[Federal Register: September 26, 2005 (Volume 70, Number 185)]
[Proposed Rules]
[Page 56318-56337]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26se05-20]
[[Page 56318]]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 2, 10, 12, 16, 44, and 52
[FAR Case 2003-027]
RIN 9000-AK07
Federal Acquisition Regulation; Additional Contract Types
AGENCIES: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Proposed rule.
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SUMMARY: The Civilian Agency Acquisition Council and the Defense
Acquisition Regulations Council (Councils) are proposing to amend the
Federal Acquisition Regulation (FAR) to implement section 1432 of the
National Defense Authorization Act for Fiscal Year 2004. 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) to expressly authorize the use of time-and-materials
(T&M) and labor-hour (LH) contracts for certain categories of
commercial services under specified conditions.
DATES: Interested parties should submit written comments to the FAR
Secretariat on or before November 25, 2005, to be considered in the
formulation of a final rule.
Public Meeting: A public meeting will be held on Tuesday, October
18, 2005, from 9 a.m. to 4 p.m. Eastern Time, in the GS Building
Auditorium, 1800 F Street NW, Washington, DC 20405, to facilitate an
open dialogue between the Government and parties interested in the
implementation of section 8002(d). Because they are so closely related,
the public meeting will also cover proposed rule, FAR case 2004-015,
Payment Under Time-and-Materials and Labor-Hour Contracts. FAR case
2004-015 is published as the next item following this publication.
Interested parties are encouraged to attend and engage in discussions
regarding these proposed rules.
To facilitate discussions at the public meeting, interested parties
are encouraged to provide written comments on issues they would like
addressed at the public meeting no later than Tuesday, October 11,
2005. Interested parties may register and submit their input
electronically at http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.acq.osd.mil/dpap/dars/index.htm. Attendees
are encouraged, but not required, to register for the public meeting,
to ensure adequate accommodations.
Directions to the meeting can be found at the Web site.
Participants are encouraged to check with the Web site prior to the
public meeting to ensure the location has not been changed as a result
of a large number of registrants. The public meeting is physically
accessible to people with disabilities. Requests for sign language
interpretation or other auxiliary aids should be directed to Mr. Jeremy
Olson at 202-501-3221 at least 5 days prior to the meeting.
ADDRESSES: Submit comments identified by FAR case 2003-027 by any of
the following methods:
Federal eRulemaking Portal: http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov.
Follow the instructions for submitting comments.
Agency Web Site: http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.acqnet.gov/far/ProposedRules/proposed.htm.
Click on the FAR case number to submit comments. E-mail: farcase.2003-027@gsa.gov. Include FAR case 2003-
3-
027 in the subject line of the message.
Fax: 202-501-4067.
Mail: General Services Administration, Regulatory
Secretariat (VIR), 1800 F Street, NW, Room 4035, ATTN: Laurieann
Duarte, Washington, DC 20405.
Instructions: Please submit comments only and cite FAR case 2003-
027 in all correspondence related to this case. All comments received
will be posted without change to http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.acqnet.gov/far/ProposedRules/proposed.htm
, including any personal and/or business
confidential information provided.
FOR FURTHER INFORMATION CONTACT: The FAR Secretariat at (202) 501-4755
for information pertaining to status or publication schedules. For
clarification of content, contact Mr. Jeremy Olson at (202) 501-3221.
Please cite FAR case 2003-027.
SUPPLEMENTARY INFORMATION:
A. Background
Section 8002(d) 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); and
Any other category of commercial services that is
designated by the Administrator of 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 and notice of public meeting published in
the Federal Register on September 20, 2004 (69 FR 56316), 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 these questions. The
public comments are discussed in greater detail below. In addition, a
number of interested parties provided oral comments during a public
meeting that was held on October 19, 2004, to facilitate an open
dialogue with Government procurement policy officials.
OFPP and several members of the Acquisition Strategy Team also
received an oral 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.
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
[[Page 56319]]
generally offered 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.
Based on these findings, OFPP recommended to the Councils that the
proposed 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 8002(d) that
contracting officers must execute a D&F that establishes that no
contract type other than a T&M and LH contract is suitable before
pursuing one of these arrangements. The agency would 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 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.
With respect to the contents of the D-F, OFPP advised the Councils
that the rationale supporting use of a T&M or LH contract for
commercial services should 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. As noted in the findings above, this condition
typically appears to exist in circumstances where the private sector
commonly turns to T&M and LH contracting. And, this condition always
appears to exist for services that are predominantly purchased on a T&M
and LH basis, such as emergency repair services-i.e., emergency repair
services, by their very nature, are difficult to capture in a well-
defined scope of work and therefore are not generally conducive to
purchase on a fixed-price basis. 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 7.104(h), 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 believes
that these steps will help ensure that T&M and LH contracts are used
only when in the best interests of the government, as envisioned by
section 8002(d)(3)(B)(ii).
Finally, the Councils invite the public to provide additional
comment that might further inform OFPP's findings and conclusions.
Respondents are encouraged to include citations, as appropriate, to
relevant sources of information that may be used to substantiate the
basis for the response provided.
The Councils have shaped the proposed rule to reflect OFPP's
recommendations.
Comments were received from 23 respondents in response to the ANPR.
The Councils considered all of the comments and recommendations in
developing the proposed rule. The Councils made the following changes
to the rule as a result of the public comments and Council
deliberations:
1. REVISED FAR 12.207(b) to be consistent with OFPP's determination
not to develop a list of commercial services that are commonly sold to
the general public on a T&M basis.
2. REVISED FAR 12.207(b)(3) to be consistent with the requirements
for noncommercial T&M/LH contracts and to emphasize that requirements
should be structured so as to ``maximize the use of fixed price
contracts'' to be consistent with the statutory language.
3. REVISED FAR 12.301(b)(3) to prohibit tailoring of the consent to
subcontract provisions in paragraph (u) of Alternate I of the FAR
clause at 52.212-4 (except to require individual orders to be addressed
individually under indefinite delivery contracts) because the Councils
believe tailored subcontract provisions may not adequately protect the
Government.
4. REVISED FAR 44.303 to specify that only firm-fixed price or
fixed-price with economic price adjustment contracts awarded for
commercial items under FAR Part 12 are excluded from Contractor
Purchasing System Reviews (CPSR) to assure that the CPSR includes
commercial T&M/LH contracts thereby providing contractors the
flexibility to award commercial T&M/LH subcontracts without the
otherwise required subcontract consent.
5. DELETED the language in paragraph (a) of the FAR clause at
52.212-4 that allowed the Government to require the contractor to
ensure future performance conforms to contract requirements because the
Councils believe that this language is unnecessary since the Government
already has this right through the use of a cure notice and ADD
language to clarify that the Government may seek either ``an equitable
price adjustment'' or ``adequate consideration'' for acceptance on
nonconforming supplies or services.
6. Alternate I to FAR clause 52.212-4--
a. REVISED paragraph (a) to allow contractors to be paid for
reperformance, without profit, up to the ceiling price to be consistent
with the provisions for noncommercial T&M contracts, i.e., paragraphs
(c) through (k) of the FAR clause at 52.246-6, Inspection--Time-and-
Material and Labor-Hour. However, since contracting officers will not
necessarily know the portion of profit in the labor rates for these
competitive awards, the Councils revised paragraph (a)(4) of the clause
to require contracting officers to identify the portion of profit in
the ``hourly rate'' and included a 10 percent default if not otherwise
specified in the clause. The Councils note that 10 percent default is
arbitrary and not necessarily representative of the actual portion of
profit in the labor rates; however, the Councils believe it is
advisable to establish a default for instances where contracting
officers fail to provide a specific decrement.
b. RELOCATED definitions previously located in paragraph (u) to
paragraph (e) to be consistent with the new format of the basis clause
and ADDED a new definition for ``materials'' to recognize that the term
has different meaning for T&M contracts, i.e., materials include other
direct and indirect costs.
c. DELETED the requirement in paragraph (i)(1)(i)(A) that only
permitted reimbursement of fractional hours if the contract
specifically authorized fractional hours because the Councils believe
contractors should be paid for fractional hours on a prorated basis.
d. REVISED paragraph (i)(1)(i)(B) to specify that contractors shall
substantiate subcontractor hours reimbursed at the hourly rate in the
schedule when requested by the contracting officer and to specify the
payment records that may be requested to substantiate the labor.
e. REVISED the material cost provisions at paragraph (i)(1)(ii)
to--
1. Permit payment at the contractor's established catalog or market
price for materials that meet the definition of a commercial item.
2. Permit reimbursement of subcontract costs at the hourly rate
specified in the schedule in certain situations.
3. Delete the requirement to take all discounts, rebates,
allowances, etc. to be more consistent with commercial practices.
However, when the contractor receives the benefit of such discounts,
rebates, or allowances, the Government must receive appropriate credit.
[[Page 56320]]
4. Eliminate the ``most favored customer'' requirement to be
consistent with the allowability provision for material costs at
31.205-26(f).
5. Add provisions to permit reimbursement of other direct costs on
a cost basis only to the extent such costs are listed in the contract
clause so the Government will know the ``types of costs'' a contractor
might subsequently bill as other direct costs.
6. Add provisions for reimbursement of indirect costs at a fixed
amount to the extent such reimbursement are listed in the contract
clause to permit reimbursement without imposing the requirements of FAR
Part 31.
f. REVISED the access to records provisions at paragraph (4) to
allow the Government to review records of employee qualifications and
changed terminology from ``records of distribution of labor'' versus
``labor distribution reports'' to be more consistent with commercial
practices.
g. ELIMINATED the requirements at paragraph (i)(5) for Assignment
of Refunds, Rebates and Credits because the Councils believe the
applicable credits are adequately covered in paragraph (i)(1)(ii).
h. REVISED paragraph (u)(8), to clarify that payment of subcontract
costs incurred prior to the date of any required subcontract consent
will only be reimbursed if the contracting officer subsequently
provides the consent.
Disposition of Public Comments
1. Types of Commercial Services Sold on a T&M/LH Basis.
a. Predominately Sold on T&M or LH Basis. One commenter said that
T&M contracts are predominately used when the work effort to complete
is extremely difficult or impossible to determine at the time the
contract is executed and when the customer does not have a complete
definition of the final or expected result. Another commenter said
commercial T&M/LH contracts are appropriate when it is not possible for
the buyer/seller to estimate accurately the resources required for
performing and neither party can assume the financial risks for
performance. Another commenter said the commercial marketplace
regularly acquires support on a fixed rate per day or hours basis. In
addition, various commenters identified the following specific services
as a type of commercial service predominately sold on a T&M or LH
basis:
1. Emergency Response.
2. Repairs.
3. Information Technology.
4. Professional.
5. System Integration.
6. Program Management.
7. Software Development.
8. Facilities.
9. Legal.
10. Accounting and Auditing.
11. Cleaning.
12. Consulting.
13. Business Advisory.
14. Financial Management.
15. Project Management.
16. Training.
17. Certain building trades (e.g., painters).
18. Quality Assurance.
19. Moving.
20. Installation.
21. Support.
22. Engineering.
23. Wind Tunnels.
24. Troubleshooting.
25. Miscellaneous Testing.
26. Pilot.
b. Rarely Sold on a T&M or LH Basis. One commenter said T&M/LH
contracts are rarely used when the extent of the work effort to
complete is clearly understood and definable, i.e., the customer is
able to clearly and accurately define the work.
c. Commonly Sold as Both T&M/LH and Fixed Price. One commenter said
commonly sold commercial T&M/LH services can also be sold as fixed-
price, under different circumstances, and that the customer's ability
to specify required services/needs should be the basis for determining
the use of commercial T&M/LH contracts. Another commenter said
professional architectural and engineering design services, and
consulting services are commonly sold on both a T&M/LH and fixed price
basis.
Response: The Councils appreciate the public input and has fully
considered it in formulating the types of services that are appropriate
for commercial T&M/LH contracts.
2. Appropriate Use.
a. One commenter said the Government should conduct a thorough
review of actual commercial buying practices to substantiate that T&M/
LH contracts are used in the private sector rather than assuming and
asserting that the use of T&M/LH contracts are a standard commercial
practice.
Response: The FAR rule implements the statute that authorizes the
use of T&M contracts for commercial services. The Councils note that
the ANPR requested information from the public to better ensure that
the implementation applies only to services that are commonly sold on a
commercial basis as required by the statute. The Councils believe the
public's input and the statute provide a sufficient basis for
developing appropriate FAR coverage.
b. One commenter said the language at FAR 12.207(b)(3)(iii) that
minimizes the use of T&M and LH contracts to the maximum extent
practicable comes close to defeating the purpose of the original
legislation. The commenter also said that the rule does not convey
Congress's intent because the SARA legislation required maximum use of
fixed price contracts and the ANPR indicates that the D&F is to
demonstrate that a Government requirement is described in such a way as
to minimize the use of T&M and LH contracts.
Response: The Councils recognize that the language should focus on
maximizing fixed price contracts for commercial items. Therefore, the
Councils revised the rule to establish the requirement in a way that
will maximize the use of fixed price contracts, e.g., by limiting the
value or length of the current T&M/LH contracts or orders.
c. One commenter questioned the need to restrict commercial T&M and
LH contracts to competitive circumstances because there may be
situations where sufficient controls are in place to acquire services
using procedures other than competition.
Response: Section 1423 of Public Law 108-136 stipulates commercial
T&M and LH contracts must be made on a competitive basis.
d. One commenter recommended that the Councils clarify that the
fair opportunity requirements of FAR 16.505 apply to commercial task
order T&M contracts.
Response: The provisions at FAR 16.505 apply to commercial task
order T&M contracts. Nothing in this rule requires that each task order
be subject to full and open competition.
e. One commenter said the FAR Council solicited responses at the
public meeting regarding whether commercial services task orders
awarded on a noncompetitive basis should be eligible to be awarded
under T&M/LH vehicles. The commenter has legal and policy objections to
sole-source procurements being awarded under T&M/LH vehicles since SARA
extended only to competitive procurements.
Response: The Councils acknowledge noncompetitive contract awards
were discussed at the public meeting; however, noncompetitive awards
were only discussed to obtain input on what constitutes competition. As
stated in the ANPR and the rule, the awards must be made on a
competitive basis.
f. One commenter said that use of competition and a ceiling does
not adequately protect the Government from abuse because competition is
an ``illusionary protection'' as
[[Page 56321]]
demonstrated by the General Services' schedules and task orders under
IDIQs since ``in practice, they are mostly awarded on a sole source
basis.''
Response: The commenter is concerned about compliance with the rule
rather than promulgation of the rule itself. The rule requires use of
competition in accordance with the statutory requirement for use of T&M
contracts for commercial services. The commenter did not state that
true competition is a problem, but merely assumes that such competition
will not be obtained, i.e., procuring components will not comply with
the FAR requirements. Issues regarding compliance with the FAR are
beyond the scope of the Councils; however, the Councils note that the
assumption in promulgating the FAR is that it will be properly applied.
g. One commenter recommended eliminating the phrase ``of a type''
in FAR 12.207(b)(2)(ii)(A) since it cannot be uniformly defined and is
confusing. The commenter believes eliminating the phrase will ensure
that the services being purchased are truly commercial and not just a
stretch of someone's imagination.
Response: The term ``of a type'' is part of the regulatory
definition of a commercial item and also part of the statutory
requirement that provides for use of T&M contracts for commercial
items. Therefore, the Councils believe it is not appropriate to
eliminate this phrase from this rule or FAR.
h. One commenter said the rule should limit services bought on T&M
and LH contracts under FAR Part 12 to those that are truly commercial
in nature and commonly sold in the commercial markets and restrict the
use of commercial item T&M/LH contracts for requirements with large
material components.
Response: The rule restricts the use to commercial services that
are commonly sold to the general public through use of a T&M/LH
contract. The Councils agree a commercial T&M/LH contract may not be
the most suitable contract type when material costs are a significant
cost of the acquisition. However, the Councils believe imposing strict
limits on the material component would unnecessarily restrict the
contracting officer's flexibility and discretion when responding to a
specific requirement. The Councils note that the rule adopts the same
procedures for noncommercial T&M contracts in FAR Subpart 16.6.
i. One commenter said the definition of what qualifies as a
commercial service should be broad in scope and recommended requiring
an affirmative determination by the contracting officer instead of
developing a comprehensive list. Another commenter recommended adding
the type(s) of service to a general list of subject areas to be
considered when choosing a T&M or LH contract but not adding examples
(consulting, training, etc.) because doing so might result in premature
decisions for T&M or LH applicability. Another commenter recommended
using broad categories, such as Federal supply codes or three-digit
NAICS, so as not to limit implementation of public law because there
are innumerable services that could be procured on a T&M/LH basis.
Conversely, one commenter recommended adding a clear definition of
commercial service with concrete examples. Another commenter said SARA
requires OFPP to formulate a list of services typically sold on a T&M/
LH basis commercially and that the list is needed because some
contracting officers may be limited in their ability to properly
determine whether the service could be bought on a T&M/LH basis.
Another commenter said the rule should not go beyond the statutory
language in describing the type of service(s) that may be procured
under T&M contracts. Another commenter said the rule is incomplete
because the rule authorizes use of T&M/LH contracts to acquire any
other category of commercial services identified by OFPP but the rule
does not identify where the OFPP determination will be posted or how it
will be communicated to agencies.
Response: The Council note that many of the attendees at the public
meeting expressed the view that a comprehensive list of commercial
services would be overly restrictive and impractical. The Councils
agree that developing and maintaining a comprehensive list is not
practical or feasible because many services may be sold on both a T&M/
LH and fixed price basis depending on the circumstances of the
acquisition. Further, the Councils note that the ANPR did not identify
a location for the ``OFPP determination'' because the Councils intended
to revise the rule when OFPP made its determination. As OFPP has now
made its determination, the Councils revised the rule to reflect that
determination, i.e., the rule allows agencies to purchase any
commercial service on a T&M/LH basis when the agency has completed a
D&F containing sufficient facts and rationale to justify that a FFP
arrangement is not suitable.
j. One commenter said the term ``predominantly'' should not be used
in lieu of the term ``commonly'' since they have distinctively
different meanings.
Response: The Federal Register notice requested input on T&M
services ``predominately'' and ``commonly'' sold on a T&M/LH basis to
obtain additional insight into the use of T&M contracts for commercial
services. The Councils agree the terms have different meaning and notes
that the term ``predominately'' is not used in the provisions discussed
in the ANPR or the rule.
k. One commenter suggested adding the ``type of work'' or ``type of
skills needed'' to the list of considerations for deciding whether
other contract types authorized by FAR 12.207 are suitable instead of
limiting the determination to situations where it is not possible at
the time of award to estimate accurately the extent or duration of work
stating many times the Government's requirements quickly evolve after
award. Another commenter said the rule should not adopt the rule in the
GSA Multiple Award Schedule because T&M and LH contracts are
advantageous to the Government since profit is defined and limited.
Another commenter recommended revising the coverage at FAR
12.207(b)(3)(ii)(A) for when a T&M/LH contract is suitable by inserting
either the word ``some'' or ``certain'' in front of the word ``costs''
at the beginning of the fifth line to specify that only ``some'' or
``certain'' costs cannot be anticipated with a reasonable degree or
certainty since contracting officers are required to determine that the
contract award amount is fair and reasonable. Three commenters said the
situations when T&M/LH contracts can be used should be the same for
commercial and noncommercial acquisitions.
Response: The ANPR language at FAR 12.207(b)(3)(ii)(B) that would
have allowed use of commercial T&M/LH contracts when the work is
sufficiently understood to allow for fixed pricing was intended to
clarify that there were only two pricing arrangements for commercial
items, fixed price (i.e., firm-fixed price and fixed price with
economic price adjustment) and T&M/LH. The Councils agree the
situations for appropriate use of commercial T&M/LH contracts should be
the same as the situations that permit noncommercial T&M/LH contracts.
As the additional language appears to have caused confusion, the
Councils eliminated the requirements at FAR 12.207(b)(3)(ii)(B). The
rule is now identical to the requirements to FAR Subpart 16.6
(noncommercial) and MAS special ordering procedures which restrict T&M
contracts to situations where it is not possible at the time of placing
the contract to estimate accurately the extent or duration of the work
to
[[Page 56322]]
anticipate costs with any reasonable degree of confidence.
l. Two commenters said the Government should not assume that T&M
contracts can only be used when the entire effort is T&M since
contracts that are predominately firm-fixed price can also include T&M
items.
Response: Neither the FAR, nor this rule, preclude the use of
``hybrid'' contracts, i.e., contracts with mixed contract types.
Therefore, additional authority is not needed. However, the Councils
note that contracting officers must adequately document why no other
contract type is suitable for the T&M portion of the contract in the
supporting D&F.
m. One commenter said offerors should be allowed the flexibility to
propose both fixed price and T&M solutions and that the contracting
officer could analyze and decide which offer is most cost effective and
advantageous to the Government.
Response: The Councils believe contracting officers will conduct
adequate market research to determine the appropriate contract type and
notes that T&M contracts are only authorized when no other contract
type is suitable. The solicitation must identify the anticipated
contract type so offerors will know the terms and conditions that apply
to the solicitation and can price their offers accordingly.
Additionally, the solicitation must specify the evaluation factors that
will be used to determine the successful offeror so that all offerors
are on equal footing since evaluation factors, like proposed prices,
vary depending on the contract type. The Councils note that existing
FAR provisions allow contracting officers to solicit alternate
proposals.
n. One commenter noted that T&M contracts represent more risk to
the buyer than firm fixed price contracts and said differences in
Federal and State court interpretations of critical performance
aspects, especially the ability of the buyer to enforce firm
deliverables and warranties, may explain why the rule limits the use of
T&M or LH contracts to when ``no other contract type is suitable.'' The
commenter said that Federal courts have often found that the buyer
cannot enforce firm deliverables or warranties under T&M and LH
contracts, which makes these contract types inherently risky for the
Government. Conversely, State courts, applying the principles of the
Uniform Commercial Code, typically do not make distinctions between
T&M/LH and FFP contracts in regard to the buyer's rights to firm
deliverables and warranties. The commenter further recognized that a
continued bias in favor of fixed price contracts for acquisition of
commercial services under FAR Part 12 is in order. However, the
commenter recommended that the Councils fully understand the important
distinctions made by the Courts before implementing the rule.
Response: The Councils agree that T&M contracts comprise the
highest contract type risk to the Government. As such, they should only
be used when no other contract type is suitable. The Councils recognize
there are Court opinions regarding deliverables and warranties.
However, the issue of deliverables and warranties does not factor into
the decision to use a T&M contract. The key factor in deciding to use a
T&M contract is the ability to accurately estimate the extent or
duration of the work or anticipate costs with any reasonable degree of
certainty.
o. One commenter said there is a clear separation between projects
that are obviously suited for FFP (defined scope development or
implementation) and those suited for T&M (design consulting services,
quality assurance, security, auditing, etc.) and that there is little
chance that the rule would drive contracts away from FFP.
Response: Since commercial T&M contracts are not currently
authorized by the FAR, the Councils are unable to determine whether the
rule will ``drive contracts away from FFP.'' In accordance with the
rule, T&M/LH contracts are only authorized when the contracting officer
determines that no other contract type is suitable which should assure
that the rule does not ``drive contracts away from FFP''.
p. One commenter said contracting officers should be provided
guidance on sources and specific instructions for conducting market
research to evaluate options and rationale for not using fixed-prices
for delivery of services.
Response: The discussion of market research is included in FAR Part
10, Market Research. The FAR does not provide specific instructions or
sources for conducting market research since this will vary with
different types of acquisitions. Such specific instructions and sources
are more appropriately contained in agency training materials and
guidance.
q. One commenter said the rule should be revised to emphasize that
market research is performed to establish why T&M is the appropriate
contract type for a particular requirement. Another commenter said the
market research procedures in FAR Part 10 will be an effective way to
determine whether it is feasible to purchase services on a fixed-price
basis or a T&M/ LH basis. Another commenter said market research should
be limited to a determination of whether the desired services are
commercial which could result in solicitation of both fixed-price and
T&M contracts. Another commenter noted that contracting officers should
rely on market analysis to identify services typically sold
commercially since market analysis, coupled with documentation that the
scope or duration of work is not sufficiently clear, should be
sufficient to establish that a fixed-price contract is not suitable.
Response: The Councils agree market research is an effective way to
determine whether purchases can be made on a T&M/LH or FFP basis and
notes that the ANPR and the proposed rule require agencies to determine
commercial practices, including contract type, during market research.
The Councils do not believe additional coverage is needed.
r. One commenter recommended revising FAR Parts 7 and 37 to require
Government personnel to evaluate the existing requirements and market
conditions and adapt the strategy needed to address them.
Response: Government personnel are required to conduct market
research, which includes evaluating the existing requirements and
market conditions, to determine the most suitable approach to
acquiring, distributing, and supporting the needed supplies or
services. The Councils do not believe additional coverage is needed.
s. One commenter recommended that the Councils amend Part 12 to
exclude applied research since established catalog or market prices
cannot exist because the primary objective of this type of research is
to advance scientific knowledge not yet existing in the marketplace.
The commenter noted that the Deputy Inspector General for Auditing had
previously identified the inappropriate use of FAR Part 12 in
procurement of applied research in Report No. D2001-051, ``Use of
Federal Acquisition Regulation (FAR) Part 12 Contracts for Applied
Research,'' dated February 15, 2001.
Response: Applied research is a service that is performed on a T&M/
LH basis in the commercial marketplace. The acquired scientific
knowledge is the result of the research services.
t. One commenter said contracting officer should be given
discretion in making an award on the basis of an overall evaluation of
the proposal, which presumably includes rates, technical approach to
performing the work, price, etc., and that price alone should not be
the deciding factor.
[[Page 56323]]
Response: The Councils agree that price alone is not necessarily
the sole or key factor in making an award. However, the rule does not
need to be changed since FAR Part 12 already requires the contracting
officer to use the provisions in FAR 15.101 and 15.304, which provide
criteria to be used in making the award. The criteria states that the
relative importance of price will vary with different types of
acquisitions.
u. One commenter believes award fees and performance or delivery
incentives fees provisions at FAR 12.207(d) should only be used in
contracts for commercial services when use of such fees are consistent
with commercial practices.
Response: The Councils see no reason to limit the use of award fees
and performance or delivery incentives to be consistent with commercial
practices. The Government uses award fees and incentives to motivate
contractor efforts that might not otherwise be emphasized in order to
meet specific acquisition objectives. While the use of award fees and
incentives may not be customary in all commercial industries, the
Councils believe similar incentives are generally used in the
commercial marketplace when appropriate.
v. One commenter encouraged the ``abandonment of CPFF contracts for
commercial services in favor of T&M'' and urged approval of the rule.
Response: Cost type commercial contracts are prohibited by statute.
w. One commenter at the public meeting said the rule should apply
only at the prime contract level since the commercial sector does not
compete awards at the subcontract level.
Response: The rule does not change how commercial contractors price
subcontracts. As always, commercial contractors can use T&M contracts.
However, the Councils believe commercial contractors often award
subcontracts on a competitive basis.
x. One commenter at the public meeting asked how contracting
officers determine what is ``in scope'' for the purpose of issuing
change orders since T&M contracts do not always specify an outcome.
Response: The procedures for determining what is ``in scope'' for
commercial T&M contracts are the same as those used for noncommercial
T&M contracts. While T&M contracts do not always specify an outcome,
they do specify the contract requirements. Determining whether the
change is ``in scope'' or ``out of scope'' will be based on the
requirements in the contract. The Councils note that work is within the
scope of the contract if it is regarded as having been fairly and
reasonably within the contemplation of the parties when the contract
was entered into.
y. One commenter at the Public Meeting asked if fixed-price
contracts with prospective price redetermination contracts could serve
the same purpose for many contracts that are awarded on a T&M basis.
Response: Fixed-price contracts with prospective price
redeterminations may be used in acquisitions of quantity production or
services when it is possible to negotiate a fair and reasonable firm
fixed price for an initial period, but not for subsequent periods of
contract performance (see FAR 16.205-2). Conversely, a T&M contract can
only be used when it is not possible at the time of placing the
contract to estimate accurately the extent or duration of the work or
to anticipate costs with any reasonable degree of confidence (see FAR
16.601(b)). The appropriate contract type will be based on the specific
circumstances of the acquisition.
3. Determination and Finding (D&F).
a. One commenter said the requirement for a D&F for every CLIN or
order would be unduly burdensome to contracting officers and instead
recommended revising the acquisition planning process and associated
documentation requirements to address the possibility or probability
for using T&M and LH based on the analysis of the requirement and
market research. Another commenter said a D&F is needed for each task
order. Another commenter said that the rule could be drafted to make it
less onerous for developing and approving D&Fs and that the requirement
for a D&F for each order when the IDIQ contract provides for both FP
and T&M orders would be redundant and wasteful and that it is not
necessary to require approval one level above the contracting officer
for a D&F for an IDIQ authorizing only T&M and LH contracts. Another
commenter said separate D&Fs should be issued for each task order under
an IDIQ contract when all task orders will be issued as T&M/LH. Another
commenter said a D&F should be executed by the contracting officer only
as currently required under the FAR, i.e., a D&F should not be required
for each order.
Response: The Councils note that there is no requirement for a D&F
for each CLIN and that there is no requirement for a D&F for fixed
price orders. The Councils acknowledge that the proposed 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 as required by the statute.
b. One commenter said the rule should make clear that a D&F will
not be required prior to issuing a solicitation inviting both fixed
price and T&M/LH proposals and that a D&F should only be required if
the ultimate award is T&M or LH. Three commenters recommended setting a
D&F threshold to limit the burden for small dollar acquisitions.
Response: FAR 12.207(b)(1) only requires a D&F before award. It
does not require a D&F before issuance of a solicitation. The Councils
also note that statute requires a D&F for T&M/LH contracts regardless
of the dollar amount.
c. One commenter suggested adding a requirement for the D&F to
address the specific reasons why a FFP contract was eliminated instead
of allowing high-level generalities as explanations. The commenter also
said the D&F should explain the boundaries of the requirement so the
performance risk to the Government is reduced or the contract value or
contract length is limited. Another commenter recommended changing the
word suitable to a phrase more like ``a determination and findings
(D&F) that the use of commercial items is not suitable if it is not
used''.
Response: The content of a D&F is addressed in the rule at FAR
12.207(b). The rule requires that ``each D&F shall contain sufficient
facts and rationale to justify that no other contract type authorized
by this part is suitable.'' The Councils believe the rule provides
adequate guidance to contracting officers as to the required content of
the D&F. Sufficient facts and rationale include any necessary
information regarding contract value and length. The D&F required by
the statute and the rule relate to contract type only and not the
determination of whether ``use of commercial items is not suitable.''
d. One commenter said the D&F process appears to be adequate and
appropriate but the commenter recommended adding a requirement to
analyze the need to definitively control the profit level when
determining whether a fixed price contract is appropriate.
Response: The ``need to definitively control the profit level'' is
not a criterion for determining whether a fixed price contract is
suitable. T&M/LH contracts are only used ``when it is not possible at
the time of placing the
[[Page 56324]]
contract to estimate accurately the extent or duration of the work or
to anticipate costs with any reasonable degree of confidence.''
e. One commenter recommended adding a requirement to FAR
12.207(b)(1) for the contracting officer to obtain higher-level D&F
approval before taking any actions to extend or renew the contract
beyond five years because the Deputy Inspector General for Auditing has
previously identified problems with service contracts such as T&M/LH
contracts that have been extended or renewed for 10, 20, and even 30
years with no attempt to use available historical information to
transform the T&M/LH contract to FFP.
Response: The Councils believe current FAR provisions adequately
cover the commenter's recommendations. Actions to extend the contract
or order beyond the limits established in FAR 17.204(e) require
approval in accordance with agency procedures. In addition, FAR
7.103(r) requires that agency heads ensure that knowledge gained on
prior acquisitions is used to further refine requirements and
acquisition strategies. Furthermore, the rule requires that actions be
taken to maximize the use of fixed price contracts, including limiting
the contract length for T&M/LH contracts.
4. Payment.
a. One commenter asked the Councils to consider revising the last
sentence of FAR 52.212-4, Alternate I (a)(i)(B) (sic, paragraph
(i)(1)(i)(B)) from ``or other substantiation specified in the
contract'' to ``or other substantiation required by the contracting
officer'' because the commenter believes that the specific type of
substantiation necessary may not be apparent until after award.
Response: The Councils do not believe it would be prudent to leave
the contract terms open to the unilateral discretion of the contracting
officer. The Councils believe it is imperative for commercial
contractors to know what will be required to receive reimbursement.
Leaving the contract terms open-ended will discourage competition and
possibly lead to disputes. Should the parties agree after contract
performance has begun that additional or alternative substantiation is
needed, the contract can be appropriately modified.
b. One commenter said payment of partial hours should not be
dependent on specific language allowing payment and recommended payment
for work performed unless the contract specifically provides otherwise.
Response: The Councils agree that partial hours should be paid on a
pro-rated basis and revised the rule to provide for payment of partial
hours on a pro-rata basis.
c. One commenter said the Government's unilateral right to dispute
a payment and withhold money under the Overpayments/Underpayments
portion of the clause is inconsistent with commercial practices and
that disputes should be subject to the Contracts Disputes procedures.
Response: The Councils believe that the rule is consistent with
commercial practices since commercial companies withhold payments when
the supplier does not comply with the terms of the contract. The
Councils note that the Overpayments/Underpayments provisions protect
both the Government and contractors and those contractors have full
rights under the disputes clause of the contract to file claims and
recover monies, including applicable interest.
d. One commenter said the payment clause on withholds for non-
commercial T&M contracts at FAR clause 52.232-7 is not appropriate for
commercial T&M contracts and the proposed payment provisions in
paragraph (i) of the proposed alternate clause are acceptable.
Response: The Councils agree that withhold provisions at FAR clause
52.232-7 are not necessary for commercial T&M contracts and notes that
the rule, like the ANPR, does not include the withhold provisions.
e. One commenter said it is common for a contractor to subcontract
for labor categories when the contractor does not have the labor
category identified in the contract and questioned what the contractor
will be permitted to bill and what the Government will be required to
pay the contractor for subcontract labor, i.e., schedule rates or
actual costs. The commenter also said clear guidance is needed on how
to treat subcontract labor costs for both commercial and non-commercial
T&M/LH contracts. Another commenter said the common commercial practice
is to negotiate and pay vendors one hourly rate per labor category
regardless of whether the work is performed by the prime or
subcontractor employees, i.e., ``blended rates'' which include
subcontract rates.
Response: The Councils believe that the contract should clearly
address how the contractor will be reimbursed for subcontract costs and
revised the rule to provide for reimbursement of subcontractor costs at
actual cost unless the contract specifies that the subcontract cost are
reimbursable at the hourly rates prescribed in the schedule.
5. Ceiling Price.
a. One commenter said the not-to-exceed (NTE) requirements of the
proposed rule and continued auditing of labor rates and internal costs
by DCAA make long-standing fears about T&M contracts unrealistic.
Response: T&M contracts will continue to comprise the highest
contract type risk to the Government since they provide the least
incentive for contractors to perform efficiently and economically. The
NTE ceiling for commercial T&M contracts, like the ceiling for non-
commercial T&M contracts, simply limits the Government's risk. The
Councils note that, like non-commercial T&M contracts, labor hours and
not labor rates are subject to Government audit after contract award.
The Councils further note that the Government's audit rights under the
rule are limited to verification of labor hours and employee
qualifications (when reimbursed on an actual cost basis), direct
material, subcontract, and other direct costs.
b. One commenter said the ceiling prices may be established with
the expectation of completion even if the contractor exceeds the
ceiling price. Another commenter said the provision will encourage
contractors to perform services on the Government's ``promise'' to
extend ceiling prices thereby creating additional disputes and
controversies. The same commenter also said that the Government should
increase the ceiling price on a timely basis because the commenter
believes the provisions that allow contractors to be paid after the
fact for services provided prior to the obligation of money may violate
the Anti-Deficiency Act (ADA).
Response: The provisions in the rule for commercial T&M contracts,
like those for non-commercial T&M contracts, clearly state that the
Government is not obligated to pay, and the contractor is not obligated
to perform, after the ceiling price is reached. The Councils recognize
that some contractors have continued to perform on noncommercial T&M
contracts beyond the established ceiling based on a Government
employee's belief that the ceiling price will be increased and agrees
that this practice has led to many disputes and controversies. The
Councils agree that the Government should increase the ceiling price on
a timely basis when the Government intends to continue performance
beyond the existing ceiling price and notes this is why contractors are
required to notify the Government when they expect to exceed 85 percent
of the ceiling price. The ADA prohibits the Government from taking any
action to obligate the Government prior to obligating sufficient funds
to the contract. The Councils further agree that
[[Page 56325]]
these provisions may result in a contractor being paid after the fact
for services provided prior to the obligation of additional funds to
increase the ceiling. However, since the Government has no obligation
to pay for services rendered after the ceiling is reached and before
additional monies are obligated, there is no ADA violation. After
additional funds are obligated, the issue is allowability.
c. One commenter said requiring the contractor to track and report
costs against a NTE value is inconsistent with commercial practices and
that changes to its business systems to accommodate these government-
unique requirements would not likely be justified since commercial
customers do not need a ceiling price or notification of 85 percent of
the NTE. The commenter said that the incentive to deliver high-quality
support services at a reasonable price in the commercial marketplace is
to retain a competitive advantage and maintain a reputation for
responsive, high quality customer support. Another commenter said the
provisions requiring notification to the Government when contractors
believe they may exceed 85 percent of the ceiling price or that the
total price to the Government will be substantially greater or less
than the ceiling price in the contract makes the commercial provider
responsible for Government management of the contract and requires
systems and reports that are inconsistent with commercial practices.
The commenter said this is a shift of responsibility and costs without
justification and that commercial contractors are at risk since breach
of this provision can result in non-payment for services rendered.
Another commenter recommended not requiring ceiling prices when
contracting under emergency procurement procedures.
Response: The Councils recognize there may be unique situations in
the commercial marketplace where commercial companies agree to open
ended commitments; however, statute prohibits the Government from doing
so. As discussed in b above, the Government is prohibited from taking
any action that obligates the Government prior to obligating sufficient
funds to the contract. The same is true even for emergency
procurements. The Councils note that these provisions also protect
contractors from nonpayment for services rendered by ensuring
sufficient funds are available if the contracting officer determines
the ceiling price should be increased. Unless notified by the
contractor, the Government will have no way of knowing when the
contractor will exceed the ceiling since the Government does not know
the price for work performed and not billed or the price of work
planned to be performed in the current period. While systems and
reports will vary between commercial providers, the Councils believe
commercial providers generally track and measure performance against
negotiated contract values and can therefore report projected
expenditures and cumulative services rendered.
d. Another commenter said the ceiling price should equal the
available funds since the total contract costs cannot be reasonably
determined with any degree of confidence.
Response: The ceiling price is required by statute. While
establishing a ceiling price is not an exact science, the ceiling
represents the Government's best estimate of the contract price. If the
estimated price increases during contract performance, the contracting
officer will only obligate additional funds when it is in the
Government's best interest to do so.
6. Advance Consent for Overtime. One commenter said the advance
consent for payment of overtime is inconsistent with commercial
practice and that commercial customers expect repair teams to work as
necessary to complete repairs expeditiously. Another commenter believes
that commercial standards should be utilized for overtime payment
because requiring the contracting officer to approve overtime may delay
the project and end up costing the Government more than results from
contracting officer approval.
Response: The Councils believe the consent is needed to ensure
overtime is only used when the Government agrees the additional costs
of overtime are justified and necessary to meet the Government's
objective. The clause provides the flexibility for the contracting
officer to authorize overtime at the time of contract award if deemed
necessary to meet essential delivery and performance schedules; make up
for delays beyond the Contractor's control; or to eliminate extended
production bottlenecks or project delays.
7. Materials Costs.
a. Material Handling. One commenter recommended using loaded rates
or a fixed charge to allow contractors to recover material handling and
subcontract administration costs without imposing the requirements of
FAR Part 31. Another commenter said reimbursing contractors for
material handling does not violate the cost plus a percentage of cost
prohibition imposed by Congress because the material handling costs are
not a ``fee'' of the type Congress prohibited. Another commenter said
instead of using a percentage markup, which raises cost plus percentage
of cost contracting concerns, the rule should permit the contractor to
charge the Government a fixed fee for providing material that will
compensate the contractor for its indirect costs. Another commenter
said since the work is being awarded competitively, the rule should
allow contractors to mark up their subcontractor's T&M or LH service
rates as long as the amount of the mark-up is fully disclosed to the
government and the total rate, including the mark-up, does not exceed
the contractor's own rate for the same service thereby avoiding the
application of Part 31 and concerns over cost-plus-percentage-of-cost
contracting. Another commenter said material handling and subcontract
administration costs are normally marked up a percentage rate as
mutually agreed to and negotiated by the contractor and client. Two
other commenters said customers are charged the catalog price that
includes material handling charge. One commenter said basing material
handling or subcontract administration fees on actual costs is rare in
the commercial marketplace. Another commenter said that many commercial
contractors do not add a separate material handling fee or subcontract
administration costs on top of their fully burdened labor rates.
Another commenter said payment of separate indirect rates for material
and subcontracts should not be allowed for commercial purchases.
Another commenter said contractors that are otherwise CAS covered will
have to allocate the indirect cost for the direct materials on FAR Part
12 T&M contracts to those contracts even though the contractor will not
be paid for the indirect costs and will suffer an overall loss. Another
commenter concurred with the ANPR's proposed prohibition on mark-ups on
materials costs.
Response: The comments reflect a varying set of commercial
practices for material handling and subcontract administration costs.
The Councils believe it is important to provide as much flexibility as
possible without violating the cost plus percentage of cost
prohibition. The Councils believe use of a fixed rate violates the cost
plus percentage of cost contract prohibition. Therefore, the rule does
not permit application of a fixed rate. The Councils believe use of a
fixed amount may be appropriate and revised the rule accordingly.
However, the fixed amounts for indirect costs should exclude any
amounts already included in the schedule labor rates. Finally, the
[[Page 56326]]
Councils note that while the ANPR did not permit direct reimbursement
for material handling, nothing in the ANPR or rule prevents contractors
from including material handling in the fully burdened labor rates.
b. Most Favored Customer Terms. One commenter cautioned against use
of the mandated ``most favorable customer'' terms for materials the
contractor sells rather than purchasing from outside vendors. Another
commenter said the ``most favored customer'' price clauses pose
numerous compliance risks to industry and are inconsistent with
commercial practices. The commenter said it cannot ensure that the
catalog price for a part is no higher than the market price or the
``most favored customer'' price.
Response: The Councils note ``most favored customer'' pricing is
consistent with the provisions for noncommercial T&M/LH contracts but
not consistent with the general allowability provisions for material
costs at FAR 31.205-26(f) and that the Councils are currently
considering changes to the provisions for noncommercial T&M contracts.
The Councils believe the provisions at FAR 31.205-27(e) are more
appropriate for commercial contracts and revised the rule to permit
reimbursement at the catalog or market price when the materials
furnished by the contractor meet the definition of a commercial item at
FAR 2.101. In addition, the Councils note that the ANPR failed to
address interdivisional transfers. The Councils also revised the rule
to specify the procedures for interdivisional transfers on commercial
T&M/LH contracts consistent with the provisions of FAR 31.205-26(e).
c. Most Advantageous Pricing. One commenter said requiring ``most
advantageous prices'' for purchases of material from outside vendors is
inconsistent with commercial practices and the Government's own ``best
value'' requirement. The commenter believes Government auditors will
interpret ``most advantageous'' to mean lowest price when there are
sound business reasons to procure from other than lowest price. The
commenter said when prices are set by the initial competition, no
further Government action should be taken. Further, the commenter said
if the Government is concerned about product pricing, the Government
should furnish the materials to the contractor so the Government, and
not the contractor, will incur the unnecessary costs and risks
associated with the proposed standards of most advantageous prices.
Response: The Councils believe the rule is consistent with
commercial practices and the Government's ``best value'' determination
because the rule, like commercial practice and the best value
determinations, considers factors other than lowest price, i.e., prompt
delivery and quality materials. Since the rule specifically identifies
factors other than lowest price, the Councils believe Government
auditors will properly consider these other factors. In addition, the
Councils agree additional Government action would not be needed if the
material prices were set by the initial competition; however, the
material price for commercial T&M contracts are not set at time of
contract award. Instead, the Government reimburses contractors based on
actual costs or catalog or market prices for the materials furnished by
the contractors. Finally, the Councils do not believe contractors will
incur additional costs or risks to buy materials at the most
advantageous price because the Councils believe commercial companies
already consider the price, quality, and availability before acquiring
materials. The rule requires the contractor to obtain materials at the
most advantageous prices ``to the extent able.''
d. Refunds. One commenter said requiring contractors to give the
Government credit for cash and trade discounts, rebates, scrap,
commissions, and other amounts that have accrued to the benefit of the
contractor is inconsistent with commercial practices. The commenter
also said commercial companies apply commercial pricing standards for
its labor and spares catalog pricing for materials. Another commenter
said the Government is arbitrarily establishing a method of pricing
materials that is inconsistent with commercial practices and requires
accounting of ``rebates, refunds and discounts that are received or
accrued to the contractor.'' The commenter believes this tracking is
unjustified, would be very costly, and ultimately result in many
disputes that in turn would be costly for both Government and
commercial services contractors for audits, disputes and legal fees.
The commenter recommended that the Government rely on competition as
means to determine the price is fair and reasonable. Another commenter
said that if a contracting officer is responsible for enforcing this
requirement of giving the Government credit for all discounts and
rebates, it may be advisable to consider allowing the CO to require
supporting information from the contractor. Another commenter
recommends that these contracts include refund or price reduction
clauses allowing the Government to recoup any overages identified
through surveillance of the contract.
Response: The Councils recognize that reducing the price of
materials for any possible applicable credits may not be customary in
the commercial marketplace. The Councils note that the credits only
apply when the Government reimburses the contractor at his actual
costs, which, if such credits are received, are reduced accordingly.
However, to be more consistent with commercial practices, the Councils
revised the rule to limit the requirements to credits received by or
accrued to the contractor.
e. General. One commenter said limiting the ``allowable material
costs'' to actual costs focused on ``costs'' rather than ``price''
which is fundamentally inconsistent with commercial practices.
Response: While reimbursement for actual costs may be inconsistent
with commercial practices, the Councils believe payment of the actual
cost is necessary to protect the Government when the material being
sold to the Government does not meet the definition of a commercial
item at FAR 2.101. The Councils note when the material is a commercial
item, the rule provides that the contractor will be paid on the basis
of an established catalog or market price.
8. Consent to Subcontract.
a. Several commenters said the consent to subcontract requirements
should not apply to commercial contracts because they are inconsistent
with commercial practice. One commenter said that the consent to
subcontract requirement is generally limited and does not apply when a
prime contractor requires subcontracting to an affiliate. Two
commenters said the consent to subcontract is necessary and agreed with
the proposed language in paragraph (u) of Alternate I at FAR clause
52.212-4. Another commenter said the normal practice is that the
contractor is not allowed to assign any portion of its responsibilities
or rights under the contract without first obtaining the written
approval of the client. Two commenters said the subcontract consent
requirement is contrary to the FASA's intended purpose of simplifying
commercial item contracting. Another commenter said the requirement
will add administrative effort and costs with no value added to
contractors and little benefit to the Government. Another commenter
said that once an authorized determination has been made to allow a T&M
contract type, further authorizations for T&M should not be required
for subcontracts
[[Page 56327]]
under an approved overall contract. The commenter said it should be
presumed that the approval of T&M for the prime contract flows to all
subcontracts under it. Another commenter said since commercial
contractors are not likely to have government-approved purchasing
systems, the contractors would be subject to the proposed subcontract
consent provisions which is not practicable in commercial contracts and
is not a commercial practice. Another commenter said the costs outweigh
benefits when the choice is to either create/maintain approved
purchasing system or delay performance pending Government approval. The
same commenter also said a fair & reasonable determination can be made
at contract award because use of T&M is limited to contracts awarded
through competition.
Response: When contractors add or substitute subcontractors after
award, the basis for the best value determination used to award the
contract may have been altered. Therefore, the Government must have the
right to approve changes in subcontractors to maintain best value. As
indicated by some of the comments, some commercial companies reserve
the right to approve or deny changes in subcontractors. In fact, one
commenter stated ``the normal practice is that the contractor is not
allowed to assign any portion of its responsibilities or rights under
the contract without first obtaining the written approval of the
client.'' The Councils do not believe subcontract consent will add
significant administrative effort but will protect the Government from
potential subcontractor substitution issues.
b. One commenter recommended revising the proposed paragraph at FAR
12.216 as follows because all contractors should be required to get the
contracting officer's consent prior to using foreign subcontractors to
prevent contractors from negotiating labor hours and rates based upon
its local workforce and subsequently subcontracting with a foreign
contractor with much lower rates.
(1) Add the following after the second sentence in proposed FAR
12.216:
Any subcontract with a foreign company when the work will be
physically performed outside the United States or Canada requires
the contracting officer's consent.
(2) Add the following phrase at the end of the proposed last
sentence:
. . . except for subcontracts with a foreign companies as
described above.
(3) Add the following new coverage to the proposed FAR clause at
52.212-4, Alternate I (u), to enact the revised requirements discussed
above:
(2) The Contractor must obtain the contracting officer's written
consent for any subcontract with a foreign company when the work
will be performed outside the United States or Canada.
Response: Such provisions are not provided for non-commercial T&M
contracts. The Councils do not believe it is advisable to add more
stringent requirements for commercial T&M contracts than are used for
non-commercial T&M contracts. The Councils are not aware of any
problems in this area under existing T&M contracts.
c. One commenter said the rule should (as the ANPR proposes)
require contractors to obtain the contracting officer's consent to
subcontract. The Government should know what entity is providing
services on a T&M or LH basis. However, the requirement to obtain
consent to subcontract should apply only to charges that are directly
charged to the contract, as opposed to overhead expenses and general
and administrative expenses. Many commercial companies have corporate-
wide agreements with vendors to perform those functions.
Response: The Councils agree that the consent to subcontract
applies only to costs that are directly charged to the contract and
does not apply to overhead expenses and G&A expenses. The provisions in
the proposed rule are the same as the consent to subcontract
requirements for non-commercial T&M contracts. Therefore, there is no
need to provide additional language.
d. One commenter assumed that the clause at FAR 52.212-4, Alt. I,
paragraph (u) can be tailored to conform to commercial practices in the
industry as provided under FAR 12.302(b) and recommends acknowledging
such in the final rule.
Response: The tailoring provisions at FAR 12.302 do not apply to
the proposed FAR clause at 52.212-4, Alternate I, paragraph (u),
because the Councils believe tailored subcontract provisions may not
adequately protect the Government's interests. While some commercial
companies may allow assignment of rights and responsibilities under the
contract without the approval of the client, the Councils do not
believe commercial industries, as a whole, generally allow unknown or
unapproved changes to the contract. The Councils believe the Government
should retain the right to approve such changes to protect the
Government's interest in achieving best value. The Councils revised FAR
12.301(b)(3) to clarify that the Alternate clause is not subject to the
tailoring authorities of FAR 12.302.
9. Contractor Purchasing System Reviews (CPSR). One commenter said
imposing CPSRs requirements on commercial T&M or LH contracts would
stop many small businesses and small disadvantaged businesses from
providing commercial services since these businesses may not need, nor
have, the sophisticated infrastructure required to successfully
complete a CPSR.
Response: The rule does not impose a CPSR requirement but simply
recognizes that contractors with approved purchasing systems require
less oversight because the contractor's overall system provides
adequate controls and procedures to protect the Government.
10. Other Direct Costs (ODC). One commenter said ODC may include
travel, software license fees, software subscription fees, and other
categories of other direct costs outside the normal definition of
materials and subcontracts. The commenter suggested not defining the
elements of ODC so that these other types of other direct costs could
be proposed and evaluated. Another commenter asked whether travel would
be considered ``materials'' under a T&M contract or be perceived as a
cost reimbursement item requiring non-commercial procedures. Another
commenter noted that the ANPR appears to only allow materials costs and
subcontract costs to be charged as ODC. The commenter suggested
limiting the definition of materials costs to preclude direct charging
of intangible types of costs and force vendors to include such costs in
their loaded labor rates.
Response: The Councils believe that it is important to provide as
much flexibility as possible. However, it is also imperative that the
contract clearly articulates what costs are reimbursable outside of the
fixed hourly labor rate(s) set forth in the contract. To clarify the
issue, the Councils revised the rule to allow reimbursement of ODC
based on actual costs for the types of ODC specified in the contract
thereby allowing flexibility to negotiate reimbursable ODC on a case-
by-case basis.
11. Government Property.
One commenter said customers do not normally furnish property for
commercial T&M or LH airplane repair contracts. Another commenter said
customer provided property is not the ``norm'', but if property is
supplied, the owner's standard procedures should apply. Another
commenter said GFP should be listed in the contract and tracked by the
agency's property management process. Another commenter said the
proposed Alternate I to the FAR clause at 52.212-4 should
[[Page 56328]]
also contain a provision requiring any property or equipment submitted
for reimbursement under the contract as ODC to be designated as
Government property and treated accordingly. Another commenter said
this does not occur often on professional A&E services contracts. When
it does, it normally is in the form of Project Record Documents for
existing facilities that the customer wishes to remodel or modify. Such
Project Record Documents are managed and controlled by our staff as if
they were our own. Upon completion of the contract, such documents are
returned to the customer in their original condition. They can be
either in hard copy or electronic medium.
Response: As with any acquisition, the need to furnish Government
property will depend on the nature of the requirements, e.g. military
equipment repair. However, when property is furnished, the contract
must include the appropriate Part 45 property clauses. The Councils
note that the Councils are revising Part 45 and the associated clauses
to reflect accepted industry practices for property management.
Finally, the Councils note documents, such as project record documents,
are not considered Government property under FAR Part 45.
12. Government Oversight.
a. One commenter recommended that the Government hold the prime
contractor accountable for proper record keeping and invoicing and not
require copies of a commercial subcontracting agreement and
subcontractor invoices because the Government has no privity with the
subcontractors. The commenter believes requesting such information is
clearly inappropriate and that the Government has no need to routinely
obtain and review subcontractor's documentation since the Government
presumably evaluated and accepted the prime's proposal. Another
commenter asserted that subcontract costs should be the responsibility
of the prime for competitive procurements and there should be no
Government involvement.
Response: The Councils agree that the Government generally will not
need access to the subcontractor's books and records. The Councils
believe there are two possible scenarios regarding subcontract costs.
The first scenario is where the contract provides for subcontract costs
to be reimbursed at actual costs to the prime contractor. In this case,
the Government would need to verify that the prime contractor has
actually made the payments in the ordinary course of business and that
such payments were made in accordance with the subcontract agreement
(the Government would not need access to the subcontractor books and
records, only to a copy of the subcontract agreement maintained by the
prime contractor and verification to the prime contractors records that
payment was made). The second is where the contract provides for the
subcontract costs to be reimbursed at the prime contract fixed hourly
labor rates. In this case, the Government needs to have some assurance
that the prime contractor has verified the hours worked by the
subcontractor. To address this situation, the Councils have revised the
rule to require that subcontractor hours be substantiated by actual
payment, individual timecards, employee qualifications, or other
substantiation specified in the contract.
b. One commenter said the proposed Alternate I to FAR clause
52.212-4 creates issues related to the governments audit rights such as
whether the government has the right to interview contractor employees
about work they have performed. Another commenter said access to
contractor employees is not consistent with commercial practices and
should not be permitted.
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.
c. One commenter advocates including protections, above those
currently required in commercial items purchases, for commercial
services bought on a T&M/LH basis. The commenter suggested a provision
which would authorize the CO to request substantiation for hourly rates
charged under the task orders stating that such a provision would allow
for substantiation of hours worked, access to original timecards,
timekeeping procedures, labor distribution reports, and assigned
employees. The commenter also said documents such as employees' resumes
or other personnel records of employees, to verify that employees have
the contractually required qualifications and experience, should be
made available for Government review. The commenter also suggested
identifying labor distribution reports as ``records of distribution of
labor'' to avoid confusion at contractors that do not maintain formal
reports, but do maintain records relating to their distribution of
labor.
Response: The Councils believe that access to employee timecards,
labor distributions, and the ability to interview the employees should
provide sufficient information to verify the validity of hours claimed
on the contract. However, the Councils believe that there may also be a
need to assess employee qualifications to verify that the employee
meets the qualifications of the labor category to which he/she has been
charged. Therefore, the Councils revised the rule to also provide
access to records that substantiate employee qualifications. In
addition, the Councils revised the rule to say ``records of
distribution of labor'' versus ``labor distribution reports'' to be
more consistent with commercial practices.
d. One commenter said that additional controls and oversights are
used in the commercial marketplace since T&M/LH contracts do represent
more risk to the buyer, e.g., verification of labor hours performed
versus billed, labor categories utilized versus billed, and adequate
accounting systems so the buyer could validate costs billed. The
commenter also said that existing oversight methods and controls for
Federal non-commercial T&M/LH contracts are a good basis for crafting
the methods and controls to apply to Part 12 T&M/LH contracts and that
the proposed rule appears to have carefully examined those terms and
conditions that should be applied to the new authority under FAR Part
12. Another commenter said that allowing contracting officers to
negotiate access to other types of documents on task orders, where
circumstances merit such access, is warranted. Another commenter said
that access to commercial contractor records or audit rights is
uncommon, limited in scope or nonexistent and that surveillance, if
any, was generally limited to verification of hours or expenses billed.
Another commenter said in the commercial marketplace, the contractor is
responsible for providing sufficient information to support billings
for hours charged, materials used, and subcontracts performed.
Response: The Councils believe that the ANPR carefully considered
existing requirements for T&M contracts as well as differences between
the commercial marketplace and non-commercial contracts. The Councils
believe the rule provides the proper balance between the need to verify
compliance with contract terms and the need to minimize access
contractor records.
e. Two commenters said the payment provision in the FAR clause at
52.212-4 and the proposed alternate provisions are inconsistent with
commercial practices. One of the commenters also said commercial
companies do not
[[Page 56329]]
provide access to time cards, actual material or subcontract costs,
employees or employee time cards and that this access would not be
provided to the Government and that oversight is not used to ensure
work is being properly charged. Another commenter said it is a
customary commercial practice for the seller to grant limited access to
records and limited audit rights, i.e., time sheets, invoices, expense
reimbursement receipts, etc. This commenter and another commenter said
the Government should not have access to contractor employees. Another
commenter said it is normal practice for the client to request copies
of time cards, along with detailed invoices outlining which individual
performed the services, the amount of time that individual spent on
those services during the period of the invoice. In addition, the time
card would have the respective supervisor approval indicating that the
time was properly recorded. The clients also normally require that they
have the ability to audit the contractor's records if they so choose.
Response: The Councils believe the Government must have some
assurance that the number of hours claimed by the contractor accurately
reflects the time spent by the appropriate labor category performing
work on the contract and that the amounts paid to the contractor based
on actual costs accurately reflect the actual costs paid by the
contractor for materials, subcontracts, and other direct costs. Some
commenters said their commercial companies do require access to time
cards, actual material, and subcontract costs as a condition for T&M
contracting. The Councils believe that the rule minimizes access to
records to only those documents that are necessary to verify compliance
with the contract terms. The Councils do not believe it is appropriate
for the Government to simply accept the submitted hours and material/
subcontract costs as valid without some type of verification.
f. One commenter noted that the ANPR failed to include sufficient
oversight mechanisms to protect the taxpayers' interests. The commenter
recommended establishing periodic audits and reporting requirements on
the use of D&F in commercial T&M/LH contracts, and requiring approval
of the D&F by the head of the contracting authority. Further, the
commenter recommended that the Government have access to the contractor
books and records; FAR clause 52.215-2, Audit and Records--Negotiation,
should be included in all T&M/LH contracts; and contracts should be
subject to the cost principles found in FAR Part 31, Contract Cost
Principles and Procedures. Another commenter is not opposed to T&M and
LH contracts, but opposes the proposed rule because it does not make
them subject to full oversight and audit provisions.
Response: The FAR does not provide for periodic audits of
contracting officer decisions. The frequency and scope of such audits
are under the purview of the agency Inspector General, not the FAR
Council. In regards to the application of FAR Part 31, the Councils do
not believe such access is necessary because the proposed rule does not
provide for reimbursement of indirect costs using actual indirect cost
rates. In addition, the rule does provide access to those records
necessary to verify those costs that are reimbursed on an actual basis.
There is no benefit to extending such access to include all records
that are normally accessible for non-commercial contracts. In fact,
extending such access would essentially nullify the concept of a
commercial contract.
g. One commenter believes substantiation of invoices should be
based on commercial practices, rather than relying upon a time card
system, ``as presumably identified'' in the DCAA manual. This commenter
also believes this is inconsistent with commercial practices regarding
audits of cost by requiring timecards pursuant to Government procedures
and that SARA does not authorize this extension of Government rights to
provide auditors with ``free range with disrupting employees and
subcontractor relationships.'' Another commenter asserts that the
``Proposed rule does not include any of the protections that are in the
commercial market.'' This commenter believes these ``contract vehicles
are high risk and do not include adequate cost controls.''
Response: While these commenters refer to using commercial
practices for protection (e.g., for substantiation of invoices),
neither commenter provides a description of what that protection is,
i.e., how does the commercial customer know the hours or actual costs
are a proper reflection of the amounts actually incurred? The Councils
believe there must be some verification, and believes that the proposed
rule provides the minimum access to records needed to perform that
verification. The Councils do not believe that SARA requires the
Government to make payments based on actual hours and/or actual costs
incurred without some form of verification. The Councils note some
commenters said requiring access to time cards, invoices, and
subcontract agreements is a standard commercial practice for T&M
contracting.
h. One commenter believes that quality assurance is not sufficient
to protect taxpayers and that post award audits are necessary. The
commenter also expressed concern that currently paragraph (e) of FAR
clause 52.232-7 allows for contracting officer requests for audit prior
to final payment and that this may contradict other provisions for
commercial audits that are not subject to post award audits.
Additionally, the commenter said there may be a conflict between 41
U.S.C. 254d(a)(1) and 10 U.S.C. 2313(a) (which allows post award
audits) and the FAR provision (which does not expressly allow audits
for commercial items). The commenter believes that if a post award
audit provision is not included, the contracting officer should be
required to provide written justification why one was not included.
Further, the commenter said the audit should occur when the contractor
notifies the Government that the costs will exceed 85 percent of
ceiling. The commenter recommended a price reduction clause to recoup
overages identified in audit.
Response: Post-award audits for commercial items are necessary for
T&M contracts. The contract clause requires the contractor to
substantiate the labor hours and material, subcontract, and other
direct costs. The rule provides the necessary access to records to
verify compliance with these contract terms.
i. One commenter said the ANPR's suggestion of describing the types
of information that may be audited to verify material and subcontract
costs (rather than merely repeating the vague ``substantiating
material'' description) makes sense. The commenter also said government
access to the contractor's employees to verify hours charged is
unnecessary, inconsistent with commercial practices, and substantially
broader than the Government's rights under the existing T&M payment
clause. In the absence of indicia of fraud or other wrongdoing,
timecards should be sufficient evidence of hours actually worked. Given
the time and expense associated with conducting interviews, the
government would likely interview employees only when there was a basis
to investigate alleged wrongdoing. In those circumstances, the
government could obtain information through subpoenas; a contract
clause is therefore unnecessary.
Response: According to some commenters, requiring access to
contractor employees is a standard commercial practice for T&M
contracting. In addition, the proposed provisions for access to
contractor
[[Page 56330]]
employees are no broader than what is currently provided for under non-
commercial T&M contracts. The relevant access to records provision for
current T&M contracts is not the T&M payment clause, but instead is the
clause at FAR 52.215-2, Audit and Records--Negotiation, which provides
the Government with access to contractor employees. The Government
should not have to allege wrongdoing to interview contractor employees
when their labor hours are included on invoices submitted to the
Government.
j. Commenters at the public meeting said commercial companies do
not keep payment records three years after contract completion.
Response: The requirement at paragraph (d)(2) of FAR clause 52.212-
5 for contractors to maintain the payment records three years after
contract completion is a statutory requirement that provides for
Comptroller General examination of records under contracts for
commercial items.
13. Nonconforming.
a. One commenter said it may be extremely difficult for the
Government to enforce the defects language after the contractor
invoices and the Government accepts the labor, as opposed to accepting
the tangible products generated by the labor, because the Government
will have a difficult time proving, after the fact, that the labor was
defective or otherwise unacceptable unless the Government can prove
fraudulent timekeeping practices or sloth on the part of the contractor
or its employees can be proven. The commenter also said if the
contractor provides the correct mix of labor skills and the service is
provided in accordance with the statement of work, the contractor
should bear no burden for corrections and that it would be hard to
reject or prove the services were non-conforming after payment since
the Government evaluates, interviews, and approves contractor
personnel. Another commenter said it is reasonable to expect the
contractor to be responsible for the correction of any non-conforming
contract requirement, if it is determined to be the fault of the
contractor.
Response: The Councils agree that it may be difficult to prove
services are nonconforming on a commercial T&M/LH contract after the
contractor has invoiced the Government and the Government has accepted
and paid for the labor. The Councils note the current FAR coverage,
while previously applicable only to commercial FFP contracts, provides
post acceptance remedies for nonconforming services. The rule simply
adds additional remedies to address situations when reperformance will
not correct the defect or is not possible to reperform.
b. One commenter recommended replacing the word ``may'' with
``should'' in the third and sixth lines of paragraph (a) at FAR clause
52.212-4 because Government officials should be encouraged to seek
consideration for nonconforming services and should be required to
ensure that the contractor's future performance conforms to the
contract requirements. The commenter also recommended revising proposed
paragraph 52.212-4, Alternate I (a), to include the word ``should''
instead of ``may'' in the seventh, twelfth, and fifteenth lines for the
same reasons.
Response: The use of the term ``may'' is consistent with the
existing terminology for commercial FFP contracts, i.e., paragraph (a)
at FAR clause 52.212-4, which states the ``Government may require
repair or replacement of nonconforming supplies or reperformance of
nonconforming services at no increase in contract price.'' The
Government should seek consideration when appropriate. However, the
Councils believe the term ``may'' provides the contracting officer
sufficient latitude to exercise their judgment while managing the
contract. The Councils did, however, revise the rule to clarify that
the Government may seek either ``an equitable price adjustment or
adequate'' consideration and deleted the language that allowed the
Government to require the contractor to ensure future performance
conforms to contract requirements because the Councils believe that
this language is unnecessary since the Government already has this
right through the use of a cure notice.
c. One commenter said commercial T&M agreements include a warranty
and a disclaimer of any other remedies as permitted under the UCC.
Another commenter said seeking consideration for acceptance of
nonconforming supplies or services is a right of the Government under
common law so there is no need to include such a provision in the
clause.
Response: Remedies, including warranty provisions, vary by
industry, service and products. The FAR routinely includes rights
covered under common law in contract clauses to ensure all parties are
cognizant of their rights and responsibilities.
d. One commenter said the requirement for contractors to repair or
replace rejected supplies or reperform rejected services at no cost to
the Government imposes more contract risk on the contractor than the
non-commercial clause which does not require repair or reperformance at
no cost to the Government, essentially imposing a fixed-price level of
risks. The commenter further said combining a ceiling price that
contractors exceed at their own risk and a requirement that the
contractor use ``best efforts'' to perform within the ceiling price may
result in contractors interpreting the clause to requirement to mean
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 commenter recommended allowing contracting officers, where
appropriate, to compensate contractors for reperformance or repair of
deficient services or supplies up to the ceiling price, but not
including profit, to be consistent with the non-commercial clause and
to more accurately reflect standard commercial practices. Two
commenters also recommended that replacement of nonconforming supplies
or re-performance should be at no increase in contract price, allowing
the contractor to re-perform up to the agreed upon ceiling price.
Another commenter said the proposed rule establishes a contractor-
friendly threshold because the contractor is agreeing to use its best
efforts to perform work and T&M contracts pay for time or money spent,
not milestones reached or work completed. Commenter states this is main
difference between commercial practices and proposed rule.
Response: The Councils agree 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. The
non-commercial T&M/LH clause does allow contractor to be paid for
reperformance, without profit, up to the ceiling price (or the ceiling
price as increased by the Government) unless the contractor fails to
proceed with reasonable promptness to reperform within the ceiling
price (or the ceiling price as increased by the Government), in which
case, the Government may charge the contractor reperformance costs or
terminate the contract for default. Additionally, the noncommercial
clause only allows the Government to require the contractor to remedy
without reimbursement in very limited situations such as fraud and
willful misconduct. Since contractors are only required to use ``best
efforts'' within the established ceiling price for
[[Page 56331]]
T&M and LH contracts, the Councils agree contractors should be paid for
reperformance, without profit, up to the ceiling price. The Councils
revised the proposed rule to be consistent with the provisions for
noncommercial T&M contracts at FAR clause 52.246-6. However, since
contracting officers will not necessarily know the proposed profit in
competitive awards, the Councils revised the noncommercial T&M
provisions to require contracting officers to specify a profit
decrement in paragraph (a)(4) of the clause. Unless otherwise specified
by the contracting officer, the labor rates will be reduced by 10
percent to exclude profit.
e. Another commenter said that its commercial contracts include
normal commercial warranties that cover workmanship and materials.
Under these provisions, a buyer can make a warranty claim and, if
deemed valid, the servicing company would re-perform the work at no
charge. Another commenter said surveillance/QC/Inspections for T&M and
LH commercial contracts versus those of commercial FP contracts do not
vary. Contractors are responsible for performance to minimum stated
levels of completion and quality. Reviews of performance by the
customer are the same regardless of the type of contract executed.
Response: When the commercial warranties adequately cover
workmanship and materials, there is generally no need to include
additional requirements addressing non-conforming supplies or services.
In other instances, commercial warranties may not exist or may not
adequately address the contract requirements. In such cases, the
Government needs provisions to address non-conforming supplies and
services. As such, the rule provides remedies for non-conforming
supplies and services that are consistent with those provided for under
non-commercial contracts.
14. Termination.
a. One commenter recommended revising FAR 12.403 to specify the
amounts recoverable upon termination for convenience of a T&M or LH
contract for commercial services because the ANPR did not adequately
address a contractor's need to recover material costs in a termination
for convenience.
Response: As provided in FAR 12.403(d)(ii), which also applies to
commercial FFP contracts, contractors can recover ``any charges the
contractor can demonstrate directly resulted from the termination.''
While material costs are not specifically addressed in this coverage, a
contractor would recover the costs if the contractor is able to
demonstrate the costs were incurred in support of the contract and the
costs are otherwise allowable in accordance with the proposed language
at paragraph (i)(1)(ii) of FAR clause 52.212-7.
b. One commenter said the concept of termination for convenience is
inconsistent with commercial practices and would be considered a breach
of contract, with damages, in the commercial marketplace. The commenter
also said amount of damages would be negotiated or established in a
lawsuit and would not be limited to reasonable charges the contractor
can demonstrate to the satisfaction of the Government using its
standard record keeping system. Another commenter said few, if any,
commercial T&M contracts include right of immediate termination as is
proposed. Further, the commenter said the Government should compensate
for additional costs beyond hours worked as is provided for in FAR
12.403(d)(ii) and that the termination clause should mirror those used
in the commercial marketplace which generally require 30 to 90 days
termination notice with no cap on compensation.''
Response: The Councils recognize that terminations for convenience
are not standard commercial practice. However, to protect the public's
interest, the Government must retain the right to terminate a contract
when the product or service is no longer needed or funds are not
available. The Councils note the FAR already contains the provisions
for terminating commercial contracts at the Government's convenience.
The proposed rule simply provides the basis for calculating labor costs
on a terminated commercial T&M/LH contract.
15. CAS Applicability.
a. One commenter said CAS coverage needs to be extended to
commercial contracts when the contractor is already CAS covered.
Another commenter said many commercial companies do not require
employees to record all time worked and that these companies' labor
charging systems will not be tied to a CAS compliant accounting system.
The commenter said requiring commercial companies to comply with CAS
flies in the face of commercial item reform. Another commenter stated
that CAS should continue to apply to all T&M/LH contracts to protect
taxpayers' interests by ensuring consistent accounting treatment,
proper allocation of costs to contracts, and preparation of reliable
cost estimates. Another commenter said application of CAS is
unnecessary and would have adverse consequences. This commenter noted
that commercial contractors that sell exclusively in the commercial
marketplace most likely do not have accounting systems configured to
comply with CAS and may decline to perform commercial services for the
government on a T&M or LH basis. Accordingly, CAS rules should be
amended to exempt commercial services purchased under T&M or LH
contracts from its coverage. Another commenter said they see no
particular difference between the contract types as to the
applicability of CAS. Another commenter said commercial systems are set
up to support commercial transactions, not to comply with CAS clauses
in Government contracts. Thus, this commenter asserted, such clauses
would not be acceptable. One commenter stated CAS should not apply to
commercial item acquisitions and that the CAS Board did not fully
implement FARA since FARA exempted all contract for commercial items
from CAS requirements. Another commenter said that if CAS applies to
commercial T&M/LH contracts, the government will effectively eliminate
most commercial contractors from competition for these types of
contracts. Another commenter said that CAS should not apply and all
that should be required from contractors is an adequate accounting
system for recording hours and material purchases.
Response: Revisions to CAS requirements is beyond the scope of this
case. The Councils will forward the comments to the CAS Board for the
Board's consideration.
b. One commenter said that the ``Councils'' infer that they (the
Councils) have some authority to amend or interpret CAS, as evidenced
by the Councils soliciting public comments based on the assumption that
CAS will not apply to commercial T&M/LH contracts.
Response: The Federal Register notice is very clear that any
actions regarding the Cost Accounting Standards would need to be taken
by the CAS Board. In paragraph (3) of Section C, Regulatory Amendments
under Consideration, the Notice states the following:
The need for potential amendments to the current CAS exemption
for commercial items is being considered. Temporary waivers are
subject to approval by the CAS Board. Permanent exemptions are
subject to the regulatory promulgation process and are codified in
48 CFR Chapter 99. No changes to FAR 12.214 are reflected in the
draft amendment that is being published with this notice. However,
FAR 12.214 will be revised to reflect any actions that are taken by
the CAS Board. Any public comments addressing CAS will be provided
to the CAS Board for consideration.
16. General Comments.
[[Page 56332]]
a. One commenter said the Councils were too restrictive when they
implemented Section 8002(d) of FASA (Pub. L. 103-355) because there is
no statutory prohibition against the use of T&M/LH contracts. The
commenter requested the Councils to take this opportunity to revisit
this question and amend the FAR to permit use of T&M/LH contracts to
acquire any commercial item.
Response: Congress was well aware of the FAR requirements that
limit the available contract types for commercial items when it drafted
Section 1432 of the National Defense Authorization Act for Fiscal Year
2004. If Congress disagreed with the Council implementation of FASA,
the Councils believe Congress would have expanded Section 1432 to
specifically authorize T&M/LH contracts for commercial items. The
Councils do not believe it is appropriate to expand contract types for
commercial items without specific statutory authority.
b. One commenter questioned why the minutes posted by the Councils
from the Public Meeting did not include the detailed questions and
answers discussed at the Public Meeting. Specifically, the commenter
was concerned that the minutes failed to recognize the discussion on
how to conduct market research to determine if the service was sold in
the commercial marketplace using T&M or LH contracts.
Response: The purpose of the public meeting was to allow the public
to provide input on the effective use of T&M and LH contracts for the
acquisition of commercial items and suggestions for implementing the
provisions of the SARA legislation for the Council's consideration.
While the Councils did record and post the general topics that were
discussed at the meeting, the Councils did not record or post the
detailed discussions from the meeting. The ANPR and the proposed rule
contain provisions that require the contracting officer to consider
various customary practices, including contract type, when conducting
market research. Detailed instructions for how to conduct market
research are not contained in the FAR because the instructions would
vary based on the unique aspects of the acquisition. More specific
instructions are appropriately contained in agency training materials.
c. One commenter said that the proposed rulemaking should be
designated as a major rule under the Congressional Review Act and
economically significant under Executive Order 12866. The commenter
also states that the assessment of benefits, costs and reasonable
alternatives should be conducted assuming applicability and
inapplicability of Cost Accounting Standards (CAS) and reviewed by
Agency attorneys, economists, engineers and scientists.
Response: As required in the regulatory process, OMB's Office of
Information Regulatory Affairs reviewed the rule to ensure the
requirements of Executive Order 12866 were fully met.
d. One commenter noted that the ANPR failed to eliminate what the
commenter considers the current illegal use of commercial T&M/LH
contracts by GSA by declaring commercial T&M/LH contracts executed in
violation of FAR 12.207 null and void.
Response: The rule implements Section 1432 of Public Law 108-136.
Questions over legality of actions agencies may have taken prior to
this authority are beyond the scope and authority of the Councils.
e. One commenter said the FAR Council has exceeded its statutory
authority under SARA by adding clauses and requirements that are not
consistent with the requirements of Section 8002 of Public Law 103-355
which limit the contract clauses, to the maximum extent practicable, to
those required to implement provisions of law or executive orders or
those determined to be consistent with standard commercial practice.
Response: The Councils believe it limited the contract clauses to
the ``maximum extent practicable'' to those required to implement the
SARA legislation for commercial T&M and LH contracts. The Councils
acknowledge it added a limited number of provisions not specifically
mandated by the SARA legislation (such as consent to subcontract);
however, the Councils believe that the provisions are needed to protect
the Government and are, to the maximum extent practicable, consistent
with commercial practice. FASA acknowledges that additional contract
clauses may be required by including the phrase ``to the maximum extent
practicable.''
f. One commenter identified industry best practices of close
communication and cooperation between buyer and seller, using a project
management team that is well versed in the types of services involved,
and establishing Forward Pricing Rate Agreements with firms frequently
contracted with for T&M/LH to reduce the time and effort involved in
contract formation and administration.
Response: The Councils thank the commenter for the identified best
practices. The Councils agree close communication, cooperation, and
knowledge of the type of services are necessary for any successful
procurement. The Councils note, however, that commercial T&M and LH
contracts will be awarded using competitive procedures and establishing
forward pricing rate agreements is not necessary and contrary to
competitive procedures.
g. One commenter requested that the Councils consider customary
commercial pricing concepts for acquiring commercial services to be
consistent with the tenets of FAR Part 12 and existing statutes. FAR
Part 12 encourages the consideration of commercial practices when
acquiring commercial services. As an example, the commenter identified
GSA's recent multi-channel contact center contract, which involved
acquiring commercial telecommunication services on a price per unit or
price per minute basis.
Response: The rule does not prohibit the use of a wide variety of
commercial pricing practices including the example given by the
commenter.
h. Two commenters recommended that the final rule explicitly state
that the rule only applies to contracts executed on or after the
effective date of the rule. In addition, one of the commenters said the
rule should not apply to task orders under IDIQ commercial contracts in
existence at the time of the rule's effective date unless mutually
agreed to in writing by all parties.
Response: The standard FAR conventions at FAR 1.108(d) apply. As
the rule does not specify otherwise, the FAR changes apply to
solicitations issued after the effective date of the change. However,
the Councils note the FAR allows contracting officers to make changes
in existing contracts with appropriate considerations and mutual
consent of the parties.
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 changes may have a significant economic impact on a substantial
number of small entities within the meaning of the Regulatory
Flexibility Act, 5 U.S.C. 601, et seq., because small entities that
have not bid on non-commercial T&M/LH contracts in the past may be
induced to bid on commercial T&M/LH contracts. An Initial Regulatory
Flexibility Analysis (IRFA) has been prepared. The analysis is
summarized as follows:
[[Page 56333]]
Initial Regulatory Flexibility Analysis
1. Description of the reasons why action by the agency is being
considered. This proposed rule would revise the Federal Acquisition
Regulation to allow contracting officers to award Time and Material
and Labor Hour (T&M/LH) contracts when procuring commercial items.
The proposed rule is required by Section 1432 of the National
Defense Authorization Act for Fiscal Year 2004 (Pub. L. 108-136).
2. Succinct statement of the objectives of, and legal basis for,
the proposed rule. This proposed rule implements Section 1432 of the
National Defense Authorization Act for Fiscal Year 2004 (Pub. L.
108-136), which authorized the use of Time and Material or Labor
Hour (T&M or LH) contracts for commercial services acquired in
support of a commercial item, and any other category of services
that is designated by the Administrator of OFPP as being of a type
commonly sold to the general public on a T&M or LH basis, and would
be in the best interest of the Government to acquire such services
on a T&M or LH basis.
3. Description of, and, where feasible, estimate of the number
of small entities to which the proposed rule will apply. The changes
may have a significant economic impact on a substantial number of
small entities within the meaning of the Regulatory Flexibility Act,
5 U.S.C. 601, et seq., because the use of commercial practices will
allow additional small businesses that do not maintain records that
are adequate for cost reimbursement contracting to compete for
commercial T&M/LH contracts. At this time, there is no way to
predict the number of procurements that will be awarded using
commercial T&M/LH contracts, nor is there a method available to
estimate the number of small entities that may be influenced by this
change to begin competing for these types of contracts.
4. Description of projected reporting, record keeping, and other
compliance requirements of the proposed 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. Identification, to the extent practicable, of all relevant
Federal rules which may duplicate, overlap, or conflict with the
proposed rule. There are no Federal rules that duplicate, overlap or
conflict with the proposed rule.
6. Description of any significant alternatives to the proposed
rule which accomplish the stated objectives of applicable statutes
and which minimize any significant economic impact of the proposed
rule on small entities. There are not any alternatives to publishing
this proposed rule that will accomplish the stated objectives of
Section 1432 of the National Defense Authorization Act for Fiscal
Year 2004 (Pub. L. 108-136). The rule includes only FAR text
revisions required to implement the statute cited herein.
The FAR Secretariat has submitted a copy of the IRFA to the Chief
Counsel for Advocacy of the Small Business Administration. A copy of
the IRFA may be obtained from the FAR Secretariat. The Councils will
consider comments from small entities concerning the affected FAR parts
2, 10, 12, 16, 44, and 52, in accordance with 5 U.S.C. 610. Comments
must be submitted separately and should cite 5 U.S.C. 601, et seq. (FAR
case 2003-027), in correspondence.
C. Paperwork Reduction Act
The Paperwork Reduction Act does not apply because the proposed
changes to the FAR do not impose information collection requirements
that require the approval of the Office of Management and Budget under
44 U.S.C. 3501, et seq.
List of Subjects in 48 CFR Parts 2, 10, 12, 16, 44, and 52
Government procurement.
Dated: September 16, 2005.
Julia B. Wise,
Director, Contract Policy Division.
Therefore, DoD, GSA, and NASA propose amending 48 CFR parts 2, 10,
12, 16, 44, and 52 as set forth below:
1. The authority citation for 48 CFR parts 2, 10, 12, 16, 44, and
52 is revised 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]
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]
3. Amend section 10.001 by removing from paragraph (a)(3)(iv) ``as
terms'' and adding ``as type of contract, terms'' in its place.
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
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
competitive procedures; 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 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 fixed price contracts (e.g., by limiting the value
or length of the Time and Material/Labor Hour contract or order) on
future acquisitions for the same or similar requirements.
(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
[[Page 56334]]
(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 16.5.
(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.
6. Add section 12.216 to read as follows:
12.216 Subcontract consent.
(a) When a time and materials or labor hour contract is awarded
pursuant to 12.207(b), Alternate I to the clause at 52.212-4 is used.
Alternate I includes a subcontract consent provision that requires the
contractor to obtain the contracting officer's consent prior to
awarding certain subcontracts.
(b) When the contractor has an approved purchasing system, the
contracting officer shall identify, in an addendum to the clause, those
subcontracts that will require consent.
(c) When the contractor does not have an approved purchasing
system, the contracting officer shall identify, in an addendum to the
clause--
(1) Those subcontracts reviewed during proposal evaluation for
which consent is not required after contract award;
(2) Those subcontracts for which consent is not required by the
clause, but which the contracting officer has determined that an
individual consent action is required to protect the Government; and
(3) Any other exceptions to the standard consent requirements.
(d) The contracting officer shall consider the risk, complexity and
dollar value of anticipated subcontracts when determining the consent
requirements.
7. Amend section 12.301 by revising paragraph (b)(3) to read as
follows:
12.301 Solicitation provisions and contract clauses for the
acquisition of commercial items.
* * * * *
(b)* * *
(3) The clause at 52.212-4, Contract Terms and Conditions--
Commercial Items. This clause includes terms and conditions which are,
to the maximum extent practicable, consistent with customary commercial
practices and is incorporated in the solicitation and contract by
reference (see Block 27, SF 1449). Use this clause with its Alternate I
when a time and materials or labor hour contract will be awarded. The
contracting officer may tailor this clause in accordance with 12.302,
except that paragraph (u) of Alternate I may be tailored only for
indefinite delivery contracts and only to indicate that subcontract
consent requirements apply to individual orders and not the basic
contract.
* * * * *
8. 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
9. Amend section 16.601 by adding a sentence at the end of the
introductory text of paragraph (b) to read as follows:
16.601 Time-and-materials contracts.
* * * * *
(b) Application. * * * See 12.207(b) for the use of time-and-
material contracts for certain commercial services.
* * * * *
10. Amend section 16.602 by adding a sentence at the end of the
paragraph to read as follows:
16.602 Labor-hour contracts.
* * * See 12.207(b) for the use of labor hour contracts for certain
commercial services.
PART 44--SUBCONTRACTING POLICIES AND PROCEDURES
11. Amend section 44.302 by revising the second sentence of
paragraph (a) to read as follows:
44.302 Requirements.
(a)* * * If a contractor's sales to the Government (excluding
competitively awarded firm-fixed-price and competitively awarded fixed-
price with economic price adjustment contracts and firm-fixed price or
fixed-price with economic price adjustment sales of commercial items
pursuant to Part 12) are expected to exceed $25 million during the next
12 months, perform a review to determine if a CPSR is needed.* * *
* * * * *
12. Amend section 44.303 by revising the second sentence of the
introductory paragraph to read as follows:
44.303 Extent of review.
* * * Unless segregation of subcontracts is impracticable, this
evaluation shall not include subcontracts awarded by the contractor
exclusively in support of Government contracts that are competitively
awarded firm-fixed-price, competitively awarded fixed-price with
economic price adjustment, or firm-fixed price or fixed-price with
economic price adjustment awarded for commercial items pursuant to Part
12.* * *
* * * * *
PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES
13. Amend section 52.212-4 by--
a. Revising the date of the clause;
b. Adding a new fourth sentence to the introductory text of
paragraph (a) of the clause; and
c. Adding Alternate I to read as follows:
52.212-4 Contract Terms and Conditions--Commercial Items.
* * * * *
CONTRACT TERMS AND CONDITIONS--COMMERCIAL ITEMS (DATE)
(a) Inspection/Acceptance.* * * If repair/replacement or
reperformance will not correct the defects or is not possible, the
[[Page 56335]]
Government may seek an equitable price reduction or adequate
consideration for acceptance of nonconforming supplies or services.*
* *
* * * * *
Alternate I (Date). 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 and add the following
paragraph (u) to 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 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 (a)(5) of this clause,
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--
Approved purchasing system means a Contractor's purchasing
system that has been reviewed and approved in accordance with Part
44 of the Federal Acquisition Regulation (FAR).
Consent to subcontract means the Contracting Officer's written
consent for the Contractor to enter into a particular subcontract.
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.
Materials means--
(1) Direct materials, including supplies and services
transferred between divisions, subsidiaries, or affiliates of the
contractor under a common control;
(2) Subcontracts for supplies and services;
(3) Other direct costs (e.g., travel, computer usage charges,
etc.); or
(4) Indirect costs specifically provided for in this clause.
Subcontract means any contract, as defined in FAR Subpart 2.1,
entered into by a subcontractor to furnish supplies or services for
performance of the prime contract or a subcontract. 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. 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. Invoices may be submitted once
each month (or at more frequent intervals, if approved by the
Contracting Officer) to the Contracting Officer or the Contracting
Officer's representative. When requested by the Contracting Officer
or the Contracting Officer's 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. 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. If no overtime rates are provided in the
Schedule and the Contracting Officer approves overtime work in
advance, overtime rates shall be negotiated. Failure to agree upon
these overtime rates shall be treated as a dispute under the
Disputes clause of this contract. 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 its own
materials that meet the definition of a commercial item at 2.101,
the price to be paid for such materials shall be the Contractor's
established catalog or the market price, adjusted to reflect the--
(1) Quantities being acquired; and
(2) Actual cost of any modifications necessary because of
contract requirements.
(B) Subcontracts. (1) Unless the subcontractor is listed in
paragraph (i)(1)(ii)(B)(2) of this clause, subcontract costs will be
reimbursed at actual costs as specified in (i)(1)(ii)(C) of this
clause.
(2) Provided the subcontract agreement requires the contractor
to substantiate the subcontract hours and employee qualification,
the contractor shall be reimbursed at the hourly rates prescribed in
the schedule for the following subcontractors: [Insert subcontractor
name(s) or, if no subcontracts are to be reimbursed at the hourly
rates prescribed in the schedule, ``None.'' If this is an indefinite
delivery contract, the Contracting Officer may insert ``Each order
must list separately the subcontractor(s) for that order or, if no
subcontracts under that order are to be reimbursed at the hourly
rates prescribed in the schedule, insert `None'.'']
(C) Except as provided for in paragraphs (i)(1)(ii)(A) and (B)
of this clause, the Government will reimburse the Contractor the
actual cost of materials (less any rebates, refunds, or discounts
received by or accrued to the contractor) provided the Contractor--
(1) Has made payments for materials in accordance with the terms
and conditions of the agreement or invoice; or
[[Page 56336]]
(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.
(D) 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
(2) Give credit to the Government for cash and trade discounts,
rebates, scrap, commissions, and other amounts that have accrued to
the benefit of the Contractor, or would have accrued except for the
fault or neglect of the Contractor.
(E) 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)(C)
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.]
(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.]
(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 performing 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 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;
(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. 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 paragraph (b) of the FAR clause at 52.212-5 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
[[Page 56337]]
before the effective date of termination by the hourly rate(s) in
the contract, less any hourly rate payments already made to the
Contractor 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.
* * * * *
(u) Subcontracts. (1) If the Contractor has an approved
purchasing system, the Contractor shall obtain the Contracting
Officer's written consent only before placing subcontracts
identified in an addendum to this clause.
(2) If the Contractor does not have an approved purchasing
system, consent to subcontract is required for any subcontract
that--
(i) Is of the cost-reimbursement, time-and-materials, or labor-
hour type; or
(ii) Is fixed-price and exceeds--
(A) For a contract awarded by the Department of Defense, the
Coast Guard, or the National Aeronautics and Space Administration,
the greater of the simplified acquisition threshold or 5 percent of
the total estimated cost of the contract; or
(B) For a contract awarded by a civilian agency other than the
Coast Guard and the National Aeronautics and Space Administration,
either the simplified acquisition threshold or 5 percent of the
total estimated cost of the contract.
(iii) Exceptions to this requirement may be as specified by the
Contracting Officer in an addendum to this clause.
(3) The Contractor shall notify the Contracting Officer
reasonably in advance of placing any subcontract or modification
thereof for which consent is required under paragraph (u)(1) or
(u)(2) of this clause, including the following information:
(i) A description of the supplies or services to be
subcontracted.
(ii) Identification of the type of subcontract to be used.
(iii) Identification of the proposed subcontractor.
(iv) Extent of competition or basis for determining price
reasonableness.
(v) The proposed subcontract amount.
(vi) If a time-and-materials or labor-hour subcontract, a list
of the labor categories, corresponding labor rates and estimated
hours.
(4) The Contractor is not required to notify the Contracting
Officer in advance of entering into any subcontract for which
consent is not required under paragraph (u)(1) or (u)(2) of this
clause.
(5) Unless the consent or approval specifically provides
otherwise, neither consent by the Contracting Officer to any
subcontract nor approval of the Contractor's purchasing system shall
constitute a determination--
(i) Of the acceptability of any subcontract terms or conditions;
or
(ii) Relieve the Contractor of any responsibility for performing
this contract.
(6) No subcontract or modification thereof placed under this
contract shall provide for payment on a cost-plus-a-percentage-of-
cost basis, and any fee payable under cost-reimbursement type
subcontracts shall not exceed the fee limitations in FAR 15.404-
4(c)(4)(i).
(7) The Contractor shall give the Contracting Officer immediate
written notice of any action or suit filed and prompt notice of any
claim made against the Contractor by any subcontractor or vendor
that, in the opinion of the Contractor, may result in litigation
related in any way to this contract, with respect to which the
Contractor may be entitled to reimbursement from the Government.
(8) If the contractor enters into any subcontract that requires
consent without obtaining such consent, the Government will not be
liable for any costs incurred under that subcontract prior to the
date the contractor obtains the required consent. Any payment of
subcontract costs incurred prior to the date of the consent will be
reimbursed only if the Contracting Officer subsequently provides the
consent required by paragraph (u) of this clause.
[FR Doc. 05-18965 Filed 9-23-05; 8:45 am]
BILLING CODE 6820-EP-S