Federal Acquisition Regulation; Accounting for Unallowable Costs, 57463-57467 [05-19476]
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Federal Register / Vol. 70, No. 189 / Friday, September 30, 2005 / Rules and Regulations
originally authorized under the Federal
Acquisition Streamlining Act of 1994 (Public
Law 103–355, Sec. 7102) expired. This
provision, as implemented in Federal
Acquisition Regulation subpart 19.11
authorized agencies to apply the price
evaluation adjustment to benefit certain
small disadvantaged business concerns in
competitive acquisitions. This change may
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 civilian agencies
(excluding NASA and Coast Guard) will no
longer have the authority to apply the price
evaluation adjustment to benefit certain
small disadvantaged business concerns in
competitive acquisitions. However, the price
evaluation adjustment is still authorized for
the Department of Defense, U.S. Coast Guard,
and NASA.
The FAR Secretariat has submitted a
copy of the IRFA to the Chief Counsel
for Advocacy of the Small Business
Administration. Interested parties may
obtain a copy from the FAR Secretariat.
The Councils will consider comments
from small entities concerning the
affected FAR Part 19 in accordance with
5 U.S.C. 610. Interested parties must
submit such comments separately and
should cite 5 U.S.C 601 et seq. (FAC
2005–06, FAR case 2005–002), in
correspondence.
C. Paperwork Reduction Act
The Paperwork Reduction Act does
not apply because the changes to the
FAR do not impose information
collection requirements that require the
approval of the Office of Management
and Budget under 44 U.S.C. 3501 et seq.
D. Determination to Issue an Interim
Rule
17:16 Sep 29, 2005
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List of Subjects in 48 CFR Parts 19 and
52
Government procurement.
Dated: September 22, 2005.
Julia B. Wise,
Director, Contract Policy Division.
Therefore, DoD, GSA, and NASA
amend 48 CFR parts 19 and 52 as set
forth below:
I 1. The authority citation for 48 CFR
parts 19 and 52 continues to read as
follows:
I
Authority: Authority: 40 U.S.C. 121(c); 10
U.S.C. chapter 137; and 42 U.S.C. 2473(c).
Disadvantaged Business Concerns (SEP
2005) (10 U.S.C. 2323) (if the offeror
elects to waive the adjustment, it shall
so indicate in its offer).
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I 4. Amend section 52.219–23 by
revising the date of the clause and
paragraph (b)(1)(ii) of the clause to read
as follows:
52.219–23 Notice of Price Evaluation
Adjustment for Small Disadvantaged
Business Concerns.
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*
*
*
NOTICE OF PRICE EVALUATION
ADJUSTMENT FOR SMALL
DISADVANTAGED BUSINESS CONCERNS
(SEP 2005)
*
PART 19—SMALL BUSINESS
PROGRAMS
2. Amend section 19.1102 by
redesignating paragraphs (a) and (b) as
(b) and (c), respectively, and adding a
new paragraph (a) to read as follows:
I
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*
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*
(b) Evaluation adjustment. (1)* * *
(ii) An otherwise successful offer from
a historically black college or university
or minority institution.
*
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[FR Doc. 05–19475 Filed 9–29–05; 8:45 am]
BILLING CODE 6820–EP–S
19.1102
Applicability.
(a) This subpart applies to the
Department of Defense, National
Aeronautics and Space Administration,
and the U.S. Coast Guard. Civilian
agencies do not have the statutory
authority (originally authorized in the
Federal Acquisition Streamlining Act of
1994 (Public Law 103–355, Sec. 7102))
for use of the Small Disadvantaged
Business (SDB) price evaluation
adjustment.
*
*
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I 2. Amend section 19.1103 by revising
paragraph (a)(2) to read as follows:
19.1103
A determination has been made under
the authority of the Secretary of Defense
(DoD), the Administrator of General
Services (GSA), and the Administrator
of the National Aeronautics and Space
Administration (NASA) that urgent and
compelling reasons exist to promulgate
this interim rule without prior
opportunity for public comment. This
action is necessary because the small
disadvantaged business price evaluation
adjustment for civilian agencies other
than NASA and Coast Guard, originally
authorized under the Federal
Acquisition Streamlining Act of 1994
(Public Law 103–355, Sec. 7102)
expired. This revision to the FAR is
necessary to ensure that civilian
agencies (except Coast Guard and
NASA) are aware that the price
evaluation adjustment should not be
applied to their acquisitions. However,
pursuant to Public Law 98–577 and FAR
1.501, the Councils will consider public
comments received in response to this
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interim rule in the formation of the final
rule.
57463
Procedures.
(a)* * *
(2) An otherwise successful offer from
a historically black college or university
or minority institution.
*
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PART 52—SOLICITATION PROVISIONS
AND CONTRACT CLAUSES
3. Amend section 52.212–5 by
revising the date of the clause and
paragraph (b)(10)(i) of the clause to read
as follows:
I
52.212–5 Contract Terms and Conditions
Required to Implement Statutes or
Executive Orders—Commercial Items.
*
*
*
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*
CONTRACT TERMS AND CONDITIONS
REQUIRED TO IMPLEMENT STATUTES OR
EXECUTIVE ORDERS—COMMERCIAL
ITEMS (SEP 2005)
*
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*
*
*
(b)* * *
(10)(i) 52.219–23, Notice of Price
Evaluation Adjustment for Small
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DEPARTMENT OF DEFENSE
GENERAL SERVICES
ADMINISTRATION
NATIONAL AERONAUTICS AND
SPACE ADMINISTRATION
48 CFR Part 31
[FAC 2005–06; FAR Case 2004–006; Item
IX]
RIN 9000–AK06
Federal Acquisition Regulation;
Accounting for Unallowable Costs
Department of Defense (DoD),
General Services Administration (GSA),
and National Aeronautics and Space
Administration (NASA).
ACTION: Final rule.
AGENCIES:
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 revising language
regarding accounting for unallowable
costs. The final rule adds language
which provides specific criteria on the
use of statistical sampling as a method
to identify unallowable costs, including
the applicability of penalties for failure
to exclude certain projected
unallowable costs. The final rule also
revises the language regarding advance
agreements by adding statistical
sampling methods as an example for
which advance agreements between the
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contracting officers and contractors may
be appropriate.
DATES: Effective Date: October 31, 2005.
FOR FURTHER INFORMATION CONTACT: The
FAR Secretariat at (202) 501–4755 for
information pertaining to status or
publication schedules. For clarification
of content, contact Mr. Jeremy Olson at
(202) 501–3221. Please cite FAC 2005–
06, FAR case 2004–006.
SUPPLEMENTARY INFORMATION:
A. Background
DoD, GSA, and NASA published a
proposed FAR rule for public comment
in the Federal Register at 68 FR 28108,
May 22, 2003, under FAR case 2002–
006. The proposed rule related to FAR
31.201–6, Accounting for unallowable
costs, and to FAR 31.204, Application of
principles and procedures. No public
comments were received on the
proposed rule relating to FAR 31.204,
and the Councils decided that the FAR
31.204 proposed rule should be
converted to a final rule with no
changes to the proposed rule. Public
comments were received on the
proposed rule relating to FAR 31.201–6,
and the Councils decided to make
substantive changes to the proposed
rule and published a second proposed
rule under separate FAR case 2004–006
in the Federal Register at 69 FR 58014,
September 28, 2004, with a request for
comments by November 29, 2004.
Five respondents submitted public
comments in response to the second
proposed FAR rule. A discussion of
these public comments is provided
below. The Councils considered all
comments and concluded that the
proposed rule should be converted to a
final rule, with changes to the proposed
rule to address the concerns raised in
the public comments. Differences
between the second proposed rule and
the final rule are discussed in
Comments 1, 2, and 3, below.
Public Comments
Application of statistical sampling, FAR
31.201–6(c)(2).
Comment 1: One respondent
recommends clarifying paragraph (c)(2)
to make it clear that this paragraph
refers to contractors, not the
Government. The respondent therefore
recommends revising the first sentence
to read as follows:
‘‘Statistical sampling is an acceptable
practice for contractors to follow in
accounting for and presenting unallowable
costs provided the following criteria are
met.’’
Councils’ response: Concur. The
Councils believe that the proposed
change will enhance the clarity of the
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rule and emphasize that it is the
contractor’s ultimate responsibility for
complying with the accounting and
presentation of unallowable costs as
prescribed in paragraph (c)(1).
Therefore, the respondent’s proposed
language is added to FAR 31.201–
6(c)(2). While it is the intent of the
Councils to specifically state that
statistical sampling is an acceptable
method for contractors to comply with
the identification and segregation
requirements of this rule, this language
in no way binds or limits the
Government from performing their
responsibilities in fulfilling the
requirements for establishing indirect
cost rates in accordance with FAR
Subpart 42.7, Indirect Cost Rates.
Application of penalties, FAR 31.201–
6(c)(3).
Comment 2:Three respondents
recommend that the proposed paragraph
(c)(3) be revised. One respondent
believes that the proposed paragraph
(c)(3) will cause more confusion than it
is intended to preclude. This
respondent states that the penalty
provisions of FAR 42.709 can be
invoked in statistical sampling by using
a simpler paragraph that reads as
follows:
‘‘For any cost in the selected sample that
is subject to the penalty provisions at FAR
42.709, the amount projected to the sampling
universe from that sampled cost is also
subject to the same penalty provisions.’’
The second respondent believes that
the proposed paragraph (c)(3) should be
simplified to improve clarity and
eliminate redundant text from FAR
42.709. This respondent believes that
the penalty provisions in FAR 42.709
can be applied when sampling is used
with a simpler, more concise paragraph
that reads as follows:
‘‘Any unallowable indirect costs that are
not excluded from the universe, either as part
of the projection of sample results or separate
review of transactions, are subject to the
penalty provisions at FAR 42.709.’’
The third respondent believes that the
proposed paragraph (c)(3) is rather
confusing and subject to
misinterpretation. This respondent
therefore recommends that the
paragraph be revised to read as follows:
‘‘For any cost in the selected sample that
is subject to the penalty provisions at FAR
42.709, the associated projected amount to
the sampling universe derived from that
sampled item is also subject to the same
penalty provisions.’’
This respondent states that if the
proposed language is retained, the
Councils need to address the following:
(a) The wording in (c)(3)(i) ‘‘excluded
from any final indirect rate proposal’’ is
technically incorrect. The amounts are
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not ‘‘excluded’’ from the ‘‘proposal’’, as
the proposal would include gross,
withdrawn, and claimed/recoverable
costs. The respondent therefore
recommends that this would need to be
revised to read ‘‘The following amounts
must be excluded from any proposed
final indirect rates or....’’
(b) Proposed paragraph (c)(3)(i)(B) is
not clear as to what is meant by
‘‘determined to be unallowable.’’ This
could relate to paragraph (b) of this cost
principle or it could relate to FAR
42.709–3(b) or something else.
(c) Proposed paragraph (c)(3)(iii)
appears redundant and unnecessary.
Paragraph (c)(3)(iii) provides ‘‘...are
subject to the penalties provisions at
FAR 42.709.’’ By virtue of this reference
that includes contract applicability
language at 42.709–6, it does not appear
necessary to provide another paragraph
with the same type of contract
applicability language.
Councils’ response: Concur. The
Councils agree that the proposed
language was potentially confusing. The
Councils therefore recommend
simplifying the language at FAR 31.201–
6(c)(3) to read as follows:
‘‘For any indirect cost in the selected
sample that is subject to the penalty
provisions at FAR 42.709, the amount
projected to the sampling universe from that
sampled cost is also subject to the same
penalty provisions.’’
The Councils note that the intent of
the subject language in both the
proposed rule and the final rule is the
same.
Advance agreements, FAR 31.201–
6(c)(4) and FAR 31.109.
Comment 3: Two respondents assert
that paragraph (c)(4) is written in such
a way as to suggest there is a
requirement for an advance agreement.
One respondent does not believe the
potentially prescriptive language at
paragraph (c)(4) is consistent with the
examples of costs at FAR 31.109(h).
Therefore, this respondent recommends
eliminating this paragraph. The
respondent further notes that if it is
determined that the advance agreement
reference must remain, the following
text would be more acceptable to the
contracting parties:
‘‘An advance agreement (see 31.109) with
respect to compliance with subparagraph
(c)(3) of this subsection may be useful and
desirable.’’
The second respondent believes it
would be more appropriate and
consistent with the verbiage used in
other cost principles to simply reference
FAR 31.109, such as is done in FAR
31.205–37. This respondent therefore
recommends that the language at FAR
31.109(h) include sampling for
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unallowable costs as another example of
items that may require an advance
agreement, and that paragraph (c)(4) be
revised to read as follows:
‘‘See 31.109 regarding advance
agreements.’’
Councils’ response: Partially concur.
The Councils do not believe the
proposed language requires an advance
agreement. The proposed language
states that use of statistical sampling
should be the subject of an advance
agreement. While the Councils believe
that the advance agreement language
should remain in FAR 31.201–6, the
Councils do agree that it would be
helpful to add sampling to FAR 31.109
as an example of the type of item for
which an advance agreement may be
appropriate, and therefore have added
‘‘statistical sampling methods’’ to FAR
31.109(a) and 31.109(h)(17).
Comment 4: One respondent asserts
that if the proposed rule is enacted, the
rule should require an advance
agreement that specifies what an
adequate sampling plan entails. As
such, this respondent recommends that
paragraph (c)(4) require an advance
agreement that documents the objective
of the sample, the population, the
measures, the sampling parameters, the
confidence level, the precision, the
sampling design, and the decision rule.
Councils’ response: Nonconcur. The
Councils believe the comments
submitted in response to the proposed
rule and the second proposed rule
demonstrate that it is preferable to
provide general criteria rather than
specific requirements. The use of
specific requirements reduce the
flexibility of the contracting parties to
apply sampling in a manner that
maximizes its efficient use while
continuing to protect the Government
interests. The Councils believe that the
requirements for the sample to be a
reasonable representation of the
sampling universe, to permit audit
verification, and to apply penalties to
any projected amounts provides
adequate protection for the Government
without unduly restricting the effective
use of proper statistical sampling
techniques.
In addition, the Councils do not
believe an advance agreement should be
required. However, the Councils believe
it is important that the rule clearly state
that it is the contractor’s responsibility
to prove compliance with the sampling
criteria in FAR 31.201–6(c) when no
advance agreement exists. When a
contractor elects to use statistical
sampling without entering into an
advance agreement, the contractor is at
risk that the Government will find the
sampling plan in noncompliance with
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FAR 31.201–6(c), and the Government
will perform their own sampling or even
possibly a 100 percent review of the
costs at issue. In those cases where the
contracting officer or contracting
officer’s representative challenges the
contractor’s sampling methods, and no
advance agreement exists, the burden of
proof should be on the contractor to
establish that the sampling methods
comply with the FAR requirements. The
final rule at paragraph (c)(5) has been
revised to include this provision. To
mitigate the potential for disputes
regarding the acceptability of sampling
methods, it is generally advisable for the
contractor and the Government to enter
into an advance agreement. Since the
advance agreement has a significant
impact on the accounting for
unallowable costs, the final rule at
paragraph (c)(4) requires that the
contracting officer request auditor input
prior to entering into such agreements.
Directly associated costs, FAR 31.201–
6(e).
Comment 5: One respondent believes
that FAR 31.201–6(e) violates CAS 405
(Accounting for Unallowable Costs) and
is subject to legal challenge by any
Government contractor to which a
procuring or administering agency
might seek to apply it. This respondent
believes that the proposed rule sends a
message to the contracting community
that contracting agencies follow CAS
only where it suits them to do so, and
may disregard CAS where it does not
suit their interests. This respondent
asserts that paragraph (e) ‘‘...departs
from the CAS 405 definition and
substitutes a ‘materiality’ test for the
‘but for’ test and further extends the
materiality test to encompass even more
factors that are unrelated to the CAS
definition. While a suitable materiality
test could itself be reconcilable with the
CAS ‘but for’ test, the FAR has gone
well beyond this point to encompass
additional factors that directly
contradict the CAS 405 definition.’’ The
respondent states that the FAR could be
revised to comply with CAS 405. The
respondent asserts that ‘‘a point clearly
comes at which a particular cost
becomes so significant that common
sense tells us the ‘but for’ test is
satisfied. Thus, a test seeking to
establish that point using the term
‘materiality’ would be a valid
implementation of CAS 405.’’ The
respondent therefore recommends that
the FAR specify ‘‘a sensible materiality
test and delete the other two current
criteria of FAR 31.201–6(e).’’ The
respondent further noted that it has
submitted copies of its comments to the
CAS Board and suggested that the Board
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‘‘review the conflict between CAS and
FAR in the identification and allocation
of directly associated cost and take what
steps it may consider appropriate to
defend its exclusive jurisdiction in this
area.’’
Councils’ response: Nonconcur. The
Councils do not believe the language at
paragraph (e) conflicts with CAS 405.
The current language at FAR 31.201–
6(e)(2), which has been in the FAR for
over twenty years, has not been ruled to
conflict with CAS 405 by any Court or
by the CAS Board. The Councils believe
this is important language, because it
provides contracting personnel and
contractors with specific information on
when to treat salaries and expenses as
directly associated costs. As such, the
Councils believe this language should
be retained.
Sampling for large dollar transactions,
FAR 31.201(c)(2)(ii).
Comment 6: One respondent believes
that the proposed requirement at FAR
31.201–6(c)(2)(ii) that ‘‘all large dollar
and high risk transactions are separately
reviewed for unallowable costs and
excluded from the sampling process’’ is
overly restrictive. This respondent notes
that its past experience has shown that
sampling for unallowable costs is most
efficient and effective for high volume
accounts with low dollar, low risk
transactions. Therefore, the respondent
believes that for a given universe, there
is often no need or benefit to set aside
transactions for 100 percent review. The
respondent notes that identification of
any transactions requiring 100 percent
review and the establishment of
sampling strata or clusters as necessary
are all inherent requirements of
developing a sampling plan that
provides a ‘‘reasonable representation of
the sampling universe,’’ as required by
FAR 31.201–6(c)(2)(i). The respondent
therefore recommends that the language
in paragraph (c)(2)(ii) be deleted.
Councils’ response: Nonconcur. The
Councils agree with the respondent that
a reasonable representation of the
sampling universe would require
elimination of items that due to their
nature and/or dollar amount are not
reasonably similar to the other items in
the universe. However, the Councils
also believe this is an important area
that requires clear language to assure
that all parties understand that large
dollar and high risk items must be
removed from the sampling universe.
Therefore, paragraph (c)(2)(ii) has been
retained.
Use of statistical sampling, General.
Comment 7: A respondent believes
that the use of statistical sampling will
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result in confusion, inconsistencies, and
disputes. The respondent believes that
statistical sampling should not replace
accounting policies and procedures for
properly identifying and segregating
unallowable costs. The respondent
states that unallowable costs should be
appropriately identified and excluded
when they are initially incurred and
recorded. The respondent asserts that
this internal control assures that
unallowable costs are accounted for and
excluded from a contractor’s
submission. The respondent states that
allowing statistical sampling for
identifying unallowable costs weakens
this key internal control. The
respondent further notes that if
sampling is to be permitted, the
Government and the contractor must
develop the expertise in statistical
sampling to ensure sampling plans are
adequate and executed properly.
Councils’ response: Nonconcur. The
Councils note that CAS 405 (Accounting
for Unallowable Costs) already permits
sampling. As such, it would be a
conflict with the CAS to state that
sampling is not permitted for CAScovered contracts. While the FAR could
add a specific provision stating that
statistical sampling is not permitted for
non-CAS covered contracts, the
Councils do not believe this would be
a prudent business action. The Councils
believe that the use of statistical
sampling should apply to all contracts
covered by FAR Part 31, Contract Cost
Principles and Procedures. The purpose
of the proposed rule is to provide some
general structure to the process.
Statistical sampling, when properly
applied, is acceptable for both
segregating unallowable costs and
verifying that such costs have been
properly segregated (either by specific
identification or using appropriate
sampling techniques). A properly
executed sampling plan should
approximate the total unallowable costs
from the sample universe. Internal
controls and procedures established to
meet the sampling objectives and
evaluation of the sample selections
should still be a key component of this
process. The Councils are also
concerned that it would be oxymoronic
to argue that statistical sampling is not
acceptable for segregating unallowable
costs but is acceptable for verifying the
validity of that segregation. As to the
expertise that needs to be developed,
the Councils again note that statistical
sampling is already permitted by CAS,
and is often used in both industry and
the Government for many different
types of applications. Thus, the
Councils believe the necessary expertise
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for applying statistical sampling already
exists within both the Government and
the contractor community.
Comment 8: One respondent believes
that the FAR should include guidance
similar to that issued by the IRS in
Revenue Procedure 2004–29. This
respondent states that this Revenue
Procedure establishes guidelines for
using statistical sampling methods for
meals and entertainment expenses. The
respondent notes that this Revenue
Procedure covered the sampling plan
standards, the methods and attributes to
be used with a sampling plan, the
sampling documentation standards, and
the technical formulas. In addition, the
procedure specified a 95 percent onesided confidence level.
Councils’ response: Nonconcur. The
Councils believe that such prescriptive
language is not necessary. The Councils
believe that it is preferable to provide
for more general requirements regarding
acceptable statistical methods than to
provide a detailed listing of what must
be present for each and every situation.
This is not a significant regulatory
action and, therefore, was not subject to
review under Section 6(b) of Executive
Order 12866, Regulatory Planning and
Review, dated September 30, 1993. This
rule is not a major rule under 5 U.S.C.
804.
B. Regulatory Flexibility Act
The Department of Defense, the
General Services Administration, and
the National Aeronautics and Space
Administration certify that this final
rule will not have a significant
economic impact on a substantial
number of small entities within the
meaning of the Regulatory Flexibility
Act, 5 U.S.C. 601, et seq., because most
contracts awarded to small entities use
simplified acquisition procedures or are
awarded on a competitive, fixed-price
basis and do not require application of
the cost principle discussed in this rule.
C. Paperwork Reduction Act
The Paperwork Reduction Act 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: September 22, 2005.
Julia B. Wise,
Director, Contract Policy Division.
Therefore, DoD, GSA, and NASA
amend 48 CFR part 31 as set forth
below:
I
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PART 31–CONTRACT COST
PRINCIPLES AND PROCEDURES
1. The authority citation for 48 CFR
part 31 continues to read as follows:
I
Authority: 40 U.S.C. 121(c); 10 U.S.C.
chapter 137; and 42 U.S.C. 2473(c).
2. Amend section 31.109 by—
a. Removing the period from the end
of the third sentence of paragraph (a)
and adding ‘‘and on statistical sampling
methodologies at 31.201–6(c).’’ in its
place; and
I b. Removing from the introductory
text of paragraph (h) the words ‘‘of
costs’’; removing from paragraph (h)(15)
the last word ‘‘and’’; removing the
period from the end of paragraph (h)(16)
and adding ‘‘; and’’ in its place; and
adding paragraph (h)(17) to read as
follows:
I
I
31.109
Advance agreements.
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*
*
(h) * * *
(17) Statistical sampling methods (see
31.201–6(c)(4).
I 3. Amend section 31.201–6 by—
I a. Removing from the second sentence
of paragraph (a) and the first sentence of
paragraph (b) the word ‘‘which’’ each
time it appears (3 times) and adding the
word ‘‘that’’ in its place;
I b. Revising paragraph (c);
I c. Removing from the first sentence of
paragraph (d) the word ‘‘which’’ the first
time it appears and adding ‘‘that’’ in its
place; and
I d. Removing from the end of
paragraph (e)(1)(ii) the word ‘‘or’’ and
adding the word ‘‘and’’ in its place; and
revising paragraph (e)(3) to read as
follows:
31.201–6
costs.
Accounting for unallowable
*
*
*
*
*
(c)(1) The practices for accounting for
and presentation of unallowable costs
must be those described in 48 CFR
9904.405, Accounting for Unallowable
Costs.
(2) Statistical sampling is an
acceptable practice for contractors to
follow in accounting for and presenting
unallowable costs provided the criteria
in paragraphs (c)(1)(i), (c)(1)(ii), and
(c)(1)(iii) of this subsection are met:
(i) The statistical sampling results in
an unbiased sample that is a reasonable
representation of the sampling universe.
(ii) Any large dollar value or high risk
transaction is separately reviewed for
unallowable costs and excluded from
the sampling process.
(iii) The statistical sampling permits
audit verification.
(3) For any indirect cost in the
selected sample that is subject to the
E:\FR\FM\30SER4.SGM
30SER4
Federal Register / Vol. 70, No. 189 / Friday, September 30, 2005 / Rules and Regulations
penalty provisions at 42.709, the
amount projected to the sampling
universe from that sampled cost is also
subject to the same penalty provisions.
(4) Use of statistical sampling
methods for identifying and segregating
unallowable costs should be the subject
of an advance agreement under the
provisions of 31.109 between the
contractor and the cognizant
administrative contracting officer or
Federal official. The advance agreement
should specify the basic characteristics
of the sampling process. The cognizant
administrative contracting officer or
Federal official shall request input from
the cognizant auditor before entering
into any such agreements.
(5) In the absence of an advance
agreement, if an initial review of the
facts results in a challenge of the
statistical sampling methods by the
contracting officer or the contracting
officer’s representative, the burden of
proof shall be on the contractor to
establish that such a method meets the
criteria in paragraph (c)(2) of this
subsection.
*
*
*
*
*
(e)(1) * * *
(3) When a selected item of cost under
31.205 provides that directly associated
costs be unallowable, such directly
associated costs are unallowable only if
determined to be material in amount in
accordance with the criteria provided in
paragraphs (e)(1) and (e)(2) of this
subsection, except in those situations
where allowance of any of the directly
associated costs involved would be
considered to be contrary to public
policy.
[FR Doc. 05–19476 Filed 9–29–05; 8:45 am]
BILLING CODE 6820–EP–S
DEPARTMENT OF DEFENSE
GENERAL SERVICES
ADMINISTRATION
NATIONAL AERONAUTICS AND
SPACE ADMINISTRATION
48 CFR Part 31
[FAC 2005–06; FAR Case 2003–002; Item
X]
RIN 9000–AJ81
Federal Acquisition Regulation;
Reimbursement of Relocation Costs
on a Lump-Sum Basis
Department of Defense (DoD),
General Services Administration (GSA),
and National Aeronautics and Space
Administration (NASA).
ACTION: Final rule.
AGENCIES:
VerDate Aug<31>2005
17:16 Sep 29, 2005
Jkt 205001
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 revising the
relocation cost principle to permit
contractors the option of being
reimbursed on a lump-sum basis for
three types of employee relocation costs:
costs of finding a new home; costs of
travel to the new location; and costs of
temporary lodging. These three types of
costs are in addition to the
miscellaneous relocation costs for
which lump-sum reimbursements are
already permitted.
DATES: Effective Date: October 31, 2005.
FOR FURTHER INFORMATION CONTACT: The
FAR Secretariat at (202) 501–4755 for
information pertaining to status or
publication schedules. For clarification
of content, contact Mr. Jeremy Olson,
Procurement Analyst, at (202) 501–
3221. Please cite FAC 2005–06, FAR
case 2003–002.
SUPPLEMENTARY INFORMATION:
A. Background
The Councils originally considered
expanding the reimbursement of
relocation costs on a lump-sum basis
under FAR case 1997–032, Relocation
Costs. However, the Councils decided to
study this issue further under a separate
case and published a final rule on the
remainder of FAR case 1997–032 in the
Federal Register at 67 FR 43516, June
27, 2002. On October 24, 2002, the
Councils published a Notice of Request
for Comments in the Federal Register
(67 FR 65468) with a list of questions
regarding the use of a lump-sum
approach for reimbursing employee
relocation expenses. After reviewing the
public comments that were submitted in
response to that Federal Register notice,
the Councils held a public meeting on
February 6, 2003, to further explore the
views of interested parties on this issue.
Public comments and the discussions
at the public meeting revealed that, in
addition to the miscellaneous relocation
costs for which lump-sum
reimbursements are already permitted
by FAR 31.205–35(b)(4), it is common
commercial practice to reimburse
relocating employees on a lump-sum
basis for their house-hunting, final
move, and temporary lodging expenses.
A FAR case was opened to expand the
relocation cost principle to permit
lump-sum reimbursements for these
three types of costs.
The Councils published a proposed
FAR rule in the Federal Register at 68
FR 69264, December 11, 2003, with a
request for comments by February 9,
PO 00000
Frm 00021
Fmt 4701
Sfmt 4700
57467
2004. Seven respondents submitted
comments on the proposed FAR rule.
Two respondents supported the
proposed rule, four respondents
opposed it, and one respondent
requested clarification. A discussion of
the comments is provided below. The
Councils considered all comments and
concluded that the proposed rule
should be converted to a final rule, with
changes to the proposed rule.
Differences between the proposed rule
and final rule are discussed in Section
B, Comment 1, and Section C below.
B. Public Comments
No standard for measuring
reasonableness
1. Comment: Four respondents
opposed the proposed rule and
expressed the concern that with
contractors spending significant
amounts on employee relocations, the
Government would have no objective
standard for evaluating the
reasonableness of the new lump-sum
amounts being claimed.
After conducting surveys that suggest
‘‘contractors are incurring hundreds of
millions of dollars of relocation costs
annually,’’ the first respondent
expressed ‘‘significant concern as to
where an auditor, contracting officer, or
contractor could turn to gather adequate
data to make a determination as to the
appropriateness and reasonableness of
the lump-sum method or resulting
amount.’’ The respondent concluded its
letter by stating it ‘‘believes that paying
a lump-sum for such significant
amounts places an unacceptable risk on
the Government and creates an
excessive audit task to establish
allowability of relocation costs.’’
Also citing the above mentioned
survey of the large amounts of
relocation costs allocated to cost
reimbursement contracts each year, the
second respondent stated that ‘‘allowing
lump-sum reimbursement of these costs
without supporting documentation is
not in the best interests of the
Government’’ because ‘‘the proposed
revision would subject millions of
dollars to a subjective test of
reasonableness requiring Government
auditors, contracting officials, attorneys,
and others to expend significantly more
resources to determine the
reasonableness of the claimed costs,
review the determination, and resolve
disputes between the Government and
the contractor involving disallowed
costs.’’ The respondent went on to
suggest ‘‘contractors will also incur
additional expenses in excess of any
administrative costs saved supporting
the reasonableness of the relocation
costs.’’
E:\FR\FM\30SER4.SGM
30SER4
]]>Agencies
[Federal Register Volume 70, Number 189 (Friday, September 30, 2005)]
[Rules and Regulations]
[Pages 57463-57467]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-19476]
-----------------------------------------------------------------------
DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Part 31
[FAC 2005-06; FAR Case 2004-006; Item IX]
RIN 9000-AK06
Federal Acquisition Regulation; Accounting for Unallowable Costs
AGENCIES: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Civilian Agency Acquisition Council and the Defense
Acquisition Regulations Council (Councils) have agreed on a final rule
amending the Federal Acquisition Regulation (FAR) by revising language
regarding accounting for unallowable costs. The final rule adds
language which provides specific criteria on the use of statistical
sampling as a method to identify unallowable costs, including the
applicability of penalties for failure to exclude certain projected
unallowable costs. The final rule also revises the language regarding
advance agreements by adding statistical sampling methods as an example
for which advance agreements between the
[[Page 57464]]
contracting officers and contractors may be appropriate.
DATES: Effective Date: October 31, 2005.
FOR FURTHER INFORMATION CONTACT: The FAR Secretariat at (202) 501-4755
for information pertaining to status or publication schedules. For
clarification of content, contact Mr. Jeremy Olson at (202) 501-3221.
Please cite FAC 2005-06, FAR case 2004-006.
SUPPLEMENTARY INFORMATION:
A. Background
DoD, GSA, and NASA published a proposed FAR rule for public comment
in the Federal Register at 68 FR 28108, May 22, 2003, under FAR case
2002-006. The proposed rule related to FAR 31.201-6, Accounting for
unallowable costs, and to FAR 31.204, Application of principles and
procedures. No public comments were received on the proposed rule
relating to FAR 31.204, and the Councils decided that the FAR 31.204
proposed rule should be converted to a final rule with no changes to
the proposed rule. Public comments were received on the proposed rule
relating to FAR 31.201-6, and the Councils decided to make substantive
changes to the proposed rule and published a second proposed rule under
separate FAR case 2004-006 in the Federal Register at 69 FR 58014,
September 28, 2004, with a request for comments by November 29, 2004.
Five respondents submitted public comments in response to the
second proposed FAR rule. A discussion of these public comments is
provided below. The Councils considered all comments and concluded that
the proposed rule should be converted to a final rule, with changes to
the proposed rule to address the concerns raised in the public
comments. Differences between the second proposed rule and the final
rule are discussed in Comments 1, 2, and 3, below.
Public Comments
Application of statistical sampling, FAR 31.201-6(c)(2).
Comment 1: One respondent recommends clarifying paragraph (c)(2) to
make it clear that this paragraph refers to contractors, not the
Government. The respondent therefore recommends revising the first
sentence to read as follows:
``Statistical sampling is an acceptable practice for contractors
to follow in accounting for and presenting unallowable costs
provided the following criteria are met.''
Councils' response: Concur. The Councils believe that the proposed
change will enhance the clarity of the rule and emphasize that it is
the contractor's ultimate responsibility for complying with the
accounting and presentation of unallowable costs as prescribed in
paragraph (c)(1). Therefore, the respondent's proposed language is
added to FAR 31.201-6(c)(2). While it is the intent of the Councils to
specifically state that statistical sampling is an acceptable method
for contractors to comply with the identification and segregation
requirements of this rule, this language in no way binds or limits the
Government from performing their responsibilities in fulfilling the
requirements for establishing indirect cost rates in accordance with
FAR Subpart 42.7, Indirect Cost Rates.
Application of penalties, FAR 31.201-6(c)(3).
Comment 2:Three respondents recommend that the proposed paragraph
(c)(3) be revised. One respondent believes that the proposed paragraph
(c)(3) will cause more confusion than it is intended to preclude. This
respondent states that the penalty provisions of FAR 42.709 can be
invoked in statistical sampling by using a simpler paragraph that reads
as follows:
``For any cost in the selected sample that is subject to the
penalty provisions at FAR 42.709, the amount projected to the
sampling universe from that sampled cost is also subject to the same
penalty provisions.''
The second respondent believes that the proposed paragraph (c)(3)
should be simplified to improve clarity and eliminate redundant text
from FAR 42.709. This respondent believes that the penalty provisions
in FAR 42.709 can be applied when sampling is used with a simpler, more
concise paragraph that reads as follows:
``Any unallowable indirect costs that are not excluded from the
universe, either as part of the projection of sample results or
separate review of transactions, are subject to the penalty
provisions at FAR 42.709.''
The third respondent believes that the proposed paragraph (c)(3) is
rather confusing and subject to misinterpretation. This respondent
therefore recommends that the paragraph be revised to read as follows:
``For any cost in the selected sample that is subject to the
penalty provisions at FAR 42.709, the associated projected amount to
the sampling universe derived from that sampled item is also subject
to the same penalty provisions.''
This respondent states that if the proposed language is retained,
the Councils need to address the following:
(a) The wording in (c)(3)(i) ``excluded from any final indirect
rate proposal'' is technically incorrect. The amounts are not
``excluded'' from the ``proposal'', as the proposal would include
gross, withdrawn, and claimed/recoverable costs. The respondent
therefore recommends that this would need to be revised to read ``The
following amounts must be excluded from any proposed final indirect
rates or....''
(b) Proposed paragraph (c)(3)(i)(B) is not clear as to what is
meant by ``determined to be unallowable.'' This could relate to
paragraph (b) of this cost principle or it could relate to FAR 42.709-
3(b) or something else.
(c) Proposed paragraph (c)(3)(iii) appears redundant and
unnecessary. Paragraph (c)(3)(iii) provides ``...are subject to the
penalties provisions at FAR 42.709.'' By virtue of this reference that
includes contract applicability language at 42.709-6, it does not
appear necessary to provide another paragraph with the same type of
contract applicability language.
Councils' response: Concur. The Councils agree that the proposed
language was potentially confusing. The Councils therefore recommend
simplifying the language at FAR 31.201-6(c)(3) to read as follows:
``For any indirect cost in the selected sample that is subject
to the penalty provisions at FAR 42.709, the amount projected to the
sampling universe from that sampled cost is also subject to the same
penalty provisions.''
The Councils note that the intent of the subject language in both
the proposed rule and the final rule is the same.
Advance agreements, FAR 31.201-6(c)(4) and FAR 31.109.
Comment 3: Two respondents assert that paragraph (c)(4) is written
in such a way as to suggest there is a requirement for an advance
agreement. One respondent does not believe the potentially prescriptive
language at paragraph (c)(4) is consistent with the examples of costs
at FAR 31.109(h). Therefore, this respondent recommends eliminating
this paragraph. The respondent further notes that if it is determined
that the advance agreement reference must remain, the following text
would be more acceptable to the contracting parties:
``An advance agreement (see 31.109) with respect to compliance
with subparagraph (c)(3) of this subsection may be useful and
desirable.''
The second respondent believes it would be more appropriate and
consistent with the verbiage used in other cost principles to simply
reference FAR 31.109, such as is done in FAR 31.205-37. This respondent
therefore recommends that the language at FAR 31.109(h) include
sampling for
[[Page 57465]]
unallowable costs as another example of items that may require an
advance agreement, and that paragraph (c)(4) be revised to read as
follows:
``See 31.109 regarding advance agreements.''
Councils' response: Partially concur. The Councils do not believe
the proposed language requires an advance agreement. The proposed
language states that use of statistical sampling should be the subject
of an advance agreement. While the Councils believe that the advance
agreement language should remain in FAR 31.201-6, the Councils do agree
that it would be helpful to add sampling to FAR 31.109 as an example of
the type of item for which an advance agreement may be appropriate, and
therefore have added ``statistical sampling methods'' to FAR 31.109(a)
and 31.109(h)(17).
Comment 4: One respondent asserts that if the proposed rule is
enacted, the rule should require an advance agreement that specifies
what an adequate sampling plan entails. As such, this respondent
recommends that paragraph (c)(4) require an advance agreement that
documents the objective of the sample, the population, the measures,
the sampling parameters, the confidence level, the precision, the
sampling design, and the decision rule.
Councils' response: Nonconcur. The Councils believe the comments
submitted in response to the proposed rule and the second proposed rule
demonstrate that it is preferable to provide general criteria rather
than specific requirements. The use of specific requirements reduce the
flexibility of the contracting parties to apply sampling in a manner
that maximizes its efficient use while continuing to protect the
Government interests. The Councils believe that the requirements for
the sample to be a reasonable representation of the sampling universe,
to permit audit verification, and to apply penalties to any projected
amounts provides adequate protection for the Government without unduly
restricting the effective use of proper statistical sampling
techniques.
In addition, the Councils do not believe an advance agreement
should be required. However, the Councils believe it is important that
the rule clearly state that it is the contractor's responsibility to
prove compliance with the sampling criteria in FAR 31.201-6(c) when no
advance agreement exists. When a contractor elects to use statistical
sampling without entering into an advance agreement, the contractor is
at risk that the Government will find the sampling plan in
noncompliance with FAR 31.201-6(c), and the Government will perform
their own sampling or even possibly a 100 percent review of the costs
at issue. In those cases where the contracting officer or contracting
officer's representative challenges the contractor's sampling methods,
and no advance agreement exists, the burden of proof should be on the
contractor to establish that the sampling methods comply with the FAR
requirements. The final rule at paragraph (c)(5) has been revised to
include this provision. To mitigate the potential for disputes
regarding the acceptability of sampling methods, it is generally
advisable for the contractor and the Government to enter into an
advance agreement. Since the advance agreement has a significant impact
on the accounting for unallowable costs, the final rule at paragraph
(c)(4) requires that the contracting officer request auditor input
prior to entering into such agreements.
Directly associated costs, FAR 31.201-6(e).
Comment 5: One respondent believes that FAR 31.201-6(e) violates
CAS 405 (Accounting for Unallowable Costs) and is subject to legal
challenge by any Government contractor to which a procuring or
administering agency might seek to apply it. This respondent believes
that the proposed rule sends a message to the contracting community
that contracting agencies follow CAS only where it suits them to do so,
and may disregard CAS where it does not suit their interests. This
respondent asserts that paragraph (e) ``...departs from the CAS 405
definition and substitutes a `materiality' test for the `but for' test
and further extends the materiality test to encompass even more factors
that are unrelated to the CAS definition. While a suitable materiality
test could itself be reconcilable with the CAS `but for' test, the FAR
has gone well beyond this point to encompass additional factors that
directly contradict the CAS 405 definition.'' The respondent states
that the FAR could be revised to comply with CAS 405. The respondent
asserts that ``a point clearly comes at which a particular cost becomes
so significant that common sense tells us the `but for' test is
satisfied. Thus, a test seeking to establish that point using the term
`materiality' would be a valid implementation of CAS 405.'' The
respondent therefore recommends that the FAR specify ``a sensible
materiality test and delete the other two current criteria of FAR
31.201-6(e).'' The respondent further noted that it has submitted
copies of its comments to the CAS Board and suggested that the Board
``review the conflict between CAS and FAR in the identification and
allocation of directly associated cost and take what steps it may
consider appropriate to defend its exclusive jurisdiction in this
area.''
Councils' response: Nonconcur. The Councils do not believe the
language at paragraph (e) conflicts with CAS 405. The current language
at FAR 31.201-6(e)(2), which has been in the FAR for over twenty years,
has not been ruled to conflict with CAS 405 by any Court or by the CAS
Board. The Councils believe this is important language, because it
provides contracting personnel and contractors with specific
information on when to treat salaries and expenses as directly
associated costs. As such, the Councils believe this language should be
retained.
Sampling for large dollar transactions, FAR 31.201(c)(2)(ii).
Comment 6: One respondent believes that the proposed requirement at
FAR 31.201-6(c)(2)(ii) that ``all large dollar and high risk
transactions are separately reviewed for unallowable costs and excluded
from the sampling process'' is overly restrictive. This respondent
notes that its past experience has shown that sampling for unallowable
costs is most efficient and effective for high volume accounts with low
dollar, low risk transactions. Therefore, the respondent believes that
for a given universe, there is often no need or benefit to set aside
transactions for 100 percent review. The respondent notes that
identification of any transactions requiring 100 percent review and the
establishment of sampling strata or clusters as necessary are all
inherent requirements of developing a sampling plan that provides a
``reasonable representation of the sampling universe,'' as required by
FAR 31.201-6(c)(2)(i). The respondent therefore recommends that the
language in paragraph (c)(2)(ii) be deleted.
Councils' response: Nonconcur. The Councils agree with the
respondent that a reasonable representation of the sampling universe
would require elimination of items that due to their nature and/or
dollar amount are not reasonably similar to the other items in the
universe. However, the Councils also believe this is an important area
that requires clear language to assure that all parties understand that
large dollar and high risk items must be removed from the sampling
universe. Therefore, paragraph (c)(2)(ii) has been retained.
Use of statistical sampling, General.
Comment 7: A respondent believes that the use of statistical
sampling will
[[Page 57466]]
result in confusion, inconsistencies, and disputes. The respondent
believes that statistical sampling should not replace accounting
policies and procedures for properly identifying and segregating
unallowable costs. The respondent states that unallowable costs should
be appropriately identified and excluded when they are initially
incurred and recorded. The respondent asserts that this internal
control assures that unallowable costs are accounted for and excluded
from a contractor's submission. The respondent states that allowing
statistical sampling for identifying unallowable costs weakens this key
internal control. The respondent further notes that if sampling is to
be permitted, the Government and the contractor must develop the
expertise in statistical sampling to ensure sampling plans are adequate
and executed properly.
Councils' response: Nonconcur. The Councils note that CAS 405
(Accounting for Unallowable Costs) already permits sampling. As such,
it would be a conflict with the CAS to state that sampling is not
permitted for CAS-covered contracts. While the FAR could add a specific
provision stating that statistical sampling is not permitted for non-
CAS covered contracts, the Councils do not believe this would be a
prudent business action. The Councils believe that the use of
statistical sampling should apply to all contracts covered by FAR Part
31, Contract Cost Principles and Procedures. The purpose of the
proposed rule is to provide some general structure to the process.
Statistical sampling, when properly applied, is acceptable for both
segregating unallowable costs and verifying that such costs have been
properly segregated (either by specific identification or using
appropriate sampling techniques). A properly executed sampling plan
should approximate the total unallowable costs from the sample
universe. Internal controls and procedures established to meet the
sampling objectives and evaluation of the sample selections should
still be a key component of this process. The Councils are also
concerned that it would be oxymoronic to argue that statistical
sampling is not acceptable for segregating unallowable costs but is
acceptable for verifying the validity of that segregation. As to the
expertise that needs to be developed, the Councils again note that
statistical sampling is already permitted by CAS, and is often used in
both industry and the Government for many different types of
applications. Thus, the Councils believe the necessary expertise for
applying statistical sampling already exists within both the Government
and the contractor community.
Comment 8: One respondent believes that the FAR should include
guidance similar to that issued by the IRS in Revenue Procedure 2004-
29. This respondent states that this Revenue Procedure establishes
guidelines for using statistical sampling methods for meals and
entertainment expenses. The respondent notes that this Revenue
Procedure covered the sampling plan standards, the methods and
attributes to be used with a sampling plan, the sampling documentation
standards, and the technical formulas. In addition, the procedure
specified a 95 percent one-sided confidence level.
Councils' response: Nonconcur. The Councils believe that such
prescriptive language is not necessary. The Councils believe that it is
preferable to provide for more general requirements regarding
acceptable statistical methods than to provide a detailed listing of
what must be present for each and every situation.
This is not a significant regulatory action and, therefore, was not
subject to review under Section 6(b) of Executive Order 12866,
Regulatory Planning and Review, dated September 30, 1993. This rule is
not a major rule under 5 U.S.C. 804.
B. Regulatory Flexibility Act
The Department of Defense, the General Services Administration, and
the National Aeronautics and Space Administration certify that this
final rule will not have a significant economic impact on a substantial
number of small entities within the meaning of the Regulatory
Flexibility Act, 5 U.S.C. 601, et seq., because most contracts awarded
to small entities use simplified acquisition procedures or are awarded
on a competitive, fixed-price basis and do not require application of
the cost principle discussed in this rule.
C. Paperwork Reduction Act
The Paperwork Reduction Act 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: September 22, 2005.
Julia B. Wise,
Director, Contract Policy Division.
0
Therefore, DoD, GSA, and NASA amend 48 CFR part 31 as set forth below:
PART 31-CONTRACT COST PRINCIPLES AND PROCEDURES
0
1. The authority citation for 48 CFR part 31 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).
0
2. Amend section 31.109 by--
0
a. Removing the period from the end of the third sentence of paragraph
(a) and adding ``and on statistical sampling methodologies at 31.201-
6(c).'' in its place; and
0
b. Removing from the introductory text of paragraph (h) the words ``of
costs''; removing from paragraph (h)(15) the last word ``and'';
removing the period from the end of paragraph (h)(16) and adding ``;
and'' in its place; and adding paragraph (h)(17) to read as follows:
31.109 Advance agreements.
* * * * *
(h) * * *
(17) Statistical sampling methods (see 31.201-6(c)(4).
0
3. Amend section 31.201-6 by--
0
a. Removing from the second sentence of paragraph (a) and the first
sentence of paragraph (b) the word ``which'' each time it appears (3
times) and adding the word ``that'' in its place;
0
b. Revising paragraph (c);
0
c. Removing from the first sentence of paragraph (d) the word ``which''
the first time it appears and adding ``that'' in its place; and
0
d. Removing from the end of paragraph (e)(1)(ii) the word ``or'' and
adding the word ``and'' in its place; and revising paragraph (e)(3) to
read as follows:
31.201-6 Accounting for unallowable costs.
* * * * *
(c)(1) The practices for accounting for and presentation of
unallowable costs must be those described in 48 CFR 9904.405,
Accounting for Unallowable Costs.
(2) Statistical sampling is an acceptable practice for contractors
to follow in accounting for and presenting unallowable costs provided
the criteria in paragraphs (c)(1)(i), (c)(1)(ii), and (c)(1)(iii) of
this subsection are met:
(i) The statistical sampling results in an unbiased sample that is
a reasonable representation of the sampling universe.
(ii) Any large dollar value or high risk transaction is separately
reviewed for unallowable costs and excluded from the sampling process.
(iii) The statistical sampling permits audit verification.
(3) For any indirect cost in the selected sample that is subject to
the
[[Page 57467]]
penalty provisions at 42.709, the amount projected to the sampling
universe from that sampled cost is also subject to the same penalty
provisions.
(4) Use of statistical sampling methods for identifying and
segregating unallowable costs should be the subject of an advance
agreement under the provisions of 31.109 between the contractor and the
cognizant administrative contracting officer or Federal official. The
advance agreement should specify the basic characteristics of the
sampling process. The cognizant administrative contracting officer or
Federal official shall request input from the cognizant auditor before
entering into any such agreements.
(5) In the absence of an advance agreement, if an initial review of
the facts results in a challenge of the statistical sampling methods by
the contracting officer or the contracting officer's representative,
the burden of proof shall be on the contractor to establish that such a
method meets the criteria in paragraph (c)(2) of this subsection.
* * * * *
(e)(1) * * *
(3) When a selected item of cost under 31.205 provides that
directly associated costs be unallowable, such directly associated
costs are unallowable only if determined to be material in amount in
accordance with the criteria provided in paragraphs (e)(1) and (e)(2)
of this subsection, except in those situations where allowance of any
of the directly associated costs involved would be considered to be
contrary to public policy.
[FR Doc. 05-19476 Filed 9-29-05; 8:45 am]
BILLING CODE 6820-EP-S
