(a) Scope and  authority. Where it would facilitate the achievement of the policy objectives  set forth in 10 U.S.C. 2501(b), the Navy may enter into a shipbuilding capability  preservation agreement with a contractor. As authorized by Section 1027 of the  National Defense Authorization Act (NDAA) for FY 1998 (P.L. 105-85), such an agreement  permits the contractor to claim certain indirect costs attributable to its private  sector work as allowable costs on Navy shipbuilding contracts.

(b) Definition. Incremental indirect cost, as used in this subsection, means an  additional indirect cost that results from performing private sector work described in  a shipbuilding capability preservation agreement.

(c) Purpose and  guidelines. The purpose of a shipbuilding capability preservation agreement is  to broaden and strengthen the shipbuilding industrial base by providing an incentive  for a shipbuilder to obtain new private sector work, thereby reducing the Navy's cost  of doing business. The Navy will use the following guidelines to evaluate requests for  shipbuilding capability preservation agreements:

(1) ASN(RDA) must make a determination that an  agreement would facilitate the achievement of the policy objectives set forth in 10  U.S.C. 2501(b). The primary consideration in making this determination is whether an  agreement would promote future growth in the amount of private sector work that a  shipbuilder is able to obtain.

(2) An agreement generally will be considered  only for a shipbuilder with little or no private sector work.

(3) The agreement shall apply to prospective  private sector work only and shall not extend beyond 5 years.

(4) The agreement must project an overall  benefit to the Navy, including net savings. This would be achieved by demonstrating  that private sector work will absorb costs that otherwise would be absorbed by the  Navy.

(d) Cost-reimbursement rules. If the Navy enters into a shipbuilding capability  preservation agreement with a contractor, the following cost-reimbursement rules  apply:

(1) The agreement shall require the contractor  to allocate the following costs to private sector work:

(i) The direct costs attributable to the  private sector work;

(ii) The incremental indirect costs  attributable to the private sector work; and

(iii) The non-incremental indirect costs to  the extent that the revenue attributable to the private sector work exceeds the sum of  the costs specified in paragraphs (d)(1)(i) and (d)(1)(ii) of this subsection.

(2) The agreement shall require that the sum  of the costs specified in paragraphs (d)(1)(ii) and (d)(1)(iii) of this subsection not  exceed the amount of indirect costs that would have been allocated to the private  sector work in accordance with the contractor's established accounting practices.

(3) The Navy may agree to modify the amount  calculated in accordance with paragraph (d)(1) of this subsection if it determines  that a modification is appropriate to the particular situation. In so doing, the Navy  may agree to the allocation of a smaller or larger portion of the amount calculated in  accordance with paragraph (d)(1) of this subsection, to private sector work.

(i) Any smaller amount shall not be less than  the sum of the costs specified in paragraphs (d)(1)(i) and (d)(1)(ii) of this  subsection.

(ii) Any larger amount shall not exceed the  sum of the costs specified in paragraph (d)(1)(i) of this subsection and the amount of  indirect costs that would have been allocated to the private sector work in accordance  with the contractor's established accounting practices.

(iii) In determining whether such a  modification is appropriate, the Navy will consider factors such as the impact of  pre-existing firm-fixed-price Navy contracts on the amount of costs that would be  reimbursed by the Navy, the impact of pre-existing private sector work on the cost  benefit that would be received by the contractor, and the extent to which allocating a  smaller or larger portion of costs to private sector work would provide a sufficient  incentive for the contractor to obtain additional private sector work.

(e) Procedure. A contractor may submit a request for a  shipbuilding capability preservation agreement, together with appropriate  justification, through the Deputy Assistant Secretary of the Navy for Ships, to  ASN(RDA), who has approval or disapproval authority. The contractor should also  provide an informational copy of any such request to the cognizant administrative  contracting officer.