The Defense Acquisition Program Administration has put on hold a proposed revision to its public notice that would have eliminated profit from government grants for defense research and development projects concluded under "agreement"-type arrangements, after the move drew strong pushback from the defense industry. [Herald Business DB]
The Defense Acquisition Program Administration has put on hold a proposed revision to its public notice that would have eliminated profit from government grants for defense research and development projects concluded under "agreement"-type arrangements, after the move drew strong pushback from the defense industry. [Herald Business DB]

The Defense Acquisition Program Administration (DAPA) has suspended a plan to revise regulations that would have stripped profit entirely from government grants for defense research and development projects concluded through "agreement" arrangements rather than formal contracts, after the proposal triggered fierce resistance from the defense industry.

DAPA had been pursuing an amendment to its public notice governing the payment, use and management of grants for defense R&D projects.

Article 3 of the current notice sets grant amounts by adding together the costs incurred by the research institution, a return on invested capital and profit. The proposed revision would have removed both the return on capital and profit components entirely, leaving only actual expenses reimbursed.

The enforcement decree and implementing rules under the Act on Promotion of Defense Science and Technology Innovation specify that grants be used for direct and indirect costs, or manufacturing costs and general administrative expenses, with no mention of profit. DAPA appears to have concluded on that basis that the existing notice had been adding a profit component with no statutory grounding, and sought to correct it.

The defense industry, however, argues that premise is fundamentally flawed.

Industry officials contend that the law sets only a standard for how funds may be used — not how much should be paid — and that the two questions are separate. They also argue that defense R&D agreements are agreements in name only: the government initiates the work because it needs the output and retains ownership of the results, making the arrangements in effect indistinguishable from contracts.

Critics also say the proposed fix points in the wrong direction. The current notice recognizes profit only for defense companies, not for nonprofit institutions or non-defense firms. Rather than eliminating profit for defense companies to resolve that disparity, they argue, the revision should extend profit recognition to the other categories as well.

"If the government takes all the results and pays zero margin, who would take on these projects?" said one defense industry official. "Whether it's called an agreement or a contract, the principle must be that fair compensation is paid when the government orders development and delivery." The official also warned that removing profit from the system could undermine incentives to participate in defense R&D, ultimately eroding the country's defense technology competitiveness.

DAPA said it had been reviewing a revision to the relevant notice since June, adding that grants are "government funds for securing technology, not corporate revenue."


rimsclub@heraldcorp.com