Defense Federal Acquisition Regulation Supplement: Architect and Engineering Service Fees (DFARS Case 2024-D019), 53502-53504 [2024-13863]

Agencies

• Defense Acquisition Regulations System
• DEPARTMENT OF DEFENSE

[Federal Register Volume 89, Number 124 (Thursday, June 27, 2024)]
[Rules and Regulations]
[Pages 53502-53504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-13863]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Part 236

[Docket DARS-2024-0019]
RIN 0750-AM16


Defense Federal Acquisition Regulation Supplement: Architect and 
Engineering Service Fees (DFARS Case 2024-D019)

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

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: DoD is issuing a final rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to implement a section of the 
National Defense Authorization Act for Fiscal Year 2024 that increases 
the statutory fee limit for architect and engineering services.

DATES: Effective August 26, 2024.

FOR FURTHER INFORMATION CONTACT: Mr. Jon Snyder, telephone 703-945-
5341.

SUPPLEMENTARY INFORMATION:

I. Background

    This final rule revises the DFARS to implement section 2881 of the 
National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2024 
(Pub. L. 118-31). Section 2881 increases the statutory fee limitation 
at 10 U.S.C. 7540, 8612, and 9540 from six to 10 percent that may be 
earned by contractors providing certain architect and engineering 
services under contracts with the Departments of the Army, Navy, and 
Air Force.
    At DFARS 236.606-70, Statutory fee limitation, DoD increased the 
statutory fee that contractors may earn under contracts for architect-
engineer services for the preparation of designs, plans, drawings, and 
specifications. The fee is increased to 10 percent of the project's 
estimated construction cost. Minor editorial revisions are made to the 
text of section 236.606-70 to comply with drafting conventions.

II. Publication of This Final Rule for Public Comment Is Not Required 
by Statute

    The statute that applies to the publication of the Federal 
Acquisition Regulation (FAR) is 41 U.S.C. 1707, Publication of Proposed 
Regulations. Subsection (a)(1) of the statute requires that a 
procurement policy, regulation, procedure, or form (including an 
amendment or modification thereof) must be published for public comment 
if it relates to the expenditure of appropriated funds, and has either 
a significant effect beyond the internal operating procedures of the 
agency issuing the policy, regulation, procedure, or form, or has a 
significant cost or administrative impact on contractors or offerors. 
This final rule is not required to be published for public comment, 
because the rule addresses internal operating procedures of the 
Government.

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

    This final rule does not create any new solicitation provisions or 
contract clauses. It does not impact any existing solicitation 
provisions or contract clauses or their applicability to contracts 
valued at or below the simplified acquisition threshold, for commercial 
products including COTS items, or for commercial services.

IV. Expected Impact of the Rule

    Architects and engineers are limited in the amount they can charge 
the Departments of the Army, Navy, and Air Force for producing and 
delivering designs, plans, drawings, and specifications. The limitation 
is a percentage of the architect and engineer's estimate of the 
construction costs for the project. The limitation is specified at 10 
U.S.C. 7540, 8612, and 9540; the limitation has been 6 percent of the 
estimated construction costs. Section 2881 of the National Defense 
Authorization Act for Fiscal Year 2024 increases the percentage at 10 
U.S.C. 7540, 8612, and 9540 to 10 percent of the estimated construction 
costs. This updated statutory limit only applies to requirements of the 
Departments of the Army, Navy, and Air Force; it does not apply to the 
rest of DoD or to civilian agencies.
    Currently, DoD contracting officers evaluate architect and 
engineering proposals in accordance with FAR 36.602 and DFARS 236.602. 
Army,

[[Page 53503]]

Navy, and Air Force contracting officers conduct an additional 
evaluation of proposals or portions of proposals for producing and 
delivering designs, plans, drawings, and specifications in accordance 
with DFARS 236.606-70, to ensure that the proposed price does not 
exceed the 6 percent statutory limit of the architect and engineer's 
estimated construction costs. The contracting officer divides the total 
proposed price for producing and delivering designs, plans, drawings, 
and specifications by the total estimated construction costs. The 
resulting percentage may not exceed the statutory limitation.
    This rule, which implements section 2881, merely changes each of 
the occurrences of ``six percent'' in DFARS 236.606-70 to ``10 
percent.'' The way the contracting workforce implements the limitation 
will be unchanged, but the limitation will be a higher percentage.
    This increase will allow architect and engineering entities, with 
particular benefit to those with smaller contracts, to cover labor, 
overhead, indirect, and other direct cost increases since the 6 percent 
rate was put in place over 80 years ago on contracts for producing and 
delivering designs, plans, drawings, and specifications. The increase 
will also benefit architect and engineering entities with contracts for 
producing and delivering designs, plans, drawings, and specifications 
for large horizontal and complex vertical construction projects. While 
costs have increased for architects and engineers, construction costs 
have increased more dramatically, which results in a higher cost limit. 
For example, if a particular construction project in the past cost 
$900,000, the statutory fee limit was $54,000. If the same construction 
project today costs $1.8 million, the prior statutory fee limit would 
be $108,000 for the same effort, and with the increased statutory 
limit, the fee would be limited to $180,000.
    The implementation of this rule will increase the amount the 
Government will pay for contracts that include producing and delivering 
designs, plans, drawings, and specifications. However, this rule may 
also encourage more architect and engineering entities to submit 
proposals for DoD contracts.
    Data was obtained from the Federal Procurement Data System (FPDS) 
on Army, Navy, and Air Force construction contracts awarded for the 
last three fiscal years. FPDS data shows that from FY 2021 through FY 
2023, there was an average of 1,857 construction contracts awarded with 
an average annual value of approximately $25 billion for all of the 
contracts. DoD subject matter experts established that DoD considers 
projects valued at less than $5 million as small projects and projects 
over $5 million as large projects. Data obtained from FPDS shows that 
from FY 2021 through FY 2023, there was an average of 1,420 small 
construction contracts awarded with an average annual value of 
approximately $1.4 billion. Information obtained from DoD subject 
matter experts establishes that the historical average price for 
architect and engineering entities to produce and deliver designs, 
plans, drawings, and specifications is 3.25 percent of the estimated 
construction costs. DoD expends on average approximately $811 million 
($25 billion x 3.25 percent) annually for producing and delivering 
designs, plans, drawings, and specifications.
    Once section 2881 is implemented, the statutory limit for 
architects and engineers to produce and deliver designs, plans, 
drawings, and specifications will be raised to 10 percent of the 
estimated construction costs. The historical average architect and 
engineer's price for producing and delivering designs, plans, drawings, 
and specifications is 45 percent less than the statutory limit, at 3.25 
percent of the estimated construction costs. This is because, 
architects and engineers must justify their proposed costs to 
accomplish the work. They cannot simply state in their proposals that 
the fee is 6 percent; they must negotiate the fee with the contracting 
officer. Given this historical average while the statutory limit was 6 
percent, it is unlikely that the price for this work would increase to 
the new statutory limit of 10 percent of the estimated construction 
costs. According to DoD subject matter experts, the statutory increase 
will have the greatest benefit to projects involving large horizontal 
projects and complex vertical projects with multi-disciplinary teams.
    DoD expects that architect and engineering contracts associated 
with large construction projects (i.e., estimated construction costs of 
more than $5 million) will experience only a small increase within the 
range of about 3.25 percent to about 3.75 percent of the estimated 
construction costs, based on information provided by DoD subject matter 
experts. From FY 2022 to FY 2023, the military departments' spending on 
construction projects more than doubled, mainly due to inflation in 
construction costs, and most of the dollars spent were for large 
construction projects. As a result, even at 3.25 percent of the 
estimated construction costs, the price for architect and engineering 
contracts associated with large construction projects is substantially 
more today than it was three or more years ago. While costs have also 
increased for architects and engineers, construction costs have 
increased more dramatically, which results in a substantially higher 
fee limit. For example, if a particular construction project in the 
past cost $6 million, the statutory fee limit was $360,000. If the same 
construction project today costs $10 million, the prior statutory fee 
limit would be $600,000 for the same architect and engineering effort. 
As this example demonstrates, architect and engineering entities have 
already seen an increase in the fee limit due to the dramatic increase 
in the estimated construction costs.
    Based on information provided by DoD subject matter experts, DoD 
expects architect and engineering contracts associated with smaller 
construction projects (i.e., estimated construction costs of less than 
$5 million) to increase from 3.25 percent to 5.42 percent of the 
estimated construction costs for producing and delivering designs, 
plans, drawings, and specifications. DoD calculated that 3.25 percent 
is about 54.16 percent of the statutory fee limit of 6 percent (3.25/6 
= 0.54166, or 54.16 percent). If DoD continues to pay about 54.16 
percent of the statutory fee limit (i.e., 54.16 percent of the new 10 
percent limit), the resulting fee would be 5.42 percent. DoD expects 
this increase will be driven by the small-dollar contracts that would 
hit the 6 percent limit without this rule, but with this rule would be 
between 6 percent and 10 percent. The construction projects associated 
with these architect and engineering contracts are much smaller, but 
may require more architect and engineering effort due to the complexity 
even though the construction project is relatively small. For example, 
a simple renovation project may require architects and engineers to 
produce drawings of the existing space, demolition plans and drawings, 
plans and drawings for structural modifications, etc., in addition to 
producing the drawings for the renovation. Even with inflation in the 
cost of construction, 3.25 percent of a small construction project may 
not be enough for the architects and engineers to cover anticipated 
costs. Therefore, DoD expects to see a larger increase in the amount 
paid to architects and engineers for smaller contracts.
    Based on an increase in smaller architect and engineering contracts 
to 5.42 percent of the estimated construction costs and an increase in 
larger architect and engineering contracts to 3.6 percent of the 
estimated

[[Page 53504]]

construction costs, DoD estimates an average annual economic impact of 
approximately $110 million. This amount was calculated using FPDS data 
on construction contracts awarded in FY 2021 through FY 2023. The 
construction contracts awarded during this 3-year period were valued at 
an annual average of $24,359,067,619, of which large construction 
contracts were $22,965,495,843 per year and smaller construction 
contracts were $1,393,571,776 per year.
    DoD calculated the value of the architect and engineering contracts 
associated with large construction projects using the historical 
average price of 3.25 percent of estimated construction costs for 
producing and delivering designs, plans, drawings, and specifications 
by multiplying the annual average value for large construction 
contracts by 3.25 percent. This results in architect and engineering 
contracts valued at $746,378,615 ($22,965,495,843 * 0.0325 = 
$746,378,615). DoD also calculated the value of the architect and 
engineering contracts associated with large construction projects using 
higher prices in the range of 3.25 percent to 3.75 percent of estimated 
construction costs, which DoD expects to pay as a result of this rule. 
This results in architect and engineering contracts valued in the range 
of $746,378,615 to $861,206,094 ($22,965,495,843 * 0.0325 = 
$746,378,615 and $22,965,495,843 * 0.0375 = $861,206,094). The 
difference between the value of the architect and engineering contracts 
calculated using the higher percentage and those calculated using the 
lower percentage is $80,379,235 ($861,206,094 - $746,378,615 = 
$114,827,479). DoD expects to pay up to $114,827,479 more for architect 
and engineering contracts associated with large construction projects 
as a result of this rule.
    DoD calculated the value of the architect and engineering contracts 
associated with smaller construction projects using the historical 
average price of 3.25 percent of estimated construction costs for 
producing and delivering designs, plans, drawings, and specifications 
by multiplying the annual average value for smaller construction 
contracts by 3.25 percent. This results in architect and engineering 
contracts valued at $45,291,083 ($1,393,571,776 * 0.0325 = 
$45,291,083). DoD also calculated the value of architect and 
engineering contracts associated with smaller construction projects 
using the higher price of 5.42 percent of estimated construction costs, 
which DoD expects to pay as a result of this rule. This results in 
architect and engineering contracts valued at $75,531,590 
($1,393,571,776 * 0.0542 = $75,531,590). The difference between the 
value of the architect and engineering contracts calculated using the 
higher percentage and those calculated using the lower percentage is 
$30,240,507 ($75,531,590 - $45,291,083 = $30,240,507). DoD expects to 
pay that much more for architect and engineering contracts associated 
with smaller construction projects as a result of this rule.
    Therefore, as a result of this rule, DoD expects to pay up to 
approximately $145,021,999 ($114,827,479 + $30,194,520 = $145,021,999) 
more per year than it has paid in recent years for architect and 
engineering contracts associated with both large and smaller 
construction projects.

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 and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility. 
This is a significant regulatory action and, therefore, was subject to 
review under section 6(b) of E.O. 12866, Regulatory Planning and 
Review, as amended.

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 a 
major rule as defined by 5 U.S.C. 804.

VII. Regulatory Flexibility Act

    The Regulatory Flexibility Act does not apply to this rule because 
this final rule does not constitute a significant DFARS revision within 
the meaning of FAR 1.501-1, and 41 U.S.C. 1707 does not require 
publication for public comment.

VIII. Paperwork Reduction Act

    This final 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 Part 236

    Government procurement.

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

    Therefore, the Defense Acquisition Regulations System amends 48 CFR 
part 236 as follows:

PART 236--CONSTRUCTION AND ARCHITECT-ENGINEER CONTRACTS

0
1. The authority citation for 48 CFR part 236 continues to read as 
follows:

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


0
2. Revise section 236.606-70 to read as follows:


236.606-70  Statutory fee limitation.

    (a) The statutes at 10 U.S.C. 7540, 8612, and 9540, for the 
Departments of the Army, Navy, and Air Force, respectively, limit the 
contract price (or fee) for architect-engineer services for the 
preparation of designs, plans, drawings, and specifications to 10 
percent of the project's estimated construction cost.
    (b) The 10 percent limit also applies to contract modifications, 
including modifications involving--
    (1) Work not initially included in the contract; apply the 10 
percent limit to the revised total estimated construction cost; and
    (2) Redesign work; apply the 10 percent limit by--
    (i) Adding the estimated construction cost of the redesign features 
to the original estimated construction cost;
    (ii) Adding the contract cost for the original design to the 
contract cost for redesign; and
    (iii) Dividing the total contract design cost by the total 
estimated construction cost. The resulting percentage may not exceed 
the 10 percent statutory limitation.
    (c) The 10 percent limit applies only to that portion of the 
contract (or modification) price attributable to the preparation of 
designs, plans, drawings, and specifications. If a contract or 
modification also includes other services, the part of the price 
attributable to the other services is not subject to the 10 percent 
limit.

[FR Doc. 2024-13863 Filed 6-26-24; 8:45 am]
BILLING CODE 6001-FR-P