[Federal Register: April 23, 2002 (Volume 67, Number 78)]
[Proposed Rules]
[Page 19951-19954]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23ap02-43]
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Part VIII
Department of Defense
General Services Administration
National Aeronautics and Space Administration
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48 CFR Parts 16, 22, et al.
Federal Acquisition Regulation; Compensation Cost Principle; Proposed
Rule
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 16, 22, 31, 37, and 52
[FAR Case 2001-008]
RIN 9000-AJ36
Federal Acquisition Regulation; Compensation Cost Principle
AGENCIES: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Proposed rule.
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SUMMARY: The Civilian Agency Acquisition Council and the Defense
Acquisition Regulations Council (Councils) are proposing to amend the
Federal Acquisition Regulation (FAR) to revise the ``compensation for
personal services'' cost principle.
DATES: Interested parties should submit comments in writing on or
before June 24, 2002 to be considered in the formulation of a final
rule.
ADDRESSES: Submit written comments to: General Services Administration,
FAR Secretariat (MVP), 1800 F Street, NW, Room 4035, ATTN: Laurie
Duarte, Washington, DC 20405.
Submit electronic comments via the Internet to: farcase.2001-
008@gsa.gov
Please submit comments only and cite FAR case 2001-008 in all
correspondence related to this case.
FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, Room 4035, GS
Building, Washington, DC, 20405, at (202)
501-4755 for information pertaining to status or publication
schedules. For clarification of content, contact Mr. Jeremy Olson at
(202) 501-3221. Please cite FAR case 2001-008.
SUPPLEMENTARY INFORMATION:
A. Background
The Councils performed an analysis of the cost principle at FAR
31.205-6, Compensation for personal services. This analysis excluded a
review of the paragraphs of the cost principle addressing pension costs
(paragraph (j)), deferred compensation other than pensions (paragraph
(k)), and postretirement benefits other than pensions (paragraph (o)),
which the Councils are planning to review at a later date under a
separate FAR case.
Specifically, the proposed rule revises FAR 31.205-6 by--
1. Adding a definition for ``compensation for personal services''
at FAR 31.001, Definitions;
2. Removing as unnecessary the listing of examples of specific
types of compensation currently located at FAR 31.205-6(a);
3. Clarifying and moving the current FAR 31.205-6(b)(2)(i) to a new
paragraph FAR 31.205-6(a)(6), and expanding the new paragraph to cover
members of ``limited liabilities companies'' since their compensation
also requires special consideration;
4. Revising paragraph (b) to consolidate all reasonableness
provisions, including those dealing with labor-management agreements
that are currently addressed at FAR 31.205-6(c);
5. Deleting the language that places the burden of demonstrating
reasonableness on the contractor, currently found in FAR 31.205-6(b)(1)
because it is redundant of language currently found in FAR 31.201-3(a).
By removing this language, the Councils are not intending to imply that
this burden has shifted to the Government;
6. Rewriting paragraph (h), as new paragraph (g), entitled
``Backpay'' to improve its clarity, without changing its meaning, and
to emphasize that backpay for underpaid work is the only allowable
retroactive adjustment, except as may be specifically listed in the
paragraph; and
7. Making other changes to clarify, improve the structure, and
remove redundancies throughout the cost principle.
This is not a significant regulatory action and, therefore, was not
subject to review under Section 6(b) of Executive Order 12866,
Regulatory Planning and Review, dated September 30, 1993. This rule is
not a major rule under 5 U.S.C. 804.
B. Regulatory Flexibility Act
The Councils do not expect this proposed rule to have a significant
economic impact on a substantial number of small entities within the
meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq.,
because most contracts awarded to small entities use simplified
acquisition procedures or are awarded on a competitive, fixed-price
basis and do not require application of the cost principle discussed in
this rule. An Initial Regulatory Flexibility Analysis has, therefore,
not been performed. We invite comments from small businesses and other
interested parties. The Councils will consider comments from small
entities concerning the affected FAR parts 16, 22, 31, 37, and 52 in
accordance with 5 U.S.C. 610. Interested parties must submit such
comments separately and should cite 5 U.S.C. 601, et seq. (FAR case
2001-008), in correspondence.
C. Paperwork Reduction Act
The Paperwork Reduction Act does not apply because the proposed
changes to the FAR do not impose information collection requirements
that require the approval of the Office of Management and Budget under
44 U.S.C. 3501, et seq.
List of Subjects in 48 CFR Parts 16, 22, 31, 37, and 52
Government procurement.
Dated: April 16, 2002.
Al Matera,
Director, Acquisition Policy Division.
Therefore, DoD, GSA, and NASA propose amending 48 CFR parts 16, 22,
31, 37, and 52 as set forth below:
1. The authority citation for 48 CFR parts 16, 22, 31, 37, and 52
continues to read as follows:
Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42
U.S.C. 2473(c).
PART 16--TYPES OF CONTRACTS
16.203-4 [Amended]
2. Amend section 16.203-4 in paragraph (c)(4)(ii) by removing
``31.205-6(m)'' and adding ``31.205-6(l)'' in its place.
PART 22--APPLICATION OF LABOR LAWS TO GOVERNMENT ACQUISITIONS
22.101-2 [Amended]
3. Amend section 22.101-2 in the last sentence of paragraph (a) by
removing ``31.205-6(c)'' and adding ``31.205-6(b)'' in its place.
PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES
4. Amend section 31.001 by adding, in alphabetical order, the
definition ``Compensation for personal services'' to read as follows:
31.001 Definitions.
* * * * *
Compensation for personal services means all remuneration paid
currently or accrued, in whatever form and whether paid immediately or
deferred, for services rendered by employees to the contractor.
* * * * *
31.201-5 [Amended]
5. Amend section 31.201-5 in the last sentence by removing
``31.205-6(j)(4)'' and adding ``31.205-6(i)(4)'' in its place.
6. Amend section 31.205-6 by--
a. Revising paragraphs (a) and (b);
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b. Removing paragraph (c);
c. Redesignating paragraphs (d) through (p) as paragraphs (c)
through (o), respectively;
d. Revising newly designated paragraphs (c) through (g);
e. Removing from newly designated paragraph (h)(3) ``paragraph
(i)'' and adding ``paragraph (h)'' in its place;
f. Removing from the last sentence of newly designated paragraph
(i)(2) introductory text the words ``(j)(2)(i) and (j)(3)'' and adding
``(i)(2)(i) and in paragraphs (i)(3)'' in its place; removing from
paragraph (i)(2)(iii) ``(j)(7)'' and adding ``(i)(7)'' in its place;
removing from the second sentence of paragraph (i)(3)(v) introductory
text ``(j)(4)'' and adding ``(i)(4)'' in its place; removing from the
last sentence of paragraph (i)(4)(ii) ``paragraph (j)(4)(ii)'' and
adding ``paragraph (i)(4)(ii)'' in its place; removing from the last
sentence of paragraph (i)(5) introductory text ``(j)(1)'' and adding
``(i)(1)'' in its place; removing from paragraph (i)(5)(ii)
``(j)(3)(ii)'' and adding ``(i)(3)(ii)'' in its place; removing from
the last sentence of paragraph (i)(7) introductory text ``subdivisions
(j)(3)(i)'' and adding ``paragraphs (i)(3)(i)'' in its place; and by
removing from paragraph (i)(8)(iii) ``subdivision (j)(3)(ii) above''
and adding ``paragraph (i)(3)(ii) of this subsection'' in its place;
g. Removing from newly designated paragraph (n)(2) ``(o)(2)(i)''
and adding ``(n)(2)(i)'' in its place, and removing ``section'' and
adding ``subsection'' in its place;
h. Removing from the first sentence of newly designated paragraph
(n)(5) ``(o)(2)(iii)'' and adding ``(n)(2)(iii)'' in its place;
i. Removing from the last sentence of newly designated paragraph
(o)(1) introductory text ``(p)(2)(ii)'' and adding ``(o)(2)(ii)'' in
its place; removing the colon at the end of paragraph (o)(2)
introductory text and adding an em-dash (--) in its place, and by
removing from paragraph (o)(2)(i) ``(j)(5) and (j)(8)'' and adding
``(i)(5) and (i)(8)'' in its place.
The revised text reads as follows:
31.205-6 Compensation for personal services.
(a) General. Compensation for personal services is allowable
subject to the following general criteria and additional requirements
contained in other parts of this cost principle:
(1) Compensation for personal services must be for work performed
by the employee in the current year and must not represent a
retroactive adjustment of prior years' salaries or wages (but see
paragraphs (f), (g), (i), (j), (l), and (n) of this subsection).
(2) The total compensation for individual employees or job classes
of employees must be reasonable for the work performed; however,
specific restrictions on individual compensation elements apply when
prescribed.
(3) The compensation must be based upon and conform to the terms
and conditions of the contractor's established compensation plan or
practice followed so consistently as to imply, in effect, an agreement
to make the payment.
(4) No presumption of allowability will exist where the contractor
introduces major revisions of existing compensation plans or new plans
and the contractor has not provided the cognizant ACO, either before
implementation or within a reasonable period after it, an opportunity
to review the allowability of the changes.
(5) Costs that are unallowable under other paragraphs of this
Subpart 31.2 are not allowable under this subsection 31.205-6 solely on
the basis that they constitute compensation for personal services.
(6) The cognizant ACO must--
(i) Give special consideration to--
(A) Owners of closely held corporations, members of limited
liability companies, partners, sole proprietors, or members of their
immediate families; and
(B) Persons who are contractually committed to acquire a
substantial financial interest in the contractor's enterprise.
(ii) Ensure that compensation costs covered by this paragraph are
not--
(A) A distribution of profits, which is not an allowable contract
cost; and
(B) In excess of costs that are deductible as compensation under
the Internal Revenue Code (26 U.S.C.) and regulations under it.
(b) Reasonableness--(1) Compensation pursuant to labor-management
agreements. If costs of compensation established under ``arm's length''
labor-management agreements negotiated under the terms of the Federal
Labor Relations Act or similar state statutes are otherwise allowable,
the costs are reasonable unless, as applied to work in performing
Government contracts, the costs are unwarranted by the character and
circumstances of the work or discriminatory against the Government. The
application of the provisions of a labor-management agreement designed
to apply to a given set of circumstances and conditions of employment
(e.g., work involving extremely hazardous activities or work not
requiring recurrent use of overtime) is unwarranted when applied to a
Government contract involving significantly different circumstances and
conditions of employment (e.g., work involving less hazardous
activities or work continually requiring use of overtime). It is
discriminatory against the Government if it results in employee
compensation (in whatever form or name) in excess of that being paid
for similar non-Government work under comparable circumstances.
(2) Compensation not covered by labor-management agreements.
Compensation for each employee or job class of employees must be
reasonable for the work performed. Compensation is reasonable if the
aggregate of each measurable and allowable element sums to a reasonable
total. In determining the reasonableness of total compensation,
consider only allowable individual elements of compensation. In
addition to the provisions of 31.201-3, in testing the reasonableness
of compensation for particular employees or job classes of employees,
consider factors determined to be relevant by the contracting officer.
Factors that may be relevant include, but are not limited to,
conformity with compensation practices of other firms--
(i) Of the same size;
(ii) In the same industry;
(iii) In the same geographic area; and
(iv) Engaged in similar non-Government work under comparable
circumstances.
(c) Form of payment. (1) Compensation for personal services
includes compensation paid or to be paid in the future to employees in
the form of--
(i) Cash;
(ii) Corporate securities, such as stocks, bonds, and other
financial instruments (see paragraph (c)(2) of this subsection
regarding valuation; or
(iii) Other assets, products, or services.
(2) When compensation is paid with securities of the contractor or
of an affiliate, the following additional restrictions apply:
(i) Valuation placed on the securities is the fair market value on
the first date the number of shares awarded is known, determined upon
the most objective basis available.
(ii) Accruals for the cost of securities before issuing the
securities to the employees are subject to adjustment according to the
possibilities that the employees will not receive the securities and
that their interest in the accruals will be forfeited.
(d) Income tax differential pay. (1) Differential allowances for
additional
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income taxes resulting from foreign assignments are allowable.
(2) Differential allowances for additional income taxes resulting
from domestic assignments are unallowable.
(e) Bonuses and incentive compensation. (1) Bonuses and incentive
compensation based on production, cost reduction, or efficient
performance are allowable provided the--
(i) Awards are paid or accrued under an agreement entered into in
good faith between the contractor and the employees before the services
are rendered or pursuant to an established plan or policy followed by
the contractor so consistently as to imply, in effect, an agreement to
make such payment; and
(ii) Basis for the award is supported.
(2) When the bonus and incentive compensation payments are
deferred, the costs are subject to the requirements of paragraphs
(e)(1) and (j) of this subsection.
(f) Severance pay. (1) Severance pay is a payment in addition to
regular salaries and wages by contractors to workers whose employment
is being involuntarily terminated. Payments for early retirement
incentive plans are covered in paragraph (i)(7) of this subsection.
(2) Severance pay is allowable only to the extent that, in each
case, it is required by--
(i) Law;
(ii) Employer-employee agreement;
(iii) Established policy that constitutes, in effect, an implied
agreement on the contractor's part; or
(iv) Circumstances of the particular employment.
(3) Payments made in the event of employment with a replacement
contractor where continuity of employment with credit for prior length
of service is preserved under substantially equal conditions of
employment, or continued employment by the contractor at another
facility, subsidiary, affiliate, or parent company of the contractor
are not severance pay and are unallowable.
(4) Abnormal or mass severance pay is of such a conjectural nature
that accruals for this purpose are not allowable. However, the
Government recognizes its obligation to participate, to the extent of
its fair share, in any specific payment. Thus, the Government will
consider allowability on a case-by-case basis.
(5) Under 10 U.S.C. 2324(e)(1)(M) and 41 U.S.C. 256(e)(1)(M), the
costs of severance payments to foreign nationals employed under a
service contract performed outside the United States are unallowable to
the extent that such payments exceed amounts typically paid to
employees providing similar services in the same industry in the United
States. Further, under 10 U.S.C. 2324(e)(1)(N) and 41 U.S.C.
256(e)(1)(N), all such costs of severance payments that are otherwise
allowable are unallowable if the termination of employment of the
foreign national is the result of the closing of, or the curtailment of
activities at, a United States facility in that country at the request
of the government of that country; this does not apply if the closing
of a facility or curtailment of activities is made pursuant to a
status-of-forces or other country-to-country agreement entered into
with the government of that country before November 29, 1989. 10 U.S.C.
2324(e)(3) and 41 U.S.C. 256(e)(2) permit the head of the agency to
waive these cost allowability limitations under certain circumstances
(see 37.113 and the solicitation provision at 52.237-8).
(g) Backpay. Backpay is a retroactive adjustment of prior years'
salaries or wages. Backpay is unallowable except as follows:
(1) Payments to employees resulting from underpaid work actually
performed are allowable, if required by a negotiated settlement, order,
or court decree.
(2) Payments to union employees for the difference in their past
and current wage rates for working without a contract or labor
agreement during labor management negotiation are allowable.
(3) Payments to nonunion employees based upon results of union
agreement negotiation are allowable only if--
(i) A formal agreement or understanding exists between management
and the employees concerning these payments; or
(ii) An established policy or practice exists and is followed by
the contractor so consistently as to imply, in effect, an agreement to
make such payments.
* * * * *
31.205-7 [Amended]
7. Amend section 31.205-7 in the last sentence of paragraph (c)(2)
by removing ``31.205-6(g)'' and adding ``31.205-6(f)'' in its place.
31.205-13 [Amended]
8. Amend section 31.205-13 in the last sentence of paragraph (b) by
removing ``31.205-6(f)'' and adding ``31.205-6(e)'' in its place.
31.205-46 [Amended]
9. Amend section 31.205-46 in the last sentence of paragraph (f) by
removing ``31.205-6(m)(2)'' and adding ``31.205-6(l)(2)'' in its place.
PART 37--SERVICE CONTRACTING
10. Amend section 37.113-1 by revising the introductory text of
paragraph (a) to read as follows:
37.113-1 Waiver of cost allowability limitations.
(a) The head of the agency may waive the 31.205-6(f)(5) cost
allowability limitations on severance payments to foreign nationals for
contracts that--
* * * * *
PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES
52.215-18 [Amended]
11. Amend section 52.215-18 by removing from the clause heading
``(OCT 1997)'' and adding ``(DATE)'' in its place; and by removing from
the second sentence of the clause ``31.205-6(o)(6)'' and adding
``31.205-6(n)(6)'' in its place.
52.237-8 [Amended]
12. Amend section 52.237-8 by removing from the provision heading
``(OCT 1995)'' and adding ``(DATE)'' in its place; and by removing from
paragraph (a) of the provision ``31.205-6(g)(3)'' and adding ``31.205-
6(f)(5)'' in its place.
52.237-9 [Amended]
13. Amend section 52.237-9 by removing from the clause heading
``(OCT 1995)'' and adding ``(DATE)'' in its place; and by removing from
paragraph (a) of the clause ``31.205-6(g)(3)'' and adding ``31.205-
6(f)(5)'' in its place.
[FR Doc. 02-9665 Filed 4-22-02; 8:45 am]
BILLING CODE 6820-EP-P