Geosyntec Consultants v. United States: fixed-price wins, capped cost-plus loses

Geosyntec Consultants, Inc. v. United States, 776 F.3d 1330 (11th Cir. 2015), is the case that sorted the funded-research exclusion by contract structure. Applying the Fairchild risk framework to an environmental engineering firm's client agreements, the Eleventh Circuit held that fixed-price contracts were not funded — Geosyntec bore overruns and the cost of failed approaches — while capped cost-plus contracts were funded, because the client reimbursed costs as incurred regardless of whether the research succeeded. The decision remains the standard citation for the proposition that payment mechanics, not project riskiness, control the Section 41(d)(4)(H) analysis.

The dispute

Geosyntec, a specialty consulting and engineering firm, performed innovative environmental work — landfill design, contaminated-site remediation — for clients under a range of contract forms, and claimed research credits exceeding $1.6 million for 2002–2005. In a refund suit, the parties selected representative contracts of two types: firm fixed-price agreements, under which Geosyntec was paid a set amount for defined deliverables, and "capped" cost-plus agreements, under which clients reimbursed Geosyntec's costs plus a markup as billed, subject to a maximum. The government argued all the research was funded by clients; Geosyntec argued none of it was, because it could always be required to redo unsatisfactory work.

The holding

The district court and the Eleventh Circuit split the portfolio along the payment-structure line. Fixed-price contracts: not funded. Geosyntec had to deliver a working solution for the agreed price; if its research approach failed, it absorbed the added cost, so payment was contingent on success in the Fairchild sense. Capped cost-plus contracts: funded. Clients paid invoiced costs as the work progressed, whether or not the research panned out; the cap merely limited total exposure and did not make any payment contingent on successful research. The court also rejected the argument that a general obligation to perform in a professionally competent manner creates the required contingency — a professional-standards clause is not a success condition.

The reasoning that matters

Geosyntec's contribution is its insistence on tracing dollars. The question is not whether the engagement was risky, novel, or could have gone wrong — most research can — but whether the payment obligation turned on the research succeeding. Under the capped cost-plus contracts, if an approach failed mid-project, the client had already paid for the failed effort; Geosyntec's only exposure was hitting the cap. Under the fixed-price contracts, a failed approach came straight out of Geosyntec's margin. The court read Treas. Reg. §1.41-4A(d) to require exactly that contrast. It also touched the second prong, noting that rights alone cannot rescue a claim where the taxpayer bears no risk: retaining know-how or reuse rights is necessary but not sufficient when the client is paying win or lose.

What it means for claims today

For professional-services and engineering firms, Geosyntec turned credit eligibility into a contract-drafting question. Time-and-materials and cost-reimbursement engagements — the default in much of consulting — generally produce funded research and no credit for the performer, however inventive the work. Fixed-fee engagements generally preserve the claim, provided the firm also retains substantial rights in the results. Exam teams routinely categorize a firm's contract population into these buckets before testing anything else, so a claim should arrive with the same triage already done: contract type, payment terms, acceptance conditions, and rights clauses summarized per agreement, in line with the substantiation the IRS research credit guidance contemplates. Firms with mixed portfolios should expect the credit to survive only on the fixed-price slice, as Geosyntec's did.

Related cases on the site

Fairchild Industries supplies the risk framework Geosyntec applied; Populous Holdings is the taxpayer-favorable application to fixed-fee architectural services, and Dynetics the clause-by-clause version for government contractors. See the funded research exclusion for the full doctrine and the research credit case law map for how the cases fit together.