Independent Research and Development (IR&D)

Independent Research and Development (IR&D) refers to a contractor's own R&D work that is not performed under a contract, grant, or cooperative agreement. The federal government allows contractors to recover these costs as allowable indirect costs when properly tracked and reported, because IR&D investments help maintain the industrial base and advance technology relevant to future government needs.

What is IR&D?

IR&D costs arise when a defense or civilian contractor invests its own resources in research, development, or experimentation that is not directly funded by the government on a specific contract. This includes basic and applied research, development of new technologies, and systems engineering studies. The key distinction from contract-funded R&D is that IR&D is company-initiated and company-funded, though the costs can ultimately be recovered through the overhead rate applied to government contracts.

FAR 31.205-18 and DFARS 231.205-18 govern the allowability of IR&D costs. For major defense contractors, these costs must be reported to the Defense Contract Management Agency (DCMA) and the cognizant Defense Contract Audit Agency (DCAA) office. The contractor must demonstrate that the work has potential relationship to military functions or operations to support recoverability on defense contracts.

Why IR&D Matters for Contractors

IR&D gives contractors a mechanism to invest in next-generation capabilities without bearing the full financial burden. By treating qualified R&D spending as an allowable indirect cost, the government shares in the investment through the overhead recovery mechanism. This is a significant incentive for defense primes and large contractors to maintain technology development pipelines even when no funded contract exists for the work.

For proposal teams, understanding a company's IR&D portfolio is often the first step in building a technical approach for advanced capability solicitations. Work performed under IR&D can demonstrate that a contractor has hands-on experience with a technology even before a government program is funded. This distinguishes IR&D investment from theoretical claims in an rfp response.

Contractors must track IR&D separately from Bid and Proposal (B&P) costs. IR&D covers actual technical work; B&P covers the effort of preparing offers and proposals. Both are allowable indirect costs, but they serve different purposes and have different reporting requirements under cost accounting standards.

Reporting Requirements

Defense contractors with IR&D costs exceeding $11 million in a fiscal year must submit a technical report to the Defense Technical Information Center (DTIC) describing their IR&D projects. The government uses these reports to understand what technology is being developed in the commercial sector and to plan future acquisition programs accordingly. Contractors that skip this reporting step risk disallowance of their IR&D costs.

Frequently Asked Questions

Can small businesses claim IR&D?

Yes. Small businesses can claim IR&D costs as allowable indirect costs, though the reporting thresholds and scrutiny levels differ. SBIR and STTR programs are a separate mechanism for small business R&D funding and are not classified as IR&D in the same sense.

How is IR&D different from SBIR?

SBIR/STTR are government-funded programs where the government sponsors the R&D through a formal award. IR&D is company-funded with potential indirect cost recovery. The two are mutually exclusive for the same work.