[Federal Register: June 18, 2004 (Volume 69, Number 117)]
[Rules and Regulations]               
[Page 34242-34244]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]





48 CFR Part 31

[FAC 2001-24; FAR Case 2002-008; Item IX]
RIN 9000-AJ69

Federal Acquisition Regulation; Gains and Losses, Maintenance and 
Repair Costs, and Material 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 deleting the cost 
principle regarding maintenance and repair costs, and revising the cost 
principles regarding contingencies, material costs, and training and 
education costs. The rule revises the cost principles by improving 
clarity and structure, and removing unnecessary and duplicative 
language. The revisions are intended to amend the FAR regarding 
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 the 
FAR regarding contract cost principles and procedures.

DATES: Effective Date: July 19, 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 at (202) 501-0650. 
Please cite FAC 2001-24, FAR case 2002-008.


A. Background

    DoD, GSA, and NASA published a proposed rule in the Federal 
Register at 68 FR 40466, July 7, 2003, with request for comments. Three 
respondents submitted comments on the proposed FAR rule. A discussion 
of the comments related to FAR 31.205-24 and 31.205-26 are provided 
below. The Councils considered all comments and concluded that the 
proposed rule should be converted to a final rule, with minor changes 
to the proposed rule. Differences between the proposed rule and final 
rule are discussed in Section B, Comment 2, below.
    In addition to the above, the proposed FAR rule also included 
proposed revisions to FAR 31.205-16, Gains and losses on disposition or 
impairment of depreciable property or other capital assets. Due to 
significant changes made as a result of public comments received, the 
Councils have decided that the proposed revisions to the FAR 31.205-16 
cost principle will be published as a second proposed rule in a Federal 
Register notice under FAR case 2004-005.

B. Public Comments

FAR 31.205-24, Maintenance and Repair Costs

    1. Comment: The respondent agrees that the cost principle can be 
removed from the FAR.
    Councils' response: Concur.

[[Page 34243]]

FAR 31.205-26, Material Costs

    2. Comment: One respondent agreed with the deletion of the FAR 
31.205-26 wording as proposed because generally accepted accounting 
principles (GAAP) adequately cover the topic. A second respondent was 
concerned with the deletions in paragraphs (a) and (c) that deal with 
the allowability of material costs and the allowability of reasonable 
adjustments between book and physical inventory. The second respondent 
was concerned that the part of the FAR that delineates allowable versus 
unallowable cost would omit these statements of material cost 
allowability; the respondent believes these statements should be 
retained to avoid confusion and disputes.
    Councils' response: Partially concur. The Councils generally 
believe that affirmative statements of allowability are not value-added 
in a cost principle. For this reason, the Councils do not believe it is 
necessary to retain the last sentence in paragraph (a), which simply 
states that material costs are allowable subject to the requirements of 
paragraphs (b) through (e) of the cost principle. The Councils 
recognize that there are instances in which it is desirable to retain 
the coverage if users might apply another cost principle and improperly 
disallow a particular type of cost. However, the Councils do not 
believe this situation exists for FAR 31.205-26.
    The current paragraph (c) requires that adjustments for differences 
in physical and book inventories relate to the period of contract 
performance. The Councils had recommended deleting this provision and, 
thereby, relying upon GAAP. However, based on the public input, it 
appears there are significant concerns that reliance solely upon GAAP 
could result in potential disputes. The Councils, therefore, now 
believe that the language in paragraph (c) should be retained. The 
Councils recognize that this provision provides protection to both the 
contractor and the Government by specifically permitting reasonable 
adjustments for inventory differences while also requiring that such 
adjustments relate to the period of contract performance.
    3. Comment: A respondent noted that reference to FAR 31.205-26(e) 
in paragraph (k) of FAR 31.205-11, Depreciation, and in FAR 15.208, 
Submission, modification, revision, and withdrawal of proposals, needs 
to be revised to reflect the reordering and renumbering of the FAR 
31.205-26 cost principle.
    Councils' response: Since the Councils have reinstated paragraph 
(c), as noted in the response to Comment 1, above, the original 
paragraph numbering for paragraph (e) is retained and there is no need 
to revise FAR 31.205-11 or FAR 15.208. Notwithstanding, the Councils 
note that paragraph (k) of FAR 31.205-11 was deleted by FAC 2001-18, 
dated December 11, 2003.

C. Regulatory Planning and Review

    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.

D. 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 and procedures discussed in this rule. For fiscal 
year 2003, only 2.4 percent of all contract actions were cost contracts 
awarded to small businesses.

E. 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 31

    Government procurement.

    Dated: June 10, 2004.
Ralph J. De Stefano,
Acting Director, Acquisition Policy Division.

Therefore, DoD, GSA, and NASA amend 48 CFR part 31 as set forth below:


1. The authority citation for 48 CFR part 31 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).

2. In section 31.205-7, revise the last sentence in paragraph (c)(2) to 
read as follows:

31.205-7  Contingencies.

* * * * *
    (c) * * *
    (2) * * * (See, for example, 31.205-6(g) and 31.205-19.)

31.205-24  [Removed and Reserved]

3. Remove and reserve section 31.205-24.
4. Revise section 31.205-26 to read as follows:

31.205-26  Material costs.

    (a) Material costs include the costs of such items as raw 
materials, parts, subassemblies, components, and manufacturing 
supplies, whether purchased or manufactured by the contractor, and may 
include such collateral items as inbound transportation and in-transit 
insurance. In computing material costs, the contractor shall consider 
reasonable overruns, spoilage, or defective work (unless otherwise 
provided in any contract provision relating to inspecting and 
correcting defective work).
    (b) The contractor shall--
    (1) Adjust the costs of material for income and other credits, 
including available trade discounts, refunds, rebates, allowances, and 
cash discounts, and credits for scrap, salvage, and material returned 
to vendors; and
    (2) Credit such income and other credits either directly to the 
cost of the material or allocate such income and other credits as a 
credit to indirect costs. When the contractor can demonstrate that 
failure to take cash discounts was reasonable, the contractor does not 
need to credit lost discounts.
    (c) Reasonable adjustments arising from differences between 
periodic physical inventories and book inventories may be included in 
arriving at costs; provided such adjustments relate to the period of 
contract performance.
    (d) When materials are purchased specifically for and are 
identifiable solely with performance under a contract, the actual 
purchase cost of those materials should be charged to the contract. If 
material is issued from stores, any generally recognized method of 
pricing such material is acceptable if that method is consistently 
applied and the results are equitable.
    (e) Allowance for all materials, supplies and services that are 
sold or transferred between any divisions, subdivisions, subsidiaries, 
or affiliates of the contractor under a common control shall be on the 
basis of cost incurred in accordance with this subpart. However, 
allowance may be at price when--
    (1) It is the established practice of the transferring organization 
to price interorganizational transfers at other

[[Page 34244]]

than cost for commercial work of the contractor or any division, 
subsidiary or affiliate of the contractor under a common control; and
    (2) The item being transferred qualifies for an exception under 
15.403-1(b) and the contracting officer has not determined the price to 
be unreasonable.
    (f) When a commercial item under paragraph (e) of this subsection 
is transferred at a price based on a catalog or market price, the 
    (1) Should adjust the price to reflect the quantities being 
acquired; and
    (2) May adjust the price to reflect the actual cost of any 
modifications necessary because of contract requirements.

31.205-44  [Amended]

5. Amend section 31.205-44 in paragraph (f) by removing ``31.205-24,''.

[FR Doc. 04-13626 Filed 6-17-04; 8:45 am]