[Federal Register Volume 71, Number 238 (Tuesday, December 12, 2006)]
[Rules and Regulations]
[Pages 74656-74667]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-9610]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 16, 32, and 52

[FAC 2005-15; FAR Case 2004-015; Item I; Docket 2006-0020, Sequence 23]
RIN 9000-AK32


Federal Acquisition Regulation; FAR Case 2004-015, Payments Under 
Time-and-Materials and Labor-Hour Contracts

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 agreed on a final rule 
amending the Federal Acquisition Regulation (FAR) to clarify payment 
procedures for Time-and-Materials (T&M) and Labor-Hour (LH) Contracts.

DATES: Effective Date: February 12, 2007.

FOR FURTHER INFORMATION CONTACT:  For clarification of content, contact 
Mr. Jeremy Olson at (202) 501-3221. Please cite FAC 2005-15, FAR case 
2004-015. For information pertaining to status or publication 
schedules, contact the FAR Secretariat at (202) 501-4755.

SUPPLEMENTARY INFORMATION:

[[Page 74657]]

A. Background

    DoD, GSA, and NASA published a proposed rule in the Federal 
Register at 70 FR 56314 on September 26, 2005. The amendments made 
under this case are intended to be applicable primarily to non-
commercial item contracts. Policies primarily applicable to commercial 
item T&M or LH contracts are being addressed separately under FAR case 
2003-027.
    The proposed amendments to FAR 16.307, 16.601, 16.602, 32.111, and 
52.232-7 are intended to amend the underlying policies and increase the 
clarity of the affected FAR language. The FAR amendments address the 
areas related to payments made under T&M and LH contracts for non-
commercial items, as described below.
    1. FAR 16.307 - Contract clauses.
    The Councils amended FAR 16.307(a)(1) to specify that the Allowable 
Cost and Payment Clause is included in T&M contracts. The clause is 
only applicable to the portion of the contract that provides for 
reimbursement of materials at actual cost and related indirect costs. 
This change is being made to ensure that appropriate rights and 
responsibilities are provided in T&M contracts with respect to 
reimbursement for material cost.
    2. FAR 16.601 - Time-and-materials contracts.
    The Councils revised the language at FAR 16.601(a) to provide a 
description of ``materials'' as used in ``time-and-materials 
contract.'' FAR 16.601(a) currently describes a T&M contract as a 
contract that provides for acquiring supplies or services on the basis 
of--
    <bullet>Direct labor hours at specified fixed hourly rates that 
include wages, overhead, general and administrative expenses, and 
profit; and
    <bullet> Materials at cost, including, if appropriate, material 
handling costs as part of material costs.
    The prior FAR description did not address subcontract costs, even 
though such costs are often a significant part of the work performed 
and are provided for under the payments clause at 52.232-7. Also, that 
description did not address other direct costs and applicable indirect 
costs other than material handling (e.g., general and administrative 
expenses) that may be appropriate for the acquisition.
    3. General structure of FAR 52.232-7 - Payments under Time-and-
Materials and Labor-Hour Contracts.
    The Councils amended the current paragraph (b) of the clause at FAR 
52.232-7 to specify that the term ``materials,'' as used in the clause, 
includes direct materials, subcontracts for supplies and ancillary 
services, other direct costs, and applicable indirect costs (this is 
consistent with the proposed changes to FAR 16.601). Materials also 
include supplies and ancillary services transferred between divisions, 
subdivisions, subsidiaries, or affiliates of the contractor under a 
common control.
    Although the proposed rule had proposed to revise ``materials'' to 
include all subcontracts for services, the final rule defines 
subcontracts for labor as part of the definition of labor, if the 
subcontracted labor meets the requirements of the prime contract for 
labor hours. The prior FAR language had caused significant confusion 
because it did not adequately describe what is included in ``labor'' or 
``materials.''
    4. Contractor furnished material - Alternate I.
    The Councils moved and amended the prior Alternate I of the clause 
at FAR 52.232-7. When a contractor furnishes its own materials that 
meet the definition of a commercial item at 2.101, the price to be paid 
for such materials shall be the contractor's established catalog or the 
market price. The ability of the contractor to bill at such prices 
should not be dependent on a contracting officer decision as to whether 
an alternate clause should be included in the contract.
    5. Profit or fee on materials.
    The Councils amended FAR 52.232-7(b)(7) to specifically state that 
the Government does not pay profit or fee to the prime contractor on 
materials (except for commercial items discussed in item 4, above or as 
otherwise provided for in FAR 31.205-26). The Councils believe this is 
consistent with the historical intent of the clause and the concept of 
a T&M contract. The recovery of profit or fee is accomplished as part 
of the labor hour portion of the T&M/LH contract.
    6. Billing subcontracts and interdivisional transfers for 
incidental supplies or services.
    For subcontracts, the Councils clarified that subcontracts for 
incidental services are to be reimbursed at the actual subcontract 
price, plus allowable indirect costs, per the requirements of FAR 
52.216-7, Allowable Cost and Payment. For interdivisional transfers, 
the Councils revised the language to limit reimbursement to the actual 
rates or commercial prices of the division performing the work and 
specified that only one division may obtain profit. No profit 
pyramiding within a company is to be permitted.
    7. Billing subcontracts and interdivisional transfers for services 
that comply with the labor hour requirements.
    For services performed by employees of subcontractors, the proposed 
rule had included a process under which that labor would be reimbursed 
at actual cost (plus related indirect costs) unless it was included on 
a list in the prime contract. If it were included on the list, it was 
to be paid at the labor hour rate.
    The final rule eliminates that proposed approach. The final rule 
provides that all labor hours that qualify under the labor hour 
requirements of the contract are to be paid at the labor hour rate 
specified in the contract. This applies regardless of whether an 
individual is an employee of the prime contractor, a subcontractor or 
an affiliate of the prime contractor.
    8. Solicitation provisions.
    The final rule incorporates three new solicitation provisions that 
direct how proposals address subcontract labor.
    The first provision applies to acquisitions of noncommercial items 
that are to be based on adequate price competition. This provision 
requires each offeror to indicate for each labor rate in the proposal 
whether it is a rate that applies to employees of one company or if it 
is a blended rate that applies to employees of more than one company. 
The offerors must show for each labor rate if it applies to employees 
of the prime contractor, employees a particular subcontractor or 
affiliate, or if it is a blended rate that applies to employees of more 
than one subcontractor or employees of the prime contractor or any 
subcontractor. Agency procedures may authorize contracting officers to 
select one of three options in the provision as mandatory, and/or to 
require each offer to identify individual subcontractors in the 
proposal.
    The second provision applies to acquisitions of noncommercial items 
not based on adequate price competition. This provision requires the 
offeror to establish separate individual labor hour rates for prime 
contractor employees, employees of each subcontractor and employees 
from affiliates of the offeror.
    The third provision applies to acquisitions of commercial items and 
it requires each offeror to identify for each proposed labor hour rate 
whether the rate applies to prime contractor employees, subcontractor 
employees or employees from affiliates of the offeror.
    9. Application of the Prompt Payment Act.
    The Councils amended FAR 52.232-7(i) to include application of the 
Prompt Payment Act for interim payments

[[Page 74658]]

under T&M and LH contracts for services. The Prompt Payment Act has 
applied to fixed-price contracts for services for many years. Congress 
also recently amended the Prompt Payment Act to include cost 
reimbursement contracts for services. The Councils believe that since 
the Prompt Payment Act is applicable to both fixed-price and cost 
reimbursement contracts for services, it should also be applicable to 
T&M and LH contracts for services.

Discussion and Analysis

    Payment for labor performed by subcontractors is treated 
differently depending on whether a contract action is awarded under 
adequate price competition or not. If a contract is not awarded on the 
basis of adequate price competition, the contract must separately 
identify labor rate categories for each subcontractor, in addition to 
the labor rates for the contractor. If the price of a contract is based 
on adequate price competition, the CO is not required to include 
separate rates for subcontractors, but may use blended rates that apply 
to any labor meeting the qualifications of the contract, regardless of 
whether provided by the contractor or a subcontractor.
    The Councils adopted the philosophy on treatment of subcontractor 
labor that was developed under FAR Case 2003-027 and applied it to 
noncommercial T&M contracts awarded on the basis of adequate price 
competition. That is, FAR case 2003-027 requires no special treatment 
of labor provided by subcontractors. Any labor that meets the labor 
hour qualifications of the contract is to be paid at the labor hour 
rate specified in the contract, regardless if it provided by individual 
working for the prime contractor or a subcontractor. This approach was 
developed under FAR case 2003-027 for commercial items because it was 
felt that competitive pressure would produce fair and reasonable prices 
and eliminate potential abuses related to subcontractor labor. 
Competition for commercial items is the same as competition for 
noncommercial items and the approach should be the same for both FAR 
cases.
    However, for noncommercial T&M contracts awarded without adequate 
price competition, competitive pressures are substantially diminished 
and the Government must take a much more cautious approach with respect 
to labor provided by subcontractors. Labor hour rates for these types 
of actions are largely based on cost information provided by the prime 
contractor. In order to avoid potential for issues arising after award 
of a noncompetitive T&M contract, each subcontractor must have its 
labor hour rates specified in the prime contract. This will be required 
in FAR Part 16 and offerors will be required to include such rates in 
their offer by a solicitation provision.
    The FAR amendment includes three new solicitation provisions to be 
used for noncommercial T&M/LH solicitations. These provisions serve 
several purposes. First, they communicate plainly that labor hour rates 
for subcontractors are a potential major issue that must be addressed 
by the CO and by the offerors. Second, they communicate that contracts 
awarded on the basis of adequate price competition may be approached in 
a much more flexible way than may be used for contracts not awarded 
competitively. Finally, they provide a structure to CO's that can be 
used to eliminate issues related to potential abuse of subcontract 
labor hour rates.
    FAR 52.216-29, Time-and-Material/Labor-Hour Proposal Requirements--
Noncommercial Item Acquisitions without Adequate Price Competition, 
instructs offerors that they may identify the labor rates they are 
proposing in either one of three different manners. First, offerors may 
propose blended rates under which labor hours will be paid at the same 
rate, regardless of whether the individual performing the labor works 
for the prime contractor or a subcontractor. Second, offerors may offer 
labor hour rates that include two sets of rates, one set for 
individuals employed by the offeror and a second set for individuals 
employed by subcontractors. Third, offerors may offer multiple sets of 
labor hour rates, one set for individuals employed by the offeror and 
additional sets for each subcontractor for individuals employed by 
different subcontractors. If CO's are authorized by agency procedures, 
the contracting officer may amend this provision to pre-select a single 
method from among those three methods that every offeror must use.
    FAR 52.216-30, Time-and-Material/Labor-Hour Proposal Requirements--
Noncommercial Item Acquisitions without Adequate Price Competition, 
instructs offerors that they must offer multiple sets of labor hour 
rates, one set for individuals employed by the offeror and a additional 
sets for each subcontractor for individuals employed by different 
subcontractors. The purpose of this solicitation provision is to 
enforce the policy in Part 16 which requires acquisitions awarded on 
the basis other than adequate price competition to include individual 
labor hour rates for each subcontractor.
    FAR 52.216-31, Time-and-Material/Labor-Hour Proposal Requirements--
Commercial Item Acquisitions, instructs offerors that they must 
identify for each labor hour rate if the rate applies to only the 
offeror, a subcontractor, and affiliate of the offeror, or any 
combination.

Disposition of Public Comments

    Comments were received from 17 respondents in response to the 
proposed rule. The Councils considered all of the comments and 
recommendations in developing the final rule. The Councils made the 
following changes to the proposed rule as a result of the public 
comments and deliberations:
    (1) Definition of ``Hourly Rate.'' Established a definition for 
``hourly rate'' to permit reimbursement of subcontracts for services 
and services transferred between divisions, subsidiaries, or affiliates 
under a common control at the hourly rates in the schedule when the 
employee meets the labor qualification specified in the contract (see 
comment (4)(c)(3)).
    (2) Definition of ``Materials.'' Revised the definition for 
``materials ''to (1) exclude subcontracts for services and services 
transferred between divisions, subsidiaries, or affiliates under a 
common control from the definition of ``materials'' because these 
services are included in the ``hourly rate'' when the services meet the 
labor qualifications specified in the contract (2) add incidental 
services to the examples of other direct costs (see comment (4)(c)(3)). 
Subcontracts for services and services transferred between divisions, 
subsidiaries, or affiliates under a common control that do not meet the 
labor qualifications specified in the contract are incidental services 
but see (3)(ii) below.
    (3) Reimbursement for Subcontract and Interdivisional Transfers of 
Services. Eliminated the provisions in the proposed rule that only 
permitted reimbursement of subcontract costs at the hourly rates in the 
contract when the subcontractors were listed in the contract. (see 
comment (4)(c), (4)(e)). Added provisions that--
    (i) Require reimbursement of subcontracts for services and services 
transferred between divisions, subsidiaries, or affiliates under a 
common control of at the hourly rates in the schedule that include 
profit when the employees performing the work meet the qualifications 
specified in the contract.
    (ii) Address reimbursement for subcontracts for services and 
services transferred between divisions, subsidiaries, or affiliates 
under a common control when the employees performing the work do not 
meet the qualifications specified in the contract.

[[Page 74659]]

 Payment for such services is at the sole discretion of the Government.
    (iii) Require separate fixed hourly rates that include wages, 
overhead, general and administrative expenses, and profit for each 
category of labor. When the contract is awarded without adequate price 
competitions, the rule also requires a separate set of rates for labor 
performed by the contractor, each subcontractor, and each division, 
subsidiary, or affiliate of the contractor under a common control that 
will perform on the contract.
    (4) Solicitation Provisions. Added three solicitation provisions to 
ensure contractors understand the methodology for reimbursing 
subcontract costs (see comment (4)(c),(11)(c)).
    (5) Timecards. Revised the rule to recognize that companies use 
both paper-based and electronic timecards (see comment (4)(c), (9)).
    (6) Commercial Item Materials. Revised the prescription for 
reimbursing commercial items to clarify the commercial catalog or 
market prices are subject to negotiation (see comment (4)(c)(4)(b)).
    (7) Assignment and Release of Claims. Re-titled the paragraph 
previously title ``Assignment'' to ``Assignment and Release of Claims'' 
to clarify both topic are covered in the paragraph (see comment (4)(c), 
(7)).
    (8) Refunds. Deleted the current provision on refunds from the 
clause because the provisions duplicate coverage in the Allowable Cost 
and Payment clause (see comment (4)(c), (4)(d)).

Discussion of Public Comments

    (1) Restrict Use of T&M Contracts. A respondent commented: Revise 
FAR 16.601(c) to also restrict the use of T&M contracts when the costs 
other than direct labor are incidental to the work. If a contract 
requires substantial direct materials, interdivisional transfers, 
subcontracts, and other direct costs, or the costs are so high that 
they warrant the submission, auditing, and settlement of final indirect 
rates, the contract type should not be a T&M contract.
    Response: When substantial direct materials, interdivisional 
transfers, subcontracts, and other direct costs are anticipated, a T&M 
contract type may not be appropriate. However, selecting the 
appropriate contract type is generally a matter for negotiation and 
requires the exercise of sound judgment. The objective is to negotiate 
a contract type and price (or estimated cost and fee) that will result 
in reasonable contractor risk and provide the contractor the greatest 
incentive for efficient and economical performance. There are many 
factors the contracting officer must consider in selecting the 
appropriate contract type. T&M contracts are the least preferable 
contract type that can only be used when it is not possible at the time 
of placing the contract to estimate accurately the extent or duration 
of the work or to anticipate costs with any reasonable degree of 
confidence.
    (2) Allowable Cost and Payment Clause. A respondent commented: 
Clarify which provisions of the Allowable Cost And Payment clause apply 
to the material portion of T&M contracts. Recommend either repeating 
the applicable portions of the clause in the T&M clause or identifying 
the Allowable Cost and Payment clause as a required clause in FAR 
Subpart 16.6.
    Response: As prescribed in FAR 16.307(a), the Allowable Cost and 
Payment clause is a required clause for all cost-reimbursement 
contracts. All provisions of the clause are applicable to the material 
portions of T&M contracts. The rule clearly specifies that the 
Allowable Cost and Payment clause is included in T&M contracts and that 
it is only applicable to the portion of the contract that provides for 
reimbursement of materials at actual costs. The change is being made to 
ensure that the appropriate rights and responsibilities are provided in 
T&M contracts. The Councils see no reason to repeat the clause in the 
T&M clause. Multiple clauses will be included in T&M contracts.
    (3) Definition of Materials. A respondent commented: The proposed 
definition of material that includes direct materials, subcontracts for 
supplies and services, other direct costs, and applicable indirect 
costs adds certainty to the process and will eliminate significant 
issues that arise during the audit process. A respondent commented: The 
proposed definition of materials is contrary to the common business 
meaning of the word. Instead of defining materials to include 
subcontracted services, the rule should exclude the word materials from 
the contract type. The Government routinely reimburses travel, 
equipment, communication, and other direct costs under T&M contracts. 
Recommend instead establishing a time-and-other-direct-cost contract 
type. A respondent commented: Do not include subcontracts in the 
definition of materials. Instead, separately address subcontracts and 
interdivisional transfers to clarify the payment policies for these 
elements of cost and to avoid inevitable disputes over whether the 
subcontract for supplies and services was ``material consumed directly 
in connection with furnishing the service'' that is reimbursed at the 
fixed contract rates or another type of subcontract for supplies and 
services that would be reimbursed at actual costs.  A respondent 
commented: Including services transferred between divisions, 
subsidiaries, or affiliates of the contractor under a common control 
and subcontracts for services in the definition of materials is 
contrary to the traditional, and common sense, definition of the term 
``materials.'' Prime, subcontract, and interdivisional labor should be 
included in the ``time'' element. A respondent commented: Including 
subcontract services and incidental expense in ``materials'' is 
contrary to common usage and to the language of FAR 31.205-26 and 
45.301. Instead, recommend separately addressing the elements of costs 
as follows:
    <bullet> Direct labor (time) means prime and subcontractor labor 
devoted to the performance of the tasks in the statement of work (SOW).
    <bullet> Materials mean products, including raw materials, parts, 
subassemblies, components, and manufacturing supplies, whether 
manufactured or purchased by the contractor, and including such 
collateral items as inbound transportation and in transit insurance.
    <bullet> Incidental services means services performed or purchased 
solely for the support of contract direct labor, such as travel, 
printing, or computer usage.
    <bullet> Indirect costs.
    Response: While the definition for materials in the rule is 
different from the referenced definitions at FAR 31.205-26 and 45.301, 
reimbursing subcontracts for services and other costs as materials is 
not contrary to common usage for T&M contracts. Currently, FAR 
16.601(a) only identifies ``direct labor'' and ``materials'' as 
elements of T&M contracts. However, the associated payment clause at 
FAR 52.232-7, Payments Under T&M/LH Contracts addresses payment of 
``materials and subcontracts.'' In addition, the Government routinely 
pays contractors for other direct costs (ODC) and G&A incurred in 
performance of a T&M contract even though ODC and G&A are not mentioned 
in FAR 16.601 or 52.232-7. In addition, contractors commonly record 
subcontracts for services, like subcontracts for supplies, as elements 
of ``materials'' for accounting purposes. There are no known problems 
with the longstanding practice of reimbursing these other costs as 
materials. Therefore, the Councils see no reason to revise ``time-and-
materials'' contracts to ``time-and-other-direct-

[[Page 74660]]

cost'' or ``time-and-material-and-subcontract-and-interdivisional 
transfers'' or ``time-and-material-and-incidental services-and-indirect 
costs'' contracts as recommended by the various commenters. The 
Councils did, however, establish a definition for ``hourly rate'' to 
clarify that subcontract and interdivisional labor will be reimbursed 
at the ``hourly rate'' whenever the employee satisfies the labor 
qualifications specified in the contract. The Councils also revised the 
definitions of ``materials'' to-- (1) exclude subcontracts for services 
and interdivisional transfers of services that meet the labor 
qualifications specified in the contract from the definition of 
material because these elements of cost are now included in the 
definition of ``hourly rate'' for the purposes of reimbursing the 
subcontracts; and (2) add incidental services to the examples of other 
direct costs.
    (4) Methodology for Reimbursing Materials.
    (a) A respondent commented: Strongly support the proposed 
methodology for reimbursing commercial materials and the deletion of 
the ``most favored customer''provisions.
    (b) A respondent commented: Revise the prescription for reimbursing 
commercial materials from ``shall be the contractor's established 
catalog or market price ''to `` shall not exceed the contractor's 
established catalog or market price'' because the proposed language 
could be interpreted to mean contracting officers cannot negotiate 
better pricing.
    Response: While the proposed language did not preclude negotiating 
better prices, the recommended change more clearly establishes that the 
prices are subject to negotiation. Therefore, the Councils revised the 
rule as recommended.
    (c) A respondent commented: Pay the catalog or market price for 
materials of the prime's own production that are commercial items 
(excluding the products of its affiliates) and reimburse the cost of 
other materials at actual costs, including properly allocable indirect 
costs, but no profit or fee.
    Response: When a contractor furnishes its own material that meets 
the definition of a commercial item at FAR 2.101, the contractor will 
be paid the established catalog or market price for the item. Product 
of its affiliates will be reimbursed on the basis of costs incurred 
except when the supplies are sold or transferred between divisions, 
subdivisions, subsidiaries, or affiliates of the contractor under a 
common control and it is the established practice of the transferring 
organization to price interdivisional transfers at other than cost and 
the other conditions of 31.205-26 are met. Profit or fee will not be 
paid on materials that are reimbursed at cost.
    (d) A respondent commented: Delete the current provision on refunds 
from FAR 52.232-7, Payments Under Time-and-Materials and Labor-Hour 
Contracts, because the provision duplicates the provision in FAR 
52.216-7, Allowable Cost and Payment.
    Response: The Councils revised the rule to eliminate redundant 
coverage.
    (e) Methodology for Reimbursing Subcontracts. A respondent 
commented: Concept of reimbursing subcontract labor at the hourly rates 
in the contract or the actual cost to the prime contractor is sound but 
do not permit blended prime and subcontractor labor rates. Establish 
separate hourly rates in the contract for subcontract labor not 
reimbursed based on actual costs. The subcontract rates should include 
prime contractor indirect costs allocable to subcontract costs and 
profit. A respondent commented: Reimburse all subcontract labor at the 
contract rates when the subcontracts satisfies all contract labor 
qualifications is appropriate, fair, and in the Government's best 
interest. Requiring subcontracts to be listed in the contract in order 
to be reimbursed at the contract labor rates will make it extremely 
difficult for the Government to acquire ``on-call'' or ``on-demand'' 
services that sometimes require a prime contractor to take 
responsibility for hundred or even thousands of subcontractors often 
interspersed across a wide geographic area. Requiring contract 
modifications for every change in subcontractor poses an excessive 
administrative burden on both parties. Reimburse subcontract labor at 
the schedule labor rates without listing the subcontractors in the 
contract when the contractor's proposal indicates that some of the work 
may be performed by subcontractors that meet the contract's 
qualification requirements and that the price for that ``type of work'' 
will be the prime contract's labor rate which may be blended or other 
rate. T&M/LH contracts specify the required labor qualifications. 
Whether the person filling the position is an employee of the prime or 
a subcontractor, the qualifications must be met. The Government has 
already determined through adequate price competition or otherwise the 
pricing is fair and reasonable for the ``type of work.'' The 
subcontract consent provisions are unduly burdensome. Absent the 
contracting officer's approval and the resulting contract modification 
to add new subcontractors, contractors will not be paid profit on the 
subcontract costs even though the contractor remains responsible for 
the subcontractor's performance. Lack of profit will discourage the use 
of subcontractors. A respondent commented: Allowing contracting 
officers to identify the subcontracts to be reimbursed at the contract 
rates is a positive step since the rule clearly allows prime to be paid 
profit on subcontracts. Recommend also allowing reimbursement for 
subcontracts at the contract rates when the prime proposal includes 
subcontracted services, the contractor is in a teaming relationship 
with the subcontractor, or when the acquisition has opportunities for 
small and small disadvantaged businesses. Small and small disadvantaged 
businesses rely heavily on subcontracting with prime contractors on T&M 
contracts. If primes are not paid profit on the subcontracts, the 
primes will be motivated to perform all the work themselves which could 
hurt small businesses and may not result in the best technical solution 
for the Government. Contractors establish large teams of large and 
small businesses to meet the requirements of indefinite-delivery 
contracts. If they are not allowed to recover profit on subcontracts, 
competition will be reduced and the Government may not get competition 
or the best technical solution. When the subcontracts are reimbursed at 
the contract rates, the prime assumes the risk of subcontractor labor 
rate changes. The Government is assured fair and reasonable prices 
based on competition or price analysis. Reimbursing subcontracts at 
actual costs shifts the risk of subcontract labor escalation to the 
Government. A respondent commented: Reimburse subcontract labor under 
the labor portion of the contract and do not treat subcontracts as an 
element of ``material.'' If the work qualifies for the hourly rate in 
the schedule, the Government should not care if the work was performed 
by a subcontractor or another division of the contract. It is not 
always feasible to establish hourly rates for specific subcontractors 
at the time of contract award. In some cases, the fixed hourly rates 
are a blend of anticipated prime and subcontractor hourly rates. This 
approach yields more competitive hourly rates for the Government and 
promotes using all categories of small businesses to achieve price 
advantage. Requiring separate fixed hourly rates for individual 
subcontractors would further complicate an already complex invoicing 
and payment process. Further, the bargain agreed upon at the time of 
contract award must be maintained

[[Page 74661]]

throughout contract performance unless revised by mutual agreement. 
Some contractors have priced blended prime and subcontract rates but 
were subsequently reimbursed on their actual costs for subcontracts 
which is inequitable because it unilaterally changed the terms of the 
contract. A respondent commented: Requiring additional rates and 
approvals add an unnecessary layer of administration that is not 
commensurate with the level of risk or cost benefit. Additional 
controls that restrict a contractor's use of proven subcontractors 
greatly reduce a contractor's ability to efficiently support the 
Government. Recommend revising the rule to properly place the 
responsibility for performing and providing qualified staff on the 
prime. The rule should allow prime contractors to provide competent 
staff, including subcontractors when a business need exists, and only 
designate key personnel when the criticality of the work dictates a 
need to do so. Change the rule to only require a notification instead 
of the proposed requirement for consent to subcontract. Use the 
proposed audit provisions as the monitoring device for excessive profit 
or fee. The Government can reject the work provided by a subcontractor 
using the inspection and acceptance clauses. A respondent commented: It 
is not always feasible to establish hourly rates for specific 
subcontractors at the time of contract award. T&M contracts are only 
used when it is not possible at the time of award to estimate 
accurately the extent or duration of the work. It may be difficult to 
identify at the time of award all the subcontractors that ultimately 
will be needed to perform the work. For ``on-call'' or ``on-demand'' 
services, contractors are not able to predict which subcontractors will 
be called on to fulfill each requirement. The restriction on 
subcontract profit will reduce the use of qualified subcontractors, 
especially small and small disadvantaged business. In addition, 
contractors will not be paid the appropriate compensation for 
administrative cost and financial risk that accompany the use of 
subcontracts unless the subcontractors are identified in advance. Any 
final rule should allow contractors to be paid profit on all 
subcontract labor that is not incidental to performance. The Government 
should focus on the value of the hours worked instead of the name of 
the subcontractor performing the work to allow the prime contractor to 
identify and retain the best people available for contract performance. 
A more flexible approach should be used that does not require formal 
contract modification. The flexibility in performance and selection of 
subcontractors is particularly critical to the prime contractor. A 
respondent commented: Prime contractors will only use subcontractors 
that are less expensive than the prime if blended prime and subcontract 
labor rates are used. This will limit the use of small business 
subcontractors since few small businesses achieve T&M rates that are 
competitive with large businesses because their overhead bases are 
smaller. Also, requiring each subcontract to be identified in the 
contract in order to be reimbursed at the contract rates will serve as 
a barrier to adding new subcontractors during contract performance. The 
requirement to list each subcontractor in the contract is significantly 
more cumbersome that the consent to subcontract requirements that are 
currently required for T&M contracts. Contractors will have to develop 
new blended rates that will be subject to audit and approval and 
formally modify the contract to add new subcontractors. Prime 
contractors will only use small businesses to the extent they are 
required to do so by their small business subcontracting plans and 
maybe not even then if the small businesses rates are sufficiently 
higher than the blended rates. A respondent commented: Not paying 
profit or fee on subcontracts is extremely detrimental to small 
businesses. Many small business prime contractors get much of their 
annual revenues from contracts with large amounts of materials and 
minor labor hour or T&M costs to support integration, deployment, or 
maintenance of the materials. Not paying profit on these materials 
would erode potential earnings for these small businesses. In addition, 
large businesses often subcontract out work that could be performed by 
the large business to meet small business subcontracting goals on 
Government contracts. If large businesses are no longer paid profit on 
subcontracts, large businesses will be far less likely to subcontract 
out work. An objective of the rule is to ensure fair and reasonable 
prices. Fair and reasonable must be applied to both the Government and 
the contractor. Not paying profit on materials is not a ``fair'' 
policy. Market forces will act competitively to keep the Government's 
price fair and reasonable. A respondent commented: The Government pays 
profit on materials and subcontracts on cost-plus-fixed-fee contracts. 
The existing prohibition on paying profit on materials and subcontracts 
on T&M contracts stems from the fact that such costs were incidental to 
the contract. Contrary to statements in the proposed rule, the 
Government's use of T&M contracts has changed over time and other 
factors have significantly changed. Large businesses are now required 
to subcontract out to small and small disadvantaged subcontractors to 
meet their subcontracting goals. This requirement did not exist when 
the prohibition on paying profit on materials and subcontracts was 
adopted. Small businesses-- (1) use consultants and subcontractors to 
supplement their capabilities and effectively compete for potential 
contracts; (2) need the flexibility to change subcontractors during 
contract performance; and (3) need to make profit on subcontracted 
services or they will not bid on contracts if they do not have the 
employees with the required expertise. The need for subcontracts and 
consultants is driven by the requirement of the contract. The contracts 
are not personal services contracts. The Government and prime 
contractors contract for services at specified prices and they 
negotiate the price for the work in terms of the effort required by the 
contract. When small businesses do not have the in-house staff to 
perform the work, they use salary surveys and their indirect cost 
structure to estimate the cost of employees they will ultimately 
subcontract with to perform the work which may or may not be disclosed 
to the Government. On large procurement, this may be the only way to be 
responsive. The small businesses takes the risk that they will be able 
to find subcontract labor at their estimated rate and there are times 
when the small businesses' actual cost for the labor exceeds their 
estimated price and the small business does not recover its cost of 
subcontracting. For many small businesses, subcontract labor may be 
used to perform the majority of the work. If the small business will 
not be paid profit on these subcontracts, the small business would not 
be adequately compensated and would have no incentive to bid on the 
effort. As a result, competition would decrease and some services would 
not be available in the small business community. In addition, placing 
too many limitations on subcontracting for large businesses will 
ultimately reduce the subcontracting opportunities for small 
businesses. It is in the best interest of the Government to encourage 
subcontracting. The Government should have the right to know when 
subcontractors are being replaced for quality assurance purposes and 
should be able to review and approve subcontractor's qualifications. 
Finally, listing only the known subcontracts in

[[Page 74662]]

the contract will not help small businesses and will discourage prime 
contractors from finding and using small businesses. Contract 
modifications to add subcontractors after contract award could take 
significant time and could significantly disrupt or delay the federal 
procurement process. When there is adequate competition or GSA schedule 
prices, the Government should have the right to approve new 
subcontractors for quality but not the right to automatically negotiate 
a new hourly rate which implies the right of contractors to increase 
the hourly rates after contract award. The administrative costs for T&M 
contracts will increase significantly and competition among small 
businesses will significantly decrease. The Government should focus on 
disclosure and verification of qualifications and not prohibitions or 
restrictions on subcontracting and renegotiating prices when adequate 
competition exists. Instead of limiting reimbursement to subcontractors 
listed in the contract, recommend also permitting subcontractors and 
consultants to be reimbursed at the contract rates if the labor 
categories are listed that that will be subcontracted out and simply 
adding the subcontractors name to the list when the subcontract is 
awarded. A respondent commented: The inability to make profit, coupled 
with the inherent prime contractor oversight requirements will have a 
negative affect on subcontracting. Prime contractors will be motivated 
to use their own employees in order to earn profit. The negative affect 
will fall disproportionately on small businesses which is contrary to 
current procurement policy. A respondent commented: Reimburse 
subcontract at the prime's actual cost because contractors are being 
reimbursed for subcontract at the prime's rates but are using lower 
costs, and less qualified, subcontracts to perform the work. A 
respondent commented: Restrict reimbursement of subcontract costs to 
actual costs because the prime contractor could subsequently negotiate 
lower rates with subcontractors that were authorized to be paid at the 
schedule rates and the Government would pay excessive prices for 
subcontracted effort that may be of a level less than that envisioned 
by the Government. Reimbursing at the schedule rates encourages 
contractors to maximize profit by subcontracting out more of the effort 
at lower subcontract rates. The Government will expend additional 
resources to monitor the quality and efficiency of the subcontract 
labor since the subcontract effort will not be readily apparent when 
billed at the schedule rates.
    Response: Limiting reimbursing of subcontract labor to actual costs 
is not consistent with the treatment on all other flexibly priced 
Government contracts where prime contractors are paid profit on 
subcontract costs. In addition, requiring subcontractors to be listed 
in the contract in order to be reimbursed at the hourly rates could 
have a negative impact on small businesses and was administratively 
burdensome to contractors. Upon further consideration, the Councils 
believe it is appropriate to reimburse subcontracts on competively 
awarded T&M contracts at the schedule labor rates without listing the 
subcontracts. The Councils revised the rule accordingly. However, the 
Councils do not believe it is appropriate to eliminate the traditional 
consent and advance notification requirements for non-commercial T&M. 
These same consent and advance notification requirements are not new 
for T&M contracts. The Councils are unaware of any systemic issues 
relating to their applicability on T&M contracts. Therefore, the final 
rule does not change the standard consent and advance notification 
requirements for non-commercial T&M contracts. In addition, the 
Councils revised the rule to require separate labor rates for each 
subcontract and interdivisional transfer of services when adequate 
price competition is not obtained. There may be circumstances when it 
is appropriate to use blended prime and subcontract labor rates when 
the prices are based on adequate competition. Therefore, the rule 
permits use of blended prime and subcontract labor rates when the prime 
contract is awarded with adequate competition. However, nothing in the 
rule prevents the Government from establishing separate labor rates for 
each subcontract when the prime contract is awarded based on 
competition. Also, the rule provides for payment of profit on 
subcontract labor paid at the hourly rates in the contract.
    (f) Interdivisional Transfers. Coalition Comment: Imposing FAR Part 
31 on interdivisional transfers should be avoided.
    Response: The rule provides that interdivisional transfers of labor 
that meet the qualifications specified in the contract will be 
reimbursed at the ``hourly rates'' in the contract. For these 
interdivisional transfers, FAR Part 31 is not imposed. For all other 
interdivisional transfers, contractors will be reimbursed on the basis 
of cost incurred in FAR Subpart 31.2.
    (g) A respondent commented: Pay allowable indirect costs allocable 
to subcontracts, either by inclusion in stipulated hourly rates for 
specific contractors or by addition to subcontract direct costs, (b) 
materials, and (c) incidental services.
    Response: The rule permits payment of indirect costs either by 
inclusion in the hourly rates in the contract when the subcontract 
labor meets the labor qualifications specified in the contract or at 
actual costs as recommended by the commenter.
    (h) A respondent commented: Reimburse the prime contractor for the 
cost of incidental services, including properly allocable indirect 
costs, but no profit or fee.
    Response: Refer to Comment 3 above. The Councils did not adopt the 
recommendation to establish a new ``incidental services'' category. The 
rule does, however, result in reimbursement of these elements of costs, 
including properly allocable indirect costs, with no profit or fee.
    (5) Total Cost and Ceiling Price. A respondent commented: 
Consolidate the ``Total Cost'' and ``Ceiling Price'' paragraphs.
    Response: The ``Total Cost'' paragraph addresses contractor 
responsibilities. The ``Ceiling Price'' paragraph addresses the 
Government's responsibility to pay or not pay. Therefore, the Councils 
believe it is appropriate to separately address total cost and the 
ceiling price.
    (6) Assignment and Release of Claim. A respondent commented: Change 
the title of paragraph (f) of the FAR clause at 52.232-7, Payments 
Under Time-and-Materials and Labor-Hour Contracts from ``Assignment'' 
to ``Release of Claims,'' which is what the paragraph is really about.
    Response: The Councils revised the title of the paragraph to 
``Assignments and Release of Claims'' because both topics are discussed 
in the provision.
    (7) Withhold. A respondent commented: Revise the rule to clarify 
the payment withhold is limited to five percent or $50,000 and that the 
withhold is applied at the contract level instead of the task order 
level.
    Response: The Payments under Time-and-Materials and Labor-Hour 
Contracts clause (52.232-7) was modified as suggested by the contractor 
in FAR Case 2004-003 which was published in the Federal Register at 71 
FR 43576 on July 27, 2005.
    (8) Timecards. A respondent commented: Delete the requirement to 
validate the individual daily job timecards to provide contractors the 
flexibility to use electronic time keeping systems.

[[Page 74663]]

    Response: The Councils revised the final rule to require access to 
the timekeeping records instead of job timecards to recognize 
electronic timekeeping systems.
    (9) Prompt Payment. A respondent commented: Revise the rule to 
permit Prompt Payment Act interest also on the material portion of T&M 
contracts. The Prompt Payment Act was revised to make prompt payment 
interest applicable to interim payments on cost reimbursement contracts 
for services. T&M contracts are not equivalent to cost reimbursement 
contracts and it is not logical to apply interest to labor without 
including the material resources required to provide the labor. 
However, the impact of excluding interest on the material portion is 
probably negligible since most of the payments on T&M contracts are for 
labor. Restricting prompt payment interest to labor will certainly make 
more work for Government disbursing official who will have to segregate 
labor from material to compute the interest penalties. Any amount the 
Government saves from only paying prompt payment interest on labor will 
likely be more than offset by the administrative costs of computing the 
interest on only the labor portion of the invoice.
    Response: The Prompt Payment Act applies to fixed-price contracts 
and interim payments on cost-reimbursable contracts for services. The 
Councils lack the authority to extend the Act to interim payments for 
supplies.
    (10) Miscellanous.
    (a)A respondent commented: Strongly request the Councils to hold 
additional public meetings to provide the public the opportunity to 
further explain the comments submitted.
    Response: The Councils determined that the FAR changes are within 
the scope of changes contemplated by the proposed rule and that no 
further public meetings or proposed rule are appropriate. Further 
public meetings or public comments would not result in comments that 
are substantially different from those already submitted.
    (b) A respondent commented: Recommend having the effective date for 
the rule be 60 days after publication in the Federal Register so 
agencies can develop implementing guidance and update the associated 
training.
    Response: The effective date for FAR changes is generally 30 days 
after publication in the Federal Register. However, the Councils agree 
agencies may need additional time to implement guidance and update the 
associated training. Therefore, the rule will have an effective date 60 
days after publication in the Federal Register.
    (c) A respondent commented: Recommend the Councils take steps to 
ensure the solicitation process clearly addresses the method for 
reimbursing subcontract costs, i.e., only at actual costs unless the 
subcontractor is listed in the contract.
    Response: The rule no longer requires listing subcontracts in the 
contract in order for the costs to be reimbursed using the fixed hourly 
rates in the contract. The rule includes two solicitation provisions to 
ensure contractors understand the methodology for reimbursing 
subcontract costs.
    (d) A respondent commented: Urge the Councils to also remove the 
``most favored customer'' provisions from FAR 31.106-3.
    Response: The provisions at FAR 31.106-3 are outside the scope of 
this rule. However, the Councils are considering the recommended 
change.
    (e) A respondent commented: The Supplementary Information in the 
proposed rule said that subcontracted labor paid at the LH rate must be 
accounted for and substantiated under the same standards as labor hours 
provided by the prime contractor. This could be interpreted to mean 
prime contractors are required to include the subcontractor costs in 
the prime's overhead base for direct labor. Clarify how prime 
contractors should allocate overhead to subcontract labor. Also, 
address the potential inconsistency of bidding/billing some 
subcontractor labor at contract rates and others at cost with respect 
to Cost Accounting Standards (CAS) compliance.
    Response: The Supplementary Information in the proposed rule did 
include this statement. However, nothing in the proposed or final rule 
require prime contractors to include subcontractor costs in the 
overhead base for direct labor. Contractors should continue to allocate 
overhead to subcontract labor consistent with their disclosed or 
established procedures. CAS relate to allocation issues. The costs 
allocable to T&M contracts may differ significantly from the costs 
billed and paid for the T&M contract. The same is true for fixed-price 
contracts.
    (f) A respondent commented: Replace the term ``voucher'' with 
``invoice''.
    Response: The term ``voucher'' refers to interim payments on cost 
reimbursement contracts. The term ``invoice'' refers to delivery 
payments and payments on fixed-price contracts. Therefore, the Councils 
did not revise the terminology as recommended.
    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.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act, 5 U.S.C. 601, et seq., applies to 
this final rule. The Councils prepared a Final Regulatory Flexibility 
Analysis (FRFA) as follows:
    1. Statement of need for, and objectives of, the rule.
    This rule revises the Federal Acquisition Regulation to amend 
underlying policies and increase the clarity of payments made under 
T&M and LH contracts for non-commercial items. The objectives of the 
amendment are to ensure fair and reasonable prices under T&M 
contracts and to eliminate the ambiguity in T&M contracts that has 
been responsible for confusion over payment amounts for 
subcontractor provided labor.
    2. Summary of significant issues raised by the public comments 
in response to the Initial Regulatory Flexibility Analysis (IRFA), a 
summary of the assessment of the agency of such issues, and a 
statement of any changes made in the proposed rule as a result of 
such comments.
    Comments were received from 17 respondents in response to the 
proposed rule. The Councils considered all of the comments and 
recommendations in developing the final rule. The Councils made the 
following changes to the proposed rule as a result of the public 
comments and deliberations:
    (a) Definition of ``Hourly Rate.'' Established a definition for 
``hourly rate'' to permit reimbursement of subcontracts for services 
and services transferred between divisions, subsidiaries, or 
affiliates under a common control at the hourly rates in the 
schedule when the employee meets the labor qualification specified 
in the contract (see comment (4)(c)(3)).
    (b) Definition of ``Materials.'' Revised the definition for 
``materials'' to-- (1) exclude subcontracts for services and 
services transferred between divisions, subsidiaries, or affiliates 
under a common control from the definition of ``materials'' because 
these services are included in the ``hourly rate'' when the services 
meet the labor qualifications specified in the contract; and (2) add 
incidental services to the examples of other direct costs (see 
comment (4)(c)(3)). Subcontracts for services and services 
transferred between divisions, subsidiaries, or affiliates under a 
common control that do not meet the labor qualifications specified 
in the contract are incidental services but see (3)(ii) below.
    (c) Reimbursement for Subcontract and Interdivisional Transfers 
of Services. Eliminated the provisions in the proposed rule that 
only permitted reimbursement of subcontract costs at the hourly 
rates in the contract when the subcontractors were listed in the 
contract (see comment (4)(c)(4)(e)). Added provisions that--
    (i) Require reimbursement of subcontracts for services and 
services transferred between divisions, subsidiaries, or affiliates 
under a common control of at the hourly rates in the schedule that 
include profit when the

[[Page 74664]]

employees performing the work meet the qualifications specified in 
the contract.
    (ii) Address reimbursement for subcontracts for services and 
services transferred between divisions, subsidiaries, or affiliates 
under a common control when the employees performing the work do not 
meet the qualifications specified in the contract. Payment for such 
services is at the sole discretion of the Government.
    (iii) Require separate fixed hourly rates that include wages, 
overhead, general and administrative expenses, and profit for each 
category of labor. When the contract is awarded without adequate 
price competitions, the rule also requires a separate set of rates 
for labor performed by the contractor, each subcontractor, and each 
division, subsidiary, or affiliate of the contractor under a common 
control that will perform on the contract.
    (d) Solicitation Provisions. Added two solicitation provisions 
to ensure contractors understand the methodology for reimbursing 
subcontract costs (see comment (4)(c)(11)(c)).
    (e) Timecards. Revised the rule to recognize that companies use 
both paper-based and electronic timecards (see comment (4)(c)(9)).
    (f) Commercial Item Materials. Revised the prescription for 
reimbursing commercial items to clarify the commercial catalog or 
market prices are subject to negotiation (see comment (4)(c)(4)(b)).
    (g) Assignment and Release of Claims. Re-titled the paragraph 
previously title ``Assignment'' to ``Assignment and Release of 
Claims'' to clarify both topic are covered in the paragraph (see 
comment (4)(c)(7)).
    (h)Refunds. Deleted the current provision on refunds from the 
clause because the provisions duplicate coverage in the Allowable 
Cost and Payment clause (see comment (4)(c)(4)(d)).
    3. Description of, and an estimate of the number of, small 
entities to which the rule will apply or an explanation of why no 
such estimate is available.
    The changes may 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 T&M 
contracting is a common method of acquiring services from small 
entities. However, it is not feasible to estimate the number of 
small entities impacted.
    4. Description of projected reporting, record keeping, and other 
compliance requirements of the proposed rule, including an estimate 
of the classes of small entities which will be subject to the 
requirement and the type of professional skills necessary for 
preparation of the report or record.
    The prior FAR policies required contractors to maintain records 
to support invoices presented to the Government for payment. Such 
records included original timecards, the contractor' timekeeping 
procedures, distribution of labor, invoices for material, and so 
forth. These are standard records maintained by any company, large 
or small, and the fact that the contract would require that these 
records be made available to the Government should not place any 
additional record keeping burden on the entity.
    5. Description of any significant alternatives to the rule which 
accomplish the stated objectives of applicable statutes and which 
minimize any significant economic impact of the proposed rule on 
small entities. Significant alternatives to the final rule include:
    <bullet> Not permitting any subcontractor to be paid at the 
labor hour rate and reimbursing all subcontractors at actual cost.
    <bullet> Requiring any subcontractor to be listed in the prime 
contract as the sole means of authorizing payments of labor for that 
subcontractor to be at the labor hour rate specified in the 
contract.
    <bullet> Incorporating a list of each Other Direct Cost (ODC) 
into each T&M contract that would be authorized for reimbursement 
under that contract and prohibiting reimbursement of any other ODC.
    <bullet> Not requiring a list of each Other Direct Cost (ODC) 
authorized for reimbursement and permitting any ODC to be 
reimbursed.
    Interested parties may obtain a copy of the FRFA from the FAR 
Secretariat. The FAR Secretariat has submitted a copy of the FRFA to 
the Chief Counsel for Advocacy of the Small Business Administration.

C. Paperwork Reduction Act

    The Paperwork Reduction Act (Pub. L. 104-13) does not apply because 
the changes to the FAR do not impose information collection 
requirements that require the approval of the Office of Management and 
Budget under 44 U.S.C. 3501, et seq.

List of Subjects in 48 CFR Parts 16, 32, and 52

    Government procurement.

    Dated: December 4, 2006.
Linda K. Nelson,
Deputy Director, Contract Policy Division.

0
Therefore, DoD, GSA, and NASA amend 48 CFR parts 16, 32, and 52 as set 
forth below:
0
1. The authority citation for 48 CFR parts 16, 32, and 52 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).

PART 16-TYPES OF CONTRACTS

0
2. Amend section 16.307 by revising paragraph (a)(1) to read as 
follows:


16.307  Contract clauses.

    (a)(1) The contracting officer shall insert the clause at 52.216-7, 
Allowable Cost and Payment, in solicitations and contracts when a cost-
reimbursement contract (other than a facilities contract) or a time-
and-materials contract (other than a contract for a commercial item) is 
contemplated. If the contract is with an educational institution, 
modify the clause by deleting from paragraph (a) the words ``Subpart 
31.2'' and substituting for them ``Subpart 31.3.'' If the contract is 
with a State or local government, modify the clause by deleting from 
paragraph (a) the words ``Subpart 31.2'' and substituting for them 
``Subpart 31.6.'' If the contract is with a nonprofit organization 
other than an educational institution, a State or local government, or 
a nonprofit organization exempted under OMB Circular No. A-122, modify 
the clause by deleting from paragraph (a) the words ``Subpart 31.2'' 
and substituting for them ``Subpart 31.7.'' If the contract is a time-
and-materials contract, the clause at 52.216-7 applies only to the 
portion of the contract that provides for reimbursement of materials 
(as defined in the clause at 52.232-7) at actual cost.
* * * * *
0
3. Revise section 16.601 to read as follows:


16.601  Time-and-materials contracts.

    (a) Definitions for the purposes of Time-and-Materials Contracts.
    Direct materials means those materials that enter directly into the 
end product, or that are used or consumed directly in connection with 
the furnishing of the end product or service.
    Hourly rate means the rate(s) prescribed in the contract for 
payment for labor that meets the labor category qualifications of a 
labor category specified in the contract that are--
    (1) Performed by the contractor;
    (2) Performed by the subcontractors; or
    (3) Transferred between divisions, subsidiaries, or affiliates of 
the contractor under a common control.
    Materials means--
    (1) Direct materials, including supplies transferred between 
divisions, subsidiaries, or affiliates of the contractor under a common 
control;
    (2) Subcontracts for supplies and incidental services for which 
there is not a labor category specified in the contract;
    (3) Other direct costs (e.g., incidental services for which there 
is not a labor category specified in the contract, travel, computer 
usage charges, etc.); and
    (4) Applicable indirect costs.
    (b) Description. A time-and-materials contract provides for 
acquiring supplies or services on the basis of--
    (1) Direct labor hours at specified fixed hourly rates that include 
wages, overhead, general and administrative expenses, and profit; and
    (2) Actual cost for materials (except as provided for in 31.205-
26(e) and (f)).
    (c) Application. A time-and-materials contract may be used only 
when it is not possible at the time of placing the contract to estimate 
accurately the

[[Page 74665]]

extent or duration of the work or to anticipate costs with any 
reasonable degree of confidence.
    (1) Government surveillance. A time-and-materials contract provides 
no positive profit incentive to the contractor for cost control or 
labor efficiency. Therefore, appropriate Government surveillance of 
contractor performance is required to give reasonable assurance that 
efficient methods and effective cost controls are being used.
    (2) Fixed hourly rates. (i) The contract shall specify separate 
fixed hourly rates that include wages, overhead, general and 
administrative expenses, and profit for each category of labor (see 
16.601(e)(1)).
    (ii) For acquisitions of noncommercial items awarded without 
adequate price competition (see 15.403-1(c)(1)), the contract shall 
specify separate fixed hourly rates that include wages, overhead, 
general and administrative expenses, and profit for each category of 
labor to be performed by--
    (A) The contractor;
    (B) Each subcontractor; and
    (C) Each division, subsidiary, or affiliate of the contractor under 
a common control.
    (iii) For contract actions that are not awarded using competitive 
procedures, unless exempt under paragraph (c)(2)(iv) of this section, 
the fixed hourly rates for services transferred between divisions, 
subsidiaries, or affiliates of the contractor under a common control--
    (A) Shall not include profit for the transferring organization; but
    (B) May include profit for the prime contractor.
    (iv) For contract actions that are not awarded using competitive 
procedures, the fixed hourly rates for services that meet the 
definition of commercial item at 2.101 that are transferred between 
divisions, subsidiaries, or affiliates of the contractor under a common 
control may be the established catalog or market rate when--
    (A) It is the established practice of the transferring organization 
to price interorganizational transfers at other than cost for 
commercial work of the contractor or any division, subsidiary or 
affiliate of the contractor under a common control; and
    (B) The contracting officer has not determined the price to be 
unreasonable.
    (3) Material handling costs. When included as part of material 
costs, material handling costs shall include only costs clearly 
excluded from the labor-hour rate. Material handling costs may include 
all appropriate indirect costs allocated to direct materials in 
accordance with the contractor's usual accounting procedures consistent 
with Part 31.
    (d) Limitations. A time-and-materials contract may be used-- (1) 
only after the contracting officer executes a determination and 
findings that no other contract type is suitable, and (2) only if the 
contract includes a ceiling price that the contractor exceeds at its 
own risk. The contracting officer shall document the contract file to 
justify the reasons for and amount of any subsequent change in the 
ceiling price. Also see 12.207(b) for further limitations on use of 
Time-and-Materials or Labor Hour contracts for acquisition of 
commercial items.
    (e) Solicitation provisions. (1) The contracting officer shall 
insert the provision at 52.216-29, Time-and-Materials/Labor-Hour 
Proposal Requirements--Non-Commercial Item Acquisitions With Adequate 
Price Competition, in solicitations contemplating use of a Time-and-
Materials or Labor-Hour type of contract for noncommercial items, if 
the price is expected to be based on adequate price competition. If 
authorized by agency procedures, the contracting officer may amend the 
provision to make mandatory one of the three approaches in paragraph 
(c) of the provision, and/or to require the identification of all 
subcontractors, divisions, subsidiaries, or affiliates included in a 
blended labor rate.
    (2) The contracting officer shall insert the provision at 52.216-
30, Time-and-Materials/Labor-Hour Proposal Requirements--Non-Commercial 
Item Acquisitions without Adequate Price Competition, in solicitations 
for noncommercial items contemplating use of a Time-and-Materials or 
Labor-Hour type of contract if the price is not expected to be based on 
adequate price competition.
    (3) The contracting officer shall insert the provision at 52.216-
31, Time-and-Materials/Labor-Hour Proposal Requirements--Commercial 
Item Acquisitions, in solicitations contemplating use of a Commercial 
Time-and-Materials or Labor-Hour contract.

PART 32--CONTRACT FINANCING

0
4. Amend section 32.111 in paragraph (a)(7) by removing (a)(7)(i) and 
redesignating paragraphs (a)(7)(ii) and (iii) as (a)(7)(i) and 
(a)(7)(ii), respectively; and by revising the newly designated 
paragraph (a)(7)(i) to read as follows:


32.111  Contract clauses for non-commercial purchases.

    (a) * * *
    (7) * * *
    (i) If a labor-hour contract is contemplated, the contracting 
officer shall use the clause with its Alternate I.
* * * * *

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
5. Add sections 52.216-29, 52.216-30, and 52.216-31 to read as follows:


52.216-29  Time-and-Materials/Labor-Hour Proposal Requirements--Non-
Commercial Item Acquisition With Adequate Price Competition.

    As prescribed in 16.601(e)(1), insert the following provision:

TIME-AND-MATERIALS/LABOR-HOUR PROPOSAL REQUIREMENTS--NON-COMMERCIAL 
ITEM ACQUISITION WITH ADEQUATE PRICE COMPETITION (FEB 2007)

    (a) The Government contemplates award of a Time-and-Materials or 
Labor-Hour type of contract resulting from this solicitation.
    (b) The offeror must specify fixed hourly rates in its offer 
that include wages, overhead, general and administrative expenses, 
and profit. The offeror must specify whether the fixed hourly rate 
for each labor category applies to labor performed by--
    (1) The offeror;
    (2) Subcontractors; and/or
    (3) Divisions, subsidiaries, or affiliates of the offeror under 
a common control;
    (c) The offeror must establish fixed hourly rates using--
    (1) Separate rates for each category of labor to be performed by 
each subcontractor and for each category of labor to be performed by 
the offeror, and for each category of labor to be transferred 
between divisions, subsidiaries, or affiliates of the offeror under 
a common control;
    (2) Blended rates for each category of labor to be performed by 
the offeror, including labor transferred between divisions, 
subsidiaries, or affiliates of the offeror under a common control, 
and all subcontractors; or
    (3) Any combination of separate and blended rates for each 
category of labor to be performed by the offeror, affiliates of the 
offeror under a common control, and subcontractors.
    (End of provision)


52.216-30  Time-and-Materials/Labor-Hour Proposal Requirements--Non-
Commercial Item Acquisition without Adequate Price Competition.

    As prescribed in 16.601(e)(2), insert the following provision:

[[Page 74666]]

TIME-AND-MATERIALS/LABOR-HOUR PROPOSAL REQUIREMENTS--NON-COMMERCIAL 
ITEM ACQUISITION WITHOUT ADEQUATE PRICE COMPETITION (FEB 2007)

    (a) The Government contemplates award of a Time-and-Materials or 
Labor-Hour type of contract resulting from this solicitation.
    (b) The offeror must specify separate fixed hourly rates in its 
offer that include wages, overhead, general and administrative 
expenses, and profit for each category of labor to be performed by--
    (1) The offeror;
    (2) Each subcontractor; and
    (3) Each division, subsidiary, or affiliate of the offeror under 
a common control.
    (c) Unless exempt under paragraph (d) of this provision, the 
fixed hourly rates for services transferred between divisions, 
subsidiaries, or affiliates of the offeror under a common control--
    (1) Shall not include profit for the transferring organization; 
but
    (2) May include profit for the prime Contractor.
    (d) The fixed hourly rates for services that meet the definition 
of commercial item at 2.101 that are transferred between divisions, 
subsidiaries, or affiliates of the offeror under a common control 
may be the established catalog or market rate when it is the 
established practice of the transferring organization to price 
interorganizational transfers at other than cost for commercial work 
of the offeror or any division, subsidiary or affiliate of the 
offeror under a common control.
    (End of provision)


52.216-31  Time-and-Materials/Labor-Hour Proposal Requirements--
Commercial Item Acquisition.

    As prescribed in 16.601(e)(1), insert the following provision:

TIME-AND-MATERIALS/LABOR-HOUR PROPOSAL REQUIREMENTS--COMMERCIAL ITEM 
ACQUISITION (FEB 2007)

    (a) The Government contemplates award of a Time-and-Materials or 
Labor-Hour type of contract resulting from this solicitation.
    (b) The offeror must specify fixed hourly rates in its offer 
that include wages, overhead, general and administrative expenses, 
and profit. The offeror must specify whether the fixed hourly rate 
for each labor category applies to labor performed by--
    (1) The offeror;
    (2) Subcontractors; and/or
    (3) Divisions, subsidiaries, or affiliates of the offeror under 
a common control.
    (End of provision)
0
6. Revise section 52.232-7 to read as follows:


52.232-7  Payments under Time-and-Materials and Labor-Hour Contracts.

    As prescribed in 32.111(a)(7), insert the following clause:

PAYMENTS UNDER TIME-AND-MATERIALS AND LABOR-HOUR CONTRACTS (FEB 2007)

    The Government will pay the Contractor as follows upon the 
submission of vouchers approved by the Contracting Officer or the 
authorized representative:
    (a) Hourly rate. (1) Hourly rate means the rate(s) prescribed in 
the contract for payment for labor that meets the labor category 
qualifications of a labor category specified in the contract that 
are--
    (i) Performed by the Contractor;
    (ii) Performed by the subcontractors; or
    (iii) Transferred between divisions, subsidiaries, or affiliates 
of the Contractor under a common control.
    (2) The amounts shall be computed by multiplying the appropriate 
hourly rates prescribed in the Schedule by the number of direct 
labor hours performed.
    (3) The hourly rates shall be paid for all labor performed on 
the contract that meets the labor qualifications specified in the 
contract. Labor hours incurred to perform tasks for which labor 
qualifications were specified in the contract will not be paid to 
the extent the work is performed by employees that do not meet the 
qualifications specified in the contract, unless specifically 
authorized by the Contracting Officer.
    (4) The hourly rates shall include wages, indirect costs, 
general and administrative expense, and profit. Fractional parts of 
an hour shall be payable on a prorated basis.
    (5) Vouchers may be submitted once each month (or at more 
frequent intervals, if approved by the Contracting Officer), to the 
Contracting Officer or authorized representative. The Contractor 
shall substantiate vouchers (including any subcontractor hours 
reimbursed at the hourly rate in the schedule) by evidence of actual 
payment and by--
    (i) Individual daily job timekeeping records;
    (ii) Records that verify the employees meet the qualifications 
for the labor categories specified in the contract; or
    (iii) Other substantiation approved by the Contracting Officer.
    (6) Promptly after receipt of each substantiated voucher, the 
Government shall, except as otherwise provided in this contract, and 
subject to the terms of paragraph (e) of this clause, pay the 
voucher as approved by the Contracting Officer or authorized 
representative.
    (7) Unless otherwise prescribed in the Schedule, the Contracting 
Officer may unilaterally issue a contract modification requiring the 
Contractor to withhold amounts from its billings until a reserve is 
set aside in an amount that the Contracting Officer considers 
necessary to protect the Government's interests. The Contracting 
Officer may require a withhold of 5 percent of the amounts due under 
paragraph (a) of this clause, but the total amount withheld for the 
contract shall not exceed $50,000. The amounts withheld shall be 
retained until the Contractor executes and delivers the release 
required by paragraph (f) of this clause.
    (8) Unless the Schedule prescribes otherwise, the hourly rates 
in the Schedule shall not be varied by virtue of the Contractor 
having performed work on an overtime basis. If no overtime rates are 
provided in the Schedule and overtime work is approved in advance by 
the Contracting Officer, overtime rates shall be negotiated. Failure 
to agree upon these overtime rates shall be treated as a dispute 
under the Disputes clause of this contract. If the Schedule provides 
rates for overtime, the premium portion of those rates will be 
reimbursable only to the extent the overtime is approved by the 
Contracting Officer.
    (b) Materials. (1) For the purposes of this clause--
    (i) Direct materials means those materials that enter directly 
into the end product, or that are used or consumed directly in 
connection with the furnishing of the end product or service.
    (ii) Materials means--
    (A) Direct materials, including supplies transferred between 
divisions, subsidiaries, or affiliates of the Contractor under a 
common control;
    (B) Subcontracts for supplies and incidental services for which 
there is not a labor category specified in the contract;
    (C) Other direct costs (e.g., incidental services for which 
there is not a labor category specified in the contract, travel, 
computer usage charges, etc.); and
    (D) Applicable indirect costs.
    (2) If the Contractor furnishes its own materials that meet the 
definition of a commercial item at 2.101, the price to be paid for 
such materials shall not exceed the Contractor's established catalog 
or market price, adjusted to reflect the--
    (i) Quantities being acquired; and
    (ii) Actual cost of any modifications necessary because of 
contract requirements.
    (3) Except as provided for in paragraph (b)(2) of this clause, 
the Government will reimburse the Contractor for allowable cost of 
materials provided the Contractor--
    (i) Has made payments for materials in accordance with the terms 
and conditions of the agreement or invoice; or
    (ii) Ordinarily makes these payments within 30 days of the 
submission of the Contractor's payment request to the Government and 
such payment is in accordance with the terms and conditions of the 
agreement or invoice.
    (4) Payment for materials is subject to the Allowable Cost and 
Payment clause of this contract. The Contracting Officer will 
determine allowable costs of materials in accordance with Subpart 
31.2 of the Federal Acquisition Regulation (FAR) in effect on the 
date of this contract.
    (5) The Contractor may include allocable indirect costs and 
other direct costs to the extent they are--
    (i) Comprised only of costs that are clearly excluded from the 
hourly rate;
    (ii) Allocated in accordance with the Contractor's written or 
established accounting practices; and
    (iii) Indirect costs are not applied to subcontracts that are 
paid at the hourly rates.
    (6) To the extent able, the Contractor shall--
    (i) Obtain materials at the most advantageous prices available 
with due regard to securing prompt delivery of satisfactory 
materials; and

[[Page 74667]]

    (ii) Take all cash and trade discounts, rebates, allowances, 
credits, salvage, commissions, and other benefits. When unable to 
take advantage of the benefits, the Contractor shall promptly notify 
the Contracting Officer and give the reasons. The Contractor shall 
give credit to the Government for cash and trade discounts, rebates, 
scrap, commissions, and other amounts that have accrued to the 
benefit of the Contractor, or would have accrued except for the 
fault or neglect of the Contractor. The Contractor shall not deduct 
from gross costs the benefits lost without fault or neglect on the 
part of the Contractor, or lost through fault of the Government.
    (7) Except as provided for in 31.205-26(e) and (f), the 
Government will not pay profit or fee to the prime Contractor on 
materials.
    (c) If the Contractor enters into any subcontract that requires 
consent under the clause at 52.244-2, Subcontracts, without 
obtaining such consent, the Government is not required to reimburse 
the Contractor for any costs incurred under the subcontract prior to 
the date the Contractor obtains the required consent. Any 
reimbursement of subcontract costs incurred prior to the date the 
consent was obtained shall be at the sole discretion of the 
Government.
    (d) Total cost. It is estimated that the total cost to the 
Government for the performance of this contract shall not exceed the 
ceiling price set forth in the Schedule, and the Contractor agrees 
to use its best efforts to perform the work specified in the 
Schedule and all obligations under this contract within such ceiling 
price. If at any time the Contractor has reason to believe that the 
hourly rate payments and material costs that will accrue in 
performing this contract in the next succeeding 30 days, if added to 
all other payments and costs previously accrued, will exceed 85 
percent of the ceiling price in the Schedule, the Contractor shall 
notify the Contracting Officer giving a revised estimate of the 
total price to the Government for performing this contract with 
supporting reasons and documentation. If at any time during 
performing this contract, the Contractor has reason to believe that 
the total price to the Government for performing this contract will 
be substantially greater or less than the then stated ceiling price, 
the Contractor shall so notify the Contracting Officer, giving a 
revised estimate of the total price for performing this contract, 
with supporting reasons and documentation. If at any time during 
performing this contract, the Government has reason to believe that 
the work to be required in performing this contract will be 
substantially greater or less than the stated ceiling price, the 
Contracting Officer will so advise the Contractor, giving the then 
revised estimate of the total amount of effort to be required under 
the contract.
    (e) Ceiling price. The Government will not be obligated to pay 
the Contractor any amount in excess of the ceiling price in the 
Schedule, and the Contractor shall not be obligated to continue 
performance if to do so would exceed the ceiling price set forth in 
the Schedule, unless and until the Contracting Officer notifies the 
Contractor in writing that the ceiling price has been increased and 
specifies in the notice a revised ceiling that shall constitute the 
ceiling price for performance under this contract. When and to the 
extent that the ceiling price set forth in the Schedule has been 
increased, any hours expended and material costs incurred by the 
Contractor in excess of the ceiling price before the increase shall 
be allowable to the same extent as if the hours expended and 
material costs had been incurred after the increase in the ceiling 
price.
    (f) Audit. At any time before final payment under this contract, 
the Contracting Officer may request audit of the vouchers and 
supporting documentation. Each payment previously made shall be 
subject to reduction to the extent of amounts, on preceding 
vouchers, that are found by the Contracting Officer or authorized 
representative not to have been properly payable and shall also be 
subject to reduction for overpayments or to increase for 
underpayments. Upon receipt and approval of the voucher designated 
by the Contractor as the ``completion voucher'' and supporting 
documentation, and upon compliance by the Contractor with all terms 
of this contract (including, without limitation, terms relating to 
patents and the terms of paragraphs (f) and (g) of this clause), the 
Government shall promptly pay any balance due the Contractor. The 
completion voucher, and supporting documentation, shall be submitted 
by the Contractor as promptly as practicable following completion of 
the work under this contract, but in no event later than 1 year (or 
such longer period as the Contracting Officer may approve in 
writing) from the date of completion.
    (g) Assignment and Release of Claims. The Contractor, and each 
assignee under an assignment entered into under this contract and in 
effect at the time of final payment under this contract, shall 
execute and deliver, at the time of and as a condition precedent to 
final payment under this contract, a release discharging the 
Government, its officers, agents, and employees of and from all 
liabilities, obligations, and claims arising out of or under this 
contract, subject only to the following exceptions:
    (1) Specified claims in stated amounts, or in estimated amounts 
if the amounts are not susceptible of exact statement by the 
Contractor.
    (2) Claims, together with reasonable incidental expenses, based 
upon the liabilities of the Contractor to third parties arising out 
of performing this contract, that are not known to the Contractor on 
the date of the execution of the release, and of which the 
Contractor gives notice in writing to the Contracting Officer not 
more than 6 years after the date of the release or the date of any 
notice to the Contractor that the Government is prepared to make 
final payment, whichever is earlier.
    (3) Claims for reimbursement of costs (other than expenses of 
the Contractor by reason of its indemnification of the Government 
against patent liability), including reasonable incidental expenses, 
incurred by the Contractor under the terms of this contract relating 
to patents.
    (h) Interim payments on contracts for other than services. (1) 
Interim payments made prior to the final payment under the contract 
are contract financing payments. Contract financing payments are not 
subject to the interest penalty provisions of the Prompt Payment 
Act.
    (2) The designated payment office will make interim payments for 
contract financing on the ---------- [Contracting Officer insert day 
as prescribed by agency head; if not prescribed, insert ``30th''] 
day after the designated billing office receives a proper payment 
request. In the event that the Government requires an audit or other 
review of a specific payment request to ensure compliance with the 
terms and conditions of the contract, the designated payment office 
is not compelled to make payment by the specified due date.
    (i) Interim payments on contracts for services. For interim 
payments made prior to the final payment under this contract, the 
Government will make payment in accordance with the Prompt Payment 
Act (31 U.S.C. 3903) and prompt payment regulations at 5 CFR part 
1315.
    (End of Clause)
    Alternate I (FEB 2007). If a labor-hour contract is 
contemplated, the Contracting Officer shall add the following 
paragraph (i) to the basic clause:
    (i) The terms of this clause that govern reimbursement for 
materials furnished are considered to have been deleted.
[FR Doc. 06-9610 Filed 12-6-06; 8:45 am]
BILLING CODE 6820-EP-S