[Federal Register Volume 63, Number 30 (Friday, February 13, 1998)]
[Rules and Regulations]
[Pages 7308-7311]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3714]
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DEPARTMENT OF DEFENSE
48 CFR Part 231
[DFARS Case 97-D313]
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
amending the Defense Federal Acquisition Regulation Supplement (DFARS)
to implement Section 8092 of the National Defense Appropriations Act
for Fiscal Year 1998 and Section 804 of the National Defense
Authorization Act for Fiscal Year 1998 concerning the reimbursement of
external restructuring costs associated with a business combination.
DATES: Effective date: February 13, 1998.
Comment date: Comments on the interim rule should be submitted in
writing to the address shown below on or before April 14, 1998, to be
considered in the formulation of the final rule.
ADDRESSES: Interested parties should submit written comments to:
Defense Acquisition Regulations Council, Attn: Ms. Sandra G. Haberlin,
PDUSD (A&T) DP (DAR), IMD 3D139, 3062 Defense Pentagon, Washington, DC
20301-3062. Telefax number (703) 602-0350.
[[Page 7309]]
E-mail comments submitted over the Internet should be addressed to:
dfarsacq.osd.mil
Please cite DFARS Case 97-D313 in all correspondence related to
this issue. E-mail comments should cite DFARS Case 97-D313 in the
subject line.
FOR FURTHER INFORMATION CONTACT:
Ms. Sandra G. Haberlin, (703) 602-0131.
SUPPLEMENTARY INFORMATION:
A. Background
This interim rule amends DFARS 231.205-70, External restructuring
costs, to implement Section 8092 of the National Defense Appropriations
Act for Fiscal Year 1998 (Public Law 105-56), and Section 804 of the
National Defense Authorization Act for Fiscal Year 1998 (Pub. L. 105-
85).
Section 8092 of Pub. L. 105-56 restricts DoD form using fiscal year
1998 funds to reimburse external restructuring costs associated with a
business combination undertaken by a defense contractor unless certain
conditions are met. These conditions include that either (1) the
audited savings for DoD resulting from the restructuring will exceed
the costs allowed by a factor of at least two to one; or (2) the
savings for DoD resulting from the restructuring will exceed the costs
allowed and the Secretary of Defense determines that the business
combination will result in the preservation of a critical capability
that might otherwise be lost to DoD.
Section 804 of Pub. L. 105-85 (1) specifies that similar conditions
be met before DoD reimburses contractors for restructuring costs; (2)
codifies this limitation on payment of restructuring costs under
defense contracts at 10 U.S.C. 2324; and (3) repeals Section 818(a) of
the National Defense Authorization Act for Fiscal Year 1995 (10 U.S.C.
2324 note). Section 818(a) required an official of DoD at the level of
Assistant Secretary of Defense or above to certify in writing that
projections of future cost savings resulting from the business
combination were based on audited cost data and should result in
overall reduced costs to DoD, prior to DoD reimbursing contractors for
restructuring costs.
B. 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
contracts awarded to small entities use simplified acquisition
procedures or are awarded on a competitive fixed-price basis, and do
not require application of the cost principle contained in this rule.
An Initial Regulatory Flexibility Analysis has, therefore, not been
performed. Comments are invited from small businesses and other
interested parties. Comments from small entities concerning the
affected DFARS subpart also will be considered in accordance with 5
U.S.C. 610. Such comments should be submitted separately and should
cite DFARS Case 97-D313 in correspondence.
C. Paperwork Reduction Act
The Paperwork Reduction Act does not apply because the interim rule
does not impose any information collection requirements that require
Office of Management and Budget approval under 44 U.S.C. 3501, et seq.
D. Determination To Issue an Interim Rule
A determination has been made under the authority of the Secretary
of Defense that urgent and compelling reasons exist to promulgate this
interim rule without prior opportunity for public comment. This rule
implements Section 8092 of the National Defense Appropriations Act for
Fiscal Year 1998 (Pub. L. 105-56), which was effective upon enactment
on October 8, 1997; and Section 804 of the National Defense
Authorizations Act for Fiscal Year 1998 (Pub. L. 105-85), which was
effective upon enactment on November 18, 1997. These sections restrict
the reimbursement of restructuring costs associated with a business
combination of a defense contractor unless certain conditions are met.
Comments received in response to the publication of this interim rule
will be considered in formulating the final rule.
List of Subjects in 48 CFR Part 231
Government procurement.
Michele P. Peterson,
Executive Editor, Defense Acquisition Regulations Council.
Therefore, 48 CFR part 231 is amended as follows:
1. The authority citation for 48 CFR part 231 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 savings would
result for DoD. This subsection also implements 10 U.S.C. 2325, Section
818 of the National Defense Authorization Act for Fiscal Year 1995
(Pub. L. 103-337) (10 U.S.C. 2324 note), Section 8115 of the National
Defense Appropriations Act for Fiscal Year 1997 (Pub. L. 104-208), and
Section 8092 of the National Defense Appropriations Act for Fiscal Year
1998 (Pub. L. 105-56).
(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 or 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,
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
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external restructuring activities allocated to DoD contracts are less
than $2.5 million, the costs shall not be subject to the audit, review,
certification, and determination requirements of paragraph (c)(1) of
this subsection; 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,
and negotiates an advance agreement in accordance with paragraph (d)(8)
of this subsection; and
(iv) For business combinations that occur--
(A) Prior to October 1, 1996, the Under Secretary of Defense
(Acquisition & Technology) or the Principal Deputy certifies 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.
(B) October 1, 1996, through November 18, 1997, the Under Secretary
of Defense (Acquisition & Technology) or the Principal Deputy--
(1) Certifies 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; and
(2) Determines in writing that the audited projected savings for
DoD resulting from the restructuring will exceed either--
(i) The costs allowed by a factor of at least two to one; or
(ii) The costs allowed, and the business combination will result in
the preservation of a critical capability that might otherwise be lost
to DoD.
(C) After November 18, 1997, the Under Secretary of Defense
(Acquisition & Technology) or the Principal Deputy determines in
writing that the audited projected savings for DoD resulting from
restructuring will exceed either--
(1) The costs allowed by a factor of at least two to one; or
(2) The costs allowed, and the business combination will result in
the preservation of a critical capability that might otherwise be lost
to DoD.
(2) The audit, review, certification, and determination required by
paragraph (c)(1) of this subsection 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, or
determination, or both, as applicable, in paragraph (c)(1)(iv) of this
subsection is obtain.
(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 present value of 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 paragraph (d)(8) of this subsection, 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, or determination, or both, as applicable, required by
paragraph (c)(1)(iv) of this subsection 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.
However, for business combinations that occur on or after October 1,
1996, the audited projected savings for DoD must exceed the costs
allowed by a factor of at least two to one on a present value basis,
unless the determination in paragraph (c)(1)(iv)(B) (2)(ii) or
(c)(1)(iv)(C) (2) of this subsection applies.
(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 costs
may not exceed the amount of projected restructuring savings on a
present value basis. The advance agreement shall not be executed until
the certification, or determination, or both, as applicable, required
by paragraph (c)(1)(iv) of this subsection 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, or determination, or both,
as applicable. Include the information described in paragraph (e) of
this subsection.
(10) Consult with the Director of Defense Procurement, Office of
the Under Secretary of Defense (Acquisition & Technology), when
paragraph (c)(1) (iv)(B) (2)(ii) or (c)(1)(iv)(C) (2) of this
subsection applies.
(e) Information needed to obtain certification and determination.
(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, or
determination, or both, as applicable. This recommendation must clearly
indicate one of the following, consistent with paragraph (c)(1)(iv) of
this subsection:
(i) 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.
(ii) The audited projected savings for DoD will exceed the costs
allowed by a factor of at least two to one.
(iii) The business combination will result in the preservation of a
critical capability that might otherwise be lost
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to DoD, and the audited projected savings will exceed the costs
allowed.
[FR Doc. 98-3714 Filed 2-12-98; 8:45 am]
BILLING CODE 5000-04-M