[Federal Register Volume 81, Number 214 (Friday, November 4, 2016)]
[Proposed Rules]
[Pages 78015-78019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-26377]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 202, 215, 225, and 252

[Docket DARS-2015-0027]
RIN 0750-AI59


Defense Federal Acquisition Regulation Supplement: Offset Costs 
(DFARS Case 2015-D028)

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

ACTION: Proposed rule.

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SUMMARY: DoD is issuing a proposed rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to implement a section of the 
National Defense Authorization Act for Fiscal Year 2016 related to 
costs associated with indirect offsets under foreign military sales 
agreements.

DATES: Comments on the proposed rule should be submitted in writing to 
the address shown below on or before January 3, 2017, to be considered 
in the formation of a final rule.

ADDRESSES: Submit comments identified by DFARS Case 2015-D028, using 
any of the following methods:
    [cir] Federal eRulemaking Portal: http://www.regulations.gov. 
Search for ``DFARS Case 2015-D028.'' Select ``Comment Now'' and follow 
the instructions provided to submit a comment. Please include ``DFARS 
Case 2015-D028'' on any attached documents.
    [cir] Email: [email protected]. Include DFARS Case 2015-D028 in 
the subject line of the message.
    [cir] Fax: 571-372-6094.
    [cir] Mail: Defense Acquisition Regulations System, Attn: Mr. Mark 
Gomersall, OUSD(AT&L)DPAP/DARS, Room 3B941, 3060 Defense Pentagon, 
Washington, DC 20301-3060.
    Comments received generally will be posted without change to http://www.regulations.gov, including any personal information provided. To 
confirm receipt of your comment(s), please check www.regulations.gov, 
approximately two to three days after submission to verify posting 
(except allow 30 days for posting of comments submitted by mail).

FOR FURTHER INFORMATION CONTACT: Mr. Mark Gomersall, telephone 571-372-
6099.

SUPPLEMENTARY INFORMATION: 

I. Background

    This proposed rule expands on interim rule guidance and 
incorporates the requirements of section 812 of the National Defense 
Authorization Act (NDAA) for Fiscal Year (FY) 2016.
    DoD published an interim rule in the Federal Register (80 FR 31309) 
on June 2, 2015. The comment period closed on August 3, 2015. The 
interim rule revised DFARS 225.7303-2, Cost of Doing Business with a 
Foreign Government or an International Organization, by providing 
guidelines to contracting officers when an indirect offset is a 
condition of a foreign military sales (FMS) acquisition. Specifically, 
the interim rule set forth that all offset costs that involve benefits 
provided by the U.S. defense contractor to the FMS

[[Page 78016]]

customer that are unrelated to the item being purchased under the 
Letter of Offer and Acceptance (LOA) (indirect offset costs) are deemed 
reasonable for purposes of FAR part 31 with no further analysis 
necessary on the part of the contracting officer, provided that the 
U.S. defense contractor submits to the contracting officer a signed 
offset agreement or other documentation showing that the FMS customer 
has made the provision of an indirect offset of a certain dollar value 
a condition of the FMS acquisition. FMS customers are placed on notice 
through the LOA that indirect offset costs are deemed reasonable 
without any further analysis by the contracting officer.

II. Discussion and Analysis

    DoD reviewed the public comments submitted in response to the 
interim rule in the development of this proposed 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 Significant Changes

    Section 812 of the NDAA for FY 2016 amended 10 U.S.C. 2306a(b)(1) 
to state that submission of certified cost or pricing data shall not be 
required in the case of a contract, a subcontract, or modification of a 
contract or subcontract to the extent such data--
    (i) Relates to an offset agreement in connection with a contract 
for the sale of a weapon system or defense-related item to a foreign 
country or foreign firm; and
    (ii) Does not relate to a contract or subcontract under the offset 
agreement for work performed in such foreign country or by such foreign 
firm that is directly related to the weapon system or defense-related 
item being purchased under the contract.
    This proposed rule amends DFARS 215.403-1(b), Exceptions to 
Certified Cost or Pricing Data Requirements, and adds DFARS clause 
252.215-70XX, Requirements for Certified Cost or Pricing Data for 
Foreign Military Sales Indirect Offset Agreements, to incorporate the 
revisions implemented in section 812.
    Additionally, this proposed rule relocates the language at DFARS 
Procedures, Guidance, and Information (PGI) 225.7303-2(a)(3) into DFARS 
225.7303-2(a)(3) for clarity. In response to public comments, the rule 
also adds: (1) Definitions of ``offset'' and ``offset costs'' at 
202.101, and (2) the appropriate reference to Federal Acquisition 
Regulation (FAR) part 15 and deletes the phrase ``of a certain dollar 
value'' in DFARS 225.7303-2(a)(3).

B. Analysis of Public Comments

    Comment: One respondent is supportive of the U.S. Government's goal 
to add clarity on the evaluation of offset costs within an FMS 
contract, and concurs with the U.S. Government's determination in this 
rule that indirect offsets are to be deemed reasonable for the purposes 
of FAR parts 15 and 31.
    Response: Noted.
    Comment: One respondent recommended that the determination of 
reasonableness in this rule be made applicable to all offset 
agreements, both ``direct'' and ``indirect.''
    Response: DFARS 225.7301(b) requires that the U.S. Government 
conduct FMS acquisitions under the same acquisition and contract 
management procedures used for other defense acquisitions. This 
requires the contracting officer to adhere to FAR regulations 
concerning the negotiation of contracts and subcontracts (FAR part 15) 
and contract cost principles (FAR part 31), and thus attest to the 
reasonableness of FMS contract prices. Contracting officers must follow 
these regulations even though no DoD-appropriated funds are being used 
to pay for the effort. While DoD contracting officers have no insight 
to pricing of the indirect offset, and shall not encourage, enter 
directly into, or commit U.S. companies to any offset arrangement in 
connection with the sale of defense goods or services to foreign 
governments, it is reasonable to maintain the requirement that 
contracting officers determine that prices are fair and reasonable for 
direct offsets, as they directly tie to the FMS end item(s).
    Comment: One respondent recommended that the rule include 
definitions of direct and indirect offsets. The respondent recommended 
that the DFARS define indirect offset as ``an offset transaction 
unrelated to the article(s) or service(s) exported or to be exported 
pursuant to the military export sales agreement.''
    Response: A definition of offsets is provided at DFARS 202.101 for 
clarity.
    Comment: A number of respondents suggested making the rule 
applicable to FAR part 15, as well as FAR part 31.
    Response: The rule is clarified to state that indirect offset costs 
are deemed reasonable for purposes of FAR part 15 as well as FAR part 
31.
    Comment: One respondent requested that the rule clarify what forms 
of documentation will be acceptable to the contracting officer. 
Frequently the contractor will be able to document the legal, 
contractual or policy requirement for offsets (e.g., published 
guidelines) and infer the dollar value. However, a signed, specific 
offset agreement rarely predates the LOA. Further, a country's offset 
guidelines may allow for both direct and indirect projects, but the 
defense contractor and foreign government might not decide on the 
specific mix of direct versus indirect projects until after the LOA is 
signed. As such, this requirement could effectively negate much of the 
benefit of the rule. The respondent suggested that the rule clarify 
acceptable documentation as a ``signed offset agreement or other 
documentation, which may include, but is not limited to, the FMS 
customer's offset guidelines, requirements, regulations or law, policy, 
or historical requirements.''
    Response: While the costs associated with such indirect offset 
agreements are deemed reasonable for purposes of FAR parts 15 and 31 
with no further analysis necessary on the part of the contracting 
officer, the U.S. defense contractor must still provide evidence of a 
signed offset agreement or other documentation showing that the FMS 
customer has made the provision of an indirect offset a condition of 
the FMS acquisition to support this determination. While this rule does 
not define the specific documentation required, such documentation must 
support the specific FMS acquisition.
    Comment: One respondent stated that often the type of offset 
projects to be implemented will not yet be specified, and the dollar 
value associated with an offset budget in an FMS contract is only an 
estimate. The respondent recommended that the rule be revised to 
clarify how contracting officers will consider offset costs when the 
exact nature and value of the individual projects that will help 
fulfill the overall offset obligation remains to be negotiated and 
finalized between the contractor and the foreign customer at the time 
of submission of the proposal.
    Response: This is precisely why this rule is necessary. DoD 
contracting officers are not provided the information necessary to 
negotiate cost or price of the indirect offsets, particularly with 
respect to price reasonableness determinations. Therefore, indirect 
offset costs are deemed reasonable for purposes of FAR parts 15 and 31 
with no further analysis necessary on the part of the contracting 
officer.
    Comment: One respondent suggested that a sentence stating that ``if 
the FMS customer requires additional information on offsets, they 
should discuss directly with the seller'' be

[[Page 78017]]

inserted to emphasize that all offset obligations/projects are 
negotiated between the contractor and the foreign customer.
    Response: Since a determination of fair and reasonable pricing is 
established for indirect offset costs, the statement that FMS customers 
are placed on notice through the LOA that indirect offset costs are 
deemed reasonable without any further analysis by the contracting 
officer is included in DFARS 225.7303-2(a)(3).
    Comment: One respondent stated that by deeming indirect offset 
costs to be reasonable, the rule appears to conflict with FAR 31.201-
3(a), which states, ``No presumption of reasonableness shall be 
attached to the incurrence of costs by a contractor.'' The apparent 
conflicting language may create confusion in the field as contracting 
officers attempt to execute the FAR and DFARS rules and guidance 
regarding reasonableness. The respondent recommended amending FAR 
31.201-3(a) to acknowledge the existence of a DFARS exception to the 
rule of no presumption of reasonableness with respect to indirect 
offset costs.
    Response: It is unnecessary and inappropriate to amend the FAR to 
acknowledge the existence of DFARS supplementary language. The FAR 
System consists of the FAR, which is the primary document, and agency 
acquisition regulations that implement or supplement the FAR. The DFARS 
implements or supplements the FAR to incorporate DoD policies, 
procedures, contract clauses, solicitation provisions, and forms that 
govern the contracting process or otherwise control the relationship 
between DoD and contractors or prospective contractors. To include a 
FAR reference for each occurrence of an agency supplement to the FAR 
would be unwieldy. Further, since this is a DFARS rule, making such a 
reference in the FAR would be out of scope for this rule.
    Comment: One respondent questioned whether the contractor's costs 
associated with administering offset agreements are also deemed 
reasonable for the purposes of FAR part 31 with no further analysis by 
the contracting officer.
    Response: Unlike the specific indirect offset costs, contracting 
officers do have insight into the administration costs associated with 
direct and indirect offset agreements. Therefore, costs associated with 
administering indirect offset agreements are not deemed reasonable 
without further analysis under this rule.
    Comment: One respondent stated that offset agreements often include 
values associated with ``offset credits'' that may or may not be 
representative of the costs of the supplies or services being acquired 
or performed. The respondent suggested clarifying the meaning of the 
term ``certain dollar value'' and questioned whether that term refers 
to the ``offset credit'' value that is included in the offset 
agreement, or whether the offset agreement needs to set out the 
anticipated cost of the actual supplies or services being contracted 
for under the FMS contract.
    Response: The phrase ``of a certain dollar value'' has been removed 
as a clarifier to the documentation requirements to indicate the 
existence of an indirect offset agreement as a condition of an FMS 
acquisition.

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

    This rule proposes to create a new clause: DFARS 252.215-70XX, 
Requirements for Certified Cost or Pricing Data for Foreign Military 
Sales Indirect Offset Agreements. DoD plans not to apply this clause to 
contracts at or below the simplified acquisition threshold or to 
commercial items, including commercially available off-the-shelf items.

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 (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

    DoD does not expect this rule 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. However, an initial 
regulatory flexibility analysis has been performed, and is summarized 
as follows:
    This rule amends the DFARS to clarify requirements related to 
indirect offset costs associated with Foreign Military Sales offset 
agreements.
    The objective of this rule is to expand on the DFARS interim rule 
published in the Federal Register (80 FR 31309) on June 2, 2015, and 
implement the requirements of section 812 of the National Defense 
Authorization Act for Fiscal Year 2016.
    DoD does not expect this rule 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 indirect 
offset agreements are not incorporated into FMS contracts with small 
entities and the DFARS amendments merely clarify that contracting 
officers are not responsible for making a determination of price 
reasonableness for indirect offset agreements for which they have no 
purview.
    This rule does not add any reporting or recordkeeping requirements. 
The rule does not duplicate, overlap, or conflict with any other 
Federal rules. There are no known significant alternatives to this 
rule.
    DoD invites comments from small business concerns and other 
interested parties on the expected impact of this rule on small 
entities.
    DoD will also consider comments from small entities concerning the 
existing regulations in subparts affected by this rule in accordance 
with 5 U.S.C. 610. Interested parties must submit such comments 
separately and should cite 5 U.S.C 610 (DFARS Case 2015-D028), in 
correspondence.

VI. Paperwork Reduction Act

    The rule does not contain any information collection requirements 
that require the approval of the Office of Management and Budget under 
the Paperwork Reduction Act (44 U.S.C. chapter 35).

List of Subjects in 48 CFR Parts 202, 215, 225, and 252

    Government procurement.

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

    Therefore, 48 CFR parts 202, 215, 225, and 252 are proposed to be 
amended as follows:

0
1. The authority citation for parts 202, 215, 225, and 252 continues to 
read as follows:

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

[[Page 78018]]

PART 202--DEFINITIONS OF WORDS AND TERMS

0
2. In section 202.101, add in alphabetical order definitions of 
``offset'' and ``offset costs'' to read as follows:


202.101   Definitions.

* * * * *
    Offset means a benefit or obligation agreed to by a contractor and 
a foreign government or international organization as an inducement or 
condition to purchase supplies or services pursuant to a foreign 
military sale (FMS). There are two types of offsets: Direct offsets and 
indirect offsets.
    (1) A direct offset involves benefits or obligations, including 
supplies or services, that are related to the item being purchased. For 
example, as a condition of a foreign military sale, the contractor may 
require or agree to permit the customer to produce in its country 
certain components or subsystems of the item being sold. Generally, 
direct offsets must be performed within a specified period, because 
they are integral to the deliverable of the FMS contract.
    (2) An indirect offset involves benefits, including supplies or 
services, that are unrelated to the item being purchased. For example, 
as a condition of a foreign military sale, the contractor may agree to 
purchase certain manufactured products, agricultural commodities, raw 
materials, or services required by the FMS customer, or may agree to 
build a school or road. Indirect offsets may be accomplished without a 
clearly defined period of performance.
    Offset costs means the costs to the contractor of providing any 
direct or indirect offsets required (explicitly or implicitly) as a 
condition of a foreign military sale.
* * * * *

PART 215--CONTRACTING BY NEGOTIATION

0
3. In section 215.403-1, revise paragraph (b) to read as follows:


215.403-1   Prohibition on obtaining certified cost or pricing data (10 
U.S.C. 2306a and 41 U.S.C. chapter 35).

    (b) Exceptions to certified cost or pricing data requirements. (i) 
Follow the procedures at PGI 215.403-1(b).
    (ii) Submission of certified cost or pricing data shall not be 
required in the case of a contract, subcontract, or modification of a 
contract or subcontract to the extent such data relates to an indirect 
offset.
* * * * *
0
4. In section 215.408, add paragraph (6) to read as follows:


215.408   Solicitation provisions and contract clauses.

* * * * *
    (6) Requirements for certified cost or pricing data for foreign 
military sales offset agreements. Use the clause at 252.215-70XX, 
Requirements for Certified Cost or Pricing Data for Foreign Military 
Sales Indirect Offset Agreements, in solicitations and contracts that 
contain the provision at FAR 52.215-20, Requirements for Certified Cost 
or Pricing Data and Data Other Than Certified Cost or Pricing Data, 
when it is reasonably certain that--
    (i) The contract is expected to include costs associated with an 
indirect offset; and
    (ii) The submission of certified cost or pricing data or data other 
than certified cost or pricing data will be required.

PART 225--FOREIGN ACQUISITION


225.7301   [Amended]

0
5. Amend section 225.7301 in paragraph (a) by removing ``defense 
articles'' and adding ``supplies'' in its place.
0
6. In section 225.7303-2, revise paragraph (a)(3) to read as follows:


225.7303-2   Cost of doing business with a foreign government or an 
international organization.

    (a) * * *
    (3) Offsets. For additional information see 225.7306.
    (i) An offset agreement is the contractual arrangement between the 
FMS customer and the U.S. defense contractor that identifies the offset 
obligation imposed by the FMS customer that has been accepted by the 
U.S. defense contractor as a condition of the FMS customer's purchase. 
These agreements are distinct and independent of the LOA and the FMS 
contract. Further information about offsets and LOAs may be found in 
the Defense Security Cooperation Agency (DSCA) Security Assistance 
Management Manual (DSCA 5105.38-M), chapter 6, paragraph 6.3.9. (http://samm.dsca.mil/chapter/chapter-6).
    (ii) A U.S. defense contractor may recover all costs incurred for 
offset agreements with a foreign government or international 
organization if the LOA is financed wholly with foreign government or 
international organization customer cash or repayable foreign military 
finance credits.
    (iii) The U.S. Government assumes no obligation to satisfy or 
administer the offset agreement or to bear any of the associated costs.
    (iv) Indirect offset costs are deemed reasonable for purposes of 
FAR parts 15 and 31 with no further analysis necessary on the part of 
the contracting officer, provided that the U.S. defense contractor 
submits to the contracting officer a signed offset agreement or other 
documentation showing that the FMS customer has made the provision of 
an indirect offset a condition of the FMS acquisition. FMS customers 
are placed on notice through the LOA that indirect offset costs are 
deemed reasonable without any further analysis by the contracting 
officer.
* * * * *

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
7. Add section 252.215-70XX to read as follows:


252.215-70XX   Requirements for Certified Cost or Pricing Data for 
Foreign Military Sales Indirect Offset Agreements.

    As prescribed in 215.408(6)(i), use the following clause:

Requirements for Certified Cost or Pricing Data for Foreign Military 
Sales Indirect Offset Agreements (Date)

    (a) Definition. As used in this clause--
    Offset means a benefit or obligation agreed to by a contractor 
and a foreign government or international organization as an 
inducement or condition to purchase supplies or services pursuant to 
a foreign military sale (FMS). There are two types of offsets: 
Direct offsets and indirect offsets.
    (1) A direct offset involves benefits or obligations, including 
supplies or services, that are related to the item being purchased. 
For example, as a condition of a foreign military sale, the 
contractor may require or agree to permit the customer to produce in 
its country certain components or subsystems of the item being sold. 
Generally, direct offsets must be performed within a specified 
period because they are integral to the deliverable of the FMS 
contract.
    (2) An indirect offset involves benefits, including supplies or 
services, that are unrelated to the item being purchased. For 
example, as a condition of a foreign military sale the contractor 
may agree to purchase certain manufactured products, agricultural 
commodities, raw materials, or services required by the FMS 
customer, or may agree to build a school or road. Indirect offsets 
may be accomplished without a clearly defined period of performance.
    (b) Exceptions from certified cost or pricing data requirements. 
Notwithstanding the requirements of Federal Acquisition Regulation 
(FAR) 52.215-20, Requirements for Certified Cost or Pricing Data and 
Data Other Than Certified Cost or Pricing Data, in the case of this 
contract or a subcontract, and FAR 52.215-21, Requirements for 
Certified Cost or Pricing Data and Data Other Than

[[Page 78019]]

Certified Cost or Pricing Data--Modifications, in the case of 
modification of this contract or a subcontract, submission of 
certified cost or pricing data will not be required to the extent 
such data relates to an indirect offset (10 U.S.C. 2306a(b)(1)).
    (End of clause)

[FR Doc. 2016-26377 Filed 11-3-16; 8:45 am]
 BILLING CODE 5001-06-P