[Federal Register Volume 83, Number 126 (Friday, June 29, 2018)]
[Rules and Regulations]
[Pages 30825-30829]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-14045]


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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: Final rule.

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SUMMARY: DoD is issuing a final 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 
(FMS) agreements and expand on the prior interim rule guidance related 
to FMS offset costs.

DATES: Effective June 29, 2018.

FOR FURTHER INFORMATION CONTACT: Mr. Mark Gomersall, telephone 571-372-
6176.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD published an interim rule in the Federal Register (80 FR 31309) 
on June 2, 2015, to amend the DFARS to state that all offset costs that 
involve benefits provided by the U.S. defense contractor to the FMS 
customer that are unrelated to the item being purchased under the 
Letter of Offer and Acceptance (LOA) (indirect offset costs) are deemed 
reasonable, 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.
    To expand on the interim rule guidance and incorporate the 
requirements of section 812 of the National Defense Authorization Act 
(NDAA) for Fiscal Year (FY) 2016, DoD

[[Page 30826]]

published a subsequent proposed rule in the Federal Register (81 FR 
78015) on November 4, 2016.
    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.

II. Discussion and Analysis

    One respondent submitted public comments in response to the 
proposed rule. 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 are provided as follows:

A. Summary of Significant Changes

    In addition to the interim rule revisions to DFARS 225.7303-2, Cost 
of doing business with a foreign government or an international 
organization, this final rule includes the proposed rule amendments to 
revise 215.403-1(b), Exceptions to certified cost or pricing data 
requirements, and adds clause 252.215-7014, Exception from Certified 
Cost or Pricing Data Requirements for Foreign Military Sales Indirect 
Offsets.
    In response to public comments, the definitions of ``direct 
offset'' and ``indirect offset'' have been revised, and the title of 
DFARS Clause 252.215-7014 has been revised.

B. Analysis of Public Comments

1. Definition of ``direct offsets''
    Comment: The respondent stated that the definition of ``direct 
offsets'' in the proposed rule is too broad to satisfy the statutory 
requirements, and leaves room for ambiguity in determining whether an 
offset requirement is indirect or direct. In some cases, there may be 
indirect offset projects that are related to the item being purchased, 
but not part of the FMS procurement itself, such as a maintenance 
facility for the item that is being offered. The definition for direct 
offsets should be limited to manufacturing or services performed by a 
foreign supplier to fulfill the specific FMS contract deliverable. For 
example, the respondent explained that FMS customers are increasingly 
interested in maintaining their aircraft throughout the lifecycle and 
are requesting projects from U.S. aerospace companies that involve 
maintenance, repair, overhaul, and simulation capability. Related 
products and services that are needed to operate, maintain, and/or 
sustain the item, but are not part of the scope or directly procured 
under the LOA, including training and maintenance activities, are not 
direct offsets.
    Moreover, although it is correct that direct offsets are 
``generally . . . performed within a specific period,'' this is not 
necessarily a distinguishing characteristic for a direct offset, and 
may lead to confusion. The respondent, however, recommended adding the 
clarifying phrase ``integral to the deliverable of the FMS contract'' 
in the definition, because it reinforces that direct offsets are 
directly related to the system offered in the LOA.
    Response: DoD concurs with the respondent's recommendation in part. 
The first sentence of the direct offset definition is revised to 
provide that a direct offset involves benefits or obligations, 
including supplies or services, that are directly related to the item 
being purchased and are integral to the deliverable of the FMS 
contract. However, the definition still states that, generally, direct 
offsets must be performed within a specific period, because they are 
integral to the deliverable of the FMS contract, to provide a bright 
line discriminator between direct and indirect offsets.
2. Definition of ``indirect offsets''
    Comment: The respondent recommended revising the definition of 
``indirect offsets'' to provide clarity for the contracting officers to 
identify indirect offsets and enable FMS customers to obtain the offset 
benefits they need without the additional cost and time of having the 
contractor propose and negotiate an offset program subject to Federal 
Acquisition Regulation (FAR) parts 15 and 31, thereby fulfilling the 
intention of section 812 of the NDAA for FY 2016. Foreign customers are 
increasingly looking for indirect offset projects that are not integral 
to the items being purchased in an LOA, but that may be related to the 
defense articles. Without revision to this definition, contracting 
officers could mistakenly view these indirect offset projects as direct 
offsets. In addition, offsets are not necessarily in fulfillment of an 
FMS contract. Since offsets are executed under a separate offset 
agreement, the offset customer is not always the same as the supply 
contract customer, and the offset authority may have different offset 
project priorities than the supply contract customer.
    Response: DoD concurs with the respondent's recommendation and has 
revised the definition of indirect offsets.
3. Definition of ``offset costs''
    Comment: The respondent recommended revising the definition of 
``offset costs.'' Generally, offsets are implemented in accordance with 
a foreign purchaser's national offset requirements. These requirements 
can differ from country to country, and not all offset transactions may 
be deemed to be required. Offsets are frequently agreed to in a 
contractual commitment and are not addressed explicitly in the LOA. 
Accordingly, the definition of offset costs should be modified to 
address these circumstances.
    Response: DoD disagrees with this recommendation. For offsets to be 
included in FMS contracts, they must be required (explicitly or 
implicitly) as a condition of foreign military sales.
4. Offset Agreements
    Comment: The respondent recommended removing the word 
``Agreements'' from the title for DFARS clause 252.215-7014. The 
distinction between direct and indirect offsets is typically made at 
the project level, not at the agreement level. An FMS customer may 
include requirements for both direct and indirect projects in a single 
offset agreement. A reference here to an Agreement is overbroad and is 
certain to cause confusion in the implementation.
    Response: DoD concurs with the respondent's recommendation and has 
revised the title of DFARS clause 252.215-7014, accordingly.
5. Appropriate Documentation
    Comment: The respondent believes that the administrative 
requirement for evidence to show that the FMS customer has ``made the 
provision of an indirect offset a condition of the FMS acquisition'' 
and that such evidence support the specific acquisition is unnecessary, 
onerous, and not responsive to statutory guidance provided in section 
812 of the NDAA for FY 2016.
    The respondent concurs with prior public comments to the interim 
rule which stated that, ``a country's offset guidelines may allow for 
both direct and indirect projects, but the defense contractor and 
foreign government might not decide on a specific mix of

[[Page 30827]]

direct versus indirect projects until after the LOA is signed. As such, 
this requirement could effectively negate much of the benefit of this 
rule.''
    The respondent explained that in practice, an offset agreement may 
not specify an indirect offset requirement, but rather the overall 
offset obligation that can be fulfilled with both direct and indirect 
offset projects. Moreover, many offset agreements do not require offset 
obligation percentages or minimum direct/indirect offset requirements. 
A country's offset requirements may also flow down to items (products 
or services) that are affiliated with sales that are being supplied by, 
but not limited to, Government-furnished equipment, or lower tier 
defense contractors. In such cases, a contractor may have no 
``evidence'' to provide of the requirement related to the specific 
acquisition other than the requirements outlined in the foreign law, 
regulation, policy, or other general guidance.
    The intent of section 812 of the NDAA for FY 2016 was to eliminate 
the need for an unnecessary and time-consuming review of offsets that 
are negotiated directly between the contractor and foreign customer. A 
combination of the ``FMS customer's offset guidelines, requirements, 
regulations or law, policy or historical requirements'' should be a 
sufficient showing of evidence for an offset requirement.
    The respondent recommended that contracting officers accept that 
the contractor has an indirect offset requirement, if so stated, since 
a contractor claiming an offset requirement where none exists would be 
subject to other laws and regulations governing such false claims.
    Response: It is not an unreasonable requirement for contractors to 
provide 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 as a condition 
for deeming indirect offset costs to be reasonable for purposes of FAR 
parts 15 and 31 with no further analysis necessary. Therefore, no 
revisions are necessary.
6. Administrative Costs
    Comment: The respondent believed that administration costs should 
not be distinguishable from other indirect costs for the purposes of 
this rule. As stated, ``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. . . .'' Similarly, section 812 of 
the NDAA for FY 2016 makes no such distinction between indirect offset 
administration costs and other costs.
    The respondent further stated that it is unclear what 
administration costs might be envisioned for further review. For 
example, travel and project execution costs might be deemed 
administrative costs. Since these costs would not be determined until 
the offset projects are defined, such costs might also not be 
determined until after the LOA is signed.
    The respondent explained that the intent of the statutory and 
regulatory guidance related to indirect offset costs was to ensure that 
contracting officers did not have to conduct reasonableness analysis in 
these instances. Contracting officers should not have a greater 
requirement to parse out indirect administration costs for which they 
have no greater knowledge and expertise than the indirect offset costs 
in total.
    The respondent suggested that the definitions for ``direct'' and 
``indirect'' offsets should provide sufficient clarification for 
contracting officers to ensure that the final rule implements the 
statutory requirement that those costs not directly related to the 
system or item being purchased under the LOA are not subjected to 
certified pricing requirements.
    Therefore, the respondent believed that it is not appropriate or 
necessary for a contracting officer to engage in cost reasonableness 
analysis for administration costs related to indirect offsets. The 
respondent recommended that the final rule should make clear that all 
indirect offset costs are deemed reasonable for the purposes of FAR 
parts 15 and 31 with no further analysis necessary on the part of the 
contracting officer, and that the rule applies to all indirect offset 
costs, including any administrative costs.
    Response: The definitions for ``direct'' and ``indirect'' offsets 
provides sufficient clarification for contracting officers to ensure 
that those costs not directly related to the item being purchased or 
integral to the deliverable of the FMS contract are not subjected to 
certified pricing requirements. No further clarification is required.

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

    This rule clarifies requirements related to costs associated with 
indirect offsets under Foreign Military Sales agreements. The revisions 
do not add any new burdens or impact applicability of clauses and 
provisions at or below the simplified acquisition threshold, or to 
commercial 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. Executive Order 13771

    This rule is not an E.O. 13771, Reducing Regulation and Controlling 
Regulatory Costs, regulatory action, because this rule is not 
significant under E.O. 12866.

VI. Regulatory Flexibility Act

    A final regulatory flexibility analysis has been performed and is 
summarized as follows:
    The objective of this rule is to incorporate the requirements of 
section 812 of the National Defense Authorization Act of 2016 to 
provide clarification to contracting officers when indirect offsets are 
a condition of an FMS acquisition. This rule revises DFARS 225.7303-2, 
``Cost of doing business with a foreign government or an international 
organization'' by adding paragraph (a)(3)(iii) to provide guidelines to 
contracting officers when an indirect offset is a condition of a 
Foreign Military Sales (FMS) acquisition. This rule specifically 
addresses indirect offsets as they are applied to the Defense Security 
Cooperation Agency's FMS cases. This rule is necessitated by the recent 
and foreseeable trend of increasing numbers and complexity of indirect 
offsets desired by DoD FMS customers.
    DoD administers FMS programs with partner nations to maintain and 
strengthen relationships with nations that if not nurtured through 
these partnerships may threaten national security. The Department's FMS 
program allows foreign customers to request, and pay for, through 
inclusion of the cost in the FMS Letter of Offer and Acceptance (LOA) 
and DoD contract, offsets that are directly related

[[Page 30828]]

to the FMS end items (i.e., ``direct offsets''), as well as offsets 
that are not directly related to the end item (i.e., ``indirect 
offsets'').
    DoD recognizes the need to have offsets embedded in DoD FMS 
contracts. However, the decision whether to engage in indirect offsets, 
and the responsibility for negotiating and implementing these offset 
arrangements, ultimately reside with the FMS customer and contractor(s) 
involved. Thus, the DoD contracting officer is not provided the 
information necessary to negotiate cost or price of the indirect 
offsets, particularly with respect to price reasonableness 
determinations pursuant to FAR part 15. This rule provides that under 
these circumstances, when the provision of an indirect offset is a 
condition of the FMS acquisition and provided that the U.S. defense 
contractor submits to the contracting officer an offset agreement or 
other substantiating documentation, those indirect offset costs are 
deemed reasonable for the purposes of FAR part 31.
    There were no significant issues raised by the public in response 
to the initial regulatory flexibility analysis.
    DoD does not expect this rule to have a significant impact on the 
small businesses that may be affected by this rule, because 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.
    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.
    There is no change to reporting or recordkeeping as a result of 
this rule. The rule does not duplicate, overlap, or conflict with any 
other Federal rules, and there are no known significant alternative 
approaches to the rule that would meet the requirements.

VII. 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.

Amy G. Williams,
Deputy, Defense Acquisition Regulations System.

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

0
1. The authority citation for 48 CFR parts 202, 215, 225, and 252 
continues to read as follows:

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

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 directly related to the item(s) being 
purchased and are integral to the deliverable of the FMS contract. 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 or obligations, including 
supplies or services that are not directly related to the specific 
item(s) being purchased and are not integral to the deliverable of the 
FMS contract. 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, or make an equity 
investment or grant of equipment required by the FMS customer, or may 
agree to build a school, road or other facility. Indirect offsets would 
also include projects that are related to the FMS contract but not 
purchased under said contract (e.g., a project to develop or advance a 
capability, technology transfer, or know-how in a foreign company). 
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 (7) to read as follows:


215.408   Solicitation provisions and contract clauses.

* * * * *
    (7) Use the clause at 252.215-7014, Exception from Certified Cost 
or Pricing Data Requirements for Foreign Military Sales Indirect 
Offsets, 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

0
5. 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

[[Page 30829]]

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
6. Add section 252.215-7014 to read as follows:


252.215-7014   Exception from Certified Cost or Pricing Data 
Requirements for Foreign Military Sales Indirect Offsets.

    As prescribed in 215.408(8), use the following clause:

Exception From Certified Cost or Pricing Data Requirements for Foreign 
Military Sales Indirect Offsets (JUN 2018)

    (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.
    (i) A direct offset involves benefits or obligations, including 
supplies or services that are directly related to the item being 
purchased and are integral to the deliverable of the FMS contract. 
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.
    (ii) An indirect offset involves benefits or obligations, 
including supplies or services that are not directly related to the 
specific item(s) being purchased and are not integral to the 
deliverable of the FMS contract. 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, or make an equity investment or grant of equipment 
required by the FMS customer, or may agree to build a school, road 
or other facility. Indirect offsets would also include projects that 
are related to the FMS contract but not purchased under said 
contract (e.g., a project to develop or advance a capability, 
technology transfer, or know-how in a foreign company). 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 Certified Cost or 
Pricing Data--Modifications, in the case of modification of this 
contract or a subcontract, submission of certified cost or pricing 
data shall 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. 2018-14045 Filed 6-28-18; 8:45 am]
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