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[Federal Register Volume 78, Number 101 (Friday, May 24, 2013)]
[Rules and Regulations]
[Pages 31399-31402]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-12411]

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DEPARTMENT OF DEFENSE

Office of the Secretary

32 CFR Part 165

[Docket ID: DOD-2009-OS-0030]
RIN 0790-AI45

Recoupment of Nonrecurring Costs (NCs) on Sales of U.S. Items

AGENCY: Office of the Under Secretary of Defense (Comptroller)/Chief 
Financial Officer, DoD.

ACTION: Final rule.

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SUMMARY: This rule updates policy, responsibilities, and procedures for 
calculating and assessing NC recoupment charges on sales of items 
developed for or by the Department of Defense to non-U.S. Government 
customers. All costs related to the sale of the items are fully 
reimbursable by the non-U.S. Government.

DATES: Effective Date: This rule is effective June 24, 2013.

FOR FURTHER INFORMATION CONTACT: Claire Nelson, 703-602-0250.

SUPPLEMENTARY INFORMATION: 

Executive Summary

I. Purpose of the Regulatory Action

    This rule updates policy, responsibilities, and procedures to 
conform with sections 2761(e)(1)(B), 2761 (e)(2), and 2767(b) of 
Title22, United States Code (U.S.C.) (also known as ``sections 
21(e)(1)(B), 21(e)(2), and 27(b) of the Arms Export Control Act, as 
amended'') for calculating and assessing NC recoupment charges on sales 
of items developed for or by the Department of Defense to non-U.S. 
Government customers.

II. Summary of the Major Provisions of the Regulatory Action In 
Question

    This rule provides guidance for reviewing NC waiver requests; 
clarifies when NC calculations are used; clarifies the types of DoD 
agreements covered; and provides additional waiver authorities.

III. Costs and Benefits

    All costs related to the sale of the items are fully reimbursable 
by the non-U.S. Government customers. The Department of Defense does 
not incur cost nor receive profit for the items sold. The non-U.S. 
Government customers benefit from the sale of the items from the 
Department of Defense. The NC amount collected in 2010 and 2011 was 
$4.8 and $9.6 million, respectively. On average it is roughly $7.2 
million annually.

Public Comments

    The Department of Defense published a proposed rule on November 4, 
2011 (76 FR 68376-68378). No comments were received on the proposed 
rule.
    The Department has made a few additional changes in the final rule. 
Reference citations were updated. Definitions were updated or added for 
clarification. This final rule provides guidance for reviewing NC 
waiver requests; clarifies when NC calculations are used; clarifies the 
types of DoD agreements covered; and provides additional waiver 
authorities.

Regulatory Procedures

Executive Order 12866, ``Regulatory Planning and Review'' and Executive 
Order 13563 ``Improving Regulation and Regulatory Review''

    It has been certified that 32 CFR part 165 does not:
    (1) Have an annual effect on the economy of $100 million or more or 
adversely affect in a material way the economy; a section of the 
economy; productivity; competition; jobs; the environment; public 
health or safety; or State, local, or tribal governments or 
communities;
    (2) Create a serious inconsistency or otherwise interfere with an 
action taken or planned by another Agency;
    (3) Materially alter the budgetary impact of entitlements, grants, 
user fees, or loan programs, or the rights and obligations of 
recipients thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the President's priorities, or the principles set forth in 
these Executive Orders.

Section 202, Public Law 104-4, ``Unfunded Mandates Reform Act''

    It has been certified that 32 CFR part 165 does not contain a 
Federal mandate that may result in expenditure by State, local and 
tribal governments, in aggregate, or by the private sector, of $100 
million or more in any one year.

[[Page 31400]]

Public Law 96-354, ``Regulatory Flexibility Act'' (5 U.S.C. 601)

    It has been certified that 32 CFR part 165 is not subject to the 
Regulatory Flexibility Act (5 U.S.C. 601) because it would not if 
promulgated, have a significant economic impact on a substantial number 
of small entities.

Public Law 96-511, ``Paperwork Reduction Act'' (44 U.S.C. Chapter 35)

    It has been certified that 32 CFR part 165 does not impose 
reporting or recordkeeping requirements under the Paperwork Reduction 
Act of 1995.

Executive Order 13132, ``Federalism''

    It has been certified that 32 CFR part 165 does not have federalism 
implications, as set forth in Executive Order 13132. This rule does not 
have substantial direct effects on:
    (1) The States;
    (2) The relationship between the National Government and the 
States; or
    (3) The distribution of power and responsibilities among the 
various levels of Government.

List of Subjects in 32 CFR Part 165

    Armed forces, Arms and munitions, Government contracts.
    Accordingly 32 CFR Part 165 is revised to read as follows:

PART 165--RECOUPMENT OF NONRECURRING COSTS (NCs) ON SALES OF U.S. 
ITEMS

Sec.
165.1 Purpose.
 165.2 Applicability.
165.3 Definitions.
165.4 Policy.
165.5 Responsibilities.
165.6 Procedures.
165.7 Waivers (including reductions).

    Authority:  22 U.S.C. 2761(e)(1)(B); 22 U.S.C. 2761 (e)(2); and 
22 U.S.C. 2767(b)

Sec.  165.1  Purpose.

    This part updates policy, responsibilities, and procedures to 
conform with 22 U.S.C. 2761(e)(1)(B), 2761 (e)(2), and 2767(b) (also 
known as ``sections 21(e)(1)(B), 21(e)(2), and 27(b) of the Arms Export 
Control Act, as amended'') for calculating and assessing NC recoupment 
charges on sales of items developed for or by the Department of Defense 
to non-U.S. Government customers.

Sec.  165.2  Applicability.

    (a) This part applies to the Office of the Secretary of Defense, 
the Military Departments, the Office of the Chairman of the Joint 
Chiefs of Staff and the Joint Staff, the Combatant Commands, the Office 
of the Inspector General of the Department of Defense, the Defense 
Agencies, the DoD Field Activities, and all other organizational 
entities within the Department of Defense (hereafter referred to 
collectively as the ``DoD Components'').
    (b) This part does not apply to sales of excess property when 
accountability has been transferred to property disposal activities and 
the property is sold in open competition to the highest bidder.

Sec.  165.3  Definitions.

    The following definitions apply to this part.
    Blanket waiver. An NC recoupment charge waiver that is not related 
to a particular sale; for example, waivers for all sales to a country 
or all sales of a weapon system.
    Cooperative projects. Defined in 22 U.S.C. 2767(b).
    Cost pool. The total cost to be distributed across the specific 
number of units, normally the number of units produced plus those 
planned to be produced. The nonrecurring research, development, test, 
and evaluation cost pool comprises the costs described in the 
definition for nonrecurring research, development, test and evaluation 
costs in this section. The nonrecurring production cost pool comprises 
costs described in the definition for nonrecurring production costs.
    Foreign military sale. A sale by the U.S. Government (U.S.G.) of 
defense items or defense services to a foreign government or 
international organization pursuant to 22 U.S.C. Chapter 39.
    Major defense equipment. Any item of significant military equipment 
on the United States Munitions List having a nonrecurring research, 
development, test, and evaluation cost of more than 50 million dollars 
or a total production cost of more than 200 million dollars. The 
determination of whether an item meets the major defense equipment 
dollar threshold for research, development, test, and evaluation shall 
be based on DoD obligations recorded to the date the equipment is 
offered for sale. Production costs shall include costs incurred by the 
Department of Defense. Production costs for the foreign military sales 
program and known direct commercial sales production are excluded.
    Model. A basic alpha-numeric designation in a weapon system series 
(e.g., a ship hull series, an equipment or system series, an airframe 
series, or a vehicle series). For example, the AN/TPQ-36(V)2 and the 
(AN/TPQ-36(V)10 are different models in the same radar system series.
    Nonrecurring production costs. Those one-time costs incurred in 
support of previous production of the model specified and those costs 
specifically incurred in support of the total projected production run. 
Those NCs include DoD expenditures for preproduction engineering; 
special tooling; special test equipment; production engineering; 
product improvement; destructive testing; and pilot model production, 
testing, and evaluation. That includes costs of any engineering change 
proposals initiated before the date of calculations of the NC 
recoupment charge. Nonrecurring production costs do not include DoD 
expenditures for machine tools, capital equipment, or facilities for 
which contractor rental payments are made or waived in accordance with 
the Defense Federal Acquisition Regulation Supplement.\1\
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    \1\ Available at http://www.acq.osd.mil/dpap/dars/dfarspgi/current/index.html.
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    Nonrecurring research, development, test and evaluation costs. 
Those costs funded by a research, development, test, and evaluation 
appropriation to develop or improve the product or technology under 
consideration either through contract or in-house DoD effort. This 
includes costs of any engineering change proposal started before the 
date of calculation of the NC recoupment charges as well as projections 
of such costs, to the extent additional effort applicable to the sale 
model or technology is necessary or planned. It does not include costs 
funded by either procurement or operation and maintenance 
appropriations.
    Pro rata recovery of NCs. Equal distribution (proration) of a pool 
of NCs to a specific number of units that benefit from the investment 
so that a DoD Component shall collect from a customer a fair (pro rata) 
share of the investment in the product being sold. The production 
quantity base used to determine the pro rata calculation of major 
defense equipment includes total production.
    Significant change in NCs recoupment charge. (1) A significant 
change in an NC recoupment charge occurs when:
    (i) A new calculation shows a change of 30 percent of the current 
system NC charge.
    (ii) The NC unit charge increases or decreases by 50,000 dollars or 
more, or
    (iii) Where the potential for a 5 million dollar change in 
recoupment exists.
    (2) The total collections may be estimated based on the projected 
sales quantities. A significant change occurs

[[Page 31401]]

when potential collections increase or decrease by 5 million dollars.
    Special research, development, test, and evaluation and 
nonrecurring production costs. Costs incurred under a foreign military 
sale at the request of, or for the benefit of, a foreign customer to 
develop a special feature or unique or joint requirement. Those costs 
must be paid by the customer as they are incurred.

Sec.  165.4  Policy.

    It is DoD policy that:
    (a) The NC recoupment charge shall be imposed for sales of major 
defense equipment only as required by an Act of Congress. The USD(P), 
through the Defense Security Cooperation Agency, may grant a waiver to 
recoupment charges in accordance with in accordance with this part and 
DoD Directive 5105.65.'' \2\
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    \2\ Available at http://www.dtic.mil/whs/directives/corres/pdf/510565p.pdf.
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    (b) The NC charges shall be based on the amount of the Department 
of Defense nonrecurring investment in an item.

Sec.  165.5  Responsibilities.

    (a) Under Secretary of Defense (Comptroller)/Chief Financial 
Officer (USD(C)/CFO)) shall provide necessary financial management 
guidance to the Department of Defense regarding the recoupment of NC.
    (b) The Under Secretary of Defense for Acquisition, Technology, and 
Logistics shall take appropriate action to ensure the Defense Federal 
Acquisition Regulation Supplement remains in accordance with this part.
    (c) The USD(P) shall:
    (1) Monitor the application of this part.
    (2) Review and approve NC recoupment charges.
    (3) Review and approve NC recoupment charge waiver requests 
received from foreign countries and international organizations for 
foreign military sales.
    (4) Oversee publication of a listing of items developed for or by 
the Department of Defense to which NC recoupment charges are 
applicable.
    (5) Use the guidance in Sec.  165.7 of this part to review NC 
waiver requests.
    (d) The Secretaries of the Military Departments and the Directors 
of the Defense Agencies shall:
    (1) Determine the DoD nonrecurring investment in items developed 
for or by the Department of Defense and perform required pro rata 
calculations in accordance with this part and financial management 
guidance from USD(C)/CFO when a military equipment asset type is 
considered a candidate for sale.
    (2) Validate and provide recommended charges to the USD(P). Retain 
supporting documentation until the item has been eliminated from the NC 
recoupment charge listing.
    (3) Review approved NC recoupment charges on a biennial basis to 
determine if there has been a change in factors or assumptions used to 
compute a NC recoupment charge and, if there is a significant change in 
a NC recoupment charge, recommend the change to USD(P) for review, 
approval, and publication in DSCA 5105.38-M, ``Security Assistance 
Management Manual (SAMM).'' \3\
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    \3\ Available at http://www.dsca.osd.mil/samm/.
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    (4) Collect charges on foreign military sales, in accordance with 
DoD 7000.14-R.\4\
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    \4\ Available at http://www.defenselink.mil/comptroller/fmr/.
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    (5) Deposit collections to accounts as prescribed by the USD(C)/
CFO.
    (6) Request guidance from the USD(P), within 90 days after 
determining that an issue concerning an NC recoupment charge cannot be 
resolved.

Sec.  165.6  Procedures.

    (a) The NC recoupment charge to be reimbursed shall be a pro rata 
recovery of NCs for the applicable major defense equipment (MDE). 
Recovery of NC recoupment charges shall cease upon the recovery of 
total DoD nonrecurring investment costs. Such charges shall be based on 
a cost pool as defined in Sec.  165.3. For an MDE system that includes 
more than one component, a ``building block'' approach (i.e., the sum 
of NC recoupment charges for individual components) shall be used to 
determine the NC recoupment charge for the sale of the entire system.
    (b) The NC recoupment charge shall not apply when a waiver has been 
approved by USD(P), in accordance with Sec.  165.7, or when sales are 
financed with USG funds made available on a non-repayable basis. 
Approved revised NC recoupment charges shall not be applied 
retroactively to accepted foreign military sales agreements.
    (c) When MDE is sold at a reduced price due to age or condition, 
the equipment's NC recoupment charge shall be reduced by the same 
percentage reduction.
    (d) The full amount of costs for ``special'' research, development, 
test, and evaluation and nonrecurring production costs incurred for the 
benefit of particular customers shall be paid by those customers. 
However, when a subsequent purchaser requests the same specialized 
features that resulted from the added ``special'' research, 
development, test, and evaluation and nonrecurring production costs, a 
pro rata share of those costs may be paid by the subsequent purchaser 
and transferred to the original customer if those special NCs exceed 50 
million dollars. The pro rata share may be a unit charge determined by 
the DoD Component as a result of distribution of the total costs 
divided by the total production. Unless otherwise authorized by USD(P), 
special research, development, test, and evaluation and nonrecurring 
production costs will not be collected after 10 years have passed since 
the date the original FMS customer accepted the FMS Letter of Offer and 
Acceptance (LOA) that included the special NC charges. The USG shall 
not be charged any NC recoupment charges if it adopts the features for 
its own use or provides equipment with such features under a U.S. grant 
aid or similar program.
    (e) Cooperative DoD agreements, to include co-production, co-
development and cooperative development agreements, shall use the 
policy in this part to determine the allocation basis for recouping the 
participant investment costs from third-party purchasers. Each 
respective DoD agreement shall bind all parties to the agreement to 
comply with the policies in this part regarding third party sales and 
for the distribution of recouped funds among the parties.

Sec.  165.7  Waivers (including reductions).

    (a) Title 22, U.S.C. 2761(e)(1)(B) requires the recoupment of a 
proportionate amount of NCs of MDE from foreign military sales 
customers.
    (b) Pursuant to 22 U.S.C. 2761(e)(2)(A), a waiver or reduction in 
the NC for a specific sale may be made if the sale will significantly 
advance U.S. Government interests in:
    (1) Standardization with the North Atlantic Treaty Organization.
    (2) Standardization with Australia, Israel, Japan, New Zealand, or 
the Republic of Korea in furtherance of mutual defense treaties with 
one or more of those countries.
    (3) Foreign procurement in the United States under a co-production 
agreement.
    (c) In accordance with 22 U.S.C. 2761(e)(2)(B), a waiver may be 
made if:
    (1) Imposition of an NC recoupment charge likely would result in 
the loss of the sale; or,
    (2) The sale is for an MDE also being procured for the Military 
Services, and will result in DoD unit cost savings that substantially 
offset the revenue foregone by waiving the recoupment charge because 
the total quantity of purchased

[[Page 31402]]

equipment caused a reduction in the unit cost.
    (d) In accordance with 22 U.S.C. 2761(e)(2)(C), any increase in a 
NC charge previously approved as appropriate may be waived for a 
particular sale if the increase results from a correction of an 
estimate of the production quantity base that was used for calculating 
the charge.
    (e) Requests for waivers should originate with the foreign 
government and shall provide information on the extent of 
standardization to be derived as a result of the waiver.
    (1) Blanket waiver requests should not be submitted and shall not 
be considered.
    (2) A waiver request shall not be considered for a sale that was 
accepted without an NC recoupment charge waiver, unless the acceptance 
was conditional on consideration of the waiver request.
    (3) Requests for waivers shall be processed expeditiously, and 
approved or disapproved by USD(P) within 60 days of receipt. A waiver 
in whole or in part of the recoupment charge or a denial of the request 
shall be provided in writing.

    Dated: May 21, 2013.
Patricia L. Toppings,
OSD Federal Register, Liaison Officer, Department of Defense.
[FR Doc. 2013-12411 Filed 5-23-13; 8:45 am]
BILLING CODE 5001-06-P
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