over-runs, or commercial contracts.
d. There is no ceiling limitation except reasonableness for any contractor that does not meet the $10 million threshold (7-1505.2c), nor for any contractor segment that does not meet the $1 million threshold (7-1505.2b), even if the contractor meets the $10 million threshold.
7-1505.2 Determination of Contractor Segments Subject to a Ceiling Limitation
a. "Covered" contracts are Government contracts (or subcontracts under a "cov-ered" prime contract) for amounts in excess of $100,000, except for fixed-price con-tracts without cost incentives.
b. A "covered segment" is a segment of a company with over $1 million of IR&D and B&P costs allocated during its prior fiscal year to "covered" contracts. IR&D and B&P costs of segments that are not
"covered" are not counted in determining if a contractor meets the $10 million thresh-old discussed below.
c. The ceiling applies (only for the first three CFYs beginning after September 30, 1992) to a contractor with over $10 million of IR&D and B&P costs allocated during its prior fiscal year to "covered" contracts at its "covered segments."
d. Only the IR&D and B&P costs of
"covered segments" of contractors exceed-ing the $10 million threshold are subject to the new ceiling limitation.
7-1505.3 Calculation of Ceiling Limita-tion
a. The ceiling limitation is calculated using a new formula applied to actual costs incurred. The formula for the limita-tion on current year's cost begins with the allowable amount of IR&D and B&P
costs incurred at "covered segments" dur-ing the previous year. To determine the ceiling amount the prior year's allowable amount is first automatically increased by 5 percent. The prior year's allowable amount is also increased by an additional percentage if the contractor incurs more for IR&D and B&P in the current year than it did in the prior year. The addi-tional increase is proporaddi-tional to the con-tractor's spending increase, but is limited to the price escalation index for the Re-search, Development, Test, & Evaluation (RDT&E) account, Total Obligation Au-thority (TOA) published annually by the DoD Comptroller.
b. As updated through December 14, 1995, the RDT&E TOA indices are cur-rently 2.6 percent for Government Fiscal Year (GFY) 1993, 2.5 percent for GFY 1994, 2.9 percent for GFY 1995, and 3.0 percent for GFY 1996.
c. The following ceiling calculation example is for a calendar year contractor that had an advance agreement ceiling ne-gotiated under the old cost principle, ex-ceeds the $10 million threshold for its cov-ered segments for all years in the example, and has a constant 80 percent DoD negoti-ated contract share of the total business base. Its CFY 1993 would be the first year subject to the new cost principle's ceiling and its CFY 1995 would be the last. The example is provided assuming that all amounts are incurred costs. For forward pricing, the amounts would be projected.
Because the ceiling amounts depend on prior years' actual costs, the actual limita-tions would change if the costs incurred differed from the projections. In the exam-ple, the negotiated ceiling for 1992 was
$30 million. All dollar amounts are in mil-lions and represent only the costs allocable to "covered segments."
7-1506
Costs Incurred at Segments Meeting Amounts in Millions
$1 Million Threshold (note 3) 1992 1993 1994 1995 1996 1. Incurred IR&D/B&P Costs 20.0 30.0 25.0 25.3 40.0
(note 1) 2. Prior Year’s Allowable Amount NA 20.0 21.5 22.6 NA 3. 5% Increase (5% of Line 2) NA 1.0 1.1 1.1
4. Percentage Increase in Costs* NA 50.0% 0% 1.2%
5. RDT&E TOA Escalation Index** NA 2.6% 2.7% 2.9%
6. Lesser of Lines 4 or 5 NA 2.6% 0% 1.2%
7. Ceiling Increase Based on Spending Increase (Line 6 X Line 2)
NA .5 0.0 .3
8. Ceiling (Line 2 + Line 3 + Line 7) 30.0 21.5 22.6 24.0 9. Allowable IR&D/B&P (Lower of Lines
1 or 8) (note 4)
20.0 21.5 22.6 24.0 40.0
10. IR&D/B&P Costs with DoD Potential (note 2)
18.0 25.5 20.0 20.0 NA
11. Share of IR&D/B&P Allowable Under FAR Allocated to DoD (80% of Line 9)
16.0 17.2 18.1 19.2 NA
12. Allowable Total IR&D/B&P under DFARS for DoD Contracts (Lower of Lines 10 or 11)
16.0 17.2 18.1 19.2 NA
NA = Not Applicable
* = (Current Year - Prior Year) / Prior Year, But Not Less Than 0%.
** = The rates shown are from January 1994 projections and change annually.
Notes on the Example:
(1) In the example for 1996, the contractor's IR&D and B&P costs are no longer sub-ject to the ceiling limitations.
(2) Given the broad definition of "potential interest to DoD" in the DFARS, the risk is low that the costs would not meet the definition. The "potential interest" amount normally is the result of a technical review. If the amount on line 10 is ever less than the amount on line 11 for a year, there must be a lower IR&D-B&P rate calculated for allocation to DoD contracts to ensure that no more than the amount on line 12 is allocated to DoD.
(3) If the segments meeting the $1 million threshold change from one year to the next, it may affect the contractor's $10 million threshold coverage. The calculation of the cur-rent year's limitation on allowable costs must be based on the prior and curcur-rent years' costs for the segments that are to be covered by the limitation being calculated.
(4) The ceiling calculated using the new FAR formula (FAC 90-13) must be increased if the contracting officer determines that the new ceiling formula would reimburse the contractor less than the contractor would have received under the rule prior to FAC 90-13.
7-1506 IR&D and B&P Allowability Criteria for CFYs Beginning After September 30, 1995
FAC 97-03 implemented the intent of Congress in Public Law 102-190 to eliminate over a three year period any allowability ceiling for IR&D and B&P costs and treat these costs for FY 1996 and beyond as fully allowable, subject
only to the FAR standards of reasonable-ness and allocability. The final rule (FAC 97-03), effective February 9, 1998, re-moved for fiscal year 1996 and beyond the requirements to calculate or negotiate a ceiling for IR&D and B&P costs. Costs for IR&D and B&P are allowable as indi-rect expenses on contracts for all contrac-tors to the extent that those costs are al-locable and reasonable.
7-1507 7-1507 Cooperative
Arrangements/Agreements
a. FAR 31.205-18(e)(1) provides that costs incurred by a contractor working jointly with one or more non-Federal enti-ties pursuant to cooperative arrangements (e.g., joint ventures, limited partnerships, teaming arrangements, and collaboration and consortium arrangements) or costs contributed by a contractor in performing cooperative research and development agreements entered into under any of the authorities listed below, should be consid-ered as allowable IR&D costs if the work performed would have been allowed as IR&D had there been no cooperative ar-rangement:
(1) Section 12 of the Stevenson-Wydler Technology Transfer Act;
(2) For contracts awarded prior to May 16, 1997 - Sections 203(c)(5) and (6) of the National Aeronautics and Space Act of 1958, as amended, when there is no trans-fer of Federally appropriated funds;
(3) For contracts awarded on or after May 16, 1997 - Section 203(c)(5) and (6) of the National Aeronautics and Space Act of 1958, as amended;
(4) 10 U.S.C. 2371 for the Defense Advanced Research Projects Agency; or
(5) Other equivalent authority.
b. Contracts awarded prior to May 16, 1997. Effective May 2, 1994, NASA issued a class deviation from FAR 31.205-18(e)(2). Under this class deviation, costs incurred under NASA cooperative ar-rangements, regardless of whether or not there is a transfer of federally appropriated funds, may be charged to IR&D and allo-cated to contracts in accordance with the contractor's established practice, provided the work performed would have been al-lowed as IR&D had there been no coopera-tive arrangement.
c. Contracts awarded on or after May 16, 1997. Effective May 16, 1997, FAR 31.205-18(e) was revised to permit con-tractor IR&D contributions under NASA cooperative arrangements to be treated as allowable indirect costs. The FAR revision eliminated the need for the prior NASA class deviation (see paragraph b.).
d. “Other equivalent authority”, as re-ferred to in FAR 31.205-18(e)(1)(iv),
ap-plies to any cooperative research and de-velopment agreement, or similar arrangement, entered into under a statutory authority. When contractors classify costs incurred under such arrangements as IR&D, the auditor should coordinate with the agency that awarded the arrangement to determine if the arrangement is entered into under a statutory authority. The auditor should adequately document this coordina-tion in the working papers and/or audit report.
e. For contracts awarded on or after February 9, 1998 (FAC 97-03), costs in-curred in preparing, submitting, and sup-porting offers on potential cooperative arrangements are allowable to the extent they are allocable, reasonable, and not oth-erwise unallowable.
7-1508 Special Consideration for IR&D and B&P in NASA Contracts
The auditor must review the effective date of the contract to determine if the con-tract is covered by the FAR or by the NASA Procurement Regulations. Special considerations are needed for contracts subject to the NASA Procurement Regula-tions.
7-1508.1 NASA Contracts Entered Into Under the FAR
The FAR provisions apply to all NASA contracts entered into on or after April 1, 1984. The NASA FAR Supplement has no special requirements for IR&D and B&P costs. Therefore, no special considerations are required for NASA contracts entered into under the FAR.
7-1508.2 NASA Contracts Entered Into Under the NASA Procurement Regula-tions (NASA PR)
a. The NASA PR generally applies to all NASA contracts entered into prior to the implementation of the FAR on April 1, 1984. The NASA PR cost principles cover-ing IR&D and B&P costs are in conformity with the DAR cost principles in effect at the time for matters of definitions, burden-ing, and allocation procedures. Both sets of cost principles provide that IR&D and
7-1508