[Federal Register: December 20, 2004 (Volume 69, Number 243)]
[Rules and Regulations]               
[Page 76356-76358]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]





48 CFR Part 42

[FAC 2001-26; FAR Case 2001-018; Item VI]
RIN 9000-AJ77

Federal Acquisition Regulation; Applicability of the Cost 
Principles and Penalties for Unallowable Costs

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) by increasing the 
contract dollar threshold for assessing a penalty if the contractor 
includes expressly unallowable costs in its claim for reimbursement.

DATES: Effective Date: January 19, 2005.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat at (202) 501-4755 
for information pertaining to status or publication schedules. For 
clarification of content, contact Mr. Richard C. Loeb at (202) 208-
3810. Please cite FAC 2001-26, FAR case 2001-018.


A. Background

    DoD, GSA, and NASA published a proposed rule in the Federal 
Register at 68 FR 66988 on November 28, 2003, with request for 
comments. The Councils proposed to amend the FAR to: (1) remove the 
requirement to apply the cost principles and procedures at FAR Part 31 
when pricing a contract if cost or pricing data are not obtained; (2) 
add a definition to FAR Part 31 for fixed-price contracts, 
subcontracts, and modifications; and (3) increase the contract dollar 
threshold for assessing a penalty if the contractor includes expressly 
unallowable costs in its claim for reimbursement (FAR Part 42). Three 
respondents submitted comments on the proposed FAR rule; a discussion 
of the comments are provided below. The Councils considered all 
comments and decided not to adopt the proposed revisions to FAR Parts 
15 and 31, and to convert the proposed rule at FAR Part 42 to a final 
rule. Differences between

[[Page 76357]]

the proposed rule and final rule are discussed in comments 1, 2, and 3, 
    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.

Public Comments:

Applicability of FAR Part 31

    1. Comment: Two of the three respondents believe the change should 
not be made.
    The first respondent urged the withdrawal of the proposed rule and 
expressed the position that the need for the proposed change was not 
clearly and fully disclosed. The respondent strongly believes that the 
Government's prenegotiation objective for cost based fixed-price 
contracts should continue to be predicated on the consistent 
application of applicable FAR Part 31 cost principles. Whether a 
contractor's submitted cost data is ``certified'' or ``uncertified'' 
should not alter the basis for determining the Government's 
prenegotiation objective, or a determination on whether the negotiated 
fixed-price is fair and reasonable.
    The respondent noted that FAR Part 31 has more than just 
unallowable costs within it, e.g., allocability, consistency, direct 
vs. indirect, and accounting methods. The respondent also made the 
following points:
     If FAR Subpart 31.2 policies and procedures are not 
consistently applied to cost-based fixed-price contracts, what are the 
alternate policies, procedures and principles to be applied when 
performing a ``cost analysis'' of the ``uncertified'' information other 
than cost or pricing data?
     What fundamental constructs will the proposing contractor 
have to comply with?
     What will guide the cost analyst and/or auditor when 
performing the ``cost analysis'' of the contractor's uncertified data?
    After referencing the Councils' stated goal ``...to reduce 
Government unique regulations when the risk to the Government is low,'' 
the respondent opined:
    When negotiating fixed-price contracts based on a prenegotiation 
objective that was predicated on a ``cost analysis'' of contractor 
submitted information other than cost or pricing cost data, the 
respondent believes that the risk to the Government is higher, not 
lower, than if ``certified'' cost or pricing data had been obtained. 
Without certified data, there is less assurance that contractor 
submitted data are current, complete and accurate.
    The respondent concluded that FAR Part 31 contract cost principles 
should continue to be applied to pricing contracts whenever cost data 
is submitted to support a contract price, regardless of whether the 
contract type is fixed-price.
    The second respondent believes that the Government's policy 
objective should be clarified, and that the mention of cost analysis is 
potentially confusing and unnecessary. The respondent characterized the 
phrasing of the proposed rule as terribly awkward (due to using the 
passive voice) and suggested alternative language.
    The third respondent was concerned that the proposed coverage at 
FAR 31.000 appears to restrict in some way the underlying Truth in 
Negotiations Act (TINA) mandate to obtain cost or pricing data in the 
first place (as to both negotiated contracts and negotiated 
    Councils' response: Concur that the proposed change should not be 
made. The Councils believe that the Government needs a consistent 
playing field when dealing with cost data whether ``certified'' or not. 
The Councils are also concerned that the proposed language could be 
construed as limiting the Government's use of FAR Part 31 for its 
prenegotiation positions. This would adversely affect any requests for 
audit support made by the contracting officer. The General Accepted 
Government Auditing Standards (GAGAS) under attestation standards AT 
101.23, ``Suitability of Criteria,'' require auditors to have 
objective, measurable, complete, and relevant criteria to apply during 
their work. The Councils believe that the guidance in FAR Part 31 meets 
these requirements, as General Accepted Accounting Principles (GAAP) 
alone does not go to the level necessary to support contract pricing. 
Therefore, the Councils have withdrawn the proposed revisions to FAR 
Parts 15 and 31.

Definition of fixed-price contracts

    2. Comment: Two respondents believe the proposed FAR 31.001 
definition of fixed-price contracts, subcontracts and modifications 
would lead to confusion in the area of Time-and-Material (T&M) type 
contracting actions.
    The first respondent stated that it strongly opposes the proposed 
``redefinition'' of fixed-price contracts to include the fixed hourly 
portion of a T&M and labor-hour (LH) contract, and that it flies in the 
face of law and common sense. The respondent cited GSBCA decision CACI, 
Inc.--Federal v. General Services Administration, dated December 13, 
2002, to support its position that T&M/LH contracts are not fixed-
price. The respondent believes that the Council's attempt to 
rationalize a portion a T&M/LH contract as ``fixed-price'' is a 
shameful capitulation to contractors interests, and an abrogation of 
the Council's duty to taxpayers.
    The second respondent was concerned the proposed definition may 
impact T&M orders placed under GSA's Multiple Award Schedule (MAS) 
contracts. The proposed definition would include the fixed hourly rate 
portion of the T&M and LH contracts and subcontracts in FAR Subpart 
16.6. The respondent believes this may suggest that time-and-material 
orders with a fixed labor hour component are fixed-price in nature for 
any contracting or FAR purpose. GSA mandates that all T&M orders placed 
under MAS contracts include the contract clause at FAR 52.232-7, 
Payments under Time-and-Materials and Labor-Hour Contracts. This clause 
provides contracting officers with an ability to require more 
substantiation of hours worked under a time-and-materials order. 
Because such task orders have fixed labor components, the respondent is 
concerned that contracting officers may--based on this proposed FAR 
change--consider such task orders to be fixed price and not invoke the 
controls attendant with this clause or other necessary safeguards to 
the use of such vehicles.
    Councils' response: Partially concur. The Councils believe there is 
a limited risk that contracting officers could be confused by the 
inclusion of the ``fixed rate portion'' of a T&M contracting action in 
the proposed definition. However, due to the Council's decision not to 
adopt the proposed revisions discussed at Comment 1, above, this 
definition is no longer required.

Dollar threshold for assessing penalties--FAR 42.709

    3. Comment: One respondent stated that it had no objection to the 
proposed change in the threshold from the current $500,000 to $550,000 
to adjust for inflation. The other two respondents did not address the 
proposed change.
    Councils' response: Concur. The Councils agree that the contract 
dollar threshold for assessing a penalty if the contractor includes 
expressly unallowable costs in its claim for reimbursement should be 
increased from $500,000 to $550,000, to adjust for inflation. This 
increase is authorized by 10 U.S.C. 2324(l) and 41 U.S.C. 256(1). 
Therefore, the dollar threshold amounts

[[Page 76358]]

in FAR 42.709(b) and FAR 42.709-6 are increased from $500,000 to 

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 principles discussed in this rule.

C. Paperwork Reduction Act

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

List of Subjects in 48 CFR Part 42

    Government procurement.

    Dated: December 9, 2004.
Laura Auletta,
Director, Contract Policy Division.

Therefore, DoD, GSA, and NASA amend 48 CFR part 42 as set forth below:


1. The authority citation for 48 CFR part 42 is revised to read as 

    Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42 
U.S.C. 2473(c).

42.709 and 42.709-6  [Amended]

2. Amend sections 42.709(b) and 42.709-6 by removing ``$500,000'' and 
adding ``$550,000'' in its place.
[FR Doc. 04-27638 Filed 12-17-04; 8:45 am]