[Federal Register: September 30, 2005 (Volume 70, Number 189)]
[Rules and Regulations]
[Page 57463-57467]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30se05-46]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Part 31
[FAC 2005-06; FAR Case 2004-006; Item IX]
RIN 9000-AK06
Federal Acquisition Regulation; Accounting for Unallowable Costs
AGENCIES: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Final rule.
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SUMMARY: The Civilian Agency Acquisition Council and the Defense
Acquisition Regulations Council (Councils) have agreed on a final rule
amending the Federal Acquisition Regulation (FAR) by revising language
regarding accounting for unallowable costs. The final rule adds
language which provides specific criteria on the use of statistical
sampling as a method to identify unallowable costs, including the
applicability of penalties for failure to exclude certain projected
unallowable costs. The final rule also revises the language regarding
advance agreements by adding statistical sampling methods as an example
for which advance agreements between the
[[Page 57464]]
contracting officers and contractors may be appropriate.
DATES: Effective Date: October 31, 2005.
FOR FURTHER INFORMATION CONTACT: The FAR Secretariat 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 FAC 2005-06, FAR case 2004-006.
SUPPLEMENTARY INFORMATION:
A. Background
DoD, GSA, and NASA published a proposed FAR rule for public comment
in the Federal Register at 68 FR 28108, May 22, 2003, under FAR case
2002-006. The proposed rule related to FAR 31.201-6, Accounting for
unallowable costs, and to FAR 31.204, Application of principles and
procedures. No public comments were received on the proposed rule
relating to FAR 31.204, and the Councils decided that the FAR 31.204
proposed rule should be converted to a final rule with no changes to
the proposed rule. Public comments were received on the proposed rule
relating to FAR 31.201-6, and the Councils decided to make substantive
changes to the proposed rule and published a second proposed rule under
separate FAR case 2004-006 in the Federal Register at 69 FR 58014,
September 28, 2004, with a request for comments by November 29, 2004.
Five respondents submitted public comments in response to the
second proposed FAR rule. A discussion of these public comments is
provided below. The Councils considered all comments and concluded that
the proposed rule should be converted to a final rule, with changes to
the proposed rule to address the concerns raised in the public
comments. Differences between the second proposed rule and the final
rule are discussed in Comments 1, 2, and 3, below.
Public Comments
Application of statistical sampling, FAR 31.201-6(c)(2).
Comment 1: One respondent recommends clarifying paragraph (c)(2) to
make it clear that this paragraph refers to contractors, not the
Government. The respondent therefore recommends revising the first
sentence to read as follows:
``Statistical sampling is an acceptable practice for contractors
to follow in accounting for and presenting unallowable costs
provided the following criteria are met.''
Councils' response: Concur. The Councils believe that the proposed
change will enhance the clarity of the rule and emphasize that it is
the contractor's ultimate responsibility for complying with the
accounting and presentation of unallowable costs as prescribed in
paragraph (c)(1). Therefore, the respondent's proposed language is
added to FAR 31.201-6(c)(2). While it is the intent of the Councils to
specifically state that statistical sampling is an acceptable method
for contractors to comply with the identification and segregation
requirements of this rule, this language in no way binds or limits the
Government from performing their responsibilities in fulfilling the
requirements for establishing indirect cost rates in accordance with
FAR Subpart 42.7, Indirect Cost Rates.
Application of penalties, FAR 31.201-6(c)(3).
Comment 2:Three respondents recommend that the proposed paragraph
(c)(3) be revised. One respondent believes that the proposed paragraph
(c)(3) will cause more confusion than it is intended to preclude. This
respondent states that the penalty provisions of FAR 42.709 can be
invoked in statistical sampling by using a simpler paragraph that reads
as follows:
``For any cost in the selected sample that is subject to the
penalty provisions at FAR 42.709, the amount projected to the
sampling universe from that sampled cost is also subject to the same
penalty provisions.''
The second respondent believes that the proposed paragraph (c)(3)
should be simplified to improve clarity and eliminate redundant text
from FAR 42.709. This respondent believes that the penalty provisions
in FAR 42.709 can be applied when sampling is used with a simpler, more
concise paragraph that reads as follows:
``Any unallowable indirect costs that are not excluded from the
universe, either as part of the projection of sample results or
separate review of transactions, are subject to the penalty
provisions at FAR 42.709.''
The third respondent believes that the proposed paragraph (c)(3) is
rather confusing and subject to misinterpretation. This respondent
therefore recommends that the paragraph be revised to read as follows:
``For any cost in the selected sample that is subject to the
penalty provisions at FAR 42.709, the associated projected amount to
the sampling universe derived from that sampled item is also subject
to the same penalty provisions.''
This respondent states that if the proposed language is retained,
the Councils need to address the following:
(a) The wording in (c)(3)(i) ``excluded from any final indirect
rate proposal'' is technically incorrect. The amounts are not
``excluded'' from the ``proposal'', as the proposal would include
gross, withdrawn, and claimed/recoverable costs. The respondent
therefore recommends that this would need to be revised to read ``The
following amounts must be excluded from any proposed final indirect
rates or....''
(b) Proposed paragraph (c)(3)(i)(B) is not clear as to what is
meant by ``determined to be unallowable.'' This could relate to
paragraph (b) of this cost principle or it could relate to FAR 42.709-
3(b) or something else.
(c) Proposed paragraph (c)(3)(iii) appears redundant and
unnecessary. Paragraph (c)(3)(iii) provides ``...are subject to the
penalties provisions at FAR 42.709.'' By virtue of this reference that
includes contract applicability language at 42.709-6, it does not
appear necessary to provide another paragraph with the same type of
contract applicability language.
Councils' response: Concur. The Councils agree that the proposed
language was potentially confusing. The Councils therefore recommend
simplifying the language at FAR 31.201-6(c)(3) to read as follows:
``For any indirect cost in the selected sample that is subject
to the penalty provisions at FAR 42.709, the amount projected to the
sampling universe from that sampled cost is also subject to the same
penalty provisions.''
The Councils note that the intent of the subject language in both
the proposed rule and the final rule is the same.
Advance agreements, FAR 31.201-6(c)(4) and FAR 31.109.
Comment 3: Two respondents assert that paragraph (c)(4) is written
in such a way as to suggest there is a requirement for an advance
agreement. One respondent does not believe the potentially prescriptive
language at paragraph (c)(4) is consistent with the examples of costs
at FAR 31.109(h). Therefore, this respondent recommends eliminating
this paragraph. The respondent further notes that if it is determined
that the advance agreement reference must remain, the following text
would be more acceptable to the contracting parties:
``An advance agreement (see 31.109) with respect to compliance
with subparagraph (c)(3) of this subsection may be useful and
desirable.''
The second respondent believes it would be more appropriate and
consistent with the verbiage used in other cost principles to simply
reference FAR 31.109, such as is done in FAR 31.205-37. This respondent
therefore recommends that the language at FAR 31.109(h) include
sampling for
[[Page 57465]]
unallowable costs as another example of items that may require an
advance agreement, and that paragraph (c)(4) be revised to read as
follows:
``See 31.109 regarding advance agreements.''
Councils' response: Partially concur. The Councils do not believe
the proposed language requires an advance agreement. The proposed
language states that use of statistical sampling should be the subject
of an advance agreement. While the Councils believe that the advance
agreement language should remain in FAR 31.201-6, the Councils do agree
that it would be helpful to add sampling to FAR 31.109 as an example of
the type of item for which an advance agreement may be appropriate, and
therefore have added ``statistical sampling methods'' to FAR 31.109(a)
and 31.109(h)(17).
Comment 4: One respondent asserts that if the proposed rule is
enacted, the rule should require an advance agreement that specifies
what an adequate sampling plan entails. As such, this respondent
recommends that paragraph (c)(4) require an advance agreement that
documents the objective of the sample, the population, the measures,
the sampling parameters, the confidence level, the precision, the
sampling design, and the decision rule.
Councils' response: Nonconcur. The Councils believe the comments
submitted in response to the proposed rule and the second proposed rule
demonstrate that it is preferable to provide general criteria rather
than specific requirements. The use of specific requirements reduce the
flexibility of the contracting parties to apply sampling in a manner
that maximizes its efficient use while continuing to protect the
Government interests. The Councils believe that the requirements for
the sample to be a reasonable representation of the sampling universe,
to permit audit verification, and to apply penalties to any projected
amounts provides adequate protection for the Government without unduly
restricting the effective use of proper statistical sampling
techniques.
In addition, the Councils do not believe an advance agreement
should be required. However, the Councils believe it is important that
the rule clearly state that it is the contractor's responsibility to
prove compliance with the sampling criteria in FAR 31.201-6(c) when no
advance agreement exists. When a contractor elects to use statistical
sampling without entering into an advance agreement, the contractor is
at risk that the Government will find the sampling plan in
noncompliance with FAR 31.201-6(c), and the Government will perform
their own sampling or even possibly a 100 percent review of the costs
at issue. In those cases where the contracting officer or contracting
officer's representative challenges the contractor's sampling methods,
and no advance agreement exists, the burden of proof should be on the
contractor to establish that the sampling methods comply with the FAR
requirements. The final rule at paragraph (c)(5) has been revised to
include this provision. To mitigate the potential for disputes
regarding the acceptability of sampling methods, it is generally
advisable for the contractor and the Government to enter into an
advance agreement. Since the advance agreement has a significant impact
on the accounting for unallowable costs, the final rule at paragraph
(c)(4) requires that the contracting officer request auditor input
prior to entering into such agreements.
Directly associated costs, FAR 31.201-6(e).
Comment 5: One respondent believes that FAR 31.201-6(e) violates
CAS 405 (Accounting for Unallowable Costs) and is subject to legal
challenge by any Government contractor to which a procuring or
administering agency might seek to apply it. This respondent believes
that the proposed rule sends a message to the contracting community
that contracting agencies follow CAS only where it suits them to do so,
and may disregard CAS where it does not suit their interests. This
respondent asserts that paragraph (e) ``...departs from the CAS 405
definition and substitutes a `materiality' test for the `but for' test
and further extends the materiality test to encompass even more factors
that are unrelated to the CAS definition. While a suitable materiality
test could itself be reconcilable with the CAS `but for' test, the FAR
has gone well beyond this point to encompass additional factors that
directly contradict the CAS 405 definition.'' The respondent states
that the FAR could be revised to comply with CAS 405. The respondent
asserts that ``a point clearly comes at which a particular cost becomes
so significant that common sense tells us the `but for' test is
satisfied. Thus, a test seeking to establish that point using the term
`materiality' would be a valid implementation of CAS 405.'' The
respondent therefore recommends that the FAR specify ``a sensible
materiality test and delete the other two current criteria of FAR
31.201-6(e).'' The respondent further noted that it has submitted
copies of its comments to the CAS Board and suggested that the Board
``review the conflict between CAS and FAR in the identification and
allocation of directly associated cost and take what steps it may
consider appropriate to defend its exclusive jurisdiction in this
area.''
Councils' response: Nonconcur. The Councils do not believe the
language at paragraph (e) conflicts with CAS 405. The current language
at FAR 31.201-6(e)(2), which has been in the FAR for over twenty years,
has not been ruled to conflict with CAS 405 by any Court or by the CAS
Board. The Councils believe this is important language, because it
provides contracting personnel and contractors with specific
information on when to treat salaries and expenses as directly
associated costs. As such, the Councils believe this language should be
retained.
Sampling for large dollar transactions, FAR 31.201(c)(2)(ii).
Comment 6: One respondent believes that the proposed requirement at
FAR 31.201-6(c)(2)(ii) that ``all large dollar and high risk
transactions are separately reviewed for unallowable costs and excluded
from the sampling process'' is overly restrictive. This respondent
notes that its past experience has shown that sampling for unallowable
costs is most efficient and effective for high volume accounts with low
dollar, low risk transactions. Therefore, the respondent believes that
for a given universe, there is often no need or benefit to set aside
transactions for 100 percent review. The respondent notes that
identification of any transactions requiring 100 percent review and the
establishment of sampling strata or clusters as necessary are all
inherent requirements of developing a sampling plan that provides a
``reasonable representation of the sampling universe,'' as required by
FAR 31.201-6(c)(2)(i). The respondent therefore recommends that the
language in paragraph (c)(2)(ii) be deleted.
Councils' response: Nonconcur. The Councils agree with the
respondent that a reasonable representation of the sampling universe
would require elimination of items that due to their nature and/or
dollar amount are not reasonably similar to the other items in the
universe. However, the Councils also believe this is an important area
that requires clear language to assure that all parties understand that
large dollar and high risk items must be removed from the sampling
universe. Therefore, paragraph (c)(2)(ii) has been retained.
Use of statistical sampling, General.
Comment 7: A respondent believes that the use of statistical
sampling will
[[Page 57466]]
result in confusion, inconsistencies, and disputes. The respondent
believes that statistical sampling should not replace accounting
policies and procedures for properly identifying and segregating
unallowable costs. The respondent states that unallowable costs should
be appropriately identified and excluded when they are initially
incurred and recorded. The respondent asserts that this internal
control assures that unallowable costs are accounted for and excluded
from a contractor's submission. The respondent states that allowing
statistical sampling for identifying unallowable costs weakens this key
internal control. The respondent further notes that if sampling is to
be permitted, the Government and the contractor must develop the
expertise in statistical sampling to ensure sampling plans are adequate
and executed properly.
Councils' response: Nonconcur. The Councils note that CAS 405
(Accounting for Unallowable Costs) already permits sampling. As such,
it would be a conflict with the CAS to state that sampling is not
permitted for CAS-covered contracts. While the FAR could add a specific
provision stating that statistical sampling is not permitted for non-
CAS covered contracts, the Councils do not believe this would be a
prudent business action. The Councils believe that the use of
statistical sampling should apply to all contracts covered by FAR Part
31, Contract Cost Principles and Procedures. The purpose of the
proposed rule is to provide some general structure to the process.
Statistical sampling, when properly applied, is acceptable for both
segregating unallowable costs and verifying that such costs have been
properly segregated (either by specific identification or using
appropriate sampling techniques). A properly executed sampling plan
should approximate the total unallowable costs from the sample
universe. Internal controls and procedures established to meet the
sampling objectives and evaluation of the sample selections should
still be a key component of this process. The Councils are also
concerned that it would be oxymoronic to argue that statistical
sampling is not acceptable for segregating unallowable costs but is
acceptable for verifying the validity of that segregation. As to the
expertise that needs to be developed, the Councils again note that
statistical sampling is already permitted by CAS, and is often used in
both industry and the Government for many different types of
applications. Thus, the Councils believe the necessary expertise for
applying statistical sampling already exists within both the Government
and the contractor community.
Comment 8: One respondent believes that the FAR should include
guidance similar to that issued by the IRS in Revenue Procedure 2004-
29. This respondent states that this Revenue Procedure establishes
guidelines for using statistical sampling methods for meals and
entertainment expenses. The respondent notes that this Revenue
Procedure covered the sampling plan standards, the methods and
attributes to be used with a sampling plan, the sampling documentation
standards, and the technical formulas. In addition, the procedure
specified a 95 percent one-sided confidence level.
Councils' response: Nonconcur. The Councils believe that such
prescriptive language is not necessary. The Councils believe that it is
preferable to provide for more general requirements regarding
acceptable statistical methods than to provide a detailed listing of
what must be present for each and every situation.
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 Department of Defense, the General Services Administration, and
the National Aeronautics and Space Administration certify that this
final rule will not 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.
C. Paperwork Reduction Act
The Paperwork Reduction Act does not apply because the 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 Part 31
Government procurement.
Dated: September 22, 2005.
Julia B. Wise,
Director, Contract Policy Division.
0
Therefore, DoD, GSA, and NASA amend 48 CFR part 31 as set forth below:
PART 31-CONTRACT COST PRINCIPLES AND PROCEDURES
0
1. The authority citation for 48 CFR part 31 continues to read as
follows:
Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42
U.S.C. 2473(c).
0
2. Amend section 31.109 by--
0
a. Removing the period from the end of the third sentence of paragraph
(a) and adding ``and on statistical sampling methodologies at 31.201-
6(c).'' in its place; and
0
b. Removing from the introductory text of paragraph (h) the words ``of
costs''; removing from paragraph (h)(15) the last word ``and'';
removing the period from the end of paragraph (h)(16) and adding ``;
and'' in its place; and adding paragraph (h)(17) to read as follows:
31.109 Advance agreements.
* * * * *
(h) * * *
(17) Statistical sampling methods (see 31.201-6(c)(4).
0
3. Amend section 31.201-6 by--
0
a. Removing from the second sentence of paragraph (a) and the first
sentence of paragraph (b) the word ``which'' each time it appears (3
times) and adding the word ``that'' in its place;
0
b. Revising paragraph (c);
0
c. Removing from the first sentence of paragraph (d) the word ``which''
the first time it appears and adding ``that'' in its place; and
0
d. Removing from the end of paragraph (e)(1)(ii) the word ``or'' and
adding the word ``and'' in its place; and revising paragraph (e)(3) to
read as follows:
31.201-6 Accounting for unallowable costs.
* * * * *
(c)(1) The practices for accounting for and presentation of
unallowable costs must be those described in 48 CFR 9904.405,
Accounting for Unallowable Costs.
(2) Statistical sampling is an acceptable practice for contractors
to follow in accounting for and presenting unallowable costs provided
the criteria in paragraphs (c)(1)(i), (c)(1)(ii), and (c)(1)(iii) of
this subsection are met:
(i) The statistical sampling results in an unbiased sample that is
a reasonable representation of the sampling universe.
(ii) Any large dollar value or high risk transaction is separately
reviewed for unallowable costs and excluded from the sampling process.
(iii) The statistical sampling permits audit verification.
(3) For any indirect cost in the selected sample that is subject to
the
[[Page 57467]]
penalty provisions at 42.709, the amount projected to the sampling
universe from that sampled cost is also subject to the same penalty
provisions.
(4) Use of statistical sampling methods for identifying and
segregating unallowable costs should be the subject of an advance
agreement under the provisions of 31.109 between the contractor and the
cognizant administrative contracting officer or Federal official. The
advance agreement should specify the basic characteristics of the
sampling process. The cognizant administrative contracting officer or
Federal official shall request input from the cognizant auditor before
entering into any such agreements.
(5) In the absence of an advance agreement, if an initial review of
the facts results in a challenge of the statistical sampling methods by
the contracting officer or the contracting officer's representative,
the burden of proof shall be on the contractor to establish that such a
method meets the criteria in paragraph (c)(2) of this subsection.
* * * * *
(e)(1) * * *
(3) When a selected item of cost under 31.205 provides that
directly associated costs be unallowable, such directly associated
costs are unallowable only if determined to be material in amount in
accordance with the criteria provided in paragraphs (e)(1) and (e)(2)
of this subsection, except in those situations where allowance of any
of the directly associated costs involved would be considered to be
contrary to public policy.
[FR Doc. 05-19476 Filed 9-29-05; 8:45 am]
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