[Federal Register Volume 75, Number 238 (Monday, December 13, 2010)]
[Rules and Regulations]
[Pages 77741-77745]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30566]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 15, 31, and 52

[FAC 2005-47; FAR Case 2008-031; Item VI; Docket 2009-0034, Sequence 2]
RIN 9000-AL27


Federal Acquisition Regulation; Limitation on Pass-Through 
Charges

AGENCIES: Department of Defense (DoD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Final rule.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) have adopted as final, with 
changes, the interim rule amending the Federal Acquisition Regulation 
(FAR) to implement section 866 of the Duncan Hunter National Defense 
Authorization Act (NDAA) for Fiscal Year (FY) 2009, which applies to 
executive agencies other than DoD. DoD is subject to section 852 of the 
John Warner NDAA for FY 2007, which is also implemented in this final 
rule. Section 866 requires the Councils to amend the FAR, and section 
852 requires the Secretary of Defense to prescribe regulations to 
minimize excessive pass-through charges by contractors from 
subcontractors, or from tiers of subcontractors, that add no or 
negligible value, and to ensure that neither a contractor nor a 
subcontractor receives indirect costs or profit/fee (i.e., pass-through 
charges) on work performed by

[[Page 77742]]

a lower-tier subcontractor to which the higher-tier contractor or 
subcontractor adds no or negligible value.

DATES: Effective Date: January 12, 2011.

FOR FURTHER INFORMATION CONTACT: For clarification of content, contact 
Mr. Edward Chambers, Procurement Analyst, at (202) 501-3221. For 
information pertaining to status or publication schedules, contact the 
Regulatory Secretariat at (202) 501-4755. Please cite FAC 2005-47, FAR 
Case 2008-031.

SUPPLEMENTARY INFORMATION:

A. Background

    DoD, GSA, and NASA published an interim rule in the Federal 
Register at 74 FR 52853, October 14, 2009, to implement section 866 of 
the Duncan Hunter NDAA for FY 2009 (Pub. L. 110-417) as well as section 
852 of the John Warner NDAA for FY 2007 (Pub. L. 109-364). These acts 
required the Councils to amend the FAR to minimize excessive pass-
through charges by contractors from subcontractors, or from tiers of 
subcontractors, that add no or negligible value, and to ensure that 
neither a contractor nor a higher-tier subcontractor receives indirect 
costs or profit/fee (i.e., pass-through charges) on work performed by a 
lower-tier subcontractor to which the contractor or higher-tier 
subcontractor adds no or negligible value.
    To enable agencies to ensure that pass-through charges are not 
excessive, the interim rule included a solicitation provision and a 
contract clause requiring offerors and contractors to identify the 
percentage of work that will be subcontracted, and when subcontract 
costs will exceed 70 percent of the total cost of work to be performed, 
to provide information on indirect costs and profit/fee and value added 
with regard to the subcontract work. Seventy percent was selected as 
the threshold for this information reporting requirement, because it 
represents a substantial amount of subcontracting.
    To ensure that the Government can make a determination as to 
whether or not pass-through charges are excessive, the interim rule 
incorporated a reporting threshold that affords the contracting officer 
the ability to understand what functions the contractor will perform 
(e.g., consistent with the contractor's disclosed practice) and thus 
will provide added value, whether it be before award, or if the 
contractor subsequently decides to subcontract substantially all of the 
effort. The rule provides a recovery mechanism for the excessive pass-
through charges for those situations in which a contractor subcontracts 
all, or substantially all, of the performance of the contract, and does 
not perform the subcontract management functions, or other value-added 
functions, that were charged to the Government through indirect costs 
and related profit/fee.
    The final rule adopts the interim rule with a minor change 
involving the addition of two types of fixed-price incentive contracts 
to the list of contracts at FAR 15.408(n)(2)(i)(B)(2) for DoD that are 
not subject to the limitation on pass-through charges clauses. These 
additions are fixed-price incentive contracts awarded on the basis of 
adequate price competition and fixed-price incentive contracts for the 
acquisition of a commercial item. Section 852 of the John Warner NDAA 
for FY 2007 (Pub. L. 109-364) is clear that DoD contracts awarded on 
the basis of adequate price competition, and DoD contracts for the 
acquisition of a commercial item are not subject to the limitation on 
pass-through charges.

B. Discussion and Analysis

    The FAR Secretariat received five responses to the interim rule. 
These responses included a total of 31 comments on 23 issues. Each 
issue is discussed in the following sections.
    Issue 1: Three respondents expressed their support for the interim 
rule with one respondent stating that they were in favor of companies 
being responsible, responsive, and capable of providing adequate 
management systems to track the level of subcontracting taking place 
under specific contracts.
    Response: The Councils acknowledge their support for the interim 
rule.
    Issue 2: One respondent recommended that guidance should be 
provided to assist contracting officers with implementing the rule. The 
respondent cited several examples of what should be in that guidance.
    Response: The Councils disagree with the inclusion of such 
implementation guidance in the FAR. Agencies will provide supplemental 
guidance and training to implement this rule, as appropriate.
    Issue 3: One respondent recommended that the clause language 
incorporate GAO recommendations relative to ``requiring contracting 
officials to take risk into account when determining the degree of 
assessment needed.''
    Response: The Councils do not concur. The respondent's 
recommendation goes to procedures for assessing contractor value added. 
Such procedures are beyond the scope of this case, and reasonably 
should be implemented through agency guidance.
    Issue 4: One respondent recommended that the final rule be written 
such as to ``serve as a tool to ensure consistency to the extent 
practicable between contractor's proposals and actual performance 
rather than to serve as a basis to disallow cost after incurrence.''
    Response: The Councils do not concur with the respondent's 
recommendation. Unless otherwise required under the contract, 
contractors have the right to revise and manage workload under the 
contract as they see fit. The clauses provide sufficient protection to 
the Government for such cases where the contractor revises the workload 
from what had been negotiated to a situation where excessive pass-
through charges exist.
    Issue 5: One respondent recommended that the final rule be written 
such as to ``carefully consider the potential effects on those small 
businesses performing as prime contractors on contract set-asides given 
that small business prime contractors could experience significant 
financial impacts as a result of disallowed pass-through costs under 
this rule.''
    Response: The Councils do not concur with the respondent's 
recommendation. Section 866 of the FY 2009 NDAA does not set forth an 
exclusion for small businesses under this rule.
    Issue 6: One respondent recommended that the final rule should 
reconcile DoD policies to avoid confusion. Specifically, they assert 
that the Wynne memorandum dated July 12, 2004, and the policies enacted 
in the Weapons Systems Acquisition Reform Act of 2009 are contrary to 
this rule, which ``exerts pressure on contracting officials to keep 
work in-house to address the reporting requirement.''
    Response: The Councils do not concur with the respondent's 
recommendation. The Councils do not agree that there are conflicts 
between this rule and DoD policy. Competition and teaming arrangements 
are not hindered by this regulation, and subcontracting efforts are not 
limited to 70 percent of the total effort. The 70 percent threshold 
triggers an information reporting requirement. This rule is emphasizing 
that value is to be added by the contractor to the subcontracted 
effort.
    Issue 7: One respondent recommended that ``a distinction be made 
with regard to G&A applied to contracts versus applied profit. This 
will serve to protect the contractor's recovery of allowable G&A if 
incurred in accordance with CAS and the contractor's disclosed 
practices, while focusing the Government's attention to the negotiated 
item of profit.''

[[Page 77743]]

    Response: The Councils do not concur with the respondent's 
recommendation. The Councils disagree that a distinction should be made 
with regard to G&A applied to contracts versus applied profit because 
the statutes prohibit application of overhead to excessive pass-through 
charges, as well as profit.
    Issue 8: One respondent recommended that the rule should use the 
threshold in FAR 15.403-4 to ensure a consistent minimum threshold 
among all executive agencies in lieu of multiple thresholds currently 
in the rule. The respondent believed that if the Councils utilize the 
threshold in FAR 15.404-4, the rule ``will exclude a significant number 
of subcontracts from this burdensome requirement but still cover the 
vast majority of the total value of subcontracts.''
    Response: The Councils do not concur with the respondent's 
recommendation. By statute, civilian agencies are required to establish 
the threshold at the simplified acquisition threshold, while DoD 
established its threshold at the threshold for obtaining cost or 
pricing data in FAR 15.403-4.
    Issue 9: One respondent recommended that the provision and clause 
be amended to include definitions of ``total cost of the work'' and 
``total cost of work''. As such, the respondent recommended that ``FAR 
52.215-22 be amended to provide that, for purposes of determining 
whether the 70 percent subcontracting threshold is reached, the `total 
cost of the work' to be performed by the prime contractor or a higher-
tier subcontractor shall include the prime contractor's or higher-tier 
subcontractor's direct and indirect costs of the work, excluding 
applicable profit or fee, to be performed under the contract or higher-
tier subcontractor, as the case may be, and the `total cost of the 
work' to be performed by each subcontractor to the prime contractor or 
to a higher-tier subcontractor shall include its direct and indirect 
costs, including applicable profit or fee, of the work to be performed 
under its subcontract.'' Also, the respondent recommended that ``FAR 
52.215-23 be amended to provide that, for purposes of determining 
whether a prime contractor, or higher-tier subcontractor, changes the 
amount of subcontractor effort after award such that it exceeds 70 
percent of the total cost of work to be performed under the contractor 
or higher-tier subcontractor, the `total cost of the work' to be 
performed by the prime contractor or higher-tier subcontractor under 
the contract or higher-tier subcontractor shall include the 
contractor's or higher-tier subcontractor's direct and indirect costs 
of the work, excluding applicable profit or fee, to be performed under 
the contract or higher-tier subcontractor, as the case may be, and the 
`total cost of the work' to be performed by each subcontractor to the 
prime contractor or to a higher-tier subcontractor shall include its 
direct and indirect costs, including applicable profit or fee, of the 
work to be performed under its subcontract.''
    Response: The Councils do not concur with the respondent's 
recommendation. The Councils believe that the respondent's recommended 
definitions are not necessary, as they are universally understood 
within the acquisition community.
    Issue 10: Two respondents believed that the determination of value-
added work be performed before contract award and not during contract 
performance. One respondent recommended that ``the rule be placed in 
FAR Part 15 (for example, in 15.404-1, Proposal Analysis) rather than 
in a clause to affirm and emphasize the basic contract formation policy 
that contracts should not be entered into where the contracting officer 
determines after a thorough proposal analysis that an offeror adds no 
or negligible value to the proposed acquisition.'' The respondent 
believed that the pass-through rule, as currently written, ``would 
unfairly continue to subject contractors to continuing post-award 
reviews by the government of pass-through charges and potential 
disallowances throughout the life of the contract which is unjustified, 
inappropriate, onerous, and not required by sections 866 or 852 of the 
NDAAs.'' Similarly, another respondent recommended that FAR 52.215-23 
be changed to add language from Alternate I to the standard clause, 
thus, mandating that contracting officers determine prior to award that 
the contractor will add value. The respondent also recommended that FAR 
52.215-23(c) be changed ``to require the contracting officer to make a 
determination as to whether the contractor will, in fact, provide 
`added value', thereby putting the contractor on notice as to whether 
it can apply indirect costs and profit to work performed by 
subcontractors.'' This determination should be required to be made in a 
reasonable time not to exceed 30 days and if no determination made by 
30 days, consider work to be value-added.
    Response: The Councils do not concur with the respondent's 
recommendations. The statute's requirements are not limited only to 
pre-award restrictions, but instead set forth the requirements to 
ensure that neither a contractor nor a subcontractor receives indirect 
costs or profit on work performed by a lower-tier subcontractor to 
which the higher-tier contractor or subcontractor adds no or negligible 
value at any time.
    Issue 11: One respondent recommended that the final rule include an 
exemption for cost accounting standard (CAS)-covered contracts since 
allocability and allowability of pass-through charges are already 
covered in CAS and cost principles.
    Response: The Councils do not concur with the respondent's 
recommendation. The statutes do not set forth an exclusion for CAS-
covered contracts. Furthermore, CAS does not ensure that the Government 
does not pay excessive pass-through charges as required by the 
statutes.
    Issue 12: One respondent recommended that the final rule include an 
exemption for contracts issued subject to the Truth In Negotiations Act 
(TINA) requirements since already existing cost or pricing data 
requirements would provide necessary data relative to pass-through 
charges.
    Response: The Councils do not concur with the respondent's 
recommendation. The statutes do not set forth an exclusion for 
contracts subject to TINA. Furthermore, TINA does not ensure that the 
Government does not pay excessive pass-through charges as required by 
the statutes.
    Issue 13: Two respondents recommended that the final rule include 
an exemption for all commercial item acquisitions since, as currently 
written, commercial items/services procured by DoD through time-and-
materials or labor-hour contracts could be subject to the pass-through 
clause. One of these respondents believed that applying these 
requirements to commercial contracts would be unnecessary; contrary to 
TINA; inconsistent with the Federal Acquisition Streamlining Act, as 
well as the Services Acquisition Reform Act; and exceed Congressional 
authority.
    Response: The Councils do not concur with these respondents' 
recommendations. The statutes do not set forth an exemption for 
commercial item/service time-and-materials or labor-hour contracts. 
Furthermore, the Councils do not believe it would be within the spirit 
of the statute to implement such exemptions.
    Issue 14: Two respondents recommended that FAR 52.215-23(e) be 
removed as redundant or re-worded to specifically address what 
additional records or data the contracting officer requires access to 
that is not currently addressed by FAR 52.215-2.

[[Page 77744]]

    Response: The Councils do not concur with the respondent's 
recommendation. The audit and records FAR clause at 52.215-2 does not 
provide access to all of the necessary records to show excessive pass-
through charges. The final rule maintains the access to records FAR 
provision at 52.215-23(e) because it is needed to fully implement the 
statutes and ensure that the Government is not paying excessive pass-
through charges.
    Issue 15: One respondent recommended that the 70 percent threshold 
be raised to 90 percent which reflects the level initially contemplated 
by Congress in the Senate version of the bill (section 844 of S2766). 
The respondent believed there was no basis for the 70 percent 
threshold.
    Response: The Councils disagree with this recommendation. As 
permitted by section 852 of the ``John Warner NDAA for FY 2007'', the 
Councils have identified 70 percent as the threshold whereby a greater 
risk is assumed by the Government in paying excessive pass-through 
charges. The Councils consider this 70 percent threshold reasonable, 
because it affords the parties an opportunity to address subcontracting 
management requirements above this level in more detail and to ensure 
the contracting officer is able to determine the disclosed subcontract 
management functions are of benefit to the Government. The statute 
requires that the Government not pay excessive pass-through charges on 
any contract, subcontract, or order.
    Issue 16: One respondent recommended that the flowdown provisions 
of the solicitation provision and clause be limited to first-tier 
subcontractors. The respondent believed that there was little benefit 
in micro-managing pass-through charges deep into the supply chain.
    Response: The Councils do not concur with the respondent's 
recommendation. It is very apparent from the language of the statutes 
that Congressional intent is to flow down this requirement beyond the 
first tier-subcontract level.
    Issue 17: One respondent recommends that the final rule include a 
set of narrowly defined definitions for all key terms, such as, but not 
limited to ``no or negligible value'', ``substantial value'', and 
``added value''.
    Response: In general, the Councils do not concur with the 
respondent's recommendation. The Councils believe that the respondent's 
recommended definitions are not necessary, as they are universally 
understood within the acquisition community. However, the rule does 
provide definitions of five of the more commonly understood terms, 
including ``no or negligible value'' and ``added value''.
    Issue 18: One respondent recommended that the definition of ``added 
value'' in FAR 52.215-23(a), where ``e.g.'' is included in parentheses, 
be changed to ``including, but not limited to''.
    Response: The Councils do not concur with the respondent's 
recommendation. The term ``e.g.'' means for example, which does not 
imply that these functions are all inclusive.
    Issue 19: One respondent recommended that the pass-through 
provision and clause be limited to only sole source contracts (firm-
fixed-price, time and materials, or otherwise) below the TINA 
threshold.
    Response: The Councils do not concur with the respondent's 
recommendation. The statutes do not limit implementation of the 
requirements on such a limited basis.
    Issue 20: One respondent recommended that the intent of FAR 52.215-
23(d) be clarified since, as written, it is an open invitation to 
contracting officers to revisit contract terms and price agreements 
after the fact, which is unfair and unproductive, and further be 
clarified as to how this section will be implemented in light of other 
contract compliance requirements and/or other operative contract 
clauses.
    Response: The Councils do not concur with the respondent's 
recommendation. This is not an invitation to revisit contract terms or 
price agreements. This is a compliance function performed under, and in 
conjunction with, standard contract administration.
    Issue 21: One respondent recommended that the final rule 
specifically address small business goals. The respondent did not want 
to have the rule inadvertently discourage substantial subcontracting to 
small firms that do provide value added solutions. In general, the 
respondent recommended clarifying intent and wording of the final rule 
to prevent contracting officers from leaving out legitimate small firms 
or discouraging prime contractors from subcontracting. Specifically, 
the respondent recommended that the following language be added to the 
rule, ``not intended to penalize companies with substantial small 
business goals that may on individual task orders exceed 70 percent''.
    Response: The Councils disagree with including the respondent's 
recommended language. It is not the Government's intention to establish 
a disincentive for a company from achieving their small business 
subcontractor goals. This rule merely requires that the Government not 
pay excessive pass-through charges to contractors who add no or 
negligible value. The contracting officer has the discretion to make 
the determination whether the contractor has added value.
    Issue 22: One respondent recommended that the definition of value-
added at FAR 52.215-23(a) be ``expanded to include all activities with 
respect to subcontractor sourcing, selection, negotiation, and 
administration that facilitate performance of services and delivery of 
goods to the Government and reduce Government's risk.''
    Response: The Councils disagree. The recommended language is too 
broad and does not adhere to the intent of the statute. The interim 
rule language provided examples for the contracting officer to 
consider, but ultimately this is a contracting officer determination.
    Issue 23: One respondent recommended that the Defense Federal 
Acquisition Regulation Supplement (DFARS) language in the second 
interim rule that was published in the Federal Register at 73 FR 27464, 
May 13, 2008, be eliminated since it is no longer required based upon 
this rule.
    Response: Although this comment is outside the scope of this case, 
the language has been removed from the DFARS (DFARS Case 2006-D057, 75 
FR 48278, effective August 10, 2010).

C. Regulatory Planning and Review

    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.

D. Regulatory Flexibility Act

    The Department of Defense, the General Services Administration, and 
the National Aeronautics and Space Administration certify 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 we do not expect a 
significant number of entities to propose excessive pass-through 
charges under contracts or subcontracts, and the information required 
from offerors and contractors regarding pass-through charges is 
minimal.

E. Paperwork Reduction Act

    The Paperwork Reduction Act does apply; however, these changes to 
the FAR do not impose additional information collection requirements to

[[Page 77745]]

the paperwork burden previously approved under OMB Control Number 9000-
0173.

List of Subjects in 48 CFR Parts 15, 31, and 52

    Government procurement.

    Dated: November 24, 2010.
Millisa Gary,
Acting Director, Acquisition Policy Division.

Interim Rule Adopted as Final With Changes

0
Accordingly, the interim rule amending 48 CFR parts 15, 31, and 52, 
which was published in the Federal Register at 74 FR 52853, October 14, 
2009, is adopted as final with the following changes:

PART 15--CONTRACTING BY NEGOTIATION

0
1. The authority citation for 48 CFR part 15 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).


0
2. Amend section 15.408 by--
0
a. Removing from paragraph (n)(2)(i)(B)(2)(iii) the word ``or'';
0
b. Removing the period from the end of paragraph (n)(2)(i)(B)(2)(iv) 
and adding a semicolon in its place; and
0
c. Adding paragraphs (n)(2)(i)(B)(2)(v) and (n)(2)(i)(B)(2)(vi) to read 
as follows:


15.408  Solicitation provisions and contract clauses.

* * * * *
    (n) * * *
    (2)(i) * * *
    (B) * * *
    (2) * * *
    (v) A fixed-price incentive contract awarded on the basis of 
adequate price competition; or
    (vi) A fixed-price incentive contract for the acquisition of a 
commercial item.

[FR Doc. 2010-30566 Filed 12-10-10; 8:45 am]
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