Note: This is the second article in our series on capturing industrial base funding from the U.S. Department of Defense

In our last post, we discussed the Defense Production Act (DPA) and Technology Investment Agreement (TIA), the instrument of choice for awarding funds under this statutory authority.

TIAs are used by the U.S. Department of Defense (DOD) to stimulate research and development. Unlike traditional federal contracts, the Federal Acquisition Regulation (FAR) and agency-specific supplements (e.g., Defense Federal Acquisition Regulation Supplement, or DFARS) do not apply to TIAs. Instead, TIAs are governed by Part 37 of the Department of Defense Grant and Agreement Regulations (DoDGARs). This structure is especially advantageous to contractors because negotiation is possible on an array of terms, including cost share and data rights.

This article provides tips to contractors on how they can successfully negotiate recipient cost share. First, we discuss the statutory and regulatory guidance related to cost share. Next, we list specific considerations for determining the amount of recipient cost share to propose when competing for a TIA award. Finally, we provide helpful tips on negotiating recipient cost share to the government in the event that a contractor is selected for award – including a discussion of factors that the contractor can use to justify its level of recipient cost share.

Below, we discuss ways that a contractor may successfully advocate for itself to obtain a TIA at a lower recipient cost share than the default of 50 percent.

Statutory and Regulatory Guidance

10 U.S.C. § 4021(e)(2) provides, in pertinent part, that the U.S. Secretary of Defense "shall ensure that – to the extent that the Secretary determines practicable, the funds provided by the Government ... do not exceed the total amount provided by other parties … ." (emphasis added) In other words, the government's share of funding should not eclipse the recipient's cost-share (i.e., 50/50).

In addition to 10 U.S.C. § 4021, the government is directed to seek at least 50 percent recipient cost sharing to the maximum extent practicable for TIAs pursuant to DoDGARs Part 37.215 and 37.525. The former states, "[o]btaining [50%] cost sharing, to the maximum extent practicable, is a statutory condition for any TIA under the authority of 10 U.S.C. 2371 [4021], and is a matter of DoD policy for all other TIAs." 32 CFR § 37.215(b)(1).

However, DoDGARs allows for recipients to have less than a 50 percent cost share by the awardee if a 50/50 split would be impracticable¹ and if there are other indications that the recipient has "a vested interest in the project's success." 32 CFR § 37.215(b).

Below are some key points that contractors should analyze when determining what recipient cost share to propose and suggestions for obtaining a recipient cost share of less than 50 percent (thus, a greater government cost share).

Considerations for Determining the Amount of Cost Share to Propose

Understanding the Competition

A contractor should understand that submitting a proposal in response to a funding opportunity announcement (FOA) is a competitive process. Typically, the amount of an offeror's proposed cost share is an explicit evaluation criterion. If an offeror's proposal provides for a lower recipient cost share than does its competitors' proposals, the government may choose not to select that offeror for award in the absence of a compelling contractor submission. Thus, the first analysis point is understanding the field of competition. If a contractor is the only domestic source for a particular requirement or has technology that gives it a unique competitive advantage over other offerors, then the contractor is likely to have a better chance of obtaining an award despite proposing a recipient cost share of less than 50 percent. After all, "enhancing the national security by increasing DoD reliance on the U.S. commercial technology and industrial bases" is one of the explicit objectives of using a TIA. 32 CFR § 37.875.

In contrast, if a contractor is submitting a proposal in response to an FOA that is expected to be competitive, or if one in which the contractor does not necessarily have a clear "leg-up" over its competition, then the contractor should be careful about proposing recipient cost share of less than 50 percent. In that case, the contractor may even consider proposing a recipient cost share of more than 50 percent (government funds less than half of the project) in order to increase its chances of award.

Remember, the government (whether it be the merit review teams, the program office or the contracting command) is looking for the best taxpayer value while also meeting the requirement. Understanding the field of competition is critical for submitting a successful proposal that will result in a TIA award.

Contractor's Opportunity Cost

Another key consideration for a contractor when deciding on the amount of recipient cost share to propose is the alternatives available to the contractor. This is largely a business decision, but it must remain at the forefront of the proposal process.

The relevant inquiry follows: If the contractor was not committing its resources (money, time) to the government project, what alternatives would exist for those resources, and what rate of return could the contractor expect from those alternatives? This is the starting point when deciding what level of cost share to propose to the government. There may be reasons to perform a TIA at a lower rate of return that the contractor could obtain elsewhere. For instance, if the TIA could lead to future opportunities or will lead to valuable experience in a particular line of work or with a particular agency, then the contractor might consider a lower rate of return. Or perhaps the research project could be instrumental in helping the contractor foster technology to be incorporated into products and processes for the commercial marketplace. However, barring those dynamics, a contractor should generally seek the same level of return from a TIA award as it would any other project.

Accordingly, when determining the amount of recipient cost share to propose, a contractor should use its current rate of return as a baseline in deciding the recipient cost share to propose (desired rate of return) for the TIA project.

How Critical Is the Government's Need?

The third consideration is the leverage the contractor has with the government. Clearly, the government desires the project that the TIA will accomplish. But how important is this project to the government? This is a fact-specific inquiry to which there often is no easy answer. Signs to analyze on this point include statements made by political leaders and agency officials, as well as the geopolitical realities of the present day. Perhaps the most important consideration, however, is whether or not the requirement has been identified within a federal government budget. Have the project parameters found their way into the president's budget request? Is the requirement included in DOD programmatic guidance? Has the cognizant authorizing or appropriation committee of Congress made an applicable provision?

We suggest several starting points. Get to know DOD Justification Tables and other Comptroller documents. Understand whether a specific requirement – that reads on your project submission – has been authorized by the House or Senate Armed Services Committee and/or the subcommittee(s) for defense appropriation(s). And understand the difference between these two committees and their respective roles.

The government's need will drive the overall budget, which in turn drives cost share.

Form of and Limitations on Cost Share

Cash contributions are the government's preferred form of recipient cost share. DoDGARs Part 37.530(a) states "Cash contributions clearly demonstrate commitment, and they are strongly preferred over in-kind contributions." However, the government may also accept in-kind contributions.

DoDGARs Part 37.530 also requires that contributions be reasonable, allocable, verifiable and not be paid for by the government under another award, unless they are specifically authorized by federal statute to be used for cost sharing or are independent research and development costs. Costs can be either direct or indirect, as long as the contributions meet the above requirements.

Contributions may be in the form of services, equipment, supplies and, sometimes, even real property. The goods and services contributed should directly benefit and be specifically identified with the project or program. The value of the contribution will need to be capable of being readily determined, verified and justified. In-kind contributions are valued at either their fair market value or the value of the property as shown in the recipient's accounting records (purchase price less accumulated depreciation). 32 CFR § 37.535.

Contractors cannot use costs of prior research as a cost-sharing contribution and will generally not be permitted to count costs of patents and other intellectual property (e.g., copyrighted material, including software) as cost sharing. 32 CFR § 37.545 – 37.550.

Summary of Proposing Cost Share Considerations

The list above is not exhaustive, and contractors should recognize that each proposal is unique. If the contractor is selected for award following proposal submission, then the government and contractor generally enter into negotiations on the specific terms of the TIA. Because TIAs are governed by DoDGARs, rather than the FAR, contractors have greater latitude to negotiate a variety of terms – including cost share.

Negotiating Cost Share After Selection

The Government's Inquiry

If a contractor who proposed less than 50 percent cost share is selected for a TIA award, the government likely will send the contractor a list of questions. These questions will ask the contractor to justify its proposed recipient cost share, usually by requesting explanations regarding the contractor's 1) commitment to the project, 2) self-interest in the project, 3) how the contractor will incur real risk by performing the project and 4) why greater recipient cost sharing is impracticable.

DoDGARs Parts 37.215 and 37.530 set forth the following explicit factors for the Agreements Officer (AO) to consider in deciding whether to accept a recipient's cost sharing:

• "You should judge that the recipient has a strong commitment to and self-interest in the success of the project." DoDGARs 37.215(a).
• "You may consider whether cost sharing is impracticable in a given case … . Before deciding that cost sharing is impracticable, you should carefully consider whether there are other factors that demonstrate the recipient's self-interest in the success of the current project." DoDGARs 37.215(c).
• "In your judgment, [the recipient's contributions] represent meaningful cost sharing that demonstrates the recipient's commitment to the success of the research project." DoDGARs 37.530(a).

Contractor Considerations in Negotiations

Given the level of the government's investment in the project, contractors should expect the AO to be interested in confirming that the contractor is incentivized to successfully perform the contract. The lower the recipient's cost share, the greater the chance that the contractor's incentives for project completion will not align with the government's incentives. Still, it is possible for the contractor to provide less than 50 percent recipient cost sharing and ultimately perform successfully. In that scenario, the contractor would be well-served to focus on justifying its level of recipient cost share. Such justification can be found in a variety of factors, including:

1. The current alternatives available to the contractor. If a certain level of government funding is needed to make the project worth pursuing, the contractor should note this. The contractor does not necessarily need to provide its internal rate of return, but the government needs to know that the contractor has other options. Also note the benefit/opportunity in pursuing similar/identical activities in other (foreign) jurisdictions; lay out the case for why favorable government cost share is a necessary inducement to perform the work domestically.
2. The contractor should point out any previously made investments that are similar to the TIA project. This shows that the contractor's business depends on the success of the TIA project. In other words, the contractor will have strong commitment to and self-interest in the success of the project.
3. Identify the length of time the contractor has been performing similar projects, which demonstrates long-term commitment to the industry/field, less risk of failure, and fewer cost overruns and/or delays.
4. Note long-term goals of contractor and why the TIA project aligns with these goals.
5. Articulate the importance of the customer relationship to the contractor. For instance, if the TIA is being awarded by the U.S. Air Force Research Laboratory, and 95 percent of the contractor's revenue comes from contracts with the Air Force, the contractor should indicate that maintaining a record of successful performance with the Air Force is of paramount importance to the contractor's overall business.

These are just some of the points that a contractor may justify its position related to recipient cost share. It is always advisable to consult with legal counsel prior to beginning TIA negotiations. Counsel can assist in helping craft arguments that show a contractor has a vested interest in the project and can also help the contractor understand the limits of the government's authority.

Conclusion

TIAs offer contractors a unique opportunity to develop and invest in technology that can be mutually beneficial to both the government and the contractor. Though statutory and regulatory guidance direct the government to seek 50 percent recipient cost sharing to the maximum extent practicable, contractors can obtain lower recipient cost sharing in negotiations by demonstrating strong commitment to and self-interest in the success of the project.

In our next post, Holland & Knight's Government Contracts Group will discuss ways that a contractor may successfully negotiate data rights in a TIA.

Notes

¹ Although the regulation does not provide examples of when cost sharing would be "impracticable," it does advise Agreements Officers to "carefully consider whether there are other factors that demonstrate the recipient's self-interest in the success of the current project" before deciding that cost sharing is impracticable.