[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

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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