[Federal Register: July 24, 2003 (Volume 68, Number 142)]
[Rules and Regulations]               
[Page 43863-43867]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]





48 CFR Parts 22, 31, 37, and 52

[FAC 2001-15; FAR Case 2001-008; Item IV]
RIN 9000-AJ36

Federal Acquisition Regulation; Compensation Cost Principle

AGENCIES: Department of Defense (DoD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Final rule.


SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) have agreed on a final rule 
amending the Federal Acquisition Regulation (FAR) to revise the 
``compensation for personal services'' cost principle by restructuring 
the paragraphs, and by removing unnecessary and duplicative language.

DATES: Effective Date: August 25, 2003.

Building, Washington, DC 20405, (202) 501-4755, for information 
pertaining to status or publication schedules. For clarification of 
content, contact Mr. Edward Loeb, Procurement Analyst, at (202) 501-
0650. Please cite FAC 2001-15, FAR case 2001-008.


A. Background

    DoD, GSA, and NASA published a proposed rule in the Federal 
Register at 67 FR 19952, April 23, 2002, with request for comments. 
Three respondents submitted public comments. A discussion of the 
comments is provided below. Differences between the proposed and the 
final rule are discussed in paragraphs 1, 5, 13, 15, and 19 below.
    Public Comments:
    1. Comment: Designate FAR 31.205-6(c) as Reserved. The current 
paragraph designations, especially paragraph (j) for pensions, have 
been cited in many court cases, Government contracts, and other 
documents over the years. All the respondents expressed concerns that 
the re-designation of paragraphs (d) through (p) within FAR 31.205-6 as 
paragraphs (c) through (o) would create confusion.
    Councils' response: Concur.
    2. Comment: Move proposed FAR 31.205-6(g)(1) (Backpay) to FAR 
31.205-6(a)(1). The respondent did not provide an explanation for this 
    Councils' response. Do not concur. The Councils believe there is 
merit in maintaining a separate paragraph for backpay. See paragraph 16 
for further discussion.
    3. Comment: Delete proposed FAR 31.205-6(a)(2) (total 
compensation). The language is duplicative of FAR 31.201-3, 
Reasonableness, and the focus of the cost principle should be on the 
reasonableness of a contractor's total compensation plan and not on 
individual employees or job classes.
    Councils' response. Do not concur. The proposed paragraph makes it 
clear that, although compensation must conform to FAR 31.201-3, it must 
also conform to the more specific provisions contained in this cost 
principle. The Councils do not agree with the concept that the 
reasonableness of compensation should be based ``solely'' on the 
contractor's total compensation plan, without consideration of the 
reasonableness of the compensation for individual employees or job 
classes of employees. See paragraph 9 for further discussion.
    4. Comment: Delete proposed FAR 31.205-6(a)(5) (unallowable cost). 
The proposed language states: ``Costs that are unallowable under other 
paragraphs of this Subpart 31.2 are not allowable under this subsection 
31.205-6 solely on the basis that they constitute compensation for 
personal services.'' In lieu of the above statement, the respondent 
suggested adding the following language to FAR 31.204(c): ``Cost made 
specifically unallowable under one cost principle in this subpart are 
not allowable under any other cost principle.''
    Councils' response: Do not concur. Similar proposals for such a 
global policy statement were rejected in the past by both industry and 
the Government. The current language at FAR 31.204(c) was adopted 
instead, and the ``unallowable under other paragraphs'' statements in 
individual cost principles were retained. The Councils agree with the 
original drafters of the current FAR 31.205-6(a)(5) that this language 
is needed to avoid a situation in which activity that is specifically 
designated unallowable in another cost principle becomes allowable 
merely because it meets the criteria for allowable ``compensation.''
    5. Comment: Modify proposed FAR 31.205-6(a)(6)(i) (partners and 
sole proprietors). Reinstate the following portion of the current 
language included in FAR 31.205-6(b)(2)(i): ``Compensation in lieu of 
salary for services rendered by partners and sole proprietors will be 
allowed to the extent that it is reasonable and does not constitute a 
distribution of profits.'' This insertion would become 31.205-
6(a)(6)(i)(C). ``Without this re-instatement costs previously allowed 
could become unallowable since there are instances where these costs 
are not distribution of profits and the deductible amount is zero.''
    Councils' response: Partially concur. Historically, the tax 
deductibility limitation on allowable compensation in the cost 
principle is solely for closely held corporations. The Councils did not 
intend to change the allowability of costs in this area. However, the 
proposed rule inadvertently removed the qualifying phrase for ``closely 
held corporations.'' In addition, the editorial restructuring 
unintentionally changed the allowability of costs covered by this 
subsection. Accordingly, the Councils have revised FAR 31.205-6(a)(6) 
to clarify and rectify this situation.
    6. Comment: Remove phrase in proposed FAR 31.205-6(a)(6)(ii)(A) 
(distribution of profits). Remove the unnecessary phrase ``which is not 
an allowable cost.''

[[Page 43864]]

    Councils' response: Do not concur. The Councils' rationale for 
keeping this phrase is to affirm the unallowability of profit 
    7. Comment: Revise proposed FAR 31.205-6(b)(1) (labor-management 
agreements). Reposition the word ``negotiated'' and add the word 
``set'' to the first sentence.
    Councils' response: Do not concur. The Councils do not believe it 
improves the readability of this paragraph.
    8. Comment: Express rationale for deletion of current FAR 31.205-
6(c)(1) and (c)(2) (unusual conditions). ``To make clear the contractor 
still has the opportunity to justify cost and consideration of unusual 
conditions(,) include express reason for language deletion of original 
rule sections (c)(1) and (c)(2).''
    Councils' response: These paragraphs (c)(1) and (c)(2) were deleted 
because such guidance is not necessary in the cost principle.
    9. Comment: Revise proposed FAR 31.205-6(b)(2) (total 
compensation). Revise FAR 31.205-6(b)(2) to reflect the concept that 
reasonableness of compensation should be reviewed at the total 
compensation plan(s) level and not at an individual employee or job 
class level.
    Councils' response: Do not concur. Contractors should be able to 
determine their own mix of wages, bonuses, and benefits to fit the 
needs of their business and workforce. The Councils believe that 
compensation should be reviewed for reasonableness in total by employee 
or job class of employee and that ``offsets'' are implied in this 
concept. It should be noted that the concept of ``review of total 
compensation reasonableness'' does not waive the Government's right to 
review individual compensation elements in order to determine total 
reasonableness. It is impossible to determine the reasonableness of 
total compensation without reviewing individual compensation elements 
because reliable surveys of ``total compensation'' do not exist.
    10. Comment: Revise proposed FAR 31.205-6(b)(2) (ACO 
consideration). Eliminate ACO consideration of the listed 
reasonableness factors and rely only on FAR 31.201-3 for determining 
reasonableness since rule enforcement should not vary according to 
individual ACO determination of relevancy. This list could cause 
misapplication, e.g., have to consider all four factors in each 
instance. Restore original language related to proposed FAR 31.205-
6(b)(2)(iv), if factors remain. New language is confusing, difficult to 
understand, and may lead to negative impacts.
    Councils' response: Do not concur. In determining the 
reasonableness of compensation costs, both the criteria in FAR 31.201-3 
and the criteria in FAR 31.205-6(b) should be used. The concept of 
listing various factors to be considered by the ACO has been in the 
cost principle for many years. The relevancy determination is an 
important and proper ACO function. The cost principle should continue 
to include coverage on the factors to be used in determining 
reasonableness, as well as the authority of the contracting officer to 
determine how to weigh such factors. We believe the proposed language 
is very straightforward and easy to understand.
    11. Comment: Change language in proposed FAR 31.205-6(c)(2)(i) 
(valuation date). Suggest adding the phrase ``to the employee'' at FAR 
31.205-6(c)(2)(i) to make clear that the award date is the date that 
compensation (in the form of securities) is awarded to the employee.
    Councils' response: Do not concur. The proposed rule is basically 
the same language as in the current FAR. We merely deleted the term 
``measurement date'' since the definition already included in the cost 
principle, i.e., ``first date the number of shares awarded is known,'' 
is more precise. The proper measurement date is upon the award of the 
stock; however, this award may be to an employee or to another entity, 
such as a trust. The respondent's recommended change would radically 
alter the current valuation methodology.
    12. Comment: Delete proposed FAR 31.205-6(6)(d) (Income tax 
differential pay). Affirmative statements of allowability, such as that 
included in FAR 31.205-6(d)(1) for foreign differential pay, should not 
be included in the cost principles. In addition, the provision at FAR 
31.205-6(d)(2) making domestic differential pay unallowable is not 
consistent with commercial practices or the allowability of foreign 
differential pay.
    Councils' response: Do not concur. The Councils revised this 
paragraph to apply only to the allowability of differential pay to 
cover income tax increases due to foreign or domestic assignments. 
Normally, affirmative statements of allowability are not value-added in 
a cost principle. However, in this case, coverage making foreign income 
tax differentials explicitly allowable should remain. If there were no 
coverage on foreign differentials, reviewers might use FAR 31.204(c) to 
find the closest cost principle (domestic differentials) and improperly 
disallow the costs of foreign differentials. The Councils continue to 
believe domestic income tax differentials should be unallowable and do 
not agree with the respondent's argument that the treatment of domestic 
differentials has to be consistent with the treatment of foreign 
differentials. We continue to believe that there should be an incentive 
for employees to accept foreign assignments.
    13. Comment: Delete proposed FAR 31.205-6(e) (Bonuses and incentive 
compensation). Specific limitations on bonuses and incentives are not 
necessary because these situations are covered by the general 
reasonableness provisions of FAR 31.201-3(b)(2), generally accepted 
sound business practices, and the executive compensation cap at FAR 
31.205-6(p). ``Streamlining should have the goal of defining what is 
unallowable; illustration of what is allowable makes regulation 
excessively detailed and cannot be comprehensive.'' There is no need to 
state in the proposed FAR 31.205-6(e)(1)(ii) that the basis of the 
award must be supported, since adequate documentation is required for 
all costs. In addition, the proposed paragraph (e)(2) at FAR 31.205-6 
regarding deferred bonus and incentive compensation payment is not 
    Councils' response. Do not concur. We have deleted those parts 
(e.g., the listing of various types of incentive compensation) that the 
Councils view as unnecessary. It is important for the cost principle to 
continue to explicitly require that ``the basis for the award is 
supported'' in order for the cost to be allowable. This requirement for 
documenting the basis for the payment is separate and distinct from 
documenting that the payment was made. In addition, the proposed 
language at FAR 31.205-6(e)(2) is necessary to ensure deferred bonus 
payments are subject to both the incentive compensation and the 
deferred compensation allowability criteria.
    However, this final rule is deleting the qualifying phrase ``based 
on production, cost reduction, or efficient performance'' which is 
current in the proposed rule at 31.205-6(e)(1). Although we generally 
agree that such criteria may be good standards for determining 
allowability, we do not believe that the current rule or proposed rule 
actually accomplishes this. The wording of the current cost principle 
or proposed rule may be read as not covering an incentive payment if it 
doesn't fall within one of these three criteria, although this is 
clearly not the intent.

[[Page 43865]]

    14. Comment: Delete proposed FAR 31.205-6(f) except for legislative 
coverage at (f)(5) (Severance pay). The deleted portion is adequately 
covered by the reasonableness criteria at FAR 31.201-3.
    Councils' response: Do not concur. This paragraph makes it clear 
that, although severance pay must conform to the general reasonableness 
criteria of FAR 31.201-3, it must also conform to the more specific 
provisions contained in this cost principle.
    15. Comment: Deletion of ``designee'' in FAR 31.205-6(f)(5). To 
avoid confusion, suggest that the express reason for deleting the term 
``designee'' in the waiver provision of the proposed FAR 31.205-6(f)(5) 
be explained.
    Councils' response: The term ``or designee'' is unnecessary because 
paragraph (b) under FAR 1.108, FAR conventions, states that ``each 
authority is delegable unless specifically stated otherwise (see 1.102-
3(b)).'' Accordingly, the term has been deleted from the final rule at 
FAR 31.205-6(g)(6), FAR 37.113-1(a), and FAR 37.113-2(b). To avoid any 
possible ambiguity in the clauses, ``head of the agency, or designee,'' 
was changed to ``agency'' at FAR provision 52.237-8(a) and (b).
    16. Comment: Modify proposed FAR 31.205-6(g) (Backpay). Replace the 
language at FAR 31.205-6(g) with the following sentence: ``Backpay 
resulting from violations of Federal labor laws or the Civil Rights Act 
of 1964 other than that for work performed is unallowable.'' Under the 
current rule, the ``backpay'' provisions do not apply unless and until 
there is a violation of Federal labor laws or the 1964 Civil Rights 
Act. Until such a violation is found by a court, compensation costs are 
not covered by these backpay provisions and they are allowable to the 
extent they are reasonable as defined by the general reasonableness 
provisions at FAR 31.201-3 and not limited by additional compensation 
for work performed. This proposed change could be construed to expand 
the definition of backpay to now cover retroactive adjustment to 
salaries or wages for those instances in which there has been no 
finding of a violation of the 1964 Civil Rights Act or other Federal 
labor laws and limits recovery to the additional compensation for work 
    Contractors are currently being reimbursed for prudent decisions to 
save litigation expense by settling wrongful discharge cases for 
nominal amounts. It is in the Government's interest to continue to 
incentivize contractors to make prudent decisions. If the Government 
begins disallowing all settlements as unallowable ``backpay,'' 
contractors may be incentivized to spend more allowable money 
litigating instead of settling.
    Councils' response. Do not concur. The Councils rewrote this 
paragraph to improve its clarity without changing its meaning. Our 
intent was to emphasize that backpay for underpaid work is the only 
allowable retroactive adjustment, subject to the specific criteria 
listed in this paragraph. The current language might be improperly 
interpreted to mean that if a survey shows an employee is underpaid in 
a particular year, the contractor could make that underpayment up in a 
future year. Accordingly, we revised the language of the regulation to 
preclude such an interpretation.
    Backpay for underpaid work that does not fall under the current FAR 
31.205-6(h) criteria is unallowable, and the proposed FAR 31.205-6(g) 
language would not change that fact. The respondent's argument that all 
settlements would become unallowable is not correct. That part of the 
settlement that represents backpay for work actually performed is 
    17. Comment: Eliminate FAR 31.205-6(m) (Fringe benefits). Paragraph 
(m)(1) is covered by the general reasonableness provisions at FAR 
31.201-3, and definitions and examples of allowable cost are not 
needed, only identification of unallowable cost. ``List[s] of 
compensation elements have been eliminated throughout and should be 
eliminated here as well.'' Paragraph (m)(2), which covers the personal 
use of company furnished automobiles, should be eliminated unless 
    Councils' response. Do not concur. This paragraph needs to be 
retained as it includes needed criteria for allowability and not just 
general reasonableness criteria. The language on company furnished 
automobiles is required by 10 U.S.C. 2324(f)(1)(o).
    18. Comment: Eliminate FAR 31.206-6(n) (Employee rebate and 
purchase discount plans). In an effort to move toward commercial 
practice, suggest the elimination of 31.205-6(n) ``on the basis of 
immateriality and not cost efficient accounting.'' Also, employee 
rebates and purchase discounts are sales reductions and not 
compensation cost.
    Councils' response. Do not concur. Employee rebates and discounts 
should be considered as a sales reduction; however, Generally Accepted 
Accounting Principles do allow such costs to be treated as compensation 
in some limited cases. Therefore, we retained this provision to prevent 
such sales reductions from being claimed as compensation costs.
    19. Additional change: Reinstate and revise FAR 31.205-6(g)(2)(ii). 
This paragraph was deleted in the proposed rule because it was thought 
to be covered under FAR 31.201-4, Determining allocability. However, 
upon further analysis, the Councils have reinstated FAR 31.205-
6(g)(2)(ii) (as FAR 31.205-6(g)(4) in the final rule) because the 
language exceeds the requirement stated in FAR 31.201-4 by expressly 
identifying what method equates to a proper allocation. The specific 
identification of what constitutes an allocable allocation of normal 
severance pay has worked and will continue to work to reduce disputes. 
The paragraph has been revised, however, to enhance its clarity.
    This is not a significant regulatory action and, therefore, was not 
subject to review under section 6(b) of Executive Order 12866, 
Regulatory Planning and Review, dated September 30, 1993. This rule is 
not a major rule under 5 U.S.C. 804.

B. Regulatory Flexibility Act

    The Department of Defense, the General Services Administration, and 
the National Aeronautics and Space Administration certify that this 
final rule will not have a significant economic impact on a substantial 
number of small entities within the meaning of the Regulatory 
Flexibility Act, 5 U.S.C. 601, et seq., because most contracts awarded 
to small entities use simplified acquisition procedures or are awarded 
on a competitive, fixed-price basis, and do not require application of 
the cost principle discussed in this rule.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the changes to 
the FAR do not impose information collection requirements that require 
the approval of the Office of Management and Budget under 44 U.S.C. 
3501, et seq.

List of Subjects in 48 CFR Parts 22, 31, 37, and 52

    Government procurement.

    Dated: July 16, 2003.
Laura Auletta,
Director, Acquisition Policy Division.

Therefore, DoD, GSA, and NASA amend 48 CFR parts 22, 31, 37, and 52 as 
set forth below:
1. The authority citation for 48 CFR parts 22, 31, 37, 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).

[[Page 43866]]


22.101-2  [Amended]

2. Amend section 22.101-2 in the last sentence of paragraph (a) by 
removing ``31.205-6(c)'' and adding ``31.205-6(b)'' in its place.


3. Amend section 31.001 by adding, in alphabetical order, the 
definition ``Compensation for personal services'' to read as follows:

31.001  Definitions.

* * * * *
    Compensation for personal services means all remuneration paid 
currently or accrued, in whatever form and whether paid immediately or 
deferred, for services rendered by employees to the contractor.
* * * * *

4. Amend section 31.205-6 by--
a. Revising paragraphs (a) through (h);
b. Removing the word ``subdivisions'' from the last sentence of the 
introductory text of paragraph (j)(7) and adding ``paragraphs'' in its 
place; and removing the word ``subdivision'' from paragraph (j)(8)(iii) 
and adding ``paragraph'' in its place;
c. Removing the word ``section'' from the introductory text of 
paragraph (o)(2) and adding ``subsection'' in its place; and removing 
the word ``subdivision'' from the first sentence of paragraph (o)(5) 
and adding ``paragraph'' in its place; and
    d. Removing the colon from the end of the introductory text of 
paragraph (p)(2) and adding ``--'' in its place.
    The revised text reads as follows:

31.205-6  Compensation for personal services.

    (a) General. Compensation for personal services is allowable 
subject to the following general criteria and additional requirements 
contained in other parts of this cost principle:
    (1) Compensation for personal services must be for work performed 
by the employee in the current year and must not represent a 
retroactive adjustment of prior years' salaries or wages (but see 
paragraphs (g), (h), (j), (k), (m), and (o) of this subsection).
    (2) The total compensation for individual employees or job classes 
of employees must be reasonable for the work performed; however, 
specific restrictions on individual compensation elements apply when 
    (3) The compensation must be based upon and conform to the terms 
and conditions of the contractor's established compensation plan or 
practice followed so consistently as to imply, in effect, an agreement 
to make the payment.
    (4) No presumption of allowability will exist where the contractor 
introduces major revisions of existing compensation plans or new plans 
and the contractor has not provided the cognizant ACO, either before 
implementation or within a reasonable period after it, an opportunity 
to review the allowability of the changes.
    (5) Costs that are unallowable under other paragraphs of this 
Subpart 31.2 are not allowable under this subsection 31.205-6 solely on 
the basis that they constitute compensation for personal services.
    (6)(i) Compensation costs for certain individuals give rise to the 
need for special consideration. Such individuals include:
    (A) Owners of closely held corporations, members of limited 
liability companies, partners, sole proprietors, or members of their 
immediate families; and
    (B) Persons who are contractually committed to acquire a 
substantial financial interest in the contractor's enterprise.
    (ii) For these individuals, compensation must--
    (A) Be reasonable for the personal services rendered; and
    (B) Not be a distribution of profits (which is not an allowable 
contract cost).
    (iii) For owners of closely held companies, compensation in excess 
of the costs that are deductible as compensation under the Internal 
Revenue Code (26 U.S.C.) and regulations under it is unallowable.
    (b) Reasonableness--(1) Compensation pursuant to labor-management 
agreements. If costs of compensation established under ``arm's length'' 
labor-management agreements negotiated under the terms of the Federal 
Labor Relations Act or similar state statutes are otherwise allowable, 
the costs are reasonable unless, as applied to work in performing 
Government contracts, the costs are unwarranted by the character and 
circumstances of the work or discriminatory against the Government. The 
application of the provisions of a labor-management agreement designed 
to apply to a given set of circumstances and conditions of employment 
(e.g., work involving extremely hazardous activities or work not 
requiring recurrent use of overtime) is unwarranted when applied to a 
Government contract involving significantly different circumstances and 
conditions of employment (e.g., work involving less hazardous 
activities or work continually requiring use of overtime). It is 
discriminatory against the Government if it results in employee 
compensation (in whatever form or name) in excess of that being paid 
for similar non-Government work under comparable circumstances.
    (2) Compensation not covered by labor-management agreements. 
Compensation for each employee or job class of employees must be 
reasonable for the work performed. Compensation is reasonable if the 
aggregate of each measurable and allowable element sums to a reasonable 
total. In determining the reasonableness of total compensation, 
consider only allowable individual elements of compensation. In 
addition to the provisions of 31.201-3, in testing the reasonableness 
of compensation for particular employees or job classes of employees, 
consider factors determined to be relevant by the contracting officer. 
Factors that may be relevant include, but are not limited to, 
conformity with compensation practices of other firms--
    (i) Of the same size;
    (ii) In the same industry;
    (iii) In the same geographic area; and
    (iv) Engaged in similar non-Government work under comparable 
    (c) [Reserved]
    (d) Form of payment. (1) Compensation for personal services 
includes compensation paid or to be paid in the future to employees in 
the form of--
    (i) Cash;
    (ii) Corporate securities, such as stocks, bonds, and other 
financial instruments (see paragraph (d)(2) of this subsection 
regarding valuation); or
    (iii) Other assets, products, or services.
    (2) When compensation is paid with securities of the contractor or 
of an affiliate, the following additional restrictions apply:
    (i) Valuation placed on the securities is the fair market value on 
the first date the number of shares awarded is known, determined upon 
the most objective basis available.
    (ii) Accruals for the cost of securities before issuing the 
securities to the employees are subject to adjustment according to the 
possibilities that the employees will not receive the securities and 
that their interest in the accruals will be forfeited.
    (e) Income tax differential pay. (1) Differential allowances for 
additional income taxes resulting from foreign assignments are 

[[Page 43867]]

    (2) Differential allowances for additional income taxes resulting 
from domestic assignments are unallowable. (However, payments for 
increased employee income or Federal Insurance Contributions Act taxes 
incident to allowable reimbursed relocation costs are allowable under 
    (f) Bonuses and incentive compensation. (1) Bonuses and incentive 
compensation are allowable provided the--
    (i) Awards are paid or accrued under an agreement entered into in 
good faith between the contractor and the employees before the services 
are rendered or pursuant to an established plan or policy followed by 
the contractor so consistently as to imply, in effect, an agreement to 
make such payment; and
    (ii) Basis for the award is supported.
    (2) When the bonus and incentive compensation payments are 
deferred, the costs are subject to the requirements of paragraphs 
(f)(1) and (k) of this subsection.
    (g) Severance pay. (1) Severance pay is a payment in addition to 
regular salaries and wages by contractors to workers whose employment 
is being involuntarily terminated. Payments for early retirement 
incentive plans are covered in paragraph (j)(7) of this subsection.
    (2) Severance pay is allowable only to the extent that, in each 
case, it is required by--
    (i) Law;
    (ii) Employer-employee agreement;
    (iii) Established policy that constitutes, in effect, an implied 
agreement on the contractor's part; or
    (iv) Circumstances of the particular employment.
    (3) Payments made in the event of employment with a replacement 
contractor where continuity of employment with credit for prior length 
of service is preserved under substantially equal conditions of 
employment, or continued employment by the contractor at another 
facility, subsidiary, affiliate, or parent company of the contractor 
are not severance pay and are unallowable.
    (4) Actual normal turnover severance payments shall be allocated to 
all work performed in the contractor's plant. However, if the 
contractor uses the accrual method to account for normal turnover 
severance payments, that method will be acceptable if the amount of the 
accrual is--
    (i) Reasonable in light of payments actually made for normal 
severances over a representative past period; and
    (ii) Allocated to all work performed in the contractor's plant.
    (5) Abnormal or mass severance pay is of such a conjectural nature 
that accruals for this purpose are not allowable. However, the 
Government recognizes its obligation to participate, to the extent of 
its fair share, in any specific payment. Thus, the Government will 
consider allowability on a case-by-case basis.
    (6) Under 10 U.S.C. 2324(e)(1)(M) and 41 U.S.C. 256(e)(1)(M), the 
costs of severance payments to foreign nationals employed under a 
service contract performed outside the United States are unallowable to 
the extent that such payments exceed amounts typically paid to 
employees providing similar services in the same industry in the United 
States. Further, under 10 U.S.C. 2324(e)(1)(N) and 41 U.S.C. 
256(e)(1)(N), all such costs of severance payments that are otherwise 
allowable are unallowable if the termination of employment of the 
foreign national is the result of the closing of, or the curtailment of 
activities at, a United States facility in that country at the request 
of the government of that country; this does not apply if the closing 
of a facility or curtailment of activities is made pursuant to a 
status-of-forces or other country-to-country agreement entered into 
with the government of that country before November 29, 1989. 10 U.S.C. 
2324(e)(3) and 41 U.S.C. 256(e)(2) permit the head of the agency to 
waive these cost allowability limitations under certain circumstances 
(see 37.113 and the solicitation provision at 52.237-8).
    (h) Backpay. Backpay is a retroactive adjustment of prior years' 
salaries or wages. Backpay is unallowable except as follows:
    (1) Payments to employees resulting from underpaid work actually 
performed are allowable, if required by a negotiated settlement, order, 
or court decree.
    (2) Payments to union employees for the difference in their past 
and current wage rates for working without a contract or labor 
agreement during labor management negotiation are allowable.
    (3) Payments to nonunion employees based upon results of union 
agreement negotiation are allowable only if--
    (i) A formal agreement or understanding exists between management 
and the employees concerning these payments; or
    (ii) An established policy or practice exists and is followed by 
the contractor so consistently as to imply, in effect, an agreement to 
make such payments.


5. Amend section 37.113-1 by revising the introductory text of 
paragraph (a) to read as follows:

37.113-1  Waiver of cost allowability limitations.

    (a) The head of the agency may waive the 31.205-6(g)(6) cost 
allowability limitations on severance payments to foreign nationals for 
contracts that--
* * * * *

37.113-2  [Amended]

6. Amend section 37.113-2 in paragraph (b) by removing ``, or 


7. Amend section 52.237-8 by revising the date of the provision, 
paragraph (a) and the introductory text of paragraph (b) of the 
provision to read as follows:

52.237-8  Restriction on Severance Payments to Foreign Nationals.

* * * * *

Restriction on Severance Payments to Foreign Nationals (Aug 2003)

    (a) The Federal Acquisition Regulation (FAR), at 31.205-6(g)(6), 
limits the cost allowability of severance payments to foreign 
nationals employed under a service contract performed outside the 
United States unless the agency grants a waiver pursuant to FAR 
37.113-1 before contract award.
    (b) In making the determination concerning the granting of a 
waiver, the agency will determine that--

52.237-9  [Amended]

8. Amend section 52.237-9 by revising the date of the clause to read 
``(Aug 2003); and by removing from paragraph (a) of the clause 
``31.205-6(g)(3)'' and adding ``31.205-6(g)(6) in its place.

[FR Doc. 03-18536 Filed 7-23-03; 8:45 am]