraph (c) of this clause, only to the extent that such royalties were included in the contract price and are determined by the Contracting Officer to be properly chargeable to the Government and allocable to the contract. To the extent that any royalties that are included in the contract price are not in fact paid by the Contractor or are determined by the Contracting Officer not to be properly chargeable to the Government and allocable to the contract, the contract price shall be reduced. Repayment or credit to the Government shall be made as the Contracting Officer directs. (e) If, at any time within 3 years after final payment under this contract, the Contractor for any reason is relieved in whole or in part from the payment of the royalties included in the final contract price as adjusted pursuant to paragraph (d) of this clause, the Contractor shall promptly notify the Contracting Officer of that fact and shall reimburse the Government in a corresponding amount. (f) The substance of this clause, including this paragraph (f), shall be included in any subcontract in which the amount of royalties reported during negotiation of the subcontract exceeds $250. (End of clause)