Cost Accounting Standards: Elimination of the Exemption From Cost Accounting Standards for Contracts Executed and Performed Entirely Outside the United States, Its Territories, and Possessions, 64684-64690 [2010-26228]

Agencies

• Office of Management and Budget
• Office of Federal Procurement Policy
• Federal Procurement Policy Office

[Federal Register Volume 75, Number 202 (Wednesday, October 20, 2010)]
[Proposed Rules]
[Pages 64684-64690]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-26228]


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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9903


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

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

ACTION: Notice of proposed rule.

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SUMMARY: The Office of Federal Procurement Policy (OFPP), Cost 
Accounting Standards (CAS) Board (Board), invites public comments 
concerning a Notice of Proposed Rule (NPR) to eliminate an exemption 
from the Cost Accounting Standards for contracts executed and performed 
entirely outside the United States, its territories, and possessions.

DATES: Comments must be in writing and must be received by December 20, 
2010.

ADDRESSES: All comments to this NPR must be in writing. Electronic 
comments may be submitted in any one of three ways:
    1. Federal eRulemaking Portal: Comments may be directly sent via 
https://www.regulations.gov--a Federal E-Government Web site that allows 
the public to find, review, and submit comments on documents that 
agencies have published in the Federal Register and that are open for 
comment. Simply type ``(b)(14) Overseas Exemption NPR'' (without 
quotation marks) in the Comment or Submission search box, click Go, and 
follow the instructions for submitting comments;
    2. E-mail: Comments may be included in an e-mail message sent to 
casb2@omb.eop.gov. The comments may be submitted in the text of the e-
mail message or as an attachment;
    3. Facsimile: Comments may also be submitted via facsimile to (202) 
395-5105; or
    4. Mail: If you choose to submit your responses via regular mail, 
please mail them to: Office of Federal Procurement Policy, 725 17th 
Street, NW., Room 9013, Washington, DC 20503, ATTN: Raymond J.M. Wong. 
Due to delays caused by the screening and processing of mail, 
respondents are strongly encouraged to submit responses electronically.
    Be sure to include your name, title, organization, postal address, 
telephone number, and e-mail address in the text of your public comment 
and reference ``(b)(14) Overseas Exemption NPR'' in the subject line 
irrespective of how you submit your comments. Comments received by the 
date specified above will be included as part of the official record. 
Comments delayed due to use of regular mail may not be considered.
    Please note that all public comments received will be available in 
their entirety at https://www.whitehouse.gov/omb/casb_index_public_comments/ and https://www.regulations.gov after the close of the comment 
period. Do not include any information whose disclosure you would 
object to.

FOR FURTHER INFORMATION CONTACT: Raymond J.M. Wong, Director, Cost 
Accounting Standards Board (telephone: 202-395-6805; e-mail: Raymond_wong@omb.eop.gov).

SUPPLEMENTARY INFORMATION

A. Regulatory Process

    Rules, Regulations and Standards issued by the Cost Accounting 
Standards Board (Board) are codified at 48 CFR Chapter 99. The Office 
of Federal Procurement Policy (OFPP) Act, at 41 U.S.C. 422(g), requires 
that the Board, prior to the establishment of any new or revised Cost 
Accounting Standard (CAS or Standard), complete a prescribed rulemaking 
process. The process generally consists of the following four steps:
    1. Consult with interested persons concerning the advantages, 
disadvantages and improvements anticipated in the pricing and 
administration of Government contracts as a result of the adoption of a 
proposed Standard.
    2. Promulgate an Advance Notice of Proposed Rulemaking (ANPRM).
    3. Promulgate a Notice of Proposed Rulemaking (NPRM).
    4. Promulgate a Final Rule.
    The Board notes that the (b)(14) overseas exemption from CAS at 48 
CFR 9903.201-1(b)(14) is not subject to the four-step process required 
by 41 U.S.C. 422(g)(1) because it is not a Cost Accounting Standard. 
The Board elects to follow those requirements in the OFPP Act, at 41 
U.S.C. 422(g)(1), to consult with interested persons concerning the 
advantages, disadvantages, and improvements anticipated in the pricing 
and administration of Government contracts as a result of the adoption 
of any new or revised rule, prior to its promulgation.

B. Background and Summary

    The Office of Federal Procurement Policy (OFPP), Cost Accounting 
Standards Board (Board), is today releasing a Notice of Proposed Rule 
(NPR) on a proposal to eliminate the exemption from the Cost Accounting 
Standards (CAS) for contracts executed and performed entirely outside 
the United States, its territories, and possessions as codified at 48 
CFR 9903.201-1(b)(14), the ``(b)(14) overseas exemption.'' The purpose 
of this NPR is to obtain input on whether the (b)(14) overseas 
exemption at 48 CFR 9903.201-1(b)(14) should be retained, eliminated, 
or revised.

Statutory Requirement

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

[[Page 64685]]

History of the (b)(14) Overseas Exemption at 48 CFR 9903.201-1(b)(14)

    The subject of this NPR is the (b)(14) overseas exemption at 48 CFR 
9903.201-1(b)(14) which exempts from CAS ``contracts and subcontracts 
to be executed and performed entirely outside the United States, its 
territories, and possessions.'' This exemption was first promulgated in 
1973. The Armed Services Procurement Regulation (ASPR), a predecessor 
regulation to the Federal Acquisition Regulation (FAR), provided that 
the CAS clause in ASPR 7-104.83 shall not be inserted in ``contracts 
which are executed and performed in their entirety outside the United 
States, its territories and possessions [(the (b)(14) overseas 
exemption)].'' See ASPR 3-1204, as amended by Defense Procurement 
Circular No. 115 (dated September 24, 1973). The basis for the (b)(14) 
overseas exemption is connected to the scope of the law that originally 
created the Board.
    The original Board was established by Section 2168 of the Defense 
Production Act (DPA). Section 2163, Territorial application of Act, of 
the DPA provided that sections 2061 through 2171 (which included the 
authority for the Board) ``shall be applicable to the United States, 
its Territories and possessions, and the District of Columbia.'' The 
(b)(14) overseas exemption reflects this same limitation of 
applicability on contracts executed and performed overseas. In 1980, 
the Board ceased to exist under the DPA. Congress reestablished the 
Board in 1988 under section 22 of the OFPP Act, 41 U.S.C. 422. Unlike 
the DPA, the OFPP Act is not limited in applicability to the United 
States. Additional historical background is provided at 70 FR 53977 
(September 13, 2005).
    In 1991, the re-established Board reviewed the rules and 
regulations applicable to the administration of CAS. FAR 30.201-1(14), 
the exemption from CAS for contracts and subcontracts executed and 
performed entirely outside the United States, its territories and 
possessions, was part of that review. The Board retained the exemption 
and incorporated it into its current re-codified rules and regulations 
at 48 CFR 9903.201-1(b)(14), the ``(b)(14) overseas exemption,'' on 
April 17, 1992 (57 FR 14148.) No specific explanation was provided for 
retaining the exemption.
    On September 13, 2005, the Board published a Staff Discussion Paper 
(SDP) discussing the (b)(14) overseas exemption and sought comments on 
its continued appropriateness (70 FR 53977). The three public comments 
received in response to the SDP offered arguments for retaining the 
exemption; none of the comments supported any revision to, or an 
elimination of, the (b)(14) overseas exemption. After reviewing and 
discussing the public comments, the Board decided to retain the 
exemption. (73 FR 8259, February 13, 2008.) While the Board did not 
agree with all of the views expressed, it did agree with the conclusion 
not to delete or revise the (b)(14) overseas exemption.

Conclusions

    After considering the comments from the public and Government 
agencies (discussed in section C. Public Comments to the Notice of 
Request for Information), the Board has proposed to eliminate the 
(b)(14) overseas exemption at 48 CFR 9903.201-1(b)(14) for the 
following reasons:
    (1) The statutory basis that was used to justify the (b)(14) 
overseas exemption when it was first promulgated no longer exists. The 
(b)(14) overseas exemption was initially established because the 
Defense Production Act (DPA), the statute that originally created the 
Board, was limited in applicability to the United States, its 
territories and possessions, and the District of Columbia. Unlike the 
DPA, the current statute from which the Board derives its authority, 
the OFPP Act, does not restrict the applicability of CAS to the United 
States.
    (2) There is no accounting basis for the (b)(14) overseas 
exemption. The place of contract execution and performance--the trigger 
for the (b)(14) overseas exemption--is not germane to the fundamental 
principles and methods used to account for the costs of contract 
performance. The exemption does not help to achieve consistency and 
uniformity in the cost accounting practices used by Government 
contractors in the measurement, assignment and allocation of costs to 
Government contracts, the primary objective of the CAS.
    (3) Based on the data submitted in response to its request for 
information, the Board projects the volume of affected contractors and 
subcontractors to be relatively small. Some respondents expressed 
concern that elimination of the (b)(14) overseas exemption could 
negatively affect contracting, such as through deceased competition, 
increased prices, difficulty of enforcement overseas, and potential 
retaliation by foreign governments, but did not offer evidence to 
support these assertions. The Board has concluded that these concerns 
are too speculative to address. Additionally, the Board has concluded 
that some of the same principles, that would be applicable due to the 
imposition of CAS because of the elimination of the (b)(14) overseas 
exemption, are already applicable under the cost principles found in 
Part 31 of the Federal Acquisition Regulation.

C. Public Comments to the Notice of Request for Information

    On April 23, 2009, as required by section 823(b) of the NDAA FY 
2009, the Board published a Notice of Request for Information (74 FR 
18491). It solicited public comments and information with respect to 
the Board's review of whether the (b)(14) overseas exemption at 48 CFR 
9903.201-1(b)(14) should be retained, eliminated, or revised. The 
Notice posed a series of questions, the purpose of which was to elicit 
information and comments for the Board's consideration. The Board also 
solicited comments directly from three Federal Government organizations 
with a significant volume of contracts performed outside the United 
States--the Department of Defense (DOD), the Department of State (DOS), 
and the United States Agency for International Development (USAID). The 
Board received seven public comments as well as comments from these 
three Government organizations. The comments, which were considered by 
the Board in its deliberations, provide a variety of views. The full 
text of the public comments to the Notice of Request for Information is 
available at: https://www.whitehouse.gov/omb/casb_index_public_comments/ and https://www.regulations.gov. They are summarized and 
addressed in this section, grouped by the questions posed by the Board 
in its Notice of Request for Information, and by common themes when the 
comments were not responsive to the questions posed.

1. What is your experience with the [(b)(14)] overseas exemption?

    a. As a procuring entity (e.g., procurement office, higher tier 
contractor) awarding contracts/subcontracts; or
    b. As the contractor/subcontractor claiming the applicability of 
the [(b)(14)] overseas exemption?
    Comments: Some of the responses from Federal agencies reflected 
their experiences with the (b)(14) overseas exemption. DOS indicated 
that there are few major contracts both executed and performed overseas 
that are subject to CAS. USAID had only two recent actions involving 
the (b)(14) overseas exemption. DOD reported very little activity with 
the (b)(14) overseas exemption at the prime contractor level, and that 
much of the activity is at the

[[Page 64686]]

subcontractor level where the data is not readily available. See the 
Board's responses to question 2 for additional details.
    Individual contractors did not respond to the Notice of Request for 
Information, and comments from other respondents, including trade and 
industry associations, did not address this question directly. A public 
interest group respondent took issue with the narrow set of questions 
posed by the Board as it felt the questions were posed to contractors 
and contracting officers that were unlikely to support increased CAS 
coverage. It noted that the questions appeared to be aimed solely at 
contractors and contracting offices of the Federal government. A 
consulting firm noted that, for foreign companies and foreign owned 
subsidiaries of U.S. companies, the (b)(14) overseas exemption appears 
to be useful; the firm stated that the (b)(14) overseas exemption made 
it easier to obtain bids from companies willing to bid on US Government 
subcontracts, but acknowledged that, in absence of the applicability of 
CAS, the cost measurement and allocation rules under FAR Part 31 would 
apply.
    Responses: The Board notes that this question was directed to 
procuring entities (i.e., Government, contractor and subcontractor) and 
affected contractors and subcontractors because the Board was seeking 
information on how the (b)(14) overseas exemption directly and 
specifically impacted the affected entities. While some questions were 
addressed to entities directly affected by the (b)(14) overseas 
exemption, the public was not precluded from providing comments on the 
substance of those questions. Other questions were not so narrowly 
targeted. The Board takes note of the Government's experiences with the 
(b)(14) overseas exemption. The Board agrees that, in the absence of 
the applicability of CAS, FAR Part 31, including its cost measurement, 
assignment, and allocation rules, would still apply. The Board sees no 
benefit to a CAS exemption when FAR Part 31 applies. The Board does not 
agree that the CAS (b)(14) overseas exemption relieves the ``burden'' 
on foreign companies from complying with the CAS rules on the 
measurement, assignment, and allocation of cost to Federal contracts, 
since the cost measurement, assignment, and allocations rules in FAR 
Part 31 would generally apply in the absence of CAS.

2. How often (number of actions, dollar amounts, by fiscal year) has 
the [(b)(14)] overseas exemption been claimed?

    Comments: DOS did not provide the number of actions or dollars of 
obligations subject to the (b)(14) overseas exemption, but stated that 
eliminating the exemption would have minimal impact on State, as DOS 
had few major contracts that are both executed and performed overseas 
that are subject to CAS. USAID indicated only two recent actions: $23.5 
million and $1.4 billion for 2006 and 2007, respectively. (The $1.4 
billion is 34% of FY 2007 obligations for USAID.) DOD reported very 
little activity with the (b)(14) overseas exemption at the prime 
contractor level. The Navy reported that no (b)(14) overseas exemptions 
have been granted. The Air Force (AF) reported seventeen (b)(14) 
overseas exemptions with prime contractors in the past three years 
representing only a small percentage of its obligations. The AF expects 
the number of (b)(14) overseas exemptions to increase in the future 
because of its contingency contracting efforts, but cannot predict the 
amount as a percentage of total obligations, which may remain very 
small. DOD reported that the Army appeared to have the largest number 
and dollar volume of contracts claiming the (b)(14) overseas exemption, 
but did not compile any data. DOD's preliminary finding is that most of 
the activity with the (b)(14) overseas exemptions is at the 
subcontractor level where data is not readily available. DOD reported 
that its contract administrator, the Defense Contract Management Agency 
(DCMA), is not staffed currently to administer CAS overseas. DOD stated 
that the Military Services were compiling data and would forward the 
data on specific experiences and the number of exemptions granted based 
on the (b)(14) overseas exemption. During the preparation of the NPR, 
the Board staff contacted DOD on the status of the additional 
information. DOD responded that it had no additional information to 
provide and could not develop the information to support the use of the 
(b)(14) overseas exemption.
    Responses: Based on the comments with usage data received from the 
three Federal Government agencies with the highest volume of contracts 
in foreign countries, it appears that the (b)(14) overseas exemption 
has been rarely used at the prime contractor level. No respondents 
provided usage data at the subcontractor level. Consequently, 
eliminating the (b)(14) overseas exemption based on available data 
would not appear to be detrimental to the performance of Government 
contracts.

3. If the [(b)(14)] overseas exemption is eliminated, what problems 
will that cause you?

    a. As a procuring entity (e.g., procurement office, higher tier 
contractor) awarding contracts/subcontracts?
    Comments: Responses were mixed. Both DOS and USAID indicated that 
the elimination of the (b)(14) overseas exemption would have minimal to 
no impact on their operations. By contrast, DOD anticipates that some 
host governments may object to the imposition of CAS on the accounting 
practices of foreign concerns as an infringement of their sovereignty. 
There is also concern that some foreign entities may elect not to 
perform work for the U.S. Government, causing a reduction in the number 
of entities willing to perform work overseas for an unknown period of 
time. DOD anticipates an increase in the requests for CAS waivers from 
entities that are now using the (b)(14) overseas exemption, which could 
slow the contract award process. There may also be an increase in 
proposed prices from entities previously exempted by the (b)(14) 
overseas exemption for the costs associated with changing accounting 
systems, and to account for the additional risks due to the potential 
cost impacts for CAS non-compliances. The Defense Contract Audit Agency 
(DCAA) believes that the elimination of the (b)(14) overseas exemption 
will have little or no impact on U.S. firms. It believes that those 
firms most affected by the elimination of the (b)(14) overseas 
exemption will be foreign concerns that are subcontractors to U.S. 
prime contractors. DCAA commented that the cost of administering CAS 
requirements to certain foreign subcontractors that are currently CAS 
exempt under the (b)(14) overseas exemption might outweigh the benefit 
to be derived from making CAS applicable to them.
    Two industry association respondents echoed the comments made by 
DOD. One industry group respondent noted that the Government benefits 
from sales to foreign governments, many of which require some form of 
foreign company participation. ``Currently, foreign companies are 
covered by the [(b)(14) overseas] exemption in CAS for contracts 
executed and performed entirely outside the U.S. Were the [(b)(14) 
overseas] exemption eliminated, the opportunities provided through 
these industrial participation programs would be significantly reduced, 
which

[[Page 64687]]

would reduce beneficial foreign military sales.'' The situation would 
be the same, even if industrial participation programs were not 
involved, where the U.S. Government and local foreign government share 
common foreign vendors. The respondent noted that ``[g]iven the global 
economy, the effects of international reciprocity should be considered 
in avoiding unintended consequences. If the U.S. applies CAS to foreign 
contractors, other countries may extend their rules to U.S. 
contractors, effectively eliminating U.S. contractors from competing 
globally for foreign military sales.'' Another industry group 
respondent predicts reduced competition by foreign concerns if CAS is 
extended to foreign contractors; the imposition of CAS would discourage 
foreign participation as contractors and subcontractors, especially 
where the industrial base is commercial. This industry group respondent 
believes that USAID would be adversely impacted by the elimination of 
the (b)(14) overseas exemption. Local foreign vendors may elect to 
cease doing business with the U.S. Government rather than incur the 
costs of complying with CAS. This industry group respondent notes the 
increased administrative burden and costs of compliance for both the 
Government and the contracting community resulting in longer 
procurement lead times. The lack of local foreign vendors would be 
especially critical in remote locations and war zones. Generally, a 
foreign trade association respondent, which represents several British 
trade groups, made similar comments.
    Responses: The three Federal government organizations with the 
largest dollar volume of contracts performed outside the U.S. did not 
provide data demonstrating that eliminating the (b)(14) overseas 
exemption would be detrimental to their contracting. The Board does not 
agree with comments about the acquisition of commercial items from 
foreign companies, as acquisitions of commercial items are generally 
exempt under 48 CFR 9903.201-1(b)(6). The Board notes that while one 
respondent believes that USAID would be adversely affected by the 
elimination of the (b)(14) overseas exemption, USAID itself does not 
believe the elimination of the exemption would be problematic.
    Many of the comments and concerns appear to reflect the mistaken 
impression that the elimination of the (b)(14) overseas exemption would 
impose full CAS upon foreign concerns. That may not be true in light of 
the availability of another CAS exemption, at 48 CFR 9903.201-1(b)(4), 
which has two distinct parts: The (b)(4) foreign government exemption 
and the (b)(4) foreign concern exemption. The (b)(4) foreign government 
exemption provides for a complete exemption to CAS for ``contracts and 
subcontracts with foreign governments or their agents or 
instrumentalities,'' while the (b)(4) foreign concern exemption 
provides an exemption to CAS, other than CAS 401 and 402, for any ``any 
contract or subcontract awarded to a foreign concern.'' Even if no 
other CAS exemptions were applicable, many of the contracts with 
foreign concerns would continue to be subject to the cost principles in 
FAR Part 31 with its measurement, assignment, and allocation rules, as 
the FAR does not have an exemption or deviation for foreign concerns.
    b. As the contractor/subcontractor claiming the applicability of 
the [(b)(14)] overseas exemption?
    Comments: Three industry group respondents, including a foreign 
trade association respondent, expressed concerns that the ability to 
utilize foreign subcontractors would be curtailed. They stated that 
many foreign concerns will not be able to comply with CAS because of a 
lack of resources, the lack of knowledgeable personnel, as well as the 
costs of implementation. Another respondent stated that U.S. firms 
would be at a competitive disadvantage with foreign firms exempted from 
all CAS, other than CAS 401 and 402, if the foreign concern qualifies 
for the (b)(4) foreign concern exemption at 48 CFR 9903.201-1(b)(4).
    Responses: See the Board's responses in question 3.a. The Board 
does not believe that U.S. concerns will necessarily be at a 
competitive disadvantage with foreign concerns exempted from all CAS, 
other than CAS 401 and 402, especially since most, if not all, of the 
contracts and subcontracts would continue to be subject to the cost 
principles in FAR Part 31, including its cost measurement, assignment, 
and allocation rules. The principles of consistency articulated by CAS 
401 and 402 are incorporated into FAR Part 31.
    The Board acknowledges that the (b)(4) foreign concern exemption, 
unlike the (b)(14) overseas exemption, is not an exemption from all of 
the Standards in CAS. Concerns which qualify for the (b)(4) foreign 
concern exemption are subject to CAS 401 and 402. Thus, they may be 
required to file a CAS disclosure statement. As the (b)(14) overseas 
exemption exempts all of CAS, there is not a requirement to file a CAS 
disclosure statement for entities covered by the exemption. There will 
be costs associated with filing and administering disclosure statements 
for foreign concerns claiming the (b)(4) foreign concern exemption for 
the various affected parties, including the Government, contractor and 
subcontractor, as applicable. The costs for the contractor or 
subcontractor filing the disclosure statement should be minimal as the 
disclosure statement merely documents and reports the existing 
established cost accounting practices and procedures of the filing 
entity.
    4. How does the [(b)14)] overseas exemption help, or not help, to 
implement the Board's mandate ``to achieve uniformity and consistency 
in the cost accounting standards governing measurement, assignment, and 
allocation of costs to contracts with the United States?''
    Comments: DCAA voiced a comment echoed by several Government 
respondents. ``The primary objective of the Cost Accounting Standards 
is to achieve increased consistency and uniformity in the cost 
accounting practices used by Government contractors. Exempting 
contracts from the CAS solely based on the fact that they are executed 
and performed outside the United States does not achieve that primary 
objective.'' USAID is concerned that the (b)(14) overseas exemption 
provides a mechanism for contractors to circumvent the consistency 
principle of accounting. It opined that ``whether the contract is CAS 
covered or not the contractors' established practices should result in 
an equitable assignment, measurement, and allocation of costs on all 
cost objectives regardless of the place of performance. * * * that 
contracts, regardless of the place of performance, receive its 
equitable share of direct and indirect costs.'' The DOD Inspector 
General (DODIG) noted that ``[c]ontractors * * * may use the [(b)(14)] 
overseas exemption to hide potential fraudulent activities.''
    DOD observed that ``[t]he more firms covered by the CASB rules, the 
more uniform and consistent the costs applied to US Government 
contracts will be.'' At the same time, DOD noted that all CAS 
exemptions are based on a cost benefits analysis of the costs of 
implementation versus the benefits of the consistent cost treatment. 
``As a class, there may be a good case to continue to exempt foreign 
firms performing overseas due to the administrative costs to both the 
U.S. Government and the contractor [/subcontractor] to enforce the 
rules, problems with host governments, and contractors[/subcontractors] 
who may

[[Page 64688]]

choose not to bid on U.S. Government work.''
    In a contrary viewpoint, one non-government respondent stated that 
``[a]pplying full CAS to overseas contracts would not necessarily 
enhance measurement, assignment or allocation of costs to federal 
government contracts. This is because only U.S. firms would be subject 
to full CAS. Being less competitive may mean that foreign organization 
would get the work and would only have to comply with CAS 401 and 402. 
Applying CAS 401 and 402 may enhance the consistency in the assignment 
and allocation of costs to contracts. * * * CAS is also not a 
substitute for sound financial accounting practices and internal 
controls. Consistency will be better served by all companies adopting 
the financial reporting standards.'' A foreign trade association 
respondent offered that the FAR requires compliance with comparable 
standards. ``[I]n many instances the organization will be covered by 
International Accounting Standards, which in recent years has seen a 
significant increase in scale and coverage.''
    Finally, one industry group respondent offered that with some 
contracts (those that are transitory, e.g., DOD contingency operations, 
or cooperative, e.g., coproduction) the expressed objectives of CAS are 
irrelevant ``because CAS cannot be reasonable expected to yield the 
intended benefits.''
    Responses: The Board agrees that the (b)(14) overseas exemption 
does not help to implement consistency and uniformity in the cost 
accounting standards governing the measurement, assignment, and 
allocation of costs to contracts with the United States. The Board 
agrees that applying CAS 401 and 402 to foreign entities may enhance 
consistency and will enhance transparency with the filing of the 
required disclosure statements.
    The Board does not agree that complying only with CAS 401 and 402 
necessarily gives foreign based entities a competitive advantage over 
U.S. based entities which must comply with full CAS, as discussed in 
the Board's responses to questions 3.a. and 3.b..

5. What are the arguments for, and against, the requirement in the 
[(b)(14)] overseas exemption to require execution of the contract 
overseas?

    Comments: One industry group resondent noted that the 
distinguishing feature of the (b)(14) overseas exemption is the phrase 
``executed and performed exclusively outside the United States. * * * 
[W]hen the U.S. Government extends itself beyond its sovereign borders 
and executes contracts to be performed outside the U.S., prospective 
foreign concern contractors should not be expected to adopt U.S. 
Government cost accounting rules where future utility and benefit 
cannot be reasonable foreseen beyond the immediate contract.''
    DOD expressed the general consensus of the respondents that in an 
environment of global operations, electronic commerce, and contractor 
mobility, the place of execution of the contract has little to do with 
contract operation. A public interest group respondent noted ``that the 
term `executed' no longer has much meaning in the context of electronic 
commerce and other modern forms of communication. Gone are the days 
when a contract was physically executed by parties and the location of 
the parties at the time of `execution' was easily defined. Today, 
contracts are executed by parties who are often remote from one another 
and even in different countries or continents at the time of 
`execution.' '' A foreign trade association respondent agreed with 
those sentiments stating that the ``[e]xecution of the contract 
overseas does not seem to be material to the contractual obligations 
and the application of the exemption. The nature of a contract does not 
change merely because it is executed overseas.'' USAID observed that 
``in some instances, the contractors' expend funds to transport [their] 
representatives outside of the United States to execute (sign) the 
contracts in order to adhere to this requirement.'' DCAA opined ``that 
from the pure accounting perspective, the place of contract execution 
and performance should not have any bearing on the fundamental 
principles and methods used to account for costs of contract 
performance.''
    A public interest group respondent questioned ``why should a 
contract that is executed and performed entirely overseas involving the 
U.S. Government and a U.S. company or subsidiary thereof enjoy an 
exemption from CAS coverage?'' However, a consulting firm respondent 
noted that ``[t]he execution of the contracts for a U.S. firms for work 
overseas is often done in the U.S. and therefore it is not eligible for 
the [(b)(14)] overseas exemption. The [place of] execution of the 
contract should not be sufficient enough to prevent the [(b)(14)] 
overseas exemption from being claimed. This places many U.S. firms at a 
disadvantage in competing with foreign firms for U.S. government 
projects.''
    DOD observed that a better indicator of the need for the (b)(14) 
overseas exemption is the location of the company headquarters and/or 
the location of the normal accounting operations.
    Responses: The Board agrees with the sentiments expressed by the 
majority of respondents, that the requirement for execution overseas 
has no bearing in the context of contract cost accounting, and 
consequently, believes that the (b)(14) overseas exemption should be 
eliminated. In a global economy with electronic commerce, the adherence 
to the place of execution of a contract has little relevance to the 
underlying contractual obligations. The Board agrees that it makes 
little sense for an entity subject to U.S. jurisdiction to be exempted 
from CAS merely because its contract is executed overseas. 
Fundamentally, the requirement has very little to do with contract 
performance.

6. What are the arguments for, and against, the requirement in the 
[(b)(14)] overseas exemption to require performance of the contract 
overseas?

    Comments: A foreign trade association respondent observed that 
there is no argument to support the requirement for performance 
overseas in the (b)(14) overseas exemption. DCAA would agree with that 
sentiment from the pure accounting perspective. ``[T]he place of 
contract execution and performance should not have any bearing on the 
fundamental principles and methods used to account for costs of 
contract performance.''
    To the contrary, a consulting firm respondent observed that the 
``exemption for work overseas makes logical sense to promote 
competition and to allow U.S. companies to compete for such work.'' The 
respondent argued that U.S. entities working overseas must comply with 
the laws and regulations of the country of contract performance. To 
comply with CAS also would increase the costs of contract performance 
overseas for U.S. entities and limit competition.
    USAID opined that the (b)(14) overseas exemption ``should continue 
to require that contracts and subcontracts be performed entirely 
overseas.'' A foreign trade association respondent further opined that 
``[t]he current wording of `performed entirely outside' is problematic 
and too restrictive,'' and should be changed to ``substantially 
performed outside.'' USAID agreed with the assessment that the wording 
is problematic. However, it viewed the problem not as restrictive, but 
as lacking in clarity, stating that ``[t]he language in

[[Page 64689]]

this exemption should clearly state that `performance' includes both 
direct and indirect costs up to and including General and 
Administrative expenses when incurred within the United States, its 
territories, and its possessions * * * [because] the Executive 
Management that oversees the performance or the company is located in 
the U.S. along with support functions and backstop positions.'' DOD 
agreed with USAID's assessment. DCAA offered ``that the current 
[(b)(14)] overseas exemption at 48 CFR 9903.201-1(b)(14) would not 
exempt the vast majority of U.S. firms from the CAS due to the fact 
that some costs would be incurred within the United States, thereby 
failing to meet the [(b)(14) overseas] exemption criterion.''
    DOD went further, stating that the performance overseas is not as 
important as other factors such as the ownership and control of the 
company, and whether the contractor's accounting activities already 
encompassed CAS covered work performed elsewhere.
    Responses: The Board agrees that the place of performance has no 
bearing on the fundamental principles and methods used to account for 
the costs of contract performance. The adherence to the principles and 
standards of financial and managerial accounting applied consistently 
is the foundation for financial reporting and managerial decisions.
    The Board believes that there is competition overseas. The Board 
does not believe that the imposition of full CAS, or the exemption from 
it, is necessarily a major factor in a U.S. based entity's decision to 
do business overseas with the U.S. Government. It is only one factor 
among many in the decision to do business outside of the U.S. Smaller 
entities are already exempted from CAS under 48 CFR 9903-201-1(b)(3). 
Full CAS is only initially imposed either upon the award of a CAS-
covered contract of at least $50 million, or upon the award of a CAS-
covered contract if a contractor has received $50 million or more in 
net CAS-covered contracts during its preceding cost accounting period. 
Modified CAS may be imposed on a covered contract of less than $50 
million awarded to a contractor that received less than $50 million in 
net CAS-covered awards in the immediately preceding cost accounting 
period.

7. Other Comments

    The following additional comments were offered in response to the 
Notice of Request for Information:
a. Fraud, Waste and Abuse
    Comment: One industry group respondent observed that ``CAS 
compliance does not prevent wasteful practices, bribery, or fraudulent 
activities.'' Other respondents agreed with those sentiments.
    Response: The Board agrees that CAS compliance, by itself, does not 
prevent wasteful practices or fraudulent activities. However, CAS 
provides a framework for the measurement, assignment, and allocation of 
costs to government contracts in a systematically structured and 
consistent manner, which promotes uniformity and consistency in 
estimating, accumulating, and reporting costs in connection with the 
pricing and administration of Government contracts.
b. Prime Contractors' Responsibility Related to CAS 401 and 402 for 
Foreign Subcontractors
    Comment: DCAA commented that the prime contractor will need to give 
greater attention to foreign concerns that are performing as 
subcontractors to U.S. contractors and will no longer be covered by the 
(b)(14) overseas exemption. DCAA observed that if the (b)(14) overseas 
exemption is eliminated, the foreign subcontractors would be subject to 
the (b)(4) foreign concern exemption and must comply with CAS 401 and 
402. DCAA noted ``that these foreign subcontractors' accounting 
practices are not always adequately defined and that the prime 
contractor's oversight responsibility for ensuring its foreign 
subcontractors' CAS compliance is not clearly understood and properly 
executed.'' DCAA recommended that the prime contractor be required to 
evaluate the CAS compliance of its subcontractor, and to submit the CAS 
evaluation report on the subcontractor to its Contracting Officer (CO). 
DCAA also recommended that the Government be provided the right to 
examine the subcontractor's records for CAS compliance when the prime 
contractor does not submit the CAS evaluation report on a 
subcontractor's compliance with CAS to the CO. To mitigate these 
concerns, DCAA recommends that the Board strengthen the CAS contract 
clause to ``* * * clearly require the prime contractor to enforce CAS 
compliance by its foreign subcontractor.''
    Response: The Board does not see a need to amend the CAS contract 
clauses because the Board believes it is already clear that the prime 
contractor is responsible for assessing the CAS compliance of its 
subcontractors. However, the Board is inviting comments on the issue. 
(See F. Public Comments to the Notice of Proposed Rulemaking, herein.)
    The FAR contract provisions and the CAS clauses already state that 
the prime contractor and higher tier subcontractor are responsible for 
their subcontractors. The CAS clauses at 48 CFR 9903.201-4 require the 
CAS-covered contractor and higher tier subcontractor (who shall be 
required to do so by the contractor) to insert the appropriate CAS 
clauses into all their negotiated subcontracts unless they are 
exempted. 48 CFR 9903.202-8(a) states the contractor or higher tier 
subcontractor is responsible for administering the CAS requirements in 
their subcontracts. These requirements are applicable whether the 
contracts and subcontracts are performed in the U.S. or overseas.
c. [(b)(14) Overseas Exemption Inconsistent With the Application of FAR 
Part 31
    Comment: A public interest group respondent argues that there must 
be some type of accounting system in foreign entities to ensure that 
billings under cost based contracts are reasonable, allowable and 
allocable. ``If the argument is that CAS cannot be used for this 
purpose because foreign contractors and subcontractors will not have 
adequate systems in place, then how is it that these firms are eligible 
to receive cost-type contracts? * * * [C]ontractors cannot have it both 
ways by claiming that a CAS exemption should apply to contracts and 
subcontracts executed and performed entirely outside the U.S. while 
still being permitted to accept cost-type contracts and applying the 
FAR Part 31 cost principles to these contracts. * * * [Claiming the 
(b)(14) overseas exemption] while asserting that all costs submitted in 
billings to the government are reasonable, allowable, and allocable is 
an exercise in false logic.''
    Response: The Board agrees with the public interest group 
respondent's comments and has proposed to eliminate the (b)(14) 
overseas exemption.

D. Paperwork Reduction Act

    The Paperwork Reduction Act, Public Law 96-511, does not apply to 
this proposed rule because this rule imposes no additional paperwork 
burden on offerors, affected contractors and subcontractors, or members 
of the public which requires the approval of OMB under 44 U.S.C. 3501, 
et seq. The records required by this proposed rule are those normally 
maintained by contractors and subcontractors who

[[Page 64690]]

claim reimbursement of costs under government contracts.

E. Executive Order 12866 and the Regulatory Flexibility Act

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

F. Public Comments to the Notice of Proposed Rulemaking

    Interested persons are invited to provide input to this notice of a 
proposed rule to eliminate the (b)(14) overseas exemption from CAS at 
48 CFR 9903.201-1(b)(14). Respondents are encouraged to identify, 
comment and provide information on any issues that they believe are 
important to the subject. This might include comment on whether there 
is a need to strengthen the CAS clauses to address the prime 
contractor's oversight responsibility for ensuring its subcontractors 
are compliant with CAS where it is applicable. All comments must be in 
writing, and submitted via facsimile, by e-mail, or by any other means 
as instructed in the ADDRESSES section.
    To comply with the Congressional mandate in Section 823 of the NDAA 
FY 2009, the Board must consider the applicability of CAS to contracts 
and subcontracts which would be subject to CAS but for the (b)(14) 
overseas exemption. As always, the public is invited to submit comments 
on other issues regarding CAS exemptions that respondents believe the 
Board should consider. Those comments that are unrelated to the (b)(14) 
overseas exemption and its directly related issues will be separately 
considered by the Board. The staff continues to be especially 
appreciative of comments and suggestions that bring forth the concerns 
of all parties for consideration in the rulemaking process.

List of Subjects in 48 CFR 9903

    Government procurement, Cost Accounting Standards.

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

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

PART 9903--CONTRACT COVERAGE

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

    Authority: Public Law 100-679, 102 Stat. 4056, 41 U.S.C. 422.

    2. In section 9903.201-1, remove and reserve paragraph (b)(14) to 
read as follows:


9903.201-1  CAS applicability.

* * * * *
    (b) * * *
    (14) [Reserved]
* * * * *
[FR Doc. 2010-26228 Filed 10-19-10; 8:45 am]
BILLING CODE 3110-01-P