R&D Contracts — Atlas of Innovation

Definition

A contract for research and development (R&D) is an agreement in which a funder contracts with a specific performer, often a company, to conduct R&D. Such contracts hire companies to develop a clearly defined idea, insight, proof of concept, or early-stage prototype within an agreed-upon timeline and budget structure.

Companies and private-sector organizations are the most common performers for R&D contracts, but non-profit research organizations or academic teams may be well-suited in cases where a research grant approach does not make sense.

Why might R&D contracts be the right funding approach?

R&D contracts work best when the funder can define specific deliverables, and when private-sector or other well-suited teams can supply them effectively. They are particularly valuable for applied or development projects with concrete objectives, rather than exploratory research with uncertain outcomes.

R&D contracts are best suited to areas of innovation with the following characteristics:

Identifiable teams: To administer contracts, the funder needs to confidently identify or competitively select the team best placed to pursue the innovation. This works best in fields where prior work, expertise, or submitted information provides a strong signal of competence.
Unique, private sector expertise: Private sector actors sometimes develop specialized technical capabilities ahead of academic or public institutions, positioning them to execute work on a given innovation area more effectively.
Clear development paths: The funder understands the steps required to advance the innovation, can define specific deliverables, and monitor progress toward completion.

R&D contracts offer important advantages compared to other innovation funding approaches:

Flexible terms and risk sharing: The funder can set the payment structure and deliverables to fit specific problems, allowing risks to be distributed between the funder and performers, while tailored intellectual property clauses (e.g., exclusive, government‑purpose, or fully open) and claw‑back provisions enable the funder to both capture value and reclaim funds if progress stalls.
Targeted research investment: Clearly defined deliverables ensure performers use resources to address the specific research gaps that funders care about, buying new research effort rather than supporting work that industry would have pursued independently.
Limited duplication: Contracting with a single capable performer helps prevent multiple teams from duplicating the same work, especially in cases when the success of one team strongly indicates the viability of a technology.
Delivery-based accountability: Linking payments to specific deliverables reduces the risk that researchers will pursue their own interests over the funder’s priorities.

What can go wrong?

Despite these advantages, R&D contracts come with challenges:

Information gaps: A funder may misread which team is best equipped to deliver or which technological path is most promising. Competitive selection can help surface information, though companies can oversell their capabilities, and the funder may lack the technical expertise to spot weak proposals. Even after awarding a contract, funders may struggle to track progress or evaluate whether delivered prototypes meet technical specifications.
Delays and cost overruns: Poorly scoped statements of work and payment terms like cost-plus can lead to timelines slipping and budgets ballooning.
Limited competition: Relative to more open innovation funding approaches like prizes and advance market commitments, over-reliance on a small number of incumbent contractors can reduce competitive pressure, leaving programs dependent on a single contractor’s capacity or performance.
Over‑prescription: Overly prescriptive contracts that dictate rigid designs or methods too early can prevent performers from pivoting when scientific discoveries suggest better approaches, potentially locking both parties into suboptimal solutions.
Prototype limitations: Given that R&D contracts typically produce early-stage prototypes rather than market-ready products, deliverables can fail to translate into useful, deployable innovations.

Funders can mitigate these challenges by:

Developing sufficient technical capacity to evaluate proposals and track progress, whether internal or through external reviewers.
Using competitive selection processes (e.g., requests for proposals) that minimize incentives for companies to overpromise and to attract diverse performers beyond established incumbents.
Structuring contracts so that clear specifications are balanced against flexibility, so performers can adapt when new evidence emerges.
Using milestone-based payment structures to maintain accountability.

Competitive selection processes

Funders must decide how to choose the performer for an R&D contract. How funders select the research team shapes whether contracts reward capability, cost discipline, or novel ideas. Some common selection processes include:

Requests for Proposals (RFPs): A formal solicitation where the funder issues a detailed scope of work and bidders respond with written technical and cost proposals. RFPs provide a structured way to compare bidders across multiple criteria, such as technical merit, past performance, and cost.

Auctions: A rule-based competition where eligible bidders that meet minimum requirements submit price offers under rules set in advance (e.g., reverse auctions, multi-round bidding), and the lowest qualifying bid wins. Auctions can ensure cost transparency and sharp price competition when the contract involves standardized tasks with easily verifiable outcomes.

Open calls: A low-barrier call for ideas, such as Broad Agency Announcements (BAAs), pitch rounds, or staged down-select tournaments, where companies propose approaches without a rigid scope of work. By making it easier for suppliers to engage with funders, open calls can broaden the field and surface non-traditional performers and novel approaches that a funder might overlook while crafting an RFP or auction requirements.

Examples

Federal agencies rely on R&D contracts to advance defined projects and early prototypes. Examples include:

Quieter supersonic flights (NASA - Lockheed Martin): In 2018, NASA awarded Lockheed Martin a $247.5 million contract to design and test the X-59 quiet-supersonic research X-plane. The award supports the development of the aircraft, prototype test flights over land, and the collection of community feedback on the noise it creates.
Antibiotics (BARDA - GSK): The Biomedical Advanced Research and Development Authority (BARDA) has signed multiple contracts with GSK to support the development of novel antibiotics, including agreements worth $38.5 million and $40 million. These contracts led to the development of a new antibiotic in 2025. Partnering with one of the few pharmaceutical companies still actively engaged in antibiotic R&D ensures that expertise on these products is housed within an organization that can scale innovation during a healthcare emergency.
Radiation injury prevention (Department of Defense - Humanetics): The Department of Defense awarded Humanetics a five-year, $20 million contract to advance BIO 300, a drug designed to prevent radiation injuries. If approved, it would be the first pre-exposure radioprotectant. This case shows how government procurement can tap private-sector research expertise to prepare for rare but catastrophic events that require innovation.

Other approaches are often considered in place of or alongside R&D contracts, but differ in the following ways:

Loan instruments: Loan instruments and R&D contracts are both ways to provide early capital (e.g., upfront, cost-reimbursable) to private sector researchers. Many loan instruments have revenue-generating potential, whereas R&D contracts do not provide the opportunity for the funder to recoup funding.
Milestone payments: Adding milestone payments to R&D contracts creates guardrails for long-term projects, linking payments to demonstrable progress.
Research grants: Grants and R&D contracts fund research activities and pay regardless of scientific success. Generally, grants fund activity and contracts purchase deliverables. Grants typically go to academic institutions and allow more open-ended research, while contracts target private companies and require the delivery of research outputs, even when the research does not advance toward the funder’s innovation goal.
Procurement contracts: Procurement contracts are designed to deliver a finished product or service. They are suitable for innovations where funders are ready to define the necessary characteristics for the applied use case, rather than research outputs.
Prizes: Prizes and other actor-agnostic funding approaches reward meeting technical targets regardless of who achieves them, making them suitable when funders cannot identify the best-positioned performer in advance.

Definition

Why might R&D contracts be the right funding approach?

What can go wrong?

Examples

Related funding approaches

Further reading