It makes a difference it makes a big difference.Īnd then you have manufacturing and production engineering costs, which are similar to IRAD costs but not IRAD. Moreover, for government cost accounting purposes IRAD costs are recovered through the General & Administrative (G&A) expense rate whereas direct contract costs are recovered by charging them to the contract as incurred, dollar for dollar. You need to keep the costs separate because (as noted) IRAD expenses are period expenses, but direct contract costs are “costs of goods sold” or “costs of sales” which is something entirely different. Because what about concurrent IRAD and contract work, where the end product of a successful IRAD project will be a technology that will be inserted into an active contract? You need to separate the two cost streams (direct contract work and IRAD work) for both financial reporting and government contract accounting purposes. But that’s not the end of the story, not by a long shot. IRAD expenses are “period” expenses, which means that in almost every circumstance they will be accounted for as “below the line” costs in the fiscal year in which they are incurred.Īt its most fundamental level, proper IRAD accounting requires compliance with the requirements of both 31.205-18 and CAS 420. If they have a cost-type contract that belief is (unfortunately) not true.) (This is a news flash to many small businesses that think they are exempt from CAS. At that point, the cost principle points you to CAS 420 and tells you that you need to comply with that Standard in order for your IRAD costs to be allowable. When you do that, you get a definition of the kinds of activities that qualify as IRAD expenses. So the first thing to do is to parse out what parts of 31.205-18 apply to which expenses. IR&D and B&P expenses are treated similarly, but they are not the same. There’s a cost principle (31.205-18) that discusses the allowability of such costs, but that cost principle also discusses the allowability of Bids & Proposals (B&P) costs.
Accounting for Independent Research & Development (IR&D or IRAD) expenses is hard to do.
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