[Federal Register Volume 61, Number 76 (Thursday, April 18, 1996)]
[Rules and Regulations]
[Pages 16880-16882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9450]
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DEPARTMENT OF DEFENSE
48 CFR Parts 231 and 242
[DFARS Case 94-D316]
Defense Federal Acquisition Regulation Supplement; Restructuring
Costs Under Defense Contracts
AGENCY: Department of Defense (DoD).
ACTION: Final rule.
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SUMMARY: The Director of Defense Procurement has amended the Defense
Federal Acquisition Regulation Supplement (DFARS) to implement Section
818 of the National Defense Authorization Act for Fiscal Year 1995
(Pub. L. 103-337) concerning the reimbursement of external
restructuring costs associated with business combinations.
DATES: Effective date: April 18, 1996.
FOR FURTHER INFORMATION CONTACT:
Ms. Sandra Haberlin, (703) 602-0131.
SUPPLEMENTARY INFORMATION:
A. Background
This final rule implements Section 818 of the National Defense
Authorization Act for Fiscal Year 1995 (Pub. L. 103-337). Section 818
restricts DoD from reimbursing external restructuring costs associated
with a business combination undertaken by a defense contractor unless
certain conditions are met.
An interim rule with request for comments was published at 60 FR
1747 on January 5, 1995. All comments received in response to the
interim rule were considered in the development of the final rule. The
final rule differs from the interim rule in that it (1) revises certain
definitions at 231.205-70(b); (2) deletes the list of examples at
321.205-70(c)(3) and the requirement of a Memorandum of Understanding
at 231.205-70(d)(3) and 242.1204(e); (3) amends 242.1204(e) to state
that certain external restructuring costs are allowable under
flexibily-priced novated contracts, provided restructuring will reduce
overall costs to the National Aeronautics and Space Administration
(NASA), in addition to DoD, where there is a mix of DoD and NASA
contracts; and (4) makes editorial changes for clarification.
B. Regulatory Flexibility Act
The Department of Defense certifies that this final rule will not
have a significant economic impact on a substantial number of small
entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C.
601 et seq., because most contracts awarded to small entities are
awarded on a competitive fixed-price basis and cost principles,
therefore, do not apply.
C. Paperwork Reduction Act
The Paperwork Reduction Act does not apply, because this final rule
does not impose any new reporting or recordkeeping requirements which
require Office of Management and Budget approval under 44 U.S.C. 3501,
et seq.
List of Subjects in 48 CFR Parts 231 and 242
Government procurement.
Michele P. Peterson,
Executive Editor, Defense Acquisition Regulations Council.
Therefore, 48 CFR Parts 231 and 242 are amended as follows:
1. The authority citation for 48 CFR Parts 231 and 242 continues to
read as follows:
Authority: 41 U.S.C. 421 and 48 CFR Chapter 1.
PART 231--CONTRACT COST PRINCIPLES AND PROCEDURES
2. Section 231.205-70 is revised to read as follows:
231.205-70 External restructuring costs.
(a) Scope. This subsection prescribes policies and procedures for
allowing contractor external restructuring costs when net savings would
result for DoD. This subsection also implements Section 818 of the
National Defense Authorization Act for Fiscal Year 1995 (Pub. L. 103-
337).
(b) Definitions. As used in this subsection:
(1) Business combination means a transaction whereby assets or
operations of two or more companies not previously under common
ownership or control are combined, whether by merger, acquisition, or
sale/purchase of assets.
(2) External restructuring activities means restructuring
activities occurring after a business combination that affect the
operations of companies not previously under common ownership or
control. They do not include restructuring activities occurring after a
business combination that affect the operations of only one of the
companies not previously under common ownership or control, or, when
there has been no business combination, restructuring activities
undertaken within one company. External restructuring activities are a
direct outgrowth of a business combination. They normally will be
initiated within 3 years of the business combination.
(3) Restructuring activities means nonroutine, nonrecurring, or
extraordinary activities to combine facilities, operations, or
workforce, in order to eliminate redundant capabilities, improve future
operations, and reduce overall costs. Restructuring activities do not
include routine or ongoing repositionings and redeployments of a
contractor's productive facilities or workforce (e.g., normal plant
rearrangement of employee relocation), nor do they include other
routine or ordinary activities charged as indirect costs that would
otherwise have been incurred (e.g., planning and analysis, contract
administration and oversight, or recurring financial and administrative
support).
(4) Restructuring costs means the costs, including both direct and
indirect, of restructuring activities. Restructuring costs that may be
allowed include, but are not limited to, severance pay for employees,
early retirement incentive payments for employees, employee retraining
costs, relocation expense for retained employees, and relocation and
rearrangement of plant and equipment. For purposes of this definition,
if restructuring costs associated with external restructuring
activities allocated to DoD contracts are less than $2.5 million, the
costs shall not be subject to the audit, review, and certification
requirements of 231.205-70(c)(1); instead, the normal rules for
determining cost allowability in accordance with FAR Part 31 shall
apply.
(5) Restructuring savings means cost reductions, including both
direct and indirect cost reductions, that result from restructuring
activities. Reassignments of cost to future periods are not
restructuring savings.
(c) Limitations on cost allowability. (1) Restructuring costs
associated with external restructuring activities shall not be allowed
unless--
(i) Such costs are allowable in accordance with FAR Part 31 and
DFARS Part 231;
(ii) An audit of projected restructuring costs and restructuring
savings is performed;
(iii) The cognizant administrative contracting officer (ACO)
reviews the audit report and the projected costs and projected savings,
determines that overall reduced costs should result for DoD, and
negotiates an advance agreement in accordance with 231.205-70(d)(8);
and
(iv) A certification is made by the Under Secretary of Defense
(Acquisition & Technology), his Principal Deputy or designee (in all
cases, an individual appointed by the President and confirmed by the
Senate), that
[[Page 16882]]
projections of future restructuring savings resulting for DoD from the
business combination are based on audited cost data and should result
in overall reduced costs for DoD.
(2) The audit, review, and certification required by 231.205-
70(c)(1) shall not apply to any business combination for which payments
for restructuring costs were made before August 15, 1994, or for which
the cognizant ACO executed an advance agreement establishing cost
ceilings based on audit/negotiation of detailed cost proposals for
individual restructuring projects before August 15, 1994.
(d) Procedures and ACO responsibilities. As soon as it is known
that the contractor will incur restructuring costs for external
restructuring activities, the cognizant ACO shall:
(1) Promptly execute a novation agreement, if one is required, in
accordance with FAR subpart 42.12 and DFARS subpart 242.12 and include
the provision at DFARS 242.1204(e).
(2) Direct the contractor to segregate restructuring costs and to
suspend these amounts from any billings, final contract price
settlements, and overhead settlements until the certification in
paragraph (c)(1)(iv) of this subsection is obtained.
(3) Require the contractor to submit an overall plan of
restructuring activities and an adequately supported proposal for
planned restructuring projects. The proposal must include a breakout by
year by cost element, showing the projected restructuring costs and
projected restructuring savings.
(4) Notify major buying activities of contractor restructuring
actions and inform them about any potential monetary impacts on major
weapons programs, when known.
(5) Upon receipt of the contractor's proposal, as soon as
practicable, adjust forward pricing rates to reflect the impact of
projected restructuring savings. If restructuring costs are included in
forward pricing rates prior to execution of an advance agreement in
accordance with 231.205-70(d)(8), the contracting officer shall include
a repricing clause in each fixed-price action that is priced based on
the rates. The repricing clause must provide for a downward price
adjustment to remove restructuring costs if the certification required
by 231.205-70(c)(1)(iv) is not obtained.
(6) Upon receipt of the contractor's proposal, immediately request
an audit review of the contractor's proposal.
(7) Upon receipt of the audit report, determine if restructuring
savings will exceed restructuring costs on a present value basis.
(8) Negotiate an advance agreement with the contractor setting
forth, at a minimum, a cumulative cost ceiling for restructuring
projects and, when necessary, a cost amortization schedule. The cost
may not exceed the amount of projected restructuring savings on a
present value basis. The advance agreement shall not be executed until
the certification required by 231.205-70(c)(1)(iv) is obtained.
(9) Submit to the Director of Defense Procurement, Office of the
Under Secretary of Defense (Acquisition & Technology), ATTN:
OUSD(A&T)DP/CPF, a recommendation for certification of net benefit.
Include the information described in 231.205-70(e).
(e) Information needed to obtain certification of net benefit. (1)
The novation agreement (if one is required).
(2) The contractor's restructuring proposal.
(3) The proposed advance agreement.
(4) The audit report.
(5) Any other pertinent information.
(6) The cognizant ACO's recommendation for certification. This
recommendation must clearly indicate that contractor projections of
future cost savings resulting for DoD from the business combination are
based on audited cost data and should result in overall reduced costs
for the Department.
PART 242--CONTRACT ADMINISTRATION
3. Section 242.1204 is amended by revising paragraph (e) to read as
follows:
242.1204 Agreement to recognize a successor in interest (novation
agreement).
(e) When a novation agreement is required and the transferee
intends to incur restructuring costs as defined at 213.205-70, the
cognizant contracting officer shall include the following provisions as
paragraph (b)(7) of the novation agreement instead of the paragraph
(b)(7) provided in the sample format at FAR 42.1204(e):
``(7)(i) Except as set forth in subparagraph (7)(ii) below, the
Transferor and the Transferee agree that the Government is not
obligated to pay or reimburse either of them, for, or otherwise give
effect to, any costs, taxes, or other expenses, or any related
increases, directly or indirectly arising out of or resulting from
the transfer or this Agreement, other than those that the Government
in the absence of this transfer or Agreement would have been
obligated to pay or reimburse under the terms of the contracts.
(ii) The Government recognizes that restructuring by the
Transferee incidental to the acquisition/merger may be in the best
interests of the Government. Restructuring costs that are allowable
under Part 31 of the Federal Acquisition Regulation (FAR) or Part
231 of the Defense Federal Acquisition Regulation Supplement (DFARS)
may be reimbursed under flexibily-priced novated contracts, provided
the Transferee demonstrates that the restructuring will reduce
overall costs to the Department of Defense (DoD) (and to the
National Aeronautics and Space Administration (NASA), where there is
a mix of DoD and NASA contracts), and the requirements included in
DFARS 231.205-70 are met. Restructuring costs shall not be allowed
on novated contracts unless there is an audit of the restructuring
proposal; a determination by the contracting officer of overall
reduced costs to DoD/NASA; and an Advance Agreement setting forth a
cumulative cost ceiling for restructuring projects and the period to
which such costs shall be assigned.''
[FR Doc. 96-9450 Filed 4-17-96; 8:45 am]
BILLING CODE 5000-04-M
