Federal Acquisition Regulation; FAR Case 2004-015, Payments Under Time-and-Materials and Labor-Hour Contracts, 74656-74667 [06-9610]
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74656
Federal Register / Vol. 71, No. 238 / Tuesday, December 12, 2006 / Rules and Regulations
and National Aeronautics and Space
Administration (NASA).
ACTION: Summary presentation of final
rules.
DEPARTMENT OF DEFENSE
GENERAL SERVICES
ADMINISTRATION
NATIONAL AERONAUTICS AND
SPACE ADMINISTRATION
This document summarizes
the Federal Acquisition Regulation
(FAR) rules agreed to by the Civilian
Agency Acquisition Council and the
Defense Acquisition Regulations
Council in this Federal Acquisition
Circular (FAC) 2005–15. A companion
document, the Small Entity Compliance
Guide (SECG), follows this FAC. The
FAC, including the SECG, is available
via the Internet at https://
www.regulations.gov.
SUMMARY:
48 CFR Chapter 1
[Docket FAR—2006–0023, Sequence 8]
Federal Acquisition Regulation;
Federal Acquisition Circular 2005–15;
Introduction
Department of Defense (DoD),
General Services Administration (GSA),
AGENCIES:
For effective dates and comment
dates, see separate documents, which
follow.
DATES:
The
analyst whose name appears in the table
below in relation to each FAR case or
subject area. Please cite FAC 2005–15
and specific FAR case number(s). For
information pertaining to status or
publication schedules, contact the FAR
Secretariat at (202) 501–4755.
FOR FURTHER INFORMATION CONTACT:
LIST OF RULES IN FAC 2005–15
Item
Subject
I ............
II ...........
Payments Under Time-and-Materials and Labor-Hour Contracts ...................................................
Additional Commercial Contract Types ...........................................................................................
SUPPLEMENTARY INFORMATION:
Summaries for each FAR rule follow.
For the actual revisions and/or
amendments to these FAR cases, refer to
the specific item number and subject set
forth in the documents following these
item summaries.
FAC 2005–15 amends the FAR as
specified below:
Item I—Payments Under Time-andMaterials and Labor-Hour Contracts
(FAR Case 2004–015)
This final rule revises and clarifies
policies related to award and
administration of noncommercial item
Time-and-Materials (T&M) and LaborHour (LH) contracts and the policies
regarding payments made under those
contracts. The objectives of the changes
are to ensure fair and reasonable prices
under T&M and LH contracts and to
eliminate confusion related to payment
amounts for subcontractor provided
labor.
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Item II—Additional Commercial
Contract Types (FAR Case 2003–027)
This final rule implements section
1432 of the National Defense
Authorization Act for Fiscal Year 2004
(Pub. L. 108–136). 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) (Pub. L. 103–355, 41 U.S.C. 264)
to expressly authorize the use of Time–
and–Materials (T&M) and Labor–Hour
(LH) contracts for commercial services
under specified conditions.
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FAR case
Dated: December 4, 2006.
Linda K. Nelson,
Deputy Director, Contract Policy Division.
2004–015
2003–027
Analyst
Olson.
Olson.
DEPARTMENT OF DEFENSE
GENERAL SERVICES
ADMINISTRATION
Federal Acquisition Circular
Federal Acquisition Circular (FAC)
2005-15 is issued under the authority of
the Secretary of Defense, the
Administrator of General Services, and
the Administrator for the National
Aeronautics and Space Administration.
Unless otherwise specified, all
Federal Acquisition Regulation (FAR)
and other directive material contained
in FAC 2005-15 is effective February 12,
2007.
Dated: November 22, 2006.
Shay D. Assad,
Director, Defense Procurement and
Acquisition Policy.
Dated: November 22, 2006.
Roger D. Waldron,
Acting Senior Procurement Executive,
General Services Administration.
Dated: November 21, 2006.
Tom Luedtke,
Assistant Administrator for Procurement,
National Aeronautics and Space
Administration.
[FR Doc. 06–9611 Filed 12–11–06; 8:45 am]
BILLING CODE 6820–EP–S
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NATIONAL AERONAUTICS AND
SPACE ADMINISTRATION
48 CFR Parts 16, 32, and 52
[FAC 2005–15; FAR Case 2004–015; Item
I; Docket 2006–0020, Sequence 23]
RIN 9000–AK32
Federal Acquisition Regulation; FAR
Case 2004–015, Payments Under Timeand-Materials and Labor-Hour
Contracts
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) to clarify payment
procedures for Time-and-Materials
(T&M) and Labor-Hour (LH) Contracts.
DATES: Effective Date: February 12,
2007.
For
clarification of content, contact Mr.
Jeremy Olson at (202) 501–3221. Please
cite FAC 2005–15, FAR case 2004–015.
For information pertaining to status or
publication schedules, contact the FAR
Secretariat at (202) 501–4755.
SUPPLEMENTARY INFORMATION:
FOR FURTHER INFORMATION CONTACT:
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A. Background
DoD, GSA, and NASA published a
proposed rule in the Federal Register at
70 FR 56314 on September 26, 2005.
The amendments made under this case
are intended to be applicable primarily
to non-commercial item contracts.
Policies primarily applicable to
commercial item T&M or LH contracts
are being addressed separately under
FAR case 2003–027.
The proposed amendments to FAR
16.307, 16.601, 16.602, 32.111, and
52.232–7 are intended to amend the
underlying policies and increase the
clarity of the affected FAR language.
The FAR amendments address the areas
related to payments made under T&M
and LH contracts for non-commercial
items, as described below.
1. FAR 16.307 - Contract clauses.
The Councils amended FAR
16.307(a)(1) to specify that the
Allowable Cost and Payment Clause is
included in T&M contracts. The clause
is only applicable to the portion of the
contract that provides for
reimbursement of materials at actual
cost and related indirect costs. This
change is being made to ensure that
appropriate rights and responsibilities
are provided in T&M contracts with
respect to reimbursement for material
cost.
2. FAR 16.601 - Time-and-materials
contracts.
The Councils revised the language at
FAR 16.601(a) to provide a description
of ‘‘materials’’ as used in ‘‘time-andmaterials contract.’’ FAR 16.601(a)
currently describes a T&M contract as a
contract that provides for acquiring
supplies or services on the basis of—
•Direct labor hours at specified fixed
hourly rates that include wages,
overhead, general and administrative
expenses, and profit; and
• Materials at cost, including, if
appropriate, material handling costs as
part of material costs.
The prior FAR description did not
address subcontract costs, even though
such costs are often a significant part of
the work performed and are provided
for under the payments clause at
52.232–7. Also, that description did not
address other direct costs and
applicable indirect costs other than
material handling (e.g., general and
administrative expenses) that may be
appropriate for the acquisition.
3. General structure of FAR 52.232–
7 – Payments under Time-andMaterials and Labor-Hour Contracts.
The Councils amended the current
paragraph (b) of the clause at FAR
52.232–7 to specify that the term
‘‘materials,’’ as used in the clause,
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includes direct materials, subcontracts
for supplies and ancillary services, other
direct costs, and applicable indirect
costs (this is consistent with the
proposed changes to FAR 16.601).
Materials also include supplies and
ancillary services transferred between
divisions, subdivisions, subsidiaries, or
affiliates of the contractor under a
common control.
Although the proposed rule had
proposed to revise ‘‘materials’’ to
include all subcontracts for services, the
final rule defines subcontracts for labor
as part of the definition of labor, if the
subcontracted labor meets the
requirements of the prime contract for
labor hours. The prior FAR language
had caused significant confusion
because it did not adequately describe
what is included in ‘‘labor’’ or
‘‘materials.’’
4. Contractor furnished material –
Alternate I.
The Councils moved and amended
the prior Alternate I of the clause at FAR
52.232–7. When a contractor furnishes
its own materials that meet the
definition of a commercial item at 2.101,
the price to be paid for such materials
shall be the contractor’s established
catalog or the market price. The ability
of the contractor to bill at such prices
should not be dependent on a
contracting officer decision as to
whether an alternate clause should be
included in the contract.
5. Profit or fee on materials.
The Councils amended FAR 52.232–
7(b)(7) to specifically state that the
Government does not pay profit or fee
to the prime contractor on materials
(except for commercial items discussed
in item 4, above or as otherwise
provided for in FAR 31.205–26). The
Councils believe this is consistent with
the historical intent of the clause and
the concept of a T&M contract. The
recovery of profit or fee is accomplished
as part of the labor hour portion of the
T&M/LH contract.
6. Billing subcontracts and
interdivisional transfers for incidental
supplies or services.
For subcontracts, the Councils
clarified that subcontracts for incidental
services are to be reimbursed at the
actual subcontract price, plus allowable
indirect costs, per the requirements of
FAR 52.216–7, Allowable Cost and
Payment. For interdivisional transfers,
the Councils revised the language to
limit reimbursement to the actual rates
or commercial prices of the division
performing the work and specified that
only one division may obtain profit. No
profit pyramiding within a company is
to be permitted.
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7. Billing subcontracts and
interdivisional transfers for services
that comply with the labor hour
requirements.
For services performed by employees
of subcontractors, the proposed rule had
included a process under which that
labor would be reimbursed at actual cost
(plus related indirect costs) unless it
was included on a list in the prime
contract. If it were included on the list,
it was to be paid at the labor hour rate.
The final rule eliminates that
proposed approach. The final rule
provides that all labor hours that qualify
under the labor hour requirements of
the contract are to be paid at the labor
hour rate specified in the contract. This
applies regardless of whether an
individual is an employee of the prime
contractor, a subcontractor or an affiliate
of the prime contractor.
8. Solicitation provisions.
The final rule incorporates three new
solicitation provisions that direct how
proposals address subcontract labor.
The first provision applies to
acquisitions of noncommercial items
that are to be based on adequate price
competition. This provision requires
each offeror to indicate for each labor
rate in the proposal whether it is a rate
that applies to employees of one
company or if it is a blended rate that
applies to employees of more than one
company. The offerors must show for
each labor rate if it applies to employees
of the prime contractor, employees a
particular subcontractor or affiliate, or if
it is a blended rate that applies to
employees of more than one
subcontractor or employees of the prime
contractor or any subcontractor. Agency
procedures may authorize contracting
officers to select one of three options in
the provision as mandatory, and/or to
require each offer to identify individual
subcontractors in the proposal.
The second provision applies to
acquisitions of noncommercial items
not based on adequate price
competition. This provision requires the
offeror to establish separate individual
labor hour rates for prime contractor
employees, employees of each
subcontractor and employees from
affiliates of the offeror.
The third provision applies to
acquisitions of commercial items and it
requires each offeror to identify for each
proposed labor hour rate whether the
rate applies to prime contractor
employees, subcontractor employees or
employees from affiliates of the offeror.
9. Application of the Prompt Payment
Act.
The Councils amended FAR 52.232–
7(i) to include application of the Prompt
Payment Act for interim payments
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under T&M and LH contracts for
services. The Prompt Payment Act has
applied to fixed-price contracts for
services for many years. Congress also
recently amended the Prompt Payment
Act to include cost reimbursement
contracts for services. The Councils
believe that since the Prompt Payment
Act is applicable to both fixed-price and
cost reimbursement contracts for
services, it should also be applicable to
T&M and LH contracts for services.
Discussion and Analysis
Payment for labor performed by
subcontractors is treated differently
depending on whether a contract action
is awarded under adequate price
competition or not. If a contract is not
awarded on the basis of adequate price
competition, the contract must
separately identify labor rate categories
for each subcontractor, in addition to
the labor rates for the contractor. If the
price of a contract is based on adequate
price competition, the CO is not
required to include separate rates for
subcontractors, but may use blended
rates that apply to any labor meeting the
qualifications of the contract, regardless
of whether provided by the contractor or
a subcontractor.
The Councils adopted the philosophy
on treatment of subcontractor labor that
was developed under FAR Case 2003–
027 and applied it to noncommercial
T&M contracts awarded on the basis of
adequate price competition. That is,
FAR case 2003–027 requires no special
treatment of labor provided by
subcontractors. Any labor that meets the
labor hour qualifications of the contract
is to be paid at the labor hour rate
specified in the contract, regardless if it
provided by individual working for the
prime contractor or a subcontractor.
This approach was developed under
FAR case 2003–027 for commercial
items because it was felt that
competitive pressure would produce
fair and reasonable prices and eliminate
potential abuses related to subcontractor
labor. Competition for commercial items
is the same as competition for
noncommercial items and the approach
should be the same for both FAR cases.
However, for noncommercial T&M
contracts awarded without adequate
price competition, competitive
pressures are substantially diminished
and the Government must take a much
more cautious approach with respect to
labor provided by subcontractors. Labor
hour rates for these types of actions are
largely based on cost information
provided by the prime contractor. In
order to avoid potential for issues
arising after award of a noncompetitive
T&M contract, each subcontractor must
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have its labor hour rates specified in the
prime contract. This will be required in
FAR Part 16 and offerors will be
required to include such rates in their
offer by a solicitation provision.
The FAR amendment includes three
new solicitation provisions to be used
for noncommercial T&M/LH
solicitations. These provisions serve
several purposes. First, they
communicate plainly that labor hour
rates for subcontractors are a potential
major issue that must be addressed by
the CO and by the offerors. Second, they
communicate that contracts awarded on
the basis of adequate price competition
may be approached in a much more
flexible way than may be used for
contracts not awarded competitively.
Finally, they provide a structure to CO’s
that can be used to eliminate issues
related to potential abuse of subcontract
labor hour rates.
FAR 52.216–29, Time-and-Material/
Labor-Hour Proposal Requirements—
Noncommercial Item Acquisitions
without Adequate Price Competition,
instructs offerors that they may identify
the labor rates they are proposing in
either one of three different manners.
First, offerors may propose blended
rates under which labor hours will be
paid at the same rate, regardless of
whether the individual performing the
labor works for the prime contractor or
a subcontractor. Second, offerors may
offer labor hour rates that include two
sets of rates, one set for individuals
employed by the offeror and a second
set for individuals employed by
subcontractors. Third, offerors may offer
multiple sets of labor hour rates, one set
for individuals employed by the offeror
and additional sets for each
subcontractor for individuals employed
by different subcontractors. If CO’s are
authorized by agency procedures, the
contracting officer may amend this
provision to pre-select a single method
from among those three methods that
every offeror must use.
FAR 52.216–30, Time-and-Material/
Labor-Hour Proposal Requirements—
Noncommercial Item Acquisitions
without Adequate Price Competition,
instructs offerors that they must offer
multiple sets of labor hour rates, one set
for individuals employed by the offeror
and a additional sets for each
subcontractor for individuals employed
by different subcontractors. The purpose
of this solicitation provision is to
enforce the policy in Part 16 which
requires acquisitions awarded on the
basis other than adequate price
competition to include individual labor
hour rates for each subcontractor.
FAR 52.216–31, Time-and-Material/
Labor-Hour Proposal Requirements—
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Commercial Item Acquisitions, instructs
offerors that they must identify for each
labor hour rate if the rate applies to only
the offeror, a subcontractor, and affiliate
of the offeror, or any combination.
Disposition of Public Comments
Comments were received from 17
respondents in response to the proposed
rule. The Councils considered all of the
comments and recommendations in
developing the final rule. The Councils
made the following changes to the
proposed rule as a result of the public
comments and deliberations:
(1) Definition of ‘‘Hourly Rate.’’
Established a definition for ‘‘hourly
rate’’ to permit reimbursement of
subcontracts for services and services
transferred between divisions,
subsidiaries, or affiliates under a
common control at the hourly rates in
the schedule when the employee meets
the labor qualification specified in the
contract (see comment (4)(c)(3)).
(2) Definition of ‘‘Materials.’’ Revised
the definition for ‘‘materials ’’to (1)
exclude subcontracts for services and
services transferred between divisions,
subsidiaries, or affiliates under a
common control from the definition of
‘‘materials’’ because these services are
included in the ‘‘hourly rate’’ when the
services meet the labor qualifications
specified in the contract (2) add
incidental services to the examples of
other direct costs (see comment
(4)(c)(3)). Subcontracts for services and
services transferred between divisions,
subsidiaries, or affiliates under a
common control that do not meet the
labor qualifications specified in the
contract are incidental services but see
(3)(ii) below.
(3) Reimbursement for Subcontract
and Interdivisional Transfers of
Services. Eliminated the provisions in
the proposed rule that only permitted
reimbursement of subcontract costs at
the hourly rates in the contract when
the subcontractors were listed in the
contract. (see comment (4)(c), (4)(e)).
Added provisions that—
(i) Require reimbursement of
subcontracts for services and services
transferred between divisions,
subsidiaries, or affiliates under a
common control of at the hourly rates in
the schedule that include profit when
the employees performing the work
meet the qualifications specified in the
contract.
(ii) Address reimbursement for
subcontracts for services and services
transferred between divisions,
subsidiaries, or affiliates under a
common control when the employees
performing the work do not meet the
qualifications specified in the contract.
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Payment for such services is at the sole
discretion of the Government.
(iii) Require separate fixed hourly
rates that include wages, overhead,
general and administrative expenses,
and profit for each category of labor.
When the contract is awarded without
adequate price competitions, the rule
also requires a separate set of rates for
labor performed by the contractor, each
subcontractor, and each division,
subsidiary, or affiliate of the contractor
under a common control that will
perform on the contract.
(4) Solicitation Provisions. Added
three solicitation provisions to ensure
contractors understand the methodology
for reimbursing subcontract costs (see
comment (4)(c),(11)(c)).
(5) Timecards. Revised the rule to
recognize that companies use both
paper-based and electronic timecards
(see comment (4)(c), (9)).
(6) Commercial Item Materials.
Revised the prescription for reimbursing
commercial items to clarify the
commercial catalog or market prices are
subject to negotiation (see comment
(4)(c)(4)(b)).
(7) Assignment and Release of Claims.
Re-titled the paragraph previously title
‘‘Assignment’’ to ‘‘Assignment and
Release of Claims’’ to clarify both topic
are covered in the paragraph (see
comment (4)(c), (7)).
(8) Refunds. Deleted the current
provision on refunds from the clause
because the provisions duplicate
coverage in the Allowable Cost and
Payment clause (see comment (4)(c),
(4)(d)).
Discussion of Public Comments
(1) Restrict Use of T&M Contracts. A
respondent commented: Revise FAR
16.601(c) to also restrict the use of T&M
contracts when the costs other than
direct labor are incidental to the work.
If a contract requires substantial direct
materials, interdivisional transfers,
subcontracts, and other direct costs, or
the costs are so high that they warrant
the submission, auditing, and settlement
of final indirect rates, the contract type
should not be a T&M contract.
Response: When substantial direct
materials, interdivisional transfers,
subcontracts, and other direct costs are
anticipated, a T&M contract type may
not be appropriate. However, selecting
the appropriate contract type is
generally a matter for negotiation and
requires the exercise of sound judgment.
The objective is to negotiate a contract
type and price (or estimated cost and
fee) that will result in reasonable
contractor risk and provide the
contractor the greatest incentive for
efficient and economical performance.
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There are many factors the contracting
officer must consider in selecting the
appropriate contract type. T&M
contracts are the least preferable
contract type that 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.
(2) Allowable Cost and Payment
Clause. A respondent commented:
Clarify which provisions of the
Allowable Cost And Payment clause
apply to the material portion of T&M
contracts. Recommend either repeating
the applicable portions of the clause in
the T&M clause or identifying the
Allowable Cost and Payment clause as
a required clause in FAR Subpart 16.6.
Response: As prescribed in FAR
16.307(a), the Allowable Cost and
Payment clause is a required clause for
all cost-reimbursement contracts. All
provisions of the clause are applicable
to the material portions of T&M
contracts. The rule clearly specifies that
the Allowable Cost and Payment clause
is included in T&M contracts and that
it is only applicable to the portion of the
contract that provides for
reimbursement of materials at actual
costs. The change is being made to
ensure that the appropriate rights and
responsibilities are provided in T&M
contracts. The Councils see no reason to
repeat the clause in the T&M clause.
Multiple clauses will be included in
T&M contracts.
(3) Definition of Materials. A
respondent commented: The proposed
definition of material that includes
direct materials, subcontracts for
supplies and services, other direct costs,
and applicable indirect costs adds
certainty to the process and will
eliminate significant issues that arise
during the audit process. A respondent
commented: The proposed definition of
materials is contrary to the common
business meaning of the word. Instead
of defining materials to include
subcontracted services, the rule should
exclude the word materials from the
contract type. The Government
routinely reimburses travel, equipment,
communication, and other direct costs
under T&M contracts. Recommend
instead establishing a time-and-otherdirect-cost contract type. A respondent
commented: Do not include
subcontracts in the definition of
materials. Instead, separately address
subcontracts and interdivisional
transfers to clarify the payment policies
for these elements of cost and to avoid
inevitable disputes over whether the
subcontract for supplies and services
was ‘‘material consumed directly in
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connection with furnishing the service’’
that is reimbursed at the fixed contract
rates or another type of subcontract for
supplies and services that would be
reimbursed at actual costs. A
respondent commented: Including
services transferred between divisions,
subsidiaries, or affiliates of the
contractor under a common control and
subcontracts for services in the
definition of materials is contrary to the
traditional, and common sense,
definition of the term ‘‘materials.’’
Prime, subcontract, and interdivisional
labor should be included in the ‘‘time’’
element. A respondent commented:
Including subcontract services and
incidental expense in ‘‘materials’’ is
contrary to common usage and to the
language of FAR 31.205–26 and 45.301.
Instead, recommend separately
addressing the elements of costs as
follows:
• Direct labor (time) means prime and
subcontractor labor devoted to the
performance of the tasks in the
statement of work (SOW).
• Materials mean products, including
raw materials, parts, subassemblies,
components, and manufacturing
supplies, whether manufactured or
purchased by the contractor, and
including such collateral items as
inbound transportation and in transit
insurance.
• Incidental services means services
performed or purchased solely for the
support of contract direct labor, such as
travel, printing, or computer usage.
• Indirect costs.
Response: While the definition for
materials in the rule is different from
the referenced definitions at FAR
31.205–26 and 45.301, reimbursing
subcontracts for services and other costs
as materials is not contrary to common
usage for T&M contracts. Currently, FAR
16.601(a) only identifies ‘‘direct labor’’
and ‘‘materials’’ as elements of T&M
contracts. However, the associated
payment clause at FAR 52.232–7,
Payments Under T&M/LH Contracts
addresses payment of ‘‘materials and
subcontracts.’’ In addition, the
Government routinely pays contractors
for other direct costs (ODC) and G&A
incurred in performance of a T&M
contract even though ODC and G&A are
not mentioned in FAR 16.601 or
52.232–7. In addition, contractors
commonly record subcontracts for
services, like subcontracts for supplies,
as elements of ‘‘materials’’ for
accounting purposes. There are no
known problems with the longstanding
practice of reimbursing these other costs
as materials. Therefore, the Councils see
no reason to revise ‘‘time-and-materials’’
contracts to ‘‘time-and-other-direct-
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cost’’ or ‘‘time-and-material-andsubcontract-and-interdivisional
transfers’’ or ‘‘time-and-material-andincidental services-and-indirect costs’’
contracts as recommended by the
various commenters. The Councils did,
however, establish a definition for
‘‘hourly rate’’ to clarify that subcontract
and interdivisional labor will be
reimbursed at the ‘‘hourly rate’’
whenever the employee satisfies the
labor qualifications specified in the
contract. The Councils also revised the
definitions of ‘‘materials’’ to— (1)
exclude subcontracts for services and
interdivisional transfers of services that
meet the labor qualifications specified
in the contract from the definition of
material because these elements of cost
are now included in the definition of
‘‘hourly rate’’ for the purposes of
reimbursing the subcontracts; and (2)
add incidental services to the examples
of other direct costs.
(4) Methodology for Reimbursing
Materials.
(a) A respondent commented:
Strongly support the proposed
methodology for reimbursing
commercial materials and the deletion
of the ‘‘most favored
customer’’provisions.
(b) A respondent commented: Revise
the prescription for reimbursing
commercial materials from ‘‘shall be the
contractor’s established catalog or
market price ’’to ‘‘ shall not exceed the
contractor’s established catalog or
market price’’ because the proposed
language could be interpreted to mean
contracting officers cannot negotiate
better pricing.
Response: While the proposed
language did not preclude negotiating
better prices, the recommended change
more clearly establishes that the prices
are subject to negotiation. Therefore, the
Councils revised the rule as
recommended.
(c) A respondent commented: Pay the
catalog or market price for materials of
the prime’s own production that are
commercial items (excluding the
products of its affiliates) and reimburse
the cost of other materials at actual
costs, including properly allocable
indirect costs, but no profit or fee.
Response: When a contractor
furnishes its own material that meets
the definition of a commercial item at
FAR 2.101, the contractor will be paid
the established catalog or market price
for the item. Product of its affiliates will
be reimbursed on the basis of costs
incurred except when the supplies are
sold or transferred between divisions,
subdivisions, subsidiaries, or affiliates
of the contractor under a common
control and it is the established practice
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of the transferring organization to price
interdivisional transfers at other than
cost and the other conditions of 31.205–
26 are met. Profit or fee will not be paid
on materials that are reimbursed at cost.
(d) A respondent commented: Delete
the current provision on refunds from
FAR 52.232–7, Payments Under Timeand-Materials and Labor-Hour
Contracts, because the provision
duplicates the provision in FAR 52.216–
7, Allowable Cost and Payment.
Response: The Councils revised the
rule to eliminate redundant coverage.
(e) Methodology for Reimbursing
Subcontracts. A respondent commented:
Concept of reimbursing subcontract
labor at the hourly rates in the contract
or the actual cost to the prime contractor
is sound but do not permit blended
prime and subcontractor labor rates.
Establish separate hourly rates in the
contract for subcontract labor not
reimbursed based on actual costs. The
subcontract rates should include prime
contractor indirect costs allocable to
subcontract costs and profit. A
respondent commented: Reimburse all
subcontract labor at the contract rates
when the subcontracts satisfies all
contract labor qualifications is
appropriate, fair, and in the
Government’s best interest. Requiring
subcontracts to be listed in the contract
in order to be reimbursed at the contract
labor rates will make it extremely
difficult for the Government to acquire
‘‘on-call’’ or ‘‘on-demand’’ services that
sometimes require a prime contractor to
take responsibility for hundred or even
thousands of subcontractors often
interspersed across a wide geographic
area. Requiring contract modifications
for every change in subcontractor poses
an excessive administrative burden on
both parties. Reimburse subcontract
labor at the schedule labor rates without
listing the subcontractors in the contract
when the contractor’s proposal indicates
that some of the work may be performed
by subcontractors that meet the
contract’s qualification requirements
and that the price for that ‘‘type of
work’’ will be the prime contract’s labor
rate which may be blended or other rate.
T&M/LH contracts specify the required
labor qualifications. Whether the person
filling the position is an employee of the
prime or a subcontractor, the
qualifications must be met. The
Government has already determined
through adequate price competition or
otherwise the pricing is fair and
reasonable for the ‘‘type of work.’’ The
subcontract consent provisions are
unduly burdensome. Absent the
contracting officer’s approval and the
resulting contract modification to add
new subcontractors, contractors will not
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be paid profit on the subcontract costs
even though the contractor remains
responsible for the subcontractor’s
performance. Lack of profit will
discourage the use of subcontractors. A
respondent commented: Allowing
contracting officers to identify the
subcontracts to be reimbursed at the
contract rates is a positive step since the
rule clearly allows prime to be paid
profit on subcontracts. Recommend also
allowing reimbursement for
subcontracts at the contract rates when
the prime proposal includes
subcontracted services, the contractor is
in a teaming relationship with the
subcontractor, or when the acquisition
has opportunities for small and small
disadvantaged businesses. Small and
small disadvantaged businesses rely
heavily on subcontracting with prime
contractors on T&M contracts. If primes
are not paid profit on the subcontracts,
the primes will be motivated to perform
all the work themselves which could
hurt small businesses and may not
result in the best technical solution for
the Government. Contractors establish
large teams of large and small
businesses to meet the requirements of
indefinite-delivery contracts. If they are
not allowed to recover profit on
subcontracts, competition will be
reduced and the Government may not
get competition or the best technical
solution. When the subcontracts are
reimbursed at the contract rates, the
prime assumes the risk of subcontractor
labor rate changes. The Government is
assured fair and reasonable prices based
on competition or price analysis.
Reimbursing subcontracts at actual costs
shifts the risk of subcontract labor
escalation to the Government. A
respondent commented: Reimburse
subcontract labor under the labor
portion of the contract and do not treat
subcontracts as an element of
‘‘material.’’ If the work qualifies for the
hourly rate in the schedule, the
Government should not care if the work
was performed by a subcontractor or
another division of the contract. It is not
always feasible to establish hourly rates
for specific subcontractors at the time of
contract award. In some cases, the fixed
hourly rates are a blend of anticipated
prime and subcontractor hourly rates.
This approach yields more competitive
hourly rates for the Government and
promotes using all categories of small
businesses to achieve price advantage.
Requiring separate fixed hourly rates for
individual subcontractors would further
complicate an already complex
invoicing and payment process. Further,
the bargain agreed upon at the time of
contract award must be maintained
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throughout contract performance unless
revised by mutual agreement. Some
contractors have priced blended prime
and subcontract rates but were
subsequently reimbursed on their actual
costs for subcontracts which is
inequitable because it unilaterally
changed the terms of the contract. A
respondent commented: Requiring
additional rates and approvals add an
unnecessary layer of administration that
is not commensurate with the level of
risk or cost benefit. Additional controls
that restrict a contractor’s use of proven
subcontractors greatly reduce a
contractor’s ability to efficiently support
the Government. Recommend revising
the rule to properly place the
responsibility for performing and
providing qualified staff on the prime.
The rule should allow prime contractors
to provide competent staff, including
subcontractors when a business need
exists, and only designate key personnel
when the criticality of the work dictates
a need to do so. Change the rule to only
require a notification instead of the
proposed requirement for consent to
subcontract. Use the proposed audit
provisions as the monitoring device for
excessive profit or fee. The Government
can reject the work provided by a
subcontractor using the inspection and
acceptance clauses. A respondent
commented: It is not always feasible to
establish hourly rates for specific
subcontractors at the time of contract
award. T&M contracts are only used
when it is not possible at the time of
award to estimate accurately the extent
or duration of the work. It may be
difficult to identify at the time of award
all the subcontractors that ultimately
will be needed to perform the work. For
‘‘on-call’’ or ‘‘on-demand’’ services,
contractors are not able to predict which
subcontractors will be called on to
fulfill each requirement. The restriction
on subcontract profit will reduce the use
of qualified subcontractors, especially
small and small disadvantaged business.
In addition, contractors will not be paid
the appropriate compensation for
administrative cost and financial risk
that accompany the use of subcontracts
unless the subcontractors are identified
in advance. Any final rule should allow
contractors to be paid profit on all
subcontract labor that is not incidental
to performance. The Government should
focus on the value of the hours worked
instead of the name of the subcontractor
performing the work to allow the prime
contractor to identify and retain the best
people available for contract
performance. A more flexible approach
should be used that does not require
formal contract modification. The
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flexibility in performance and selection
of subcontractors is particularly critical
to the prime contractor. A respondent
commented: Prime contractors will only
use subcontractors that are less
expensive than the prime if blended
prime and subcontract labor rates are
used. This will limit the use of small
business subcontractors since few small
businesses achieve T&M rates that are
competitive with large businesses
because their overhead bases are
smaller. Also, requiring each
subcontract to be identified in the
contract in order to be reimbursed at the
contract rates will serve as a barrier to
adding new subcontractors during
contract performance. The requirement
to list each subcontractor in the contract
is significantly more cumbersome that
the consent to subcontract requirements
that are currently required for T&M
contracts. Contractors will have to
develop new blended rates that will be
subject to audit and approval and
formally modify the contract to add new
subcontractors. Prime contractors will
only use small businesses to the extent
they are required to do so by their small
business subcontracting plans and
maybe not even then if the small
businesses rates are sufficiently higher
than the blended rates. A respondent
commented: Not paying profit or fee on
subcontracts is extremely detrimental to
small businesses. Many small business
prime contractors get much of their
annual revenues from contracts with
large amounts of materials and minor
labor hour or T&M costs to support
integration, deployment, or
maintenance of the materials. Not
paying profit on these materials would
erode potential earnings for these small
businesses. In addition, large businesses
often subcontract out work that could be
performed by the large business to meet
small business subcontracting goals on
Government contracts. If large
businesses are no longer paid profit on
subcontracts, large businesses will be far
less likely to subcontract out work. An
objective of the rule is to ensure fair and
reasonable prices. Fair and reasonable
must be applied to both the Government
and the contractor. Not paying profit on
materials is not a ‘‘fair’’ policy. Market
forces will act competitively to keep the
Government’s price fair and reasonable.
A respondent commented: The
Government pays profit on materials
and subcontracts on cost-plus-fixed-fee
contracts. The existing prohibition on
paying profit on materials and
subcontracts on T&M contracts stems
from the fact that such costs were
incidental to the contract. Contrary to
statements in the proposed rule, the
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Government’s use of T&M contracts has
changed over time and other factors
have significantly changed. Large
businesses are now required to
subcontract out to small and small
disadvantaged subcontractors to meet
their subcontracting goals. This
requirement did not exist when the
prohibition on paying profit on
materials and subcontracts was adopted.
Small businesses— (1) use consultants
and subcontractors to supplement their
capabilities and effectively compete for
potential contracts; (2) need the
flexibility to change subcontractors
during contract performance; and (3)
need to make profit on subcontracted
services or they will not bid on
contracts if they do not have the
employees with the required expertise.
The need for subcontracts and
consultants is driven by the requirement
of the contract. The contracts are not
personal services contracts. The
Government and prime contractors
contract for services at specified prices
and they negotiate the price for the work
in terms of the effort required by the
contract. When small businesses do not
have the in-house staff to perform the
work, they use salary surveys and their
indirect cost structure to estimate the
cost of employees they will ultimately
subcontract with to perform the work
which may or may not be disclosed to
the Government. On large procurement,
this may be the only way to be
responsive. The small businesses takes
the risk that they will be able to find
subcontract labor at their estimated rate
and there are times when the small
businesses’ actual cost for the labor
exceeds their estimated price and the
small business does not recover its cost
of subcontracting. For many small
businesses, subcontract labor may be
used to perform the majority of the
work. If the small business will not be
paid profit on these subcontracts, the
small business would not be adequately
compensated and would have no
incentive to bid on the effort. As a
result, competition would decrease and
some services would not be available in
the small business community. In
addition, placing too many limitations
on subcontracting for large businesses
will ultimately reduce the
subcontracting opportunities for small
businesses. It is in the best interest of
the Government to encourage
subcontracting. The Government should
have the right to know when
subcontractors are being replaced for
quality assurance purposes and should
be able to review and approve
subcontractor’s qualifications. Finally,
listing only the known subcontracts in
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the contract will not help small
businesses and will discourage prime
contractors from finding and using
small businesses. Contract
modifications to add subcontractors
after contract award could take
significant time and could significantly
disrupt or delay the federal procurement
process. When there is adequate
competition or GSA schedule prices, the
Government should have the right to
approve new subcontractors for quality
but not the right to automatically
negotiate a new hourly rate which
implies the right of contractors to
increase the hourly rates after contract
award. The administrative costs for
T&M contracts will increase
significantly and competition among
small businesses will significantly
decrease. The Government should focus
on disclosure and verification of
qualifications and not prohibitions or
restrictions on subcontracting and
renegotiating prices when adequate
competition exists. Instead of limiting
reimbursement to subcontractors listed
in the contract, recommend also
permitting subcontractors and
consultants to be reimbursed at the
contract rates if the labor categories are
listed that that will be subcontracted out
and simply adding the subcontractors
name to the list when the subcontract is
awarded. A respondent commented:
The inability to make profit, coupled
with the inherent prime contractor
oversight requirements will have a
negative affect on subcontracting. Prime
contractors will be motivated to use
their own employees in order to earn
profit. The negative affect will fall
disproportionately on small businesses
which is contrary to current
procurement policy. A respondent
commented: Reimburse subcontract at
the prime’s actual cost because
contractors are being reimbursed for
subcontract at the prime’s rates but are
using lower costs, and less qualified,
subcontracts to perform the work. A
respondent commented: Restrict
reimbursement of subcontract costs to
actual costs because the prime
contractor could subsequently negotiate
lower rates with subcontractors that
were authorized to be paid at the
schedule rates and the Government
would pay excessive prices for
subcontracted effort that may be of a
level less than that envisioned by the
Government. Reimbursing at the
schedule rates encourages contractors to
maximize profit by subcontracting out
more of the effort at lower subcontract
rates. The Government will expend
additional resources to monitor the
quality and efficiency of the subcontract
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labor since the subcontract effort will
not be readily apparent when billed at
the schedule rates.
Response: Limiting reimbursing of
subcontract labor to actual costs is not
consistent with the treatment on all
other flexibly priced Government
contracts where prime contractors are
paid profit on subcontract costs. In
addition, requiring subcontractors to be
listed in the contract in order to be
reimbursed at the hourly rates could
have a negative impact on small
businesses and was administratively
burdensome to contractors. Upon
further consideration, the Councils
believe it is appropriate to reimburse
subcontracts on competively awarded
T&M contracts at the schedule labor
rates without listing the subcontracts.
The Councils revised the rule
accordingly. However, the Councils do
not believe it is appropriate to eliminate
the traditional consent and advance
notification requirements for noncommercial T&M. These same consent
and advance notification requirements
are not new for T&M contracts. The
Councils are unaware of any systemic
issues relating to their applicability on
T&M contracts. Therefore, the final rule
does not change the standard consent
and advance notification requirements
for non-commercial T&M contracts. In
addition, the Councils revised the rule
to require separate labor rates for each
subcontract and interdivisional transfer
of services when adequate price
competition is not obtained. There may
be circumstances when it is appropriate
to use blended prime and subcontract
labor rates when the prices are based on
adequate competition. Therefore, the
rule permits use of blended prime and
subcontract labor rates when the prime
contract is awarded with adequate
competition. However, nothing in the
rule prevents the Government from
establishing separate labor rates for each
subcontract when the prime contract is
awarded based on competition. Also,
the rule provides for payment of profit
on subcontract labor paid at the hourly
rates in the contract.
(f) Interdivisional Transfers.
Coalition Comment: Imposing FAR Part
31 on interdivisional transfers should be
avoided.
Response: The rule provides that
interdivisional transfers of labor that
meet the qualifications specified in the
contract will be reimbursed at the
‘‘hourly rates’’ in the contract. For these
interdivisional transfers, FAR Part 31 is
not imposed. For all other
interdivisional transfers, contractors
will be reimbursed on the basis of cost
incurred in FAR Subpart 31.2.
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(g) A respondent commented: Pay
allowable indirect costs allocable to
subcontracts, either by inclusion in
stipulated hourly rates for specific
contractors or by addition to subcontract
direct costs, (b) materials, and (c)
incidental services.
Response: The rule permits payment
of indirect costs either by inclusion in
the hourly rates in the contract when
the subcontract labor meets the labor
qualifications specified in the contract
or at actual costs as recommended by
the commenter.
(h) A respondent commented:
Reimburse the prime contractor for the
cost of incidental services, including
properly allocable indirect costs, but no
profit or fee.
Response: Refer to Comment 3 above.
The Councils did not adopt the
recommendation to establish a new
‘‘incidental services’’ category. The rule
does, however, result in reimbursement
of these elements of costs, including
properly allocable indirect costs, with
no profit or fee.
(5) Total Cost and Ceiling Price. A
respondent commented: Consolidate the
‘‘Total Cost’’ and ‘‘Ceiling Price’’
paragraphs.
Response: The ‘‘Total Cost’’ paragraph
addresses contractor responsibilities.
The ‘‘Ceiling Price’’ paragraph addresses
the Government’s responsibility to pay
or not pay. Therefore, the Councils
believe it is appropriate to separately
address total cost and the ceiling price.
(6) Assignment and Release of Claim.
A respondent commented: Change the
title of paragraph (f) of the FAR clause
at 52.232–7, Payments Under Time-andMaterials and Labor-Hour Contracts
from ‘‘Assignment’’ to ‘‘Release of
Claims,’’ which is what the paragraph is
really about.
Response: The Councils revised the
title of the paragraph to ‘‘Assignments
and Release of Claims’’ because both
topics are discussed in the provision.
(7) Withhold. A respondent
commented: Revise the rule to clarify
the payment withhold is limited to five
percent or $50,000 and that the
withhold is applied at the contract level
instead of the task order level.
Response: The Payments under Timeand-Materials and Labor-Hour Contracts
clause (52.232–7) was modified as
suggested by the contractor in FAR Case
2004–003 which was published in the
Federal Register at 71 FR 43576 on July
27, 2005.
(8) Timecards. A respondent
commented: Delete the requirement to
validate the individual daily job
timecards to provide contractors the
flexibility to use electronic time keeping
systems.
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Response: The Councils revised the
final rule to require access to the
timekeeping records instead of job
timecards to recognize electronic
timekeeping systems.
(9) Prompt Payment. A respondent
commented: Revise the rule to permit
Prompt Payment Act interest also on the
material portion of T&M contracts. The
Prompt Payment Act was revised to
make prompt payment interest
applicable to interim payments on cost
reimbursement contracts for services.
T&M contracts are not equivalent to cost
reimbursement contracts and it is not
logical to apply interest to labor without
including the material resources
required to provide the labor. However,
the impact of excluding interest on the
material portion is probably negligible
since most of the payments on T&M
contracts are for labor. Restricting
prompt payment interest to labor will
certainly make more work for
Government disbursing official who will
have to segregate labor from material to
compute the interest penalties. Any
amount the Government saves from only
paying prompt payment interest on
labor will likely be more than offset by
the administrative costs of computing
the interest on only the labor portion of
the invoice.
Response: The Prompt Payment Act
applies to fixed-price contracts and
interim payments on cost-reimbursable
contracts for services. The Councils lack
the authority to extend the Act to
interim payments for supplies.
(10) Miscellanous.
(a)A respondent commented: Strongly
request the Councils to hold additional
public meetings to provide the public
the opportunity to further explain the
comments submitted.
Response: The Councils determined
that the FAR changes are within the
scope of changes contemplated by the
proposed rule and that no further public
meetings or proposed rule are
appropriate. Further public meetings or
public comments would not result in
comments that are substantially
different from those already submitted.
(b) A respondent commented:
Recommend having the effective date
for the rule be 60 days after publication
in the Federal Register so agencies can
develop implementing guidance and
update the associated training.
Response: The effective date for FAR
changes is generally 30 days after
publication in the Federal Register.
However, the Councils agree agencies
may need additional time to implement
guidance and update the associated
training. Therefore, the rule will have an
effective date 60 days after publication
in the Federal Register.
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(c) A respondent commented:
Recommend the Councils take steps to
ensure the solicitation process clearly
addresses the method for reimbursing
subcontract costs, i.e., only at actual
costs unless the subcontractor is listed
in the contract.
Response: The rule no longer requires
listing subcontracts in the contract in
order for the costs to be reimbursed
using the fixed hourly rates in the
contract. The rule includes two
solicitation provisions to ensure
contractors understand the methodology
for reimbursing subcontract costs.
(d) A respondent commented: Urge
the Councils to also remove the ‘‘most
favored customer’’ provisions from FAR
31.106–3.
Response: The provisions at FAR
31.106–3 are outside the scope of this
rule. However, the Councils are
considering the recommended change.
(e) A respondent commented: The
Supplementary Information in the
proposed rule said that subcontracted
labor paid at the LH rate must be
accounted for and substantiated under
the same standards as labor hours
provided by the prime contractor. This
could be interpreted to mean prime
contractors are required to include the
subcontractor costs in the prime’s
overhead base for direct labor. Clarify
how prime contractors should allocate
overhead to subcontract labor. Also,
address the potential inconsistency of
bidding/billing some subcontractor
labor at contract rates and others at cost
with respect to Cost Accounting
Standards (CAS) compliance.
Response: The Supplementary
Information in the proposed rule did
include this statement. However,
nothing in the proposed or final rule
require prime contractors to include
subcontractor costs in the overhead base
for direct labor. Contractors should
continue to allocate overhead to
subcontract labor consistent with their
disclosed or established procedures.
CAS relate to allocation issues. The
costs allocable to T&M contracts may
differ significantly from the costs billed
and paid for the T&M contract. The
same is true for fixed-price contracts.
(f) A respondent commented: Replace
the term ‘‘voucher’’ with ‘‘invoice’’.
Response: The term ‘‘voucher’’ refers
to interim payments on cost
reimbursement contracts. The term
‘‘invoice’’ refers to delivery payments
and payments on fixed-price contracts.
Therefore, the Councils did not revise
the terminology as recommended.
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
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Review, dated September 30, 1993. This
rule is not a major rule under 5 U.S.C.
804.
B. Regulatory Flexibility Act
The Regulatory Flexibility Act, 5
U.S.C. 601, et seq., applies to this final
rule. The Councils prepared a Final
Regulatory Flexibility Analysis (FRFA)
as follows:
1. Statement of need for, and objectives of,
the rule.
This rule revises the Federal Acquisition
Regulation to amend underlying policies and
increase the clarity of payments made under
T&M and LH contracts for non-commercial
items. The objectives of the amendment are
to ensure fair and reasonable prices under
T&M contracts and to eliminate the
ambiguity in T&M contracts that has been
responsible for confusion over payment
amounts for subcontractor provided labor.
2. Summary of significant issues raised by
the public comments in response to the
Initial Regulatory Flexibility Analysis
(IRFA), a summary of the assessment of the
agency of such issues, and a statement of any
changes made in the proposed rule as a
result of such comments.
Comments were received from 17
respondents in response to the proposed rule.
The Councils considered all of the comments
and recommendations in developing the final
rule. The Councils made the following
changes to the proposed rule as a result of
the public comments and deliberations:
(a) Definition of ‘‘Hourly Rate.’’ Established
a definition for ‘‘hourly rate’’ to permit
reimbursement of subcontracts for services
and services transferred between divisions,
subsidiaries, or affiliates under a common
control at the hourly rates in the schedule
when the employee meets the labor
qualification specified in the contract (see
comment (4)(c)(3)).
(b) Definition of ‘‘Materials.’’ Revised the
definition for ‘‘materials’’ to— (1) exclude
subcontracts for services and services
transferred between divisions, subsidiaries,
or affiliates under a common control from the
definition of ‘‘materials’’ because these
services are included in the ‘‘hourly rate’’
when the services meet the labor
qualifications specified in the contract; and
(2) add incidental services to the examples of
other direct costs (see comment (4)(c)(3)).
Subcontracts for services and services
transferred between divisions, subsidiaries,
or affiliates under a common control that do
not meet the labor qualifications specified in
the contract are incidental services but see
(3)(ii) below.
(c) Reimbursement for Subcontract and
Interdivisional Transfers of Services.
Eliminated the provisions in the proposed
rule that only permitted reimbursement of
subcontract costs at the hourly rates in the
contract when the subcontractors were listed
in the contract (see comment (4)(c)(4)(e)).
Added provisions that—
(i) Require reimbursement of subcontracts
for services and services transferred between
divisions, subsidiaries, or affiliates under a
common control of at the hourly rates in the
schedule that include profit when the
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employees performing the work meet the
qualifications specified in the contract.
(ii) Address reimbursement for
subcontracts for services and services
transferred between divisions, subsidiaries,
or affiliates under a common control when
the employees performing the work do not
meet the qualifications specified in the
contract. Payment for such services is at the
sole discretion of the Government.
(iii) Require separate fixed hourly rates that
include wages, overhead, general and
administrative expenses, and profit for each
category of labor. When the contract is
awarded without adequate price
competitions, the rule also requires a
separate set of rates for labor performed by
the contractor, each subcontractor, and each
division, subsidiary, or affiliate of the
contractor under a common control that will
perform on the contract.
(d) Solicitation Provisions. Added two
solicitation provisions to ensure contractors
understand the methodology for reimbursing
subcontract costs (see comment (4)(c)(11)(c)).
(e) Timecards. Revised the rule to
recognize that companies use both paperbased and electronic timecards (see comment
(4)(c)(9)).
(f) Commercial Item Materials. Revised the
prescription for reimbursing commercial
items to clarify the commercial catalog or
market prices are subject to negotiation (see
comment (4)(c)(4)(b)).
(g) Assignment and Release of Claims. Retitled the paragraph previously title
‘‘Assignment’’ to ‘‘Assignment and Release of
Claims’’ to clarify both topic are covered in
the paragraph (see comment (4)(c)(7)).
(h)Refunds. Deleted the current provision
on refunds from the clause because the
provisions duplicate coverage in the
Allowable Cost and Payment clause (see
comment (4)(c)(4)(d)).
3. Description of, and an estimate of the
number of, small entities to which the rule
will apply or an explanation of why no such
estimate is available.
The changes 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 T&M contracting is a common
method of acquiring services from small
entities. However, it is not feasible to
estimate the number of small entities
impacted.
4. Description of projected reporting,
record keeping, and other compliance
requirements of the proposed rule, including
an estimate of the classes of small entities
which will be subject to the requirement and
the type of professional skills necessary for
preparation of the report or record.
The prior FAR policies required
contractors to maintain records to support
invoices presented to the Government for
payment. Such records included original
timecards, the contractor’ timekeeping
procedures, distribution of labor, invoices for
material, and so forth. These are standard
records maintained by any company, large or
small, and the fact that the contract would
require that these records be made available
to the Government should not place any
additional record keeping burden on the
entity.
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5. Description of any significant
alternatives to the rule which accomplish
the stated objectives of applicable statutes
and which minimize any significant
economic impact of the proposed rule on
small entities. Significant alternatives to the
final rule include:
• Not permitting any subcontractor to be
paid at the labor hour rate and reimbursing
all subcontractors at actual cost.
• Requiring any subcontractor to be listed
in the prime contract as the sole means of
authorizing payments of labor for that
subcontractor to be at the labor hour rate
specified in the contract.
• Incorporating a list of each Other Direct
Cost (ODC) into each T&M contract that
would be authorized for reimbursement
under that contract and prohibiting
reimbursement of any other ODC.
• Not requiring a list of each Other Direct
Cost (ODC) authorized for reimbursement
and permitting any ODC to be reimbursed.
Interested parties may obtain a copy
of the FRFA from the FAR Secretariat.
The FAR Secretariat has submitted a
copy of the FRFA to the Chief Counsel
for Advocacy of the Small Business
Administration.
C. Paperwork Reduction Act
The Paperwork Reduction Act (Pub.
L. 104–13) does not apply because the
changes to the FAR do not impose
information collection requirements that
require the approval of the Office of
Management and Budget under 44
U.S.C. 3501, et seq.
List of Subjects in 48 CFR Parts 16, 32,
and 52
Government procurement.
Dated: December 4, 2006.
Linda K. Nelson,
Deputy Director, Contract Policy Division.
Therefore, DoD, GSA, and NASA
amend 48 CFR parts 16, 32, and 52 as
set forth below:
I 1. The authority citation for 48 CFR
parts 16, 32, and 52 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).
PART 16–TYPES OF CONTRACTS
2. Amend section 16.307 by revising
paragraph (a)(1) to read as follows:
I
16.307
Contract clauses.
(a)(1) The contracting officer shall
insert the clause at 52.216–7, Allowable
Cost and Payment, in solicitations and
contracts when a cost-reimbursement
contract (other than a facilities contract)
or a time-and-materials contract (other
than a contract for a commercial item)
is contemplated. If the contract is with
an educational institution, modify the
clause by deleting from paragraph (a)
the words ‘‘Subpart 31.2’’ and
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substituting for them ‘‘Subpart 31.3.’’ If
the contract is with a State or local
government, modify the clause by
deleting from paragraph (a) the words
‘‘Subpart 31.2’’ and substituting for
them ‘‘Subpart 31.6.’’ If the contract is
with a nonprofit organization other than
an educational institution, a State or
local government, or a nonprofit
organization exempted under OMB
Circular No. A–122, modify the clause
by deleting from paragraph (a) the
words ‘‘Subpart 31.2’’ and substituting
for them ‘‘Subpart 31.7.’’ If the contract
is a time-and-materials contract, the
clause at 52.216–7 applies only to the
portion of the contract that provides for
reimbursement of materials (as defined
in the clause at 52.232–7) at actual cost.
*
*
*
*
*
I 3. Revise section 16.601 to read as
follows:
16.601
Time-and-materials contracts.
(a) Definitions for the purposes of
Time-and-Materials Contracts.
Direct materials means those
materials that enter directly into the end
product, or that are used or consumed
directly in connection with the
furnishing of the end product or service.
Hourly rate means the rate(s)
prescribed in the contract for payment
for labor that meets the labor category
qualifications of a labor category
specified in the contract that are—
(1) Performed by the contractor;
(2) Performed by the subcontractors;
or
(3) Transferred between divisions,
subsidiaries, or affiliates of the
contractor under a common control.
Materials means—
(1) Direct materials, including
supplies transferred between divisions,
subsidiaries, or affiliates of the
contractor under a common control;
(2) Subcontracts for supplies and
incidental services for which there is
not a labor category specified in the
contract;
(3) Other direct costs (e.g., incidental
services for which there is not a labor
category specified in the contract, travel,
computer usage charges, etc.); and
(4) Applicable indirect costs.
(b) Description. A time-and-materials
contract provides for acquiring supplies
or services on the basis of—
(1) Direct labor hours at specified
fixed hourly rates that include wages,
overhead, general and administrative
expenses, and profit; and
(2) Actual cost for materials (except as
provided for in 31.205–26(e) and (f)).
(c) Application. A time-and-materials
contract may be used only when it is not
possible at the time of placing the
contract to estimate accurately the
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extent or duration of the work or to
anticipate costs with any reasonable
degree of confidence.
(1) Government surveillance. A timeand-materials contract provides no
positive profit incentive to the
contractor for cost control or labor
efficiency. Therefore, appropriate
Government surveillance of contractor
performance is required to give
reasonable assurance that efficient
methods and effective cost controls are
being used.
(2) Fixed hourly rates. (i) The contract
shall specify separate fixed hourly rates
that include wages, overhead, general
and administrative expenses, and profit
for each category of labor (see
16.601(e)(1)).
(ii) For acquisitions of noncommercial
items awarded without adequate price
competition (see 15.403–1(c)(1)), the
contract shall specify separate fixed
hourly rates that include wages,
overhead, general and administrative
expenses, and profit for each category of
labor to be performed by—
(A) The contractor;
(B) Each subcontractor; and
(C) Each division, subsidiary, or
affiliate of the contractor under a
common control.
(iii) For contract actions that are not
awarded using competitive procedures,
unless exempt under paragraph
(c)(2)(iv) of this section, the fixed hourly
rates for services transferred between
divisions, subsidiaries, or affiliates of
the contractor under a common
control—
(A) Shall not include profit for the
transferring organization; but
(B) May include profit for the prime
contractor.
(iv) For contract actions that are not
awarded using competitive procedures,
the fixed hourly rates for services that
meet the definition of commercial item
at 2.101 that are transferred between
divisions, subsidiaries, or affiliates of
the contractor under a common control
may be the established catalog or market
rate when—
(A) It is the established practice of the
transferring organization to price
interorganizational transfers at other
than cost for commercial work of the
contractor or any division, subsidiary or
affiliate of the contractor under a
common control; and
(B) The contracting officer has not
determined the price to be
unreasonable.
(3) Material handling costs. When
included as part of material costs,
material handling costs shall include
only costs clearly excluded from the
labor-hour rate. Material handling costs
may include all appropriate indirect
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costs allocated to direct materials in
accordance with the contractor’s usual
accounting procedures consistent with
Part 31.
(d) Limitations. A time-and-materials
contract may be used— (1) only after the
contracting officer executes a
determination and findings that no
other contract type is suitable, and (2)
only if the contract includes a ceiling
price that the contractor exceeds at its
own risk. The contracting officer shall
document the contract file to justify the
reasons for and amount of any
subsequent change in the ceiling price.
Also see 12.207(b) for further limitations
on use of Time-and-Materials or Labor
Hour contracts for acquisition of
commercial items.
(e) Solicitation provisions. (1) The
contracting officer shall insert the
provision at 52.216–29, Time-andMaterials/Labor-Hour Proposal
Requirements—Non-Commercial Item
Acquisitions With Adequate Price
Competition, in solicitations
contemplating use of a Time-andMaterials or Labor-Hour type of contract
for noncommercial items, if the price is
expected to be based on adequate price
competition. If authorized by agency
procedures, the contracting officer may
amend the provision to make mandatory
one of the three approaches in
paragraph (c) of the provision, and/or to
require the identification of all
subcontractors, divisions, subsidiaries,
or affiliates included in a blended labor
rate.
(2) The contracting officer shall insert
the provision at 52.216–30, Time-andMaterials/Labor-Hour Proposal
Requirements—Non-Commercial Item
Acquisitions without Adequate Price
Competition, in solicitations for
noncommercial items contemplating use
of a Time-and-Materials or Labor-Hour
type of contract if the price is not
expected to be based on adequate price
competition.
(3) The contracting officer shall insert
the provision at 52.216–31, Time-andMaterials/Labor-Hour Proposal
Requirements—Commercial Item
Acquisitions, in solicitations
contemplating use of a Commercial
Time-and-Materials or Labor-Hour
contract.
PART 32—CONTRACT FINANCING
4. Amend section 32.111 in paragraph
(a)(7) by removing (a)(7)(i) and
redesignating paragraphs (a)(7)(ii) and
(iii) as (a)(7)(i) and (a)(7)(ii),
respectively; and by revising the newly
designated paragraph (a)(7)(i) to read as
follows:
I
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32.111 Contract clauses for noncommercial purchases.
(a) * * *
(7) * * *
(i) If a labor-hour contract is
contemplated, the contracting officer
shall use the clause with its Alternate I.
*
*
*
*
*
PART 52—SOLICITATION PROVISIONS
AND CONTRACT CLAUSES
5. Add sections 52.216–29, 52.216–30,
and 52.216–31 to read as follows:
I
52.216–29 Time-and-Materials/Labor-Hour
Proposal Requirements—Non-Commercial
Item Acquisition With Adequate Price
Competition.
As prescribed in 16.601(e)(1), insert
the following provision:
TIME-AND-MATERIALS/LABOR-HOUR
PROPOSAL REQUIREMENTS—NONCOMMERCIAL ITEM ACQUISITION WITH
ADEQUATE PRICE COMPETITION (FEB
2007)
(a) The Government contemplates award of
a Time-and-Materials or Labor-Hour type of
contract resulting from this solicitation.
(b) The offeror must specify fixed hourly
rates in its offer that include wages,
overhead, general and administrative
expenses, and profit. The offeror must
specify whether the fixed hourly rate for each
labor category applies to labor performed
by—
(1) The offeror;
(2) Subcontractors; and/or
(3) Divisions, subsidiaries, or affiliates of
the offeror under a common control;
(c) The offeror must establish fixed hourly
rates using—
(1) Separate rates for each category of labor
to be performed by each subcontractor and
for each category of labor to be performed by
the offeror, and for each category of labor to
be transferred between divisions,
subsidiaries, or affiliates of the offeror under
a common control;
(2) Blended rates for each category of labor
to be performed by the offeror, including
labor transferred between divisions,
subsidiaries, or affiliates of the offeror under
a common control, and all subcontractors; or
(3) Any combination of separate and
blended rates for each category of labor to be
performed by the offeror, affiliates of the
offeror under a common control, and
subcontractors.
(End of provision)
52.216–30 Time-and-Materials/Labor-Hour
Proposal Requirements—Non-Commercial
Item Acquisition without Adequate Price
Competition.
As prescribed in 16.601(e)(2), insert
the following provision:
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TIME-AND-MATERIALS/LABOR-HOUR
PROPOSAL REQUIREMENTS—NONCOMMERCIAL ITEM ACQUISITION
WITHOUT ADEQUATE PRICE
COMPETITION (FEB 2007)
(a) The Government contemplates award of
a Time-and-Materials or Labor-Hour type of
contract resulting from this solicitation.
(b) The offeror must specify separate fixed
hourly rates in its offer that include wages,
overhead, general and administrative
expenses, and profit for each category of
labor to be performed by—
(1) The offeror;
(2) Each subcontractor; and
(3) Each division, subsidiary, or affiliate of
the offeror under a common control.
(c) Unless exempt under paragraph (d) of
this provision, the fixed hourly rates for
services transferred between divisions,
subsidiaries, or affiliates of the offeror under
a common control—
(1) Shall not include profit for the
transferring organization; but
(2) May include profit for the prime
Contractor.
(d) The fixed hourly rates for services that
meet the definition of commercial item at
2.101 that are transferred between divisions,
subsidiaries, or affiliates of the offeror under
a common control may be the established
catalog or market rate when it is the
established practice of the transferring
organization to price interorganizational
transfers at other than cost for commercial
work of the offeror or any division,
subsidiary or affiliate of the offeror under a
common control.
(End of provision)
52.216–31 Time-and-Materials/Labor-Hour
Proposal Requirements—Commercial Item
Acquisition.
As prescribed in 16.601(e)(1), insert
the following provision:
TIME-AND-MATERIALS/LABOR-HOUR
PROPOSAL REQUIREMENTS—
COMMERCIAL ITEM ACQUISITION (FEB
2007)
(a) The Government contemplates award of
a Time-and-Materials or Labor-Hour type of
contract resulting from this solicitation.
(b) The offeror must specify fixed hourly
rates in its offer that include wages,
overhead, general and administrative
expenses, and profit. The offeror must
specify whether the fixed hourly rate for each
labor category applies to labor performed
by—
(1) The offeror;
(2) Subcontractors; and/or
(3) Divisions, subsidiaries, or affiliates of
the offeror under a common control.
(End of provision)
6. Revise section 52.232–7 to read as
follows:
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I
52.232–7 Payments under Time-andMaterials and Labor-Hour Contracts.
As prescribed in 32.111(a)(7), insert
the following clause:
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PAYMENTS UNDER TIME-ANDMATERIALS AND LABOR-HOUR
CONTRACTS (FEB 2007)
The Government will pay the Contractor as
follows upon the submission of vouchers
approved by the Contracting Officer or the
authorized representative:
(a) Hourly rate. (1) Hourly rate means the
rate(s) prescribed in the contract for payment
for labor that meets the labor category
qualifications of a labor category specified in
the contract that are—
(i) Performed by the Contractor;
(ii) Performed by the subcontractors; or
(iii) Transferred between divisions,
subsidiaries, or affiliates of the Contractor
under a common control.
(2) The amounts shall be computed by
multiplying the appropriate hourly rates
prescribed in the Schedule by the number of
direct labor hours performed.
(3) The hourly rates shall be paid for all
labor performed on the contract that meets
the labor qualifications specified in the
contract. Labor hours incurred to perform
tasks for which labor qualifications were
specified in the contract will not be paid to
the extent the work is performed by
employees that do not meet the qualifications
specified in the contract, unless specifically
authorized by the Contracting Officer.
(4) The hourly rates shall include wages,
indirect costs, general and administrative
expense, and profit. Fractional parts of an
hour shall be payable on a prorated basis.
(5) Vouchers may be submitted once each
month (or at more frequent intervals, if
approved by the Contracting Officer), to the
Contracting Officer or authorized
representative. The Contractor shall
substantiate vouchers (including any
subcontractor hours reimbursed at the hourly
rate in the schedule) by evidence of actual
payment and by—
(i) Individual daily job timekeeping
records;
(ii) Records that verify the employees meet
the qualifications for the labor categories
specified in the contract; or
(iii) Other substantiation approved by the
Contracting Officer.
(6) Promptly after receipt of each
substantiated voucher, the Government shall,
except as otherwise provided in this contract,
and subject to the terms of paragraph (e) of
this clause, pay the voucher as approved by
the Contracting Officer or authorized
representative.
(7) Unless otherwise prescribed in the
Schedule, the Contracting Officer may
unilaterally issue a contract modification
requiring the Contractor to withhold amounts
from its billings until a reserve is set aside
in an amount that the Contracting Officer
considers necessary to protect the
Government’s interests. The Contracting
Officer may require a withhold of 5 percent
of the amounts due under paragraph (a) of
this clause, but the total amount withheld for
the contract shall not exceed $50,000. The
amounts withheld shall be retained until the
Contractor executes and delivers the release
required by paragraph (f) of this clause.
(8) Unless the Schedule prescribes
otherwise, the hourly rates in the Schedule
shall not be varied by virtue of the Contractor
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having performed work on an overtime basis.
If no overtime rates are provided in the
Schedule and overtime work is approved in
advance by the Contracting Officer, overtime
rates shall be negotiated. Failure to agree
upon these overtime rates shall be treated as
a dispute under the Disputes clause of this
contract. If the Schedule provides rates for
overtime, the premium portion of those rates
will be reimbursable only to the extent the
overtime is approved by the Contracting
Officer.
(b) Materials. (1) For the purposes of this
clause—
(i) Direct materials means those materials
that enter directly into the end product, or
that are used or consumed directly in
connection with the furnishing of the end
product or service.
(ii) Materials means—
(A) Direct materials, including supplies
transferred between divisions, subsidiaries,
or affiliates of the Contractor under a
common control;
(B) Subcontracts for supplies and
incidental services for which there is not a
labor category specified in the contract;
(C) Other direct costs (e.g., incidental
services for which there is not a labor
category specified in the contract, travel,
computer usage charges, etc.); and
(D) Applicable indirect costs.
(2) If the Contractor furnishes its own
materials that meet the definition of a
commercial item at 2.101, the price to be
paid for such materials shall not exceed the
Contractor’s established catalog or market
price, adjusted to reflect the—
(i) Quantities being acquired; and
(ii) Actual cost of any modifications
necessary because of contract requirements.
(3) Except as provided for in paragraph
(b)(2) of this clause, the Government will
reimburse the Contractor for allowable cost of
materials provided the Contractor—
(i) Has made payments for materials in
accordance with the terms and conditions of
the agreement or invoice; or
(ii) Ordinarily makes these payments
within 30 days of the submission of the
Contractor’s payment request to the
Government and such payment is in
accordance with the terms and conditions of
the agreement or invoice.
(4) Payment for materials is subject to the
Allowable Cost and Payment clause of this
contract. The Contracting Officer will
determine allowable costs of materials in
accordance with Subpart 31.2 of the Federal
Acquisition Regulation (FAR) in effect on the
date of this contract.
(5) The Contractor may include allocable
indirect costs and other direct costs to the
extent they are—
(i) Comprised only of costs that are clearly
excluded from the hourly rate;
(ii) Allocated in accordance with the
Contractor’s written or established
accounting practices; and
(iii) Indirect costs are not applied to
subcontracts that are paid at the hourly rates.
(6) To the extent able, the Contractor
shall—
(i) Obtain materials at the most
advantageous prices available with due
regard to securing prompt delivery of
satisfactory materials; and
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(ii) Take all cash and trade discounts,
rebates, allowances, credits, salvage,
commissions, and other benefits. When
unable to take advantage of the benefits, the
Contractor shall promptly notify the
Contracting Officer and give the reasons. The
Contractor shall give credit to the
Government for cash and trade discounts,
rebates, scrap, commissions, and other
amounts that have accrued to the benefit of
the Contractor, or would have accrued except
for the fault or neglect of the Contractor. The
Contractor shall not deduct from gross costs
the benefits lost without fault or neglect on
the part of the Contractor, or lost through
fault of the Government.
(7) Except as provided for in 31.205–26(e)
and (f), the Government will not pay profit
or fee to the prime Contractor on materials.
(c) If the Contractor enters into any
subcontract that requires consent under the
clause at 52.244–2, Subcontracts, without
obtaining such consent, the Government is
not required to reimburse the Contractor for
any costs incurred under the subcontract
prior to the date the Contractor obtains the
required consent. Any reimbursement of
subcontract costs incurred prior to the date
the consent was obtained shall be at the sole
discretion of the Government.
(d) Total cost. It is estimated that the total
cost to the Government for the performance
of this contract shall not exceed the ceiling
price set forth in the Schedule, and the
Contractor agrees to use its best efforts to
perform the work specified in the Schedule
and all obligations under this contract within
such ceiling price. If at any time the
Contractor has reason to believe that the
hourly rate payments and material costs that
will accrue in performing this contract in the
next succeeding 30 days, if added to all other
payments and costs previously accrued, will
exceed 85 percent of the ceiling price in the
Schedule, the Contractor shall notify the
Contracting Officer giving a revised estimate
of the total price to the Government for
performing this contract with supporting
reasons and documentation. If at any time
during performing this contract, the
Contractor has reason to believe that the total
price to the Government for performing this
contract will be substantially greater or less
than the then stated ceiling price, the
Contractor shall so notify the Contracting
Officer, giving a revised estimate of the total
price for performing this contract, with
supporting reasons and documentation. If at
any time during performing this contract, the
Government has reason to believe that the
work to be required in performing this
contract will be substantially greater or less
than the stated ceiling price, the Contracting
Officer will so advise the Contractor, giving
the then revised estimate of the total amount
of effort to be required under the contract.
(e) Ceiling price. The Government will not
be obligated to pay the Contractor any
amount in excess of the ceiling price in the
Schedule, and the Contractor shall not be
obligated to continue performance if to do so
would exceed the ceiling price set forth in
the Schedule, unless and until the
Contracting Officer notifies the Contractor in
writing that the ceiling price has been
increased and specifies in the notice a
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revised ceiling that shall constitute the
ceiling price for performance under this
contract. When and to the extent that the
ceiling price set forth in the Schedule has
been increased, any hours expended and
material costs incurred by the Contractor in
excess of the ceiling price before the increase
shall be allowable to the same extent as if the
hours expended and material costs had been
incurred after the increase in the ceiling
price.
(f) Audit. At any time before final payment
under this contract, the Contracting Officer
may request audit of the vouchers and
supporting documentation. Each payment
previously made shall be subject to reduction
to the extent of amounts, on preceding
vouchers, that are found by the Contracting
Officer or authorized representative not to
have been properly payable and shall also be
subject to reduction for overpayments or to
increase for underpayments. Upon receipt
and approval of the voucher designated by
the Contractor as the ‘‘completion voucher’’
and supporting documentation, and upon
compliance by the Contractor with all terms
of this contract (including, without
limitation, terms relating to patents and the
terms of paragraphs (f) and (g) of this clause),
the Government shall promptly pay any
balance due the Contractor. The completion
voucher, and supporting documentation,
shall be submitted by the Contractor as
promptly as practicable following completion
of the work under this contract, but in no
event later than 1 year (or such longer period
as the Contracting Officer may approve in
writing) from the date of completion.
(g) Assignment and Release of Claims. The
Contractor, and each assignee under an
assignment entered into under this contract
and in effect at the time of final payment
under this contract, shall execute and
deliver, at the time of and as a condition
precedent to final payment under this
contract, a release discharging the
Government, its officers, agents, and
employees of and from all liabilities,
obligations, and claims arising out of or
under this contract, subject only to the
following exceptions:
(1) Specified claims in stated amounts, or
in estimated amounts if the amounts are not
susceptible of exact statement by the
Contractor.
(2) Claims, together with reasonable
incidental expenses, based upon the
liabilities of the Contractor to third parties
arising out of performing this contract, that
are not known to the Contractor on the date
of the execution of the release, and of which
the Contractor gives notice in writing to the
Contracting Officer not more than 6 years
after the date of the release or the date of any
notice to the Contractor that the Government
is prepared to make final payment,
whichever is earlier.
(3) Claims for reimbursement of costs
(other than expenses of the Contractor by
reason of its indemnification of the
Government against patent liability),
including reasonable incidental expenses,
incurred by the Contractor under the terms
of this contract relating to patents.
(h) Interim payments on contracts for other
than services. (1) Interim payments made
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prior to the final payment under the contract
are contract financing payments. Contract
financing payments are not subject to the
interest penalty provisions of the Prompt
Payment Act.
(2) The designated payment office will
make interim payments for contract financing
on the lllll [Contracting Officer insert
day as prescribed by agency head; if not
prescribed, insert ‘‘30th’’] day after the
designated billing office receives a proper
payment request. In the event that the
Government requires an audit or other review
of a specific payment request to ensure
compliance with the terms and conditions of
the contract, the designated payment office is
not compelled to make payment by the
specified due date.
(i) Interim payments on contracts for
services. For interim payments made prior to
the final payment under this contract, the
Government will make payment in
accordance with the Prompt Payment Act (31
U.S.C. 3903) and prompt payment
regulations at 5 CFR part 1315.
(End of Clause)
Alternate I (FEB 2007). If a labor-hour
contract is contemplated, the Contracting
Officer shall add the following paragraph (i)
to the basic clause:
(i) The terms of this clause that govern
reimbursement for materials furnished are
considered to have been deleted.
[FR Doc. 06–9610 Filed 12–6–06; 8:45 am]
BILLING CODE 6820–EP–S
DEPARTMENT OF DEFENSE
GENERAL SERVICES
ADMINISTRATION
NATIONAL AERONAUTICS AND
SPACE ADMINISTRATION
48 CFR Parts 2, 10, 12, 16, and 52
[FAC 2005–15; FAR Case 2003–027; Item
II; Docket 2006–0020, Sequence 22]
RIN 9000–AK07
Federal Acquisition Regulation; FAR
Case 2003–027, Additional Commercial
Contract Types
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) 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 Report Act of 2003
(SARA), amended section 8002(d) of the
Federal Acquisition Streamlining Act of
E:\FR\FM\12DER4.SGM
12DER4
Agencies
[Federal Register Volume 71, Number 238 (Tuesday, December 12, 2006)]
[Rules and Regulations]
[Pages 74656-74667]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-9610]
-----------------------------------------------------------------------
DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 16, 32, and 52
[FAC 2005-15; FAR Case 2004-015; Item I; Docket 2006-0020, Sequence 23]
RIN 9000-AK32
Federal Acquisition Regulation; FAR Case 2004-015, Payments Under
Time-and-Materials and Labor-Hour Contracts
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) to clarify payment
procedures for Time-and-Materials (T&M) and Labor-Hour (LH) Contracts.
DATES: Effective Date: February 12, 2007.
FOR FURTHER INFORMATION CONTACT: For clarification of content, contact
Mr. Jeremy Olson at (202) 501-3221. Please cite FAC 2005-15, FAR case
2004-015. For information pertaining to status or publication
schedules, contact the FAR Secretariat at (202) 501-4755.
SUPPLEMENTARY INFORMATION:
[[Page 74657]]
A. Background
DoD, GSA, and NASA published a proposed rule in the Federal
Register at 70 FR 56314 on September 26, 2005. The amendments made
under this case are intended to be applicable primarily to non-
commercial item contracts. Policies primarily applicable to commercial
item T&M or LH contracts are being addressed separately under FAR case
2003-027.
The proposed amendments to FAR 16.307, 16.601, 16.602, 32.111, and
52.232-7 are intended to amend the underlying policies and increase the
clarity of the affected FAR language. The FAR amendments address the
areas related to payments made under T&M and LH contracts for non-
commercial items, as described below.
1. FAR 16.307 - Contract clauses.
The Councils amended FAR 16.307(a)(1) to specify that the Allowable
Cost and Payment Clause is included in T&M contracts. The clause is
only applicable to the portion of the contract that provides for
reimbursement of materials at actual cost and related indirect costs.
This change is being made to ensure that appropriate rights and
responsibilities are provided in T&M contracts with respect to
reimbursement for material cost.
2. FAR 16.601 - Time-and-materials contracts.
The Councils revised the language at FAR 16.601(a) to provide a
description of ``materials'' as used in ``time-and-materials
contract.'' FAR 16.601(a) currently describes a T&M contract as a
contract that provides for acquiring supplies or services on the basis
of--
Direct labor hours at specified fixed hourly rates that
include wages, overhead, general and administrative expenses, and
profit; and
Materials at cost, including, if appropriate, material
handling costs as part of material costs.
The prior FAR description did not address subcontract costs, even
though such costs are often a significant part of the work performed
and are provided for under the payments clause at 52.232-7. Also, that
description did not address other direct costs and applicable indirect
costs other than material handling (e.g., general and administrative
expenses) that may be appropriate for the acquisition.
3. General structure of FAR 52.232-7 - Payments under Time-and-
Materials and Labor-Hour Contracts.
The Councils amended the current paragraph (b) of the clause at FAR
52.232-7 to specify that the term ``materials,'' as used in the clause,
includes direct materials, subcontracts for supplies and ancillary
services, other direct costs, and applicable indirect costs (this is
consistent with the proposed changes to FAR 16.601). Materials also
include supplies and ancillary services transferred between divisions,
subdivisions, subsidiaries, or affiliates of the contractor under a
common control.
Although the proposed rule had proposed to revise ``materials'' to
include all subcontracts for services, the final rule defines
subcontracts for labor as part of the definition of labor, if the
subcontracted labor meets the requirements of the prime contract for
labor hours. The prior FAR language had caused significant confusion
because it did not adequately describe what is included in ``labor'' or
``materials.''
4. Contractor furnished material - Alternate I.
The Councils moved and amended the prior Alternate I of the clause
at FAR 52.232-7. When a contractor furnishes its own materials that
meet the definition of a commercial item at 2.101, the price to be paid
for such materials shall be the contractor's established catalog or the
market price. The ability of the contractor to bill at such prices
should not be dependent on a contracting officer decision as to whether
an alternate clause should be included in the contract.
5. Profit or fee on materials.
The Councils amended FAR 52.232-7(b)(7) to specifically state that
the Government does not pay profit or fee to the prime contractor on
materials (except for commercial items discussed in item 4, above or as
otherwise provided for in FAR 31.205-26). The Councils believe this is
consistent with the historical intent of the clause and the concept of
a T&M contract. The recovery of profit or fee is accomplished as part
of the labor hour portion of the T&M/LH contract.
6. Billing subcontracts and interdivisional transfers for
incidental supplies or services.
For subcontracts, the Councils clarified that subcontracts for
incidental services are to be reimbursed at the actual subcontract
price, plus allowable indirect costs, per the requirements of FAR
52.216-7, Allowable Cost and Payment. For interdivisional transfers,
the Councils revised the language to limit reimbursement to the actual
rates or commercial prices of the division performing the work and
specified that only one division may obtain profit. No profit
pyramiding within a company is to be permitted.
7. Billing subcontracts and interdivisional transfers for services
that comply with the labor hour requirements.
For services performed by employees of subcontractors, the proposed
rule had included a process under which that labor would be reimbursed
at actual cost (plus related indirect costs) unless it was included on
a list in the prime contract. If it were included on the list, it was
to be paid at the labor hour rate.
The final rule eliminates that proposed approach. The final rule
provides that all labor hours that qualify under the labor hour
requirements of the contract are to be paid at the labor hour rate
specified in the contract. This applies regardless of whether an
individual is an employee of the prime contractor, a subcontractor or
an affiliate of the prime contractor.
8. Solicitation provisions.
The final rule incorporates three new solicitation provisions that
direct how proposals address subcontract labor.
The first provision applies to acquisitions of noncommercial items
that are to be based on adequate price competition. This provision
requires each offeror to indicate for each labor rate in the proposal
whether it is a rate that applies to employees of one company or if it
is a blended rate that applies to employees of more than one company.
The offerors must show for each labor rate if it applies to employees
of the prime contractor, employees a particular subcontractor or
affiliate, or if it is a blended rate that applies to employees of more
than one subcontractor or employees of the prime contractor or any
subcontractor. Agency procedures may authorize contracting officers to
select one of three options in the provision as mandatory, and/or to
require each offer to identify individual subcontractors in the
proposal.
The second provision applies to acquisitions of noncommercial items
not based on adequate price competition. This provision requires the
offeror to establish separate individual labor hour rates for prime
contractor employees, employees of each subcontractor and employees
from affiliates of the offeror.
The third provision applies to acquisitions of commercial items and
it requires each offeror to identify for each proposed labor hour rate
whether the rate applies to prime contractor employees, subcontractor
employees or employees from affiliates of the offeror.
9. Application of the Prompt Payment Act.
The Councils amended FAR 52.232-7(i) to include application of the
Prompt Payment Act for interim payments
[[Page 74658]]
under T&M and LH contracts for services. The Prompt Payment Act has
applied to fixed-price contracts for services for many years. Congress
also recently amended the Prompt Payment Act to include cost
reimbursement contracts for services. The Councils believe that since
the Prompt Payment Act is applicable to both fixed-price and cost
reimbursement contracts for services, it should also be applicable to
T&M and LH contracts for services.
Discussion and Analysis
Payment for labor performed by subcontractors is treated
differently depending on whether a contract action is awarded under
adequate price competition or not. If a contract is not awarded on the
basis of adequate price competition, the contract must separately
identify labor rate categories for each subcontractor, in addition to
the labor rates for the contractor. If the price of a contract is based
on adequate price competition, the CO is not required to include
separate rates for subcontractors, but may use blended rates that apply
to any labor meeting the qualifications of the contract, regardless of
whether provided by the contractor or a subcontractor.
The Councils adopted the philosophy on treatment of subcontractor
labor that was developed under FAR Case 2003-027 and applied it to
noncommercial T&M contracts awarded on the basis of adequate price
competition. That is, FAR case 2003-027 requires no special treatment
of labor provided by subcontractors. Any labor that meets the labor
hour qualifications of the contract is to be paid at the labor hour
rate specified in the contract, regardless if it provided by individual
working for the prime contractor or a subcontractor. This approach was
developed under FAR case 2003-027 for commercial items because it was
felt that competitive pressure would produce fair and reasonable prices
and eliminate potential abuses related to subcontractor labor.
Competition for commercial items is the same as competition for
noncommercial items and the approach should be the same for both FAR
cases.
However, for noncommercial T&M contracts awarded without adequate
price competition, competitive pressures are substantially diminished
and the Government must take a much more cautious approach with respect
to labor provided by subcontractors. Labor hour rates for these types
of actions are largely based on cost information provided by the prime
contractor. In order to avoid potential for issues arising after award
of a noncompetitive T&M contract, each subcontractor must have its
labor hour rates specified in the prime contract. This will be required
in FAR Part 16 and offerors will be required to include such rates in
their offer by a solicitation provision.
The FAR amendment includes three new solicitation provisions to be
used for noncommercial T&M/LH solicitations. These provisions serve
several purposes. First, they communicate plainly that labor hour rates
for subcontractors are a potential major issue that must be addressed
by the CO and by the offerors. Second, they communicate that contracts
awarded on the basis of adequate price competition may be approached in
a much more flexible way than may be used for contracts not awarded
competitively. Finally, they provide a structure to CO's that can be
used to eliminate issues related to potential abuse of subcontract
labor hour rates.
FAR 52.216-29, Time-and-Material/Labor-Hour Proposal Requirements--
Noncommercial Item Acquisitions without Adequate Price Competition,
instructs offerors that they may identify the labor rates they are
proposing in either one of three different manners. First, offerors may
propose blended rates under which labor hours will be paid at the same
rate, regardless of whether the individual performing the labor works
for the prime contractor or a subcontractor. Second, offerors may offer
labor hour rates that include two sets of rates, one set for
individuals employed by the offeror and a second set for individuals
employed by subcontractors. Third, offerors may offer multiple sets of
labor hour rates, one set for individuals employed by the offeror and
additional sets for each subcontractor for individuals employed by
different subcontractors. If CO's are authorized by agency procedures,
the contracting officer may amend this provision to pre-select a single
method from among those three methods that every offeror must use.
FAR 52.216-30, Time-and-Material/Labor-Hour Proposal Requirements--
Noncommercial Item Acquisitions without Adequate Price Competition,
instructs offerors that they must offer multiple sets of labor hour
rates, one set for individuals employed by the offeror and a additional
sets for each subcontractor for individuals employed by different
subcontractors. The purpose of this solicitation provision is to
enforce the policy in Part 16 which requires acquisitions awarded on
the basis other than adequate price competition to include individual
labor hour rates for each subcontractor.
FAR 52.216-31, Time-and-Material/Labor-Hour Proposal Requirements--
Commercial Item Acquisitions, instructs offerors that they must
identify for each labor hour rate if the rate applies to only the
offeror, a subcontractor, and affiliate of the offeror, or any
combination.
Disposition of Public Comments
Comments were received from 17 respondents in response to the
proposed rule. The Councils considered all of the comments and
recommendations in developing the final rule. The Councils made the
following changes to the proposed rule as a result of the public
comments and deliberations:
(1) Definition of ``Hourly Rate.'' Established a definition for
``hourly rate'' to permit reimbursement of subcontracts for services
and services transferred between divisions, subsidiaries, or affiliates
under a common control at the hourly rates in the schedule when the
employee meets the labor qualification specified in the contract (see
comment (4)(c)(3)).
(2) Definition of ``Materials.'' Revised the definition for
``materials ''to (1) exclude subcontracts for services and services
transferred between divisions, subsidiaries, or affiliates under a
common control from the definition of ``materials'' because these
services are included in the ``hourly rate'' when the services meet the
labor qualifications specified in the contract (2) add incidental
services to the examples of other direct costs (see comment (4)(c)(3)).
Subcontracts for services and services transferred between divisions,
subsidiaries, or affiliates under a common control that do not meet the
labor qualifications specified in the contract are incidental services
but see (3)(ii) below.
(3) Reimbursement for Subcontract and Interdivisional Transfers of
Services. Eliminated the provisions in the proposed rule that only
permitted reimbursement of subcontract costs at the hourly rates in the
contract when the subcontractors were listed in the contract. (see
comment (4)(c), (4)(e)). Added provisions that--
(i) Require reimbursement of subcontracts for services and services
transferred between divisions, subsidiaries, or affiliates under a
common control of at the hourly rates in the schedule that include
profit when the employees performing the work meet the qualifications
specified in the contract.
(ii) Address reimbursement for subcontracts for services and
services transferred between divisions, subsidiaries, or affiliates
under a common control when the employees performing the work do not
meet the qualifications specified in the contract.
[[Page 74659]]
Payment for such services is at the sole discretion of the Government.
(iii) Require separate fixed hourly rates that include wages,
overhead, general and administrative expenses, and profit for each
category of labor. When the contract is awarded without adequate price
competitions, the rule also requires a separate set of rates for labor
performed by the contractor, each subcontractor, and each division,
subsidiary, or affiliate of the contractor under a common control that
will perform on the contract.
(4) Solicitation Provisions. Added three solicitation provisions to
ensure contractors understand the methodology for reimbursing
subcontract costs (see comment (4)(c),(11)(c)).
(5) Timecards. Revised the rule to recognize that companies use
both paper-based and electronic timecards (see comment (4)(c), (9)).
(6) Commercial Item Materials. Revised the prescription for
reimbursing commercial items to clarify the commercial catalog or
market prices are subject to negotiation (see comment (4)(c)(4)(b)).
(7) Assignment and Release of Claims. Re-titled the paragraph
previously title ``Assignment'' to ``Assignment and Release of Claims''
to clarify both topic are covered in the paragraph (see comment (4)(c),
(7)).
(8) Refunds. Deleted the current provision on refunds from the
clause because the provisions duplicate coverage in the Allowable Cost
and Payment clause (see comment (4)(c), (4)(d)).
Discussion of Public Comments
(1) Restrict Use of T&M Contracts. A respondent commented: Revise
FAR 16.601(c) to also restrict the use of T&M contracts when the costs
other than direct labor are incidental to the work. If a contract
requires substantial direct materials, interdivisional transfers,
subcontracts, and other direct costs, or the costs are so high that
they warrant the submission, auditing, and settlement of final indirect
rates, the contract type should not be a T&M contract.
Response: When substantial direct materials, interdivisional
transfers, subcontracts, and other direct costs are anticipated, a T&M
contract type may not be appropriate. However, selecting the
appropriate contract type is generally a matter for negotiation and
requires the exercise of sound judgment. The objective is to negotiate
a contract type and price (or estimated cost and fee) that will result
in reasonable contractor risk and provide the contractor the greatest
incentive for efficient and economical performance. There are many
factors the contracting officer must consider in selecting the
appropriate contract type. T&M contracts are the least preferable
contract type that 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.
(2) Allowable Cost and Payment Clause. A respondent commented:
Clarify which provisions of the Allowable Cost And Payment clause apply
to the material portion of T&M contracts. Recommend either repeating
the applicable portions of the clause in the T&M clause or identifying
the Allowable Cost and Payment clause as a required clause in FAR
Subpart 16.6.
Response: As prescribed in FAR 16.307(a), the Allowable Cost and
Payment clause is a required clause for all cost-reimbursement
contracts. All provisions of the clause are applicable to the material
portions of T&M contracts. The rule clearly specifies that the
Allowable Cost and Payment clause is included in T&M contracts and that
it is only applicable to the portion of the contract that provides for
reimbursement of materials at actual costs. The change is being made to
ensure that the appropriate rights and responsibilities are provided in
T&M contracts. The Councils see no reason to repeat the clause in the
T&M clause. Multiple clauses will be included in T&M contracts.
(3) Definition of Materials. A respondent commented: The proposed
definition of material that includes direct materials, subcontracts for
supplies and services, other direct costs, and applicable indirect
costs adds certainty to the process and will eliminate significant
issues that arise during the audit process. A respondent commented: The
proposed definition of materials is contrary to the common business
meaning of the word. Instead of defining materials to include
subcontracted services, the rule should exclude the word materials from
the contract type. The Government routinely reimburses travel,
equipment, communication, and other direct costs under T&M contracts.
Recommend instead establishing a time-and-other-direct-cost contract
type. A respondent commented: Do not include subcontracts in the
definition of materials. Instead, separately address subcontracts and
interdivisional transfers to clarify the payment policies for these
elements of cost and to avoid inevitable disputes over whether the
subcontract for supplies and services was ``material consumed directly
in connection with furnishing the service'' that is reimbursed at the
fixed contract rates or another type of subcontract for supplies and
services that would be reimbursed at actual costs. A respondent
commented: Including services transferred between divisions,
subsidiaries, or affiliates of the contractor under a common control
and subcontracts for services in the definition of materials is
contrary to the traditional, and common sense, definition of the term
``materials.'' Prime, subcontract, and interdivisional labor should be
included in the ``time'' element. A respondent commented: Including
subcontract services and incidental expense in ``materials'' is
contrary to common usage and to the language of FAR 31.205-26 and
45.301. Instead, recommend separately addressing the elements of costs
as follows:
Direct labor (time) means prime and subcontractor labor
devoted to the performance of the tasks in the statement of work (SOW).
Materials mean products, including raw materials, parts,
subassemblies, components, and manufacturing supplies, whether
manufactured or purchased by the contractor, and including such
collateral items as inbound transportation and in transit insurance.
Incidental services means services performed or purchased
solely for the support of contract direct labor, such as travel,
printing, or computer usage.
Indirect costs.
Response: While the definition for materials in the rule is
different from the referenced definitions at FAR 31.205-26 and 45.301,
reimbursing subcontracts for services and other costs as materials is
not contrary to common usage for T&M contracts. Currently, FAR
16.601(a) only identifies ``direct labor'' and ``materials'' as
elements of T&M contracts. However, the associated payment clause at
FAR 52.232-7, Payments Under T&M/LH Contracts addresses payment of
``materials and subcontracts.'' In addition, the Government routinely
pays contractors for other direct costs (ODC) and G&A incurred in
performance of a T&M contract even though ODC and G&A are not mentioned
in FAR 16.601 or 52.232-7. In addition, contractors commonly record
subcontracts for services, like subcontracts for supplies, as elements
of ``materials'' for accounting purposes. There are no known problems
with the longstanding practice of reimbursing these other costs as
materials. Therefore, the Councils see no reason to revise ``time-and-
materials'' contracts to ``time-and-other-direct-
[[Page 74660]]
cost'' or ``time-and-material-and-subcontract-and-interdivisional
transfers'' or ``time-and-material-and-incidental services-and-indirect
costs'' contracts as recommended by the various commenters. The
Councils did, however, establish a definition for ``hourly rate'' to
clarify that subcontract and interdivisional labor will be reimbursed
at the ``hourly rate'' whenever the employee satisfies the labor
qualifications specified in the contract. The Councils also revised the
definitions of ``materials'' to-- (1) exclude subcontracts for services
and interdivisional transfers of services that meet the labor
qualifications specified in the contract from the definition of
material because these elements of cost are now included in the
definition of ``hourly rate'' for the purposes of reimbursing the
subcontracts; and (2) add incidental services to the examples of other
direct costs.
(4) Methodology for Reimbursing Materials.
(a) A respondent commented: Strongly support the proposed
methodology for reimbursing commercial materials and the deletion of
the ``most favored customer''provisions.
(b) A respondent commented: Revise the prescription for reimbursing
commercial materials from ``shall be the contractor's established
catalog or market price ''to `` shall not exceed the contractor's
established catalog or market price'' because the proposed language
could be interpreted to mean contracting officers cannot negotiate
better pricing.
Response: While the proposed language did not preclude negotiating
better prices, the recommended change more clearly establishes that the
prices are subject to negotiation. Therefore, the Councils revised the
rule as recommended.
(c) A respondent commented: Pay the catalog or market price for
materials of the prime's own production that are commercial items
(excluding the products of its affiliates) and reimburse the cost of
other materials at actual costs, including properly allocable indirect
costs, but no profit or fee.
Response: When a contractor furnishes its own material that meets
the definition of a commercial item at FAR 2.101, the contractor will
be paid the established catalog or market price for the item. Product
of its affiliates will be reimbursed on the basis of costs incurred
except when the supplies are sold or transferred between divisions,
subdivisions, subsidiaries, or affiliates of the contractor under a
common control and it is the established practice of the transferring
organization to price interdivisional transfers at other than cost and
the other conditions of 31.205-26 are met. Profit or fee will not be
paid on materials that are reimbursed at cost.
(d) A respondent commented: Delete the current provision on refunds
from FAR 52.232-7, Payments Under Time-and-Materials and Labor-Hour
Contracts, because the provision duplicates the provision in FAR
52.216-7, Allowable Cost and Payment.
Response: The Councils revised the rule to eliminate redundant
coverage.
(e) Methodology for Reimbursing Subcontracts. A respondent
commented: Concept of reimbursing subcontract labor at the hourly rates
in the contract or the actual cost to the prime contractor is sound but
do not permit blended prime and subcontractor labor rates. Establish
separate hourly rates in the contract for subcontract labor not
reimbursed based on actual costs. The subcontract rates should include
prime contractor indirect costs allocable to subcontract costs and
profit. A respondent commented: Reimburse all subcontract labor at the
contract rates when the subcontracts satisfies all contract labor
qualifications is appropriate, fair, and in the Government's best
interest. Requiring subcontracts to be listed in the contract in order
to be reimbursed at the contract labor rates will make it extremely
difficult for the Government to acquire ``on-call'' or ``on-demand''
services that sometimes require a prime contractor to take
responsibility for hundred or even thousands of subcontractors often
interspersed across a wide geographic area. Requiring contract
modifications for every change in subcontractor poses an excessive
administrative burden on both parties. Reimburse subcontract labor at
the schedule labor rates without listing the subcontractors in the
contract when the contractor's proposal indicates that some of the work
may be performed by subcontractors that meet the contract's
qualification requirements and that the price for that ``type of work''
will be the prime contract's labor rate which may be blended or other
rate. T&M/LH contracts specify the required labor qualifications.
Whether the person filling the position is an employee of the prime or
a subcontractor, the qualifications must be met. The Government has
already determined through adequate price competition or otherwise the
pricing is fair and reasonable for the ``type of work.'' The
subcontract consent provisions are unduly burdensome. Absent the
contracting officer's approval and the resulting contract modification
to add new subcontractors, contractors will not be paid profit on the
subcontract costs even though the contractor remains responsible for
the subcontractor's performance. Lack of profit will discourage the use
of subcontractors. A respondent commented: Allowing contracting
officers to identify the subcontracts to be reimbursed at the contract
rates is a positive step since the rule clearly allows prime to be paid
profit on subcontracts. Recommend also allowing reimbursement for
subcontracts at the contract rates when the prime proposal includes
subcontracted services, the contractor is in a teaming relationship
with the subcontractor, or when the acquisition has opportunities for
small and small disadvantaged businesses. Small and small disadvantaged
businesses rely heavily on subcontracting with prime contractors on T&M
contracts. If primes are not paid profit on the subcontracts, the
primes will be motivated to perform all the work themselves which could
hurt small businesses and may not result in the best technical solution
for the Government. Contractors establish large teams of large and
small businesses to meet the requirements of indefinite-delivery
contracts. If they are not allowed to recover profit on subcontracts,
competition will be reduced and the Government may not get competition
or the best technical solution. When the subcontracts are reimbursed at
the contract rates, the prime assumes the risk of subcontractor labor
rate changes. The Government is assured fair and reasonable prices
based on competition or price analysis. Reimbursing subcontracts at
actual costs shifts the risk of subcontract labor escalation to the
Government. A respondent commented: Reimburse subcontract labor under
the labor portion of the contract and do not treat subcontracts as an
element of ``material.'' If the work qualifies for the hourly rate in
the schedule, the Government should not care if the work was performed
by a subcontractor or another division of the contract. It is not
always feasible to establish hourly rates for specific subcontractors
at the time of contract award. In some cases, the fixed hourly rates
are a blend of anticipated prime and subcontractor hourly rates. This
approach yields more competitive hourly rates for the Government and
promotes using all categories of small businesses to achieve price
advantage. Requiring separate fixed hourly rates for individual
subcontractors would further complicate an already complex invoicing
and payment process. Further, the bargain agreed upon at the time of
contract award must be maintained
[[Page 74661]]
throughout contract performance unless revised by mutual agreement.
Some contractors have priced blended prime and subcontract rates but
were subsequently reimbursed on their actual costs for subcontracts
which is inequitable because it unilaterally changed the terms of the
contract. A respondent commented: Requiring additional rates and
approvals add an unnecessary layer of administration that is not
commensurate with the level of risk or cost benefit. Additional
controls that restrict a contractor's use of proven subcontractors
greatly reduce a contractor's ability to efficiently support the
Government. Recommend revising the rule to properly place the
responsibility for performing and providing qualified staff on the
prime. The rule should allow prime contractors to provide competent
staff, including subcontractors when a business need exists, and only
designate key personnel when the criticality of the work dictates a
need to do so. Change the rule to only require a notification instead
of the proposed requirement for consent to subcontract. Use the
proposed audit provisions as the monitoring device for excessive profit
or fee. The Government can reject the work provided by a subcontractor
using the inspection and acceptance clauses. A respondent commented: It
is not always feasible to establish hourly rates for specific
subcontractors at the time of contract award. T&M contracts are only
used when it is not possible at the time of award to estimate
accurately the extent or duration of the work. It may be difficult to
identify at the time of award all the subcontractors that ultimately
will be needed to perform the work. For ``on-call'' or ``on-demand''
services, contractors are not able to predict which subcontractors will
be called on to fulfill each requirement. The restriction on
subcontract profit will reduce the use of qualified subcontractors,
especially small and small disadvantaged business. In addition,
contractors will not be paid the appropriate compensation for
administrative cost and financial risk that accompany the use of
subcontracts unless the subcontractors are identified in advance. Any
final rule should allow contractors to be paid profit on all
subcontract labor that is not incidental to performance. The Government
should focus on the value of the hours worked instead of the name of
the subcontractor performing the work to allow the prime contractor to
identify and retain the best people available for contract performance.
A more flexible approach should be used that does not require formal
contract modification. The flexibility in performance and selection of
subcontractors is particularly critical to the prime contractor. A
respondent commented: Prime contractors will only use subcontractors
that are less expensive than the prime if blended prime and subcontract
labor rates are used. This will limit the use of small business
subcontractors since few small businesses achieve T&M rates that are
competitive with large businesses because their overhead bases are
smaller. Also, requiring each subcontract to be identified in the
contract in order to be reimbursed at the contract rates will serve as
a barrier to adding new subcontractors during contract performance. The
requirement to list each subcontractor in the contract is significantly
more cumbersome that the consent to subcontract requirements that are
currently required for T&M contracts. Contractors will have to develop
new blended rates that will be subject to audit and approval and
formally modify the contract to add new subcontractors. Prime
contractors will only use small businesses to the extent they are
required to do so by their small business subcontracting plans and
maybe not even then if the small businesses rates are sufficiently
higher than the blended rates. A respondent commented: Not paying
profit or fee on subcontracts is extremely detrimental to small
businesses. Many small business prime contractors get much of their
annual revenues from contracts with large amounts of materials and
minor labor hour or T&M costs to support integration, deployment, or
maintenance of the materials. Not paying profit on these materials
would erode potential earnings for these small businesses. In addition,
large businesses often subcontract out work that could be performed by
the large business to meet small business subcontracting goals on
Government contracts. If large businesses are no longer paid profit on
subcontracts, large businesses will be far less likely to subcontract
out work. An objective of the rule is to ensure fair and reasonable
prices. Fair and reasonable must be applied to both the Government and
the contractor. Not paying profit on materials is not a ``fair''
policy. Market forces will act competitively to keep the Government's
price fair and reasonable. A respondent commented: The Government pays
profit on materials and subcontracts on cost-plus-fixed-fee contracts.
The existing prohibition on paying profit on materials and subcontracts
on T&M contracts stems from the fact that such costs were incidental to
the contract. Contrary to statements in the proposed rule, the
Government's use of T&M contracts has changed over time and other
factors have significantly changed. Large businesses are now required
to subcontract out to small and small disadvantaged subcontractors to
meet their subcontracting goals. This requirement did not exist when
the prohibition on paying profit on materials and subcontracts was
adopted. Small businesses-- (1) use consultants and subcontractors to
supplement their capabilities and effectively compete for potential
contracts; (2) need the flexibility to change subcontractors during
contract performance; and (3) need to make profit on subcontracted
services or they will not bid on contracts if they do not have the
employees with the required expertise. The need for subcontracts and
consultants is driven by the requirement of the contract. The contracts
are not personal services contracts. The Government and prime
contractors contract for services at specified prices and they
negotiate the price for the work in terms of the effort required by the
contract. When small businesses do not have the in-house staff to
perform the work, they use salary surveys and their indirect cost
structure to estimate the cost of employees they will ultimately
subcontract with to perform the work which may or may not be disclosed
to the Government. On large procurement, this may be the only way to be
responsive. The small businesses takes the risk that they will be able
to find subcontract labor at their estimated rate and there are times
when the small businesses' actual cost for the labor exceeds their
estimated price and the small business does not recover its cost of
subcontracting. For many small businesses, subcontract labor may be
used to perform the majority of the work. If the small business will
not be paid profit on these subcontracts, the small business would not
be adequately compensated and would have no incentive to bid on the
effort. As a result, competition would decrease and some services would
not be available in the small business community. In addition, placing
too many limitations on subcontracting for large businesses will
ultimately reduce the subcontracting opportunities for small
businesses. It is in the best interest of the Government to encourage
subcontracting. The Government should have the right to know when
subcontractors are being replaced for quality assurance purposes and
should be able to review and approve subcontractor's qualifications.
Finally, listing only the known subcontracts in
[[Page 74662]]
the contract will not help small businesses and will discourage prime
contractors from finding and using small businesses. Contract
modifications to add subcontractors after contract award could take
significant time and could significantly disrupt or delay the federal
procurement process. When there is adequate competition or GSA schedule
prices, the Government should have the right to approve new
subcontractors for quality but not the right to automatically negotiate
a new hourly rate which implies the right of contractors to increase
the hourly rates after contract award. The administrative costs for T&M
contracts will increase significantly and competition among small
businesses will significantly decrease. The Government should focus on
disclosure and verification of qualifications and not prohibitions or
restrictions on subcontracting and renegotiating prices when adequate
competition exists. Instead of limiting reimbursement to subcontractors
listed in the contract, recommend also permitting subcontractors and
consultants to be reimbursed at the contract rates if the labor
categories are listed that that will be subcontracted out and simply
adding the subcontractors name to the list when the subcontract is
awarded. A respondent commented: The inability to make profit, coupled
with the inherent prime contractor oversight requirements will have a
negative affect on subcontracting. Prime contractors will be motivated
to use their own employees in order to earn profit. The negative affect
will fall disproportionately on small businesses which is contrary to
current procurement policy. A respondent commented: Reimburse
subcontract at the prime's actual cost because contractors are being
reimbursed for subcontract at the prime's rates but are using lower
costs, and less qualified, subcontracts to perform the work. A
respondent commented: Restrict reimbursement of subcontract costs to
actual costs because the prime contractor could subsequently negotiate
lower rates with subcontractors that were authorized to be paid at the
schedule rates and the Government would pay excessive prices for
subcontracted effort that may be of a level less than that envisioned
by the Government. Reimbursing at the schedule rates encourages
contractors to maximize profit by subcontracting out more of the effort
at lower subcontract rates. The Government will expend additional
resources to monitor the quality and efficiency of the subcontract
labor since the subcontract effort will not be readily apparent when
billed at the schedule rates.
Response: Limiting reimbursing of subcontract labor to actual costs
is not consistent with the treatment on all other flexibly priced
Government contracts where prime contractors are paid profit on
subcontract costs. In addition, requiring subcontractors to be listed
in the contract in order to be reimbursed at the hourly rates could
have a negative impact on small businesses and was administratively
burdensome to contractors. Upon further consideration, the Councils
believe it is appropriate to reimburse subcontracts on competively
awarded T&M contracts at the schedule labor rates without listing the
subcontracts. The Councils revised the rule accordingly. However, the
Councils do not believe it is appropriate to eliminate the traditional
consent and advance notification requirements for non-commercial T&M.
These same consent and advance notification requirements are not new
for T&M contracts. The Councils are unaware of any systemic issues
relating to their applicability on T&M contracts. Therefore, the final
rule does not change the standard consent and advance notification
requirements for non-commercial T&M contracts. In addition, the
Councils revised the rule to require separate labor rates for each
subcontract and interdivisional transfer of services when adequate
price competition is not obtained. There may be circumstances when it
is appropriate to use blended prime and subcontract labor rates when
the prices are based on adequate competition. Therefore, the rule
permits use of blended prime and subcontract labor rates when the prime
contract is awarded with adequate competition. However, nothing in the
rule prevents the Government from establishing separate labor rates for
each subcontract when the prime contract is awarded based on
competition. Also, the rule provides for payment of profit on
subcontract labor paid at the hourly rates in the contract.
(f) Interdivisional Transfers. Coalition Comment: Imposing FAR Part
31 on interdivisional transfers should be avoided.
Response: The rule provides that interdivisional transfers of labor
that meet the qualifications specified in the contract will be
reimbursed at the ``hourly rates'' in the contract. For these
interdivisional transfers, FAR Part 31 is not imposed. For all other
interdivisional transfers, contractors will be reimbursed on the basis
of cost incurred in FAR Subpart 31.2.
(g) A respondent commented: Pay allowable indirect costs allocable
to subcontracts, either by inclusion in stipulated hourly rates for
specific contractors or by addition to subcontract direct costs, (b)
materials, and (c) incidental services.
Response: The rule permits payment of indirect costs either by
inclusion in the hourly rates in the contract when the subcontract
labor meets the labor qualifications specified in the contract or at
actual costs as recommended by the commenter.
(h) A respondent commented: Reimburse the prime contractor for the
cost of incidental services, including properly allocable indirect
costs, but no profit or fee.
Response: Refer to Comment 3 above. The Councils did not adopt the
recommendation to establish a new ``incidental services'' category. The
rule does, however, result in reimbursement of these elements of costs,
including properly allocable indirect costs, with no profit or fee.
(5) Total Cost and Ceiling Price. A respondent commented:
Consolidate the ``Total Cost'' and ``Ceiling Price'' paragraphs.
Response: The ``Total Cost'' paragraph addresses contractor
responsibilities. The ``Ceiling Price'' paragraph addresses the
Government's responsibility to pay or not pay. Therefore, the Councils
believe it is appropriate to separately address total cost and the
ceiling price.
(6) Assignment and Release of Claim. A respondent commented: Change
the title of paragraph (f) of the FAR clause at 52.232-7, Payments
Under Time-and-Materials and Labor-Hour Contracts from ``Assignment''
to ``Release of Claims,'' which is what the paragraph is really about.
Response: The Councils revised the title of the paragraph to
``Assignments and Release of Claims'' because both topics are discussed
in the provision.
(7) Withhold. A respondent commented: Revise the rule to clarify
the payment withhold is limited to five percent or $50,000 and that the
withhold is applied at the contract level instead of the task order
level.
Response: The Payments under Time-and-Materials and Labor-Hour
Contracts clause (52.232-7) was modified as suggested by the contractor
in FAR Case 2004-003 which was published in the Federal Register at 71
FR 43576 on July 27, 2005.
(8) Timecards. A respondent commented: Delete the requirement to
validate the individual daily job timecards to provide contractors the
flexibility to use electronic time keeping systems.
[[Page 74663]]
Response: The Councils revised the final rule to require access to
the timekeeping records instead of job timecards to recognize
electronic timekeeping systems.
(9) Prompt Payment. A respondent commented: Revise the rule to
permit Prompt Payment Act interest also on the material portion of T&M
contracts. The Prompt Payment Act was revised to make prompt payment
interest applicable to interim payments on cost reimbursement contracts
for services. T&M contracts are not equivalent to cost reimbursement
contracts and it is not logical to apply interest to labor without
including the material resources required to provide the labor.
However, the impact of excluding interest on the material portion is
probably negligible since most of the payments on T&M contracts are for
labor. Restricting prompt payment interest to labor will certainly make
more work for Government disbursing official who will have to segregate
labor from material to compute the interest penalties. Any amount the
Government saves from only paying prompt payment interest on labor will
likely be more than offset by the administrative costs of computing the
interest on only the labor portion of the invoice.
Response: The Prompt Payment Act applies to fixed-price contracts
and interim payments on cost-reimbursable contracts for services. The
Councils lack the authority to extend the Act to interim payments for
supplies.
(10) Miscellanous.
(a)A respondent commented: Strongly request the Councils to hold
additional public meetings to provide the public the opportunity to
further explain the comments submitted.
Response: The Councils determined that the FAR changes are within
the scope of changes contemplated by the proposed rule and that no
further public meetings or proposed rule are appropriate. Further
public meetings or public comments would not result in comments that
are substantially different from those already submitted.
(b) A respondent commented: Recommend having the effective date for
the rule be 60 days after publication in the Federal Register so
agencies can develop implementing guidance and update the associated
training.
Response: The effective date for FAR changes is generally 30 days
after publication in the Federal Register. However, the Councils agree
agencies may need additional time to implement guidance and update the
associated training. Therefore, the rule will have an effective date 60
days after publication in the Federal Register.
(c) A respondent commented: Recommend the Councils take steps to
ensure the solicitation process clearly addresses the method for
reimbursing subcontract costs, i.e., only at actual costs unless the
subcontractor is listed in the contract.
Response: The rule no longer requires listing subcontracts in the
contract in order for the costs to be reimbursed using the fixed hourly
rates in the contract. The rule includes two solicitation provisions to
ensure contractors understand the methodology for reimbursing
subcontract costs.
(d) A respondent commented: Urge the Councils to also remove the
``most favored customer'' provisions from FAR 31.106-3.
Response: The provisions at FAR 31.106-3 are outside the scope of
this rule. However, the Councils are considering the recommended
change.
(e) A respondent commented: The Supplementary Information in the
proposed rule said that subcontracted labor paid at the LH rate must be
accounted for and substantiated under the same standards as labor hours
provided by the prime contractor. This could be interpreted to mean
prime contractors are required to include the subcontractor costs in
the prime's overhead base for direct labor. Clarify how prime
contractors should allocate overhead to subcontract labor. Also,
address the potential inconsistency of bidding/billing some
subcontractor labor at contract rates and others at cost with respect
to Cost Accounting Standards (CAS) compliance.
Response: The Supplementary Information in the proposed rule did
include this statement. However, nothing in the proposed or final rule
require prime contractors to include subcontractor costs in the
overhead base for direct labor. Contractors should continue to allocate
overhead to subcontract labor consistent with their disclosed or
established procedures. CAS relate to allocation issues. The costs
allocable to T&M contracts may differ significantly from the costs
billed and paid for the T&M contract. The same is true for fixed-price
contracts.
(f) A respondent commented: Replace the term ``voucher'' with
``invoice''.
Response: The term ``voucher'' refers to interim payments on cost
reimbursement contracts. The term ``invoice'' refers to delivery
payments and payments on fixed-price contracts. Therefore, the Councils
did not revise the terminology as recommended.
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 Regulatory Flexibility Act, 5 U.S.C. 601, et seq., applies to
this final rule. The Councils prepared a Final Regulatory Flexibility
Analysis (FRFA) as follows:
1. Statement of need for, and objectives of, the rule.
This rule revises the Federal Acquisition Regulation to amend
underlying policies and increase the clarity of payments made under
T&M and LH contracts for non-commercial items. The objectives of the
amendment are to ensure fair and reasonable prices under T&M
contracts and to eliminate the ambiguity in T&M contracts that has
been responsible for confusion over payment amounts for
subcontractor provided labor.
2. Summary of significant issues raised by the public comments
in response to the Initial Regulatory Flexibility Analysis (IRFA), a
summary of the assessment of the agency of such issues, and a
statement of any changes made in the proposed rule as a result of
such comments.
Comments were received from 17 respondents in response to the
proposed rule. The Councils considered all of the comments and
recommendations in developing the final rule. The Councils made the
following changes to the proposed rule as a result of the public
comments and deliberations:
(a) Definition of ``Hourly Rate.'' Established a definition for
``hourly rate'' to permit reimbursement of subcontracts for services
and services transferred between divisions, subsidiaries, or
affiliates under a common control at the hourly rates in the
schedule when the employee meets the labor qualification specified
in the contract (see comment (4)(c)(3)).
(b) Definition of ``Materials.'' Revised the definition for
``materials'' to-- (1) exclude subcontracts for services and
services transferred between divisions, subsidiaries, or affiliates
under a common control from the definition of ``materials'' because
these services are included in the ``hourly rate'' when the services
meet the labor qualifications specified in the contract; and (2) add
incidental services to the examples of other direct costs (see
comment (4)(c)(3)). Subcontracts for services and services
transferred between divisions, subsidiaries, or affiliates under a
common control that do not meet the labor qualifications specified
in the contract are incidental services but see (3)(ii) below.
(c) Reimbursement for Subcontract and Interdivisional Transfers
of Services. Eliminated the provisions in the proposed rule that
only permitted reimbursement of subcontract costs at the hourly
rates in the contract when the subcontractors were listed in the
contract (see comment (4)(c)(4)(e)). Added provisions that--
(i) Require reimbursement of subcontracts for services and
services transferred between divisions, subsidiaries, or affiliates
under a common control of at the hourly rates in the schedule that
include profit when the
[[Page 74664]]
employees performing the work meet the qualifications specified in
the contract.
(ii) Address reimbursement for subcontracts for services and
services transferred between divisions, subsidiaries, or affiliates
under a common control when the employees performing the work do not
meet the qualifications specified in the contract. Payment for such
services is at the sole discretion of the Government.
(iii) Require separate fixed hourly rates that include wages,
overhead, general and administrative expenses, and profit for each
category of labor. When the contract is awarded without adequate
price competitions, the rule also requires a separate set of rates
for labor performed by the contractor, each subcontractor, and each
division, subsidiary, or affiliate of the contractor under a common
control that will perform on the contract.
(d) Solicitation Provisions. Added two solicitation provisions
to ensure contractors understand the methodology for reimbursing
subcontract costs (see comment (4)(c)(11)(c)).
(e) Timecards. Revised the rule to recognize that companies use
both paper-based and electronic timecards (see comment (4)(c)(9)).
(f) Commercial Item Materials. Revised the prescription for
reimbursing commercial items to clarify the commercial catalog or
market prices are subject to negotiation (see comment (4)(c)(4)(b)).
(g) Assignment and Release of Claims. Re-titled the paragraph
previously title ``Assignment'' to ``Assignment and Release of
Claims'' to clarify both topic are covered in the paragraph (see
comment (4)(c)(7)).
(h)Refunds. Deleted the current provision on refunds from the
clause because the provisions duplicate coverage in the Allowable
Cost and Payment clause (see comment (4)(c)(4)(d)).
3. Description of, and an estimate of the number of, small
entities to which the rule will apply or an explanation of why no
such estimate is available.
The changes 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 T&M
contracting is a common method of acquiring services from small
entities. However, it is not feasible to estimate the number of
small entities impacted.
4. Description of projected reporting, record keeping, and other
compliance requirements of the proposed rule, including an estimate
of the classes of small entities which will be subject to the
requirement and the type of professional skills necessary for
preparation of the report or record.
The prior FAR policies required contractors to maintain records
to support invoices presented to the Government for payment. Such
records included original timecards, the contractor' timekeeping
procedures, distribution of labor, invoices for material, and so
forth. These are standard records maintained by any company, large
or small, and the fact that the contract would require that these
records be made available to the Government should not place any
additional record keeping burden on the entity.
5. Description of any significant alternatives to the rule which
accomplish the stated objectives of applicable statutes and which
minimize any significant economic impact of the proposed rule on
small entities. Significant alternatives to the final rule include:
Not permitting any subcontractor to be paid at the
labor hour rate and reimbursing all subcontractors at actual cost.
Requiring any subcontractor to be listed in the prime
contract as the sole means of authorizing payments of labor for that
subcontractor to be at the labor hour rate specified in the
contract.
Incorporating a list of each Other Direct Cost (ODC)
into each T&M contract that would be authorized for reimbursement
under that contract and prohibiting reimbursement of any other ODC.
Not requiring a list of each Other Direct Cost (ODC)
authorized for reimbursement and permitting any ODC to be
reimbursed.
Interested parties may obtain a copy of the FRFA from the FAR
Secretariat. The FAR Secretariat has submitted a copy of the FRFA to
the Chief Counsel for Advocacy of the Small Business Administration.
C. Paperwork Reduction Act
The Paperwork Reduction Act (Pub. L. 104-13) does not apply because
the changes to the FAR do not impose information collection
requirements that require the approval of the Office of Management and
Budget under 44 U.S.C. 3501, et seq.
List of Subjects in 48 CFR Parts 16, 32, and 52
Government procurement.
Dated: December 4, 2006.
Linda K. Nelson,
Deputy Director, Contract Policy Division.
0
Therefore, DoD, GSA, and NASA amend 48 CFR parts 16, 32, and 52 as set
forth below:
0
1. The authority citation for 48 CFR parts 16, 32, and 52 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).
PART 16-TYPES OF CONTRACTS
0
2. Amend section 16.307 by revising paragraph (a)(1) to read as
follows:
16.307 Contract clauses.
(a)(1) The contracting officer shall insert the clause at 52.216-7,
Allowable Cost and Payment, in solicitations and contracts when a cost-
reimbursement contract (other than a facilities contract) or a time-
and-materials contract (other than a contract for a commercial item) is
contemplated. If the contract is with an educational institution,
modify the clause by deleting from paragraph (a) the words ``Subpart
31.2'' and substituting for them ``Subpart 31.3.'' If the contract is
with a State or local government, modify the clause by deleting from
paragraph (a) the words ``Subpart 31.2'' and substituting for them
``Subpart 31.6.'' If the contract is with a nonprofit organization
other than an educational institution, a State or local government, or
a nonprofit organization exempted under OMB Circular No. A-122, modify
the clause by deleting from paragraph (a) the words ``Subpart 31.2''
and substituting for them ``Subpart 31.7.'' If the contract is a time-
and-materials contract, the clause at 52.216-7 applies only to the
portion of the contract that provides for reimbursement of materials
(as defined in the clause at 52.232-7) at actual cost.
* * * * *
0
3. Revise section 16.601 to read as follows:
16.601 Time-and-materials contracts.
(a) Definitions for the purposes of Time-and-Materials Contracts.
Direct materials means those materials that enter directly into the
end product, or that are used or consumed directly in connection with
the furnishing of the end product or service.
Hourly rate means the rate(s) prescribed in the contract for
payment for labor that meets the labor category qualifications of a
labor category specified in the contract that are--
(1) Performed by the contractor;
(2) Performed by the subcontractors; or
(3) Transferred between divisions, subsidiaries, or affiliates of
the contractor under a common control.
Materials means--
(1) Direct materials, including supplies transferred between
divisions, subsidiaries, or affiliates of the contractor under a common
control;
(2) Subcontracts for supplies and incidental services for which
there is not a labor category specified in the contract;
(3) Other direct costs (e.g., incidental services for which there
is not a labor category specified in the contract, travel, computer
usage charges, etc.); and
(4) Applicable indirect costs.
(b) Description. A time-and-materials contract provides for
acquiring supplies or services on the basis of--
(1) Direct labor hours at specified fixed hourly rates that include
wages, overhead, general and administrative expenses, and profit; and
(2) Actual cost for materials (except as provided for in 31.205-
26(e) and (f)).
(c) Application. A time-and-materials contract may be used only
when it is not possible at the time of placing the contract to estimate
accurately the
[[Page 74665]]
extent or duration of the work or to anticipate costs with any
reasonable degree of confidence.
(1) Government surveillance. A time-and-materials contract provides
no positive profit incentive to the contractor for cost control or
labor efficiency. Therefore, appropriate Government surveillance of
contractor performance is required to give reasonable assurance that
efficient methods and effective cost controls are being used.
(2) Fixed hourly rates. (i) The contract shall specify separate
fixed hourly rates that include wages, overhead, general and
administrative expenses, and profit for each category of labor (see
16.601(e)(1)).
(ii) For acquisitions of noncommercial items awarded without
adequate price competition (see 15.403-1(c)(1)), the contract shall
specify separate fixed hourly rates that include wages, overhead,
general and administrative expenses, and profit for each category of
labor to be performed by--
(A) The contractor;
(B) Each subcontractor; and
(C) Each division, subsidiary, or affiliate of the contractor under
a common control.
(iii) For contract actions that are not awarded using competitive
procedures, unless exempt under paragraph (c)(2)(iv) of this section,
the fixed hourly rates for services transferred between divisions,
subsidiaries, or affiliates of the contractor under a common control--
(A) Shall not include profit for the transferring organization; but
(B) May include profit for the prime contractor.
(iv) For contract actions that are not awarded using competitive
procedures, the fixed hourly rates for services that meet the
definition of commercial item at 2.101 that are transferred between
divisions, subsidiaries, or affiliates of the contractor under a common
control may be the established catalog or market rate when--
(A) It is the established practice of the transferring organization
to price interorganizational transfers at other than cost for
commercial work of the contractor or any division, subsidiary or
affil