[Federal Register: April 5, 2004 (Volume 69, Number 65)]
[Rules and Regulations]
[Page 17764-17768]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05ap04-13]
[[Page 17764]]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 2 and 31
[FAC 2001-22; FAR Case 2001-034; Item II]
RIN 9000-AJ60
Federal Acquisition Regulation; General Provisions of the Cost
Principles
AGENCIES: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Final rule.
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SUMMARY: The Civilian Agency Acquisition Council and the Defense
Acquisition Regulations Council (Councils) have agreed on a final rule
amending the Federal Acquisition Regulation (FAR) to revise certain
general provisions of the cost principles pertaining to Composition of
total cost; Determining allowability; Direct costs; and Indirect costs.
The rule revises the cost principles by improving clarity and
structure, and removing unnecessary and duplicative language. The
revisions are intended to revise Contract Cost Principles and
Procedures in light of the evolution of Generally Accepted Accounting
Principles (GAAP), the advent of Acquisition Reform, and experience
gained from implementation of FAR Contract Cost Principles and
Procedures. The final rule also adds the definition of ``direct cost''
and revises the definition of ``indirect cost'' to be consistent with
the terminology used in the cost accounting standards (CAS).
DATES: Effective Date: May 5, 2004.
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. Edward Loeb, Policy Advisor, at
(202) 501-0650. Please cite FAC 2001-22, FAR case 2001-034.
SUPPLEMENTARY INFORMATION:
A. Background
DoD, GSA, and NASA published a proposed rule in the Federal
Register at 68 FR 5774, February 4, 2003, with request for comments.
Four respondents submitted comments; a discussion of the comments is
provided below. The Councils considered all comments and concluded that
the proposed rule should be converted to a final rule, with changes to
the proposed rule. Differences between the proposed rule and final rule
are discussed in paragraphs 4, 5, 6, 7, and 8 below.
Public Comments
FAR 2.101--Definition of ``Indirect Cost''--Reference to CAS
1. Comment: A respondent recommends that if the FAR is going to
include CAS definitions, these definitions should be referenced rather
than restated to eliminate redundancy and any inadvertent differences
of interpretation when CAS is not directly quoted.
Councils' Response: Nonconcur. The Councils believe it is better to
include the definitions in the FAR rather than include a reference to
another regulation to which a user may not have easy access. This is
particularly important in this instance, since the term ``indirect
cost'' is used in various parts of the FAR.
FAR 31 Cost Principles--Incorporating CAS Provisions
2. Comment: A respondent recommends that FAR 31 make CAS standards
applicable to FAR contracts, and then exclude certain standards and/or
certain classes of contracts from FAR Part 31 application.
Councils' Response: Nonconcur. The Councils believe it is not
desirable to incorporate all of the CAS standards and then exclude
certain ones. The Councils believe the current approach in FAR Part 31
that adopts certain standards in specific sections of the FAR provides
easier application than the suggested revision.
3. Comment: A respondent asserts that the proposed rule
incorporates substantial CAS provisions into the FAR cost principles.
The respondent states that, by law, the CAS Board governs the
measurement, assignment, and allocation of cost to cost objectives, and
that FAR cost principles should be limited to matters of allowability.
The respondent further states that if the FAR includes CAS concepts,
the inclusion should be done using direct quotes or references.
Councils' Response: Nonconcur. The Councils considered this
proposal but believe that eliminating all CAS from FAR would create
significant problems.
It is the responsibility of the Councils, not the CAS Board, to
promulgate rules for the measurement, assignment, and allocation of
costs for non-CAS covered contracts. The CAS Board does not have
jurisdiction over non-CAS covered contracts. For some costs,
particularly deferred compensation including pension costs (CAS 412,
413, and 415), cost of money (CAS 414/417), and self-insurance (CAS
416), the Councils have chosen to use the same requirements for non-CAS
covered contracts as the CAS Board has chosen to use for CAS-covered
contracts. Furthermore, the Councils have chosen to use some of the
same definitions and concepts as used in CAS, including the definitions
of direct and indirect costs. To eliminate all CAS from the FAR would
require removal of these key FAR Part 31 provisions.
As for the incorporation of the CAS provisions into the FAR, the
respondent did not specify any particular language that it believes has
been paraphrased. Nevertheless, the Councils reviewed the proposed rule
to see if any such paraphrasing existed, and found that the proposed
rule does not paraphrase any CAS requirements.
FAR 31.106-2 and 31.203--Special Allocations
4. Comment: A respondent recommends that the special allocation
language include an illustration similar to those that are included in
the CAS. The respondent notes that CAS 410.60(g) makes a point that
contract costs that are outside the contractor's normal productive
activity should be excluded from the G&A base. The respondent also
recommends that the language at 31.106-2(b)(3) be revised to read
``Exclude the related allocation base data for the facilities contract
from the base used to allocate the pool.''
Three other respondents recommend that FAR 31.106-2 be eliminated
in its entirety. One respondent asserts that this topic is adequately
addressed in CAS. If this suggestion is not adopted, the three
respondents recommend that the proposed language not be promulgated and
the existing language remain unchanged. Two respondents assert that the
proposed rule adds language prescribing the use of certain accounting
methods for special allocations for ``facilities contracts'' that will
lead to disagreements as to accounting decisions. This includes
requiring the contracting officer to enter into an advance agreement.
To correct this, they recommend replacing ``shall'' with ``may'' at
31.106-2(b).
Three respondents contend that the proposed rule ``flips'' the
responsibility of accounting decisions from the contractor to the
contracting officer by stating ``The Cognizant Federal Agency
[[Page 17765]]
is responsible for determining whether the conditions necessitating a
special allocation exist and negotiating the terms of an advance
agreement.'' Two respondents assert that this language takes the
accounting decisions out of the hands of contractors, which is clearly
against public policy. One respondent further asserts that it is the
contractor's responsibility to determine if the conditions
necessitating a special allocation exist. Another respondent asks what
is the remedy if a contractor does not agree to a special allocation.
One respondent recommends that the language be removed and replaced
with ``Negotiate an advance agreement with the cognizant Federal agency
in accordance with 31.109 criteria''.
Two respondents note that the proposed language at 31.106-2(d) and
(e) provides examples that are not all inclusive and could be
misleading. One respondent believes that this will give rise to
disputes because of differences in interpretation between the CAS and
the FAR. The other respondent believes the conceptual framework for
this language is already covered by 31.109 and thus it is not needed in
this paragraph.
Councils' Response: Concur in part. After reviewing the public
comments and the background underlying this revision, the Councils
believe it is preferable to not include the concept of special
allocations in FAR Part 31. The Councils believe the current language
is adequate and necessary to address this issue, since that language
provides the contracting parties with the necessary flexibility to
address those unique circumstances when a particular contract requires
special treatment. As a result, the Councils agreed that the proposed
rule for FAR 31.106-2 not be published (the only proposed change to
this provision was for the special allocation). The Councils also
agreed to delete the proposed language on special allocations at FAR
31.203(f), and retain the current language at FAR 31.203(f) (renumbered
as paragraph (h)).
FAR 31.201-1(a)--Standard Cost
5. Comment: Two respondents assert that the language at 31.201-1(a)
on ``standard cost'' is duplicated at the beginning and end of this
paragraph. They further assert that standard costs are fully defined
and dealt with in CAS 407, Use of Standard Costs for Direct Material
and Direct Labor, and there is no need to paraphrase CAS language or to
eliminate the reference to the CAS requirements.
Councils' Response: Concur in part. The Councils agree that the
phrase ``including standard costs properly adjusted for applicable
variances'' is repeated at the beginning and end of the paragraph at
FAR 31.201-1(a), and, therefore, they agreed to delete it from the end
of the paragraph. However, the Councils do not believe the paragraph
should completely delete the reference to standard costs. The reference
is intended to assure that standard costs are included as part of the
composition of total costs, provided they are properly adjusted to
reflect applicable variances. Without this language, the cost
principles could be misinterpreted as excluding standard costs from the
determination of total cost.
FAR 31.201-2(a)--Determining Allowability
6. Comment: Three respondents state that the proposed language
constitutes a major change in determining allowability because it
revises the language on determining allowability from ``factors to be
considered'' to ``A cost is allowable only when all of the following
requirements are met.'' Two respondents recommend that this language be
deleted.
Two respondents assert that the proposed language is overly
prescriptive, limits contracting officer discretion, and violates the
guiding principles at FAR 1.102. One respondent asserts that such
language does not ``encourage innovation, and local adaptation where
uniformity is not essential,'' nor does it provide ``the authority to
the maximum extent practicable and consistent with the law, to
determine the application of rules, regulations, and policies on a
specific contract.'' The respondent also believes this language is
contrary to FAR 1.102-4(e), which states ``If a policy or procedure, or
a particular strategy or practice, is in the best interest of the
Government and is not specifically addressed in the FAR, nor prohibited
by law (statutes or case law), Executive order or other regulation,
Government members of the Team should not assume it is prohibited.
Rather, absence of direction should be interpreted as permitting the
Team to innovate and use sound business judgment that is otherwise
consistent with the law and within the limits of their authority.
Contracting Officers should take the lead in encouraging business
process innovations and ensuring that business decisions are sound.''
One respondent asserts that the proposed language would allow
Government auditors to disregard CAS allocability requirements in
seeking to prove that the Government was charged costs that were deemed
unallocable on Government contracts. If this language is retained, the
respondent recommends that the allocability requirements in
subparagraphs (2) and (3) be deleted. The respondent also notes that
all five criteria are not necessarily present in all cases (such as
when there are no specific reimbursement requirements in the terms of
the contract) and thus the language is not appropriate.
Councils' Response: Nonconcur. The Councils believe the proposed
language is consistent with established case law, i.e., a cost must
meet all five factors to be allowable. In Celesco Industries (ASBCA
Case Number 22402, 80-1 BCA, 14721, dated 1/31/80), the court stated:
``Of course, appellant's methods of allocation of indirect costs are
required, pursuant to DAR 15-201.2, to be in accord with the
generally accepted accounting principles.'' (Emphasis added.)
In this case, the ASBCA clearly stated that application of
Generally Accepted Accounting Principles is required under the cost
principle (DAR 15-201.2 is the predecessor to the current 31.201-2 and
included the same language).
The argument that these are just ``considerations'' also fails when
viewed in light of the ``factors'' listed at FAR 31.201-2. Included in
this list are the Cost Accounting Standards (CAS) and the terms of the
contract. These are not items that can simply be ``considered'' but not
necessarily followed. The CAS, when applicable to a particular
contract, is a statutory requirement that cannot be disregarded at the
discretion of the contracting parties. In addition, the terms of the
contract cannot just be considered; they must be adhered to.
Furthermore, certain parts of FAR 31 implement statutory provisions
that preclude reimbursement of certain costs, and as such, cannot be
subjectively applied.
It is also evident that the promulgators have, for many years,
intended for these items to be requirements rather than just
considerations. In particular, DFARS 2.402 states that the Director for
Defense Procurement and Acquisition Policy is the approval authority
for any individual or class deviation to FAR subpart 31.2. If the
intention of 31.201-2 was to only consider the factors listed, the
provision at DFARS 2.402 would not be necessary. The contracting
officer would consider these factors (which includes the requirements
of FAR subpart 31.2), and apply them at his/her discretion. Such an
application would circumvent the requirement at DFARS 2.402. The
specific approval authority for deviations at DFARS 2.402 exists
because these are intended to be requirements, not just considerations.
[[Page 17766]]
As to FAR 1.102, this provision provides direction to the
contracting officer and other acquisition team members to use when the
regulations do not address a particular situation. It does not direct
that the regulations should not provide for specific allowability
criteria.
In those rare situations where a particular cost does not meet the
requirements of the five factors but is the type that the contracting
activity wants to allow, a deviation should be requested in accordance
with the FAR requirements.
As for the argument that the five requirements may not always be
present and therefore this provision is not appropriate, the Councils
disagree. However, the Councils review of this comment disclosed that
the proposed wording might have lead to some confusion. As a result,
the proposed language at 31.201-2(a) has been revised.
FAR 31.203--Indirect Costs
7. Comment: A respondent asserts that the proposed language
includes direct quotes from CAS 402, Consistency in Allocating Costs
Incurred for the Same Purpose, and other CAS language that should be
eliminated in the spirit of DFARS transformation. The respondent states
that a simple word count shows the word ``allocate'' in various forms
twenty times. The respondent also states that cost allocation is the
responsibility of the CAS Board, and sees no valid reason to replicate
CAS in FAR.
Councils' Response: Concur in part. The proposed language is
intended to apply to contractors that are not subject to the CAS
allocation standards, i.e., full CAS coverage. For contracts not
subject to full CAS-coverage, the Councils believe that some basic
requirements are needed for determining the allocation of indirect
costs to Government cost-based contracts; the absence of such
requirements would result in significant disagreements and potential
misallocations of costs to cost-based Government contracts.
Accordingly, to provide clarity, the Councils added paragraph (a) to
FAR 31.203.
FAR 31.203(b)--Final Cost Objectives
8. Comment: A respondent recommends that FAR 31.203(a) (renumbered
as paragraph (b)) be revised to add the words ``two or more'' before
``final cost objectives.''
Councils' Response: Concur. The Councils believe the revision will
provide for increased consistency with the definition of indirect costs
at 2.101.
FAR 31.203(d)--Revising FAR To Reflect Court Decisions
9. Comment: A respondent asserts that while the FAR revises the
language at 31.203(c) (renumbered as paragraph (d)) to reflect the
outcome in a recent court case where the Government position was
sustained, there is no FAR revision to reflect the outcome of another
court case on changes in cost accounting practice where the Government
position was not sustained. The respondent believes the Councils should
treat both situations alike and not attempt to sway contracting
officers in one direction or another by selectively adding the outcome
of certain court cases.
Councils' Response: Nonconcur. The language at 31.203(d) is not
being modified to reflect the outcome of any court case. This paragraph
revises the term ``distributing'' to ``allocating,'' to be consistent
with the terminology used throughout FAR Part 31. The Councils also
note that the respondent's referenced case on changes in cost
accounting practice does not address any FAR requirements, i.e., the
provisions at issue were solely in the CAS.
FAR 31.203(g)--Base Period for Allocating Indirect Costs
10. Comment: A respondent recommends that CAS 406, Cost Accounting
Period, be used in lieu of FAR 31.203(g). If FAR 31.203(g) is not
replaced by CAS 406, the respondent recommends that the language at FAR
31.203(g) replace the term ``base period'' with ``cost accounting
periods'', to be consistent with the language in CAS 406.
Councils' Response: Nonconcur. The Councils believe that the
detailed requirements in CAS 406 are not necessary for non-CAS covered
contracts. As for the ``base period,'' paragraph (g) defines the base
period as ``the cost accounting period during which * * * '' Since the
definition of a base period includes the cost accounting period, the
Councils do not believe it is necessary to change the term ``base
period'' to ``cost accounting period.''
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 (Pub. L. 104-13) does not apply because
the changes to the FAR do not impose information collection
requirements that require the approval of the Office of Management and
Budget under 44 U.S.C. 3501, et seq.
List of Subjects in 48 CFR Parts 2 and 31
Government procurement.
Dated: March 26, 2004.
Laura Auletta,
Director, Acquisition Policy Division.
0
Therefore, DoD, GSA, and NASA amend 48 CFR parts 2 and 31 as set forth
below:
0
1. The authority citation for 48 CFR parts 2 and 31 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
0
2. Amend section 2.101 in paragraph (b) by adding, in alphabetical
order, the definition ``Direct cost'' and by revising the definition
``Indirect cost'' to read as follows:
2.101 Definitions.
* * * * *
(b) * * *
* * * * *
Direct cost means any cost that is identified specifically with a
particular final cost objective. Direct costs are not limited to items
that are incorporated in the end product as material or labor. Costs
identified specifically with a contract are direct costs of that
contract. All costs identified specifically with other final cost
objectives of the contractor are direct costs of those cost objectives.
* * * * *
Indirect cost means any cost not directly identified with a single
final cost objective, but identified with two or more final cost
objectives or with at least one intermediate cost objective.
* * * * *
[[Page 17767]]
PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES
31.109 [Amended]
0
3. Amend section 31.109(h)(13) by removing ``31.203(f)'' and adding
``31.203(h)'' in its place.
31.201-1 [Amended]
0
4. Revise section 31.201-1 to read as follows:
31.201-1 Composition of total cost.
(a) The total cost, including standard costs properly adjusted for
applicable variances, of a contract is the sum of the direct and
indirect costs allocable to the contract, incurred or to be incurred,
plus any allocable cost of money pursuant to 31.205-10, less any
allocable credits. In ascertaining what constitutes a cost, any
generally accepted method of determining or estimating costs that is
equitable and is consistently applied may be used.
(b) While the total cost of a contract includes all costs properly
allocable to the contract, the allowable costs to the Government are
limited to those allocable costs which are allowable pursuant to Part
31 and applicable agency supplements.
0
5. Amend section 31.201-2 by revising paragraphs (a), (c), and (d) to
read as follows:
31.201-2 Determining allowability.
(a) A cost is allowable only when the cost complies with all of the
following requirements:
(1) Reasonableness.
(2) Allocability.
(3) Standards promulgated by the CAS Board, if applicable,
otherwise, generally accepted accounting principles and practices
appropriate to the circumstances.
(4) Terms of the contract.
(5) Any limitations set forth in this subpart.
* * * * *
(c) When contractor accounting practices are inconsistent with this
subpart 31.2, costs resulting from such inconsistent practices in
excess of the amount that would have resulted from using practices
consistent with this subpart are unallowable.
(d) A contractor is responsible for accounting for costs
appropriately and for maintaining records, including supporting
documentation, adequate to demonstrate that costs claimed have been
incurred, are allocable to the contract, and comply with applicable
cost principles in this subpart and agency supplements. The contracting
officer may disallow all or part of a claimed cost that is inadequately
supported.
0
6. Revise section 31.202 to read as follows:
31.202 Direct costs.
(a) No final cost objective shall have allocated to it as a direct
cost any cost, if other costs incurred for the same purpose in like
circumstances have been included in any indirect cost pool to be
allocated to that or any other final cost objective. Direct costs of
the contract shall be charged directly to the contract. All costs
specifically identified with other final cost objectives of the
contractor are direct costs of those cost objectives and are not to be
charged to the contract directly or indirectly.
(b) For reasons of practicality, the contractor may treat any
direct cost of a minor dollar amount as an indirect cost if the
accounting treatment--
(1) Is consistently applied to all final cost objectives; and
(2) Produces substantially the same results as treating the cost as
a direct cost.
0
7. Revise section 31.203 to read as follows:
31.203 Indirect costs.
(a) For contracts subject to full CAS coverage, allocation of
indirect costs shall be based on the applicable provisions. For all
other contracts, the applicable CAS provisions in paragraphs (b)
through (h) of this section apply.
(b) After direct costs have been determined and charged directly to
the contract or other work, indirect costs are those remaining to be
allocated to intermediate or two or more final cost objectives. No
final cost objective shall have allocated to it as an indirect cost any
cost, if other costs incurred for the same purpose, in like
circumstances, have been included as a direct cost of that or any other
final cost objective.
(c) The contractor shall accumulate indirect costs by logical cost
groupings with due consideration of the reasons for incurring such
costs. The contractor shall determine each grouping so as to permit use
of an allocation base that is common to all cost objectives to which
the grouping is to be allocated. The base selected shall allocate the
grouping on the basis of the benefits accruing to intermediate and
final cost objectives. When substantially the same results can be
achieved through less precise methods, the number and composition of
cost groupings should be governed by practical considerations and
should not unduly complicate the allocation.
(d) Once an appropriate base for allocating indirect costs has been
accepted, the contractor shall not fragment the base by removing
individual elements. All items properly includable in an indirect cost
base shall bear a pro rata share of indirect costs irrespective of
their acceptance as Government contract costs. For example, when a cost
input base is used for the allocation of G&A costs, the contractor
shall include in the base all items that would properly be part of the
cost input base, whether allowable or unallowable, and these items
shall bear their pro rata share of G&A costs.
(e) The method of allocating indirect costs may require revision
when there is a significant change in the nature of the business, the
extent of subcontracting, fixed-asset improvement programs,
inventories, the volume of sales and production, manufacturing
processes, the contractor's products, or other relevant circumstances.
(f) Separate cost groupings for costs allocable to offsite
locations may be necessary to permit equitable distribution of costs on
the basis of the benefits accruing to the several cost objectives.
(g) A base period for allocating indirect costs is the cost
accounting period during which such costs are incurred and accumulated
for allocation to work performed in that period.
(1) For contracts subject to full or modified CAS coverage, the
contractor shall follow the criteria and guidance in 48 CFR 9904.406
for selecting the cost accounting periods to be used in allocating
indirect costs.
(2) For contracts other than those subject to paragraph (g)(1) of
this section, the base period for allocating indirect costs shall be
the contractor's fiscal year used for financial reporting purposes in
accordance with generally accepted accounting principles. The fiscal
year will normally be 12 months, but a different period may be
appropriate (e.g., when a change in fiscal year occurs due to a
business combination or other circumstances).
(h) Special care should be exercised in applying the principles of
paragraphs (c), (d), and (e) of this section when Government-owned
contractor-operated (GOCO) plants are involved. The distribution of
corporate, division or branch office G&A expenses to such plants
operating with little or no dependence on corporate administrative
activities may require more precise cost groupings, detailed accounts
screening, and carefully developed distribution bases.
31.205-42 [Amended]
0
8. Amend section 31.205-42 in the second sentence of paragraph (h) by
[[Page 17768]]
removing ``31.203(c)'' and adding ``31.203(d)'' in its place.
[FR Doc. 04-7406 Filed 4-2-04; 8:45 am]