ALLOWABLE COSTS.

SEC. 818. ALLOWABLE COSTS. (a) Penalties.—Section 2324 of title 10, United States Code, is amended— (1) in subsection (a)— (A) in paragraph (1), by striking out “(1)”; (B) in paragraph (2)— (i) by striking out “(2)” and inserting in lieu thereof “(b)(1)”; (ii) by striking out “by clear and convincing evidence”; (iii) by inserting “expressly” before “unallowable”; (iv) by striking out “under paragraph (1)” and inserting in lieu thereof “under a cost principle referred to in subsection (a) that defines the allowability of specific selected costs”; and 106 STAT. 2458 (v) in subparagraph (A), by striking out “costs” and inserting in lieu thereof the following: “cost allocated to covered contracts for which a proposal for settlement of indirect costs has been submitted”; (2) in subsection (b)— (A) by striking out “(b) If the Secretary” and inserting in lieu thereof “(2) If the Secretary”; (B) by striking out “, in addition to the penalty assessed under subsection (a),”; and (C) by striking out “the amount of such cost” and inserting in lieu thereof “the amount of the disallowed cost allocated to covered contracts for which a proposal for settlement of indirect costs has been submitted”; (3) by striking out subsection (d); (4) by redesignating subsection (c) as subsection (d); and (5) by inserting before subsection (d) (as so redesignated) the following: “(c) The Secretary shall prescribe regulations providing for a penalty under subsection (b) to be waived in the case of a contractor’s proposal for settlement of indirect costs when— “(1) the contractor withdraws the proposal before the formal initiation of an audit of the proposal by the Federal Government and resubmits a revised proposal; “(2) the amount of unallowable costs subject to the penalty is insignificant; or “(3) the contractor demonstrates, to the contracting officer’s satisfaction, that— “(A) it has established appropriate policies and personnel training and an internal control and review system that provide assurances that unallowable costs subject to penalties are precluded from being included in the contractor’s proposal for settlement of indirect costs; and “(B) the unallowable costs subject to the penalty were inadvertently incorporated into the proposal.”. (b) Effective Date.—The amendments made by subsection (a) shall take effect on the date of the enactment of this Act and shall apply, as provided in regulations prescribed by the Secretary of Defense, with respect to proposals for settlement of indirect costs for which the Federal Government has not formally initiated an audit before that date.