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[Federal Register Volume 76, Number 180 (Friday, September 16, 2011)]
[Rules and Regulations]
[Pages 57677-57679]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-23779]

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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Part 216

[DFARS Case 2011-D010]
RIN 0750-AH15

Defense Federal Acquisition Regulation Supplement; Increase the 
Use of Fixed-Price Incentive (Firm Target) Contracts

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 DFARS to increase the 
use of fixed-price incentive (firm target) contracts, with particular 
attention to share lines and ceiling prices.

DATES: Effective date: September 16, 2011.

FOR FURTHER INFORMATION CONTACT:  Ms. Amy Williams, telephone 703-602-
0328.

SUPPLEMENTARY INFORMATION:

I. Background

    This DFARS case was initiated to implement an initiative to 
incentivize productivity and innovation in industry, as set forth in a 
memorandum from the Under Secretary of Defense for Acquisition, 
Technology, & Logistics (USD(AT&L)), dated November 3, 2010. The 
memorandum provided guidance to the secretaries of the military 
departments and directors of defense

[[Page 57678]]

agencies on obtaining greater efficiency and productivity in defense 
spending. In support of this initiative, DoD published a proposed rule 
in the Federal Register on March 2, 2011 (76 FR 11410). The proposed 
rule required that contracting officers must--
    (1) Give particular consideration to the use of fixed-price 
incentive (firm target) contracts, especially for acquisitions moving 
from development to production; and
    (2) Pay particular attention to share line and ceiling prices for 
fixed-price incentive (firm target) contracts, with 120 percent ceiling 
and a 50/50 share ratio as the default arrangement.

The comment period closed on May 2, 2011. DoD received comments from 
one respondent.

II. Discussion/Analysis

    The respondent considered that the incorporation of a broad 
preference to use a 50/50 share line with a ceiling of 120 percent is a 
mistake for Government acquisitions for the reasons discussed in the 
following comments.
    Comment: The respondent provided anecdotal evidence that currently 
acquisition leadership translates this preference as a mandatory 
requirement.
    Response: All of the documentation for this case, and all of the 
presentations by senior acquisition leaders within DoD, have emphasized 
that this initiative is to be implemented in a way that makes sense for 
each individual acquisition. The guidance in the DFARS companion 
Procedures, Guidance, and Information (PGI) reiterates that each 
situation must be evaluated in terms of the degree and nature of the 
risk presented in order to select the proper contract type. The PGI 
also provides additional guidance on establishing the target cost, 
share lines, and ceiling price. This regulation is not a ``one-size-
fits-all'' mandate.
    However, to make the final rule more consistent with the 
terminology of the USD(AT&L) memo of November 3, 2010, and to clarify 
that each contract must be considered on a case-by-case basis, DoD has 
revised the description of the use of a fixed-price incentive (firm 
target) contract with a 50/50 share ratio and a 120 percent ceiling 
from ``the default arrangement'' to ``the point of departure for 
establishing the incentive arrangement.''
    Comment: According to the respondent, the Institute for Defense 
Analyses (IDA) study, Can Profit Policy and Contract Incentives Improve 
Defense Contract Outcomes?, makes a strong case for the ineffectiveness 
of incentive contracts.
    Response: The majority of incentive contracts covered by the IDA 
study were award-fee contracts, not fixed-price incentive (firm target) 
contracts. Furthermore, DoD is actively taking steps to ensure that 
incentives are linked to acquisition outcomes and the profits are tied 
to performance in achieving those outcomes.
    Comment: The respondent stated that in order to correct the use of 
incentives, DoD should mandate that contracting officers use a true 
pessimistic/optimistic weighted average and ensure that their cost 
curves do not mirror cost-plus-fixed-fee cost curves.
    Response: DoD endorses the respondent's concept that contracting 
officers should carefully develop a realistic target cost and that an 
incentive contract should provide adequate incentives. The reason for 
specifying the 120 percent ceiling and the 50/50 cost sharing 
arrangement as the point of departure for establishing the incentive 
arrangement is to promote cost realism and discourage an incentive 
arrangement that does not provide adequate incentive to the contractor 
to control costs. An excessively flat share line approaches a cost-
plus-fixed-fee arrangement (100/0), thereby providing almost no 
incentive to the contractor to control costs. A 50/50 share line 
suggests that the Government and the contractor have a common view of 
the likely contract execution cost. A 50/50 share line should represent 
a point where the estimate is deemed equally likely to be too high or 
too low. However, as already stated, rather than issuing mandates, DoD 
encourages the evaluation of each situation in terms of the degree and 
nature of the risk presented in order to select the proper contract 
type and, if an incentive contract type is selected, the appropriate 
incentive arrangement.

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 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. This rule is not a major rule 
under 5 U.S.C. 804.

IV. Regulatory Flexibility Act

    DoD has prepared a final regulatory flexibility analysis (FRFA) 
consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq. 
The FRFA is summarized as follows:
    This rule amends the Defense Federal Acquisition Regulation 
Supplement to implement the initiative on incentivizing productivity 
and innovation in industry, as presented by the Under Secretary of 
Defense for Acquisition, Technology, & Logistics in a memorandum dated 
November 3, 2010. The objective of the rule is to incentivize 
contractors to control costs. The legal basis is 41 U.S.C. 1303 and 48 
CFR chapter 1.
    There were no public comments in response to the initial regulatory 
flexibility analysis.
    The final rule will not have much impact on small entities, because 
the focus of the rule is on development efforts that are moving into 
early production. Small entities are more likely to receive awards for 
commercial products, including commercially available off-the-shelf 
products, for which firm-fixed-price contracts are appropriate. In 
Fiscal Year 2010, 93 percent of awards to small businesses were firm-
fixed-price contracts, and 99.99 percent of awards to small businesses 
were other than fixed-price incentive contracts.
    The final rule imposes no reporting, recordkeeping, or other 
information collection requirements.
    There are no known alternatives to the rule that would adequately 
implement the DoD policy. There is no significant economic impact on 
small entities.
    There are no other alternatives that will accomplish the objectives 
of the rule.

V. Paperwork Reduction Act

    The final rule does not contain any information collection 
requirements that require 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 216

    Government procurement.

Ynette R. Shelkin,
Editor, Defense Acquisition Regulations System.
    Therefore, 48 CFR part 216 is amended as follows:

[[Page 57679]]

PART 216--TYPES OF CONTRACTS

0
1. The authority citation for 48 CFR part 216 continues to read as 
follows:

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

0
2. Add section 216.403-1 to read as follows:

216.403-1  Fixed-price incentive (firm target) contracts.

    (b) Application.
    (1) The contracting officer shall give particular consideration to 
the use of fixed-price incentive (firm target) contracts, especially 
for acquisitions moving from development to production.
    (2) The contracting officer shall pay particular attention to share 
lines and ceiling prices for fixed-price incentive (firm target) 
contracts, with a 120 percent ceiling and a 50/50 share ratio as the 
point of departure for establishing the incentive arrangement.
    (3) See PGI 216.403-1 for guidance on the use of fixed-price 
incentive (firm target) contracts.

[FR Doc. 2011-23779 Filed 9-15-11; 8:45 am]
BILLING CODE 5001-08-P
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