Geosyntec v. United States: When Contract Language Determines the R&D Tax Credit

Fairchild taught contractors what a winning “funded research” claim looks like. Geosyntec shows exactly what happens when your contract doesn’t measure up to it.

If you’ve read our case study on Fairchild Industries v. United States, you’ll recognize the legal test at the center of this case. Fairchild established the standard for determining when contract research is “funded” by a client and therefore ineligible for the R&D tax credit. Fairchild won because it bore real financial risk. Fail to deliver, and it had to absorb the cost.

Nine years later, in Geosyntec Consultants, Inc. v. United States, an environmental engineering firm tried the same argument under its own client contracts. The Eleventh Circuit disagreed. The 2015 decision is the clearest real-world illustration of how a contract’s fine print, not the researcher’s intent, decides who gets the credit.

The Company and the Claim

Geosyntec is a specialized engineering firm that designs solutions for environmental cleanup, landfill expansion, and groundwater remediation. Between 2002 and 2005, it filed for a $1.67 million federal refund tied to research credits across hundreds of client contracts.

To keep the case manageable, both sides picked six representative contracts:

Three fixed-price contracts
Three capped, cost-plus contracts

The district court found all three capped contracts funded by Geosyntec’s clients, and therefore ineligible for the credit. Geosyntec appealed two of them:

The Cherry Island Contract, a landfill expansion project for the Delaware Solid Waste Authority
The WM Contract, a groundwater remediation study for Waste Management, Inc.

The Test: Who Bears the Risk of Failure?

Under Section 41(d)(4)(H), research funded by a grant, contract, or another person doesn’t qualify for the credit. The regulations focus on whether payment is contingent on the successful performance of the research or acceptance of the work under the contract.

If the client has to pay regardless of outcome, the researcher bears the financial risk, and the research is not funded.
If payment is contingent on successful performance or contractual acceptance of the work, the research may be treated as funded, making it ineligible for the credit.

This is the same payment-contingency standard established in Fairchild, and it became the deciding issue in Geosyntec. The Air Force only paid when Fairchild’s aircraft components passed inspection, line item by line item. That structure put real financial risk on Fairchild, and the court ruled in its favor.

Why Geosyntec's Contracts Didn't Clear the Bar

Geosyntec argued its capped, cost-reimbursement structure created real financial exposure, it could exceed its own budget or fail to earn the full contract ceiling. The court wasn’t persuaded, and for good reason: running over budget is a cost-of-performance risk, not a risk tied to whether the research succeeds. Only one of those matters under Section 41.

Looking at the actual contract language:

Under the WM Contract, if Geosyntec’s lab tests were performed properly but showed the proposed cleanup method simply wouldn’t work, WM still had to pay for the labor and materials that went into finding that out.
Under the Cherry Island Contract, DSWA paid on approved monthly invoices, not on delivery and acceptance of a finished, successful design.

Geosyntec also pointed to its clients’ rights to review and dispute invoices as evidence of real performance risk. The court drew a sharp line here: a billing dispute over accuracy is not the same as a client rejecting a failed deliverable. In Fairchild, payment depended on inspection and acceptance of individual deliverables. Geosyntec’s contracts never imposed that same condition.

What Geosyntec Could Have Done Differently

Build success-based payment terms directly into the contract: The clearest lesson from both Fairchild and Geosyntec is that courts read the actual contract language first. A capped price alone doesn’t create the kind of risk Section 41 is looking for. Payment needs to be explicitly tied to a successful outcome, not just to hours worked or tasks completed.
Don’t lean on general economic risk: Geosyntec’s strongest argument, that it could lose money if costs ran over the cap, was also its weakest under the statute. Budget risk and research risk are not interchangeable.
Review every client agreement before assuming eligibility. Geosyntec’s six representative contracts split three ways. Within the same company, contract structure alone determined which projects qualified. A blanket assumption that “our research work qualifies” doesn’t hold up when the credit depends on a clause-by-clause reading of every individual agreement.

[Visual suggestion: a side-by-side comparison graphic contrasting the Fairchild contract terms, payment tied to inspection and acceptance, line item by line item, against the Geosyntec contract terms, payment on approved monthly invoices regardless of research outcome, to make the funded versus not-funded distinction clear at a glance.]

Where TaxDrone.AI and NTG Help

Geosyntec had real engineers doing real research. The credit was lost because of contract language, not the science. That’s a difficult way to lose a claim, and one that can often be identified before a return is filed.

Here’s how TaxDrone.AI and NTG are designed to help address that challenge:

Client contracts can be reviewed clause by clause for potential funded research issues using the same payment-contingency principles applied by the courts.
Fixed-price, capped, and cost-plus agreements are treated differently, because they are legally different. NTG’s process flags exactly which of your contracts carry real research risk and which don’t, contract by contract, the way Geosyntec’s own agreements should have been sorted before filing.
Contract reviews can be combined with project-level documentation to help support a more complete and defensible R&D tax credit claim.

Want to Know Which of Your Contracts Actually Qualify?

The outcome in Geosyntec wasn’t driven by the engineering. It was driven by the contract.

If your business performs contract research, understanding who bears the financial risk can be just as important as documenting the research itself.

See TaxDrone.AI in action and learn how contract-level reviews can help strengthen your R&D tax credit claim before you file.