AEC policy

AEC's policy toward acceptance of IR&D costs differs from the DOD-NASA policy.

As stated in section 9-15.5010-12 of the AEC Contract Cost Principles and Procedures:

"(a) AEC does not accept a general allocation of
independent research and development costs.
Such costs are considered unallowable except
to the extent specifically set forth in the
contract.

Research and development costs may

be made allowable only to the extent to which
they provide a direct or indirect benefit to
the contract work."

AEC estimates that about 80 percent of its contract work is with contractors which operate AEC-owned plants and laboratories on a cost-plus-a-fixed-fee basis. AEC not only owns the facilities but also provides the materials and advances of funds. The generation of new ideas through R&D is an integral part of the program which is completely financed by AEC. There is therefore no independent research and development performed by the contractor under an AEC operating contract, but the equivalent thereto is performed and fully funded as a part of the AEC program.

The remaining 20 percent of AEC business generally is with contractors which perform the contract work in their own facilities and without advances of Government funds. In addition, the contractors which operate the AEC-owned plants and laboratories subcontract some work to industrial firms. These subcontractors, as well as the prime contractors which perform work in their own facilities, frequently are engaged in contract work also with DOD or NASA. AEC accepts a limited amount of IR&D costs incurred by the se firms.

Differences between AEC and DOD-NASA policies

The AEC policy toward the IR&D costs incurred by independent firms and subcontractors differs from the policy

that has been followed by DOD and NASA in these major reSpects:

1. The contractor's entire IR&D program is not submitted to, or evaluated by. AEC for reasonableness. Rather, the contractor submits individual projects for evaluation. The costs of these projects are accepted for allocation only when AEC establishes that the projects individually benefit, either directly or indirectly existing AEC contract work.

DOD and NASA. on the other hand. generally have ne-
gotiated agreements with companies conducting large
IR&D programs, specifying the maximum amount of
costs which will be considered to be reasonable.
To facilitate such negotiations, DOD and NASA may
(a) request a contractor to submit a brochure de-
scribing its entire planned IR&D program and (b)
perform technical evaluations of the contractor's
IR&D program.
The negotiated amount of the program
that DOD and NASA consider reasonable for alloca-
tion is based on the entire program rather than on
a project-by-project determination of acceptability.

2. The AEC regulation Specifically describes the nature
of unallowable projects. For example, individual
IR&D projects are not accepted when (a) they are
primarily of a promotional nature, such as projects
directed toward the development of new business or
projects connected with proposals for new business,
(b) they are studies or projects which are, in fact,
undertaken, in whole or in part, for other custom-
ers, and (c) they duplicate R&D work that AEC has
sponsored,

N.B.:

ASPR stipulates that acceptable independent devel-
opment projects must be related to product lines
for which the Government has contracts. Because of
the broad involvement of DOD in practically all as-
pects of the economy, however, very few independent__
development projects have been determined to be un-
allowable under this provision.

3. When the cost of the work involved in segregating the IR&D which benefits the contract work is disproportionate to the amount involved, a flat amount not exceeding either 5 percent of the contractor's total estimated IR&D costs or 5 percent of the total estimated direct labor and material under the contract may be negotiated by AEC. The current ASPR does not provide for any fixed limitations on IR&D cost.

4. AEC requires that the costs of IR&D, whether or not accepted as allowable, must include an amount for the related indirect and administrative costs, regardless of the contractor's accounting practices.

The current ASPR provides that an appropriate amount
of indirect and administrative costs be allocated
to IR&D costs, unless the contractor's policy is to
treat such costs otherwise.

5. When AEC is the predominant customer, special consideration is given to whether IR&D should be performed as part of the contract work. This is done to avoid the apportionment to AEC of most, if not all, of IR&D costs over which AEC would have no direct control. This approach is not followed by DOD and NASA.

The additional amount that would be paid by the Government for IR&D under the DOD-NASA policy over that which would be paid under the AEC policy in the same circumstances is not known. AEC advised us in June 1968, however, that a recently completed study indicated that, for 77 contracts with contract costs aggregating about $150 million, AEC had allowed about $2.1 million for IR&D, or 1.4 percent of the contract costs. AEC estimates that, had DOD principles been applied, 2.15 percent of the contract costs would have been reimbursed for IR&D.

We were informed that AEC had developed its own cost principle for IR&D because its activities, which are primarily oriented to research in the broad field of nuclear energy, dictated adoption of a principle that recognized

that AEC would be paying directly for most research which benefited its work.

Although DOD and NASA conduct a large amount of research in their own laboratories and contract for specific R&D projects, they utilize the IR&D activities of private industry to assist them in planning for future development programs, AEC, on the other hand, feels that it can acquire sufficient expertise in its limited field through its contracts with laboratories. universities, and industrial firms to determine the nature of its future programs and consequently is willing to pay for only an allocable share of IR&D that it considers beneficial to its contract work.

OTHER SUGGESTED IR&D POLICIES

Other approaches for determining the extent and method of participation by the Government in IR&D costs have been suggested or considered in the past, which are summarized below.

Using industrywide averages

In the early 1960's DOD developed a plan involving the use of average annual expenditures of contractors in a specific segment of industry as a basis for determining the reasonableness of proposed IR&D expenditures of contractors in that segment.

Development of such industrywide averages would have required that contractors submit actual cost information on prior IR&D programs. After verification of the cost information by audit, a range of reasonableness would have had to be established for each specific industry. When this plan was submitted to industry for comment, various objections were stated, the main one being that an industrywide average for IR&D would reduce all contractors in that segment of industry to commonality. Also it was contended that this plan would create changes in contractors' accounting classifications for IR&D and that the initial cost of developing the necessary data would be prohibitive.

The plan was acceptable to NASA, but was objected to by AEC because the plan did not require a clear showing of benefits to the contract work as a basis for determining acceptable costs. DOD finally decided that it would not be realistic to adopt this plan because of the peculiarities associated with each contractor and the substantial amount of effort needed to accumulate and verify the cost data for each contractor.

Requiring advance agreement covering

all independent technical effort

The contractor's independent technical effort (CITE) approach was given a substantial amount of attention by DOD from 1964 to 1966. This approach would have combined IR&D