[Federal Register Volume 60, Number 3 (Thursday, January 5, 1995)]
[Rules and Regulations]
[Pages 1747-1749]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-158]



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DEPARTMENT OF DEFENSE

48 CFR Parts 231 and 242


Defense Federal Acquisition Regulation Supplement; Restructuring 
Costs

AGENCY: Department of Defense (DoD).

ACTION: Interim rule with request for comments.

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SUMMARY: The Director of Defense Procurement has issued an interim rule 
which amends the Defense Federal Acquisition Regulation Supplement 
(DFARS) to implement section 818 of the National Defense Authorization 
Act for Fiscal Year 1995 (Public Law 103-337) concerning the 
reimbursement of restructuring costs associated with business 
combinations.

DATES:  Effective date: December 29, 1994.
    Comment date: Comments on the interim rule should be submitted in 
writing at the address shown below on or before March 6, 1995, to be 
considered in the formulation of a final rule.

ADDRESSES: Interested parties should submit written comments to: 
Defense Acquisition Regulations Council, ATTN: Mr. Eric R. Mens, 
PDUSD(A&T)DP/DAR, IMD 3D139, 3062 Defense Pentagon, Washington, DC 
20301-3062. Telefax number (703) 602-0350. Please cite DFARS Case 94-
D316 in all correspondence.

FOR FURTHER INFORMATION CONTACT: Mr. Eric R. Mens, (703) 602-0131.

SUPPLEMENTARY INFORMATION: 

A. Background

    Section 818 of the National Defense Authorization Act for Fiscal 
Year 1995 (Public Law 103-337) restricts the Department of Defense from 
reimbursing restructuring costs associated with a business combination 
undertaken by a defense contractor unless certain conditions are met. 
This interim DFARS rule provides policies and procedures for allowing 
appropriate contractor costs which involve external restructuring 
activities. A proposed DFARS rule addressing the allowability of 
contractor costs associated with internal restructuring activities will 
be published separately.

B. Determination to Issue an Interim Rule

    A determination has been made under the authority of the Secretary 
of Defense to issue this rule as an interim rule. Compelling reasons 
exist to promulgate this rule without prior opportunity for public 
comment because section 818 of the National Defense Authorization Act 
for Fiscal Year 1995 (Public Law 103-337) requires the Secretary of 
Defense to prescribe regulations no later than January 1, 1995. 
However, comments received in response to the publication of this rule 
will be considered in formulating the final rule.

C. Regulatory Flexibility Act

    The interim rule is not expected to 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 
small entities are not subject to the contract cost principles in FAR 
part 31 or DFARS part 231. The contract cost principles normally apply 
where contract award exceeds $500,000 and the price is based on 
certified cost or pricing data. This interim DFARS rule applies only to 
defense contractors which incur restructuring costs coincident to a 
business combination and are subject to the contract cost principles. 
Most contracts awarded to small entities are awarded on a competitive, 
fixed-price basis. An Initial Regulatory Flexibility Analysis has, 
therefore, not been performed. Comments are invited from small business 
entities and other interested parties. Comments from small entities 
concerning the affected DFARS subparts will also be considered in 
accordance with section 610 of the Act. Such comments must be submitted 
separately and cite DFARS Case 94-D316 in correspondence.

D. Paperwork Reduction Act

    The Paperwork Reduction Act (Pub. L. 96-511) does not apply because 
the interim rule does not impose any additional reporting or 
recordkeeping requirements which require the approval of OMB under 44 
U.S.C. 3501 et. seq.

List of Subjects in 48 CFR Parts 231 and 242

    Government procurement.
Claudia L. Naugle,
Deputy Director, 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 is amended by adding a new subsection 231.205-70 
to read as follows: [[Page 1748]] 


231.205-70  Restructuring costs.

    (a) Scope. This subsection prescribes policies and procedures for 
allowing appropriate contractor restructuring costs when allowing such 
costs would result in net savings for DoD. This subsection also 
implements Section 818 of the National Defense Authorization Act for 
Fiscal Year 1995 (Public Law 103-337).
    (b) Definitions. As used in this subsection:
    (1) Business combination means a transaction whereby assets or 
operations of two previously separate companies are combined, whether 
by merger, acquisition, or sale/purchase of assets.
    (2) External restructuring activities means restructuring 
activities occurring after a business combination that involve 
facilities or workforce from both of the previously separate companies.
    (3) Internal restructuring activities means restructuring 
activities occurring after a business combination that involve 
facilities or workforce from only one of the previously separate 
companies, or, when there has been no business combination, 
restructuring activities undertaken within one company.
    (4) Restructuring activities means nonroutine, nonrecurring, or 
extraordinary activities associated with the reduction of facilities or 
workforce, or consolidation of facilities or operations (including 
disposal or abandonment undertaken to effect such consolidation), in an 
effort to improve future operations and reduce overall costs. 
Restructuring activities do not include routine or ongoing 
repositioning and redeployments of a contractor's productive facilities 
or workforce (e.g., normal plant rearrangement or employee relocation).
    (5) Restructuring costs means the costs, including both direct and 
indirect, associated with 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.
    (6) Restructuring savings means cost reductions, including both 
direct and indirect cost reductions, that are directly associated with 
or result directly 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 (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 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 certification required by 231.205-70(c)(1)(iv) 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.
    (3) Costs that may be incurred after a business combination but are 
not allowed in accordance with FAR part 31 and DFARS part 231 include, 
but are not limited to:
    (i) Incorporation fees; costs of attorneys, accountants, brokers, 
promoters, organizers, management consultants, and investment 
counselors (see FAR 31.205-27).
    (ii) The cost of any change in the contractor's financial structure 
(see FAR 31.205-27).
    (iii) Interest or other costs of borrowing to finance the 
acquisition or merger (however represented) (see FAR 31.205-20).
    (iv) When the purchase method of accounting for a business 
combination is used, increased depreciation, amortization, or cost of 
money attributable to increases in the book value of plant, equipment, 
and other tangible assets of the acquired company above the amount that 
would have been allowed if the business combination had not taken place 
(see FAR 31.205-52).
    (v) Any costs for amortization, expensing, write-off, or write-down 
of goodwill (however represented) (see FAR 31.205-49).
    (vi) Payments to employees of special compensation in excess of the 
contractor's normal severance pay practice if their employment 
terminates following a change in the management control over, or 
ownership of, the company or a substantial portion of its assets (see 
FAR 31.205-6(l)(1)).
    (vii) Payments to employees of special compensation which is 
contingent upon the employee remaining with the contractor for a 
specified period of time following a change in the management control 
over, or ownership of, the company or a substantial portion of its 
assets (see FAR 31.205-6(l)(2)).
    (d) Procedures and ACO responsibilities. As soon as it is known 
that the contractor will incur restructuring costs associated with 
external restructuring activities, the cognizant ACO shall:
    (1) 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 
(c)(1)(iv) is obtained.
    (2) 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 detailed 
breakout by year by cost element, showing the projected restructuring 
costs, both direct and indirect, and projected restructuring savings, 
both direct and indirect.
    (3) Negotiate a Memorandum of Understanding with the contractor 
setting forth, at a minimum, the types and treatments of restructuring 
costs and the methodology to be used to demonstrate reduced costs to 
DoD.
    (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, immediately adjust 
forward pricing rates to reflect the impact of projected restructuring 
savings. Pending execution of an advance agreement in accordance with 
231.205-70(d)(8), restructuring costs may be included in forward 
pricing rates if a repricing clause is included 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. [[Page 1749]] 
    (8) Negotiate an advance agreement with the contractor setting 
forth, at a minimum, cost ceiling amounts on restructuring projects 
and, when necessary, a cost amortization schedule. Cost ceilings 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.

SUBPART 242.12--NOVATION AND CHANGE-OF-NAME AGREEMENTS

    3. Sections 242.1202 and 242.1204 are added to read as follows:


242.1202  Responsibility for executing agreements.

    The contracting officer responsible for processing and executing 
novation and change-of-name agreements shall ensure agreements are 
executed promptly.


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 231.205-70, the 
cognizant contracting officer shall include the following provision 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 flexibly-priced novated contracts, provided 
the Transferee demonstrates that the restructuring will reduce 
overall costs to the Department of Defense (DoD) and/or the National 
Aeronautics and Space Administration (NASA), and the requirements 
included in DFARS 231.205-70 are met. These costs and the 
contracting parties' responsibilities shall be addressed in a 
Memorandum of Understanding to be negotiated between the cognizant 
contracting officer and the Transferee. The Memorandum of 
Understanding will specify the types and treatment of restructuring 
costs and the methodology to be used to demonstrate reduced costs to 
DoD and/or NASA. 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 cost ceiling 
amounts on restructuring projects and the period to which such costs 
shall be assigned.''

[FR Doc. 95-158 Filed 1-4-95; 8:45 am]
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