```

[Federal Register Volume 76, Number 30 (Monday, February 14, 2011)]
[Rules and Regulations]
[Pages 8303-8305]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-3116]

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

DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 216 and 252

RIN 0750-AF51

Defense Federal Acquisition Regulation Supplement; Award-Fee 
Contracts (DFARS Case 2006-D021)

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 address award-fee 
contracts, including eliminating the use of provisional award-fee 
payments.

DATES: Effective Date: February 14, 2011.

FOR FURTHER INFORMATION CONTACT: Mr. Mark Gomersall, Defense 
Acquisition Regulations System, OUSD (AT&L) DPAP/DARS, 3060 Defense 
Pentagon, Room 3B855, Washington, DC 20301-3060. Telephone 703-602-
0302; facsimile 703-602-0350. Please cite DFARS Case 2006-D021.

SUPPLEMENTARY INFORMATION: 

I. Background

    DoD published a proposed rule in the Federal Register (75 FR 22728) 
on April 30, 2010, to revise guidance for award-fee evaluations and 
payments, eliminate the use of provisional award-fee payments, and 
incorporate DoD policy guidance on the use of objective criteria. A new 
clause entitled Award Fee sets forth the use of award fees in DoD 
contracts.

II. Discussion and Analysis

A. Analysis of Public Comments

    In response to the proposed rule, DoD received comments from three 
respondents. A discussion of the comments is provided below:
 1. Making 40 Percent of the Award-Fee Pool Available for the Final 
Evaluation
    a. Comment: The respondents considered the language aligning fee 
distributions with contract performance and cost schedules. One 
respondent stated that holding 40 percent of the award fee until the 
final evaluation does not consider the completion of individual 
contract line items or undefinitized work.
    DoD Response: The purpose of making 40 percent of the award-fee 
pool available under the final evaluation period is to set aside a 
sufficient amount to protect the taxpayer's interest in the event a 
contractor fails to meet contractual obligations. Assuming the contract 
is properly structured, there is nothing in the rule that prohibits 
contractors from being paid for completed contract line items or work 
performed under undefinitized contracts.
    b. Comment: The respondents expressed concern that holding 40 
percent award fee until the final evaluation does not reward contract 
performance, particularly if a contract is terminated before the final 
evaluation. One respondent was concerned that by making a specified 
percentage of the award fee available for the final evaluation period, 
in the event of a termination for convenience, the contractor may not 
have the ability to earn that final award-fee percentage.
    DoD response: The rule does not change the current procedures for 
terminations for convenience. In the event of a termination for 
convenience prior to the final evaluation period, contractors will be 
eligible to earn award fee available up to the point of the 
termination.
    c. Comment: One respondent was concerned that holding of 40 percent 
of the award fee until final evaluation will negatively affect cash 
flow. The respondents were also concerned that the proposed rule will 
increase financial risk to Government contractors and result in an 
imbalance in the risk/reward relationship. One respondent was 
concerned, therefore, that the rule will unfavorably impact DoD's 
supplier base by adversely impacting suppliers' ability to attract debt 
and equity investment.
    DoD Response: Contractors will continue to be paid incurred costs 
on cost-type contracts, completed work under fixed-price contracts with 
progress payments, or milestones achieved under fixed-price contracts 
with performance-based payments. Accordingly, a contractor's cash flow 
should not be significantly impacted. Since contractors who 
consistently meet contractual performance requirements will maximize 
the amount of award fee earned, there is no imbalance in the risk/
reward relationship. There should be little, if any, impact on a 
superior

[[Page 8304]]

performer's ability to attract debt and equity investment.
    d. Comment: One respondent commented that the 40 percent fee 
withhold until final evaluation is arbitrary. The respondent requested 
DoD to consider reducing the 40 percent of the award-fee amount held 
until final evaluation to a minimum of 20 percent.
    DoD response: DoD agrees that under certain circumstances it may be 
appropriate to establish a lower percentage of award fee to be 
available for the final evaluation period. Therefore, DFARS 216.405-
2(1) has been revised to state that the percentage of award fee 
available for the final evaluation may be set below 40 percent if the 
contracting officer determines that a lower percentage is appropriate, 
and this determination is approved by the head of the contracting 
activity.
 2. Elimination of Provisional Award-Fee Payments
    a. Comment: One respondent was concerned that the elimination of 
provisional award-fee payments will negatively affect cash flow. One 
respondent suggested that DoD should provide a definition of 
``provisional award-fee payments'' and consider continuation of 
provisional award-fee payments, but with more restrictions.
    DoD response: DoD understands the respondents' concerns. However, 
the payment of award fee prior to the end of an award-fee period is not 
appropriate since the contractor's performance has not been evaluated 
and the contractor may not earn that paid award fee during that period. 
Because DoD has made the policy decision that provisional award-fee 
payments are not appropriate, no definition of the term is required.
    b. Comment: One respondent stated that payment for successful 
completion of elements of multiple-incentive contracts should not be 
affected by the proposed rule's elimination of provisional award fees.
    DoD Response: DoD agrees. There is nothing in the rule that 
prohibits payment when a contractor has successfully completed elements 
of a multiple-incentive contract.
3. Selection of Contract Type
    a. Comment: According to one respondent, limitations on cost-plus-
award-fee (CPAF) contracts have the unintended consequence of 
encouraging the use of the less desirable cost-plus-fixed-fee (CPFF) 
contract type.
    DoD Response: The purpose of the proposed rule is to ensure the 
amount of award fees paid on CPAF contracts is commensurate with the 
contractor's performance. DoD expects contracting officers to utilize 
appropriate contract types.
    b. Comment: One respondent suggested DoD delete the language at 
DFARS 216.45-2(3)(A)(1).
    DoD Response: DoD believes the respondent meant proposed DFARS 
216.405-2(3)(i)(A)(2) (renumbered from current DFARS 216.405-
2(c)(3)(i)(A)(2)), which states that the CPAF contract should not be 
used to avoid developing objective targets so a cost-plus-incentive-fee 
(CPIF) contract can be used. This language has not been revised by this 
rule. CPAF contract types should not be used instead of a CPIF contract 
type where a CPFF contract type is appropriate.
4. Other Issues
    a. Comment: One respondent recommended the reference to the 
``Government'' be revised to reference the ``Contracting Officer'' in 
the proposed clause at DFARS 252.216-70XX.
    DoD Response: DoD agrees. DFARS 252.216-7005 has been changed 
accordingly. Furthermore, the reference to ``the Contracting Officer's 
final evaluation'' in DFARS 216.405-2(2) has been revised for clarity 
to reference ``the fee-determining official's final evaluation.''
    b. Comment: One respondent suggested that DoD clarify the 
definition of CPAF such that it includes only contracts that provide 
for fee only on an award-fee basis, and does not include any hybrid 
award-fee/incentive-fee contracts.
    DoD Response: No change to the definition has been made. Award-fee 
portions of hybrid contracts shall be subject to the award-fee 
requirements of this rule.
    c. Comment: Respondents suggested that the proposed rule should not 
be applied retroactively.
    DoD Response: The incorporation into an existing contract of the 
new clause at DFARS 252.216-7005 would require a bilateral modification 
to that contract. The rule does not require contracting officers to 
insert DFARS 252.216-7005 into existing contracts. However, in cases 
where its use may be justified, the contracting officer may insert the 
clause via a bilateral modification in accordance with FAR 1.108(d).
    d. Comment: Respondents suggested that award-fee contract funding 
modifications should be provided concurrent with the fee-determining 
official's rating.
    DoD Response: This rule has no effect on the timeliness of funding 
modifications.
    e. Comment: Respondents suggested that DoD should reconsider the 
policy that prohibits roll-over of unearned award fee.
    DoD Response: Contractors should not be given a second opportunity 
to obtain unearned award fees when they fail to meet cost, schedule, 
and technical performance criteria specified in the contract. The roll-
over of unearned award fee would provide a disincentive to contractors 
to meet cost, schedule, and technical performance criteria specified in 
the contract in a given evaluation period if the contractor believes 
they will be given additional opportunities to obtain that unearned 
award fee in subsequent evaluation periods.

 B. Other Change

    In addition to changes made in response to the public comments, the 
phrase ``held for'' has been replaced by the phrase ``available for'' 
in DFARS 216.405-2(1) to better reflect DoD policy.

III. Executive Order 12866

    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.

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 most contracts awarded to small entities use simplified 
acquisition procedures or are awarded on a competitive fixed-price 
basis and do not utilize award-fee type incentives. Of the 1.16 million 
contracts awarded to small businesses in Fiscal Year 2010, less than 
0.1 percent were award-fee contracts.
    The rule prohibits roll-over of unearned award fee, and requires 
that at least 40 percent of the award-fee pool be available for the 
final performance evaluation with the intent of incentivizing the 
contractor throughout performance of the contract. Any impact of these 
requirements on small businesses that do have award-fee contracts is 
mitigated by the fact that contractors will continue to be paid costs 
on cost-type contracts, and progress or performance-based payments on 
fixed-price contracts. Therefore, contractors' cash flow will not be 
impacted significantly unless there is a failure to meet the 
performance criteria in the contract.

[[Page 8305]]

Furthermore, the final rule provides more flexibility regarding the 
requirement that 40 percent of the award-fee pool must be available for 
the final evaluation period. With the approval of the head of the 
contracting activity, the contracting officer can determine that, in 
some cases, a percentage of less than 40 percent of the award-fee pool 
is appropriate to be made available for the final evaluation period.
    Additionally, no comments were received in response to publication 
of the proposed rule with respect to the impact of the proposed rule on 
small entities.

V. Paperwork Reduction Act

    The final rule does not impose any information collection 
requirements that require the approval of the Office of Management and 
Budget under the Paperwork Reduction Act (44 U.S.C. 3501, et seq.).

List of Subjects in 48 CFR Parts 216 and 252

    Government procurement.

Ynette R. Shelkin,
Editor, Defense Acquisition Regulations System.
    Therefore, 48 CFR parts 216 and 252 are amended as follows:

0
1. The authority citation for 48 CFR parts 216 and 252 continues to 
read as follows:

    Authority:  41 U.S.C. 421 and 48 CFR chapter 1.

PART 216--TYPES OF CONTRACTS

0
2. Revise section 216.401, paragraph (e), to read as follows:

216.401  General.

* * * * *
    (e) Award-fee plans required in FAR 16.401(e) shall be incorporated 
into all award-fee type contracts. Follow the procedures at PGI 
216.401(e) when planning to award an award-fee contract.

0
3. Add section 216.401-71 to read as follows:

216.401-71  Objective criteria.

    (1) Contracting officers shall use objective criteria to the 
maximum extent possible to measure contract performance. Objective 
criteria are associated with cost-plus-incentive-fee and fixed-price-
incentive contracts.
    (2) When objective criteria exist but the contracting officer 
determines that it is in the best interest of the Government also to 
incentivize subjective elements of performance, the most appropriate 
contract type is a multiple-incentive contract containing both 
objective incentives and subjective award-fee criteria (i.e., cost-
plus-incentive-fee/award-fee or fixed-price-incentive/award-fee).
    (3) See PGI 216.401(e) for guidance on the use of award-fee 
contracts.

0
4. Revise section 216.405-2 to read as follows:

216.405-2  Cost-plus-award-fee contracts.

    (1) Award-fee pool. The award-fee pool is the total available award 
fee for each evaluation period for the life of the contract. The 
contracting officer shall perform an analysis of appropriate fee 
distribution to ensure at least 40 percent of the award fee is 
available for the final evaluation so that the award fee is 
appropriately distributed over all evaluation periods to incentivize 
the contractor throughout performance of the contract. The percentage 
of award fee available for the final evaluation may be set below 40 
percent if the contracting officer determines that a lower percentage 
is appropriate, and this determination is approved by the head of the 
contracting activity (HCA). The HCA may not delegate this approval 
authority.
    (2) Award-fee evaluation and payments. Award-fee payments other 
than payments resulting from the evaluation at the end of an award-fee 
period are prohibited. (This prohibition does not apply to base-fee 
payments.) The fee-determining official's rating for award-fee 
evaluations will be provided to the contractor within 45 calendar days 
of the end of the period being evaluated. The final award-fee payment 
will be consistent with the fee-determining official's final evaluation 
of the contractor's overall performance against the cost, schedule, and 
performance outcomes specified in the award-fee plan.
    (3) Limitations.
    (i) The cost-plus-award-fee contract shall not be used--
    (A) To avoid--
    (1) Establishing cost-plus-fixed-fee contracts when the criteria 
for cost-plus-fixed-fee contracts apply; or
    (2) Developing objective targets so a cost-plus-incentive-fee 
contract can be used; or
    (B) For either engineering development or operational system 
development acquisitions that have specifications suitable for 
simultaneous research and development and production, except a cost-
plus-award-fee contract may be used for individual engineering 
development or operational system development acquisitions ancillary to 
the development of a major weapon system or equipment, where--
    (1) It is more advantageous; and
    (2) The purpose of the acquisition is clearly to determine or solve 
specific problems associated with the major weapon system or equipment.
    (ii) Do not apply the weighted guidelines method to cost-plus-
award-fee contracts for either the base (fixed) fee or the award fee.
    (iii) The base fee shall not exceed three percent of the estimated 
cost of the contract exclusive of the fee.
    (4) See PGI 216.405-2 for guidance on the use of cost-plus-award-
fee contracts.

0
5. Revise section 216.406 to read as follows:

216.406  Contract clauses.

    (e)(1) Use the clause at 252.216-7004, Award Fee Reduction or 
Denial for Jeopardizing the Health or Safety of Government Personnel, 
in all solicitations and contracts containing award-fee provisions.
    (2) Use the clause at 252.216-7005, Award Fee, in solicitations and 
contracts when an award-fee contract is contemplated.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
6. Add section 252.216-7005 to read as follows:

252.216-7005  Award Fee.

    As prescribed in 216.406(e)(2), insert the following clause:

AWARD FEE (FEB 2011)

    The Contractor may earn award fee from a minimum of zero dollars 
to the maximum amount stated in the award-fee plan in this contract. 
In no event will award fee be paid to the Contractor for any 
evaluation period in which the Government rates the Contractor's 
overall cost, schedule, and technical performance below 
satisfactory. The Contracting Officer may unilaterally revise the 
award-fee plan prior to the beginning of any rating period in order 
to redirect contractor emphasis.

(End of clause)

[FR Doc. 2011-3116 Filed 2-11-11; 8:45 am]
BILLING CODE 5001-08-P
```