80 FR 31309 - Defense Federal Acquisition Regulation Supplement: Offset Costs (DFARS Case 2015-D028)

DEPARTMENT OF DEFENSE
Defense Acquisition Regulations System

Federal Register Volume 80, Issue 105 (June 2, 2015)

DoD is issuing an interim rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to clarify requirements related to costs associated with indirect offsets under Foreign Military Sales agreements.

[Federal Register Volume 80, Number 105 (Tuesday, June 2, 2015)]
[Rules and Regulations]
[Pages 31309-31310]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-12901]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Part 225

RIN 0750-AI59


Defense Federal Acquisition Regulation Supplement: Offset Costs 
(DFARS Case 2015-D028)

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Interim rule.

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SUMMARY: DoD is issuing an interim rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to clarify requirements 
related to costs associated with indirect offsets under Foreign 
Military Sales agreements.

DATES: Effective June 2, 2015.
    Comment Date: Comments on the interim rule should be submitted in 
writing to the address shown below on or before August 3, 2015, to be 
considered in the formation of a final rule.

ADDRESSES: Submit comments identified by DFARS Case 2015-D028, using 
any of the following methods:
    [cir] Regulations.gov: http://www.regulations.gov. Submit comments 
via the Federal eRulemaking portal by entering ``DFARS Case 2015-D028'' 
under the heading ``Enter keyword or ID'' and selecting ``Search.'' 
Select the link ``Submit a Comment'' that corresponds with ``DFARS Case 
2015-D028.'' Follow the instructions provided at the ``Submit a 
Comment'' screen. Please include your name, company name (if any), and 
``DFARS Case 2015-D028'' on your attached document.
    [cir] Email: [email protected]. Include DFARS Case 2015-D028 in 
the subject line of the message.
    [cir] Fax: 571-372-6094.
    [cir] Mail: Defense Acquisition Regulations System, Attn: Mr. Mark 
Gomersall, OUSD (AT&L) DPAP/DARS, Room 3B941, 3060 Defense Pentagon, 
Washington, DC 20301-3060.
    Comments received generally will be posted without change to http://www.regulations.gov, including any personal information provided. To 
confirm receipt of your comment(s), please check www.regulations.gov, 
approximately two to three days after submission to verify posting 
(except allow 30 days for posting of comments submitted by mail).

FOR FURTHER INFORMATION CONTACT: Mr. Mark Gomersall, telephone 571-372-
6099.

SUPPLEMENTARY INFORMATION:

I. Background

    This interim rule revises DFARS 225.7303-2, ``Cost of doing 
business with a foreign government or an international organization,'' 
by adding paragraph (a)(3)(iii) to provide guidelines to contracting 
officers when an indirect offset is a condition of a Foreign Military 
Sales (FMS) acquisition. A reference to the Defense Security 
Cooperation Agency manual is also updated at DFARS 225.7301.
    This interim rule specifically addresses indirect offsets as they 
are applied to the Defense Security Cooperation Agency's FMS cases.

II. Discussion and Analysis

    DoD administers FMS programs to maintain and strengthen 
relationships with partner nations. Failure to nurture these 
relationships may create a threat to national security. DoD's FMS 
program allows foreign customers to request, and pay for, through 
inclusion of the cost in the FMS Letter of Offer and Acceptance (LOA) 
and DoD contract, offsets that are directly related to the FMS end 
items (i.e., ``direct offsets''), as well as offsets that are not 
directly related to the end item (i.e., ``indirect offsets'').
    DoD recognizes the need to have offsets embedded in DoD FMS 
contracts. However, the decision whether to engage in indirect offsets 
and the responsibility for negotiating and implementing these offset 
arrangements ultimately reside with the FMS customer and contractor(s) 
involved. Thus, the DoD contracting officer is not provided the 
information necessary to negotiate cost or price of the indirect 
offsets, particularly with respect to price reasonableness 
determinations pursuant to FAR part 15. This interim rule provides that 
under these circumstances, when the provision of an indirect offset is 
a condition of the FMS acquisition, and provided that the U.S. defense 
contractor submits to the contracting officer an offset agreement or 
other substantiating documentation, the indirect offset costs are 
deemed reasonable for the purposes of FAR part 31.

III. 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. This rule is not a major rule 
under 5 U.S.C. 804.

IV. Regulatory Flexibility Act

    DoD does not expect this rule to have a significant economic impact 
on a substantial number of small entities within the meaning of the 
Regulatory Flexibility Act, 5 U.S.C. 601, et seq. However, an initial 
regulatory flexibility analysis has been performed, and is summarized 
as follows:
    The objective of this rule is to provide clarification to 
contracting officers when indirect offsets are a condition of an FMS 
acquisition. This rule revises DFARS 225.7303-2, ``Cost of doing 
business with a foreign government or an international organization,'' 
by adding paragraph (a)(3)(iii) to provide guidelines to contracting 
officers when an indirect offset is a condition of a Foreign Military 
Sales (FMS) acquisition. This interim rule specifically addresses 
indirect offsets as they are applied to the Defense Security 
Cooperation Agency's FMS cases.
    This rule does not add any reporting or recordkeeping requirements. 
The rule does not duplicate, overlap, or conflict with any other 
Federal rules. This rule does not impose any significant economic 
burden on small firms because the DFARS amendments merely clarify that 
contracting officers are not responsible for making a determination of 
price reasonableness for indirect offset agreements, which are not 
within their purview.
    DoD did not identify any alternatives that could reduce the burden 
and still meet the objectives of the rule.
    DoD invites comments from small business concerns and other 
interested parties on the expected impact of this rule on small 
entities.
    DoD will also consider comments from small entities concerning the 
existing regulations in subparts affected by this rule in accordance 
with 5 U.S.C. 610. Interested parties must submit such comments 
separately and should cite 5

[[Page 31310]]

U.S.C. 610 (DFARS Case 2015-D028), in correspondence.

V. Paperwork Reduction Act

    The rule does not contain any information collection requirements 
that require the approval of the Office of Management and Budget under 
the Paperwork Reduction Act (44 U.S.C. chapter 35).

VI. Determination to Issue an Interim Rule

    A determination has been made under the authority of the Secretary 
of Defense that urgent and compelling reasons exist to promulgate this 
interim rule without prior opportunity for public comment. DoD 
administers FMS programs to maintain and strengthen relationships with 
partner nations. Failure to nurture these relationships may create a 
threat to national security. This action is necessary because of the 
recent and foreseeable trend of increasing numbers and complexity of 
indirect offsets desired by DoD's Foreign Military Sales (FMS) 
customers.
    Currently, Defense Federal Acquisition Regulation Supplement 
(DFARS) 225.7303-2(a)(3)(ii) provides that the U.S. Government assumes 
no obligation to satisfy or administer the offset requirement or to 
bear any of the associated costs. However, DFARS 225.7301(b) provides 
that the U.S. Government conduct FMS acquisitions under the same 
acquisition and contract management procedures used for other defense 
acquisitions. This requires the contracting officer to adhere to FAR 
provisions concerning the negotiation of contracts and subcontracts 
(FAR part 15) and contract cost principles (FAR part 31), and thus be 
capable of attesting to the price reasonableness of FMS contracts, 
including indirect offset costs that are not tied directly to the end 
item. Contracting officers must follow these regulations even though no 
DoD appropriated funds are being used to pay for the effort, and DoD 
contracting officers have no insight to pricing of the indirect offset. 
In the past several years, compliance with regulations has resulted in 
an inability of contracting officers to finalize FMS contract 
negotiations.
    The interim rule affirms that all offset costs that involve 
benefits provided by a U.S. defense contractor to an FMS customer that 
are unrelated to the item being purchased under a Letter of Offer and 
Acceptance (LOA), i.e., indirect offset costs, are deemed reasonable 
for purposes of FAR part 31. The rule provides that no additional 
analysis is necessary on the part of the contracting officer, provided 
that the U.S. defense contractor submits to the contracting officer a 
signed offset agreement or other documentation showing that the FMS 
customer has made the provision of an indirect offset of a certain 
dollar value a condition of the FMS acquisition. Finally, the rule 
provides that the FMS customer shall be notified through the LOA that 
indirect offset costs are deemed reasonable without any further 
analysis by the contracting officer.
    It is essential that DoD implement this interim rule immediately to 
clarify that contracting officers are not required to make price 
reasonableness determinations on costs associated with indirect offsets 
under FMS agreements, which, while included in the FMS contract, fall 
outside of the DoD contracting officer's purview. Immediate 
implementation will allow DoD contracting officers to finalize pending 
negotiations for FMS contracts to support U.S. allies and partners, and 
maintain bilateral relationships. However, pursuant to 41 U.S.C. 1707 
and FAR 1.501-3(b), DoD will consider public comments received in 
response to this interim rule in the formation of the final rule.

List of Subjects in 48 CFR Part 225

    Government procurement.

Amy G. Williams,
Editor, Defense Acquisition Regulations System.

    Therefore, 48 CFR part 225 is amended as follows:

PART 225--FOREIGN ACQUISITION

0
1. The authority citation for 48 CFR part 225 continues to read as 
follows:

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


0
2. Amend section 225.7301 by revising paragraph (a) to read as follows:


225.7301  General.

    (a) The U.S. Government sells defense articles and services to 
foreign governments or international organizations through FMS 
agreements. The agreement is documented in a Letter of Offer and 
Acceptance (LOA) (see the Defense Security Cooperation Agency (DSCA) 
Security Assistance Management Manual (DSCA 5105.38-M)).
* * * * *

0
3. Amend section 225.7303-2 by--
0
a. Adding a heading to paragraph (a)(3), and revising the introductory 
text of paragraph (a)(3); and
0
b. Adding a new paragraph (a)(3)(iii).
    The revision and additions read as follows:


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

    (a) * * *
    (3) Offsets. For additional information see PGI 225.7303-2(a)(3)), 
and also see 225.7306.
* * * * *
    (iii) All offset costs that involve benefits provided by the U.S. 
defense contractor to the FMS customer that are unrelated to the item 
being purchased under the LOA (indirect offset costs) are deemed 
reasonable for purposes of FAR part 31 with no further analysis 
necessary on the part of the contracting officer, provided that the 
U.S. defense contractor submits to the contracting officer a signed 
offset agreement or other documentation showing that the FMS customer 
has made the provision of an indirect offset of a certain dollar value 
a condition of the FMS acquisition. FMS customers are placed on notice 
through the LOA that indirect offset costs are deemed reasonable 
without any further analysis by the contracting officer.
* * * * *
[FR Doc. 2015-12901 Filed 6-1-15; 8:45 am]
BILLING CODE 5006-01-P