[Federal Register Volume 66, Number 225 (Wednesday, November 21, 2001)]
[Proposed Rules]
[Pages 58422-58425]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-29008]


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DEPARTMENT OF DEFENSE

Office of the Secretary

32 CFR Part 3


Transactions Other Than Contracts, Grants, or Cooperative 
Agreements for Prototype Projects

AGENCY: Office of the Secretary, DoD.

ACTION:  Proposed rule.

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SUMMARY: This proposed rule outlines the conditions for appropriate use 
enacted by law, defines a nontraditional Defense contractor, and 
provides audit policy application to transactions other than contracts, 
grants or cooperative agreements for prototype projects. It directly 
impacts the public by prescribing conduct that must be followed by a 
party to, or entity that participates in the performance of any such 
transaction.

DATES: Comments on the proposed rule must be received in writing to the 
address specified below on or before January 22, 2002, to be considered 
in the formation of the final rule.

ADDRESSES: Interested parties should submit written comments on the 
proposed rule to: Office of the Director, Defense Procurement, Attn: 
Ms. Teresa Brooks, PDUSD(A&T)/DP(CPA), 3060 Defense Pentagon, 
Washington, DC 20301-3060. Telefax (703) 614-1254.

FOR FURTHER INFORMATION CONTACT: Teresa Brooks, (703) 695-8567.

SUPPLEMENTARY INFORMATION:

Background and Purpose

    Section 845 of the National Defense Authorization Act for Fiscal 
Year 1994, Pub.L. 103-160, as amended, authorizes the Secretary of a 
Military Department, the Director of Defense Advanced Research Projects 
Agency and any other official designated by the Secretary of Defense, 
to enter into transactions other than contracts, grants or cooperative 
agreements for prototype projects that are directly relevant to weapons 
or weapon systems proposed to be acquired or developed by the 
Department of Defense. Such transactions are commonly referred to as 
``other transaction'' agreements for prototype projects. To the extent 
that a particular statute or regulation is limited in its applicability 
to the use of a procurement contract, it would generally not apply to 
``other transactions'' for prototype projects.
    Part 3 to 32 CFR was initially established to implement the section 
801 of the National Defense Authorization Act for Fiscal Year 2000 
requirement that an ``other transaction'' agreement for a prototype 
project that provides for payments in a total amount in excess of 
$5,000,000 include a clause that provides Comptroller General access to 
records. However, there are additional requirements that now warrant 
public comment and expansion of part 3 to 32 CFR. Specifically, section 
803 of the Floyd D. Spence National Defense Authorization Act for 
Fiscal Year 2001 (Pub.L. 106-398) identified conditions for appropriate 
use of the authority and defined a nontraditional Defense contractor. 
In addition, the Department has developed audit policy applicable to 
transactions for prototype projects. These additional requirements are 
addressed in this proposed rule.

Regulatory Evaluation

Executive Order 12866, ``Regulatory Planning and Review.''

    It has been determined that this rule is not a significant rule as 
defined under section 3(f)(1) through 3(f)(4) of Executive Order 12866.

Unfunded Mandates Reform Act (Sec. 202, Pub.L. 104-4).

    It has been certified that this rule does not contain a Federal 
mandate that may result in the expenditure by State, local and tribal 
governments, in aggregate, or by the private sector, of $100 million or 
more in any one year.

Pub.L. 96-354, ``Regulatory Flexibility Act'' (5 U.S.C. 601).

    It has been certified that this part is not subject to the 
Regulatory Flexibility Act (5 U.S.C. 601 et seq.) because it would not, 
if promulgated, have a significant economic impact on a substantial 
number of small entities. The rule does not require additional record 
keeping or other significant expense by project participants.

Pub.L. 96-511, ``Paperwork Reduction Act of 1995'' (44 U.S.C. 3501 et 
seq.)

    It has been certified that this rule does not impose any reporting 
or record keeping requirements under the Paperwork Reduction Act of 
1995.

Federalism (Executive Order 13132).

    It has been certified that this rule does not have federalism 
implications, as set forth in Executive Order 13132.

List of Subjects in 32 CFR Part 3

    Grants program.

    Accordingly, part 3 to 32 CFR proposed to be amended as follows:

[[Page 58423]]

PART 3--TRANSACTIONS OTHER THAN CONTRACTS, GRANTS, OR COOPERATIVE 
AGREEMENTS FOR PROTOTYPE PROJECTS

    1. The authority citation for part 3 is revised to read as follows:

    Authority: Section 845 of the National Defense Authorization Act 
for Fiscal Year 1994 (Pub.L. 103-160), as amended.


    2. Section 3.1 is proposed to be revised to read as follows:


Sec. 3.1  Purpose.

    This part consolidates rules that implement section 845 of the 
National Defense Authorization Act for Fiscal Year 1994, Public Law 
103-160, as amended, and have a significant impact on the public. 
Section 845 authorizes the Secretary of a Military Department, the 
Director of Defense Advanced Research Projects Agency, and any other 
official designated by the Secretary of Defense, to enter into 
transactions other than contracts, grants, or cooperative agreements in 
certain situations for prototype projects that are directly relevant to 
weapons or weapon systems proposed to be acquired or developed by the 
Department of Defense.

    3. Section 3.4 is proposed to be redesignated as section 3.6 and 
Secs. 3.2 and 3.3 are proposed to be redesignated as Secs. 3.3 and 3.4.

    4. New Sec. 3.2 is proposed to be added to read as follows:


Sec. 3.2  Background.

    ``Other transactions'' is the term commonly used to refer to the 10 
U.S.C. 2371 authority to enter into transactions other than contracts, 
grants or cooperative agreements. ``Other Transactions'' are generally 
not subject to the federal laws and regulations limited in 
applicability to contracts, grants or cooperative agreements. As such, 
they are not required to comply with the Federal Acquisition Regulation 
(FAR) and its supplements.

    5. Newly redesignated section 3.4 is proposed to be amended to add 
the following new definitions in alphabetical order:


Sec. 3.4  Definitions.

    Agreements Officer. An individual with the authority to enter into, 
administer, or terminate OTs for prototype projects and make regulated 
determinations and findings.
    Business unit. Any segment of an organization, or an entire 
business organization which is not divided into segments.
* * * * *
    Key participant. A business unit that makes a significant 
contribution to the prototype project. Examples of a ``significant 
contribution'' include supplying new key technology or products, 
accomplishing a significant amount of the effort, or in some other way 
causing a material reduction in the cost or schedule or increase in 
performance.
    Nontraditional defense contractor. A business unit that has not, 
for a period of at least one year prior to the date of the OT 
agreement, entered into or performed on
    (1) Any contract that is subject to full coverage under the cost 
accounting standards prescribed pursuant to section 26 of the Office of 
Federal Procurement Policy Act (41 U.S.C. 422) and the regulations 
implementing such section; or
    (2) Any other contract is excess of $500,000 to carry out prototype 
projects or to perform basic, applied, or advanced research projects 
for a Federal agency, that is subject to the Federal Acquisition 
Regulation.
    Procurement contract. A contract award pursuant to the Federal 
Acquisition Regulation.
    Segment. One of two or more divisions, product departments, plants, 
or other subdivisions of an organization reporting directly to a home 
office, usually identified with responsibility for profit and/or 
producing a product or service.
    Senior Procurement Executive. (1) Department of the Army--Assistant 
Secretary of the Army (Acquisition, Logistics and Technology); (2) 
Department of the Navy--Assistant Secretary of the Navy (Research, 
Development and Acquisition); (3) Department of the Air Force--
Assistant Secretary of the Air Force (Acquisition). (4) The Directors 
of Defense Agencies have been delegated authority to act as Senior 
Procurement Executive for their respective agencies.

    6. New section 3.5 is proposed to be added to read as follows:


Sec. 3.5  Appropriate use.

    (a) In accordance with statute, this authority may be used only 
when:
    (1) At least one nontraditional Defense contractor is participating 
to a significant extent in the prototype project; or
    (2) No nontraditional Defense contractor is participating to a 
significant extent in the prototype project, but at least one of the 
following circumstances exists:
    (i) At least one third of the total cost of the prototype project 
is to be paid out of funds provided by non-Federal parties to the 
transaction.
    (ii) The Senior Procurement Executive for the agency determines in 
writing that exceptional circumstances justify the use of a transaction 
that provides for innovative business arrangements or structures that 
would not be feasible or appropriate under a procurement contract.
    (b) When a nontraditional Defense contractor is not participating 
to a significant extent in the prototype project and cost-sharing is 
the reason for using OTA, then the non-Federal amounts counted as 
provided, or to be provided, by a party to the OT agreement (including 
any entity that participates in the performance of the agreement or a 
subordinate element of the party or entities) may not include costs 
that were incurred before the date on which the OT agreement becomes 
effective. Costs that were incurred for a prototype project by a party, 
entity or subordinate element after the beginning of negotiations, but 
prior to the date the OT agreement becomes effective, may be counted as 
non-Federal amounts if and to the extent that the Agreements Officer 
determines in writing that
    (1) The party, entity or subordinate element incurred the costs in 
anticipation of entering into the OT agreement; and
    (2) It was appropriate for the party, entity or subordinate element 
to incur the costs before the OT agreement became effective in order to 
ensure the successful implementation of the OT agreement. As a matter 
of policy, these same restrictions apply any time cost-sharing may be 
recognized when using OTA.

    7. Section 3.7 is proposed to be added to read as follows:


Sec. 3.7  Audit policy.

    (a) General. This policy applies only when an agreement:
    (1) Uses amounts generated from the awardee's financial or cost 
records as the basis for payment, or
    (2) Requires at least one third of the total costs to be provided 
by non-federal parties pursuant to statute. For example, this policy 
applies when an agreement calls for interim or actual cost 
reimbursement, including payable milestones that provide for adjustment 
based on amounts generated from the awardee's financial or costs 
records. In these circumstances, Agreements Officers must include 
appropriate audit access clauses in the agreement. Sample clauses are 
provided in paragraph (g) of this section. Sample 3 must be used 
verbatim when the use of an independent public accountant (IPA) is 
authorized. Agreement Officers may tailor the remaining sample clauses, 
but

[[Page 58424]]

must ensure all such clauses are structured consistently with this 
guidance in this policy.
    (b) Key participants. In addition, Agreements Officers must require 
awardees to insert an appropriate audit access clause in awards to key 
participants who:
    (1) Contribute to the statutory cost share requirement or
    (2) Are expected to receive payments that exceed $300,000 and will 
be based on amounts generated from financial or cost records. Unless 
otherwise permitted by the Agreements Officer, the sample clauses may 
be altered by the awardee only as necessary to identify properly the 
contracting parties and the Agreements Officer.
    (c) Frequency of audits. An agreement audit normally will be 
peformed only when the Agreements Officer determines it is necessary to 
verify the awardee's compliance with the terms of the agreement.
    (d) Means of accomplishing any required audits. (1) Single Audit 
Act. When the awardee or key participant is a state government, local 
government, or nonprofit organization whose Federal procurement 
contracts and financial assistance agreements are subject to the Single 
Audit Act (Public Law 104-156, dated 5 July 1996), the agreement must 
follow the provisions of that Act. The Single Audit Act is implemented 
by OMB Circular A-133, ``Audits of States, Local Governments, and Non-
Profit Organizations,'' and DoD Directive 7600.10 \1\, ``Audits of 
State and Local Governments, Institutions of Higher Education, and 
Other Nonprofit Institutions.'' The Act is intended to minimize the 
duplication of audit activity and provides for the use of IPAs, to 
conduct annual audits of state or local governments and educational or 
other nonprofit organizations.
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    \1\ Copies may be obtained via Internet at http://www.dtic.mil/whs.directives.
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    (2) Business units currently performing on procurement contracts 
subject to the Cost Principles or Cost Accounting Standards. DCAA must 
perform any necessary audits if, at the time of agreement award, the 
awardee or key participant is performing a procurement contract that is 
subject to the Cost Principles (48 CFR part 31) and/or Cost Accounting 
Standards (48 CFR part 99) and is not subject to the Single Audit Act. 
Any decision to not use DCAA in such cases must be approved by the DoD 
Office of the Inspector General (OIG) prior to awarding an agreement 
that provides for the possible use of an IPA. When such cases arise, 
Agreements Officers should contact the Deputy Assistant Inspector 
General (Audit Policy and Oversight).
    (3) Business units not currently performing on procurement 
contracts subject to the cost principles or cost accounting standards. 
DCAA or a qualified IPA may perform any necessary audit if, at the time 
of agreement award, the awardee or key participant is not performing a 
procurement contract subject to the Cost Principles or Cost Accounting 
Standards and is not subject to the Single Audit Act. An IPA may be 
used only when there is a statement in the Agreements Officer's file 
that the business unit:
    (i) Is not performing a procurement contract subject to the Cost 
Principles or Cost Accounting Standards at the time of agreement award, 
and
    (ii) Will not accept the agreement if the Government has access to 
the business unit's records. Agreements Officer should grant approval 
to use an IPA in this instance and provide input in Part III of the 
required annual report submission. The Part III input must identify, 
for each business unit that is permitted to use an IPA, the business 
unit's name and address and the expected value of its award. The IPA is 
to be paid by the awardee or key participant. This cost will be 
reimbursable based on the business unit's established accounting 
practices and subject to any limitations in the agreement. The 
Agreements Officer is responsible for determining, with advice from the 
OIG, whether an IPA audit has been performed in accordance with 
Generally Accepted Government Auditing Standards.
    (A) Necessary provisions. The agreement must include the Sample 3 
audit access clause verbatim, when the use of an IPAA is authorized.
    (B) Awardee flow-down responsibilities. Agreements must require 
awardees to include the ``necessary provisions'' in agreements with key 
participants receiving total payments that
    (1) Exceed $300,000;
    (2) Are based on amounts generated from cost or financial records 
or contribute to statutory cost share requirements; and
    (3) Provide for use of an IPA. In such cases, the awardee must 
provide written notice, identifying the business unit name and address 
and expected value of award, to the Agreements Officer. However, the 
key participant may provide the information directly to the Agreements 
Officer if this is agreeable to the awardee.
    (e) Scope of required audits. The Agreements Officer should 
coordinate with the auditor regarding the nature of any review to be 
conducted. The Agreements Officer may request a traditional audit, 
where the auditor determines the scope of the review, or the Agreements 
Officer may request a review of only specific cost elements. While the 
auditor also determines the scope of these reviews, the reviews are 
limited to the cost elements specified by the Agreements Officer. For 
example, the Agreements Office might request a review of only the 
direct labor costs. Finally, the Agreements Officer may request an 
``agreed-upon procedures'' review. Under this review, the Agreements 
Officer specifies not only the cost elements to be reviewed, but also 
the procedures to be followed in conducting that review. For example, 
the Agreements Officer might request that the auditor verify the costs 
claimed to the awardee's general and job cost ledgers.
    (f) Length and extent of access. (1) Agreements must provide for 
the Agreements Officer's authorized representative to have direct 
access to sufficient records to ensure full accountability for all 
Government funding or statutorily required cost share under the 
agreement. This access must be allowed for a specified period of time 
(normally 3 years) after final payment, unless notified otherwise by 
the Agreements Officer. In the case where an IPA is used, the 
representative must have direct access to the IPA's audit reports and 
working papers to ensure accountability for funding or cost share.
    (2) In accordance with statute, if an agreement gives the 
Agreements Officer or another DoD component official access to a 
business unit's records, the DoDIG and GAO must receive the same access 
to those records.
    (g) Sample audit access clauses. (1) Sample 1: Clause for awardees 
[insert name, if desired], that have a contract, grant, or cooperative 
agreement subject to the Single Audit Act:
    The awardee shall comply with all aspects of the Single Audit Act.
    (2) Sample 2: Clause for awardees [insert name, if desired] that 
are not subject to the Single Audit Act but have a contract subject to 
Cost Principles and/or Cost Accounting Standards:

    The Agreements Officer, or an authorized representative, shall 
have the right to examine or audit the awardee's records during the 
period of the agreement and for three years after final payment, 
unless notified otherwise by the Agreements Officer. The Agreements 
Officer, or an authorized representative, shall have direct access 
to sufficient records to ensure full accountability for all 
Government funding or to verify statutorily required cost share 
under the agreement.


[[Page 58425]]


    (3) Sample 3: Clause for awardees [insert name, if desired] that 
are not subject to the Single Audit Act, do not have a procurement 
contract subject to Cost Principles (48 CFR part 31) and/or Cost 
Accounting Standards (48 CFR part 99), and refuse to accept Government 
access to their records:

    The Agreements Officer shall have the right to request an 
examination or audit of the awardee's records during the period of 
the agreement and for three years after final payment, unless 
notified otherwise by the Agreements Officer. The audit will be 
conducted by an independent public accountant (IPA), subject to the 
following conditions:
    (i) The audit shall be performed in accordance with Generally 
Accepted Government Auditing Standards (GAGAS).
    (ii) The Agreements Officers' authorized representative shall 
have the right to examine the IPA's audit report and working papers 
for 3 years after final payment or three years after issuance of the 
audit report, whichever is later, unless notified otherwise by the 
Agreements Officer.
    (iii) The IPA shall send copies of the audit report to the 
Agreements Officer and the Assistant Inspector General (Audit Policy 
and Oversight) [AIG(APO)], 400 Army Navy Drive, Suite 737, 
Arlington, VA 22202.
    (iv) The IPA shall report instances of suspected fraud directly 
to the DoDIG.
    (v) When the Agreements Officer determines (subject to appeal 
under the disputes clause of the agreement) that the audit has not 
been performed within twelve months of the date requested by the 
Agreements Officer or has not been performed in accordance with 
GAGAS or any other pertinent provisions of the agreement, the 
Government shall have the r8ight to require corrective action by the 
awardee. The awardee may take corrective action by having the IPA 
correct any deficiencies identified by the Agreements Officer, 
having another IPA perform the audit, or electing to have the 
Government perform the audit. If corrective action is not taken, the 
Agreements Officer shall have the right to take one or more of the 
following actions:
    (A) Withhold or disallow a percentage of costs until the audit 
is completed satisfactorily;
    (B) Suspend performance until the audit is completed 
satisfactorily; and/or
    (C) Terminate the agreement.
    (vi) If it is found that the awardee was performing a 
procurement contract subject to Cost Principles (48 CFR part 31) 
and/or Cost Accounting Standards (48 CFR part 99) at the time of 
agreement award, the Agreements Officer, or an authorized 
representative, shall have the right to audit sufficient records of 
the awardee to ensure full accountability for all Government funding 
or to verify statutorily required cost share under the agreement. 
The awardee shall retain such records for three years after final 
payment, unless notified otherwise by the Agreements Officer.

    (4) Sample 4: Clause for all awardees for flowing down 
requirements:

    The awardee shall flow down the applicable audit access 
requirements in agreements with key participants who contribute to 
statutory cost share requirements or will receive total payments 
that exceed $300,000 and are based on amounts generated from cost or 
financial records. The awardee shall request audits of key 
participants when the Agreements Officer advises that audits are 
necessary. The Agreements Officer will provide sample audit access 
clauses to the awardee. Unless otherwise permitted by the Agreements 
Officer, the awardee shall alter the sample clauses only as 
necessary to identity properly the contracting parties and the 
Agreements Officer. The awardee shall provide a statement to the 
Agreements Officer when a business unit meets the conditions for use 
of an Independent Public Accountant (other than pursuant to the 
Single Audit Act) for any needed audits. The statement shall include 
the business unit's name and address, and the expected value of its 
award. The statement must show that the business unit currently is 
not performing on a procurement contract subject to the Cost 
Principles (48 CFR part 31) and/or Cost Accounting Standards (48 CFR 
part 99) and refuses to allow Government access to its records. The 
key participant may provide this statement directly to the 
Agreements Officer if this is agreeable to the awardee.

    Dated: November 15, 2001.
L.M. Bynum,
Alternate OSD Federal Register Liaison Officer, Department of Defense.
[FR Doc. 01-29008 Filed 11-20-01; 8:45 am]
BILLING CODE 5001-08-M