[Federal Register: February 4, 2003 (Volume 68, Number 23)]
[Proposed Rules]
[Page 5773-5776]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04fe03-24]
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Part IV
Department of Defense
General Services Administration
National Aeronautics and Space Administration
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48 CFR Parts 2 and 31
Federal Acquisition Regulation; General Provisions of the Cost
Principles; Proposed Rule
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 2 and 31
[FAR Case 2001-034]
RIN 9000-AJ60
Federal Acquisition Regulation; General Provisions of the Cost
Principles
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
general provisions of the cost principles contained in the Federal
Acquisition Regulation (FAR).
DATES: Interested parties should submit comments in writing on or
before April 7, 2003 to be considered in the formulation of a final
rule.
ADDRESSES: Submit written comments to--General Services Administration,
FAR Secretariat (MVA), 1800 F Street, NW., Room 4035, ATTN: Laurie
Duarte, Washington, DC 20405.
Submit electronic comments via the Internet to--farcase.2001-
034@gsa.gov. Please submit comments only and cite FAR case 2001-034 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. Ralph De Stefano at (202) 501-1758. Please cite
FAR case 2001-034.
SUPPLEMENTARY INFORMATION:
A. Background
The Councils have performed an analysis of the general provisions
at FAR 31.106-2, Exceptions to general rule on allowability and
allocability; FAR 31.201-1, Composition of total cost; FAR 31.201-2,
Determining allowability; FAR 31.202, Direct costs; and FAR 31.203,
Indirect costs, and propose the following revisions:
1. FAR 31.106-2. When the contractor's usual method of allocating
indirect costs to a facilities contract will yield inequitable results,
the current language at paragraph (b) requires a contractor to vary its
usual method and make appropriate adjustments to the indirect cost pool
and base. This requirement is intended to provide the special treatment
needed to produce an equitable allocation of cost to applicable
facilities contracts. Although FAR 31.106-2 requires appropriate
adjustments to the indirect cost pool and base, this subsection does
not provide sufficient detail as to how the contractor must make the
adjustment.
Therefore, the Councils propose to amend this subsection to
explicitly recognize the concept of special allocations for application
to facilities contracts that are not subject to full Cost Accounting
Standards (CAS) coverage. The CAS provide for special allocations in 48
CFR 9904.403--Allocation of Home Office Expenses in Segments (CAS 403),
48 CFR 9904.410--Allocation of Business Unit General and Administrative
Expenses to Final Cost Objectives (CAS 410), 48 CFR 9904.418--
Allocation of Direct and Indirect costs (CAS 418), and 48 CFR
9904.420--Accounting for Independent Research and Development Costs and
Bid and Proposal Costs (CAS 420). The proposed special allocation
provisions provide the treatment that the contractor must use to
produce an equitable allocation to applicable facilities contracts.
In addition, proposed language has been added to provide the
specific methodology to be used when employing the concept of a special
allocation. In conjunction with these changes, the Councils propose a
new title, ``Special allocations,'' which is more descriptive of the
revised subsection.
2. FAR 31.201-1. This subsection was revised to delete unnecessary
language that is adequately addressed elsewhere in the FAR, CAS, or
generally accepted accounting principles (GAAP).
3. FAR 31.201-2. The rule revises paragraph (a) to clarify that
costs must meet all five requirements in order to be reimbursable by
the Government.
4. FAR 31.202. The rule adds a definition in FAR Part 2 for direct
costs that is virtually identical to the definition at 48 CFR 9904.418-
30(a)(2). Consequently, language in FAR Part 31 that duplicates the
language in the new definition has been removed from paragraph
31.203(a).
5. FAR 31.203. The proposed rule removes the reference to CAS and
GAAP since the subject matter is adequately addressed in FAR 31.201-2.
The rule revises paragraph (e) of 31.203 to recognize that a transition
period longer or shorter than 12 months may be appropriate in special
circumstances. The rule revises paragraphs (c) and (f) to include the
concept of a special allocation contained in CAS 403, 410, 418, and
420, since the Councils recognize there are other special situations,
in addition to Government-owned contractor-operated facilities, in
which the contractor's established accounting practices may not yield
an equitable allocation to a particular intermediate or final cost
objective. The proposed special allocation provisions provide the
treatment that the contractor must use to produce an equitable
allocation in these special situations, including the specific
methodology for adjusting the indirect cost pool and its applicable
allocation base.
6. Other editorial changes. The rule makes other editorial changes,
including revising the definition of ``indirect cost'' in FAR 2.101,
changing the term ``distributing'' to ``allocating,'' and changing the
phrase ``several cost objectives'' to ``intermediate or final cost
objectives'' to be consistent with the terminology used in CAS and FAR
Part 31.
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 general provisions
relating to cost principles that are 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 2 and 31 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 2001-034), 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
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approval of the Office of Management and Budget under 44 U.S.C. 3501,
et seq.
List of Subjects in 48 CFR Parts 2 and 31
Government procurement.
Dated: January 30, 2003.
Ralph De Stefano,
Acting Director, Acquisition Policy Division.
Therefore, DoD, GSA, and NASA propose amending 48 CFR parts 2 and
31 as set forth below:
1. The authority citation for 48 CFR parts 2 and 31 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 2--DEFINITIONS OF WORDS AND TERMS
2. Amend section 2.101(b) by adding, in alphabetical order, the
definition ``Direct cost''; and by revising the definition ``Indirect
cost'' to read as follows:
2.101 Definitions.
* * * * *
(b) * * *
Direct cost means any cost that is identified specifically with a
particular final cost objective. Direct costs are not limited to items
that are incorporated in the end product as material or labor. Costs
identified specifically with a contract are direct costs of that
contract. All costs identified specifically with other final cost
objectives of the contractor are direct costs of those cost objectives.
* * * * *
Indirect cost means any cost not directly identified with a single
final cost objective, but identified with two or more final cost
objectives or with at least one intermediate cost objective.
* * * * *
PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES
3. Amend section 31.106-2 by revising the section heading and
paragraphs (b) through (e) to read as follows:
31.106-2 Special allocations.
* * * * *
(b) When a facilities contract in relation to other cost objectives
receives significantly more or less benefit from an indirect cost pool
than would be reflected by an allocation of such costs using the
contractor's normal methods, the contractor shall--
(1) Use a special allocation from that indirect cost pool to the
facilities contract commensurate with the benefits received;
(2) Exclude the amount of the special allocation from the indirect
cost pool; and
(3) Exclude the allocation base data for the facilities contract
from the base used to allocate the pool.
(c) The cognizant Federal agency is responsible for determining
whether the conditions necessitating a special allocation exist and
negotiating the terms of an advance agreement (see 31.109) implementing
an appropriate special allocation.
(d) A special allocation is appropriate for--
(1) The purchase of completed facilities (or services in connection
with the facilities) from outside sources. Since such purchases do not
involve the contractor's direct labor or indirect plant maintenance
personnel, a special allocation is appropriate for indirect
manufacturing and plant overhead costs that are primarily incurred or
generated by reason of direct labor or maintenance labor operations;
and
(2) Contracts providing for the installation of new facilities or
the rehabilitation of existing facilities that involve the use of the
contractor's plant maintenance labor, as distinguished from direct
labor engaged in the production of the company's normal products. A
special allocation to a facilities contract that involves the use of
plant maintenance labor only should recognize that such a contract
receives less benefit from such cost items as direct productive labor
supervision, depreciation, and maintenance expense applicable to
productive machinery and equipment, or raw material and finished goods
storage costs.
(e) A special allocation is not appropriate for a facilities
contract that calls for the construction, production, or rehabilitation
of equipment or other items that are involved in the regular course of
the contractor's business using the contractor's direct labor and
manufacturing processes.
4. Amend section 31.201-1 by revising paragraph (a); and by
removing the word ``which'' from paragraph (b) and adding ``that'' in
its place. The revised text reads as follows:
31.201-1 Composition of total cost.
(a) The total cost, including standard costs properly adjusted for
applicable variances, of a contract is the sum of the direct and
indirect costs allocable to the contract, incurred or to be incurred,
plus any allocable cost of money pursuant to 31.205-10, less any
allocable credits. In ascertaining what constitutes a cost, any
generally accepted method of determining or estimating costs that is
equitable and is consistently applied may be used, including standard
costs properly adjusted for applicable variances.
* * * * *
5. Amend section 31.201-2 by--
a. Revising the introductory text of paragraph (a);
b. Revising paragraph (c); and
c. Removing the word ``which'' from the last sentence of paragraph
(d) and adding ``that'' in its place. The revised text reads as
follows:
31.201-2 Determining allowability.
(a) A cost is allowable only when all of the following requirements
are met:
* * * * *
(c) When contractor accounting practices are inconsistent with this
Subpart 31.2, costs resulting from such inconsistent practices in
excess of the amount that would have resulted from using practices
consistent with this subpart are unallowable.
* * * * *
6. Amend section 31.202 by revising paragraph (a) and the
introductory text of paragraph (b) to read as follows:
31.202 Direct costs.
(a) No final cost objective shall have allocated to it as a direct
cost any cost, if other costs incurred for the same purpose, in like
circumstances, have been included in any indirect cost pool to be
allocated to that or any other final cost objective. Direct costs of
the contract shall be charged directly to the contract. All costs
specifically identified with other final cost objectives of the
contractor are direct costs of those cost objectives and are not to be
charged to the contract directly or indirectly.
(b) For reasons of practicality, the contractor may treat any
direct cost of a minor dollar amount as an indirect cost if the
accounting treatment--
* * * * *
7. Revise section 31.203 to read as follows:
31.203 Indirect costs.
(a) After direct costs have been determined and charged directly to
the contract or other work, indirect costs are those remaining to be
allocated to intermediate or final cost objectives. No final cost
objective shall have allocated to it as an indirect cost any cost, if
other costs incurred for the same purpose, in like circumstances, have
been included as a direct cost of that or any other final cost
objective.
(b) The contractor shall accumulate indirect costs by logical cost
groupings with due consideration of the reasons
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for incurring such costs. The contractor shall determine each grouping
so as to permit use of an allocation base that is common to all cost
objectives to which the grouping is to be allocated. The base selected
must allocate the grouping on the basis of the benefits accruing to
intermediate and final cost objectives. When substantially the same
results can be achieved through less precise methods, the number and
composition of cost groupings should be governed by practical
considerations and should not unduly complicate the allocation.
(c) Once an appropriate base for allocating indirect costs has been
accepted, the contractor shall not fragment the base by removing
individual elements. All items properly includable in an indirect cost
base must bear a pro rata share of indirect costs irrespective of their
acceptance as Government contract costs. For example, when a cost input
base is used for the allocation of G&A costs, the contractor must
include in the base all items that would properly be part of the cost
input base, whether allowable or unallowable, and these items must bear
their pro rata share of G&A costs.
(d) The method of allocating indirect costs may require revision
when significant changes occur in the nature of the business, the
extent of subcontracting, fixed-asset improvement programs,
inventories, the volume of sales and production, manufacturing
processes, the contractor's products, or other relevant circumstances.
(e) Separate indirect cost groupings for costs allocable to offsite
locations may be necessary to permit equitable distribution of costs on
the basis of the benefits accruing to the several cost objectives.
(f)(1) Where a particular cost objective in relation to other cost
objectives receives significantly more or less benefit from an indirect
cost pool than would be reflected by the allocation of such costs using
the provisions in this section (e.g., Government-owned contractor
operated plants), the contractor shall--
(i) Use a special allocation from that indirect cost pool to the
particular intermediate or final cost objective commensurate with the
benefits received;
(ii) Exclude the amount of the special allocation to any such
intermediate or final cost objective from the indirect cost pool; and
(iii) Exclude the particular intermediate or final cost objective's
allocation base data from the base used to allocate the pool.
(2) The cognizant Federal agency is responsible for determining
whether the conditions necessitating a special allocation exist and
negotiating the terms of an advance agreement (see 31.109) implementing
an appropriate special allocation.
(g) A base period for allocating indirect costs is the cost
accounting period during which such costs are incurred and accumulated
for allocation to work performed in that period.
(1) For contracts subject to full or modified CAS coverage, the
contractor must follow the criteria and guidance in 48 CFR 9904.406 for
selecting the cost accounting periods to be used in allocating indirect
costs.
(2) For contracts other than those subject to paragraph (g)(1) of
this section, the base period for allocating indirect costs shall be
the contractor's fiscal year used for financial reporting purposes in
accordance with generally accepted accounting principles. The fiscal
year will normally be 12 months, but a different period may be
appropriate (e.g., when a change in fiscal year occurs due to a
business combination or other circumstances).
[FR Doc. 03-2581 Filed 2-3-03; 8:45 am]