Defense Federal Acquisition Regulation Supplement: Treatment of Incurred Independent Research and Development Costs (DFARS Case 2017-D018), 6597-6600 [2023-01293]
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Federal Register / Vol. 88, No. 20 / Tuesday, January 31, 2023 / Rules and Regulations
A. Adding a heading; and
B. Removing ‘‘commercial items’’ and
adding ‘‘commercial products’’ in its
place; and
■ f. In the Alternate II clause—
■ i. By revising the clause date;
■ ii. In paragraph (b)(2)(i) by removing
‘‘Noncommercial items’’ and adding
‘‘Other than commercial products’’ in its
place;
■ iii. In paragraph (b)(2)(ii) introductory
text by removing ‘‘Commercial items’’
and adding ‘‘Commercial products’’ in
its place; and
■ iv. In paragraph (i) introductory text
by—
■ A. Adding a heading; and
■ B. Removing ‘‘commercial items’’ and
adding ‘‘commercial products’’ in its
place.
The revisions and additions read as
follows:
■
■
252.247–7023
by Sea.
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Transportation of Supplies by Sea—
Alternate I (Jan 2023)
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(i) Subcontracts. * * *
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Transportation of Supplies By Sea—
Alternate II (Jan 2023)
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[FR Doc. 2023–01294 Filed 1–30–23; 8:45 am]
BILLING CODE 5001–06–P
DEPARTMENT OF DEFENSE
Defense Acquisition Regulations
System
DATES:
Effective January 31, 2023.
Mr.
David E. Johnson, telephone 202–913–
5764.
FOR FURTHER INFORMATION CONTACT:
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.
48 CFR Parts 225, 231, and 242
II. Discussion and Analysis
[Docket DARS–2019–0039]
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:
RIN 0750–AJ27
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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.
Defense Federal Acquisition
Regulation Supplement: Treatment of
Incurred Independent Research and
Development Costs (DFARS Case
2017–D018)
Defense Acquisition
Regulations System, Department of
Defense (DoD).
ACTION: Final rule.
AGENCY:
DoD is issuing a final rule
amending the Defense Federal
SUMMARY:
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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.
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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).
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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
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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
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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 Offthe-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.
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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.
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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:
■ 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
2. Amend section 225.7303–2—
a. In paragraph (b) by removing ‘‘FAR
Part’’ and ‘‘subsection’’ and adding
‘‘FAR part’’ and ‘‘section’’ in their
places, respectively; and
■ b. By revising paragraph (c)
introductory text.
The revision reads as follows:
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225.7303–2 Cost of doing business with a
foreign government or an international
organization.
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(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—
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PART 231—CONTRACT COST
PRINCIPLES AND PROCEDURES
3. Revise section 231.205–18 to read
as follows:
■
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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—
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(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://defenseinnovation
marketplace.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
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).
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■ 5. Revise sections 242.771–1,
242.771–2, and 242.771–3 to read as
follows:
Sec.
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242.771–1
242.771–2
242.771–3
Scope.
Policy.
Responsibilities.
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242.771–1
*
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[FR Doc. 2023–01293 Filed 1–30–23; 8:45 am]
BILLING CODE 5001–06–P
SUPPLEMENTARY INFORMATION:
DEPARTMENT OF DEFENSE
Defense Acquisition Regulations
System
48 CFR Parts 212, 225, and 252
[Docket DARS–2023–0003]
RIN 0750–AL60
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)).
Defense Federal Acquisition
Regulation Supplement: Restriction on
Acquisition of Personal Protective
Equipment and Certain Items From
Non-Allied Foreign Nations (DFARS
Case 2022–D009)
242.771–3
AGENCY:
Responsibilities.
(a) The cognizant administrative
contracting officer (ACO) or corporate
19:08 Jan 30, 2023
Interim rule.
SUMMARY:
I. Background
Scope.
VerDate Sep<11>2014
ACTION:
DoD is issuing an interim rule
amending the Defense Federal
Acquisition Regulation Supplement
(DFARS) to implement a section of the
National Defense Authorization Act for
Fiscal Year 2022 that restricts the
acquisition of personal protective
equipment and certain other items from
the Democratic People’s Republic of
North Korea, the People’s Republic of
China, the Russian Federation, and the
Islamic Republic of Iran.
DATES: Effective January 31, 2023.
Comments on the interim rule should
be submitted in writing to the address
shown below on or before April 3, 2023,
to be considered in the formation of a
final rule.
ADDRESSES: Submit comments
identified by DFARS Case 2022–D009,
using any of the following methods:
Æ Federal eRulemaking Portal:
https://www.regulations.gov. Search for
‘‘DFARS Case 2022–D009.’’ Select
‘‘Comment’’ and follow the instructions
to submit a comment. Please include
your name, company name (if any), and
‘‘DFARS Case 2022–D009’’ on any
attached documents.
Æ Email: osd.dfars@mail.mil. Include
DFARS Case 2022–D009 in the subject
line of the message.
Comments received generally will be
posted without change to https://
www.regulations.gov, including any
personal information provided. To
confirm receipt of your comment(s),
please check https://
www.regulations.gov, approximately
two to three days after submission to
verify posting.
FOR FURTHER INFORMATION CONTACT: Ms.
Kimberly Bass, telephone 703–717–
3446.
*
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
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: osd.pentagon.ousdre.mbx.communications@mail.mil.
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Defense Acquisition
Regulations System, Department of
Defense (DoD).
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This interim rule revises the DFARS
to implement section 802 of the
National Defense Authorization Act
(NDAA) for Fiscal Year (FY) 2022 (Pub.
L. 117–81) (10 U.S.C. 2533e) and section
881 of the NDAA for FY 2023 (Pub. L.
117–263). Section 802 adds the
restriction to 10 U.S.C. 2533e
(transferred to 10 U.S.C. 4875) that
limits the acquisition of ‘‘covered
items’’ (personal protective equipment
and certain other items) from any of the
following ‘‘covered countries’’: the
Democratic People’s Republic of North
Korea, the People’s Republic of China,
the Russian Federation, and the Islamic
Republic of Iran, subject to exceptions.
‘‘Covered item’’ is defined as an article
or item of—
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[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]
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