Summary of External Restructuring Cost Principles and Regulations

External Restructuring Savings and Costs

48 CFR 9904.406-61(d): When a procuring agency [DoD] imposes a net savings requirement for the payment of restructuring costs, the contractor shall submit data specifying:

• Estimated restructuring costs by period
• Estimating restructuring savings by period
• Cost accounting practices by which such costs shall be allocated to cost objectives

Treatment of External Restructuring Costs (CAS 406)

48 CFR 9904.406-61(b) Restructuring Costs

• Costs incurred after an entity decides to make a significant nonrecurring change in its business operations or structure
• Do not include ongoing routine changes an entity makes in its business operations or organizational structure
• Do not include the cost of activities that do not relate to business combinations or to other significant nonrecurring restructuring decisions

48 CFR 9904.406-61(c): The costs of betterments or improvements of capital assets that result from restructuring activities shall be capitalized and depreciated in accordance with the provisions of CAS 404 and 409

48 CFR 9904.406-61(e): Accumulated as a deferred cost, and subsequently amortized, over a period during which the benefits of restructuring are expected to accrue

48 CFR 9904.406-61(f):

• If a contractor incurs restructuring costs but does not have an established or disclosed cost accounting practice covering such costs, the deferral of such restructuring costs may be treated as the initial adoption of a cost accounting practice
• If a contractor incurs restructuring costs but does have an existing established or disclosed cost accounting practice that does not provide for deferring such costs, any resulting change in cost accounting practice to defer such costs may be presumed to be desirable and not detrimental to the interests of the Government

48 CFR 9904.406-61(h): The amortization period for deferred restructuring costs shall not exceed five years. The straight-line method of amortization should normally be used, unless another method results in a more appropriate matching of cost to expected benefits.

48 CFR 9904.406-61(j): Restructuring costs incurred at a home office level shall be treated in accordance with the provisions of CAS 403.

Cost Allowability

DFARS 231.205-70(b):

• Direct and indirect costs of external restructuring activities in excess of $2.5 million allocated to DoD contracts.
  • Direct outgrowth of a business combination
  • Normally initiated within 3 years of the business combination

• Allowable restructuring costs may include:
  • Severance pay for employees
  • Early retirement incentive payments for employees
  • Employee retraining costs
  • Relocation expense for retained employees
  • Relocation and rearrangement of plant and equipment

DFARS 231.205-70(c) Limitations on cost allowability:

• • Allowable in accordance with FAR 31 and DFARS Part 231
  • An audit of projected restructuring costs and restructuring savings is performed
  • ACO reviews audit report and negotiates an advance agreement

• On a present value basis, DoD audited projected savings will exceed either
  • Costs allowed by a factor of at least two to one; or
  • Costs allowed, and the business combination will result in the preservation of a critical capability that might otherwise be lost to DoD

DoD Procedures, Guidance, and Information (“PGI”) 231.205-70(d)

• (d)(ii): Segregate restructuring costs and suspend from billings, final contract price settlements, and overhead settlements until DoD makes a determination of projected restructure savings
• (d)(iii): Requires contractors to
• Submit a plan and adequately supported proposal (i.e., XRP) showing net present value of costs and savings by year by cost element. ACO will perform the following:
• Adjust forward pricing rates to reflect the impact of projected restructuring savings