Defense Federal Acquisition Regulation Supplement: Undefinitized Contract Actions (DFARS Case 2021-D003), 33835-33838 [2023-11139]

Agencies

• Defense Acquisition Regulations System
• DEPARTMENT OF DEFENSE

[Federal Register Volume 88, Number 101 (Thursday, May 25, 2023)]
[Rules and Regulations]
[Pages 33835-33838]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-11139]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 215, 217, and 252

[Docket DARS-2022-0026]
RIN 0750-AL22


Defense Federal Acquisition Regulation Supplement: Undefinitized 
Contract Actions (DFARS Case 2021-D003)

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Final rule.

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SUMMARY: DoD is issuing a final rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) as recommended by the DoD 
Inspector General to refine the management of undefinitized contract 
actions.

DATES: Effective May 25, 2023.

FOR FURTHER INFORMATION CONTACT: David Johnson, telephone 202-913-5764.

SUPPLEMENTARY INFORMATION: 

I. Background

    DoD published a proposed rule in the Federal Register at 87 FR 
65507 on October 28, 2022, to amend the DFARS to refine the management 
of undefinitized contract actions (UCAs). This final rule implements 
recommendations regarding management of undefinitized contract actions 
(UCAs) as addressed in the DoD Inspector General Audit of Military 
Department Management of Undefinitized Contract Actions (Report No. 
DODIG-2020-084). Three respondents submitted public comments in 
response to the proposed rule.

II. Discussion and Analysis

    DoD reviewed the public comments in the development of the final 
rule. No changes are made to the final rule in response to the public 
comments. A discussion of the comments is provided, as follows:

A. Analysis of Public Comments

1. Possible Subjectiveness Associated With the Term ``Qualified 
Proposal''
    Comment: Several respondents remarked that aspects of the 
definition of ``qualified proposal'' in the context of UCAs appear open 
to interpretation, and the resulting subjectivity could result in 
unwarranted detrimental treatment of contractors. Some respondents 
suggested DoD should change the DFARS to provide additional details 
regarding what comprises a qualifying proposal or otherwise require 
contracting officers to undertake a dialogue to assist contractors 
developing and submitting qualifying proposals.
    Response: The term ``qualified proposal,'' defined at DFARS 
217.7401, was not proposed for revision in this rule, and the 
definition is based on statute now found at 10 U.S.C. 3377(b)(2). This 
rule does not conceptually change the term or its usage, and the 
comment is therefore outside the scope of this rule.
2. Contract Risk Factors
    Comment: Several respondents commented on the language regarding 
contract risk factors at 215.404-71-3(d)(2)(i). Several respondents 
stated that this rule would limit the contracting officer's discretion 
and flexibility to review and assign risk factors that consider the 
circumstances of a particular UCA. One respondent noted that current 
language at DFARS 215.404-71-3(d)(2)(i) already instructs the 
contracting officer to consider the extent to which costs have been 
incurred prior to definitization rendering unnecessary the language 
this rule adds at DFARS 215.404-71-3(d)(2)(i), including any resulting 
updates to DD Form 1547, Record of Weighted Guidelines. One respondent 
suggested modifying DFARS 217.7404-6, Allowable Profit, to specify 
cost-risk factors, including ``inflation and baseline fluidity, and 
reduced negotiating strength with suppliers and vendors in a UCA 
environment.'' Some respondents disagreed with the assumption reflected 
in the DFARS that a contractor's cost risk declines during the period 
of a UCA, therefore warranting a fee reduction based on lower risk.
    Response: This rule is intended to incentivize both parties to 
definitize UCAs timely. The additional language in this rule at DFARS 
215.404-71-3(d)(2)(i) provides contracting officers with flexibility 
and clarity to properly consider and assign fees to the relevant 
portions based upon their differing risk profiles, and DoD declines to 
remove the additional language from the final rule. Regarding the 
comment centering on stating factors that affect cost risk, at least 
some of the factors or considerations the respondent listed are 
effectively reflected at DFARS 215.404-71-3(d)(1), and the contracting 
officer would already consider them when ascribing contract risk. The 
comment regarding contract risk declining over

[[Page 33836]]

the course of a UCA speaks to DFARS language not proposed for revision 
in this rule; rather, the change in this rule provides guidance to 
contracting officers when completing DD Form 1547, Record of Weighted 
Guidelines, without conceptually changing the language regarding 
declining contract risk. DoD declines to revise this language in the 
final rule.
3. Concerns Regarding the 5 Percent Maximum Withhold
    Comment: Several respondents remarked that the 5 percent maximum 
withhold specified under this rule, used to protect the Government's 
interest where a qualifying proposal is not submitted timely, would 
encourage a 5 percent withhold arbitrarily or as a matter of course 
without considering either extenuating circumstances or a lesser 
withholding percentage. Similarly, one respondent noted that the 
documentation requirement at DFARS 217.7404-3(b)(2) would encourage a 5 
percent withhold as a matter of course. One respondent stated that 
applying a withhold where a qualifying proposal is not submitted timely 
would cause additional delay, counter to the intent of the rule. 
Additionally, one respondent indicated that the 5 percent withhold is 
unnecessary in light of existing remedies.
    Response: In accordance with DFARS language existing prior to this 
rule, contracting officers have discretion whether to withhold or take 
other appropriate action, where a qualifying proposal is not submitted 
timely. This rule does not change the discretionary nature either of 
such withholding or taking other appropriate action. This discretion 
allows for consideration of extenuating circumstances as appropriate. 
Additionally, the rule emphasizes that the withhold can be applied in a 
broad variety of contract financing situations.
4. Requests To Withdraw the Rule
    Comment: Several respondents requested DoD withdraw this rule in 
its entirety as, for example, unnecessary to encourage submission of 
qualifying proposals.
    Response: DoD declines to withdraw the rule because doing so would 
preclude implementing updates to management of UCAs per the DoDIG 
report.
5. Underlying Causes of Delays in Submitting Qualifying Proposals
    Comment: Several respondents remarked that circumstances outside 
the control of contractors often contribute to delays in submitting 
qualifying proposals and in negotiation of the final price, rendering 
aspects of this rule one-sided or punitive. For example, some 
respondents noted that delays in submitting qualified proposals are 
sometimes caused by the prime contractor awaiting cost or pricing 
details from subcontractors. In this context, one respondent suggested 
changing the DFARS in the final rule to require explicit agreement by 
the contractor both to the definitization schedule and to the risk 
assessment negotiated in the price negotiation memorandum. Some 
respondents suggested DoD should consider minimizing Government-driven 
changes affecting contract definitization by disallowing changes to 
work statements or specifications after the parties initially enter 
into the UCA and before the contract is definitized.
    Response: The contracting officer has discretion under this rule to 
consider extenuating circumstances surrounding a particular UCA, 
including delays caused by awaiting data from subcontractors, when 
developing a defintization schedule or before taking appropriate action 
such as a withhold. The nature of a UCA, which is inherently subject to 
some uncertainty, works against the suggestion to disallow changes to 
the work statement, and DoD therefore declines the suggestion. Further, 
the parties can bilaterally address scope changes that might 
necessitate revision to the proposal submission date.
6. Past Performance Evaluations
    Comment: One respondent suggested deleting the reference to 
documenting the contractor's past performance evaluation as an 
appropriate action under DFARS 217.7404-3(b)(1) where a qualifying 
proposal is not submitted timely. One respondent suggested DoD should 
provide an appellate process to challenge past performance evaluations 
that the contractor believes are inaccurate.
    Response: DoD declines to delete the reference in this rule to 
documenting the contractor's past performance evaluation. This rule 
does not change the DFARS to compel documenting past performance 
information in this context but rather lists such documentation as an 
example of possible appropriate actions. Further, although this case 
adds a reference to documenting past performance information, the 
possibility of using this method as an appropriate action existed prior 
to this rule. Additionally, the suggestion to develop in this rule an 
appellate process to challenge past performance evaluations is outside 
the scope of this rule.
7. Underlying Causes of UCAs
    Comment: Several respondents suggested that DoD should address 
underlying causes of UCAs, such as insufficient Government staffing or 
delayed acquisition planning. Similarly, some respondents stated that 
DoD should further specify in the DFARS proper or appropriate use of 
UCAs.
    Response: DoD declines the suggestions because they are outside the 
scope of the rule.

B. Other Changes

    No other changes are made to the final rule.

III. Applicability to Contracts at or Below the Simplified Acquisition 
Threshold (SAT) and for Commercial Services, and for Commercial 
Products, Including Commercially Available Off-the-Shelf (COTS) Items

    This rule amends the clause at DFARS 252.217-7027, Contract 
Definitization. However, this rule does not impose any new requirements 
on contracts at or below the SAT or for commercial services or 
commercial products, including COTS items. The clause will continue to 
not apply to acquisitions at or below the SAT and to acquisitions of 
commercial services and commercial products, including COTS items.

IV. Expected Impact of the Rule

    The final rule will incentivize contractors to submit qualifying 
proposals according to the contract definitization schedule to avoid 
the withholding of an amount of up to 5 percent of all subsequent 
financing requests. DoD contracting officers will be required to 
consider applying separate and differing contract risk factors to costs 
incurred and estimated costs to complete, when completing the DD Form 
1547, Record of Weighted Guidelines. Contracting officers will also be 
required to document the contract file to show justification for 
withholding or not withholding a portion of financing payment, when the 
qualifying proposal was not submitted according to the contract 
definitization schedule.

V. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). E.O. 
13563 emphasizes the importance of quantifying both costs

[[Page 33837]]

and benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. This is not a significant regulatory action and, 
therefore, was not subject to review under section 6(b) of E.O. 12866, 
Regulatory Planning and Review, dated September 30, 1993.

VI. Congressional Review Act

    As required by the Congressional Review Act (5 U.S.C. 801-808) 
before an interim or final rule takes effect, DoD will submit a copy of 
the interim or final rule with the form, Submission of Federal Rules 
under the Congressional Review Act, to the U.S. Senate, the U.S. House 
of Representatives, and the Comptroller General of the United States. A 
major rule under the Congressional Review Act cannot take effect until 
60 days after it is published in the Federal Register. The Office of 
Information and Regulatory Affairs has determined that this rule is not 
a major rule as defined by 5 U.S.C. 804.

VII. Regulatory Flexibility Act

    A final regulatory flexibility analysis (FRFA) has been prepared 
consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. 
The FRFA is summarized as follows:
    DoD is amending the Defense Federal Acquisition Regulation 
Supplement (DFARS) as recommended by the DoD Inspector General Audit of 
Military Department Management of Undefinitized Contract Actions 
(Report No. DODIG-2020-084) to refine the management of undefinitized 
contract actions. This report recommends changes to the DFARS to 
encourage contractors to provide timely qualifying proposals, including 
the possibility of the Government withholding a percentage of payments 
yet to be paid under an undefinitized contract action until it receives 
a qualifying proposal from the contractor.
    This rule incentivizes contractors to submit qualifying proposals 
in accordance with the contract definitization schedule; and, 
notwithstanding FAR 52.216-26, Payments of Allowable Costs Before 
Definitization, allows contracting officers to withhold an amount 
necessary to protect the interests of the Government, not to exceed 5 
percent of all subsequent financing requests, or take other appropriate 
actions if a qualifying proposal is not submitted in accordance with 
the contract definitization schedule. Contracting officers will 
document in the contract file the justification for withholding or not 
withholding payments if the qualifying proposal was not submitted in 
accordance with the contract definitization schedule. This rule 
clarifies that, when considering the reduced cost risks associated with 
allowable incurred costs on an undefinitized contract action, it is 
appropriate to apply separate and differing contract risk factors for 
allowable incurred costs and estimated costs to complete when 
documenting the contract risk sections of DD Form 1547, Record of 
Weighted Guidelines.
    DoD received no public comments in response to the initial 
regulatory flexibility analysis.
    This rule will likely affect small entities that will be awarded 
undefinitized contract actions. Data was obtained from the Procurement 
Business Intelligence Service (PBIS) for all contracts and 
modifications containing DFARS clause 252.217-7027, Contract 
Definitization. Data from PBIS revealed DoD awarded 2,162 contracts to 
971 small businesses from fiscal year 2019 through fiscal year 2021, 
which averages out to 324 small businesses per year. Therefore, this 
rule may apply to approximately 324 unique small entities.
    The rule does not impose any new reporting, recordkeeping, or 
compliance requirements.
    DoD did not identify any significant alternatives that would 
minimize or reduce the significant economic impact on small entities, 
because this rule is not expected to have a significant impact on small 
entities.

VIII. Paperwork Reduction Act

    This rule does not contain any information collection requirements 
that require the approval of the Office of Management and Budget under 
the Paperwork Reduction Act (44 U.S.C. chapter 35).

List of Subjects in 48 CFR Parts 215, 217, and 252

    Government procurement.

Jennifer D. Johnson,
Editor/Publisher, Defense Acquisition Regulations System.

    Therefore, 48 CFR parts 215, 217, and 252 are amended as follows:

0
1. The authority citation for 48 CFR parts 215, 217, and 252 continues 
to read as follows:

    Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.

PART 215--CONTRACTING BY NEGOTIATION

0
2. Amend section 215.404-71-3 by revising paragraph (d)(2)(i) to read 
as follows:


215.404-71-3  Contract type risk and working capital adjustment.

* * * * *
    (d) * * *
    (2) * * *
    (i) The contracting officer shall assess the extent to which costs 
have been incurred prior to definitization of the contract action (also 
see 217.7404-6(a) and 243.204-70-6). When considering the reduced cost 
risks associated with allowable incurred costs on an undefinitized 
contract action, it is appropriate to apply separate contract risk 
factors for allowable incurred costs and estimated costs to complete 
when completing the contract risk sections of DD Form 1547, Record of 
Weighted Guidelines. When costs have been incurred prior to 
definitization, generally regard the contract type risk to be in the 
low end of the designated range. If a substantial portion of the costs 
has been incurred prior to definitization, the contracting officer may 
assign a value as low as zero percent, regardless of contract type. 
However, if a contractor submits a qualifying proposal to definitize an 
undefinitized contract action and the contracting officer for such 
action definitizes the contract after the end of the 180-day period 
beginning on the date on which the contractor submitted the qualifying 
proposal as defined in 217.7401, the profit allowed on the contract 
shall accurately reflect the cost risk of the contractor as such risk 
existed on the date the contractor submitted the qualifying proposal.
* * * * *

PART 217--SPECIAL CONTRACTING METHODS

0
3. Amend section 217.7404-3 by revising paragraph (b) to read as 
follows:


217.7404-3  Definitization schedule.

* * * * *
    (b)(1) Submission of a qualifying proposal in accordance with the 
definitization schedule is a material element of the contract. If the 
contractor does not submit a qualifying proposal in accordance with the 
contract definitization schedule, notwithstanding FAR 52.216-26, 
Payments of Allowable Costs Before Definitization, the contracting 
officer may withhold an amount necessary to protect the interests of 
the Government, not to exceed 5 percent of all subsequent financing 
requests, or take other appropriate actions (e.g., documenting the 
noncompliance in the contractor's past performance evaluation or 
terminating the contract for default).

[[Page 33838]]

    (2) Contracting officers shall document in the contract file the 
justification for withholding or not withholding payments if the 
qualifying proposal was not submitted in accordance with the contract 
definitization schedule.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
4. Revise section 252.217-7027 to read as follows:


252.217-7027  Contract Definitization.

    As prescribed in 217.7406(b), use the following clause:

Contract Definitization (May 2023)

    (a) A___ [insert specific type of contract action] is 
contemplated. The Contractor agrees to begin promptly negotiating 
with the Contracting Officer the terms of a definitive contract that 
will include--
    (1) All clauses required by the Federal Acquisition Regulation 
(FAR) on the date of execution of the undefinitized contract action;
    (2) All clauses required by law on the date of execution of the 
definitive contract action; and
    (3) Any other mutually agreeable clauses, terms, and conditions.
    (b) The Contractor agrees to submit a___ [insert type of 
proposal; e.g., fixed-price or cost-and-fee] proposal and certified 
cost or pricing data supporting its proposal. Notwithstanding FAR 
52.216-26, Payments of Allowable Costs Before Definitization, 
failure to meet the qualifying proposal date in the contract 
definitization schedule could result in the Contracting Officer 
withholding an amount up to 5 percent of all subsequent requests for 
financing until the Contracting Officer determines that a proposal 
is qualifying.
    (c) The schedule for definitizing this contract action is as 
follows [insert target date for definitization of the contract 
action and dates for submission of proposal, beginning of 
negotiations, and, if appropriate, submission of the make-or-buy and 
subcontracting plans and certified cost or pricing data]:

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    (d) If agreement on a definitive contract action to supersede 
this undefinitized contract action is not reached by the target date 
in paragraph (c) of this clause, or within any extension of it 
granted by the Contracting Officer, the Contracting Officer may, 
with the approval of the head of the contracting activity, determine 
a reasonable price or fee in accordance with FAR subpart 15.4 and 
part 31, subject to Contractor appeal as provided in the Disputes 
clause. In any event, the Contractor shall proceed with completion 
of the contract, subject only to the Limitation of Government 
Liability clause.
    (1) After the Contracting Officer's determination of price or 
fee, the contract shall be governed by--
    (i) All clauses required by the FAR on the date of execution of 
this undefinitized contract action for either fixed-price or cost-
reimbursement contracts, as determined by the Contracting Officer 
under this paragraph (d);
    (ii) All clauses required by law as of the date of the 
Contracting Officer's determination; and
    (iii) Any other clauses, terms, and conditions mutually agreed 
upon.
    (2) To the extent consistent with paragraph (d)(1) of this 
clause, all clauses, terms, and conditions included in this 
undefinitized contract action shall continue in effect, except those 
that by their nature apply only to an undefinitized contract action.
    (e) The definitive contract resulting from this undefinitized 
contract action will include a negotiated___ [insert ``cost/price 
ceiling'' or ``firm-fixed price''] in no event to exceed__[insert 
the not-to-exceed amount].
(End of clause)
[FR Doc. 2023-11139 Filed 5-24-23; 8:45 am]
BILLING CODE 5001-06-P