[Federal Register: December 12, 2006 (Volume 71, Number 238)]
[Rules and Regulations]
[Page 74667-74680]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12de06-16]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 2, 10, 12, 16, and 52
[FAC 2005-15; FAR Case 2003-027; Item II; Docket 2006-0020, Sequence
22]
RIN 9000-AK07
Federal Acquisition Regulation; FAR Case 2003-027, Additional
Commercial Contract Types
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) to implement section
1432 of the National Defense Authorization Act for Fiscal Year 2004.
Title XIV of the Act, referred to as the Services Acquisition Report
Act of 2003 (SARA), amended section 8002(d) of the Federal Acquisition
Streamlining Act of
[[Page 74668]]
1994 (FASA) to expressly authorize the use of time-and-materials (T&M)
and labor-hour (LH) contracts for certain commercial services under
specified conditions.
DATES: Effective Date: February 12, 2007.
FOR FURTHER INFORMATION CONTACT: For clarification of content, contact
Mr. Jeremy Olson, at (202) 501-3221. Please cite FAC 2005-15, FAR case
2003-027. For information pertaining to status or publication
schedules, contact the FAR Secretariat at (202) 501-4755.
SUPPLEMENTARY INFORMATION:
A. Background
This final rule amends the Federal Acquisition Regulation to
implement section 1432 of the National Defense Authorization Act for
Fiscal Year 2004 (Pub. L. 108-136). Title XIV of the Act, referred to
as the Services Acquisition Reform Act of 2003 (SARA), amended section
8002(d) of the Federal Acquisition Streamlining Act of 1994 (FASA)
(Pub. L. 103-355, 41 U.S.C. 264) to expressly authorize the use of
time-and-materials (T&M) and labor-hour (LH) contracts for commercial
services under specified conditions.
Section 8002(d)(3) of the Act limits use of T&M and LH contracts to
the following categories of commercial services:
Commercial services procured for support of a commercial
item, as described in 41 U.S.C. 403(12)(E).
Any other category of commercial services that is
designated by the Administrator of Office of Federal Procurement Policy
(OFPP) on the basis that--
1. The commercial services in such category are of a type of
commercial services that are commonly sold to the general public
through use of T&M or LH contracts; and
2. It would be in the best interests of the Federal Government to
authorize use of T&M or LH contracts for purchase of the commercial
services in such category.
In furtherance of its statutory responsibilities, OFPP worked in
coordination with the Councils on a series of questions for the advance
notice of proposed rulemaking (ANPR), the proposed rule, and the
notices of public meeting published in the Federal Register at 69 FR
56316 on September 20, 2004 and at 70 FR 56318 on September 26, 2005,
to obtain information describing how T&M and LH contracts are used
commercially. In particular, the questions elicited information on the
types of services that are commonly acquired on this basis and the
circumstances under which these arrangements are used. Interested
parties offered a variety of written observations in response to the
ANPR and proposed rule. See the Federal Register at 70 FR 56320 on
September 26, 2005. In addition, a number of interested parties
provided oral comments during the public meetings that were held on
October 19, 2004 and October 18, 2005, to facilitate an open dialogue
with Government procurement policy officials.
OFPP and several Council staff members also received a briefing
from the Government Accountability Office (GAO) on a survey the GAO
conducted late last year to determine how often commercial companies
use T&M and LH contracts in their commercial practices, either as a
buyer or a provider. The GAO received 23 responses to its survey. Some
of the responses came from Fortune 500 companies. Although responses
were limited, the GAO indicated that they represented buying practices
from a relatively wide range of industries, including airline,
automotive and truck manufacturers, automotive and truck parts,
business services, communications equipment, computer hardware,
computer services, electric utilities, insurance, major drugs
(pharmaceutical), money center bank, non-profit financial services, oil
and gas, regional bank, retail (grocery and technology), scientific and
technical instruments, and semiconductor.
Finally, OFPP reviewed testimony offered to the Acquisition
Advisory Panel established pursuant to section 1423 of SARA to evaluate
commercial practices and other acquisition-related issues. The Panel
specifically sought input regarding industry's use of T&M and LH
contracts. See http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.acquisition.gov/comp/aap/index.html.
OFPP made three main findings from these inputs. First, commercial
services are commonly sold on a T&M and LH basis in the marketplace
when requirements are not sufficiently well understood to complete a
well-defined scope of work and when risk can be managed by maintaining
surveillance of costs and contractor performance. Second, these same
services are also commonly sold on a fixed-price basis. Third, a few
types of services are sold predominantly on a T&M and LH basis--
specifically, emergency repair services. By their nature, emergency
repair services are difficult to capture in a well-defined scope of
work and therefore are not generally conducive to purchase on a fixed-
price basis. Industry associations, representing a wide range of
service industries, supported these findings in their comments in
response to the ANPR, proposed rule, public meetings, and SARA Panel
hearings.
OFPP advised the Councils that it is designating all categories of
services (i.e., any service) as being available for acquisition on a
T&M and LH basis because the findings made in conjunction with the
rulemaking indicate that: (1) services under any general categorization
of services, such as those examined by the GAO, are commonly sold to
the general public on a T&M and LH basis under certain conditions; and
(2) use of T&M and LH contracts under these conditions may be in the
Government's best interest. However, OFPP further advised that its
designation is limited to the same circumstances that exist when T&M
and LH contracting is commonly used to sell services to the general
public and where the other prerequisites set forth in section 8002(d)
have been met. OFPP concluded, in view of the findings, that the
identification of effective boundaries for the use of T&M and LH
contracts is a function of the specific circumstances surrounding the
acquisition rather than the specific type of service being sold. OFPP
requested that the Councils reflect its designation in the final FAR
rule.
Specifically, OFPP requested that the rule allow an agency to
purchase any commercial service on a T&M or LH basis if it has
completed a determination and findings (D&F) containing sufficient
facts and rationale to justify that a firm-fixed pricing arrangement is
not suitable. With respect to the contents of the required D&F, OFPP
advised the Councils that the rationale supporting use of a T&M or LH
contract for commercial services must establish that a T&M or LH
contract is being used under the same conditions where the private
sector would commonly rely on these arrangements--namely, where it is
not possible at the time of placing the contract or order to accurately
estimate the extent or duration of the work or to anticipate costs with
any reasonable degree of certainty. In addition, if the need is of a
recurring nature and is being acquired through a contract extension or
renewal, OFPP expects, consistent with FAR 7.103(r), that the D&F
reflect why knowledge gained from the prior acquisition could not be
used to further refine requirements and acquisition strategies in a
manner that would enable purchase on a fixed-price basis.
OFPP reminded the Councils that agencies will also need to comply
with the other limitations set forth in 8002(d)--i.e., the service is
acquired under a contract awarded using competitive procedures, the
contract or
[[Page 74669]]
order includes a ceiling price that the contractor exceeds at its own
risk, and any subsequent change in the ceiling price is authorized only
upon a determination, documented in the contract file, that it is in
the best interest of the procuring agency to change the ceiling price.
Finally, OFPP requested that the rule include appropriate additional
mechanisms that help agencies manage risk by maintaining surveillance
of costs and contractor performance, since effective surveillance is
emphasized in commercial use of T&M and LH contracts.
The Councils concur with OFPP's findings and conclusions and have
shaped the rule accordingly.
DoD, GSA, and NASA published an advance notice of public rulemaking
(ANPR) in the Federal Register at 69 FR 56316 on September 20, 2004 and
a proposed rule at 70 FR 56318 on September 26, 2005. Comments were
received from 13 respondents in response to the proposed rule. The
Councils considered all of the comments and recommendations in
developing the final rule. The Councils made the following changes to
the rule as a result of the public comments and deliberations:
(1) 16.601(d)--Added a requirement for the head of contracting
activity to approve any D&Fs that would extend the period of
performance beyond five years for both commercial and non-commercial
T&M contracts to help ensure T&M contracts are only used when no other
type of contract is suitable, to maximize the use of fixed price
commercial contracts consistent with the statute, and to avoid
protracted use of non-commercial time-and-materials contracts after
experience provides a basis for firmer pricing.
(2) Clause 52.212-4 Alternate I--
(a) Paragraph (i)(1)(ii)(B)--Eliminate the provisions that only
permitted reimbursement of subcontract costs at the hourly rates in the
contract schedule when the subcontractors are listed in contract
because the provisions were problematic and contrary to standard
commercial practice (see Comment 4.b.(6)(a)). Instead added provisions
that require the subcontract to be reimbursed at the hourly rates
prescribed in the contract except when the employees performing the
work do not meet the qualifications specified in the contract.
(b) Paragraph (i)(1)(ii)(C)(2)--Eliminated the provisions that
required commercial contractors to give the Government credit for
rebates, refunds, or discounts that ``accrued to'' the contractor
because the provision could have imposed unique Government accounting
requirements on commercial T&M contracts (see Comment 4.b.(7)(b)).
(c) Paragraph (i)(1)(ii)(C)--Excluded indirect costs as a type of
cost that could be reimbursed at actual costs since the indirect costs
will be reimbursed at the fixed amount in the schedule(see Comment
4.b.(8)(a)).
(d) Paragraph (i)(1)(ii)(D)(1)--Revised the rule to allow
contracting officers to establish the types of other direct costs (ODC)
that will be reimbursed at actual costs and the fixed amounts for
indirect costs at the order level on indefinite delivery indefinite
quantity (IDIQ) contracts. The type of ODC that will be needed to
perform an order and any fixed amount for indirect costs may need to be
established on an order-by-order basis (see Comment 4.b.(8)(a)).
(e) Paragraph (i)(4)(ii)(A)--Revised the rule to recognize that
companies use both paper-based and electronic timecards (see Comment
4.b.(9)(b)).
(f) Paragraph (u)--Eliminated the subcontract consent provisions
because the provisions were unduly restrictive, inappropriate, and the
provisions could have permitted the Government to inappropriately
impact a company's commercial reputation (see Comment 4.b.(6)(a)).
Public Comment
The public comments are discussed below:
Comment: Commercial Item Definition. Agree with deleting the
exclusion of ``services that are sold based on hourly rates without an
established catalog or market price for a specific service performed or
a specific outcome to be achieved'' from the definition of a commercial
item to be consistent with SARA.
Comment: Market Research. Agree with adding ``type of contract'' to
the examples provided for determining practices of firms engaged in
producing, distributing, and supporting commercial items because it
assists with the implementation of SARA.
Appropriate Use
Comment: Support OFPP's decision to restrict commercial T&M/LH
contracts to circumstances where no other contract type is suitable
instead of developing a list of commercial services commonly sold on a
T&M/LH basis. The conditions for using commercial T&M/LH contracts
(i.e., the contracting officer executes a determination and finding
that no other contract type is suitable, the contract includes a
ceiling price that the contractor exceeds at its own risk, and
subsequent changes in the ceiling price only authorized upon a
determination that it is in the best interest of the Government)
implement the statute in a clear and concise manner.
Comment: Support OFPP's conclusion that the use of T&M/LH contracts
should not be limited to a list of specific categories of services.
Many types of commercial services are sold and purchased on both T&M/LH
and firm fixed-price (FFP) basis depending on the circumstances of the
particular project. There are no general rules or practices that
restrict use of T&M/LH to any specific service categories. Regardless
of the service type, there are often times when work cannot be
sufficiently defined at contract award to provide for meaningful firm-
fixed prices.
Comment: Limit as much as possible the types of services eligible
to be procured on a commercial T&M/LH basis. A list of the types of
services commonly sold using commercial T&M vehicles would help
contracting officers chose the appropriate contract type and draft the
required D&F.
Response: As discussed above, OFPP's decision is based on its
findings that-- (a) commercial services are commonly sold on a T&M and
LH basis in the marketplace when requirements are not sufficiently well
understood to complete a well-defined scope of work and when risk can
be managed by maintaining surveillance of costs and contractor
performance; (b) these same services are also generally offered on a
fixed-price basis; and (c) a few types of services are sold
predominantly on a T&M and LH basis--specifically, emergency repair
services. Based on these findings, OFPP recommended to the Councils
that the rule allow an agency to purchase any commercial service on a
T&M or LH basis if it has completed a determination and findings (D&F)
containing sufficient facts and rationale to justify that a firm-fixed
pricing arrangement is not suitable. OFPP stated that this conclusion
is consistent with the statutory requirement in section 8002(d) that
contracting officers must execute a D&F that establishes that no
contract type is suitable before pursuing one of these arrangements.
The Councils agree with OFPP's finding and shaped the rule accordingly.
The Councils do not believe it is practical or feasible to develop and
maintain a comprehensive list of services sold on a T&M/LH basis
because many services may be sold on both a T&M/LH and fixed price
basis depending on the circumstances of the acquisition. The rule
clearly provides that commercial T&M/LH contracts can only be used when
the other commercial services' contract types are not suitable.
[[Page 74670]]
Comment: Clarify whether competitive procedures means ``full and
open competition'' or ``limited competition'' when the competition is
conducted with as many sources as practicable under one of the
authorities listed in FAR 6.302.
Response: Sole source commercial T&M/LH contracts are not
authorized. Commercial T&M/LH contracts may be awarded under the
statutory authorities that permit contracting without providing for
full and open competition. When these authorities are used, contracting
officers are required to solicit offers from as many potential sources
as is practicable under the circumstances. Nothing in this rule
requires ``full and open'' competition.
Comment: Restrict the use of T&M contracts to when it is not
``practicable'' instead of not ``possible'' at the time of placing the
contract or order to accurately estimate the extent or duration of the
work or to anticipate costs with any reasonable degree of certainty. It
may be ``possible'' to estimate the duration and cost of work but
impracticable given the time and effort that would be required, the
urgency of the work, and the agencies competing priorities.
Response: T&M contracts comprise the highest contract type risk to
the Government. As such, they should only be used when it is not
possible at the time of award to estimate accurately the extent or
duration of the work or to anticipate costs with any reasonable degree
of confidence. Also, restricting the use of T&M contracts to when it is
not ``possible'' is consistent with the requirements for non-commercial
T&M contracts.
Determination and Finding (D&F)
Comment: Delete the minimum D&F requirements for justifying no
other contract type is suitable because specifying the minimum
requirements imposes a potentially greater burden on contracting
officers than the corresponding provisions for non-commercial T&M/LH
contracts. Delete the requirement to execute a D&F for each order when
the indefinite-delivery contract is priced on a T&M/LH or FFP basis
because it is inconsistent with FAR 1.602-2 which stipulates
``contracting officers should be allowed wide latitude to exercise
business judgment.'' SARA requires a D&F to justify the contract type,
not the use of the contract once justified.
Comment: Eliminate the requirement for approval one level above the
contracting officer for a commercial T&M/LH IDIQ contract that only
allows for issuance of orders on a T&M/LH basis to be consistent with
non-commercial T&M/LH contracts. Commercial T&M/LH contracts pose no
greater risk to the Government than non-commercial T&M/LH contracts.
Comment: The rule contradicts and goes beyond the intent of SARA by
potentially creating, in practice and effect, a prohibition on the use
of T&M contracts. Specifically, the rule adds administrative burden and
procedural complication to the use of T&M contracts which would inhibit
the use of these contracts as a practical contracting tool, e.g.,
requiring a D&F for each T&M task order is beyond the intent of Section
1432 and appears to show little confidence in the business judgment of
contracting officers.
Comment: Develop an approval level for D&Fs commensurate with the
risk to the Government.
Response: The Councils acknowledge that the rule contains
additional requirements for commercial T&M/LH IDIQ D&Fs than those
required for noncommercial T&M/LH IDIQ D&Fs. While the Councils
recognize these additional requirements may be more burdensome, the
Councils believe the additional requirements are needed to encourage
the preference for the use of fixed price contracts for commercial
items. In addition, the Councils believe additional controls are needed
to ensure both commercial and non-commercial T&M contracts are only
used when no other type of contract is suitable. The Councils revised
the rule to require head of contracting activity approval for any D&Fs
that extend the performance period beyond five years for both
commercial and non-commercial T&M contracts.
Comment: Establish a $100,000 threshold for D&F to recognize a
reasonable level at which tangible deliverable would be expected.
Comment: Exempt small purchases at or below the five million dollar
commercial item threshold at FAR 12.203 from the D&F requirements. This
threshold allows agencies to use simplified acquisition procedures up
to five million dollars for commercial item acquisitions. The Councils
have discretion to implement the statutory provisions addressing D&Fs.
See Chevron, U.S.A. v. Natural Resources Defense Council, Inc., 467
U.S. 837, 844 (1984).
Response: When a statute is silent or ambiguous with respect to a
certain issue, agencies have discretion to interpret the statute in a
reasonable manner, consistent with its legislative history. However,
the statute is not ambiguous and the legislative history contains
nothing which would support an interpretation that the D&F condition
can be limited to a dollar threshold. The statute requires a D&F for
T&M/LH contracts regardless of the dollar amount.
Nonconforming
Comment: Paying for reperformance, excluding profit, is a
significant improvement over the ANPR and properly reflects commercial
practices. The parties will be permitted to tailor the provision
pursuant to FAR 12.302 when customary commercial practices provide
different warranty terms.
Comment: Except for the default 10 percent profit rate, the
proposed provisions are the same as those used for non-commercial T&M
contracts. These provisions contain significant departures from terms
typically found in the commercial marketplace. The proposed 10 percent
default profit rate is irrelevant if the contracting officer knows the
contractor's profit rate. Contracting officers could terminate the
contract or retain another contractor to complete the work as provided
in FAR 52.246-6(f) and (g) if a contractor is expending best efforts
and still not performing properly. Require contracting officers to
better focus on the requirements of FAR 7.105, Contents of Written
Acquisition Plans, rather than adopting the proposed inspection and
acceptance clause.
Comment: Contractors are under less budgetary pressure to perform
under a T&M contract than a FFP contract and should be held to as
stringent quality standards as FFP contracts. Paying for rework will
not discourage ``shoddy work'' since the contractor will be reimbursed,
without profit, for its costs. Develop an appropriate profit percentage
based on historical data or some other measure to avoid a potential
unintended consequence of establishing a 10 percent profit standard for
T&M contracts. A 10 percent profit may be excessive for low risk T&M
contracts.
Response: The comments reflect a varying set of commercial
practices for nonconforming supplies and services. The ANPR required
contractors to repair or replace rejected supplies or reperform
rejected services at no cost to the Government. Public commenters on
the ANPR said requiring contractors to repair or replace rejected
supplies or reperform rejected services at no cost to the Government
imposed more contract risk on the contractor than the non-commercial
clause. The Government is essentially imposing a fixed-price level of
risk. Combining a ceiling price that contractors exceed at their own
risk and a requirement that the contractor use ``best efforts'' to
perform within the
[[Page 74671]]
ceiling price means contractors are required accomplish a certain
result (i.e., performance of the work specified in the Schedule) within
a specified dollar amount (i.e., the ceiling price). The Councils
agreed that contractors are generally only required to use ``best
efforts'' to accomplish the desired results within the established
ceiling price on both commercial and non-commercial T&M contracts as
opposed to FFP contracts which requires contractors to accomplish
stated results within the fixed price. Therefore, the Councils revised
the proposed rule to be consistent with the non-commercial T&M
requirements. The 10 percent default profit rate will only be used when
the contracting officer does not know the contractor's actual profit
rate, which may be commonplace in competitive awards. Contractors are
under less budgetary pressure to perform under a T&M than a FFP
contract. However, it is not appropriate to hold contractors to the
same standards used on FFP contracts. The risk of ``shoddy work'' is
inherent to all ``best efforts'' type contracts. Accordingly, T&M/LH
contracts are only authorized when no other contract type is suitable.
The 10 percent default profit rate is arbitrary, not necessarily
representative of the actual profit rates. However, the rate is
intended to protect the Government by helping to ensure profit is not
paid for replacement or reperformance.
Comment: The proposed rule does not address reimbursement of costs
for providing accommodations to the Government for testing and
inspections at contractor and subcontractors' facility. Fairness
dictates that the Government reimburse contractors and subcontractors
for reasonable costs incurred for the required accommodations.
Response: The costs for providing accommodations to the Government
for testing and inspecting at contractor and subcontractors' facilities
are generally included in the fully burdened labor rate.
Subcontracts and Interdivisional Labor
Comment: Reimburse subcontract labor at the schedule labor rates
without listing the subcontractors in the contract for standard
commercial services, e.g., ``on-call'' IT installation and repair
services in support of commercial IT products. Reimburse subcontract
labor at the schedule labor rates without listing the subcontractors in
the contract when the contractor's proposal indicates that some of the
work may be performed by subcontractors that meet the contract's
qualification requirements and that the price for that ``type of work''
will be the prime contract's labor rate which may be blended or other
rate. Reimburse subcontract labor at the schedule labor rates without
subcontract consent when the subcontractor personnel satisfy the
qualification and other requirements for the labor categories for which
the contractor is seeking compensation. T&M/LH contracts specify the
required labor qualifications. Whether the person filling the position
is an employee of the prime or a subcontractor, the qualifications must
be met. The Government has already determined the price for the ``type
of work'' to be fair and reasonable by competition. Include
interdivisional transfers and subcontracted labor costs as elements of
``time'' instead of ``materials'' to allow prime contractors to recover
adequate compensation for the time and resources it expends on
administering subcontracts and for the financial exposure is assumes
for its subcontractor's performance.
Comment: Appreciate the Councils efforts to clarify the treatment
for subcontracts and interdivisional transfers but recommends
reimbursing all subcontract labor at the schedule labor rates to avoid
confusion over whether the costs are reimbursable as ``material'' or
``labor.'' Separately address the proper treatment for subcontracts and
interdivisional labor to avoid inevitable disputes over whether the
costs should be treated as ``labor'' or ``material.'' Contractors
frequently require use of subcontractors for any number of reasons
included to:
(a) Secure specific skill sets;
(b) Augment an existing workforce;
(c) Use small and/or small, disadvantaged businesses to meet
socioeconomic goals;
(d) Incorporate small business innovative solutions; and
(e) Replace subcontractors during contract performance for failure
to achieve the prime contractor's performance standards.
Prime contractors may not know which subcontractors will be used to
perform the work since T&M contracts are used when it is not possible
to estimate accurately the extent or duration of work at the time of
award. Contractors will not know at the time of award which
subcontractors may be used to fulfill ``on call'' or ``on demand''
services. It is unfair to require contractors to perform services
without knowing in advance whether the necessary subcontractors can be
brought to task and how the contractor will be reimbursed. Expand the
definition of ``subcontract'' to clarify that subcontracts on
commercial contracts includes ``transfers of commercial items between
divisions, subsidiaries, or affiliates of a contractor or
subcontractor'' to be consistent with FASA which specified
interdivisional transfers for commercial items are to be treated as
subcontracts (see FAR 12.001). Clarify the provisions that allow
contractors to be reimbursed for its own material at the contractor's
established catalog or the market price includes services that meet the
definition of a commercial item at FAR 2.101. Do not object to
appropriate subcontractor disclosure requirements when the contractor
does not have an approved purchasing system and the subcontract will be
cost-reimbursement, time-and-materials, labor-hour, or letter contract
(see FAR 44.201(b)(1)) but the Government should not interject its
authority over the prime contractor's determination of how to
accomplish the work being bid and awarded. Recommend the Councils
instead consider a notification requirement without the need for formal
contract amendment. In the commercial world, sellers are generally free
to delegate their duties to subcontractors as they see fit. In the
Government world, agencies make these determinations in the evaluation
of a contractor's proposal and through oversight of awarded work. The
Government could be exposed to claims for delay or disruption when the
contractor is attempting to substitute one qualified subcontractor for
another and approvals are improperly denied or unreasonable delayed.
The Councils concerns that the basis for ``best value'' determination
used to award the contract may be altered by contractors adding or
substituting subcontractors after award do not justify the provisions
that limit reimbursement of subcontract costs to those listed in the
contract or those subsequently approved by the contracting officer. The
question is not one of reimbursement but of Government payment for
services rendered. The attendant administrative procedures in the
proposed rule might impede the contractor's ability to deliver services
in accordance with the terms of the contract. The ``consent to
subcontract'' provisions and payment limitations significantly increase
the risk to contractors for meeting contract deliverables. The
administrative and financial burden of establishing and maintaining a
list of subcontractors that can be reimbursed at the hourly schedule
rates increases contract execution risk.
[[Page 74672]]
Comment: Consent to subcontract is inconsistent with the underlying
intent of commercial acquisitions.
Coalition and Comment: Reimburse interdivisional transfers at the
schedule hourly rates like subcontract labor. The proposed rule
restricts reimbursement for interdivisional transfers (e.g., transfers
from divisions, subsidiaries, and affiliates under the common control
of the commercial contractor) to cost, without profit or fee, unless
the interdivisional transfer meets the definition of a commercial item
at FAR 2.101. Commercial contractors will be required to identify the
actual costs, potentially subjecting their allowability to a
determination under the cost principles. Commercial contractors should
have the ability to use any of their resources without penalty of
profit erosion. These contracts have commercial market reference points
and disallowing profit discourages vendors from using their best
employees to meet the Government's needs.
Comment: Revise the instructions for reimbursing subcontracts at
the schedule rate to clearly permit the listing of actual or
``potential'' subcontractor name(s) since the subcontractors listed for
reimbursement at the schedule hourly rates may reflect a pool of
``potential'' subcontractors that may or may not actually work on the
contract.
Comment: Reimburse all subcontract costs at the schedule hourly
rates without requiring contracting officer consent to be consistent
with commercial practices.
Comment: Reimburse subcontract efforts requiring consent only if
proper advance consent is obtained. Do not allow contracting officers
to retroactively grant consent for subcontracts.
Comment: Restrict reimbursement of subcontract costs to actual
costs because the prime contractor could subsequently negotiate lower
rates with subcontractors that were authorized to be paid at the
schedule rates and the Government would pay excessive prices for
subcontracted effort that may be of a level less than that envisioned
by the Government. Reimbursement at the schedule rates encourages
contractors to maximize profit by subcontracting out more of the effort
at lower subcontract rates. Government will expend additional resources
to monitor the quality and efficiency of subcontract labor since the
subcontract effort will not be readily apparent when billed at the
schedule rates.
Comment: Restrict reimbursement of subcontract costs to actual
costs as long as those costs do not exceed the prime's rates.
Subcontractors have reported primes charging prime contractor labor
rates for the subcontractor's labor while paying the subcontractors
significantly lower rates. Vendors should make a reasonable profit on
services provided to the Government but there is no justification for
unduly enriching contractors by allowing them to charge their own
higher rates for subcontract effort. Permitting contractors to bill
their established rates for work they subcontract out will likely have
the unintended consequence of creating new vendor organizations
developed solely to extract higher profits from Government projects.
Contractors that believe the Government is best served by permitting
the wide use of subcontracts are free to do so in FFP agreements.
Revise or restate in a clearer fashion the provisions regarding
reimbursement for subcontract efforts at proposed FAR 52.212-
4(i)(1)(ii)(B) because the provisions are difficult to follow.
Response: The methodology in the proposed rule was problematic and
contrary to standard commercial practice.
First, the rule permitted reimbursement of commercial materials,
including subcontracts and interdivisional transfers, at the
contractor's established catalog or market price. At the same time, the
rule limited reimbursement of qualifying commercial subcontracts to
actual costs unless the subcontracts were listed in the contract for
reimbursement at the hourly schedule rates. For some commercial
companies, the established catalog or market price for its commercial
material (including subcontracts and interdivisional transfers) is the
prime contractor's established catalog or market price for labor.
Reimbursing commercial materials at actual cost is inconsistent with
commercial practices and contrary to the statutory preference for
acquisitions of commercial items and the intent of FASA, i.e.,
established acquisition policies more closely resembling those of the
commercial marketplace. In addition, subcontracts under FAR Part 12
include transfers of commercial items between divisions, subsidiaries,
or affiliates of a contractor or subcontractor. While the actual costs
for subcontracts other than interdivisional transfers can be easily
determined from an independent third party invoice, actual costs for
interdivisional transfers can only be determined using the procedures
of FAR Part 31. Imposing FAR Part 31 requirements on commercial
interdivisional transfers is contrary to commercial practices and the
intent of FASA. Further, the proposed rule failed to fully consider the
implications of subsequently altering the elements included in the
catalog or market prices. The catalog or market prices will be
determined fair and reasonable based on competition. Subsequent
modifications to the elements of those prices could impact the overall
pricing integrity and the fair and reasonable determination. Finally,
limiting reimbursement to actual costs discourages subcontracting and
would have a negative impact on small businesses. Small businesses
traditionally receive approximately 35 percent of subcontracts on
Government prime contracts and only 24 percent of prime Government
contracts. Reimbursing subcontracts at actual costs is not consistent
with the treatment on all other flexibly priced Government contracts
where prime contractors are paid profit on subcontract costs.
Restricting reimbursement of subcontract costs to actual costs ``as
long as those costs do not exceed the prime's rates'' is not equitable
or fair. Upon further consideration, the Councils believe it is
appropriate to reimburse commercial subcontracts at the schedule labor
rates without listing the subcontracts when the contractor's
established catalog or market price includes the price of its
subcontracts for the reasons discussed above. The Councils revised the
rule accordingly. In addition, the Councils believe imposing
subcontract consent requirements on these commercial subcontracts is
unduly restrictive and inappropriate and revised the rule accordingly.
If a contracting officer failed to provide a timely consent or
disagreed with the subcontract award, the Government could wrongly
affect contract performance and potentially impact a company's
commercial reputation. The Councils also revised the rule to recognize
that subcontracts under FAR Part 12 include transfers of commercial
items between divisions, subsidiaries, and affiliates of a contractor
or subcontractor to be consistent with FAR 12.001. Finally, the
Councils did not believe it was necessary to clarify that qualifying
services are commercial items since the definition of commercial items
at FAR 2.101 clearly identifies the services that meet the definition
of commercial services.
Comment: Agree subcontract consent applies only to costs that are
directly charged to the contract and not overhead expenses and G&A but
recommend explicitly stating so in the final rule to avoid future
questions about the application of this provision.
[[Page 74673]]
Response: As noted above, the final rule does not require
subcontract consents.
Material Costs
Comment: Agree there should be no ``most favored customer'' pricing
requirement because it is a barrier for market entry and inconsistent
with the Government pricing policies at FAR Subpart 15.4.
Comment: Refunds. Reimbursement of material at actual costs less
any rebates, refunds, or discounts received by or accrued to the
contractor is contrary to commercial practice which does not rely on
cost accounting information. If an accrual entry is made at all, the
accrual is typically identified to more global considerations (e.g.,
total volume of purchases), not individual contract actions. The
reference to accruals and other cost accounting data is not
appropriate.
Comment: Delete the requirement for commercial companies to give
the Government credit for rebates from interdivisional labor since the
divisions will likely have little visibility into the other business
units.
Comment: Delete the requirement to provide the Government credit
for rebates on commercial T&M contracts. Vendors typically provide some
services (e.g., maintenance on standard equipment) through the
organizational resources of their commercial business. Federal entities
have little visibility into those business units, creating a dilemma as
to how to account for a rebate.
Response: The Councils do not believe it is appropriate to require
unique Government accounting requirements for materials on commercial
T&M/LH contracts. The Councils revised the rule to only require
contractors to reduce the costs of material for any rebates, refunds,
or discounts that are identifiable to the contract.
Comment: Revise the proposed provisions to say modification to
items that meet the definition of commercial items at FAR 2.101 are
reimbursed at ``price'' instead of ``actual costs'' for to be
consistent with FAR Subpart 15.4.
Response: Depending on the circumstance of a particular
acquisition, it may be appropriate to pay ``price'' instead of
``costs'' for modifications to commercial items. To provide maximum
flexibility to the contracting officer, the Councils revised the rule
to permit reimbursement at either price or cost.
Indirect Costs and Other Direct Costs
Comment: Exclude indirect costs from the definition of material
costs to eliminate the two contradictory methods for reimbursing
indirect costs. The proposed rule permits reimbursement at a fixed
amount but also defines indirect costs as an element of material costs
that can only be reimbursed at actual costs unless the material meets
the definition of commercial item.
Response: The Councils revised the rule to eliminate the
contradictory methods. Instead of excluding indirect costs from the
definition of materials, the Councils revised the provisions in the
alternate clause at FAR 52.212-4, Alternate I (i)(1)(ii)(D)(2) to
exclude indirect costs from being reimbursed at actual cost.
Comment: Agree with the provisions that permit reimbursement of
indirect costs at a fixed price on a pro-rata basis over the period of
contract performance but recommend clarifying that the fixed price
could be adjusted as new work is added and also allowing contractors to
be reimbursed at the Government approved percentage mark-up for non-
commercial contracts. Cost Accounting Standards (CAS) covered
contractors are required to allocate material handling in accordance
with their approved accounting practices. Material handling rates are
well-recognized in Federal and commercial markets. The Councils are
proposing to reimburse indirect costs at a fixed price because of
concerns over violating the cost-plus-a-percentage-of-cost prohibition.
Material handling rates do not add fee or any other price component to
cost and therefore could not be considered a cost-plus-a-percentage-of-
cost violation. Recommend revising the coverage to permit contractors
to recover material handling provided it is excluded from the hourly
rates.
Response: If new work is added, a fixed amount may be added for
indirect expenses if appropriate. Nothing in the rule prevents contract
changes. The approved percentage mark-up for non-commercial contracts
is subject to the allowability provisions of FAR Part 31. The Councils
believe it is more appropriate to reimburse indirect costs without
imposing the requirements of FAR Part 31 to be consistent with
commercial practices. While the commenter disagrees, the Councils
believe use of a fixed rate violates the cost plus percentage of cost
contract prohibition. CAS covered contractors already allocate material
handling and other indirect costs to commercial and non-commercial FFP
contracts in accordance with their disclosed accounting practices.
While the costs are allocated to those FFP contracts, the allocation
may be different from the amounts recovered under the contracts for
those elements of cost.
Comment: Clarify which contracting officer (the contracting officer
who awards the contract or the one that awards the task order) has the
authority and ability to make determination on the method for
reimbursing subcontract efforts and the allowability of ODC and
indirect costs for IDIQ or Multiple Award Schedule (MAS) contracts.
Response: As stated in the alternate clause at (i)(1)(ii)(D)(1) and
(2) of 52.212-4, Alternate I, the contracting officer awarding the
indefinite delivery contract can authorize other contracting officers
to determine how ODC and indirect costs will be reimbursed.
Comment: Revise the rule to clarify ODC and indirect costs will
only be recovered as stand alone elements of costs if the amounts are
not also included in the loaded labor rates.
Response: ODC and indirect costs should only be recovered as
separate elements of costs if they are excluded from the schedule labor
rates. However, contracting officers will not always know the elements
of costs included in the schedule labor rates since commercial T&M/LH
contracts can only be awarded using competitive procedures. Generally,
contracting officers are precluded from obtaining detailed cost
information on these types of acquisitions. However, contracting
officers will know the proposed amount for indirect expenses and the
types of ODC proposed to be reimbursed at actual costs for each
competing contractor during the proposal evaluation phase.
Government Oversight
Comment: The right to interview contractor employees is
unreasonable intrusive and contrary to customary commercial practice.
Notwithstanding a statement by the Councils to the contrary, no similar
right exists in the FAR for any contract type. The audit clause at FAR
52.215-2 gives the contracting officer the right to examine ``records
and other evidence'' to verify claimed costs. Records are not defined
to include interviews and it is hard to believe ``other evidence''
includes employee interviews. This new right lacks precedent in the
FAR. Not even the Offices of Inspector General under the Inspectors
General Act has this authority. The Government does not need this newly
created contractual right because the Government already has this right
in cases of alleged fraud or wrongdoing pursuant to its subpoena powers
under applicable statutes. The Government should rely on the invoices
which are required, under penalty of
[[Page 74674]]
law, to be accurate. The right to interview employees is not required
by SARA or any other law. This authority also conflicts with FASA which
requires commercial item contracts contain only those terms and
conditions that are required by law or customary in the commercial
marketplace. There is no provision in SARA for this approach, a fact
recognized by Defense Contract Audit Agency (DCAA) in its April 9, 2004
``GSA Schedule'' memorandum.
Comment: Commercial T&M/LH contracts are subject to a strict
oversight process performed by company project managers that are
accountable for the successful completion of the work.
Comment: Oppose the rule because commercial contracts will not be
subject to full oversight and audit provisions. To protect taxpayer
interests, commercial T&M/LH contracts should be subject to full
oversight, audits, and CAS. Additionally, the commercial T&M contracts
need clauses for refunds or price reduction so the Government can
recoup overages identified in the audit.
Comment: Remove the restriction that limits the Government's access
to records to those listed in the contract because the Government
should not limit its access to records.
Response: The rule permits, but does not require, contracting
officers to have access to contractor employees. While such access may
not be a standard commercial practice, the Councils believe employee
interviews may be necessary in some cases to verify the hours claimed
by the contractor. According to one commenter in response to the ANPR,
requiring access to contractor employees is a standard commercial
practice for T&M contracting. The provisions for access to contractor
employees are no broader than what is currently provided for under non-
commercial T&M contracts. FAR 52.215-2, Audit and Records--Negotiation,
provides the Government the right to examine and audit all records and
other evidence sufficient to reflect properly all cost claimed to have
been incurred or anticipated to be incurred directly or indirectly in
performance of the contract. The Government routinely conducts employee
interviews and other audit procedures to verify that labor costs at
contractor locations having fixed-price, cost-reimbursement, incentive,
non-commercial time-and-material and labor hour, commercial, or price
redeterminable contracts are charged to the correct contract and not
inappropriately shifted to the flexibly priced Government contracts.
Employee interviews are part of DCAA's normal surveillance of
Government contracts and are required by DCAA's Mandatory Annual Audit
Requirements (MAARs). The Government should not have to allege
wrongdoing to interview contractor employees when their labor hours are
included on invoices submitted to the Government. The Councils do not
believe that SARA or FASA requires the Government to make payments
based on actual hours incurred without being able to verify the
employees actually worked the hours charged. The Councils have
carefully considered existing requirements for T&M contracts as well as
differences between commercial and non-commercial contracts. The
Councils believe that the rule provides the proper balance between the
need to verify compliance with contract terms and the need to minimize
access to contractor records. Finally, the Councils believe the
oversight provided in the rule will provide sufficient information to
verify the validity of amounts claimed on the contract without the
oversight requirements in FAR and CAS that are imposed on noncommercial
T&M/LH contracts.
Comment: Define the term ``original timecards'' broadly enough to
encompass both paper-based and electronic timecards because many
companies use electronic timecards.
Response: The Councils revised the final rule to provide access to
original timecards (paper-based or electronic).
Comment: Provide contracting officers specific guidance regarding
what prime oversight efforts are adequate for subcontracts listed in
the contract and reimbursed at the schedule rates. Contracting officers
may lack the expertise or time to assess the existence or quality of a
contractor's mechanism to oversee the qualifications and hours worked
by subcontractor employees. The only way to substantiate qualifications
and hours worked is through examination of payrolls and resumes for
each subcontractor.
Response: The prime contractor is responsible for the oversight of
its subcontractors. When requested by the Government, the contractors
are required to substantiate invoices (including any subcontractor
hours reimbursed at the hourly rate in the schedule) by evidence of
actual payment, individual daily job timecards, records that verify the
employees meet the qualifications for the labor categories specified in
the contract, or other substantiation specified in the contract.
Contracting officers can seek the advice of the cognizant audit office
when needed. Training would be more appropriately addressed in agency
training materials.
Withholds
Comment: Explicitly state contracting officers cannot withhold on
commercial T&M/LH contracts because some contracting officers may elect
to withhold even though the practice is not specifically allowed by the
payment clause.
Response: We do not contemplate withholds in commercial contracts
but there may be circumstances, at the contracting officer's
discretion, where withholds are appropriate.
Contractor Purchasing System Review (CPSR)
Comment: The proposed rule prohibits contractors with firm fixed-
price (FFP) or FFP with economic price adjustment (EPA) contracts from
obtaining approved purchasing systems thereby creating a ``class of
contractor'' that can never obtain an approved purchasing system. This
new class of contractors will have more oversight in terms of
subcontractor approval and approval of subcontract modifications. These
contractors are currently exempt from the subcontract approval
process--an exemptions supported by FASA and FARA.
Comment: Do not impose CPSR on commercial contractors because doing
so may deter commercial companies from doing business with the
Government. Commercial contractors may not perform sufficient
Government business to justify the establishment of a CPSR.
Response: The objective of a contractor purchasing system review
(CPSR) is to evaluate the efficiency and effectiveness with which the
contractor spends Government funds. The review provides the cognizant
contracting officer a basis for granting, withholding, or withdrawing
approval of the contractor's purchasing system. Under the existing FAR
requirements, the Government does not review a contractor's purchasing
system if all the contractor's Governments sales are commercial FFP and
FFP EPA contracts. The same is true if all a contractor's Government
sales are non-commercial competitively awarded firm-fixed-price and
competitively awarded fixed-price with economic price adjustment
contracts. For these types of contracts, the Government has no reason
to evaluate the efficiency and effectiveness with which the contractor
spends Government funds since the amounts paid to the contractor are
not affected by the efficiency and effectiveness of the contractors'
purchasing practices. The
[[Page 74675]]
proposed rule did not impose a CPSR requirement but simply recognized
that contractors who otherwise have approved purchasing systems require
less oversight of their subcontractors because the contractor's overall
system provides adequate controls and procedures to protect the
Government. However, the Councils revised the rule to eliminate the
subcontract consent requirement which means subcontracts for T&M
contracts awarded pursuant to FAR Part 12 will be excluded from CPSRs.
Cost Accounting Standards (CAS)
Comment: Do not apply CAS and other onerous Government-only
requirements to commercial T&M/LH contracts because doing so is counter
to acquisition reform legislation that envisions the Government
purchasing more like its commercial counterparts. Congress exempted
commercial item contracts from CAS; however, the CAS Board only
exempted FFP and FFP EPA contracts. Agree the Councils lack the
authority to make CAS changes but recommend the Councils implement the
statute and treat T&M contracts as covered by the existing CAS
exclusions.
Response: The decision as to whether CAS applies to commercial T&M/
LH contracts rests with the CAS Board. The Councils have limited the
imposition of other Government-only requirements to the maximum extent
practicable. The Councils do not believe commercial T&M/LH contracts
are currently exempted by any CAS exemption and therefore cannot simply
waive the requirements of CAS.
Total Cost
Comment: The rule establishes a notification procedure much like
the limitation of cost and limitation of funds clauses for non-
commercial items. Since this rule involves contracts for commercial
items, suggest it instead refer to ``Total Price.''
Response: While the rule relates to commercial T&M/LH contracts,
some material and ODC will be reimbursed at ``cost'' not ``price.''
Therefore, the Councils did not revise the title as suggested.
General Comments
Comment: Do not support the rule in its present form.
Comment: In a number of areas, the proposed rule simply imports
into this commercial items regulation many of the terms and conditions
already used by the Government when purchasing non-commercial T&M/LH
contracts. This action results in the inclusion of provisions that are
significant departures from standard commercial practices, contrary to
the spirit of FASA and in violation of FAR 12.301(a)(2) that require
commercial item contracts to only include those clauses determined to
be consistent with customary commercial practices. Other provisions of
the rule extend the Government's audit and oversight inappropriately
and unnecessary. Deeply concerned that the proposed rule will undercut
the intent of SARA by creating what effectively amounts to a
prohibition on the use of T&M contracts. The rule adds significant
administrative burden, procedural complications, and certain
significant financial disincentives. Recommend the Councils reconsider
the entire approach to T&M contracting and the expansive rulemaking in
the proposed rule. Also, recommend the Councils hold additional public
meetings to provide the public additional opportunities to explain the
submitted comments. Recommend delaying issuance of a final rule until
the Acquisition Advisory Panel has released its report and
recommendations since there may be a conflict between their
recommendations and this rule.
Response: The Councils reviewed public comments and held two public
meetings, obtaining a very complete picture of the views of interested
parties on this rule, and have determined it is appropriate to go
forward with a final rule. It is highly unlikely that further comments
or public meetings would provide any information or opinions not
already provided and evaluated.
Comment: Concur.
Comment: Industry does not prefer T&M contracts and would avoid
them for IT work.
Response: T&M/LH contracts represent the highest contract type risk
and industry, like the Government, avoids using them to the maximum
extent practicable. However, there are circumstances when these
contract types are needed and used.
Comment: The main difference between the commercial market and the
rule is the rule only requires the contractor to use its ``best
efforts'' to perform within the ceiling. There is no consumer in the
commercial market that would blindly allow a car repair shop to work on
their car for up to $1,000 without any guarantee that the car will be
fixed.
Response: T&M/LH contracts, commercial and non-commercial, are
``best effort'' contracts that can only be used when it is not possible
at the time of placing the contract or order to accurately estimate the
extent or duration of the work or to anticipate costs with any
reasonable degree of certainty. If it is possible to estimate the
extent or duration of work or anticipate costs with a reasonable degree
of certainty, T&M/LH contracts should not be used.
Comment: The use of the term ``schedule'' may be confusing to some
who understand it to refer to MAS or FSSs contracts. The subcontract
reimbursement provisions that permit reimbursement of subcontracts at
the hourly rates prescribed in the schedule could be interpreted to
mean there are separate subcontract rates on MAS contracts. Clarify the
final rule the term is not meant to connote MAS contracts.
Response: The term is used throughout the FAR and widely understood
by contracting professionals. The Councils are unaware of any issues
with its interpretation and does not believe changing the term could be
confusing to contracting professionals.
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 Regulatory Flexibility Act, 5 U.S.C. 601, et seq., applies to
this final rule. The Councils prepared a Final Regulatory Flexibility
Analysis (FRFA), and it is summarized as follows:
1. Statement of need for, and objectives of, the rule.
This final rule revises the Federal Acquisition Regulation to
allow contracting officers to award Time and Material and Labor Hour
(T&M/LH) contracts when procuring commercial items. This FAR case
was initiated to implement Section 1432 of the National Defense
Authorization Act for Fiscal Year 2004 (Pub. L. 108-136).
2. Summary of significant issues raised by the public comments
in response to the Initial Regulatory Flexibility Analysis (IRFA), a
summary of the assessment of the agency of such issues, and a
statement of any changes made in the proposed rule as a result of
such comments.
Thirteen (13) comments were received from the public in response
to the proposed rule. One of the most significant areas of
controversy in the proposed rule issued for public comment concerned
the matter of labor provided by subcontractors. The proposed rule
required that the prime contractor be reimbursed at actual cost for
all subcontractors providing labor under the contract, unless a
subcontractor was specifically authorized under the prime contract
by inclusion on a list of subcontractors to be reimbursed at the
prime contract labor hour rate. Public commenters complained that
this procedure created major administrative burdens and, because
reimbursement at actual cost did not permit
[[Page 74676]]
prime contractors to obtain profit of those subcontracts, it would
significantly reduce the use of subcontractors. The commenters
pointed out that the subcontractors at issue are commonly small
businesses.
The final rule eliminates this feature regarding payment of
labor subcontractors at actual cost and use of a list of approved
subcontractors. The final rule provides that a prime contractor can
provide qualifying labor hours under the contract through use of
subcontractors and the government will pay the prime contract labor
hour rate, without use of any pre-authorization list in the
contract. Prime contractors will be able to include profit on this
labor and there will be no special administrative approvals
required. The final rule approach eliminates the part of the
proposed rule that was most objectionable to small entities.
3. Description of, and an estimate of the number of, small
entities to which the rule will apply or an explanation of why no
such estimate is available.
This rule will apply to small and large entities that accept
Time-and-Material or Labor-Hour contracts for commercial items.
Because this rule is the first FAR authorization for use of these
types of contracts for commercial items, no history is available on
the number of awards made to small businesses. However, the Federal
Procurement Data System (FPDS) data from FY 2004 show that small
businesses received approximately 50 percent of the 42,840
noncommercial item T&M/LH awards made and approximately 30% of the
$17 Billion obligated under those awards.
4. Description of the projected reporting, recordkeeping, and
other compliance requirements of the rule, including an estimate of
the classes of small entities which will be subject to the
requirement and the type of professional skills necessary for
preparation of the report or record.
The rule would require contractors to maintain records to
support invoices presented to the Government for payment. Such
records would include original timecards, the contractor's
timekeeping procedures, distribution of labor, invoices for
material, and so forth. These are standard records maintained by any
company, large or small, and the fact that the contract would
require that these records be made available to the Government
should not place any additional record keeping burden on the entity.
5. Description of steps the agency has taken to minimize
significant economic impact on small entities consistent with the
stated objectives of applicable statutes, including a statement of
the factual, policy, and legal reasons for selecting the alternative
adopted in the final rule and why each of the other significant
alternatives to the rule considered by the agency was rejected.
Public comments submitted in response to the proposed rule were
reviewed and substantial policy adjustments to the rule were made as
a result. One of the most significant areas of controversy in the
proposed rule issued for public comment concerned the matter of
labor provided by subcontractors. The proposed rule required that
the prime contractor be reimbursed at actual cost for all
subcontractors providing labor under the contract, unless a
subcontractor was specifically authorized under the prime contract
by inclusion on a list of subcontractors to be reimbursed at the
prime contract labor hour rate. Public commenters complained that
this procedure created major administrative burdens and, because
reimbursement at actual cost did not permit prime contractors to
obtain profit of those subcontracts, it would significantly reduce
the use of subcontractors. The commenters pointed out that the
subcontractors at issue are commonly small businesses.
The final rule eliminates this feature regarding payment of
labor subcontractors at actual cost and use of a list of approved
subcontractors. The final rule provides that a prime contractor can
provide qualifying labor hours under the contract through use of
subcontractors and the government will pay the prime contract labor
hour rate, without use of any pre-authorization list in the
contract. Prime contractors will be able to include profit on this
labor and there will be no special administrative approvals
required. The final rule approach eliminates the part of the
proposed rule that was most objectionable to small entities.
Interested parties may obtain a copy of the FRFA from the FAR
Secretariat. The FAR Secretariat has submitted a copy of the FRFA to
the Chief Counsel for Advocacy of the Small Business Administration.
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 Parts 2, 10, 12, 16, and 52
Government procurement.
Dated: December 4, 2006.
Linda K. Nelson,
Deputy Director, Contract Policy Division.
0
Therefore, DoD, GSA, and NASA amend 48 CFR parts 2, 10, 12, 16, and 52
as set forth below:
0
1. The authority citation for 48 CFR parts 2, 10, 12, 16, and 52
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).
PART 2--DEFINITIONS OF WORDS AND TERMS
2.101 [Amended]
0
2. Amend section 2.101 in paragraph (b), in the definition ``Commercial
item'', by removing the second sentence in the introductory text of
paragraph (6).
PART 10--MARKET RESEARCH
10.001 [Amended]
0
3. Amend section 10.001 by removing from paragraph (a)(3)(iv) ``as
terms'' and adding ``as type of contract, terms'' in its place.
0
4. Amend section 10.002 by revising paragraph (b)(1)(iii) to read as
follows:
10.002 Procedures.
* * * * *
(b) * * *
(1) * * *
(iii) Customary practices, including warranty, buyer financing,
discounts, contract type considering the nature and risk associated
with the requirement, etc., under which commercial sales of the
products or services are made;
* * * * *
PART 12--ACQUISITION OF COMMERCIAL ITEMS
0
5. Revise section 12.207 to read as follows:
12.207 Contract type.
(a) Except as provided in paragraph (b) of this section, agencies
shall use firm-fixed-price contracts or fixed-price contracts with
economic price adjustment for the acquisition of commercial items.
(b)(1) A time-and-materials contract or labor-hour contract (see
Subpart 16.6) may be used for the acquisition of commercial services
when--
(i) The service is acquired under a contract awarded using--
(A) Competitive procedures (e.g., the procedures in 6.102, the set-
aside procedures in Subpart 19.5, or competition conducted in
accordance with Part 13);
(B) The procedures for other than full and open competition in 6.3
provided the agency receives offers that satisfy the Government's
expressed requirement from two or more responsible offerors; or
(C) The fair opportunity procedures in 16.505, if placing an order
under a multiple award delivery-order contract; and
(ii) The contracting officer--
(A) Executes a determination and findings (D&F) for the contract,
in accordance with paragraph (b)(2) of this section (but see paragraph
(c) of this section for indefinite-delivery contracts), that no other
contract type authorized by this subpart is suitable;
(B) Includes a ceiling price in the contract or order that the
contractor exceeds at its own risk; and
(C) Authorizes any subsequent change in the ceiling price only upon
a determination, documented in the
[[Page 74677]]
contract file, that it is in the best interest of the procuring agency
to change the ceiling price.
(2) Each D&F required by paragraph (b)(1)(ii)(A) of this section
shall contain sufficient facts and rationale to justify that no other
contract type authorized by this subpart is suitable. At a minimum, the
D&F shall--
(i) Include a description of the market research conducted (see
10.002(e));
(ii) Establish that it is not possible at the time of placing the
contract or order to accurately estimate the extent or duration of the
work or to anticipate costs with any reasonable degree of certainty;
and
(iii) Establish that the requirement has been structured to
maximize the use of firm-fixed-price or fixed-price with economic price
adjustment contracts (e.g., by limiting the value or length of the
time-and-material/labor-hour contract or order; establishing fixed
prices for portions of the requirement) on future acquisitions for the
same or similar requirements.
(iv) Describe actions planned to maximize the use of firm-fixed-
price or fixed-price with economic price adjustment contracts on future
acquisitions for the same requirements.
(3) See 16.601(d)(1) for additional approval required for contracts
expected to extend beyond three years.
(c)(1) Indefinite-delivery contracts (see Subpart 16.5) may be used
when--
(i) The prices are established based on a firm-fixed-price or
fixed-price with economic price adjustment; or
(ii) Rates are established for commercial services acquired on a
time-and-materials or labor-hour basis.
(2) When an indefinite-delivery contract is awarded with services
priced on a time-and-materials or labor-hour basis, contracting
officers shall, to the maximum extent practicable, also structure the
contract to allow issuance of orders on a firm-fixed-price or fixed-
price with economic price adjustment basis. For such contracts, the
contracting officer shall execute the D&F required by paragraph (b)(2)
of this section, for each order placed on a time-and-materials or
labor-hour basis. Placement of orders shall be in accordance with
Subpart 8.4 or 16.5, as applicable.
(3) If an indefinite-delivery contract only allows for the issuance
of orders on a time-and-materials or labor-hour basis, the D&F required
by paragraph (b)(2) of this section shall be executed to support the
basic contract and shall also explain why providing for an alternative
firm-fixed-price or fixed-price with economic price adjustment pricing
structure is not practicable. The D&F for this contract shall be
approved one level above the contracting officer. Placement of orders
shall be in accordance with Subpart 16.5.
(d) The contract types authorized by this subpart may be used in
conjunction with an award fee and performance or delivery incentives
when the award fee or incentive is based solely on factors other than
cost (see 16.202-1 and 16.203-1).
(e) Use of any contract type other than those authorized by this
subpart to acquire commercial items is prohibited.
0
6. Amend section 12.301 by adding a sentence after the first sentence
in paragraph (b)(3) to read as follows:
12.301 Solicitation provisions and contract clauses for the
acquisition of commercial items.
* * * * *
(b) * * *
(3) * * * Use this clause with its Alternate I when a time-and-
materials or labor-hour contract will be awarded. * * *
* * * * *
0
7. Amend section 12.403 by revising paragraph (d)(1)(i) to read as
follows:
12.403 Termination.
* * * * *
(d) * * *
(1) * * *
(i)(A) The percentage of the contract price reflecting the
percentage of the work performed prior to the notice of the termination
for fixed-price or fixed-price with economic price adjustment
contracts; or
(B) An amount for direct labor hours (as defined in the Schedule of
the contract) determined by multiplying the number of direct labor
hours expended before the effective date of termination by the hourly
rate(s) in the Schedule; and
* * * * *
PART 16--TYPES OF CONTRACTS
0
8. Amend section 16.601 by adding a sentence to the end of paragraph
(c) introductory text and revising paragraph (d) to read as follows:
16.601 Time-and-materials contracts.
* * * * *
(c) Application. * * * See 12.207(b) for the use of time-and-
material contracts for certain commercial services.
* * * * *
(d) Limitations. A time-and-materials contract may be used only
if--
(1) The contracting officer prepares a determination and findings
that no other contract type is suitable. The determination and finding
shall be--
(i) Signed by the contracting officer prior to the execution of the
base period or any option periods of the contracts; and
(ii) Approved by the head of the contracting activity prior to the
execution of the base period when the base period plus any option
periods exceeds three years; and
(2) The contract includes a ceiling price that the contractor
exceeds at its own risk. The contracting officer shall document the
contract file to justify the reasons for and amount of any subsequent
change in the ceiling price. Also see 12.207(b) for further limitations
on use of Time-and-Materials or Labor Hour contracts for acquisition of
commercial items.
* * * * *
0
9. Revise section 16.602 to read as follows:
16.602 Labor-hour contracts.
Description. A labor-hour contract is a variation of the time-and-
materials contract, differing only in that materials are not supplied
by the contractor. See 12.207(b), 16.601(c), and 16.601(d) for
application and limitations, for time-and-materials contracts that also
apply to labor-hour contracts. See 12.207(b) for the use of labor-hour
contracts for certain commercial services.
PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES
0
10. Amend section 52.212-4 by--
0
a. Revising the date of the clause;
0
b. Adding a new sentence after the third sentence in the introductory
text of paragraph (a); and
0
c. Adding Alternate I;
0
The revised and added text reads as follows:
52.212-4 Contract Terms and Conditions--Commercial Items.
* * * * *
CONTRACT TERMS AND CONDITIONS--COMMERCIAL ITEMS (FEB 2007)
(a) Inspection/Acceptance. * * * If repair/replacement or
reperformance will not correct the defects or is not possible, the
Government may seek an equitable price reduction or adequate
consideration for acceptance of nonconforming supplies or services.
* * *
* * * * *
(End of clause)
Alternate I (FEB 2007). When a time-and-materials or labor-hour
contract is contemplated, substitute the following paragraphs (a),
(e), (i) and (l) for those in the basic clause.
(a) Inspection/Acceptance. (1) The Government has the right to
inspect and test all materials furnished and services performed
under this contract, to the extent practicable at all places and
times, including
[[Page 74678]]
the period of performance, and in any event before acceptance. The
Government may also inspect the plant or plants of the Contractor or
any subcontractor engaged in contract performance. The Government
will perform inspections and tests in a manner that will not unduly
delay the work.
(2) If the Government performs inspection or tests on the
premises of the Contractor or a subcontractor, the Contractor shall
furnish and shall require subcontractors to furnish all reasonable
facilities and assistance for the safe and convenient performance of
these duties.
(3) Unless otherwise specified in the contract, the Government
will accept or reject services and materials at the place of
delivery as promptly as practicable after delivery, and they will be
presumed accepted 60 days after the date of delivery, unless
accepted earlier.
(4) At any time during contract performance, but not later than
6 months (or such other time as may be specified in the contract)
after acceptance of the services or materials last delivered under
this contract, the Government may require the Contractor to replace
or correct services or materials that at time of delivery failed to
meet contract requirements. Except as otherwise specified in
paragraph (a)(6) of this clause, the cost of replacement or
correction shall be determined under paragraph (i) of this clause,
but the ``hourly rate'' for labor hours incurred in the replacement
or correction shall be reduced to exclude that portion of the rate
attributable to profit. Unless otherwise specified below, the
portion of the ``hourly rate'' attributable to profit shall be 10
percent. The Contractor shall not tender for acceptance materials
and services required to be replaced or corrected without disclosing
the former requirement for replacement or correction, and, when
required, shall disclose the corrective action taken. [Insert
portion of labor rate attributable to profit.]
(5)(i) If the Contractor fails to proceed with reasonable
promptness to perform required replacement or correction, and if the
replacement or correction can be performed within the ceiling price
(or the ceiling price as increased by the Government), the
Government may--
(A) By contract or otherwise, perform the replacement or
correction, charge to the Contractor any increased cost, or deduct
such increased cost from any amounts paid or due under this
contract; or
(B) Terminate this contract for cause.
(ii) Failure to agree to the amount of increased cost to be
charged to the Contractor shall be a dispute under the Disputes
clause of the contract.
(6) Notwithstanding paragraphs (a)(4) and (5) above, the
Government may at any time require the Contractor to remedy by
correction or replacement, without cost to the Government, any
failure by the Contractor to comply with the requirements of this
contract, if the failure is due to--
(i) Fraud, lack of good faith, or willful misconduct on the part
of the Contractor's managerial personnel; or
(ii) The conduct of one or more of the Contractor's employees
selected or retained by the Contractor after any of the Contractor's
managerial personnel has reasonable grounds to believe that the
employee is habitually careless or unqualified.
(7) This clause applies in the same manner and to the same
extent to corrected or replacement materials or services as to
materials and services originally delivered under this contract.
(8) The Contractor has no obligation or liability under this
contract to correct or replace materials and services that at time
of delivery do not meet contract requirements, except as provided in
this clause or as may be otherwise specified in the contract.
(9) Unless otherwise specified in the contract, the Contractor's
obligation to correct or replace Government-furnished property shall
be governed by the clause pertaining to Government property.
(e) Definitions. (1) The clause at FAR 52.202-1, Definitions, is
incorporated herein by reference. As used in this clause--
(i) Direct materials means those materials that enter directly
into the end product, or that are used or consumed directly in
connection with the furnishing of the end product or service.
(ii) Hourly rate means the rate(s) prescribed in the contract
for payment for labor that meets the labor category qualifications
of a labor category specified in the contract that are--
(A) Performed by the contractor;
(B) Performed by the subcontractors; or
(C) Transferred between divisions, subsidiaries, or affiliates
of the contractor under a common control.
(iii) Materials means--
(A) Direct materials, including supplies transferred between
divisions, subsidiaries, or affiliates of the contractor under a
common control;
(B) Subcontracts for supplies and incidental services for which
there is not a labor category specified in the contract;
(C) Other direct costs (e.g., incidental services for which
there is not a labor category specified in the contract, travel,
computer usage charges, etc.);
(D) The following subcontracts for services which are
specifically excluded from the hourly rate: [Insert any subcontracts
for services to be excluded from the hourly rates prescribed in the
schedule.]; and
(E) Indirect costs specifically provided for in this clause.
(iv) Subcontract means any contract, as defined in FAR Subpart
2.1, entered into with a subcontractor to furnish supplies or
services for performance of the prime contract or a subcontract
including transfers between divisions, subsidiaries, or affiliates
of a contractor or subcontractor. It includes, but is not limited
to, purchase orders, and changes and modifications to purchase
orders.
(i) Payments. (1) Services accepted. Payment shall be made for
services accepted by the Government that have been delivered to the
delivery destination(s) set forth in this contract. The Government
will pay the Contractor as follows upon the submission of commercial
invoices approved by the Contracting Officer:
(i) Hourly rate.
(A) The amounts shall be computed by multiplying the appropriate
hourly rates prescribed in the contract by the number of direct
labor hours performed. Fractional parts of an hour shall be payable
on a prorated basis.
(B) The rates shall be paid for all labor performed on the
contract that meets the labor qualifications specified in the
contract. Labor hours incurred to perform tasks for which labor
qualifications were specified in the contract will not be paid to
the extent the work is performed by individuals that do not meet the
qualifications specified in the contract, unless specifically
authorized by the Contracting Officer.
(C) Invoices may be submitted once each month (or at more
frequent intervals, if approved by the Contracting Officer) to the
Contracting Officer or the authorized representative.
(D) When requested by the Contracting Officer or the authorized
representative, the Contractor shall substantiate invoices
(including any subcontractor hours reimbursed at the hourly rate in
the schedule) by evidence of actual payment, individual daily job
timecards, records that verify the employees meet the qualifications
for the labor categories specified in the contract, or other
substantiation specified in the contract.
(E) Unless the Schedule prescribes otherwise, the hourly rates
in the Schedule shall not be varied by virtue of the Contractor
having performed work on an overtime basis.
(1) If no overtime rates are provided in the Schedule and the
Contracting Officer approves overtime work in advance, overtime
rates shall be negotiated.
(2) Failure to agree upon these overtime rates shall be treated
as a dispute under the Disputes clause of this contract.
(3) If the Schedule provides rates for overtime, the premium
portion of those rates will be reimbursable only to the extent the
overtime is approved by the Contracting Officer.
(ii) Materials.
(A) If the Contractor furnishes materials that meet the
definition of a commercial item at FAR 2.101, the price to be paid
for such materials shall be the contractor's established catalog or
market price, adjusted to reflect the--
(1) Quantities being acquired; and
(2) Any modifications necessary because of contract
requirements.
(B) Except as provided for in paragraph (i)(1)(ii)(A) and (D)(2)
of this clause, the Government will reimburse the Contractor the
actual cost of materials (less any rebates, refunds, or discounts
received by the contractor that are identifiable to the contract)
provided the Contractor--
(1) Has made payments for materials in accordance with the terms
and conditions of the agreement or invoice; or
(2) Makes these payments within 30 days of the submission of the
Contractor's payment request to the Government and such payment is
in accordance with the terms and conditions of the agreement or
invoice.
(C) To the extent able, the Contractor shall--
(1) Obtain materials at the most advantageous prices available
with due regard to securing prompt delivery of satisfactory
materials; and
[[Page 74679]]
(2) Give credit to the Government for cash and trade discounts,
rebates, scrap, commissions, and other amounts that are identifiable
to the contract.
(D) Other Costs. Unless listed below, other direct and indirect
costs will not be reimbursed.
(1) Other Direct Costs. The Government will reimburse the
Contractor on the basis of actual cost for the following, provided
such costs comply with the requirements in paragraph (i)(1)(ii)(B)
of this clause: [Insert each element of other direct costs (e.g.,
travel, computer usage charges, etc. Insert ``None'' if no
reimbursement for other direct costs will be provided. If this is an
indefinite delivery contract, the Contracting Officer may insert
``Each order must list separately the elements of other direct
charge(s) for that order or, if no reimbursement for other direct
costs will be provided, insert `None''.']
(2) Indirect Costs (Material Handling, Subcontract
Administration, etc.). The Government will reimburse the Contractor
for indirect costs on a pro-rata basis over the period of contract
performance at the following fixed price: [Insert a fixed amount for
the indirect costs and payment schedule. Insert ``$0'' if no fixed
price reimbursement for indirect costs will be provided. (If this is
an indefinite delivery contract, the Contracting Officer may insert
``Each order must list separately the fixed amount for the indirect
costs and payment schedule or, if no reimbursement for indirect
costs, insert `None').'']
(2) Total cost. It is estimated that the total cost to the
Government for the performance of this contract shall not exceed the
ceiling price set forth in the Schedule and the Contractor agrees to
use its best efforts to perform the work specified in the Schedule
and all obligations under this contract within such ceiling price.
If at any time the Contractor has reason to believe that the hourly
rate payments and material costs that will accrue in performing this
contract in the next succeeding 30 days, if added to all other
payments and costs previously accrued, will exceed 85 percent of the
ceiling price in the Schedule, the Contractor shall notify the
Contracting Officer giving a revised estimate of the total price to
the Government for performing this contract with supporting reasons
and documentation. If at any time during the performance of this
contract, the Contractor has reason to believe that the total price
to the Government for performing this contract will be substantially
greater or less than the then stated ceiling price, the Contractor
shall so notify the Contracting Officer, giving a revised estimate
of the total price for performing this contract, with supporting
reasons and documentation. If at any time during performance of this
contract, the Government has reason to believe that the work to be
required in performing this contract will be substantially greater
or less than the stated ceiling price, the Contracting Officer will
so advise the Contractor, giving the then revised estimate of the
total amount of effort to be required under the contract.
(3) Ceiling price. The Government will not be obligated to pay
the Contractor any amount in excess of the ceiling price in the
Schedule, and the Contractor shall not be obligated to continue
performance if to do so would exceed the ceiling price set forth in
the Schedule, unless and until the Contracting Officer notifies the
Contractor in writing that the ceiling price has been increased and
specifies in the notice a revised ceiling that shall constitute the
ceiling price for performance under this contract. When and to the
extent that the ceiling price set forth in the Schedule has been
increased, any hours expended and material costs incurred by the
Contractor in excess of the ceiling price before the increase shall
be allowable to the same extent as if the hours expended and
material costs had been incurred after the increase in the ceiling
price.
(4) Access to records. At any time before final payment under
this contract, the Contracting Officer (or authorized
representative) will have access to the following (access shall be
limited to the listing below unless otherwise agreed to by the
Contractor and the Contracting Officer):
(i) Records that verify that the employees whose time has been
included in any invoice meet the qualifications for the labor
categories specified in the contract;
(ii) For labor hours (including any subcontractor hours
reimbursed at the hourly rate in the schedule), when timecards are
required as substantiation for payment--
(A) The original timecards (paper-based or electronic);
(B) The Contractor's timekeeping procedures;
(C) Contractor records that show the distribution of labor
between jobs or contracts; and
(D) Employees whose time has been included in any invoice for
the purpose of verifying that these employees have worked the hours
shown on the invoices.
(iii) For material and subcontract costs that are reimbursed on
the basis of actual cost--
(A) Any invoices or subcontract agreements substantiating
material costs; and
(B) Any documents supporting payment of those invoices.
(5) Overpayments/Underpayments. (i) Each payment previously made
shall be subject to reduction to the extent of amounts, on preceding
invoices, that are found by the Contracting Officer not to have been
properly payable and shall also be subject to reduction for
overpayments or to increase for underpayments. The Contractor shall
promptly pay any such reduction within 30 days unless the parties
agree otherwise. The Government within 30 days will pay any such
increases, unless the parties agree otherwise. The contractor's
payment will be made by check. If the Contractor becomes aware of a
duplicate invoice payment or that the Government has otherwise
overpaid on an invoice payment, the Contractor shall immediately
notify the Contracting Officer and request instructions for
disposition of the overpayment.
(ii) Upon receipt and approval of the invoice designated by the
Contractor as the ``completion invoice'' and supporting
documentation, and upon compliance by the Contractor with all terms
of this contract, any outstanding balances will be paid within 30
days unless the parties agree otherwise. The completion invoice, and
supporting documentation, shall be submitted by the Contractor as
promptly as practicable following completion of the work under this
contract, but in no event later than 1 year (or such longer period
as the Contracting Officer may approve in writing) from the date of
completion.
(6) Release of claims. The Contractor, and each assignee under
an assignment entered into under this contract and in effect at the
time of final payment under this contract, shall execute and
deliver, at the time of and as a condition precedent to final
payment under this contract, a release discharging the Government,
its officers, agents, and employees of and from all liabilities,
obligations, and claims arising out of or under this contract,
subject only to the following exceptions.
(i) Specified claims in stated amounts, or in estimated amounts
if the amounts are not susceptible to exact statement by the
Contractor.
(ii) Claims, together with reasonable incidental expenses, based
upon the liabilities of the Contractor to third parties arising out
of performing this contract, that are not known to the Contractor on
the date of the execution of the release, and of which the
Contractor gives notice in writing to the Contracting Officer not
more than 6 years after the date of the release or the date of any
notice to the Contractor that the Government is prepared to make
final payment, whichever is earlier.
(iii) Claims for reimbursement of costs (other than expenses of
the Contractor by reason of its indemnification of the Government
against patent liability), including reasonable incidental expenses,
incurred by the Contractor under the terms of this contract relating
to patents.
(7) Prompt payment. The Government will make payment in
accordance with the Prompt Payment Act (31 U.S.C. 3903) and prompt
payment regulations at 5 CFR part 1315.
(8) Electronic Funds Transfer (EFT). If the Government makes
payment by EFT, see 52.212-5(b) for the appropriate EFT clause.
(9) Discount. In connection with any discount offered for early
payment, time shall be computed from the date of the invoice. For
the purpose of computing the discount earned, payment shall be
considered to have been made on the date that appears on the payment
check or the specified payment date if an electronic funds transfer
payment is made.
(l) Termination for the Government's convenience. The Government
reserves the right to terminate this contract, or any part hereof,
for its sole convenience. In the event of such termination, the
Contractor shall immediately stop all work hereunder and shall
immediately cause any and all of its suppliers and subcontractors to
cease work. Subject to the terms of this contract, the Contractor
shall be paid an amount for direct labor hours (as defined in the
Schedule of the contract) determined by multiplying the number of
direct labor hours expended before the effective date of termination
by the hourly rate(s) in the contract, less any hourly rate payments
already made to the Contractor
[[Page 74680]]
plus reasonable charges the Contractor can demonstrate to the
satisfaction of the Government using its standard record keeping
system that have resulted from the termination. The Contractor shall
not be required to comply with the cost accounting standards or
contract cost principles for this purpose. This paragraph does not
give the Government any right to audit the Contractor's records. The
Contractor shall not be paid for any work performed or costs
incurred that reasonably could have been avoided.
[FR Doc. 06-9613 Filed 12-6-06; 8:45 am]
BILLING CODE 6820-EP-S