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[Federal Register Volume 77, Number 19 (Monday, January 30, 2012)]
[Rules and Regulations]
[Pages 4632-4636]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-1490]

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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Part 231

RIN 0750-AG96

Defense Federal Acquisition Regulation Supplement; Independent 
Research and Development Technical Descriptions (DFARS Case 2010-D011)

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 require major contractors 
to report independent research and development (IR&D) projects.

DATES: Effective date: January 30, 2012.

FOR FURTHER INFORMATION CONTACT: Mr. Mark Gomersall, (703) 602-0302.

SUPPLEMENTARY INFORMATION: 

I. Background

    DoD published a proposed rule at 76 FR 11414 on March 2, 2011, to 
revise requirements for reporting IR&D projects to the Defense 
Technical Information Center (DTIC). Beginning in the 1990s, DoD 
reduced its technical exchanges with industry, in part to ensure 
independence of IR&D. The result has been a loss of linkage between 
funding and technological purpose. The reporting requirements of this 
rule, issued in accordance with 10 U.S.C. 2372, will provide in-process 
information from IR&D projects, for which reimbursement, as an 
allowable indirect cost, is sought from DoD, to increase effectiveness 
by providing visibility into the technical content of industry IR&D 
activities to meet DoD needs and promote the technical prowess of our 
industry. Without the collection of this information, DoD will be 
unable to maximize the value of the IR&D funds it disburses without 
infringing on the independence of contractors to choose which 
technologies to pursue in IR&D programs. The public comment period 
closed May 2, 2011. Four respondents submitted comments on the proposed 
rule. A discussion of the comments is provided in Section II.

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 are provided as follows:

A. Threshold

    Comment: The proposed rule should clarify whether the reporting 
requirement is triggered by a major contractor's aggregate IR&D costs 
or the costs of an individual IR&D project. The threshold for 
triggering the reporting requirement is low and should be increased. 
The low threshold of $50,000 magnifies the burden to contractors, ACOs, 
and DCAA auditors, as this threshold would require the reporting of 
almost any IR&D project. Respondents recommended a number of 
alternative thresholds.
    Response: The $50,000 contractor annual IR&D threshold has been 
removed from the final rule. DFARS 231.205-18(c)(iii) applies only to 
major contractors, which are defined as those contractors whose covered 
segments allocated a total of more than $11,000,000 in IR&D/Bid and 
Proposal (B&P) costs to covered contracts during the preceding fiscal 
year. However, contractors who do not meet the threshold as a major 
contractor are encouraged to use the DTIC on-line input form to report 
IR&D projects to provide DoD with visibility into the technical content 
of the contractors' IR&D activities.

 B. Proprietary Information

    Comment: The proposed rule should ensure that contractor trade 
secret and proprietary information is protected. It is apparent that 
DoD is seeking to

[[Page 4633]]

collect more than high-level, basic information regarding each IR&D 
project. Moreover, the proposed rule seeks to incentivize and encourage 
the voluntary disclosure by contractors of competition-sensitive, 
proprietary information. The respondent understands that DoD has had 
concerns with the security of proprietary information contained in the 
DTIC database, as discussed in a September 2008 presentation by the 
Deputy Undersecretary of Defense, International Technology Security. 
Therefore the respondent made the following suggestions:
    (1) DoD should first assure that the DTIC database is capable of 
protecting contractor trade secret and proprietary information. How can 
DoD assure contractors that the data will not be compromised? The 
sensitive nature of the data should require encryption at the very 
least.
    (2) DoD should ensure that provisions are in place that provide 
assurance that only DoD personnel will have access to this data. If any 
third party contractors have access, ensure that assurances/
restrictions are in place to ensure that none of a contractor's 
proprietary IR&D data is disclosed outside of DoD.
    (3) The respondent suggested that the on-line input information be 
high level only and if the area has interest to DoD, contact the 
contractor to obtain more detail. This will limit the sensitive 
information in the database and still allow DoD to obtain the 
information it seeks.
    (4) DoD should reconsider the requirement that the submission of 
IR&D data be exclusively by means of the DTIC's on-line input form, and 
alternative means for submission should be permitted.
    (5) The rule should be revised so as to avoid imposing on 
contractors the burden and expense of resisting public release under 
the Freedom of Information Act (``FOIA'') of information entered into 
the DTIC database.
    (6) The rule should be revised to make clear that the submission of 
IR&D information is voluntary, and that there is a presumption that 
information entered into and maintained in the DTIC database pursuant 
to the rule is confidential, and that its release is likely to cause 
the provider of the information substantial competitive harm if such 
information were to be released to the public. This would make it clear 
that the information entered into the DTIC database is within the scope 
of FOIA exemption (b)(4) and, therefore, not subject to public 
disclosure. The Trade Secrets Act, 18 U.S.C. Sec.  1905, prohibits the 
Government from releasing private information within its possession, 
unless law otherwise authorizes the release.
    (7) DoD should ensure that processes are in place to verify data 
for accuracy and verify input for timeliness.
    (8) The proposed rule should make clear that the Government cannot 
release or disclose proprietary IR&D submissions outside the Government 
without the data owner's written authorization. Further, contractors 
should be able to restrict the internal Government use of such IR&D 
data to DoD only. If DoD needs to share such proprietary IR&D data with 
support contractors, such as ``covered Government support contractors'' 
furnishing independent and impartial advice or technical assistance 
directly to DoD, then DoD should be required to obtain the data owner's 
written permission to do so.
    Response: (1) Information protection. DTIC advises that adequate 
controls are in place to protect information from compromise. Only 
unclassified IR&D project summary information should be provided. Both 
database screens and printouts will be marked ``Proprietary.'' Any 
markings on attachments provided by a contractor would not be altered.
    (2) Access control. DTIC advises that sufficient measures are being 
employed to limit access to authorized DoD users.
    (3) Inputs. Firms have discretion regarding presentation of 
information they regard as sensitive when they submit project 
summaries.
    (4) Submission format. The DTIC on-line input form has been 
established to provide contractors with a template for reporting on 
their IR&D projects. This format allows for submission of additional 
information as attachments.
    (5) FOIA exemption. Information submitted is within the scope of 
FOIA exemption (b)(4).
    (6) FOIA exemption and trade secrets. Information submitted is 
within the scope of FOIA exemption (b)(4).
    (7) Timeliness and accuracy. Providing updates on an annual basis 
will ensure timeliness of the information submitted. Firms will be 
responsible for the accuracy of their submissions.
    (8) Proprietary information controls. The rule makes no changes to 
existing laws and regulations dealing with Government use of 
proprietary information.

C. DTIC On-Line Form

    Comment: The rule should include a copy of the proposed DTIC on-
line input form. The proposed rule does not address the nature of the 
information that must be provided through the proposed DTIC on-line 
input form and the means of transmission of the form. The respondent 
recommended that DoD include in any final rule a copy of the DTIC form 
and instructions for completing the form. By doing so, relevant DoD 
personnel, including Administrative Contracting Officers (``ACOs'') and 
Defense Contract Audit Agency (``DCAA'') auditors, and contractors 
would be provided some certainty regarding the information that would 
be required to be entered into the DTIC database by contractors and the 
nature of the form as it may be revised. Unless the rule includes the 
form, contractors must monitor the form each year and may be subjected 
to increased reporting from the DTIC without proper notice or 
opportunity to comment.
    Response: DFARS 231.205-18(v) sets forth that the cognizant 
contract administration office shall furnish contractors with guidance 
on financial information needed to support IR&D/B&P costs and on 
technical information needed from major contractors to support the 
potential interest to DoD determination. To that extent, the DTIC on-
line input form has been established to provide contractors with a 
template for reporting on their IR&D projects, and a process to provide 
such reporting that is designed to minimize the administrative burden 
on contractors. The DTIC on-line form includes reporting elements such 
as project title, project number, anticipated expenditures, project 
description, keywords, and technology readiness level. The DTIC on-line 
form can be found at http://www.dtic.mil/ird/dticdb/index.html.

 D. Classified information

    Comment: The proposed rule fails to address issues relating to the 
reporting of classified information. The proposed rule does not address 
how contractors should handle the reporting of classified information 
should a contractor's classified IR&D project trigger the reporting 
requirement. The respondent recommended that DoD address this issue, 
including whether contractors would be required to report classified 
IR&D projects and, if such a requirement exists, how contractors would 
report this information. For example, it is unclear to the respondent 
whether classified information may properly be transmitted through the 
DTIC's on-line input form or whether the DTIC database is cleared to 
maintain classified IR&D project information.
    Response: Only unclassified IR&D project summary information should 
be

[[Page 4634]]

provided. Both database screens and printouts will be marked 
``Proprietary.''

E. Technical expertise

    Comment: The proposed rule includes DCAA in the process to identify 
IR&D projects having potential interest to DoD, but fails to consider 
needed technical expertise. ACOs have responsibility for determining 
whether IR&D projects are of potential interest to DoD and thus satisfy 
that test for allowability. The proposed rule, however, suggests that 
DCAA may play some role in the determination process, but it is not 
clear to the respondent what role DCAA is expected to play. Further, to 
the extent that the purpose of making the DTIC input and updates 
available to DCAA is to facilitate assistance to ACOs in making 
potential interest determinations, this raises the question whether 
DCAA auditors, or even ACOs, have the necessary technical expertise to 
properly evaluate IR&D project descriptions to make these 
determinations. The respondent recommended that DoD clarify what role, 
if any, DCAA is to play in determining whether IR&D projects are of 
potential interest to DoD. Further, given the increasing technical 
complexity of many IR&D projects, should the proposed rule be 
finalized, the respondent recommended that DoD consider mandating the 
use of a Defense Contract Management Agency (DCMA) or other technical 
representative to assist ACOs and, as applicable, DCAA auditors, in 
evaluating contractor IR&D project descriptions and making potential 
interest determinations.
    Response: This rule does not place additional oversight 
responsibilities onto DCAA and DCMA. Further, contracting personnel 
will make appropriate determinations whether IR&D projects are of 
potential interest to DoD and thus satisfy that test for allowability, 
in accordance with this rule. However, when specialized expertise is 
required, contracting officers are expected to consult with auditors 
and other individuals with specialized experience, as necessary, to 
ensure a full understanding of issues.

 F. Administrative Burden

    Comment: The proposed rule would impose administrative burdens on 
contractors, ACOs, and DCAA auditors. Contractors would need to 
coordinate the review and approval of the data reported, often across 
multiple business units for larger IR&D projects, to ensure the 
information is accurate and relevant and meets the reporting 
objectives. This would involve contractor management personnel, as well 
as personnel from functions such as engineering, manufacturing, quality 
assurance, and many others. In addition to the impact on contractors, 
the rule would impose administrative burdens on ACOs and DCAA auditors.
    Response: The reporting requirements in this rule will provide in-
process information to allow DoD to maximize the value of the IR&D 
funds it disburses without infringing on the independence of 
contractors to choose which technologies to pursue in IR&D programs. 
DoD will employ procedures that minimize the administrative burden on 
contractors.

 G. Intent of IR&D Reporting

    Comment: A respondent questioned what DoD really intends to do with 
the information and how much detail will be required to evaluate the 
``technical content'' of IR&D projects.
    Response: The objective is to support DoD science and technology 
and acquisition program planning personnel by providing visibility into 
the technical content of industry IR&D activities to ensure that they 
meet DoD needs and promote the technical prowess of our industry. For 
this purpose, only a concise one-and-a-half to two-page overview is 
needed.

H. DoD-sponsored IR&D

    Comment: The phrase ``DoD-sponsored IR&D'' is inconsistent with the 
concept that IR&D is developed at private expense. The respondent 
suggested eliminating the phrase DoD-sponsored IR&D.
    Response: The phrase ``DoD-sponsored IR&D'' is not used in the 
DFARS. For clarity, this notice references IR&D projects for which 
reimbursement, as an allowable indirect cost, is sought from DoD.

I. Patent Issues

    Comment: The proposed rule may force contractors to file patent 
applications on early-stage technologies prematurely. Depending on the 
specificity of the information required, the proposed rule may also 
require contractors to seek patent protection for disclosed 
technologies at an earlier date than would otherwise be the case in 
order to avoid the bar to patentability provided for in 35 U.S.C. 102. 
This would entail additional and possibly unnecessary expense, as 
further development of early-stage technologies often leads to the 
conclusion that the technology isn't viable and hence does not justify 
the expense of a patent application. Expressly providing that the 
submitted information will be accorded confidential treatment may avoid 
this result, but that isn't clear to the respondent in the proposed 
rule in its present form.
    Response: Firms control the specificity of information submitted. 
Therefore, this rule will not force contractors to file patent 
applications on early-stage technologies prematurely. Information 
submitted will be safeguarded as addressed in responses to comment B.

 J. Not a Mandated Statutory Requirement

    Comment: 10 U.S.C. 2372 does not mandate IR&D reporting. Contrary 
to the statement in the background section of the proposed rule, 10 
U.S.C 2372 does not mandate any particular form of IR&D reporting. On 
the contrary, IR&D reporting is permissive. In addition, this 
information is already required under DFARS 231.205-18 for purposes of 
determining allowability of IR&D costs. Additional reporting 
information is not and should not be required. Specifically, the 
Government already is provided the data and is responsible for reviews 
of IR&D projects that are of potential interest to DoD under the DFARS 
clause.
    Response: 10 U.S.C 2372 subsection (a), Regulations, states that 
the Secretary of Defense shall prescribe regulations governing the 
payment, by the Department of Defense, of expenses incurred by 
contractors for independent research and development and bid and 
proposal costs. To that extent, subsection (c), Additional controls, 
states that the regulations prescribed pursuant to subsection (a) may 
include implementation of regular methods for transmission from 
contractors to the Department of Defense, in a reasonable manner, of 
information regarding progress by the contractor on the contractor's 
independent research and development programs. The requirement to 
determine the allowability of IR&D costs is a pre-established 
requirement in 231.205-18(c)(iii)(B), which sets forth that allowable 
IR&D/B&P costs are limited to those for projects that are of potential 
interest to DoD. The reporting requirements of this rule will provide 
necessary information to DoD cognizant administrative contracting 
officers to make the required allowability determinations.

K. Allowability of IR&D Costs

    Comment: DoD should not make IR&D cost allowability contingent on 
reporting. Under the proposed rule, IR&D costs would be unallowable for 
projects exceeding $50,000 unless the project(s) are reported in the 
DTIC.

[[Page 4635]]

Using the disallowance of costs to enforce the proposed reporting 
requirement is unnecessary and unreasonable and would result in 
sanctions that are disproportional to the potential harm to DoD. 
Normally, if a contract fails to comply with such a contractual 
reporting requirement, the noncompliance would be treated as a breach 
of contract judged on the basis of its materiality. Moreover, claimed 
contractor IR&D costs are currently auditable by the Defense Contract 
Audit Agency to support G&A rate audits. DoD already is protected from 
improper charging including the remedy of double damages and interest 
on expressly unallowable costs.
    Response: The requirement to determine the allowability of IR&D 
costs is a pre-established requirement in the DFARS. Specifically, 
231.205-18(c)(iii)(B) sets forth that allowable IR&D/B&P costs are 
limited to those costs for projects that are of potential interest to 
DoD. Further, 231.205-18(c)(iv) states that for major contractors, the 
cognizant ACO or corporate ACO shall determine whether IR&D/B&P 
projects are of potential interest to DoD. This rule establishes 
reporting requirements to provide necessary information to DoD 
cognizant ACOs to make the required allowability determinations.

 L. Impacts to Small Businesses

    Comment: The proposed rule's Regulatory Flexibility Act section 
states that the reporting requirements will not apply to a significant 
number of small businesses. If the reporting requirement is not limited 
to major contractors and is not on a per project basis, the low 
threshold likely will capture many small businesses. Given the current 
state of DoD contracting and the complex systems required to support 
DoD, there are very few IR&D projects that can be performed for less 
than $50,000 and thus the requirements, in effect, will apply to most 
IR&D, including those performed by small businesses. The respondent, 
therefore, respectfully disagreed with DoD's suggestion that the 
requirements will not apply to a significant number of small 
businesses.
    Response: DoD does not expect this proposed 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., because 231.205-18(c)(iii) applies only to major contractors, 
which are defined as those whose covered segments allocated a total of 
more than $11,000,000 in IR&D/B&P costs to covered contracts during the 
preceding fiscal year. The $50,000 contractor annual IR&D threshold has 
been removed from the final rule. However, DoD has included a new 
sentence in the rule to encourage small businesses to submit their 
project description since there may be an advantage to any size 
business to have its projects included.

 M. Increased Costs

    Comment: The scope and sweep of this proposed rule is not well 
defined and is left open to conflicting interpretations. As such, it is 
difficult for companies to assess the costs of compliance or judge the 
accuracy of the burden of the proposed information collected without 
further specificity. For example, the term ``project'' is undefined. It 
is not uncommon for contractors to account for their IR&D costs not on 
a project basis but only as charge numbers or cost centers.
    Response: The IR&D cost principle at FAR 31.205-18(b) states ``The 
requirements of 48 CFR 9904.420, Accounting for independent research 
and development costs and bid and proposal costs, are incorporated in 
their entirety * * *.'' The cost accounting standard at 48 CFR 
9904.420-40, Fundamental requirement, paragraph (a) states, ``The basic 
unit for identification and accumulation of Independent Research and 
Development (IR&D) and Bid and Proposal (B&P) costs shall be the 
individual IR&D or B&P project.'' The proposed rule used terms in long 
use with understood meanings. Further, for contractors to account for 
their IR&D costs on other than a project basis would result in 
noncompliant reporting of IR&D costs if the amount of IR&D costs were 
determined to be material in amount.

N. Public Hearing

    Comment: The proposed rule raises many issues and leaves many 
questions unanswered. In light of this, one respondent requested that 
DoD hold a public hearing to further discuss the proposed rule and 
obtain additional comments.
    Response: DoD acknowledges the respondent's recommendation. 
However, DoD has determined that a public meeting is not necessary at 
this time. Through the public comments received in response to the 
proposed rule, DoD has determined that it has a clear understanding of 
public issues and concerns.

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 a significant regulatory action and, therefore, was 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 has prepared a final regulatory flexibility analysis consistent 
with 5 U.S.C. 604. A copy of the analysis may be obtained from the 
point of contact specified herein. The analysis is summarized as 
follows:
    DoD does not expect this final 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., because 
reporting the IR&D projects utilizing the DTIC on-line input form does 
not require contractors to expend significant effort or cost. 
Furthermore, since 231.205-18(c)(iii) applies only to major 
contractors, which are defined as those whose covered segments 
allocated a total of more than $11,000,000 in IR&D/B&P costs to covered 
contracts during the preceding fiscal year, the IR&D project reporting 
requirements will not apply to a significant number of small entities. 
Reporting the IR&D projects will utilize the DTIC on-line input form, 
which does not require contractors to expend significant effort or 
cost. No alternatives to the rule that would meet the stated objectives 
were identified by the agency.

V. Paperwork Reduction Act

    The rule contains 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). OMB has cleared this information 
collection requirement through January 31, 2015 under OMB Control 
Number 0704-0483, titled: Defense Federal Acquisition Regulation 
Supplement (DFARS) Part 231, Contract Cost Principles and Procedures.

[[Page 4636]]

List of Subjects in 48 CFR Part 231

    Government procurement.

Ynette R. Shelkin,
Editor, Defense Acquisition Regulations System.

    Therefore, 48 CFR part 231 is amended as follows:

PART 231-- CONTRACT COST PRINCIPLES AND PROCEDURES

0
1. The authority citation for 48 CFR part 231 is revised to read as 
follows:

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

0
2. In section 231.205-18, add paragraph (c)(iii)(C) and revise 
paragraph (c)(iv) introductory text to read as follows:

231.205-18  Independent research and development and bid and proposal 
costs.

* * * * *
    (c) * * *
    (iii) * * *
    (C) For a contractor's annual IR&D costs to be allowable, the IR&D 
projects generating the costs must be reported to the Defense Technical 
Information Center (DTIC) using the DTIC's on-line input form and 
instructions at http://www.dtic.mil/ird/dticdb/index.html. The inputs 
must be updated at least annually and when the project is completed. 
Copies of the input and updates must be made available for review by 
the cognizant administrative contracting officer (ACO) and the 
cognizant Defense Contract Audit Agency auditor to support the 
allowability of the costs. Contractors that do not meet the threshold 
as a major contractor are encouraged to use the DTIC on-line input form 
to report IR&D projects to provide DoD with visibility into the 
technical content of the contractors' IR&D activities.
    (iv) For major contractors, the ACO or corporate ACO shall--
* * * * *
[FR Doc. 2012-1490 Filed 1-27-12; 8:45 am]
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