[Federal Register Volume 81, Number 214 (Friday, November 4, 2016)]
[Rules and Regulations]
[Pages 78008-78011]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-26366]



[[Page 78007]]

Vol. 81

Friday,

No. 214

November 4, 2016

Part V





Department of Defense





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Defense Acquisition Regulations System





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48 CFR Parts 202, 212, 215, et al.





Federal Acquisition Regulations; Final and Proposed Rules

  Federal Register / Vol. 81 , No. 214 / Friday, November 4, 2016 / 
Rules and Regulations  

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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 231 and 242

[Docket DARS-2015-0070]
RIN 0750-AI81


Defense Federal Acquisition Regulation Supplement: Enhancing the 
Effectiveness of Independent Research and Development (DFARS Case 2016-
D002)

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Final rule.

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SUMMARY: DoD is issuing a final rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to improve the effectiveness 
of independent research and development (IR&D) investments by the 
defense industrial base, by requiring contractors to engage in 
technical interchanges with DoD before costs are generated.

DATES: Effective November 4, 2016.

FOR FURTHER INFORMATION CONTACT: Mr. Tom Ruckdaschel, telephone 571-
372-6088.

SUPPLEMENTARY INFORMATION: 

I. Background

    DoD published a proposed rule in the Federal Register at 81 FR 7723 
on February 16, 2016, to revise DFARS 231.205-18, Independent Research 
and Development and Bid and Proposal Costs, to require that proposed 
new IR&D efforts be communicated to appropriate DoD personnel prior to 
the initiation of these investments, and that results be shared with 
appropriate DoD personnel. Nine respondents submitted public comments 
in response to the proposed rule.

II. Discussion and Analysis

    DoD reviewed the public comments in the development of this final 
rule. A discussion of the comments and the changes made to the rule as 
a result of those comments is provided, as follows:

A. Summary of Changes From the Proposed Rule in Response to Public 
Comments

    1. The requirement at DFARS 231.205-18(c)(iii)(C)(2) to include a 
``summary of results'' with the annual update to online inputs is 
removed in the final rule.
    2. DFARS 231.205-18(c)(iii)(C)(4)(i) is revised to cite the Office 
of the Assistant Secretary of Defense for Research and Engineering 
(OASD R&E) as a resource for contractors who do not have a point of 
contact for the technical interchange. Contact information for OASD R&E 
can be found at http://www.acq.osd.mil/rd/contacts/.

B. Analysis of Public Comments

1. Support for the Rule
    Comment: Three respondents expressed positive support of the rule 
and DoD's effort to enhance communications between industry and DoD 
regarding IR&D efforts.
    Response: DoD acknowledges the respondents' support for the rule.
2. Favor Certain Projects/Different Priorities
    Comment: One respondent, though generally supportive of the goals 
of the rulemaking effort, believed the proposed rule will make it more 
difficult to pursue IR&D projects at their infancy for the following 
reason: ``. . . by requiring technical interchange with Government 
employees before generating IR&D costs, defense contractors will shift 
toward IR&D projects that are of perceived interest to identifiable DoD 
officials.'' One respondent stated that the rule will favor companies 
that have their IR&D (efforts) preapproved. One respondent, though 
supportive of technical interchanges, was concerned that DoD 
individuals participating in the interchanges may not share the long-
term priorities outlined in Better Buying Power 3.0. Another respondent 
is concerned that ``bona fide'' technical interchanges exist outside of 
the contractor's controls and that the proposed rule penalizes 
contractors without an ``ARDEC like'' agency as their customer.
    Response: DoD anticipates that defense contractors will pursue IR&D 
projects intended to advance their ability to develop and deliver a 
superior and more competitive product to the warfighter. The 
requirement to hold a technical interchange is not a de facto approval 
process and will not favor one company over another. These technical 
interchanges are informal engagements designed to promote transparency, 
communication, and dialogue between IR&D participants and DoD. The 
intended outcome is to ensure that both IR&D performers and their 
potential DoD customers have sufficient awareness of each other's 
efforts and to provide industry with some feedback on the relevance of 
proposed and completed IR&D work. Consistent with that objective, the 
rule requires only that a technical interchange take place and that the 
date of the interchange and name of the DoD personnel contacted be 
reported to the defense innovation marketplace.
3. Existing Regulations and Practices
    Comment: One respondent stated that the rule is not necessary and 
that the current text at DFARS 231.205-18 is sufficient. Another 
respondent questioned the proposed rule's statement that ``there are no 
known significant approaches to the rule that would meet the 
requirements'' when agencies are already successfully holding voluntary 
technical interchanges that are achieving the regulation's goals.
    Response: The existing language at DFARS 231.205-18 does not 
include a requirement for technical interchanges. These technical 
interchanges are key to ensuring that both IR&D performers and their 
potential DoD customers have sufficient awareness of each other's 
effort. The fact that voluntary technical interchanges already exist, 
and are successfully achieving the regulation's goals, is consistent 
with the overall approach to the rulemaking effort.
4. Adverse Impact on Innovation
    Comment: Several respondents stated that the proposed rule will 
adversely impact innovative ideas. Another respondent cautioned that 
the rule will create a barrier to innovation and entry to the 
marketplace.
    Response: DoD believes that this rule supports and promotes 
innovative ideas and technologies, and will incentivize entry into the 
marketplace by ensuring that IR&D performers and their potential DoD 
customers have sufficient awareness of each other's efforts and that 
DoD can provide industry with feedback on the relevance of proposed and 
completed IR&D work.
5. Cost/Administrative Burden
    Comment: A number of respondents stated that the rule will cost 
taxpayers more. One respondent stated that the rule will impose an 
administrative burden on contractors, administrative contracting 
officers (ACOs), and DoD personnel. Another respondent expressed 
concern with the significant costs associated with planning and 
conducting technical interchanges and the costs accrued prior to the 
technical interchange.
    Response: While acknowledging that this rule imposes a slight 
administrative burden on contractors, ACOs, and DoD personnel, such 
burdens are overshadowed by the net benefit of ensuring that IR&D 
performers and their potential DoD customers have sufficient awareness 
of each other's efforts and

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that DoD can provide industry with feedback on the relevance of 
proposed and completed IR&D work. Moreover, the long-term priorities 
outlined in Better Buying Power 3.0 are a strategic imperative for DoD.
6. Process Issues and Practicality
    Comment: A number of respondents stated that the rule will create 
an unnecessary bureaucracy, citing concerns that the rule will create a 
``bottleneck'' that will slow down industry IR&D efforts and require 
the shifting of DoD technical resources to evaluate the IR&D projects 
and respond to contractors. The respondents claimed that the 
requirement to conduct and document the interchange of information 
between contractor and DoD personnel with respect to IR&D projects 
prior to their commencement is not practical.
    Response: The rule does not establish a requirement for DoD to 
evaluate or approve IR&D projects; rather, the rule requires 
contractors to communicate new IR&D efforts to appropriate DoD 
personnel via a technical interchange prior to the initiation of the 
investment. The requirement for technical interchanges is an extension 
of DoD's long-standing policy to engage in robust communication with 
all entities supporting the defense industrial base and promote 
transparent engagement with IR&D participants regarding research and 
development, including basic research, applied research, and 
development. This policy is outlined in DoD Instruction 3204.01, ``DoD 
Policy for Oversight of Independent Research and Development (IR&D).'' 
The technical interchanges are intended to be informal communications 
between IR&D participants and DoD. Their objective is to ensure that 
both IR&D performers and their potential DoD customers have sufficient 
awareness of each other's efforts and to provide industry with some 
feedback on the relevance of proposed and completed IR&D work. Note, 
the requirement for including a summary of results in the annual update 
on IR&D projects is removed in the final rule, thus easing any 
administrative burden.
7. Statutory Concerns
    Comment: A number of respondents stated that the rule is in 
violation of existing statute and recreates the historic DoD technical 
reviews rejected by Congress.
    Response: This rule is consistent with 10 U.S.C 2372 subsection 
(a), Regulations, which states that the Secretary of Defense shall 
prescribe regulations governing the payment, by the Department of 
Defense, of expenses incurred by contractors for independent research 
and development and bid and proposal (B&P) costs. To that extent, 
subsection (c), Additional Controls, states that the regulations 
prescribed pursuant to subsection (a) may include implementation of 
regular methods for transmission from contractors to the Department of 
Defense, in a reasonable manner, of information regarding progress by 
the contractor on the contractor's independent research and development 
programs.
8. DoD Responsiveness
    Comment: A number of respondents expressed concern with DoD 
responsiveness to requests for technical interchanges, citing that the 
rule fails to outline DoD's obligations and unfairly saddles 
contractors with the full consequence of DoD's failure to take part in 
a technical interchange. One respondent is concerned that the proposed 
rule creates practical, time, resource, and data disclosure challenges 
for conducting technical interchanges, and that DoD Components will not 
have an adequate number of personnel designated to conduct the 
technical interchanges in the time mandated. Another respondent 
questioned the recourse contractors will have if DoD personnel refuse 
to engage.
    Response: To assist contractors in ensuring that technical 
interchanges take place in a timely manner, the rule has been revised 
to identify the primary DoD focal point for technical interchanges as 
OASD R&E. Contact information for this office is available at http://www.acq.osd.mil/rd/contacts/. If a Contractor experiences difficulties 
scheduling a technical interchange, or does not have a point of contact 
for the technical interchange, the contractor may contact OASD R&E.
9. Protection of Data
    Comment: Several respondents were concerned about reporting and 
protection of proprietary and classified information.
    Response: This rule merely requires reporting of the name of the 
technical or operational DoD Government employee and the date of the 
technical interchange. The requirement to include a summary of results 
of the technical interchange in the annual update is removed in the 
final rule. There is an existing requirement at DFARS 231.205-
18(c)(iii)(C) for submission of project summaries and annual updates to 
the DTIC Web site. It remains DoD policy to protect proprietary 
information in accordance with applicable laws and agency regulations. 
Firms have discretion regarding presentation of information they regard 
as sensitive when they submit project summaries; however, only 
unclassified IR&D project summary information should be provided. Both 
database screens and printouts will be marked ``Proprietary.'' Any 
markings on attachments provided by a contractor will not be altered.
    Adequate controls are in place to protect information from 
compromise. It is DoD policy to protect national security information 
in accordance with national-level policy issuances. In accordance with 
DoD Instruction 5200.01, DoD Information Security Program and 
Protection of Sensitive Compartmented Information, DoD shall--
     Identify and protect national security information and 
controlled unclassified information (CUI) in accordance with national 
level policy issuances.
     Promote information sharing, facilitate judicious use of 
resources, and simplify management through implementation of uniform 
and standardized processes.
     Protect CUI from unauthorized disclosure by appropriately 
marking, safeguarding, disseminating, and destroying such information.
10. Additional Information
    Comment: One respondent stated that DFARS language should be added 
stating that the Government may require additional information from the 
contractor.
    Response: The objective of the technical interchanges is to ensure 
that both IR&D performers and their potential DoD customers have 
sufficient awareness of each other's efforts and to provide industry 
with some feedback on the relevance of proposed and completed IR&D 
work. Within that framework, the DoD personnel involved in technical 
interchanges will not be seeking additional information, i.e., formal 
documentation from the contractor.
11. Reporting Burden
    Comment: One respondent stated that the proposed rule inaccurately 
suggests that it does not require changes to reporting or 
recordkeeping. Another respondent stated that the rule adds to the 
contractor's existing reporting burden.
    Response: As stated in the proposed rule, the impact of this rule 
on a contractor's reporting burden is negligible. Currently, 
contractors are required to (1) report IR&D projects to the Defense 
Technical Information

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Center (DTIC) using the DTIC's online IR&D database and (2) update 
these inputs at least annually and when the project is completed. This 
rule merely changes the web address for submission of this report and 
requires major contractors to include in the report the name of the 
Government employee with which a technical interchange was held prior 
to initiation of the IR&D effort and the date of such interchange. In 
addition, the requirement to include a summary of results in the annual 
update on IR&D projects is removed in the final rule.
12. DoD Government Employee
    Comment: One respondent stated that the rule does not specify the 
needed level of detail for the technical interchange or ``who'' in DoD 
should receive the technical information. Another respondent is 
concerned that the proposed rule does not adequately define the term 
``DoD Government employee.''
    Response: In accordance with the rule, contractors shall engage in 
technical interchanges with a technical or operational DoD Government 
employee who is informed of related ongoing and future potential 
interest opportunities. If the contractor does not have a point of 
contact for the technical interchange, the contractor may contact OASD 
R&E. Contact information for OASD R&E can be found at http://www.acq.osd.mil/rd/contacts/.
13. Advance Approval Requirement
    Comment: One respondent recommended eliminating the DoD advance 
approval requirement of contractor's IR&D efforts.
    Response: The rule does not contain a requirement for DoD to 
approve a contractor's IR&D efforts in advance.
14. Administrative Guidance/Standards for Technical Interchanges
    Comment: One respondent asked if DoD will write additional 
administrative rules to outline DoD's obligation to participate in 
technical interchanges. Another respondent suggested that DoD adopt 
administrative rules, best practices, and guidance to counter the 
inconsistent support among DoD agencies and provide uniformity to the 
technical interchange process.
    Response: The rule is intentionally crafted to allow informal 
technical interchanges to ensure that IR&D performers and their 
potential DoD customers have sufficient awareness of each other's 
efforts and that DoD can provide industry with feedback on the 
relevance of proposed and completed IR&D work.
15. Cost Allowability
    Comment: One respondent recommended DoD reconsider the prerequisite 
for a determination of allowability. Another recommended the rule 
include a proviso allowing costs expended before the effective date of 
the final rule. One respondent states that DoD should not make 
allowability of IR&D costs contingent on the timing of technical 
exchange meetings. One respondent was concerned that the proposed rule 
restricts the allowability of costs related to mandatory technical 
interchanges; specifically, the proposed rule states that the 
contractor must engage in a technical interchange ``before IR&D costs 
are generated.'' Another respondent was concerned of the lack of 
specificity regarding verification for purposes of allowability 
determinations.
    Response: The requirement to determine the allowability of IR&D 
costs is a preestablished requirement in DFARS 231.205-18(c)(iii)(C), 
which sets forth the requirement that for a contractor's annual IR&D 
costs to be allowable, the IR&D projects generating the costs must be 
reported to DTIC using the DTIC's online input form. This rule merely 
adds the requirement that contractors also engage in a technical 
interchange with a technical or operational DoD Government employee, 
and record the name of the employee and the date the technical 
interchange occurred using DTIC's online form. The rule applies to IR&D 
projects initiated in the contractor's fiscal year 2017 and later. 
However, as with all DFARS rules, unless otherwise stated, the rule is 
only effective upon publication. Therefore, IR&D costs incurred prior 
to the effective date of this rule are not subject to the requirements 
of this rule.
16. Dollar Threshold
    Comment: Two respondents suggested DoD establish a dollar threshold 
for requiring technical interchanges.
    Response: The requirements of this rule only apply to major 
contractors. Establishing an IR&D project dollar threshold would 
require speculative estimate of the IR&D project costs and, as such, 
would be impossible to administer, thus defeating the purpose of the 
technical interchange.
17. Cost Bases and Pools
    Comment: Two respondents stated that the rule will require 
contractors to establish multiple accounting costs bases and pools.
    Response: This rule does not impose new cost accounting 
requirements. The IR&D cost principle at Federal Acquisition Regulation 
(FAR) 31.205-18(b) states, ``The requirements of 48 CFR 9904.420, 
Accounting for independent research and development costs and B&P 
costs, are incorporated in their entirety. . . .'' The cost accounting 
standard at 48 CFR 9904.420-40, Fundamental requirement, paragraph (a) 
states, ``The basic unit for identification and accumulation of IR&D 
and B&P costs shall be the individual IR&D or B&P project.''
18. Annual Briefings/Frequency
    Comment: A number of respondents questioned the frequency of the 
technical interchanges and whether they will be required annually. One 
respondent stated that many IR&D projects span several years, changing 
and evolving through the process, and that it is not clear whether 
these projects would need to be stopped and briefed annually. One 
respondent noted that one of the benefits of contractor IR&D is the 
ability to rapidly change direction as result of discovery or in 
response to a shifting market or defense environment.
    Response: There is no requirement to brief IR&D projects annually. 
The rule requires the technical interchange to occur at the onset of 
the IR&D project, prior to generating any costs, for the annual IR&D 
costs to be considered allowable.

C. Other Changes

    This final rule includes the following technical amendments:
    1. The proposed paragraph regarding contractors that do not meet 
the threshold of major contractor is renumbered as DFARS 231.205-
18(c)(iv) in the final rule.
    2. At DFARS 242.771-3, the entity responsible for a regular method 
for communication is changed from the ``Director, Defense Research and 
Engineering (USD(A&T)DDR&E)'' to the ``Office of the Assistant 
Secretary of Defense for Research and Engineering (OASD R&E).''

III. Applicability to Contracts at or Below the Simplified Acquisition 
Threshold and for Commercial Items, Including Commercially Available 
Off-the-Shelf Items

    This rule does not add any new provisions or clauses or impact any 
existing provisions or clauses.

IV. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits

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(including potential economic, environmental, public health and safety 
effects, distributive impacts, and equity). E.O. 13563 emphasizes the 
importance of quantifying both costs and benefits, of reducing costs, 
of harmonizing rules, and of promoting flexibility. This is not a 
significant regulatory action and, therefore, was not subject to review 
under section 6(b) of E.O. 12866, Regulatory Planning and Review, dated 
September 30, 1993. This rule is not a major rule under 5 U.S.C. 804.

V. Regulatory Flexibility Act

    A final regulatory flexibility analysis has been prepared 
consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., 
and is summarized as follows:
    The objective of this final rule is to (1) ensure that both 
independent research and development (IR&D) performers and their 
potential DoD customers have sufficient awareness of each other's 
efforts and (2) provide industry with feedback on the relevance of 
proposed and completed IR&D work.
    There were no significant issues raised by the public in response 
to the initial regulatory flexibility analysis.
    DoD does not expect this final rule to have a significant economic 
impact on a substantial number of small entities, because DFARS 
231.205-18(c)(iii) applies only to major contractors, which are defined 
as those whose covered segments allocated a total of more than $11 
million in IR&D and bid and proposal costs to covered contracts during 
the preceding fiscal year. The final rule requires major contractors to 
communicate proposed new IR&D efforts to DoD personnel in a technical 
interchange prior to the initiation of such investments.
    This rule impacts existing reporting and recordkeeping requirements 
in a very minor way. Only one element is being added to the existing 
reporting requirement to require major contractors to include the name 
of the DoD employee with which a technical interchange was held and the 
date of such interchange.
    There are no known significant alternatives to the rule. The rule 
impacts major contractors and, as such, will have minimal impact on 
small entities.

VI. Paperwork Reduction Act

    The final rule affects the information collection requirements at 
Defense Federal Acquisition Regulation Supplement (DFARS) 231.205-18, 
currently approved under the Office of Management and Budget (OMB) 
Control Number 0704-0483, entitled ``Independent Research and 
Development Technical Descriptions,'' in accordance with the Paperwork 
Reduction Act (44 U.S.C. chapter 35); however, the impact of this rule 
is negligible. Currently, contractors are required to (1) report IR&D 
projects to DTIC using the DTIC's online IR&D database and (2) update 
these inputs at least annually and when the project is completed. This 
rule merely changes the web address for submission of this report and 
requires major contractors to include in the report the name of the DoD 
Government employee with which a technical interchange was held and the 
date of such interchange.

List of Subjects in 48 CFR Parts 231 and 242

    Government procurement.

Jennifer L. Hawes,
Editor, Defense Acquisition Regulations System.

    Therefore, 48 CFR parts 231 and 242 are amended as follows:

0
1. The authority citation for 48 CFR parts 231 and 242 continues to 
read as follows:

    Authority:  41 U.S.C. 1303 and 48 CFR chapter 1.

PART 231--CONTRACT COST PRINCIPLES AND PROCEDURES

0
2. Amend section 231.205-18 by--
0
a. Revising paragraph (c)(iii)(C);
0
b. Redesignating paragraphs (c)(iv) and (v) as paragraphs (c)(v) and 
(vi), respectively; and
0
c. Adding a new paragraph (c)(iv).
    The revision and addition read as follows:


231.205-18   Independent research and development and bid and proposal 
costs.

* * * * *
    (c) * * *
    (iii) * * *
    (C) For annual IR&D costs to be allowable--
    (1) The IR&D projects generating the costs must be reported to the 
Defense Technical Information Center (DTIC) using the DTIC's online 
input form and instructions at http://www.defenseinnovationmarketplace.mil/;
    (2) The inputs must be updated at least annually and when the 
project is completed;
    (3) Copies of the input and updates must be made available for 
review by the cognizant administrative contracting officer (ACO) and 
the cognizant Defense Contract Audit Agency auditor to support the 
allowability of the costs; and
    (4) For IR&D projects initiated in the contractor's fiscal year 
2017 and later, as a prerequisite for the subsequent determination of 
allowability, the contractor shall--
    (i) Engage in a technical interchange with a technical or 
operational DoD Government employee before IR&D costs are generated so 
that contractor plans and goals for IR&D projects benefit from the 
awareness of and feedback by a DoD Government employee who is informed 
of related ongoing and future potential interest opportunities. If the 
contractor does not have a point of contact for the technical 
interchange, the contractor may contact the Office of the Assistant 
Secretary of Defense for Research and Engineering (OASD R&E). Contact 
information for OASD R&E can be found at http://www.acq.osd.mil/rd/contacts/; and
    (ii) Use the online input form for IR&D projects reported to DTIC 
to document the technical interchange, which includes the name of the 
DoD Government employee and the date the technical interchange 
occurred.
    (iv) Contractors not meeting the threshold of a major contractor 
are encouraged to use the DTIC online input form to report IR&D 
projects to provide DoD with visibility into the technical content of 
the contractors' IR&D activities.
* * * * *

PART 242--CONTRACT ADMINISTRATION AND AUDIT SERVICES


242.771-3   [Amended]

0
3. In section 242.771-3, amend paragraph (d) introductory text by 
removing ``Director, Defense Research and Engineering 
(OUSD(AT&L)DDR&E)'' and adding ``Office of the Assistant Secretary of 
Defense for Research and Engineering (OASD R&E)'' in its place.

[FR Doc. 2016-26366 Filed 11-3-16; 8:45 am]
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