FAR 31.205-8, IR&D/B&P costs must be read in conjunction with Cost Accounting Standard 420, "Accounting for independent research and development costs and bid and proposal costs" which is incorporated in its entirety in the FAR cost principle. IR&D and B&P costs will be allocated to final cost objectives in the same manner as G&A expenses for that business unit unless it results in an inequitable allocation. IR&D/B&P costs are generally allowable as indirect costs provided they are otherwise reasonable and allocable. The Armed Services Board of Contract Appeals has consistently rejected government arguments that IR&D/B&P costs are not allocable when incurred in conjunction with commercial work. To qualify as IR&D, the effort (a) must fall within one of the following four categories (1) basic research (2) applied research (3) development or (4) systems and other concept formulation studies and (b) not be "sponsored by a grant or required in the performance of a contract." Under the DOD FAR Supplement additional conditions apply to "major contractors" where the expense must be of "potential interest to DOD" – seven criteria are specified (e.g. enable superior performance of future weapons, reduce acquisition costs, strengthen industrial and technological base) but in practice virtually all IR&D activity could quality for at least one of the seven.

It is the part (b) above – "sponsored by a grant or required in the performance of a contract" - that is the source of controversy of whether costs must be charged direct to a contract and can be charged indirect to IR&D and it is that feature we will address in this article.

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