[Federal Register: September 29, 2010 (Volume 75, Number 188)]
[Rules and Regulations]
[Page 60261-60263]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29se10-20]
[[Page 60261]]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Part 16
[FAC 2005-46; FAR Case 2008-008; Item IV; Docket 2009-0036, Sequence 1]
RIN 9000-AL42
Federal Acquisition Regulation; Award-Fee Language Revision
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 adopted as final, with
changes, the interim rule amending the Federal Acquisition Regulation
(FAR) to implement section 814 of the John Warner National Defense
Authorization Act for Fiscal Year 2007 (Pub. L. 109-364), section 867
of the Duncan Hunter National Defense Authorization Act for Fiscal Year
2009 (Pub. L. 110-417), and the Office of Federal Procurement Policy
guidance memorandum dated December 4, 2007 entitled, Appropriate Use of
Incentive Contracts.
DATES: Effective Date: October 29, 2010.
FOR FURTHER INFORMATION CONTACT: For clarification of content, contact
Mr. Edward Chambers, Procurement Analyst, at 202-501-3221. For
information pertaining to status or publication schedules, contact the
Regulatory Secretariat at (202) 501-4755. Please cite FAC 2005-46, FAR
Case 2008-008.
SUPPLEMENTARY INFORMATION:
A. Background
This rule implements the provisions of section 814 of the John
Warner National Defense Authorization Act for Fiscal Year 2007 (Pub. L.
109-364), section 867 of the Duncan Hunter National Defense
Authorization Act for Fiscal Year 2009 (Pub. L. 110-417), and the
Office of Federal Procurement Policy guidance memorandum dated December
4, 2007, entitled ``Appropriate Use of Incentive Contracts,'' by
amending and/or integrating where appropriate, FAR part 7, Acquisition
Planning, and FAR part 16, Contract Types, to improve agency use and
decision making when using incentive contracts.
This final rule adopts the interim rule with one change for
clarification. This clarification entails the addition of the phrase
``in the aggregate'' to FAR 16.401(e)(2), Table 16-1, and FAR
16.401(e)(3)(v), to make it clear that the objective is to consider the
contractor's cost, schedule, and technical performance in the aggregate
when performing award-fee assessments.
B. Discussion and Analysis
An interim rule with request for comments was published in the
Federal Register on October 14, 2009 (74 FR 52856). The FAR Secretariat
received seven responses to the interim rule. These responses included
a total of 22 comments on 15 issues. Each issue is discussed in the
following sections.
1. Change in DFARS Rule Required
Comment: One respondent wrote that this interim rule, without
concurrent change to DFARS, particularly in allowing higher fixed fee,
negates the value of this rule change.
Response: DoD is considering a possible DFARS case to address this
concern. The Councils further note that the rationale for allowing a
higher fixed fee is not clear in this comment. In reading the comment
in total, a reasonable inference is that the respondent meant to
address base fee and not fixed fee.
2. Clarification Regarding Award-Fee Rating Definitions
Comment: Two respondents commented on the need to clarify whether
an unsatisfactory evaluation in one category (e.g., cost) requires an
overall unsatisfactory rating and thus no award fee in any category
(e.g., schedule and technical) for the evaluation period.
Response: The Council's intent with the use of ``overall cost,
schedule, and technical performance in the aggregate'' is to avoid the
situation where, for example, contractors would receive no award fee in
an evaluation period if they were rated below satisfactory on one of
the criteria (e.g., in schedule performance) and above satisfactory in
other criteria (e.g., technical and cost performance). The Councils
believe that this would not be equitable. In such a situation, the
contractor could receive a reduced percentage of the award-fee amount
to account for the below satisfactory schedule performance, but they
would not receive 100 percent of the award-fee amount, nor would they
receive zero award fee for that evaluation period. The final rule adds
clarifying language of ``in the aggregate'' to FAR 16.401(e)(2), Table
16-1, and FAR 16.401(e)(3)(v), to make it clear that the objective is
to consider overall cost, schedule, and technical performance in
performing award-fee assessments.
3. Requested Clarification as to Whether Firm Fixed Price Award-Fee
Contract Is an Incentive Fee Type Contract
Comment: One respondent recommended that the FAR be clarified as to
whether a firm-fixed-price award-fee contract is an incentive-type
contract citing that the language in FAR 16.404, FAR 16.202-1, and FAR
16.401(a) appears to be contradictory.
Response: The Councils take no position on this recommendation
because it is outside the scope of this case, which was limited to the
implementation of the section 814 of the John Warner National Defense
Authorization Act for Fiscal Year 2007 (Pub. L. 109-364), section 867
of the Duncan Hunter National Defense Authorization Act for Fiscal Year
2009 (Pub. L. 110-417), and the Office of Federal Procurement Policy
guidance memorandum dated December 4, 2007, entitled ``Appropriate Use
of Incentive Contracts.''
4. Permit Use of Rollover Within Certain Parameters
Comment: Three respondents recommended that the language
prohibiting the use of rollover be revised to allow rollover under
certain circumstances and at the discretion of the head of the
contracting activity. Respondents contend that rollover can be an
effective incentive tool if used properly.
Response: The Councils disagree with the respondents. Award fee is
structured to incentivize contractors to perform throughout the
contract. Therefore, rollover of unearned award fee provides a
disincentive for contractors to perform throughout the entire period of
performance. If a contractor did not perform adequately during an
award-fee rating period and was rated appropriately and then allowed to
recover that unearned award fee in a subsequent period, the incentive
for the contractor to perform consistently throughout the entire
contract would be reduced.
5. Interim Rule Presumes Award-Fee Determinations Represent Only
Subjective Measures and Not Objective Measures as Well
Comment: One respondent recommended that the language in FAR
16.401(e)(1)(i) be revised to address the concept that in addition to
subjective award-fee performance measures that we also include the use
of objective performance measures.
[[Page 60262]]
Response: The Councils disagree with this recommendation. A key
tenet in determining if an award-fee incentive is suitable for an
acquisition is whether one can devise predetermined objective
incentives applicable to cost, schedule, and technical performance. If
one can, then an award-fee incentive is not appropriate and an
incentive arrangement based on predetermined formula-type incentives
should be utilized instead.
6. Eliminate Risk and Cost-Benefit Analysis
Comment: Two respondents recommended deleting the requirement to
perform a risk and cost-benefit analysis stating that the content and
methodology for this analysis is not specified.
Response: The Councils disagree with this recommendation. The FAR
currently requires that no award-fee contract shall be awarded unless
the contract amount, performance period, and expected benefits are
sufficient to warrant the additional administrative effort. This
requirement was reinforced in the Office of Federal Procurement Policy
guidance memorandum dated December 4, 2007, entitled ``Appropriate Use
of Incentive Contracts.'' The Councils believe it is within the purview
of each Federal agency to provide supplemental guidance on how to
perform this analysis.
7. Contractor Should Be Allowed To Earn Award Fee Even if Performance
Is Less Than Satisfactory
Comment: One respondent wrote that under an award-fee contract,
even when performance is less than satisfactory, there should be some
level of fee earnings but potentially at a significantly decreased rate
of earnings since the Government received some benefit from the work
accomplished. The respondent maintained that even under a fixed-fee
contract, a contractor can still earn some amount of fee, even when
performance is less than satisfactory. The respondent recommended that
Table 16-1 include an additional rating category, entitled ``less than
satisfactory,'' with a percentage range from 2 percent-48 percent as
well as changing ``is below satisfactory'' in FAR 16.401(e)(3)(v) to
``fail to meet the basic requirements of the contract''.
Response: The Councils disagree with this recommendation. Section
814 of the John Warner National Defense Authorization Act for Fiscal
Year 2007 (Pub. L. 109-364) and section 867 of the Duncan Hunter
National Defense Authorization Act for Fiscal Year 2009 (Pub. L. 110-
417) were very clear that the FAR ``shall ensure that no award fee may
be paid for contractor performance that is judged to be below
satisfactory performance''. The Councils note that the regulations do
allow the use of a base fee in an award-fee incentive arrangement.
8. Award-Fee Determination Being Unilateral Decision
Comment: One respondent recommended that the language in FAR
16.401(e)(2) regarding the award-fee determination being a unilateral
decision by the Government be struck since the Courts have determined
that such decisions are reviewable under the Contract Disputes Act.
Response: The Councils agree that award-fee determinations are
reviewable under the Contract Disputes Act but the language in this
section does not address that issue. This language in FAR 16.401(e)(2)
was included to point out that while the award-fee determination may be
subject to the Contract Disputes Act, it is still a unilateral decision
by the Government.
9. Consider Different Language Relative to Adjectival Rating
Descriptions
Comment: One respondent recommended replacing the word
``supplement'' with ``tailor'' in the FAR 16.401(e)(3)(iv) sentence,
contracting officers may supplement the adjectival rating description.
Response: The Councils believe that these descriptions cannot be
tailored but can be supplemented to fit the specific needs of the
acquisition based upon the requirements in section 814 of the John
Warner National Defense Authorization Act for Fiscal Year 2007 (Pub. L.
109-364) and section 867 of the Duncan Hunter National Defense
Authorization Act for Fiscal Year 2009 (Pub. L. 110-417), which stated:
The FAR ``shall establish standards for determining the percentage of
the available award fee, if any, which contractors should be paid for
performance * * * ''.
10. Clarification Regarding Adjectival Descriptions
Comment: One respondent wrote that the imprecise adjective
modifiers in Table 16-1 could be problematic since what distinguishes
``almost all of'' from ``many'' or what establishes a ``significant''
criterion for ``insignificant'' criterion. A second respondent
recommended revising Table 16-1 to delete the requirement to ``exceed''
significant award-fee criteria to earn a better than satisfactory
rating.
Response: The Councils disagree and maintain that the term
``exceeds'' is a reasonable term to differentiate contractor
performance between the various ratings. In addition, the adjectives
used in the rating table adequately distinguish between the different
rating levels and provide the contracting officer with the flexibility
to supplement the descriptions as appropriate.
11. Published as Interim Rule
Comment: One respondent wrote that they were disappointed that this
rule change was published as an interim rule and not a proposed rule
and recommended that the Councils publish rules of this magnitude as
proposed rules in the future.
Response: The Councils issued a statement of urgency which was
published in the Federal Register notice with this interim rule.
12. Stringent Adjectival Ratings
Comment: One respondent wrote that since Table 16-1 adjectival
rating descriptions and associated percentages are so stringent, the
final rule should specify that the available award-fee pool must be at
least 20 percent of estimated costs for complex development contracts.
Response: The Councils do not believe that a pre-established award-
fee floor is appropriate since the contracting officer negotiates a
fair and reasonable award-fee pool for each acquisition based upon the
effort and risk associated with that acquisition.
13. Consider Different Rating Definitions
Comment: One respondent wrote that the final rule should include
the rating definitions from the Office of the Under Secretary of
Defense/Acquisition, Technology, and Logistics/Defense Procurement and
Acquisition Policy memorandum dated April 24, 2007, since these ratings
are based on meeting a higher percentage of award-fee criteria in order
to earn higher ratings.
Response: The Councils disagree. The two rating scales are very
similar but the FAR rating scale provides contracting officers with
more latitude in assigning ratings against subjective criteria.
14. Utilization of Base Fee
Comment: Two respondents commented on the utilization of base fee.
One respondent recommended that the final rule encourage contracting
officers to award base fee on cost-plus-award-fee (CPAF) contracts
subject only to the statutory restrictions on fee cited at FAR 15.404-
4(c)(4)(i). A second respondent suggested that a minimum fee be
referenced in the base amount of fee noted in FAR 16.405-2.
[[Page 60263]]
Response: The Councils believe that the contracting officer
negotiates a fair and reasonable profit or fee for each acquisition
based upon the effort and risk associated with that acquisition.
Consequently, it would not be appropriate to encourage the use of or
set a minimum base-fee rate, since the establishment of base fee is
subject to negotiation and the specific circumstances of each
acquisition.
15. Eliminate Requirement Relative to Completing a Determination and
Finding
Comment: One respondent wrote that the requirement in the interim
rule for a determination and finding (D&F) was redundant with other FAR
requirements and increases the workload of overburdened contracting
officers without providing any value added. The respondent recommended
deleting this requirement in the final rule.
Response: The Councils appreciate the respondent's concern for the
contracting officer's workload but disagree with eliminating this
requirement from the final rule. The completion of the D&F and Head of
Contracting Agency approval satisfy the requirements in section 814 of
the John Warner National Defense Authorization Act for Fiscal Year 2007
(Pub. L. 109-364) and section 867 of the Duncan Hunter National Defense
Authorization Act for Fiscal Year 2009 (Pub. L. 110-417) to establish
the appropriate approval level for using award-fee contracts. They are
also necessary to ensure that the suitability factors to use an award-
fee contract are properly addressed and documented because of the large
investment of resources required to administer an award-fee contract.
C. Regulatory Planning and Review
This is a significant regulatory action and, therefore, was subject
to review under Section 6(b) of Executive Order 12866, Regulatory
Planning and Review, dated September 30, 1933. 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 the rule largely covers
a broad range of aspects of award-fee contracting, whose upshot will be
a more consistent use and administration of award fees Governmentwide
which will provide a small benefit to all entities both large and
small. In addition, the changes promulgated in this final rule do not
directly affect the current business processes of Federal contractors.
In the matter of the rule's prohibition on the rollover of unearned
award fee, the Councils believe this will have a negligible impact on
small businesses for the following reasons. First, award-fee contracts
are largely the province of large businesses with large dollar
contracts. Second, the ability to roll over unearned award fee may have
caused evaluators in the past to be more conservative in their ratings
because of their awareness that contractors may have a second
opportunity to earn unearned award fees.
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.
chapter 35, et seq.
List of Subjects in 48 CFR Part 16
Government procurement.
Dated: September 21, 2010.
Edward Loeb,
Director, Acquisition Policy Division.
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Accordingly, the interim rule published in the Federal Register at 74
FR 52856 on October 14, 2009, is adopted as a final rule with the
following changes:
PART 16--TYPES OF CONTRACTS
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1. The authority citation for 48 CFR part 16 continues to read as
follows:
Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42
U.S.C. 2473(c).
16.401 [Amended]
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2. Amend section 16.401 by--
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a. Removing from paragraph (e)(2) the words ``performance is'' and
adding ``performance in the aggregate is'' in its place each time it
appears (twice);
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b. Removing from Table 16-1 that follows paragraph (e)(3)(iv) the words
``contract as'' and adding ``contract in the aggregate as'' in its
place each time it appears (five times); and
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c. Removing from paragraph (e)(3)(v) the words ``performance is'' and
adding ``performance in the aggregate is'' in its place.
[FR Doc. 2010-24161 Filed 9-28-10; 8:45 am]
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