Rule2023-01293
Defense Federal Acquisition Regulation Supplement: Treatment of Incurred Independent Research and Development Costs (DFARS Case 2017-D018)
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Published
January 31, 2023
Effective
January 31, 2023
Issuing agencies
Defense DepartmentDefense Acquisition Regulations System
Abstract
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.
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<title>Federal Register, Volume 88 Issue 20 (Tuesday, January 31, 2023)</title>
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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 [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[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 <a href="https://defenseinnovationmarketplace.dtic.mil/industry-portal/">https://defenseinnovationmarketplace.dtic.mil/industry-portal/</a>; 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 <a href="https://defenseinnovationmarketplace.dtic.mil/industry-portal/">https://defenseinnovationmarketplace.dtic.mil/industry-portal/</a> 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 <a href="https://defenseinnovationmarketplace.dtic.mil/communities-of-interest">https://defenseinnovationmarketplace.dtic.mil/communities-of-interest</a>; and
(ii) From contractors to DoD, of brief technical descriptions of
contractor IR&D projects; and
(2) By providing OUSD(R&E) contact information: <a href="/cdn-cgi/l/email-protection#e38c9087cd93868d9782848c8dcd8c969087ce9186cd8e819bcd808c8e8e968d8a8082978a8c8d90a38e828a8fcd8e8a8f"><span class="__cf_email__" data-cfemail="f6998592d88693988297919998d899838592db8493d89b948ed895999b9b83989f9597829f999885b69b979f9ad89b9f9a">[email protected]</span></a>.
[FR Doc. 2023-01293 Filed 1-30-23; 8:45 am]
BILLING CODE 5001-06-P
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