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[Federal Register Volume 76, Number 223 (Friday, November 18, 2011)]
[Rules and Regulations]
[Pages 71824-71826]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-29416]

[[Page 71823]]

Vol. 76

Friday,

No. 223

November 18, 2011

Part V

 Department of Defense

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Defense Acquisition Regulation System

48 CFR Parts 202, 203, 211, et al.

Defense Federal Acquisition Regulation Supplements; Final Rules

Federal Register / Vol. 76, No. 223 / Friday, November 18, 2011 / 
Rules and Regulations

[[Page 71824]]

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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Part 245

RIN 0750-AG94

Defense Federal Acquisition Regulation Supplement: Responsibility 
and Liability for Government Property (DFARS Case 2010-D018)

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 Defense Federal 
Acquisition Regulation Supplement (DFARS) to extend the Government 
self-insurance policy to Government property provided under negotiated 
fixed-price contracts that are awarded on a basis other than submission 
of certified cost or pricing data.

DATES: Effective Date: November 18, 2011.

FOR FURTHER INFORMATION CONTACT: Meredith Murphy, telephone (703) 602-
1302.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD published a proposed rule at 76 FR 21852 on April 19, 2011. 
Twenty comments were received from one respondent in response to the 
proposed rule. None of the comments took issue with the regulatory 
flexibility analysis in the proposed rule.

II. Discussion and Analysis of the Public Comments

    DoD reviewed the public comments in the formation of the final 
rule. A discussion of the comments is provided below. No changes were 
made in the rule as a result of those comments.

A. Change Should Be Made at the FAR Level

    Comment: The respondent concluded that the proposed revision is 
being improperly undertaken at the agency level and should instead be 
undertaken by the FAR Council.
    Response: FAR subpart 1.3 authorizes agency regulations that 
supplement the FAR. These agency regulations may provide additional 
policies to satisfy the specific needs of the agency. Further, FAR 
1.404 authorizes DoD to deviate from the FAR in accordance with the 
DFARS. DoD has complied with the requirements of FAR subparts 1.3 and 
1.4 and DFARS subparts 201.3 and 201.4.

B. The Proposed Rule Is Inconsistent With the FAR

    Comment: According to the respondent, the proposed rule violates 
FAR 16.202-1 and 1.304. The respondent stated that FAR 45.104(a) and 
FAR 45.201(b) are clearly coupled, while the proposed rule uncouples 
them.
    Response: FAR 16.202-1 states that a firm-fixed-price contract 
places maximum risk on the contractor and full responsibility for all 
costs and resulting profit and loss. The FAR already provides that 
contractors are not liable for loss of Government property under fixed-
price contracts awarded on the basis of submission of certified cost or 
pricing data. The purpose of the DFARS rule is to standardize policy 
for negotiated fixed-price contracts, whether or not the contract 
involved the submission of certified cost or pricing data. DoD does not 
intend to eliminate the need for Alternate I of the clause at FAR 
52.245-1. The Government's general practice of self-insuring its risks 
of loss or damage to Government-furnished property is based on policy, 
not statute (55 Comp Gen 1321 (1976)), and Government self-insurance of 
Government property is not universal. There are many examples of 
contractors retaining responsibility and liability for property loss, 
e.g., property acquired by contractors by virtue of progress payments 
is tied to the Government's financing of the contract under the 
provisions of FAR part 32. It is a well-established and acceptable 
practice for contractors to retain responsibility and liability for 
progress payment inventory, because it would make little sense for the 
Government to both finance the contract and self-insure against 
property loss.
    There is no regulation that affirmatively prohibits the purchase of 
insurance. The Government Accountability Office (GAO) has held that 
exceptions to the general rule can be made when (1) the economy sought 
to be obtained under this policy would be defeated; (2) sound business 
practice indicates that a savings can be effected; or (3) services or 
benefits not otherwise available can be obtained by purchasing 
insurance (see GAO-04-261SP, Principles of Appropriations Law, Volume 
I, section 10a, ``The Self-Insurance Rule''). The DFARS language is not 
inconsistent with established practice; i.e., to self-insure Government 
property where it makes sense to do so. To the extent that 245.104 may 
be inconsistent with FAR 45.104, such inconsistency is authorized by 
FAR 1.304, in accordance with FAR subpart 1.4 and DFARS subpart 201.4.
    With regard to the comment on ``coupling'' FAR 45.104(a) and FAR 
45.201(b), the former reference reads as follows:
    (a) Generally, contractors are not held liable for ``loss, theft, 
damage or destruction of Government property'' under the following 
types of contracts:
    (1) Cost-reimbursement contracts.
    (2) Time-and-material contracts.
    (3) Labor-hour contracts.
    (4) Fixed-price contracts awarded on the basis of submission of 
certified cost or pricing data.
    FAR 45.201(b) states that, (w)hen Government property is offered 
for use in a competitive acquisition, solicitations should specify that 
the contractor is responsible for all ``costs related to making the 
property available for use, such as payment of all transportation, 
installation, or rehabilitation costs.'' The latter paragraph makes no 
reference to liability for loss or damage to Government property and 
is, therefore, not coupled or inconsistent with the former reference, 
FAR 45.104(a). Each FAR subpart describes policy for different aspects 
of procurement.

C. The Change Would Eliminate the $700,000 Threshold

    Comment: The respondent stated that ``(c)learly the wording 
indicates that the proposed rule would only apply additionally to 
negotiated fixed-price contracts awarded below the current certified 
cost/price data submittal threshold of $700,000.'' Therefore, according 
to the respondent, ``the intent of FAR 45.104(a)(4) is that contractors 
awarded fixed-price contracts on the basis * * * of submission of 
certified cost or pricing data (all awards over $700,000) will not be 
held liable for loss, theft, damage, destruction of Government 
property.''
    Response: The intent of the proposed rule was to standardize 
Government-property policy for negotiated fixed-price contracts, 
whether or not the submission of certified cost or pricing data was 
required. The rule does not impact the threshold for submission of 
certified cost or pricing data either positively or negatively.

D. The Proposed Rule Would Revise Applicability

    Comment: According to the respondent, the proposed policy change 
omitted ``all of the competitively awarded contracts that may include 
Government property.'' The respondent said that ``it should not be 
assumed that these contracts will require `negotiation'

[[Page 71825]]

and therefore fall under the proposed rule. Contracts may in fact be 
awarded without discussion (negotiations) if so stipulated in the 
solicitation even if Government property is included in the 
solicitation and anticipated contract.''
    Response: Whether or not discussions are held, a contract awarded 
using FAR part 15 procedures is still a negotiated contract. Reference 
is made to (1) The title of FAR part 15, ``Contracting by 
Negotiation,'' and (2) the instructions at FAR 15.209, particularly 
paragraph (a) of that section: ``When contracting by negotiation * * * 
the contracting officer shall insert the provision at 52.215-1, 
Instructions to Offerors--Competitive Acquisition, in all competitive 
solicitations where the Government intends to award a contract without 
discussions.''
    Comment: According to the respondent, it ``would make more sense if 
this proposed rule banned provision of Government property under firm-
fixed-price contracts, thereby upholding the integrity of the contact 
type and being more consistent with FAR * * * 45.102(a) & (b).''
    Response: The respondent proposed prohibiting the use of 
Government-furnished property on all firm-fixed-price contracts, which 
is outside the scope of this rule. The proposed rule did not address 
the provision of, or need for, Government-furnished property, but 
rather whether responsibility and liability for loss of, or damage to, 
Government property should be treated differently depending on whether 
a negotiated fixed-price contract was awarded with, or without, 
submission of certified cost or pricing data. Regardless of contract 
type, contracting officers are still required to consider the risk of 
loss or damage prior to providing Government-furnished property (see 
PGI 245.103-70).

E. The Proposed Rule Would Shift Risk to the Government

    Comment: The respondent stated that the proposed rule shifted risk 
away from the contractor and onto the Government by requiring that DoD 
competitive fixed-price contracts bearing Government property would be 
required to convey Limited Risk of Loss, thereby shifting this risk to 
the Government.
    Response: The intent of this rule is to standardize the treatment 
of negotiated fixed-price contracts, whether or not certified cost or 
pricing data was required. The contract type used can never completely 
eliminate the Government's inherent risk of providing property to 
contractors. Contracting officers are still required to consider risks 
prior to providing Government-furnished property.
    The Government retains the option of revoking its assumption of 
risk under FAR 45.105(b)(1). DoD's policy, consistent with FAR 45.104 
(see PGI 245.103-70), is to provide Government property only after 
determining that (1) It is in the Government's best interest and (2) 
providing the property does not substantially increase the Government's 
risk.

F. The Change Would Increase the Government's Administrative Burden

    Comment: The respondent stated that the proposed rule would 
increase administrative burden rather than minimize it, as 
conceptualized in FAR 16.202-1, Description (of fixed-price contracts). 
Further, according to the respondent, the proposed rule is outside of, 
and therefore inconsistent with, the intent of a firm-fixed price 
contract instrument.
    Response: The intent of this rule is to standardize policy 
treatment for negotiated FAR part 15 fixed-price contracts. This change 
decreases the administrative burden associated with the current non-
standard treatment of negotiated fixed-price contracts.

G. Insurance Is an Unallowable Cost

    Comment: The respondent stated that the cost of insurance is an 
unallowable cost unless otherwise agreed to in the contract, and, by 
the very nature of a fixed-price contract, this fact would minimize, if 
not negate, insurance costs passed on to the Government.
    Response: Paragraph (d) of the cost principle at FAR 31.205-19, 
Insurance and indemnification, states that purchased insurance costs 
are allowable, subject to certain limitations.

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

    A final regulatory flexibility analysis has been prepared 
consistent with the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., 
and is summarized as follows:
    DoD is amending the Defense Federal Acquisition Regulation 
Supplement (DFARS) to address the inclusion of negotiated fixed-price 
contracts awarded on the basis of adequate competition to the list of 
contract types in which contractors are not held liable for loss, 
damage, destruction, or theft of Government property. The Government 
generally self-insures against contractor loss, damage, destruction, or 
theft of Government-furnished property acquired or provided under 
Government contracts (``assumption of risk''). The current exception to 
this policy (see FAR 45.104) is for negotiated fixed-price contracts 
awarded based on adequate competition, i.e., without submission of 
certified cost or pricing data. For negotiated fixed-price competitive 
contracts, the contractor, in the past, has been held liable for loss 
(except for reasonable fair wear and tear). This policy was invoked by 
use of the clause at FAR 52.245-1, Government Property, with its 
Alternate I. Government Accountability Office (GAO) decisions (see GAO-
04-261SP, Principles of Appropriations Law, Volume I, section 10a, 
``The Self-Insurance Rule'') support the basic premise that the 
Government should self-insure Government-furnished property. Any impact 
to small entities is expected to be beneficial in the form of lower 
insurance costs and higher deductibles.
    No public comments were received in response to the publication of 
the initial regulatory flexibility analysis. No comments were received 
from the Chief Counsel for Advocacy of the Small Business 
Administration in response to the rule. There are no reporting, 
recordkeeping, or other compliance requirements associated with this 
rule. This rule will align DoD policy on assumption of risk with the 
GAO policy. There are no known alternatives to this final rule. The 
rule will not have a significant economic impact on a substantial 
number of small entities.

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).

[[Page 71826]]

List of Subjects in 48 CFR Part 245

    Government procurement.

Ynette R. Shelkin,
Editor, Defense Acquisition Regulations System.

    Therefore, 48 CFR part 245 is amended as follows:

PART 245--GOVERNMENT PROPERTY

0
1. The authority citation for 48 CFR part 245 continues to read as 
follows:

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

0
2. Add section 245.104 to read as follows:

245.104   Responsibility and liability for Government property.

    In addition to the contract types listed at FAR 45.104, contractors 
are not held liable for loss of Government property under negotiated 
fixed-price contracts awarded on a basis other than submission of 
certified cost or pricing data.

0
3. Amend section 245.107 by redesignating paragraphs (a) through (e) as 
paragraphs (1) through (5) and adding paragraph (6) to read as follows:

245.107   Contract clauses.

* * * * *
    (6) For negotiated fixed-price contracts awarded on a basis other 
than submission of certified cost or pricing data for which Government 
property is provided, use the clause at FAR 52.245-1, Government 
Property, without its Alternate I.

[FR Doc. 2011-29416 Filed 11-17-11; 8:45 am]
BILLING CODE 5001-06-P
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