[Federal Register Volume 76, Number 214 (Friday, November 4, 2011)]
[Proposed Rules]
[Pages 68376-68378]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-28601]



Office of the Secretary

32 CFR Part 165

[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: Proposed rule.


SUMMARY: This rule updates policy, responsibilities, and procedures to 
conform with section 21(e)(1)(B) of Public Law 90-629, as amended, and 
section 9701 of title 31, United States Code (U.S.C.), 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.

DATES: Comments must be received by January 3, 2012.

ADDRESSES: You may submit comments, identified by docket number and/or 
RIN number and title, by any of the following methods:
     Federal Rulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Federal Docket Management System Office, 1160 
Defense Pentagon, Room 3C843, Washington, DC 20301-1160.
    Instructions: All submissions received must include the agency name 
and docket number or Regulatory Information Number (RIN) for this 
Federal Register document. The general policy for comments and other 
submissions from members of the public is to make these submissions 
available for public viewing on the Internet at http://www.regulations.gov as they are received without change, including any 
personal identifiers or contact information.

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


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 
    (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.

Sec. 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.

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:


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

    Authority: 31 U.S.C. 9701; 22 U.S.C. 2761(e).

Sec.  165.1  Purpose.

    This part updates policy, responsibilities, and procedures to 
conform with section 21(e)(1)(B) of Public Law 90-629, as amended, and 
section 9701 of title 31, United States Code (U.S.C.) 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.
    (c) The policies and procedures in this part apply to all sales on 
or after the effective date of this part, and supersede application 
thresholds and charges previously established. Previous application 
thresholds and charges continue to govern sales made prior to the 
applicable effective date of this part. Such previously established NC 
recoupment thresholds and charges shall be eliminated or revised in 
accordance with this part.

Sec.  165.3  Definitions.

    Cost pool. Represents 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 
definition for nonrecurring research, development, test and

[[Page 68377]]

evaluation costs. The nonrecurring production cost pool comprises costs 
described in definition for nonrecurring production costs.
    Foreign military sale. A sale by the U.S. Government of defense 
items or defense services to a foreign government or international 
organization under authority of the Arms Export Control Act (AECA); 
section 21(e)(1)(B) of Public Law 90-629, as amended. Except as waived 
by Under Secretary of Defense for Policy (USD(P)), foreign military 
sales are the only sales subject to NC recoupment charges.
    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, equipment or system series, an airframe 
series, or a vehicle series. For example, the F5A and the F5F are 
different models in the same F-5 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\

    \1\ Available at http://www.acq.osd.mil/dpap/dars/dfarspgi/current/index.html.

    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 
    Pro rata recovery of NCs. An 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. A significant change 
occurs as follows:
    a. A new calculation shows a change of 30 percent of the current 
system NC charge.
    b. The NC unit charge increases or decreases by 50,000 dollars or 
    c. Where the potential for a 5 million dollar change in recoupment 
    The total collections may be estimated based on the projected sales 
quantities. A significant change occurs 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 (Section 
21(e)(1)(B) of Public Law 90-629, as amended). The USD(P) may grant a 
waiver to recoupment charges in accordance with Sec.  165.7 of this 
    (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 
    (b) The Under Secretary of Defense for Acquisition, Technology, and 
Logistics shall take appropriate action to revise the Defense Federal 
Acquisition Regulation Supplement in accordance with this part.
    (c) The USD(P) shall:
    (1) Monitor the application of this part.
    (2) Review and approve NC recoupment charges and NC recoupment 
charge waiver requests received from foreign countries and 
international organizations for foreign military sales.
    (3) Ensure publication of a listing of items developed for or by 
the Department of Defense to which NC recoupment charges are 
    (4) USD(P) may grant a waiver to recoupment charges in accordance 
with Sec.  165.7 of this part.
    (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 USD(P). Supporting 
documentation will be retained 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, provide a recommended change to USD(P).
    (4) Collect charges on foreign military sales, in accordance with 
DoD 7000.14-R.\2\

    \2\ Available at http://www.defenselink.mil/comptroller/fmr/.

    (5) Deposit collections to accounts as prescribed by USD(C)/CFO.
    (6) Request guidance from USD(P), within 90 days of issue 
identification, if an issue concerning a recoupment charge cannot be 

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. Recovery of 
NC recoupment charges shall cease upon the recovery of total DoD costs. 
Such charges shall be

[[Page 68378]]

based on a ``cost pool'' as defined in Sec.  165.3 of this part. For a 
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 for the 
specific customer/case has been approved by USD(P), in accordance with 
Sec.  165.7 of this part, or when sales are financed with U.S. 
Government 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 major defense equipment is sold at a reduced price due to 
age or condition, the NC recoupment charge shall be reduced by the same 
percentage reduction.
    (d) The full amount of ``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. Such reimbursements shall not be collected after 10 years 
have elapsed since acceptance of the ``Letter of Offer and Acceptance'' 
DoD 5105.38-M,\3\ by the original customer, unless otherwise authorized 
by USD(P). The U.S. Government 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.

    \3\ Available at http://www.dsca.osd.mil/samm/.

    (e) For co-production, co-development and cooperative development, 
or cooperative production DoD agreements, the policy in this part shall 
determine the allocation basis for recouping from the third-party 
purchasers the investment costs of the participants. Such DoD 
agreements shall provide for the application of the policies in this 
part to sales to third parties by any of the parties to the agreement 
and for the distribution of recoupment among the parties to the 

Sec.  165.7  Waivers (including reductions).

    (a) Section 21(e)(10)(B) of Public Law 90-629, as amended, requires 
the recoupment of a proportionate amount of NCs of major defense 
equipment from foreign military sales customers but Section 21(e)(2) 
authorizes consideration of reductions or waivers for particular sales 
which, if made, significantly advance U.S. Government interests and the 
furtherance of mutual defense treaties between the United States and 
certain countries. Waivers may also be authorized if imposition of a NC 
recoupment charge likely would result in the loss of the sale; or, in 
the case of a sale of major defense equipment that is also being 
procured for the use of the Armed Forces, result in savings to the 
United States on the cost of the equipment procured for the Armed 
Forces, through a resulting increase in the total quantity of equipment 
purchased from the source of the equipment causing a reduction in the 
unit cost of the equipment, substantially offsetting the revenue 
foregone by reason of waiving the charge. Any increase in a NC 
recoupment charge previously considered appropriate under Section 
21(e)(1)(B) may be waived if the increase results from a correction of 
an estimate (reasonable when made) of the production quantity base that 
was used for calculating the charge.
    (b) 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. The term ``blanket waiver'' refers to a 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.
    (2) A waiver request shall not be considered for a sale that was 
accepted without a NC recoupment charge waiver, unless the acceptance 
was conditional on consideration of the waiver request.
    (3) Requests for waivers shall be processed expeditiously, and a 
decision normally made to either approve or disapprove the request 
within 60 days after receipt. A waiver in whole or in part of the 
recoupment charge or a denial of the request shall be provided in 
writing to the appropriate DoD Component.

    Dated: October 31, 2011.
Aaron Siegel,
Alternate OSD Federal Register Liaison Officer, Department of Defense.
[FR Doc. 2011-28601 Filed 11-3-11; 8:45 am]