11354 Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 

DEPARTMENT OF DEFENSE 

Defense Acquisition Regulations 

System 

48 CFR Parts 209, 216, and 252 

RIN 0750–AH37 

Defense Federal Acquisition 

Regulation Supplement: Award Fee 

Reduction or Denial for Health or 

Safety Issues (DFARS Case 2011– 

D033) 

AGENCY: Defense Acquisition 

Regulations System, Department of 

Defense (DoD). 

ACTION: Final rule. 

SUMMARY: DoD is adopting as final, 

without change, an interim rule 

amending the Defense Federal 

Acquisition Regulation Supplement 

(DFARS) to implement those sections of 

the National Defense Authorization Acts 

for Fiscal Years 2010 and 2011, 

providing increased authorities to 

reduce or deny award fees to companies 

found to jeopardize the health or safety 

of Government personnel. In addition, 

this rule modifies the requirement that 

information on the final determination 

of award fee be entered into the Federal 

Awardee Performance and Integrity 

Information System (FAPIIS). 

DATES: Effective Date: February 24, 

2012. 

FOR FURTHER INFORMATION CONTACT: Ms. 

Meredith Murphy, telephone 703–602– 

1302. 

SUPPLEMENTARY INFORMATION: 

I. Background 

DoD published an interim rule in the 

Federal Register at 76 FR 57674 on 

September 16, 2011, to implement 

sections 823 and 834 of the National 

Defense Authorization Acts (NDAA) for 

Fiscal Years (FY) 2010 and 2011, 

providing increased statutory 

authorities to reduce or deny award fees 

to companies found to jeopardize the 

health or safety of Government 

personnel and adding a mechanism to 

decrease or eliminate a contractor’s 

award fee for a specific performance 

period. In addition, the interim rule 

implemented the modification by 

section 834 of section 872 of the NDAA 

for FY 2009, which required that 

information on the final determination 

of award fee be entered into the Federal 

Awardee Performance and Integrity 

Information System (FAPIIS). One 

respondent submitted a public comment 

in response to the interim rule. 

II. Discussion and Analysis of the 

Public Comment 

The Defense Acquisition Regulations 

Council (the Council) reviewed the 

public comment in the development of 

the final rule. A discussion of the 

comment is provided as follows: 

A. Summary of Significant Changes 

The interim rule is adopted, without 

change, as a final rule. 

B. Analysis of Public Comment 

Comment: The respondent noted that 

DFARS 209.105–2–70 uses the term 

‘‘DoD appointing official,’’ while the 

clause, at DFARS 252.216–7007(a)(ii)(E), 

states that the determination is made by 

the Secretary of Defense. The 

respondent suggested that the same term 

be used in both locations. 

Response: The terminology used was 

carefully considered by DoD. Section 

834 of the statute requires the Secretary 

of Defense to provide for an 

‘‘expeditious, independent 

investigation’’ and ‘‘make a final 

determination, pursuant to procedures 

established by the Secretary for 

purposes of this section. Defense 

Criminal Investigative Organizations 

(DCIOs) currently have procedures in 

place to conduct criminal investigations 

of contractor misconduct. These 

procedures are outside the acquisition 

regulatory process, and, further, there 

are differences in the procedural 

processes followed within different 

parts of DoD. After consideration of the 

comment, DoD determined that the 

DFARS text at 209.105–2–70 should be 

as specific as possible for the guidance 

of the contracting officer, i.e., ‘‘the DoD 

appointing official that requested a DoD 

investigation makes a final 

determination * * *’’ However, DoD 

used the ‘‘Secretary of Defense’’ in the 

DFARS clause because it is not 

necessary to specify to the contractor 

the delegation of authority within DoD. 

III. 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, dated September 30, 1993. This 

rule is not a major rule under 5 U.S.C. 

804. 

IV. Regulatory Flexibility Act 

DoD certifies that this final rule will 

not have a significant economic impact 

on a substantial number of small entities 

within the meaning of the Regulatory 

Flexibility Act, 5 U.S.C. 601, et seq., 

because section 834 of the NDAA for FY 

2011 does not apply to firms that are 

subject to the jurisdiction of U.S. courts. 

By definition, small businesses are U.S. 

businesses and, therefore, are subject to 

the jurisdiction of the U.S. courts. 

Accordingly, this rule will not affect 

small businesses. For the definition of 

‘‘small business,’’ the Regulatory 

Flexibility Act refers to the Small 

Business Act, which in turn allows the 

U.S. Small Business Administration 

(SBA) Administrator to specify detailed 

definitions or standards (5 U.S.C. 601(3) 

and 15 U.S.C. 632(a)). The SBA 

regulations at 13 CFR 121.105 discuss 

who is a small business: ‘‘(a)(1) Except 

for small agricultural cooperatives, a 

business concern eligible for assistance 

from SBA as a small business is a 

business entity organized for profit, 

with a place of business located in the 

United States, and which operates 

primarily within the United States or 

which makes a significant contribution 

to the U.S. economy through payment of 

taxes or use of American products, 

materials or labor.’’ 

This rule also implements section 823 

of the NDAA for FY 2010. Section 823 

required contracting officers to consider 

reduction or denial of award fee if the 

actions of the contractor or a 

subcontractor at any tier jeopardized the 

health or safety of Government 

personnel. DoD did not prepare an 

initial regulatory flexibility analysis 

upon publication of the interim rule 

implementing section 823 (75 FR 69360, 

effective November 12, 2010) because, 

generally, contracts awarded to small 

businesses are not likely to utilize 

incentive- and award-fee contract 

structures. No comments were received 

from small entities on the interim rule. 

V. Paperwork Reduction Act 

The 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). 


srobinson on DSK4SPTVN1PROD with RULES3
Federal Register / Vol. 77, No. 37 / Friday, February 24, 2012 / Rules and Regulations 11355 

List of Subjects in 48 CFR Parts 209, 

216, and 252 

Government procurement. 

Ynette R. Shelkin, 

Editor, Defense Acquisition Regulations 

System. 

Interim Rule Adopted as Final Without 

Change 

■ Accordingly, the interim rule 

amending 48 CFR parts 209, 216, and 

252, which was published at 76 FR 

57674 on September 16, 2011, is 

adopted as a final rule without change. 

[FR Doc. 2012–4040 Filed 2–23–12; 8:45 am] 

BILLING CODE 5001–06–P 

DEPARTMENT OF DEFENSE 

Defense Acquisition Regulations 

System 

48 CFR Parts 215, 232, 234, 242, 244, 

245, and 252 

RIN 0750–AG58 

Defense Federal Acquisition 

Regulation Supplement; Business 

Systems—Definition and 

Administration (DFARS Case 2009– 

D038) 

AGENCY: Defense Acquisition 

Regulations System, Department of 

Defense (DoD). 

ACTION: Final rule. 

SUMMARY: DoD is adopting as final, with 

changes, an interim rule amending the 

Defense Federal Acquisition Regulation 

Supplement (DFARS) to improve the 

effectiveness of DoD oversight of 

contractor business systems. 

DATES: Effective date: February 24, 2012. 

FOR FURTHER INFORMATION CONTACT: Mr. 

Mark Gomersall, 703–602–0302. 

SUPPLEMENTARY INFORMATION: 

I. Background 

DoD published an initial proposed 

rule for Business Systems—Definition 

and Administration (DFARS Case 2009– 

D038) in the Federal Register on 

January 15, 2010 (75 FR 2457). Based on 

the comments received, DoD published 

a second proposed rule on December 3, 

2010 (75 FR 75550). The public 

comment period closed January 10, 

2011. On January 7, 2011, the National 

Defense Authorization Act (NDAA) for 

Fiscal Year (FY) 2011 was signed into 

law (Pub. L. 111–383). Section 893 of 

the NDAA for FY 2011, Contractor 

Business Systems, set forth statutory 

requirements for the improvement of 

contractor business systems to ensure 

that such systems provide timely, 

reliable information for the management 

of DoD programs. Based on the 

comments received in response to the 

second proposed rule and the 

requirements of the NDAA for FY 2011, 

DoD published an interim rule with 

request for comments on May 18, 2011 

(76 FR 28856). The public comment 

period ended on July 18, 2011. 

Comments were received from 14 

respondents in response to the interim 

rule. 

Contractor business systems and 

internal controls are the first line of 

defense against waste, fraud, and abuse. 

Weak control systems increase the risk 

of unallowable and unreasonable costs 

on Government contracts. To improve 

the effectiveness of Defense Contract 

Management Agency (DCMA) and 

Defense Contract Audit Agency (DCAA) 

oversight of contractor business 

systems, DoD has clarified the definition 

and administration of contractor 

business systems as follows: 

A. Contractor business systems have 

been defined as accounting systems, 

estimating systems, purchasing systems, 

earned value management systems 

(EVMS), material management and 

accounting systems (MMAS), and 

property management systems. 

B. Compliance enforcement 

mechanisms have been implemented in 

the form of a business systems clause 

which includes payment withholding 

that allows contracting officers to 

withhold a percentage of payments, 

under certain conditions, when a 

contractor’s business system contains 

significant deficiencies. Payments could 

be withheld on— 

• Interim payments under— 

Æ Cost-reimbursement contracts; 

Æ Incentive type contracts; 

Æ Time-and-materials contracts; 

Æ Labor-hour contracts; 

• Progress payments; and 

• Performance-based payments. 

II. Discussion and Analysis 

A. Analysis of Public Comments 

1. Accounting System Monitoring 

Comment: A respondent stated that 

DFARS 252.242–7006(c)(8) is vague. 

Periodic monitoring of the system can 

take many forms and be performed by 

numerous personnel. The respondent 

suggested that wording more in line 

with DFARS 252.244–7001(c)(18), 

DFARS 252.215–7002(d)(4)(xii), or 

DFARS 252.215–7002(d)(4)(xiii) would 

better state who is expected to perform 

the monitoring, why the monitoring is 

being performed, and would give a 

clearer expectation of level of 

monitoring to be performed. 

Response: The size and complexity of 

companies and their processes, 

operations, and accounting systems 

capabilities vary. Therefore, it is not 

feasible to establish specific 

requirements regarding the extent or 

frequency of monitoring by the 

contractor. However, the term 

‘‘periodic’’ has been removed and 

additional language has been added, 

similar to the language at 252.244–7001 

and 252.215–7002, to clarify that the 

contractor’s accounting system shall 

provide for management reviews or 

internal audits of the contractor’s 

system to ensure compliance with the 

contractor’s policies, procedures, and 

established accounting practices. 

2. Business Systems Clause Prescription 

Comment: A ‘‘covered contract’’ is 

defined at DFARS 242.7000(a) as one 

that is subject to Cost Accounting 

Standards (CAS). A respondent stated 

that the problem with this prescription 

is that a contracting officer will not 

typically know if the resulting contract 

will be subject to CAS when drafting the 

solicitation. A determination as to 

whether CAS applies to a particular 

contract is made after the offeror 

submits an offer containing the 

information required by the provision at 

FAR 52.230–1, Cost Accounting Notices 

and Certification. The contracting 

officer then inserts the appropriate CAS 

clauses in the contract, if necessary. The 

respondent suggested that one way to 

correct this is to add a paragraph to the 

clause making it self-deleting if CAS 

does not apply to the contract. 

Response: The clause has been 

amended to make it self-deleting if CAS 

does not apply. 

3. Definition of Covered Contract 

Comment: A respondent suggested 

that the definition of ‘‘covered contract’’ 

be modified to match the definition in 

section 893 of the NDAA for FY 2011. 

Response: Section 816 of the NDAA 

for 2012 redefined ‘‘covered contract’’ as 

‘‘a contract that is subject to the cost 

accounting standards promulgated 

pursuant to section 1502 of title 41, 

United States Code, that could be 

affected if the data produced by a 

contractor business system has a 

significant deficiency.’’ The section 816 

definition matches the definition used 

in this rule, therefore, no revisions are 

necessary. 

4. Cost vs. Cost-Reimbursement 

Comment: A respondent stated that 

the word ‘‘cost’’ is used throughout the 

rule when ‘‘cost-reimbursement’’ is 

what is meant. Unless this rule only 

applies to cost contracts, a specific type 


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