231.205-70 External restructuring costs.

(a) Scope. This subsection—

(1) Prescribes policies and procedures for allowing contractor external restructuring costs when

savings would result for DoD; and

(2) Implements 10 U.S.C. 3761.

(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 determination requirements of paragraph (c)(4) of this subsection; 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. Restructuring costs associated with external restructuring

activities shall not be allowed unless—

(1) Such costs are allowable in accordance with FAR Part 31 and DFARS Part 231;

(2) An audit of projected restructuring costs and restructuring savings is performed;
(3) The cognizant administrative contracting officer (ACO) reviews the audit report and the

projected costs and projected savings, and negotiates an advance agreement in accordance with

paragraph (d) of this subsection; and

(4)(i) The official designated in paragraph (c)(4)(ii) of this subsection determines in writing that the

audited projected savings, on a present value basis, for DoD resulting from the restructuring will

exceed either—

(A) The costs allowed by a factor of at least two to one; or

(B) The costs allowed, and the business combination will result in the preservation of a critical

capability that might otherwise be lost to DoD.

(ii)(A) If the amount of restructuring costs is expected to exceed $25 million over a 5-year period, the

designated official is the Under Secretary of Defense (Acquisition and Sustainment) or the Principal

Deputy. This authority may not be delegated below the level of an Assistant Secretary of Defense.

(B) For all other cases, the designated official is the Director of the Defense Contract Management

Agency. The Director may not delegate this authority.

(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 follow the

procedures at PGI 231.205-70 (d).

(e) Information needed to obtain a determination.

(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 a determination. This recommendation must clearly

indicate one of the following, consistent with paragraph (c)(4)(i) of this subsection:

(i) The audited projected savings for DoD will exceed the costs allowed by a factor of at least two to

one on a present value basis.

(ii) The business combination will result in the preservation of a critical capability that might

otherwise be lost to DoD, and the audited projected savings for DoD will exceed the costs allowed on

a present value basis.

(f) Contracting officer responsibilities.

(1) The contracting officer, in consultation with the cognizant ACO, should consider including a

repricing clause in noncompetitive fixed-price contracts that are negotiated during the period

between—

(i) The time a business combination is announced; and
(ii) The time the contractor’s forward pricing rates are adjusted to reflect the impact of

restructuring.

(2) The decision to use a repricing clause will depend upon the particular circumstances involved,

including—

(i) When the restructuring will take place;

(ii) When restructuring savings will begin to be realized;

(iii) The contract performance period;

(iv) Whether the contracting parties are able to make a reasonable estimate of the impact of

restructuring on the contract; and

(v) The size of the potential dollar impact of restructuring on the contract.

(3) If the contracting officer decides to use a repricing clause, the clause must provide for a

downward-only price adjustment to ensure that DoD receives its appropriate share of restructuring

net savings.

Parent topic: 231.205 Selected costs.