The DoD began compiling data on IR&D spending (costs incurred) by major defense contractors beginning in the 1970's. IR&D spending by major defense contractors peaked at $5.2 billion in 1984 and has declined during the 1990's as defense procurement spending declined by 40 percent -- contractors incurred $2.9 billion in IR&D costs in 2000. Major defense contractor IR&D spending for the years 1977 through 2000 are presented in the Chart 1 below.

Recovery of IR&D Costs

Contractors are permitted to recover a portion of their IR&D costs by including them as an allowable indirect expense on government contracts to the extent that those costs are allocable and reasonable (see FAR 231.205-18(c)). In addition, DoD permits major defense contractors to include allowable IR&D costs as indirect expenses on defense contracts to the extent that the IR&D activities are of potential interest to DoD (see DFARS 231.205-18(c)). The seven categories of IR&D activities that are of potential interest to DoD are listed in DFARS 231.205-18(c)(iii)(B.)

The average amount of allowable IR&D costs allocable to defense contracts has increased from less than 80 percent during 1984 through 1995, to more than 94 percent since 1996. As a result, the average amount of IR&D costs recovered by major defense contractors on defense contracts has increased from under 43 percent during 1984 through 1995, to over 50 percent since 1996. IR&D costs recovered by major defense contractors from DoD for the years 1977 through 2000 are presented in the Chart 1 below.

Notes for Chart 1:
FY 1984-1992: The Congress and DoD imposed caps limiting the total maximum amount of IR&D/B&P ceilings DoD was permitted to negotiate with major defense contractors.

FY 1993: The significant decrease in reported dollars is primarily due to a change in the DFARS definition of major contractor to comply with Section 802 of Public Law 102-190, and a change in DCAA reporting criteria.

DCAA IR&D Reports

IR&D cost data are compiled and reported annually by the Defense Contract Audit Agency (DCAA). The report includes all major defense contractors that meet either the statutory or regulatory dollar thresholds, or the DCAA reporting criteria. (The dollar thresholds and DCAA reporting criteria are increased periodically, which reduces the number of contractors included in the report.) The DCAA summary reports on IR&D/B&P costs incurred by major defense contractors for the years 1984 through 2005 are available at: http://www.acq.osd.mil/dpap/cpf/independent_research_and_development_and_bid_and_proposal_costs.html.