Ukrainian Council of Defence Industry proposes mechanism to reimburse R&D costs
Drone Industry
The Ukrainian Council of Defence Industry proposes creating a transparent mechanism for reimbursing R&D costs that would apply equally to all manufacturers, with a dedicated component in the pricing of defence products to fund research, development and testing.
The UCDI outlined the proposal to Business Censor during the preparation of the article "Is Ukraine losing the R&D battle? Where manufacturers can find funding for new developments".
The association noted that the war has changed the very approach to weapons development. Today, technological superiority often depends less on creating highly complex and expensive systems than on the ability to rapidly develop, test, and scale up new solutions with high combat effectiveness and an acceptable cost.
"At the same time, a substantial proportion of Ukrainian manufacturers, especially small and medium-sized companies, simply do not have sufficient working capital to independently fund a full R&D cycle. If there is no established mechanism for reimbursing the costs of developing new systems, companies are effectively forced to finance them from their profits. But manufacturers also need those profits to scale up production, purchase equipment and components, restore destroyed facilities and cover other unforeseen wartime expenses. Therefore, relying on profits alone to provide sustained R&D funding is insufficient," the Ukrainian Council of Defence Industry told Business Censor.
There is another problem as well. The absence of a mechanism for reimbursing R&D costs creates a risk of technological conservatism. As the Ukrainian Council of Defence Industry points out, manufacturers with steady government orders find it economically easier to continue producing a proven solution than to invest their own money in expensive development with an uncertain outcome. As a result, the state may receive a steady supply of existing systems while losing momentum in technological development.
This is precisely why the Ukrainian Council of Defence Industry proposes creating a transparent mechanism for reimbursing R&D costs that would apply equally to all manufacturers, with a dedicated component in the pricing of defence products to fund research, development and testing.
"This does not mean that any manufacturer should be allowed to arbitrarily increase the contract price under the pretext of R&D. On the contrary, the rules must be uniform and transparent and provide for checks on whether such costs are justified. The specific size of this component requires a separate calculation and testing in practice," the association explained.
Accelerators, grants and investment programmes already partially meet this need, the Ukrainian Council of Defence Industry noted, but their capacity is insufficient to serve the entire Ukrainian defence market. A systematic solution must therefore operate under uniform rules for a broad range of manufacturers, rather than only companies selected for a particular programme.
"For Ukraine, this is not just a matter of supporting manufacturers. It is a question of the state’s ability to continuously modernise its weapons inventory, maintain technological superiority and simultaneously ensure sufficient production volumes. In the long term, the absence of an R&D funding mechanism could become a constraint on the entire defence industry," the Ukrainian Council of Defence Industry concluded in its comments to Business Censor.
For more on R&D in Ukraine, read the Business Censor article.
