Federal Acquisition Regulation; Additional Contract Types, 56318-56337 [05-18965]

Agencies

• General Services Administration
• National Aeronautics and Space Administration
• DEPARTMENT OF DEFENSE

[Federal Register Volume 70, Number 185 (Monday, September 26, 2005)]
[Proposed Rules]
[Pages 56318-56337]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-18965]



[[Page 56318]]

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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 2, 10, 12, 16, 44, and 52

[FAR Case 2003-027]
RIN 9000-AK07


Federal Acquisition Regulation; Additional Contract Types

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

ACTION: Proposed rule.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) are proposing to amend the 
Federal Acquisition Regulation (FAR) to implement section 1432 of the 
National Defense Authorization Act for Fiscal Year 2004. Title XIV of 
the Act, referred to as the Services Acquisition Reform Act of 2003 
(SARA), amended section 8002(d) of the Federal Acquisition Streamlining 
Act of 1994 (FASA) to expressly authorize the use of time-and-materials 
(T&M) and labor-hour (LH) contracts for certain categories of 
commercial services under specified conditions.

DATES: Interested parties should submit written comments to the FAR 
Secretariat on or before November 25, 2005, to be considered in the 
formulation of a final rule.
    Public Meeting: A public meeting will be held on Tuesday, October 
18, 2005, from 9 a.m. to 4 p.m. Eastern Time, in the GS Building 
Auditorium, 1800 F Street NW, Washington, DC 20405, to facilitate an 
open dialogue between the Government and parties interested in the 
implementation of section 8002(d). Because they are so closely related, 
the public meeting will also cover proposed rule, FAR case 2004-015, 
Payment Under Time-and-Materials and Labor-Hour Contracts. FAR case 
2004-015 is published as the next item following this publication. 
Interested parties are encouraged to attend and engage in discussions 
regarding these proposed rules.
    To facilitate discussions at the public meeting, interested parties 
are encouraged to provide written comments on issues they would like 
addressed at the public meeting no later than Tuesday, October 11, 
2005. Interested parties may register and submit their input 
electronically at https://www.acq.osd.mil/dpap/dars/index.htm. Attendees 
are encouraged, but not required, to register for the public meeting, 
to ensure adequate accommodations.
    Directions to the meeting can be found at the Web site. 
Participants are encouraged to check with the Web site prior to the 
public meeting to ensure the location has not been changed as a result 
of a large number of registrants. The public meeting is physically 
accessible to people with disabilities. Requests for sign language 
interpretation or other auxiliary aids should be directed to Mr. Jeremy 
Olson at 202-501-3221 at least 5 days prior to the meeting.

ADDRESSES: Submit comments identified by FAR case 2003-027 by any of 
the following methods:
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Agency Web Site: https://www.acqnet.gov/far/ProposedRules/
proposed.htm. Click on the FAR case number to submit comments.
     E-mail: farcase.2003-027@gsa.gov. Include FAR case 2003-
027 in the subject line of the message.
     Fax: 202-501-4067.
     Mail: General Services Administration, Regulatory 
Secretariat (VIR), 1800 F Street, NW, Room 4035, ATTN: Laurieann 
Duarte, Washington, DC 20405.
    Instructions: Please submit comments only and cite FAR case 2003-
027 in all correspondence related to this case. All comments received 
will be posted without change to https://www.acqnet.gov/far/
ProposedRules/proposed.htm, including any personal and/or business 
confidential information provided.

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. Jeremy Olson at (202) 501-3221. 
Please cite FAR case 2003-027.

SUPPLEMENTARY INFORMATION:

A. Background

    Section 8002(d) limits use of T&M and LH contracts to the following 
categories of commercial services:
     Commercial services procured for support of a commercial 
item, as described in 41 U.S.C. 403(12)(E); and
     Any other category of commercial services that is 
designated by the Administrator of OFPP on the basis that--
    1. The commercial services in such category are of a type of 
commercial services that are commonly sold to the general public 
through use of T&M or LH contracts; and
    2. It would be in the best interests of the Federal Government to 
authorize use of T&M or LH contracts for purchase of the commercial 
services in such category.
    In furtherance of its statutory responsibilities, OFPP worked in 
coordination with the Councils on a series of questions for the Advance 
notice of proposed rulemaking and notice of public meeting published in 
the Federal Register on September 20, 2004 (69 FR 56316), to obtain 
information describing how T&M and LH contracts are used commercially. 
In particular, the questions elicited information on the types of 
services that are commonly acquired on this basis and the circumstances 
under which these arrangements are used. Interested parties offered a 
variety of written observations in response to these questions. The 
public comments are discussed in greater detail below. In addition, a 
number of interested parties provided oral comments during a public 
meeting that was held on October 19, 2004, to facilitate an open 
dialogue with Government procurement policy officials.
    OFPP and several members of the Acquisition Strategy Team also 
received an oral briefing from the Government Accountability Office 
(GAO) on a survey the GAO conducted late last year to determine how 
often commercial companies use T&M and LH contracts in their commercial 
practices, either as a buyer or a provider. The GAO received 23 
responses to its survey. Some of the responses came from Fortune 500 
companies. Although responses were limited, the GAO indicated that they 
represented buying practices from a relatively wide range of 
industries, including: airline, automotive and truck manufacturers, 
automotive and truck parts, business services, communications 
equipment, computer hardware, computer services, electric utilities, 
insurance, major drugs (pharmaceutical), money center bank, non-profit 
financial services, oil and gas, regional bank, retail (grocery and 
technology), scientific and technical instruments, and semiconductor.
    OFPP made three main findings from these inputs. First, commercial 
services are commonly sold on a T&M and LH basis in the marketplace 
when requirements are not sufficiently well understood to complete a 
well-defined scope of work and when risk can be managed by maintaining 
surveillance of costs and contractor performance. Second, these same 
services are also

[[Page 56319]]

generally offered on a fixed-price basis. Third, a few types of 
services are sold predominantly on a T&M and LH basis-specifically, 
emergency repair services.
    Based on these findings, OFPP recommended to the Councils that the 
proposed rule allow an agency to purchase any commercial service on a 
T&M or LH basis if it has completed a determination and findings (D&F) 
containing sufficient facts and rationale to justify that a firm-fixed 
pricing arrangement is not suitable. OFPP stated that this conclusion 
is consistent with the statutory requirement in 8002(d) that 
contracting officers must execute a D&F that establishes that no 
contract type other than a T&M and LH contract is suitable before 
pursuing one of these arrangements. The agency would also need to 
comply with the other limitations set forth in 8002(d)-i.e., the 
service is acquired under a contract awarded using competitive 
procedures, the contract or order includes a ceiling price that the 
contractor exceeds at its own risk, and any subsequent change in the 
ceiling price is authorized only upon a determination, documented in 
the contract file, that it is in the best interest of the procuring 
agency to change the ceiling price.
    With respect to the contents of the D-F, OFPP advised the Councils 
that the rationale supporting use of a T&M or LH contract for 
commercial services should establish that it is not possible at the 
time of placing the contract or order to accurately estimate the extent 
or duration of the work or to anticipate costs with any reasonable 
degree of certainty. As noted in the findings above, this condition 
typically appears to exist in circumstances where the private sector 
commonly turns to T&M and LH contracting. And, this condition always 
appears to exist for services that are predominantly purchased on a T&M 
and LH basis, such as emergency repair services-i.e., emergency repair 
services, by their very nature, are difficult to capture in a well-
defined scope of work and therefore are not generally conducive to 
purchase on a fixed-price basis. In addition, if the need is of a 
recurring nature and is being acquired through a contract extension or 
renewal, OFPP expects, consistent with FAR 7.104(h), that the D&F 
reflect why knowledge gained from the prior acquisition could not be 
used to further refine requirements and acquisition strategies in a 
manner that would enable purchase on a fixed-price basis. OFPP believes 
that these steps will help ensure that T&M and LH contracts are used 
only when in the best interests of the government, as envisioned by 
section 8002(d)(3)(B)(ii).
    Finally, the Councils invite the public to provide additional 
comment that might further inform OFPP's findings and conclusions. 
Respondents are encouraged to include citations, as appropriate, to 
relevant sources of information that may be used to substantiate the 
basis for the response provided.
    The Councils have shaped the proposed rule to reflect OFPP's 
recommendations.
    Comments were received from 23 respondents in response to the ANPR. 
The Councils considered all of the comments and recommendations in 
developing the proposed rule. The Councils made the following changes 
to the rule as a result of the public comments and Council 
deliberations:
    1. REVISED FAR 12.207(b) to be consistent with OFPP's determination 
not to develop a list of commercial services that are commonly sold to 
the general public on a T&M basis.
    2. REVISED FAR 12.207(b)(3) to be consistent with the requirements 
for noncommercial T&M/LH contracts and to emphasize that requirements 
should be structured so as to ``maximize the use of fixed price 
contracts'' to be consistent with the statutory language.
    3. REVISED FAR 12.301(b)(3) to prohibit tailoring of the consent to 
subcontract provisions in paragraph (u) of Alternate I of the FAR 
clause at 52.212-4 (except to require individual orders to be addressed 
individually under indefinite delivery contracts) because the Councils 
believe tailored subcontract provisions may not adequately protect the 
Government.
    4. REVISED FAR 44.303 to specify that only firm-fixed price or 
fixed-price with economic price adjustment contracts awarded for 
commercial items under FAR Part 12 are excluded from Contractor 
Purchasing System Reviews (CPSR) to assure that the CPSR includes 
commercial T&M/LH contracts thereby providing contractors the 
flexibility to award commercial T&M/LH subcontracts without the 
otherwise required subcontract consent.
    5. DELETED the language in paragraph (a) of the FAR clause at 
52.212-4 that allowed the Government to require the contractor to 
ensure future performance conforms to contract requirements because the 
Councils believe that this language is unnecessary since the Government 
already has this right through the use of a cure notice and ADD 
language to clarify that the Government may seek either ``an equitable 
price adjustment'' or ``adequate consideration'' for acceptance on 
nonconforming supplies or services.
    6. Alternate I to FAR clause 52.212-4--
    a. REVISED paragraph (a) to allow contractors to be paid for 
reperformance, without profit, up to the ceiling price to be consistent 
with the provisions for noncommercial T&M contracts, i.e., paragraphs 
(c) through (k) of the FAR clause at 52.246-6, Inspection--Time-and-
Material and Labor-Hour. However, since contracting officers will not 
necessarily know the portion of profit in the labor rates for these 
competitive awards, the Councils revised paragraph (a)(4) of the clause 
to require contracting officers to identify the portion of profit in 
the ``hourly rate'' and included a 10 percent default if not otherwise 
specified in the clause. The Councils note that 10 percent default is 
arbitrary and not necessarily representative of the actual portion of 
profit in the labor rates; however, the Councils believe it is 
advisable to establish a default for instances where contracting 
officers fail to provide a specific decrement.
    b. RELOCATED definitions previously located in paragraph (u) to 
paragraph (e) to be consistent with the new format of the basis clause 
and ADDED a new definition for ``materials'' to recognize that the term 
has different meaning for T&M contracts, i.e., materials include other 
direct and indirect costs.
    c. DELETED the requirement in paragraph (i)(1)(i)(A) that only 
permitted reimbursement of fractional hours if the contract 
specifically authorized fractional hours because the Councils believe 
contractors should be paid for fractional hours on a prorated basis.
    d. REVISED paragraph (i)(1)(i)(B) to specify that contractors shall 
substantiate subcontractor hours reimbursed at the hourly rate in the 
schedule when requested by the contracting officer and to specify the 
payment records that may be requested to substantiate the labor.
    e. REVISED the material cost provisions at paragraph (i)(1)(ii) 
to--
    1. Permit payment at the contractor's established catalog or market 
price for materials that meet the definition of a commercial item.
    2. Permit reimbursement of subcontract costs at the hourly rate 
specified in the schedule in certain situations.
    3. Delete the requirement to take all discounts, rebates, 
allowances, etc. to be more consistent with commercial practices. 
However, when the contractor receives the benefit of such discounts, 
rebates, or allowances, the Government must receive appropriate credit.

[[Page 56320]]

    4. Eliminate the ``most favored customer'' requirement to be 
consistent with the allowability provision for material costs at 
31.205-26(f).
    5. Add provisions to permit reimbursement of other direct costs on 
a cost basis only to the extent such costs are listed in the contract 
clause so the Government will know the ``types of costs'' a contractor 
might subsequently bill as other direct costs.
    6. Add provisions for reimbursement of indirect costs at a fixed 
amount to the extent such reimbursement are listed in the contract 
clause to permit reimbursement without imposing the requirements of FAR 
Part 31.
    f. REVISED the access to records provisions at paragraph (4) to 
allow the Government to review records of employee qualifications and 
changed terminology from ``records of distribution of labor'' versus 
``labor distribution reports'' to be more consistent with commercial 
practices.
    g. ELIMINATED the requirements at paragraph (i)(5) for Assignment 
of Refunds, Rebates and Credits because the Councils believe the 
applicable credits are adequately covered in paragraph (i)(1)(ii).
    h. REVISED paragraph (u)(8), to clarify that payment of subcontract 
costs incurred prior to the date of any required subcontract consent 
will only be reimbursed if the contracting officer subsequently 
provides the consent.

Disposition of Public Comments

    1. Types of Commercial Services Sold on a T&M/LH Basis.
    a. Predominately Sold on T&M or LH Basis. One commenter said that 
T&M contracts are predominately used when the work effort to complete 
is extremely difficult or impossible to determine at the time the 
contract is executed and when the customer does not have a complete 
definition of the final or expected result. Another commenter said 
commercial T&M/LH contracts are appropriate when it is not possible for 
the buyer/seller to estimate accurately the resources required for 
performing and neither party can assume the financial risks for 
performance. Another commenter said the commercial marketplace 
regularly acquires support on a fixed rate per day or hours basis. In 
addition, various commenters identified the following specific services 
as a type of commercial service predominately sold on a T&M or LH 
basis:
    1. Emergency Response.
    2. Repairs.
    3. Information Technology.
    4. Professional.
    5. System Integration.
    6. Program Management.
    7. Software Development.
    8. Facilities.
    9. Legal.
    10. Accounting and Auditing.
    11. Cleaning.
    12. Consulting.
    13. Business Advisory.
    14. Financial Management.
    15. Project Management.
    16. Training.
    17. Certain building trades (e.g., painters).
    18. Quality Assurance.
    19. Moving.
    20. Installation.
    21. Support.
    22. Engineering.
    23. Wind Tunnels.
    24. Troubleshooting.
    25. Miscellaneous Testing.
    26. Pilot.
    b. Rarely Sold on a T&M or LH Basis. One commenter said T&M/LH 
contracts are rarely used when the extent of the work effort to 
complete is clearly understood and definable, i.e., the customer is 
able to clearly and accurately define the work.
    c. Commonly Sold as Both T&M/LH and Fixed Price. One commenter said 
commonly sold commercial T&M/LH services can also be sold as fixed-
price, under different circumstances, and that the customer's ability 
to specify required services/needs should be the basis for determining 
the use of commercial T&M/LH contracts. Another commenter said 
professional architectural and engineering design services, and 
consulting services are commonly sold on both a T&M/LH and fixed price 
basis.
    Response: The Councils appreciate the public input and has fully 
considered it in formulating the types of services that are appropriate 
for commercial T&M/LH contracts.
    2. Appropriate Use.
    a. One commenter said the Government should conduct a thorough 
review of actual commercial buying practices to substantiate that T&M/
LH contracts are used in the private sector rather than assuming and 
asserting that the use of T&M/LH contracts are a standard commercial 
practice.
    Response: The FAR rule implements the statute that authorizes the 
use of T&M contracts for commercial services. The Councils note that 
the ANPR requested information from the public to better ensure that 
the implementation applies only to services that are commonly sold on a 
commercial basis as required by the statute. The Councils believe the 
public's input and the statute provide a sufficient basis for 
developing appropriate FAR coverage.
    b. One commenter said the language at FAR 12.207(b)(3)(iii) that 
minimizes the use of T&M and LH contracts to the maximum extent 
practicable comes close to defeating the purpose of the original 
legislation. The commenter also said that the rule does not convey 
Congress's intent because the SARA legislation required maximum use of 
fixed price contracts and the ANPR indicates that the D&F is to 
demonstrate that a Government requirement is described in such a way as 
to minimize the use of T&M and LH contracts.
    Response: The Councils recognize that the language should focus on 
maximizing fixed price contracts for commercial items. Therefore, the 
Councils revised the rule to establish the requirement in a way that 
will maximize the use of fixed price contracts, e.g., by limiting the 
value or length of the current T&M/LH contracts or orders.
    c. One commenter questioned the need to restrict commercial T&M and 
LH contracts to competitive circumstances because there may be 
situations where sufficient controls are in place to acquire services 
using procedures other than competition.
    Response: Section 1423 of Public Law 108-136 stipulates commercial 
T&M and LH contracts must be made on a competitive basis.
    d. One commenter recommended that the Councils clarify that the 
fair opportunity requirements of FAR 16.505 apply to commercial task 
order T&M contracts.
    Response: The provisions at FAR 16.505 apply to commercial task 
order T&M contracts. Nothing in this rule requires that each task order 
be subject to full and open competition.
    e. One commenter said the FAR Council solicited responses at the 
public meeting regarding whether commercial services task orders 
awarded on a noncompetitive basis should be eligible to be awarded 
under T&M/LH vehicles. The commenter has legal and policy objections to 
sole-source procurements being awarded under T&M/LH vehicles since SARA 
extended only to competitive procurements.
    Response: The Councils acknowledge noncompetitive contract awards 
were discussed at the public meeting; however, noncompetitive awards 
were only discussed to obtain input on what constitutes competition. As 
stated in the ANPR and the rule, the awards must be made on a 
competitive basis.
    f. One commenter said that use of competition and a ceiling does 
not adequately protect the Government from abuse because competition is 
an ``illusionary protection'' as

[[Page 56321]]

demonstrated by the General Services' schedules and task orders under 
IDIQs since ``in practice, they are mostly awarded on a sole source 
basis.''
    Response: The commenter is concerned about compliance with the rule 
rather than promulgation of the rule itself. The rule requires use of 
competition in accordance with the statutory requirement for use of T&M 
contracts for commercial services. The commenter did not state that 
true competition is a problem, but merely assumes that such competition 
will not be obtained, i.e., procuring components will not comply with 
the FAR requirements. Issues regarding compliance with the FAR are 
beyond the scope of the Councils; however, the Councils note that the 
assumption in promulgating the FAR is that it will be properly applied.
    g. One commenter recommended eliminating the phrase ``of a type'' 
in FAR 12.207(b)(2)(ii)(A) since it cannot be uniformly defined and is 
confusing. The commenter believes eliminating the phrase will ensure 
that the services being purchased are truly commercial and not just a 
stretch of someone's imagination.
    Response: The term ``of a type'' is part of the regulatory 
definition of a commercial item and also part of the statutory 
requirement that provides for use of T&M contracts for commercial 
items. Therefore, the Councils believe it is not appropriate to 
eliminate this phrase from this rule or FAR.
    h. One commenter said the rule should limit services bought on T&M 
and LH contracts under FAR Part 12 to those that are truly commercial 
in nature and commonly sold in the commercial markets and restrict the 
use of commercial item T&M/LH contracts for requirements with large 
material components.
    Response: The rule restricts the use to commercial services that 
are commonly sold to the general public through use of a T&M/LH 
contract. The Councils agree a commercial T&M/LH contract may not be 
the most suitable contract type when material costs are a significant 
cost of the acquisition. However, the Councils believe imposing strict 
limits on the material component would unnecessarily restrict the 
contracting officer's flexibility and discretion when responding to a 
specific requirement. The Councils note that the rule adopts the same 
procedures for noncommercial T&M contracts in FAR Subpart 16.6.
    i. One commenter said the definition of what qualifies as a 
commercial service should be broad in scope and recommended requiring 
an affirmative determination by the contracting officer instead of 
developing a comprehensive list. Another commenter recommended adding 
the type(s) of service to a general list of subject areas to be 
considered when choosing a T&M or LH contract but not adding examples 
(consulting, training, etc.) because doing so might result in premature 
decisions for T&M or LH applicability. Another commenter recommended 
using broad categories, such as Federal supply codes or three-digit 
NAICS, so as not to limit implementation of public law because there 
are innumerable services that could be procured on a T&M/LH basis. 
Conversely, one commenter recommended adding a clear definition of 
commercial service with concrete examples. Another commenter said SARA 
requires OFPP to formulate a list of services typically sold on a T&M/
LH basis commercially and that the list is needed because some 
contracting officers may be limited in their ability to properly 
determine whether the service could be bought on a T&M/LH basis. 
Another commenter said the rule should not go beyond the statutory 
language in describing the type of service(s) that may be procured 
under T&M contracts. Another commenter said the rule is incomplete 
because the rule authorizes use of T&M/LH contracts to acquire any 
other category of commercial services identified by OFPP but the rule 
does not identify where the OFPP determination will be posted or how it 
will be communicated to agencies.
    Response: The Council note that many of the attendees at the public 
meeting expressed the view that a comprehensive list of commercial 
services would be overly restrictive and impractical. The Councils 
agree that developing and maintaining a comprehensive list is not 
practical or feasible because many services may be sold on both a T&M/
LH and fixed price basis depending on the circumstances of the 
acquisition. Further, the Councils note that the ANPR did not identify 
a location for the ``OFPP determination'' because the Councils intended 
to revise the rule when OFPP made its determination. As OFPP has now 
made its determination, the Councils revised the rule to reflect that 
determination, i.e., the rule allows agencies to purchase any 
commercial service on a T&M/LH basis when the agency has completed a 
D&F containing sufficient facts and rationale to justify that a FFP 
arrangement is not suitable.
    j. One commenter said the term ``predominantly'' should not be used 
in lieu of the term ``commonly'' since they have distinctively 
different meanings.
    Response: The Federal Register notice requested input on T&M 
services ``predominately'' and ``commonly'' sold on a T&M/LH basis to 
obtain additional insight into the use of T&M contracts for commercial 
services. The Councils agree the terms have different meaning and notes 
that the term ``predominately'' is not used in the provisions discussed 
in the ANPR or the rule.
    k. One commenter suggested adding the ``type of work'' or ``type of 
skills needed'' to the list of considerations for deciding whether 
other contract types authorized by FAR 12.207 are suitable instead of 
limiting the determination to situations where it is not possible at 
the time of award to estimate accurately the extent or duration of work 
stating many times the Government's requirements quickly evolve after 
award. Another commenter said the rule should not adopt the rule in the 
GSA Multiple Award Schedule because T&M and LH contracts are 
advantageous to the Government since profit is defined and limited. 
Another commenter recommended revising the coverage at FAR 
12.207(b)(3)(ii)(A) for when a T&M/LH contract is suitable by inserting 
either the word ``some'' or ``certain'' in front of the word ``costs'' 
at the beginning of the fifth line to specify that only ``some'' or 
``certain'' costs cannot be anticipated with a reasonable degree or 
certainty since contracting officers are required to determine that the 
contract award amount is fair and reasonable. Three commenters said the 
situations when T&M/LH contracts can be used should be the same for 
commercial and noncommercial acquisitions.
    Response: The ANPR language at FAR 12.207(b)(3)(ii)(B) that would 
have allowed use of commercial T&M/LH contracts when the work is 
sufficiently understood to allow for fixed pricing was intended to 
clarify that there were only two pricing arrangements for commercial 
items, fixed price (i.e., firm-fixed price and fixed price with 
economic price adjustment) and T&M/LH. The Councils agree the 
situations for appropriate use of commercial T&M/LH contracts should be 
the same as the situations that permit noncommercial T&M/LH contracts. 
As the additional language appears to have caused confusion, the 
Councils eliminated the requirements at FAR 12.207(b)(3)(ii)(B). The 
rule is now identical to the requirements to FAR Subpart 16.6 
(noncommercial) and MAS special ordering procedures which restrict T&M 
contracts to situations where it is not possible at the time of placing 
the contract to estimate accurately the extent or duration of the work 
to

[[Page 56322]]

anticipate costs with any reasonable degree of confidence.
    l. Two commenters said the Government should not assume that T&M 
contracts can only be used when the entire effort is T&M since 
contracts that are predominately firm-fixed price can also include T&M 
items.
    Response: Neither the FAR, nor this rule, preclude the use of 
``hybrid'' contracts, i.e., contracts with mixed contract types. 
Therefore, additional authority is not needed. However, the Councils 
note that contracting officers must adequately document why no other 
contract type is suitable for the T&M portion of the contract in the 
supporting D&F.
    m. One commenter said offerors should be allowed the flexibility to 
propose both fixed price and T&M solutions and that the contracting 
officer could analyze and decide which offer is most cost effective and 
advantageous to the Government.
    Response: The Councils believe contracting officers will conduct 
adequate market research to determine the appropriate contract type and 
notes that T&M contracts are only authorized when no other contract 
type is suitable. The solicitation must identify the anticipated 
contract type so offerors will know the terms and conditions that apply 
to the solicitation and can price their offers accordingly. 
Additionally, the solicitation must specify the evaluation factors that 
will be used to determine the successful offeror so that all offerors 
are on equal footing since evaluation factors, like proposed prices, 
vary depending on the contract type. The Councils note that existing 
FAR provisions allow contracting officers to solicit alternate 
proposals.
    n. One commenter noted that T&M contracts represent more risk to 
the buyer than firm fixed price contracts and said differences in 
Federal and State court interpretations of critical performance 
aspects, especially the ability of the buyer to enforce firm 
deliverables and warranties, may explain why the rule limits the use of 
T&M or LH contracts to when ``no other contract type is suitable.'' The 
commenter said that Federal courts have often found that the buyer 
cannot enforce firm deliverables or warranties under T&M and LH 
contracts, which makes these contract types inherently risky for the 
Government. Conversely, State courts, applying the principles of the 
Uniform Commercial Code, typically do not make distinctions between 
T&M/LH and FFP contracts in regard to the buyer's rights to firm 
deliverables and warranties. The commenter further recognized that a 
continued bias in favor of fixed price contracts for acquisition of 
commercial services under FAR Part 12 is in order. However, the 
commenter recommended that the Councils fully understand the important 
distinctions made by the Courts before implementing the rule.
    Response: The Councils agree that T&M contracts comprise the 
highest contract type risk to the Government. As such, they should only 
be used when no other contract type is suitable. The Councils recognize 
there are Court opinions regarding deliverables and warranties. 
However, the issue of deliverables and warranties does not factor into 
the decision to use a T&M contract. The key factor in deciding to use a 
T&M contract is the ability to accurately estimate the extent or 
duration of the work or anticipate costs with any reasonable degree of 
certainty.
    o. One commenter said there is a clear separation between projects 
that are obviously suited for FFP (defined scope development or 
implementation) and those suited for T&M (design consulting services, 
quality assurance, security, auditing, etc.) and that there is little 
chance that the rule would drive contracts away from FFP.
    Response: Since commercial T&M contracts are not currently 
authorized by the FAR, the Councils are unable to determine whether the 
rule will ``drive contracts away from FFP.'' In accordance with the 
rule, T&M/LH contracts are only authorized when the contracting officer 
determines that no other contract type is suitable which should assure 
that the rule does not ``drive contracts away from FFP''.
    p. One commenter said contracting officers should be provided 
guidance on sources and specific instructions for conducting market 
research to evaluate options and rationale for not using fixed-prices 
for delivery of services.
    Response: The discussion of market research is included in FAR Part 
10, Market Research. The FAR does not provide specific instructions or 
sources for conducting market research since this will vary with 
different types of acquisitions. Such specific instructions and sources 
are more appropriately contained in agency training materials and 
guidance.
    q. One commenter said the rule should be revised to emphasize that 
market research is performed to establish why T&M is the appropriate 
contract type for a particular requirement. Another commenter said the 
market research procedures in FAR Part 10 will be an effective way to 
determine whether it is feasible to purchase services on a fixed-price 
basis or a T&M/ LH basis. Another commenter said market research should 
be limited to a determination of whether the desired services are 
commercial which could result in solicitation of both fixed-price and 
T&M contracts. Another commenter noted that contracting officers should 
rely on market analysis to identify services typically sold 
commercially since market analysis, coupled with documentation that the 
scope or duration of work is not sufficiently clear, should be 
sufficient to establish that a fixed-price contract is not suitable.
    Response: The Councils agree market research is an effective way to 
determine whether purchases can be made on a T&M/LH or FFP basis and 
notes that the ANPR and the proposed rule require agencies to determine 
commercial practices, including contract type, during market research. 
The Councils do not believe additional coverage is needed.
    r. One commenter recommended revising FAR Parts 7 and 37 to require 
Government personnel to evaluate the existing requirements and market 
conditions and adapt the strategy needed to address them.
    Response: Government personnel are required to conduct market 
research, which includes evaluating the existing requirements and 
market conditions, to determine the most suitable approach to 
acquiring, distributing, and supporting the needed supplies or 
services. The Councils do not believe additional coverage is needed.
    s. One commenter recommended that the Councils amend Part 12 to 
exclude applied research since established catalog or market prices 
cannot exist because the primary objective of this type of research is 
to advance scientific knowledge not yet existing in the marketplace. 
The commenter noted that the Deputy Inspector General for Auditing had 
previously identified the inappropriate use of FAR Part 12 in 
procurement of applied research in Report No. D2001-051, ``Use of 
Federal Acquisition Regulation (FAR) Part 12 Contracts for Applied 
Research,'' dated February 15, 2001.
    Response: Applied research is a service that is performed on a T&M/
LH basis in the commercial marketplace. The acquired scientific 
knowledge is the result of the research services.
    t. One commenter said contracting officer should be given 
discretion in making an award on the basis of an overall evaluation of 
the proposal, which presumably includes rates, technical approach to 
performing the work, price, etc., and that price alone should not be 
the deciding factor.

[[Page 56323]]

    Response: The Councils agree that price alone is not necessarily 
the sole or key factor in making an award. However, the rule does not 
need to be changed since FAR Part 12 already requires the contracting 
officer to use the provisions in FAR 15.101 and 15.304, which provide 
criteria to be used in making the award. The criteria states that the 
relative importance of price will vary with different types of 
acquisitions.
    u. One commenter believes award fees and performance or delivery 
incentives fees provisions at FAR 12.207(d) should only be used in 
contracts for commercial services when use of such fees are consistent 
with commercial practices.
    Response: The Councils see no reason to limit the use of award fees 
and performance or delivery incentives to be consistent with commercial 
practices. The Government uses award fees and incentives to motivate 
contractor efforts that might not otherwise be emphasized in order to 
meet specific acquisition objectives. While the use of award fees and 
incentives may not be customary in all commercial industries, the 
Councils believe similar incentives are generally used in the 
commercial marketplace when appropriate.
    v. One commenter encouraged the ``abandonment of CPFF contracts for 
commercial services in favor of T&M'' and urged approval of the rule.
    Response: Cost type commercial contracts are prohibited by statute.
    w. One commenter at the public meeting said the rule should apply 
only at the prime contract level since the commercial sector does not 
compete awards at the subcontract level.
    Response: The rule does not change how commercial contractors price 
subcontracts. As always, commercial contractors can use T&M contracts. 
However, the Councils believe commercial contractors often award 
subcontracts on a competitive basis.
    x. One commenter at the public meeting asked how contracting 
officers determine what is ``in scope'' for the purpose of issuing 
change orders since T&M contracts do not always specify an outcome.
    Response: The procedures for determining what is ``in scope'' for 
commercial T&M contracts are the same as those used for noncommercial 
T&M contracts. While T&M contracts do not always specify an outcome, 
they do specify the contract requirements. Determining whether the 
change is ``in scope'' or ``out of scope'' will be based on the 
requirements in the contract. The Councils note that work is within the 
scope of the contract if it is regarded as having been fairly and 
reasonably within the contemplation of the parties when the contract 
was entered into.
    y. One commenter at the Public Meeting asked if fixed-price 
contracts with prospective price redetermination contracts could serve 
the same purpose for many contracts that are awarded on a T&M basis.
    Response: Fixed-price contracts with prospective price 
redeterminations may be used in acquisitions of quantity production or 
services when it is possible to negotiate a fair and reasonable firm 
fixed price for an initial period, but not for subsequent periods of 
contract performance (see FAR 16.205-2). Conversely, a T&M contract can 
only be used when it is not possible at the time of placing the 
contract to estimate accurately the extent or duration of the work or 
to anticipate costs with any reasonable degree of confidence (see FAR 
16.601(b)). The appropriate contract type will be based on the specific 
circumstances of the acquisition.
    3. Determination and Finding (D&F).
    a. One commenter said the requirement for a D&F for every CLIN or 
order would be unduly burdensome to contracting officers and instead 
recommended revising the acquisition planning process and associated 
documentation requirements to address the possibility or probability 
for using T&M and LH based on the analysis of the requirement and 
market research. Another commenter said a D&F is needed for each task 
order. Another commenter said that the rule could be drafted to make it 
less onerous for developing and approving D&Fs and that the requirement 
for a D&F for each order when the IDIQ contract provides for both FP 
and T&M orders would be redundant and wasteful and that it is not 
necessary to require approval one level above the contracting officer 
for a D&F for an IDIQ authorizing only T&M and LH contracts. Another 
commenter said separate D&Fs should be issued for each task order under 
an IDIQ contract when all task orders will be issued as T&M/LH. Another 
commenter said a D&F should be executed by the contracting officer only 
as currently required under the FAR, i.e., a D&F should not be required 
for each order.
    Response: The Councils note that there is no requirement for a D&F 
for each CLIN and that there is no requirement for a D&F for fixed 
price orders. The Councils acknowledge that the proposed rule contains 
additional requirements for commercial T&M/LH IDIQ D&Fs than those 
required for noncommercial T&M/LH IDIQ D&Fs. While the Councils 
recognize these additional requirements may be more burdensome, the 
Councils believe the additional requirements are needed to encourage 
the preference for the use of fixed price contracts for commercial 
items as required by the statute.
    b. One commenter said the rule should make clear that a D&F will 
not be required prior to issuing a solicitation inviting both fixed 
price and T&M/LH proposals and that a D&F should only be required if 
the ultimate award is T&M or LH. Three commenters recommended setting a 
D&F threshold to limit the burden for small dollar acquisitions.
    Response: FAR 12.207(b)(1) only requires a D&F before award. It 
does not require a D&F before issuance of a solicitation. The Councils 
also note that statute requires a D&F for T&M/LH contracts regardless 
of the dollar amount.
    c. One commenter suggested adding a requirement for the D&F to 
address the specific reasons why a FFP contract was eliminated instead 
of allowing high-level generalities as explanations. The commenter also 
said the D&F should explain the boundaries of the requirement so the 
performance risk to the Government is reduced or the contract value or 
contract length is limited. Another commenter recommended changing the 
word suitable to a phrase more like ``a determination and findings 
(D&F) that the use of commercial items is not suitable if it is not 
used''.
    Response: The content of a D&F is addressed in the rule at FAR 
12.207(b). The rule requires that ``each D&F shall contain sufficient 
facts and rationale to justify that no other contract type authorized 
by this part is suitable.'' The Councils believe the rule provides 
adequate guidance to contracting officers as to the required content of 
the D&F. Sufficient facts and rationale include any necessary 
information regarding contract value and length. The D&F required by 
the statute and the rule relate to contract type only and not the 
determination of whether ``use of commercial items is not suitable.''
    d. One commenter said the D&F process appears to be adequate and 
appropriate but the commenter recommended adding a requirement to 
analyze the need to definitively control the profit level when 
determining whether a fixed price contract is appropriate.
    Response: The ``need to definitively control the profit level'' is 
not a criterion for determining whether a fixed price contract is 
suitable. T&M/LH contracts are only used ``when it is not possible at 
the time of placing the

[[Page 56324]]

contract to estimate accurately the extent or duration of the work or 
to anticipate costs with any reasonable degree of confidence.''
    e. One commenter recommended adding a requirement to FAR 
12.207(b)(1) for the contracting officer to obtain higher-level D&F 
approval before taking any actions to extend or renew the contract 
beyond five years because the Deputy Inspector General for Auditing has 
previously identified problems with service contracts such as T&M/LH 
contracts that have been extended or renewed for 10, 20, and even 30 
years with no attempt to use available historical information to 
transform the T&M/LH contract to FFP.
    Response: The Councils believe current FAR provisions adequately 
cover the commenter's recommendations. Actions to extend the contract 
or order beyond the limits established in FAR 17.204(e) require 
approval in accordance with agency procedures. In addition, FAR 
7.103(r) requires that agency heads ensure that knowledge gained on 
prior acquisitions is used to further refine requirements and 
acquisition strategies. Furthermore, the rule requires that actions be 
taken to maximize the use of fixed price contracts, including limiting 
the contract length for T&M/LH contracts.
    4. Payment.
    a. One commenter asked the Councils to consider revising the last 
sentence of FAR 52.212-4, Alternate I (a)(i)(B) (sic, paragraph 
(i)(1)(i)(B)) from ``or other substantiation specified in the 
contract'' to ``or other substantiation required by the contracting 
officer'' because the commenter believes that the specific type of 
substantiation necessary may not be apparent until after award.
    Response: The Councils do not believe it would be prudent to leave 
the contract terms open to the unilateral discretion of the contracting 
officer. The Councils believe it is imperative for commercial 
contractors to know what will be required to receive reimbursement. 
Leaving the contract terms open-ended will discourage competition and 
possibly lead to disputes. Should the parties agree after contract 
performance has begun that additional or alternative substantiation is 
needed, the contract can be appropriately modified.
    b. One commenter said payment of partial hours should not be 
dependent on specific language allowing payment and recommended payment 
for work performed unless the contract specifically provides otherwise.
    Response: The Councils agree that partial hours should be paid on a 
pro-rated basis and revised the rule to provide for payment of partial 
hours on a pro-rata basis.
    c. One commenter said the Government's unilateral right to dispute 
a payment and withhold money under the Overpayments/Underpayments 
portion of the clause is inconsistent with commercial practices and 
that disputes should be subject to the Contracts Disputes procedures.
    Response: The Councils believe that the rule is consistent with 
commercial practices since commercial companies withhold payments when 
the supplier does not comply with the terms of the contract. The 
Councils note that the Overpayments/Underpayments provisions protect 
both the Government and contractors and those contractors have full 
rights under the disputes clause of the contract to file claims and 
recover monies, including applicable interest.
    d. One commenter said the payment clause on withholds for non-
commercial T&M contracts at FAR clause 52.232-7 is not appropriate for 
commercial T&M contracts and the proposed payment provisions in 
paragraph (i) of the proposed alternate clause are acceptable.
    Response: The Councils agree that withhold provisions at FAR clause 
52.232-7 are not necessary for commercial T&M contracts and notes that 
the rule, like the ANPR, does not include the withhold provisions.
    e. One commenter said it is common for a contractor to subcontract 
for labor categories when the contractor does not have the labor 
category identified in the contract and questioned what the contractor 
will be permitted to bill and what the Government will be required to 
pay the contractor for subcontract labor, i.e., schedule rates or 
actual costs. The commenter also said clear guidance is needed on how 
to treat subcontract labor costs for both commercial and non-commercial 
T&M/LH contracts. Another commenter said the common commercial practice 
is to negotiate and pay vendors one hourly rate per labor category 
regardless of whether the work is performed by the prime or 
subcontractor employees, i.e., ``blended rates'' which include 
subcontract rates.
    Response: The Councils believe that the contract should clearly 
address how the contractor will be reimbursed for subcontract costs and 
revised the rule to provide for reimbursement of subcontractor costs at 
actual cost unless the contract specifies that the subcontract cost are 
reimbursable at the hourly rates prescribed in the schedule.
    5. Ceiling Price.
    a. One commenter said the not-to-exceed (NTE) requirements of the 
proposed rule and continued auditing of labor rates and internal costs 
by DCAA make long-standing fears about T&M contracts unrealistic.
    Response: T&M contracts will continue to comprise the highest 
contract type risk to the Government since they provide the least 
incentive for contractors to perform efficiently and economically. The 
NTE ceiling for commercial T&M contracts, like the ceiling for non-
commercial T&M contracts, simply limits the Government's risk. The 
Councils note that, like non-commercial T&M contracts, labor hours and 
not labor rates are subject to Government audit after contract award. 
The Councils further note that the Government's audit rights under the 
rule are limited to verification of labor hours and employee 
qualifications (when reimbursed on an actual cost basis), direct 
material, subcontract, and other direct costs.
    b. One commenter said the ceiling prices may be established with 
the expectation of completion even if the contractor exceeds the 
ceiling price. Another commenter said the provision will encourage 
contractors to perform services on the Government's ``promise'' to 
extend ceiling prices thereby creating additional disputes and 
controversies. The same commenter also said that the Government should 
increase the ceiling price on a timely basis because the commenter 
believes the provisions that allow contractors to be paid after the 
fact for services provided prior to the obligation of money may violate 
the Anti-Deficiency Act (ADA).
    Response: The provisions in the rule for commercial T&M contracts, 
like those for non-commercial T&M contracts, clearly state that the 
Government is not obligated to pay, and the contractor is not obligated 
to perform, after the ceiling price is reached. The Councils recognize 
that some contractors have continued to perform on noncommercial T&M 
contracts beyond the established ceiling based on a Government 
employee's belief that the ceiling price will be increased and agrees 
that this practice has led to many disputes and controversies. The 
Councils agree that the Government should increase the ceiling price on 
a timely basis when the Government intends to continue performance 
beyond the existing ceiling price and notes this is why contractors are 
required to notify the Government when they expect to exceed 85 percent 
of the ceiling price. The ADA prohibits the Government from taking any 
action to obligate the Government prior to obligating sufficient funds 
to the contract. The Councils further agree that

[[Page 56325]]

these provisions may result in a contractor being paid after the fact 
for services provided prior to the obligation of additional funds to 
increase the ceiling. However, since the Government has no obligation 
to pay for services rendered after the ceiling is reached and before 
additional monies are obligated, there is no ADA violation. After 
additional funds are obligated, the issue is allowability.
    c. One commenter said requiring the contractor to track and report 
costs against a NTE value is inconsistent with commercial practices and 
that changes to its business systems to accommodate these government-
unique requirements would not likely be justified since commercial 
customers do not need a ceiling price or notification of 85 percent of 
the NTE. The commenter said that the incentive to deliver high-quality 
support services at a reasonable price in the commercial marketplace is 
to retain a competitive advantage and maintain a reputation for 
responsive, high quality customer support. Another commenter said the 
provisions requiring notification to the Government when contractors 
believe they may exceed 85 percent of the ceiling price or that the 
total price to the Government will be substantially greater or less 
than the ceiling price in the contract makes the commercial provider 
responsible for Government management of the contract and requires 
systems and reports that are inconsistent with commercial practices. 
The commenter said this is a shift of responsibility and costs without 
justification and that commercial contractors are at risk since breach 
of this provision can result in non-payment for services rendered. 
Another commenter recommended not requiring ceiling prices when 
contracting under emergency procurement procedures.
    Response: The Councils recognize there may be unique situations in 
the commercial marketplace where commercial companies agree to open 
ended commitments; however, statute prohibits the Government from doing 
so. As discussed in b above, the Government is prohibited from taking 
any action that obligates the Government prior to obligating sufficient 
funds to the contract. The same is true even for emergency 
procurements. The Councils note that these provisions also protect 
contractors from nonpayment for services rendered by ensuring 
sufficient funds are available if the contracting officer determines 
the ceiling price should be increased. Unless notified by the 
contractor, the Government will have no way of knowing when the 
contractor will exceed the ceiling since the Government does not know 
the price for work performed and not billed or the price of work 
planned to be performed in the current period. While systems and 
reports will vary between commercial providers, the Councils believe 
commercial providers generally track and measure performance against 
negotiated contract values and can therefore report projected 
expenditures and cumulative services rendered.
    d. Another commenter said the ceiling price should equal the 
available funds since the total contract costs cannot be reasonably 
determined with any degree of confidence.
    Response: The ceiling price is required by statute. While 
establishing a ceiling price is not an exact science, the ceiling 
represents the Government's best estimate of the contract price. If the 
estimated price increases during contract performance, the contracting 
officer will only obligate additional funds when it is in the 
Government's best interest to do so.
    6. Advance Consent for Overtime. One commenter said the advance 
consent for payment of overtime is inconsistent with commercial 
practice and that commercial customers expect repair teams to work as 
necessary to complete repairs expeditiously. Another commenter believes 
that commercial standards should be utilized for overtime payment 
because requiring the contracting officer to approve overtime may delay 
the project and end up costing the Government more than results from 
contracting officer approval.
    Response: The Councils believe the consent is needed to ensure 
overtime is only used when the Government agrees the additional costs 
of overtime are justified and necessary to meet the Government's 
objective. The clause provides the flexibility for the contracting 
officer to authorize overtime at the time of contract award if deemed 
necessary to meet essential delivery and performance schedules; make up 
for delays beyond the Contractor's control; or to eliminate extended 
production bottlenecks or project delays.
    7. Materials Costs.
    a. Material Handling. One commenter recommended using loaded rates 
or a fixed charge to allow contractors to recover material handling and 
subcontract administration costs without imposing the requirements of 
FAR Part 31. Another commenter said reimbursing contractors for 
material handling does not violate the cost plus a percentage of cost 
prohibition imposed by Congress because the material handling costs are 
not a ``fee'' of the type Congress prohibited. Another commenter said 
instead of using a percentage markup, which raises cost plus percentage 
of cost contracting concerns, the rule should permit the contractor to 
charge the Government a fixed fee for providing material that will 
compensate the contractor for its indirect costs. Another commenter 
said since the work is being awarded competitively, the rule should 
allow contractors to mark up their subcontractor's T&M or LH service 
rates as long as the amount of the mark-up is fully disclosed to the 
government and the total rate, including the mark-up, does not exceed 
the contractor's own rate for the same service thereby avoiding the 
application of Part 31 and concerns over cost-plus-percentage-of-cost 
contracting. Another commenter said material handling and subcontract 
administration costs are normally marked up a percentage rate as 
mutually agreed to and negotiated by the contractor and client. Two 
other commenters said customers are charged the catalog price that 
includes material handling charge. One commenter said basing material 
handling or subcontract administration fees on actual costs is rare in 
the commercial marketplace. Another commenter said that many commercial 
contractors do not add a separate material handling fee or subcontract 
administration costs on top of their fully burdened labor rates. 
Another commenter said payment of separate indirect rates for material 
and subcontracts should not be allowed for commercial purchases. 
Another commenter said contractors that are otherwise CAS covered will 
have to allocate the indirect cost for the direct materials on FAR Part 
12 T&M contracts to those contracts even though the contractor will not 
be paid for the indirect costs and will suffer an overall loss. Another 
commenter concurred with the ANPR's proposed prohibition on mark-ups on 
materials costs.
    Response: The comments reflect a varying set of commercial 
practices for material handling and subcontract administration costs. 
The Councils believe it is important to provide as much flexibility as 
possible without violating the cost plus percentage of cost 
prohibition. The Councils believe use of a fixed rate violates the cost 
plus percentage of cost contract prohibition. Therefore, the rule does 
not permit application of a fixed rate. The Councils believe use of a 
fixed amount may be appropriate and revised the rule accordingly. 
However, the fixed amounts for indirect costs should exclude any 
amounts already included in the schedule labor rates. Finally, the

[[Page 56326]]

Councils note that while the ANPR did not permit direct reimbursement 
for material handling, nothing in the ANPR or rule prevents contractors 
from including material handling in the fully burdened labor rates.
    b. Most Favored Customer Terms. One commenter cautioned against use 
of the mandated ``most favorable customer'' terms for materials the 
contractor sells rather than purchasing from outside vendors. Another 
commenter said the ``most favored customer'' price clauses pose 
numerous compliance risks to industry and are inconsistent with 
commercial practices. The commenter said it cannot ensure that the 
catalog price for a part is no higher than the market price or the 
``most favored customer'' price.
    Response: The Councils note ``most favored customer'' pricing is 
consistent with the provisions for noncommercial T&M/LH contracts but 
not consistent with the general allowability provisions for material 
costs at FAR 31.205-26(f) and that the Councils are currently 
considering changes to the provisions for noncommercial T&M contracts. 
The Councils believe the provisions at FAR 31.205-27(e) are more 
appropriate for commercial contracts and revised the rule to permit 
reimbursement at the catalog or market price when the materials 
furnished by the contractor meet the definition of a commercial item at 
FAR 2.101. In addition, the Councils note that the ANPR failed to 
address interdivisional transfers. The Councils also revised the rule 
to specify the procedures for interdivisional transfers on commercial 
T&M/LH contracts consistent with the provisions of FAR 31.205-26(e).
    c. Most Advantageous Pricing. One commenter said requiring ``most 
advantageous prices'' for purchases of material from outside vendors is 
inconsistent with commercial practices and the Government's own ``best 
value'' requirement. The commenter believes Government auditors will 
interpret ``most advantageous'' to mean lowest price when there are 
sound business reasons to procure from other than lowest price. The 
commenter said when prices are set by the initial competition, no 
further Government action should be taken. Further, the commenter said 
if the Government is concerned about product pricing, the Government 
should furnish the materials to the contractor so the Government, and 
not the contractor, will incur the unnecessary costs and risks 
associated with the proposed standards of most advantageous prices.
    Response: The Councils believe the rule is consistent with 
commercial practices and the Government's ``best value'' determination 
because the rule, like commercial practice and the best value 
determinations, considers factors other than lowest price, i.e., prompt 
delivery and quality materials. Since the rule specifically identifies 
factors other than lowest price, the Councils believe Government 
auditors will properly consider these other factors. In addition, the 
Councils agree additional Government action would not be needed if the 
material prices were set by the initial competition; however, the 
material price for commercial T&M contracts are not set at time of 
contract award. Instead, the Government reimburses contractors based on 
actual costs or catalog or market prices for the materials furnished by 
the contractors. Finally, the Councils do not believe contractors will 
incur additional costs or risks to buy materials at the most 
advantageous price because the Councils believe commercial companies 
already consider the price, quality, and availability before acquiring 
materials. The rule requires the contractor to obtain materials at the 
most advantageous prices ``to the extent able.''
    d. Refunds. One commenter said requiring contractors to give the 
Government credit for cash and trade discounts, rebates, scrap, 
commissions, and other amounts that have accrued to the benefit of the 
contractor is inconsistent with commercial practices. The commenter 
also said commercial companies apply commercial pricing standards for 
its labor and spares catalog pricing for materials. Another commenter 
said the Government is arbitrarily establishing a method of pricing 
materials that is inconsistent with commercial practices and requires 
accounting of ``rebates, refunds and discounts that are received or 
accrued to the contractor.'' The commenter believes this tracking is 
unjustified, would be very costly, and ultimately result in many 
disputes that in turn would be costly for both Government and 
commercial services contractors for audits, disputes and legal fees. 
The commenter recommended that the Government rely on competition as 
means to determine the price is fair and reasonable. Another commenter 
said that if a contracting officer is responsible for enforcing this 
requirement of giving the Government credit for all discounts and 
rebates, it may be advisable to consider allowing the CO to require 
supporting information from the contractor. Another commenter 
recommends that these contracts include refund or price reduction 
clauses allowing the Government to recoup any overages identified 
through