[Federal Register Volume 76, Number 154 (Wednesday, August 10, 2011)]
[Rules and Regulations]
[Pages 49365-49368]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-20212]



Office of Federal Procurement Policy

48 CFR Part 9903

Cost Accounting Standards: Elimination of the Exemption From Cost 
Accounting Standards for Contracts and Subcontracts Executed and 
Performed Entirely Outside the United States, Its Territories, and 

AGENCY: Office of Management and Budget (OMB), Office of Federal 
Procurement Policy (OFPP), Cost Accounting Standards Board (Board).

ACTION: Final rule.


SUMMARY: The Office of Federal Procurement Policy (OFPP), Cost 
Accounting Standards (CAS) Board, is publishing a final rule to 
eliminate the exemption from regulations regarding Cost Accounting 
Standards for contracts executed and performed entirely outside the 
United States, its territories, and possessions.

DATES: Effective Date: October 11, 2011.

FOR FURTHER INFORMATION CONTACT: Raymond J. M. Wong, Director, Cost 
Accounting Standards Board (telephone: 202-395-6805; e-mail: [email protected]).


A. Regulatory Process--Changes to 48 CFR Part 9903

    The CAS Board's regulations and Standards are codified at 48 CFR 
chapter 99. This notice concerns the amendment of a CAS Board 
regulation other than a Standard, and as such is not subject to the 
statutorily prescribed rulemaking process for the promulgation of a 
Standard at 41 U.S.C. 1502(c) [formerly, 41 U.S.C. 422(g)]. The 
document being published today is a Final Rule.

B. Background and Summary

    The Office of Federal Procurement Policy (OFPP), Cost Accounting 
Standards (CAS) Board, is publishing a final rule to eliminate the 
exemption at 48 CFR 9903.201-1(b)(14) from the Cost Accounting 
Standards for contracts executed and performed entirely outside the 
United States, its territories, and possessions (hereafter referred to 
as the ``(b)(14) overseas exemption'').
    The CAS Board is publishing a final rule which eliminates the 
(b)(14) overseas exemption from CAS for contracts and subcontracts 
executed and performed entirely outside the United States, its 
territories, and possessions.

Statutory Requirement

    Section 823(a) of the Duncan Hunter National Defense Authorization 
Act for Fiscal Year 2009 (NDAA FY 2009) required the CAS Board to: 
``(1) Review the inapplicability of the cost accounting standards, in 
accordance with existing exemptions, to any contract and subcontract 
that is executed and performed outside the United States when such a 
contract or subcontract is performed by a contractor that, but for the 
fact that the contract or subcontract is being executed and performed 
entirely outside the United States, would be required to comply with 
such standards; and (2) determine whether the application of the 
standards to such a contract and subcontract (or any category of such 
contracts and subcontracts) would benefit the Government.'' Section 823 
further required the CAS Board to publish a request for information and 
to submit to the appropriate committees of Congress a report 
containing: (1) Any proposed revision to the CAS regulations as a 
result of the review and a copy of any proposed rulemaking implementing 
the revision or (2) if no revision and rulemaking are proposed, a 
detailed justification for such decision.

History of the (b)(14) Overseas Exemption

    The (b)(14) overseas exemption was first promulgated in 1973 at 
Section 3-1204 of the Armed Services Procurement Regulation (ASPR). See 
Defense Procurement Circular No. 115 (dated September 24, 1973). The 
reason given for promulgation of the (b)(14) overseas exemption was 
that the underlying authority for CAS, Section 2168 of the Defense 
Production Act (DPA), was applicable to the United States, its 
Territories and possessions, and the District of Columbia (Section 2163 
of the DPA). The (b)(14) overseas exemption was intended to eliminate 
confusion that had existed at that time over the applicability of CAS 
outside the United States.
    In 1980, the CAS Board ceased to exist under the DPA. Congress 
reestablished the CAS Board in 1988 under Section 22 of the OFPP Act, 
41 U.S.C. 1501 [formerly, 41 U.S.C. 422]. Unlike the DPA, under the 
OFPP Act, CAS is not limited in applicability to the United States. 
However, in 1991, the CAS Board, after reviewing the rules and 
regulations applicable to the administration of CAS, opted to retain 
the (b)(14) overseas exemption.
    The CAS Board later sought to reevaluate the (b)(14) overseas 
exemption. On September 13, 2005, the CAS Board published a notice 
seeking comment on the Staff Discussion Paper (SDP) discussing the 
appropriateness of continuing the exemption (70 FR 53977). Only three 
public comments were received, all of which supported retaining the 
exemption. The CAS Board took no further action at that time and 
published a notice discontinuing the review on February 13, 2008 (73 FR 
    In response to Section 823(a) of NDAA FY 2009, the CAS Board 
published on April 23, 2009, another notice requesting information on 
six general questions regarding the (b)(14) overseas exemption (74 FR 
18491). In addition to this notice, the CAS Board requested assessments 
directly from three Federal agencies with significant volume of 
contracts performed outside of the United States--the Department of 
Defense (DOD), the Department of State (DOS) and the United States 
Agency for International Development (USAID). After reviewing the 
comments received from the notice and the assessments of the three 
Federal agencies, the CAS Board published a Notice of Proposed Rule 
(NPR) on October 20, 2010, proposing to eliminate the (b)(14) overseas 
exemption (75 FR 64684). A copy of the proposed rule was provided to 
the appropriate committees of Congress in accordance with Section 823.

[[Page 49366]]


    The CAS Board has considered the comments received in response to 
the NPR, which are available to the public on the CAS Board's Web site 
at http://www.whitehouse.gov/omb/casb_index_public_comments/ and 
http://www.regulations.gov, and has concluded that the (b)(14) overseas 
exemption should be eliminated. Although the CAS Board's responses to 
specific comments received are discussed later in this notice, the 
principal reasons for eliminating the exemptions are as follows:
    (1) The statutory basis originally used to justify the (b)(14) 
overseas exemption no longer exists. Absent such justification, the CAS 
Board must give deference to the existing CAS applicability statutes as 
mandatory for use by all executive agencies and by contractors and 
subcontractors in estimating, accumulating, and reporting costs in 
connection with pricing and administration of, and settlement of 
disputes concerning, all negotiated prime contract and subcontract 
procurements with the United States (41 U.S.C. 1502(b)(1)(B) [formerly, 
41 U.S.C. 422(f)(2)(A)]).
    (2) There is not an accounting basis for the (b)(14) overseas 
exemption. The place of contract execution and performance is not 
germane to the fundamental requirements and practices set forth in CAS 
used to measure, assign, and allocate the costs of contract 
    (3) The CAS Board was not persuaded that the imposition of CAS in 
situations where the (b)(14) overseas had been applied would create 
hardships for Federal agencies, prime contractors, and subcontractors, 
particularly in view of mitigating factors. Foremost among these 
factors would be that a contractor would still have available the 
exemption at 48 CFR 9903.201-1(b)(4) which states ``Contracts and 
subcontracts with foreign governments or their agents or 
instrumentalities or, insofar as the requirements of CAS other than 
9904.401 and 9904.402 are concerned, any contract or subcontract 
awarded to a foreign concern.'' In the CAS Board's view, the imposition 
of CAS 401, ``Consistency in Estimating, Accumulating and Reporting 
Costs,'' and CAS 402, ``Consistency in Allocating Costs Incurred for 
the Same Purpose,'' are the minimal requirements necessary to meet the 
requirements of CAS. In the Board's view, these minimal requirements 
are not substantively different from what is already imposed under the 
Federal Acquisition Regulation (FAR).

C. Public Comments to the Notice of Proposed Rule

    In response to the NPR, the CAS Board received a total of five 
comments from a Federal agency, consultant, public interest group, and 
industry and trade associations. The comments, which were all 
considered by the Board in its deliberations, reflected a difference of 
views on whether to retain or eliminate the (b)(14) overseas exemption. 
They are summarized and addressed in this section, grouped by common 
    1. Comment: Two respondents supported the CAS Board's proposed rule 
to eliminate the (b)(14) overseas exemption.
    Response: The CAS Board noted the agreement.
    2. Comment: One respondent believed that eliminating the (b)(14) 
overseas exemption will have a very narrow impact in terms of the 
number of foreign concerns which will become subject to the consistency 
requirements of CAS 401 and 402, respectively, consistency in 
estimating, accumulating and reporting costs, and consistency in 
allocating costs incurred for the same purpose. Contract savvy foreign 
concerns will attempt to enter into contracts where another CAS 
exemption is applicable. To the contrary, another respondent opined 
that there is a misconception that some other CAS exemptions are 
applicable if the (b)(14) overseas exemption is eliminated. The 
respondent opined that the other CAS exemptions are of limited 
applicability, and that even the limited applicability of CAS 401 and 
402 would be a deterrent to foreign concerns in accepting subcontracts 
to satisfy the U.S. contractors' offset requirements. A greater 
deterrent to foreign concerns are the requirements to submit a CAS 
Disclosure Statement and notifications of changes in accounting 
practice with cost impact analyses.
    Response: The imposition of CAS 401 and CAS 402 are not likely to 
be a hardship, since they are already substantively applied by the FAR. 
The threshold for submitting a CAS Disclosure Statement was 
significantly increased in 2000 to $50 million in recognition that this 
requirement should be applied to levels of contracting activity where a 
more formal disclosure was appropriate.
    3. Comment: One respondent noted that there is an obvious 
accounting basis for retaining the (b)(14) overseas exemption, 
specifically, the differences between the fundamental accounting 
principles between U.S. GAAP (Generally Accepted Accounting Principles) 
and IFRS (International Financial Reporting Standards).
    Response: The CAS Board does not believe differences between GAAP 
and IFRS are relevant to the question of extending the (b)(14) overseas 
    4. Comment: Two respondents noted that the costs of CAS 
administration would exceed any benefits achieved from requiring CAS. 
One respondent noted that essentially no aspect of the CAS rulemaking 
during the past 37 years has received any input from entities otherwise 
exempt from all CAS requirements. Another respondent noted that foreign 
concerns will have difficulty understanding and interpreting the CAS 
Disclosure Statement, which is published only in English. The 
respondent also noted that not only foreign concerns will have 
administrative costs in implementing and administering CAS for foreign 
concerns; the Government, and higher tier subcontractors and prime 
contractors with foreign concerns as subcontractors will also have 
administrative costs associated with administering the CAS Disclosure 
Statement process, as well as the cost impacts for cost accounting 
changes and CAS non-compliances.
    Response: For reasons previously discussed, the CAS Board does not 
agree that the administrative costs of essentially applying CAS 401 and 
CAS 402 will exceed the benefits received by the taxpayers. There 
presently are foreign concerns, unable to take advantage of the (b)(14) 
overseas exemption, that are able to comply with the applicable 
requirements of CAS. Moreover, the same requirements are in the FAR.
    5. Comment: Two respondents raised concerns about an unintended 
consequence of imposing CAS on foreign concerns: the negative impact on 
exports which would result. The expressed concern was that the U.S. 
aerospace export sales would be endangered. The respondents stated that 
U.S. aerospace export sales have been enabled by the purchase of parts 
supplied by foreign concern subcontractors who are currently exempted 
from CAS, presumably by the (b)(14) overseas exemption. The respondents 
argued that contractors must satisfy offset requirements in order to 
make the sale to the foreign country. Offset requirements are host 
country industrial participation requirements imposed by the foreign 
host country as a condition of the contract. Contractors establish 
relationships with foreign subcontractors to develop potential offset 
placements to position themselves

[[Page 49367]]

for future contract awards for export sales. Such relationships are 
established and developed with strategic placement of subcontracts for 
contracts with the U.S. in anticipation of new export sales 
opportunities and related offset obligations.
    Response: Based on these comments, the CAS Board sought additional 
guidance on the matter of exports. Aerospace sales to foreign countries 
are made through either foreign military sales (FMS) contracts with the 
U.S. Government as the party to the contract with the contractor or 
contracts executed directly between the foreign host country and the 
U.S. contractor as a ``commercial sale.'' The CAS requirements are only 
imposed on sales to the U.S. Government (in this case, to the FMS 
contracts), and not on a commercial sale made directly with the foreign 
host country. U.S. Government funded FMS contracts do not have offset 
requirements, while foreign government funded FMS contracts may have 
offset requirements. In those instances when there are offset 
requirements in FMS contracts, the imposition of CAS 401 and CAS 402, 
if applicable, are not likely to be a hardship, since they are already 
substantively applied by the FAR for subcontracts. See the responses to 
Comments 2 and 4.
    6. Comment: One respondent stated that the other CAS exemptions or 
applicability requirements are not applicable to foreign concerns, 
generally. Sealed bidding would not be effective for subcontracting to 
meet offset requirements where discussions are likely to be necessary. 
The CAS applicability threshold of $650,000 (soon to be adjusted to 
$700,000) still leaves many foreign concern subcontractors subject to 
it. The small business exemption from CAS only applies to U.S. 
businesses. While contracts and subcontracts with foreign governments 
or their instrumentalities are exempted from CAS, other foreign 
concerns are still subject to CAS 401 and 402, which would be a 
deterrent to foreign concerns accepting subcontracts to satisfy offset 
for U.S. contractors when they do not have CAS requirements for 
subcontracts with non-U.S. contractors. The larger deterrent for the 
larger subcontractors (who exceed the $50 million CAS Disclosure 
Statement filing threshold) is the Disclosure Statement filing 
requirement. The CAS exemption applicable when the price is set by law 
or regulation is irrelevant to foreign concern subcontracts for 
aerospace products. The CAS exemption for firm-fixed price (FFP) 
contracts, fixed price contracts with economic price adjustments, and 
contracts and subcontracts for commercial items has limited 
applicability. The CAS exemption for the NATO PHM Ship program has 
limited applicability, and is not germane to foreign concern 
subcontracts for aerospace products. The limited technical capabilities 
of the industrial bases of many countries with offset requirements make 
competition not tenable. Even in the most competitive emerging markets, 
i.e., India, South Korea, Saudi Arabia, and Turkey, competition in the 
award of subcontracts will be severely limited by the industrial base, 
limiting the applicability of the CAS exemption for FFP contracts and 
subcontracts awarded on the basis of adequate price competition without 
cost or pricing data.
    Response: Whether or not another CAS exemption might apply, aside 
from the previously discussed exemption at 48 CFR 9903.201-1(b)(4), is 
not germane to the question of eliminating the (b)(14) overseas 
exemption. While it is likely that other exemptions might apply in 
certain situations, it is recognized that some exemptions would never 
apply. However, finding an alternative exemption that yields the same 
result as the (b)(14) overseas exemption is not the objective of this 
assessment. The relevant question is whether, given the absence of 
conditions which created the exemption in the first place, there are 
other sufficient reasons for retaining the exemption. As previously 
stated, the CAS Board has not been persuaded that there are other 
sufficient reasons for retaining the exemption.
    7. Comment: A respondent noted that the CAS waiver process is not 
suitable in the foreign concern subcontracting context. A CAS waiver 
must be requested by an agency, rather than the contractor, considering 
the needs of the agency with supporting justification from the 
perspective of the agency. The waiver process is not conducive to the 
offset obligations of the contractor as the offset requirement may be 
contrary to the requirement to establish other sources to avoid a 
waiver in the future.
    Response: The CAS Board agrees that the waiver process may be 
arduous. However, given that only CAS 401 and CAS 402 would be imposed 
in the absence of the (b)(14) overseas exemption, the CAS Board 
believes it is unlikely that a CAS waiver would be requested.
    8. Comment: A respondent opined that the impact from the 
elimination of the (b)(14) overseas exemption on foreign concern 
subcontractors is understated. The respondent stated the impact of 
eliminating (b)(14) overseas exemption will be most acute on foreign 
concern subcontractors, and the prime contractors and higher-tier 
subcontractors who have relied on the that exemption historically. 
Foreign concern subcontractor usage data is not readily available 
because there is no requirement to capture it. While everyone believes 
subcontractors will be affected, the scope of the impact is unknown.
    Response: The CAS Board understands that the visibility into 
subcontracting activities of a prime contractor is limited, 
particularly foreign concern subcontractors. The CAS Board notes that 
this condition has also been given as reasoning for eliminating the 
(b)(14) overseas exemption. As previously discussed, the CAS Board 
believes there will be mitigating factors that lessen the impact on 
foreign concern subcontractors. If this proves to be unfounded, then 
the CAS Board can reconsider the (b)(14) overseas exemption.
    9. Comment: Two respondents stated that the elimination of the 
(b)(14) overseas exemption is contrary to U.S. export and foreign 
economic development policies. There is a long standing belief that 
export of defense industry products benefit the US, and laws and 
regulations reflect that. NDAA FYs 1988 and 1989 (respectively, Pub. L. 
100-202 and 100-456) made allowable the costs of promoting the export 
of US defense industry products. The March 11, 2010 Executive Order 
(EO) on the National Export Initiative established the Administration's 
goal to double exports over the next five years as a critical component 
to stimulate economic growth in US. Elimination of exemption would 
create competitive disadvantages for U.S. firms attempting to grow 
export sales of defense industry products as exports are linked to 
offsets. A key element of Government policy in war torn and 
economically underdeveloped countries is to require prime contractors 
to subcontract with host foreign country subcontractors. Imposition of 
CAS ``will likely shrink the local competitive landscape, stymie host 
country economic development, potentially harm project missions, and 
stress relations with foreign governments.''
    Response: The CAS Board does not accept the notion that eliminating 
the (b)(14) overseas exemption is contrary to U.S. export and foreign 
economic development policies. No one within the Legislative or 
Executive Branches has made that claim at any time during the 
rulemaking process. The CAS Board has not been persuaded that the 
burden imposed by CAS 401 and CAS 402, as

[[Page 49368]]

well as perhaps the CAS Disclosure Statement, will be significant.
    10. Comment: A respondent observed that the (b)(14) overseas 
exemption has not been identified as a cause for overseas 
subcontracting challenges in recent testimonies. On June 29, 2010, 
Stuart W. Bowen, Jr., Special Inspector General for Iraq 
Reconstruction, testified before the House Subcommittee on National 
Security and Foreign Affairs, and identified many subcontracting 
issues. However, he did not mention the (b)(14) overseas exemption from 
CAS as a cause for any of the issues, nor did he recommend the 
imposition of CAS coverage on foreign concern subcontracts as a 
potential solution. In the July 26, 2010 hearing on war zone 
subcontracting before the Commission on Wartime Contracting (CWC), none 
of the witnesses cited the (b)(14) overseas exemption from CAS as 
contributing to the subcontracting challenges identified during the 
hearings, nor did any witness recommend the imposition of CAS coverage 
as a solution to overseas subcontracting problems. None of the CWC 
commissioners spoke of, or inquired about, subcontractor CAS coverage 
or CAS compliance during opening statements or witness testimony.
    Response: The CAS Board does not accept this reasoning for 
retaining the (b)(14) overseas exemption.

D. Paperwork Reduction Act

    The Paperwork Reduction Act (44 U.S.C. chapter 35, subchapter I) 
does not apply to this rulemaking, because this rule imposes no 
additional paperwork burden on offerors, affected contractors and 
subcontractors, or members of the public which requires the approval of 
OMB under 44 U.S.C. 3501, et seq. The records required by this final 
rule are those normally maintained by contractors and subcontractors 
who claim reimbursement of costs under government contracts.

E. Executive Order 12866, the Congressional Review Act, and the 
Regulatory Flexibility Act

    Because the affected contractors and subcontractors are those who 
are already subject to CAS but for the (b)(14) overseas exemption, and 
those who are subject to only CAS 401 and 402 under the (b)(4) foreign 
concern exemption, the economic impact of this final rule on 
contractors and subcontractors is expected to be minor. As a result, 
the CAS Board has determined that this final rule will not result in 
the promulgation of an ``economically significant rule'' under the 
provisions of Executive Order 12866, and that a regulatory impact 
analysis is not required. For the same reason, the Administrator of the 
Office of Information and Regulatory Affairs has determined that this 
final rule is not a ``major rule'' under the Congressional Review Act, 
5 U.S.C. chapter 8. Finally, this rule does not have a significant 
effect on a substantial number of small entities because small 
businesses are exempt from the application of the Cost Accounting 
Standards. Therefore, this final rule does not require a regulatory 
flexibility analysis under the Regulatory Flexibility Act of 1980, 5 
U.S.C. chapter 6.

F. List of Subjects in 48 CFR 9903

    Government procurement, Cost accounting standards.

Daniel I. Gordon,
Chair, Cost Accounting Standards Board.

    For the reasons set forth in this preamble, Chapter 99 of Title 48 
of the Code of Federal Regulations is proposed to be amended as set 
forth below:


1. The authority citation for Part 9903 is amended to read as follows:

    Authority: Public Law 111-350, 124 Stat. 3677, 41 U.S.C. 1502.

9903.201-1  [Amended]

2. Section 9903.201-1 is amended by removing and reserving paragraph 

[FR Doc. 2011-20212 Filed 8-9-11; 8:45 am]