[Federal Register Volume 88, Number 20 (Tuesday, January 31, 2023)]
[Rules and Regulations]
[Pages 6597-6600]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-01293]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 225, 231, and 242

[Docket DARS-2019-0039]
RIN 0750-AJ27


Defense Federal Acquisition Regulation Supplement: Treatment of 
Incurred Independent Research and Development Costs (DFARS Case 2017-
D018)

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 2017 that makes 
amendments regarding the treatment of independent research and 
development expenditures and requires the Defense Contract Audit Agency 
to provide an annual report to Congress on independent research and 
development and bid and proposal expenditures associated with awarded 
DoD contracts for the prior Government fiscal year.

DATES: Effective January 31, 2023.

FOR FURTHER INFORMATION CONTACT: Mr. David E. Johnson, telephone 202-
913-5764.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD published a proposed rule in the Federal Register at 86 FR 
53927 on September 29, 2021, to implement section 824 of the National 
Defense Authorization Act (NDAA) for Fiscal Year (FY) 2017 (Pub. L. 
114-328). Section 824 amends 10 U.S.C. 2372 (redesignated as 10 U.S.C. 
3762) to require that regulations may not infringe on the independence 
of a contractor to choose which technologies to pursue in its 
independent research and development (IR&D) program if the chief 
executive officer (CEO) of the contractor determines that IR&D 
expenditures will advance the needs of the Department of Defense for 
future technology and advanced capability. Section 824 also decouples 
IR&D and bid and proposal (B&P) costs by moving the language pertaining 
to B&P costs out of 10 U.S.C. 2372 and placing it in the new 10 U.S.C. 
2372a (redesignated as 10 U.S.C. 3763). This change ensures that 
regulations pertaining to B&P costs are separated from regulations 
pertaining to IR&D costs. Five respondents submitted public comments in 
response to the proposed rule.

II. Discussion and Analysis

    DoD reviewed the public comments in the development of the 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 Significant Changes From the Proposed Rule

    DoD removed the requirement to submit CEO determinations from the 
final rule, because the statute does not require this submission. DoD 
removed the proposed clause 252.242-70XX and its prescription from the 
final rule because they are unnecessary.

B. Analysis of Public Comments

    1. Support for the rule.
    Comment: One respondent expressed support for the rule.
    Response: DoD acknowledges the respondent's support for the rule.
    2. Requirement to make and submit CEO determinations.
    Comment: Several respondents commented on the requirement in the 
proposed rule for certain contractors to submit a statement that the 
contractor's CEO determined that the company's IR&D expenditures will 
advance the needs of DoD for future technology and advanced capability. 
In particular, one respondent commented that the statute does not 
actually require CEOs to make IR&D determinations as stated in the 
proposed rule. Two respondents commented that the submission 
requirement would likely overburden small businesses or nontraditional 
defense contractors. One respondent commented that the proposed rule 
lacks submission guidance for contractors that are not major 
contractors. One respondent expressed concern that IR&D cost 
allowability under the proposed rule might arbitrarily hinge on the 
form and manner of submission of the CEO determination rather than its 
substance.
    Response: DoD removed the requirement to submit a statement 
regarding CEO determinations from the final rule. DoD reviewed the 
statute and agreed that this requirement should be removed. Further, by 
removing the requirement to submit a statement regarding CEO 
determinations, the final rule does not tie cost allowability to 
submission of an affirmative statement regarding the CEO determination.
    3. Criterion for IR&D cost allowability.
    Comment: One respondent commented that the phrase ``advance the 
needs of DoD for future technology and advanced capability'' is 
undefined in the proposed rule despite being the criterion for IR&D 
cost allowability when reflected in a CEO determination. Several 
respondents commented variously that this criterion for cost 
allowability is impractical, ambiguous, subjective, or potentially 
restrictive.
    Response: The statute explicitly relates the CEO determination to 
DoD's communication of areas of need. Therefore, the language is 
retained in the final rule.
    4. Limiting applicability of the CEO determination within the rule 
to major contractors.
    Comment: A few respondents commented that any requirement under the 
rule for a CEO determination should be limited to major contractors as 
defined at DFARS 231.205-18(a).

[[Page 6598]]

    Response: The final rule clarifies that DFARS 231.205-18(c)(iii)(A) 
applies only to major contractors.
    5. Proposed clause 252.242-70XX.
    Comment: Several respondents commented on the clause at 252.242-
70XX in the proposed rule as well as the clause prescription. In 
particular, a few respondents commented that the DCAA reporting 
requirement reflected in statute, which is the basis for the proposed 
clause, is unnecessary because the information is already available and 
reported to the Government in contractor annual Final Indirect Cost 
Rate Proposals when required by FAR 52.216-7. A few respondents 
commented that the clause prescription appears overly broad. Several 
respondents commented that the reporting period covered by the clause 
should reflect the contractor's fiscal year rather than the 
Government's fiscal year. One respondent expressed concern that 
information submitted as required by the clause might be used for 
improper purposes. One respondent commented that the clause does not 
provide guidance to contractors that did not expend any IR&D funds. One 
respondent commented that the clause does not provide guidance 
regarding submission of classified information.
    Response: DoD removed the proposed clause at 252.242-70XX and its 
prescription from the final rule, because the proposed clause is not 
necessary for the Government to obtain the information required by 
statute.
    6. Retroactive application of the rule.
    Comment: A few respondents commented that the proposed rule as 
written would impermissibly entail retroactive application.
    Response: DoD amended the final rule to avoid retroactive 
application. In particular, DoD deleted proposed-rule language that 
required contractor action for IR&D projects beginning on or after 
October 1, 2017.
    7. CEO determination.
    Comment: Several respondents suggested the CEO's authority to make 
determinations ``that expenditures will advance the needs of the 
Department of Defense for future technology and advanced capability'' 
should be explicitly delegable in the final rule. Other respondents 
raised concerns regarding companies that do not have a ``chief 
executive officer.''
    Response: Regardless of formal title, the statute requires the 
determination to be made by the chief executive officer.
    8. Connection to contractor business systems.
    Comment: One respondent suggested that allowability of a 
contractor's IR&D costs could hinge on whether the contractor has an 
approved accounting system within the meaning of DFARS 252.242-7006, 
Accounting System Administration.
    Response: The Government retains the responsibility for making 
appropriate inquiries into the reasonableness of the costs submitted, 
even if an approved accounting system would presumably satisfy the 
requirement for allowability of cost. Such inquiries must follow 
routine audit procedures. Therefore, there is no need for changes to 
the rule based on this comment.
    9. Use of the word ``will'' in the rule.
    Comment: One respondent commented that use of the word ``will'' in 
the proposed rule regarding the CEO determination is impractical 
because the word ``will'' connotes knowledge of future outcomes, which 
is necessarily uncertain. The respondent suggests the phrase ``are 
reasonably expected to'' in lieu of the word ``will.''
    Response: DoD declines the suggestion because the word ``will'' 
aligns with the statutory requirement.
    10. Public reporting burden.
    Comment: One respondent commented that the Paperwork Reduction Act 
burden calculation for the proposed rule appears understated.
    Response: DoD has revisited the public reporting burden in light of 
the final rule that, as written, results in no additional public 
reporting burden, except the burden OMB has already approved.
    11. Deletion of the list of activities from DFARS 231.205-
18(c)(iii)(B).
    Comment: One respondent commented that the deletion in the proposed 
rule of the list at DFARS 231.205-18(c)(iii)(B) of activities of 
potential interest to DoD eliminates the need for the corresponding 
requirement in DFARS 242.771-3(a) for the administrative contracting 
officer to compare the IR&D projects uploaded into a Defense Technical 
Information Center (DTIC) website to the list. A few respondents 
commented that the list of activities, deleted by this rule, was useful 
and helpful to contractors.
    Response: Both the proposed rule and the final rule include the 
removal of the requirement for the administrative contracting officer 
to determine whether IR&D projects are of potential interest to DoD, 
which was at 242.771-3(a)(2). Additionally, deletion of the list of 
activities at DFARS 231.205-18(c)(iii)(B) is tied to a statutory 
change.
    12. Definition of ``major contractor.''
    Comment: One respondent commented that the definition of ``major 
contractor'' at DFARS 231.205-18(a) should be changed such that the 
relevant calculation includes only IR&D costs rather than the sum of 
IR&D costs and B&P costs.
    Response: This suggestion is outside the scope of this rule.

C. Other Changes

    Other changes to the final rule that are not based on public 
comment consist of minor edits, such as updating statutory references 
and replacing the term ``IR&D/B&P costs'' with the term ``IR&D costs 
and B&P costs.''

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

    This rule does not create any new solicitation provisions or 
contract clauses. It does not impact any existing solicitation 
provisions or contract clauses or their applicability to contracts at 
or below the SAT, for commercial services, or for commercial products 
(including COTS 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.

V. Congressional Review Act

    As required by the Congressional Review Act (5 U.S.C. 801-808) 
before an interim or final rule takes effect, DoD will submit a copy of 
the interim or final rule with the form, Submission of Federal Rules 
under the Congressional Review Act, to the U.S. Senate, the U.S. House 
of Representatives, and the Comptroller General of the United States. A 
major rule under the Congressional Review Act cannot take effect until 
60 days after it is published in the Federal Register. The Office of 
Information and Regulatory Affairs has determined that this rule is not 
a major rule as defined by 5 U.S.C. 804.

[[Page 6599]]

VI. 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:
    This rule implements section 824 of the National Defense 
Authorization Act (NDAA) for Fiscal Year (FY) 2017 (Pub. L. 114-328). 
Section 824 amended 10 U.S.C. 2372 (redesignated as 10 U.S.C. 3762) to 
require that regulations may not infringe on the independence of a 
contractor to choose which technologies to pursue in its independent 
research and development (IR&D) program if the chief executive officer 
(CEO) of the contractor determines that IR&D expenditures will advance 
the needs of the Department of Defense for future technology and 
advanced capability. Section 824 also decouples IR&D and bid and 
proposal (B&P) costs by moving the language pertaining to B&P costs out 
of 10 U.S.C. 2372 and placing it in the new 10 U.S.C. 2372a 
(redesignated as 10 U.S.C. 3763). This change ensures that regulations 
pertaining to B&P costs are separated from regulations pertaining to 
IR&D costs.
    One respondent challenged the statement in the initial regulatory 
flexibility analysis that ``DoD expects a minimal number of the 
contractors [required to submit statements regarding CEO 
determinations] to be small entities'' given that ``DoD does not have a 
list of other than major contractors or small entities that have IR&D 
programs.'' The requirement is removed from the final rule for major 
contractors to include a statement in the Defense Technical Information 
Center (DTIC) submission that the CEO of the contractor made the 
determination required by 10 U.S.C. 2372.
    The final rule will only apply to small businesses that have 
incurred IR&D costs or B&P costs associated with noncommercial DoD 
awards exceeding the simplified acquisition threshold or small 
businesses that have an IR&D program and are considered to be a major 
contractor, which is defined as having annual expenditures of $11 
million in combined IR&D and B&P expenditures.
    DoD does not maintain a list of other than major contractors or 
small businesses that have IR&D programs. Based on an internal DoD 
website, 31 contractors have historically made 99 percent of the 
submissions of IR&D activities into the relevant DTIC website. DoD 
therefore expects the final rule will have minimal impact on small 
businesses.
    This rule includes no new projected reporting, recordkeeping, or 
other compliance requirements.
    There are no known significant alternative approaches to the final 
rule that would meet the requirements of the statute.

VII. Paperwork Reduction Act

    The Paperwork Reduction Act (44 U.S.C. chapter 35) applies to this 
rule. However, these changes to the DFARS do not impose additional 
information collection requirements to the paperwork burden previously 
approved under OMB Control Number 0704-0483, titled ``Independent 
Research and Development Technical Descriptions.''

List of Subjects in 48 CFR Parts 225, 231, and 242

    Government procurement.

Jennifer D. Johnson,
Editor/Publisher, Defense Acquisition Regulations System.

    Therefore, 48 CFR parts 225, 231, and 242 are amended as follows:

0
1. The authority citation for parts 225, 231, and 242 continues to read 
as follows:

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

PART 225--FOREIGN ACQUISITION

0
2. Amend section 225.7303-2--
0
a. In paragraph (b) by removing ``FAR Part'' and ``subsection'' and 
adding ``FAR part'' and ``section'' in their places, respectively; and
0
b. By revising paragraph (c) introductory text.
    The revision reads as follows:


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

* * * * *
    (c) The limitations for all contractors described in 231.205-
18(c)(iii) and (iv) do not apply to FMS contracts, except as provided 
in 225.7303-5. The allowability of independent research and development 
(IR&D) costs and bid and proposal (B&P) costs on contracts for FMS not 
wholly paid for from funds made available on a nonrepayable basis is 
limited to the contract's allocable share of the contractor's total 
IR&D expenditures and total B&P expenditures. In pricing contracts for 
such FMS--
* * * * *

PART 231--CONTRACT COST PRINCIPLES AND PROCEDURES

0
3. Revise section 231.205-18 to read as follows:


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

    (a) Definitions. As used in this section--
    Covered contract means a DoD prime contract for an amount exceeding 
the simplified acquisition threshold, except for a fixed-price contract 
without cost incentives. The term also includes a subcontract for an 
amount exceeding the simplified acquisition threshold, except for a 
fixed-price subcontract without cost incentives under such a prime 
contract.
    Covered segment means a product division of the contractor that 
allocated more than $1,100,000 in independent research and development 
(IR&D) costs and bid and proposal (B&P) costs to covered contracts 
during the preceding fiscal year. In the case of a contractor that has 
no product divisions, the term means that contractor as a whole. A 
product division of the contractor that allocated less than $1,100,000 
in IR&D costs and B&P costs to covered contracts during the preceding 
fiscal year is not subject to the limitations in paragraph (c) of this 
section.
    Major contractor means any contractor whose covered segments 
allocated a total of more than $11 million in IR&D costs and B&P costs 
to covered contracts during the preceding fiscal year. For purposes of 
calculating the dollar threshold amounts to determine whether a 
contractor meets the definition of ``major contractor,'' do not include 
contractor segments allocating less than $1,100,000 of IR&D and B&P 
costs to covered contracts during the preceding fiscal year.
    (c) Allowability. (i) Departments/agencies shall not supplement 
this regulation in any way that limits IR&D cost allowability and B&P 
cost allowability.
    (ii) See 225.7303-2(c) for allowability provisions affecting 
foreign military sale contracts.
    (iii)(A) For IR&D costs major contractors incurred on covered 
contracts to be allowable--
    (1) The contractor is required to report IR&D projects generating 
the IR&D costs to the Defense Technical Information Center (DTIC) using 
the DTIC's online input form and instructions at https://defenseinnovationmarketplace.dtic.mil/industry-portal/; and
    (2) The contractor is required to update its DTIC inputs at least 
annually, no later than 3 months after the end of the contractor's 
fiscal year, and when the project is completed.
    (B) The amount of IR&D costs allowable under DoD contracts shall 
not exceed the lesser of--

[[Page 6600]]

    (1) Such contracts' allocable share of total incurred IR&D costs; 
or
    (2) The total amount of incurred IR&D costs that the chief 
executive officer of the contractor has determined will advance the 
needs of DoD for future technology and advanced capability as DoD 
describes such needs in communications referenced at 242.771-
3(c)(1)(i).
    (C) Contractors that are not major contractors are encouraged to 
use the DTIC online input form and instructions at https://defenseinnovationmarketplace.dtic.mil/industry-portal/ to report IR&D 
projects in order to provide DoD with visibility into the technical 
content of the contractors' IR&D projects.
    (iv) Contractors are required to report incurred IR&D costs 
separately from indirect costs.
    (v) Contractors are required to report incurred B&P costs 
separately from other indirect costs.

PART 242--CONTRACT ADMINISTRATION AND AUDIT SERVICES

0
4. Amend section 242.302 by revising paragraph (a)(9) to read as 
follows:


242.302   Contract administration functions.

    (a) * * *
    (9) For additional contract administration functions related to 
IR&D projects and B&P projects performed by major contractors, see 
242.771-3(a).
* * * * *

0
5. Revise sections 242.771-1, 242.771-2, and 242.771-3 to read as 
follows:

Sec.
* * * * *
242.771-1 Scope.
242.771-2 Policy.
242.771-3 Responsibilities.
* * * * *


242.771-1  Scope.

    This section implements 10 U.S.C. 3762, Independent research and 
development costs: allowable costs; 10 U.S.C. 3763, Bid and proposal 
costs: allowable costs; and 10 U.S.C. 3847, Defense Contract Audit 
Agency: annual report.


242.771-2  Policy.

    Defense contractors are encouraged to engage in independent 
research and development (IR&D) projects that will advance the needs of 
DoD for future technology and advanced capability (see 231.205-
18(c)(iii)).


242.771-3  Responsibilities.

    (a) The cognizant administrative contracting officer (ACO) or 
corporate ACO shall determine cost allowability of IR&D costs and bid 
and proposal (B&P) costs as set forth in 231.205-18 and FAR 31.205-18.
    (b) The Defense Contract Audit Agency (DCAA) shall--
    (1) For the DoD-wide B&P program, submit an annual report to the 
Principal Director, Defense Pricing and Contracting, Office of the 
Under Secretary of Defense for Acquisition and Sustainment, in 
connection with 10 U.S.C. 3763(c); the Defense Contract Management 
Agency or the military department responsible for performing contract 
administration functions is responsible for providing DCAA with 
statistical information, as necessary; and
    (2) For IR&D costs and B&P costs incurred under any DoD contract in 
the previous Government fiscal year, submit an annual report to the 
congressional defense committees as required by 10 U.S.C. 3847.
    (c) The Office of the Under Secretary of Defense for Research and 
Engineering (OUSD(R&E)), is responsible for establishing a regular 
method for communication--
    (1)(i) From DoD to contractors, of timely and comprehensive 
information regarding planned or expected needs of DoD for future 
technology and advanced capability, by posting information on 
communities of interest and upcoming meetings on the Defense Technical 
Information Center (DTIC) website at https://defenseinnovationmarketplace.dtic.mil/communities-of-interest; and
    (ii) From contractors to DoD, of brief technical descriptions of 
contractor IR&D projects; and
    (2) By providing OUSD(R&E) contact information: [email protected].

[FR Doc. 2023-01293 Filed 1-30-23; 8:45 am]
BILLING CODE 5001-06-P