OFFICE OF THE SECRETARY OF DEFENSE
1000 DEFENSE PENTAGON
WASHINGTON, DC 20301-1000
In reply refer to
DFARS Case: 94-D316
D. L. 96-606
MEMORANDUM FOR DIRECTORS OF DEFENSE AGENCIES
DEPUTY FOR ACQUISITION AND BUSINESS MANAGEMENT,
DEPUTY ASSISTANT SECRETARY OF THE AIR FORCE
DIRECTOR, PROCUREMENT POLICY, ASA(RD&A)/SARD-PP
DEPUTY DIRECTOR (ACQUISITION), DEFENSE LOGISTICS
SUBJECT: Restructuring Costs Under Defense Contracts
We have amended Parts 231 and 242 of the Defense Federal Acquisition Regulation Supplement
(DFARS) to implement Section 818 of the FY 1995 Defense Authorization Act (Pub. L. 103-337).
Section 818 restricts DoD from reimbursing external restructuring costs associated with a business
combination undertaken by a defense contractor unless certain conditions are met.
The attached DFARS rule revises and finalizes the interim rule which was published as Item
XXIII of DAC 91-7.
This final DFARS rule is effective immediately and will be published in a future Defense
Eleanor R. Spector
Director, Defense Procurement
cc: DSMC, Ft. Belvoir
DFARS CASE 94-D316, RESTRUCTURING COSTS UNDER DEFENSE CONTRACTS
PART 231--CONTRACT COST PRINCIPLES AND PROCEDURES
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SUBPART 231.2--CONTRACTS WITH COMMERCIAL ORGANIZATIONS
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231.205-70 [External] [r]estructuring costs.
- (a) Scope.
This subsection prescribes policies and procedures for allowing contractor [external] restructuring costs when [net savings] would result for DoD. This subsection also implements Section 818 of the National Defense Authorization Act for Fiscal Year 1995 (Public Law 103-337).
- (b) Definitions.
As used in this subsection:
- (1) "Business combination" means a transaction whereby assets or operations of two [or more] companies [not previously under common ownership or control] are combined, whether by merger, acquisition, or sale/purchase of assets.
- (2) "External restructuring activities" means restructuring activities occurring after a business combination that [affect the operations of] companies. [not previously under common ownership or control. They do not include restructuring activities occurring after a business combination that affect the operations of only one of the companies not previously under common ownership or control, or, when there has been no business combination, restructuring activities undertaken within one company. External restructuring activities are a direct outgrowth of a business combination. They normally will be initiated within 3 years of the business combination.]
- (3) "Restructuring activities" means nonroutine, nonrecurring, or extraordinary activities [to combine] facilities [, operations,] or workforce, [in order to eliminate redundant capabilities,] improve future operations [,] and reduce overall costs. Restructuring activities do not include routine or ongoing repositionings and redeployments of a contractor's productive facilities or workforce (e.g., normal plant rearrangement or employee relocation)[, nor do they include other routine or ordinary activities charged as indirect costs that would otherwise have been incurred (e.g., planning and analysis, contract administration and oversight, or recurring financial and administrative support)].
- (4) "Restructuring costs" means the costs, including both direct and indirect, [of] restructuring activities. Restructuring costs that may be allowed include, but are not limited to, severance pay for employees, early retirement incentive payments for employees, employee retraining costs, relocation expense for retained employees, and relocation and rearrangement of plant and equipment. [For purposes of this definition, if restructuring costs associated with external restructuring activities allocated to DoD contracts are less than $2.5 million, the costs shall not be subject to the audit, review, and certification requirements of 231.205-70(c)(1); instead, the normal rules for determining cost allowability in accordance with FAR Part 31 shall apply.]
- (5) "Restructuring savings" means cost reductions, including both direct and indirect cost reductions, that result from restructuring activities. Reassignments of cost to future periods are not restructuring savings.
- (c) Limitations on cost allowability.
- (1) Restructuring costs associated with external restructuring activities shall not be allowed unless--
- (i) Such costs are allowable in accordance with FAR Part 31 and DFARS Part 231;
- (ii) An audit of projected restructuring costs and restructuring savings is performed;
- (iii) The cognizant administrative contracting officer (ACO) reviews the audit report and the projected costs and projected savings, determines that overall reduced costs should result for DoD, and negotiates an advance agreement in accordance with 231.205-70(d)(8); and
- (iv) A certification is made by the Under Secretary of Defense (Acquisition & Technology), his Principal Deputy or designee (in all cases, an individual appointed by the President and confirmed by the Senate), that projections of future restructuring savings resulting for DoD from the business combination are based on audited cost data and should result in overall reduced costs for DoD.
- (2) The [audit, review, and] certification required by 231.205-70(c)(1) shall not apply to any business combination for which payments for restructuring costs were made before August 15, 1994, or for which the cognizant ACO executed an advance agreement establishing cost ceilings based on audit/negotiation of detailed cost proposals for individual restructuring projects before August 15, 1994.
- (d) Procedures and ACO responsibilities.
As soon as it is known that the contractor will incur restructuring costs [for] external restructuring activities, the cognizant ACO shall:
- [(1) Promptly execute a novation agreement, if one is required, in accordance with FAR Subpart 42.12 and DFARS Subpart 242.12 and include the provision at DFARS 242.1204(e).]
- () Direct the contractor to segregate restructuring costs and to suspend these amounts from any billings, final contract price settlements, and overhead settlements until the certification in (c)(1)(iv) is obtained.
- () Require the contractor to submit an overall plan of restructuring activities and an adequately supported proposal for planned restructuring projects. The proposal must include a breakout by year by cost element, showing the projected restructuring costs.
- (4) Notify major buying activities of contractor restructuring actions and inform them about any potential monetary impacts on major weapons programs, when known.
- (5) Upon receipt of the contractor's proposal, [as soon as practicable,] adjust forward pricing rates to reflect the impact of projected restructuring savings. [If restructuring costs are included in forward pricing rates prior to] execution of an advance agreement in accordance with 231.205-70(d)(8), [the contracting officer shall include] a repricing clause in each fixed-price action that is priced based on the rates. The repricing clause must provide for a downward price adjustment to remove restructuring costs if the certification required by 231.205-70(c)(1)(iv) is not obtained.
- (6) Upon receipt of the contractor's proposal, immediately request an audit review of the contractor's proposal.
- (7) Upon receipt of the audit report, determine if restructuring savings will exceed restructuring costs on a present value basis.
- (8) Negotiate an advance agreement with the contractor setting forth, at a minimum, [a cumulative] cost ceiling [for] restructuring projects and, when necessary, a cost amortization schedule. [The] [c]ost may not exceed the amount of projected restructuring savings on a present value basis. The advance agreement shall not be executed until the certification required by 231.205-70(c)(1)(iv) is obtained.
- (9) Submit to the Director of Defense Procurement, Office of the Under Secretary of Defense (Acquisition & Technology), ATTN: OUSD(A&T)DP/CPF, a recommendation for certification of net benefit. Include the information described in 231.205-70(e).
- (e) Information needed to obtain certification of net benefit.
- (1) The novation agreement (if one is required).
- (2) The contractor's restructuring proposal.
- (3) The proposed advance agreement.
- (4) The audit report.
- (5) Any other pertinent information.
- (6) The cognizant ACO's recommendation for certification. This recommendation must clearly indicate that contractor projections of future cost savings resulting for DoD from the business combination are based on audited cost data and should result in overall reduced costs for the Department.
SUBPART 242.12--NOVATION AND CHANGE-OF-NAME AGREEMENTS
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242.1204 Agreement to recognize a successor in interest (novation agreement).
(e) When a novation agreement is required and the transferee intends to incur restructuring costs as defined at 231.205-70, the cognizant contracting officer shall include the following provision as paragraph (b)(7) of the novation agreement instead of the paragraph (b)(7) provided in the sample format at FAR 42.1204(e):
- "(7)(i) Except as set forth in subparagraph (7)(ii) below, the Transferor and the Transferee agree that the Government is not obligated to pay or reimburse either of them for, or otherwise give effect to, any costs, taxes, or other expenses, or any related increases, directly or indirectly arising out of or resulting from the transfer or this Agreement, other than those that the Government in the absence of this transfer or Agreement would have been obligated to pay or reimburse under the terms of the contracts.
- (ii) The Government recognizes that restructuring by the Transferee incidental to the acquisition/merger may be in the best interests of the Government. Restructuring costs that are allowable under Part 31 of the Federal Acquisition Regulation (FAR) or Part 231 of the Defense Federal Acquisition Regulation Supplement (DFARS) may be reimbursed under flexibly-priced novated contracts, provided the Transferee demonstrates that the restructuring will reduce overall costs to the Department of Defense (DoD) [(and to the National Aeronautics and Space Administration (NASA), where there is a mix of DoD and NASA contracts)], and the requirements included in DFARS 231.205-70 are met. Restructuring costs shall not be allowed on novated contracts unless there is an audit of the restructuring proposal; a determination by the contracting officer of overall reduced costs to DoD/NASA; and an Advance Agreement setting forth [a cumulative] cost ceiling [for] restructuring projects and the period to which such costs shall be assigned."