Federal Register / Vol. 71, No. 238 / Tuesday, December 12, 2006 / Rules and Regulations 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 lllll [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 

DEPARTMENT OF DEFENSE 

GENERAL SERVICES 

ADMINISTRATION 

NATIONAL AERONAUTICS AND 

SPACE ADMINISTRATION 

48 CFR Parts 2, 10, 12, 16, and 52 

[FAC 2005–15; FAR Case 2003–027; Item 

II; Docket 2006–0020, Sequence 22] 

RIN 9000–AK07 

Federal Acquisition Regulation; FAR 

Case 2003–027, Additional Commercial 

Contract Types 

AGENCIES: Department of Defense (DoD), 

General Services Administration (GSA), 

and National Aeronautics and Space 

Administration (NASA). 

ACTION: Final rule. 

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 implement section 

1432 of the National Defense 

Authorization Act for Fiscal Year 2004. 

Title XIV of the Act, referred to as the 

Services Acquisition Report Act of 2003 

(SARA), amended section 8002(d) of the 

Federal Acquisition Streamlining Act of 


jlentini on PROD1PC65 with RULES4
74668 Federal Register / Vol. 71, No. 238 / Tuesday, December 12, 2006 / Rules and Regulations 

1994 (FASA) to expressly authorize the 

use of time-and-materials (T&M) and 

labor-hour (LH) contracts for certain 

commercial services under specified 

conditions. 

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 2003–027. 

For information pertaining to status or 

publication schedules, contact the FAR 

Secretariat at (202) 501–4755. 

SUPPLEMENTARY INFORMATION: 

A. Background 

This final rule amends the Federal 

Acquisition Regulation to implement 

section 1432 of the National Defense 

Authorization Act for Fiscal Year 2004 

(Pub. L. 108–136). Title XIV of the Act, 

referred to as the Services Acquisition 

Reform Act of 2003 (SARA), amended 

section 8002(d) of the Federal 

Acquisition Streamlining Act of 1994 

(FASA) (Pub. L. 103–355, 41 U.S.C. 264) 

to expressly authorize the use of timeand-materials (T&M) and labor-hour 

(LH) contracts for commercial services 

under specified conditions. 

Section 8002(d)(3) of the Act limits 

use of T&M and LH contracts to the 

following categories of commercial 

services: 

• Commercial services procured for 

support of a commercial item, as 

described in 41 U.S.C. 403(12)(E). 

• Any other category of commercial 

services that is designated by the 

Administrator of Office of Federal 

Procurement Policy (OFPP) on the basis 

that—

1. The commercial services in such 

category are of a type of commercial 

services that are commonly sold to the 

general public through use of T&M or 

LH contracts; and 

2. It would be in the best interests of 

the Federal Government to authorize 

use of T&M or LH contracts for purchase 

of the commercial services in such 

category. 

In furtherance of its statutory 

responsibilities, OFPP worked in 

coordination with the Councils on a 

series of questions for the advance 

notice of proposed rulemaking (ANPR), 

the proposed rule, and the notices of 

public meeting published in the Federal 

Register at 69 FR 56316 on September 

20, 2004 and at 70 FR 56318 on 

September 26, 2005, to obtain 

information describing how T&M and 

LH contracts are used commercially. In 

particular, the questions elicited 

information on the types of services that 

are commonly acquired on this basis 

and the circumstances under which 

these arrangements are used. Interested 

parties offered a variety of written 

observations in response to the ANPR 

and proposed rule. See the Federal 

Register at 70 FR 56320 on September 

26, 2005. In addition, a number of 

interested parties provided oral 

comments during the public meetings 

that were held on October 19, 2004 and 

October 18, 2005, to facilitate an open 

dialogue with Government procurement 

policy officials. 

OFPP and several Council staff 

members also received a briefing from 

the Government Accountability Office 

(GAO) on a survey the GAO conducted 

late last year to determine how often 

commercial companies use T&M and LH 

contracts in their commercial practices, 

either as a buyer or a provider. The GAO 

received 23 responses to its survey. 

Some of the responses came from 

Fortune 500 companies. Although 

responses were limited, the GAO 

indicated that they represented buying 

practices from a relatively wide range of 

industries, including airline, automotive 

and truck manufacturers, automotive 

and truck parts, business services, 

communications equipment, computer 

hardware, computer services, electric 

utilities, insurance, major drugs 

(pharmaceutical), money center bank, 

non-profit financial services, oil and 

gas, regional bank, retail (grocery and 

technology), scientific and technical 

instruments, and semiconductor. 

Finally, OFPP reviewed testimony 

offered to the Acquisition Advisory 

Panel established pursuant to section 

1423 of SARA to evaluate commercial 

practices and other acquisition-related 

issues. The Panel specifically sought 

input regarding industry’s use of T&M 

and LH contracts. See http:// 

www.acquisition.gov/comp/aap/ 

index.html. 

OFPP made three main findings from 

these inputs. First, commercial services 

are commonly sold on a T&M and LH 

basis in the marketplace when 

requirements are not sufficiently well 

understood to complete a well-defined 

scope of work and when risk can be 

managed by maintaining surveillance of 

costs and contractor performance. 

Second, these same services are also 

commonly sold on a fixed-price basis. 

Third, a few types of services are sold 

predominantly on a T&M and LH 

basis—specifically, emergency repair 

services. By their nature, emergency 

repair services are difficult to capture in 

a well-defined scope of work and 

therefore are not generally conducive to 

purchase on a fixed-price basis. Industry 

associations, representing a wide range 

of service industries, supported these 

findings in their comments in response 

to the ANPR, proposed rule, public 

meetings, and SARA Panel hearings. 

OFPP advised the Councils that it is 

designating all categories of services 

(i.e., any service) as being available for 

acquisition on a T&M and LH basis 

because the findings made in 

conjunction with the rulemaking 

indicate that: (1) services under any 

general categorization of services, such 

as those examined by the GAO, are 

commonly sold to the general public on 

a T&M and LH basis under certain 

conditions; and (2) use of T&M and LH 

contracts under these conditions may be 

in the Government’s best interest. 

However, OFPP further advised that its 

designation is limited to the same 

circumstances that exist when T&M and 

LH contracting is commonly used to sell 

services to the general public and where 

the other prerequisites set forth in 

section 8002(d) have been met. OFPP 

concluded, in view of the findings, that 

the identification of effective boundaries 

for the use of T&M and LH contracts is 

a function of the specific circumstances 

surrounding the acquisition rather than 

the specific type of service being sold. 

OFPP requested that the Councils reflect 

its designation in the final FAR rule. 

Specifically, OFPP requested that the 

rule allow an agency to purchase any 

commercial service on a T&M or LH 

basis if it has completed a determination 

and findings (D&F) containing sufficient 

facts and rationale to justify that a firmfixed pricing arrangement is not 

suitable. With respect to the contents of 

the required D&F, OFPP advised the 

Councils that the rationale supporting 

use of a T&M or LH contract for 

commercial services must establish that 

a T&M or LH contract is being used 

under the same conditions where the 

private sector would commonly rely on 

these arrangements—namely, where it is 

not possible at the time of placing the 

contract or order to accurately estimate 

the extent or duration of the work or to 

anticipate costs with any reasonable 

degree of certainty. In addition, if the 

need is of a recurring nature and is 

being acquired through a contract 

extension or renewal, OFPP expects, 

consistent with FAR 7.103(r), that the 

D&F reflect why knowledge gained from 

the prior acquisition could not be used 

to further refine requirements and 

acquisition strategies in a manner that 

would enable purchase on a fixed-price 

basis. 

OFPP reminded the Councils that 

agencies will also need to comply with 

the other limitations set forth in 

8002(d)—i.e., the service is acquired 

under a contract awarded using 

competitive procedures, the contract or 


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Federal Register / Vol. 71, No. 238 / Tuesday, December 12, 2006 / Rules and Regulations 74669 

order includes a ceiling price that the 

contractor exceeds at its own risk, and 

any subsequent change in the ceiling 

price is authorized only upon a 

determination, documented in the 

contract file, that it is in the best interest 

of the procuring agency to change the 

ceiling price. Finally, OFPP requested 

that the rule include appropriate 

additional mechanisms that help 

agencies manage risk by maintaining 

surveillance of costs and contractor 

performance, since effective 

surveillance is emphasized in 

commercial use of T&M and LH 

contracts. 

The Councils concur with OFPP’s 

findings and conclusions and have 

shaped the rule accordingly. 

DoD, GSA, and NASA published an 

advance notice of public rulemaking 

(ANPR) in the Federal Register at 69 FR 

56316 on September 20, 2004 and a 

proposed rule at 70 FR 56318 on 

September 26, 2005. Comments were 

received from 13 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 rule 

as a result of the public comments and 

deliberations: 

(1) 16.601(d)—Added a requirement 

for the head of contracting activity to 

approve any D&Fs that would extend 

the period of performance beyond five 

years for both commercial and noncommercial T&M contracts to help 

ensure T&M contracts are only used 

when no other type of contract is 

suitable, to maximize the use of fixed 

price commercial contracts consistent 

with the statute, and to avoid protracted 

use of non-commercial time-andmaterials contracts after experience 

provides a basis for firmer pricing. 

(2) Clause 52.212–4 Alternate I—

(a) Paragraph (i)(1)(ii)(B)—Eliminate 

the provisions that only permitted 

reimbursement of subcontract costs at 

the hourly rates in the contract schedule 

when the subcontractors are listed in 

contract because the provisions were 

problematic and contrary to standard 

commercial practice (see Comment 

4.b.(6)(a)). Instead added provisions that 

require the subcontract to be reimbursed 

at the hourly rates prescribed in the 

contract except when the employees 

performing the work do not meet the 

qualifications specified in the contract. 

(b) Paragraph (i)(1)(ii)(C)(2)—

Eliminated the provisions that required 

commercial contractors to give the 

Government credit for rebates, refunds, 

or discounts that ‘‘accrued to’’ the 

contractor because the provision could 

have imposed unique Government 

accounting requirements on commercial 

T&M contracts (see Comment 4.b.(7)(b)). 

(c) Paragraph (i)(1)(ii)(C)—Excluded 

indirect costs as a type of cost that could 

be reimbursed at actual costs since the 

indirect costs will be reimbursed at the 

fixed amount in the schedule(see 

Comment 4.b.(8)(a)). 

(d) Paragraph (i)(1)(ii)(D)(1)—Revised 

the rule to allow contracting officers to 

establish the types of other direct costs 

(ODC) that will be reimbursed at actual 

costs and the fixed amounts for indirect 

costs at the order level on indefinite 

delivery indefinite quantity (IDIQ) 

contracts. The type of ODC that will be 

needed to perform an order and any 

fixed amount for indirect costs may 

need to be established on an order-byorder basis (see Comment 4.b.(8)(a)). 

(e) Paragraph (i)(4)(ii)(A)—Revised the 

rule to recognize that companies use 

both paper-based and electronic 

timecards (see Comment 4.b.(9)(b)). 

(f) Paragraph (u)—Eliminated the 

subcontract consent provisions because 

the provisions were unduly restrictive, 

inappropriate, and the provisions could 

have permitted the Government to 

inappropriately impact a company’s 

commercial reputation (see Comment 

4.b.(6)(a)). 

Public Comment 

The public comments are discussed 

below: 

Comment: Commercial Item 

Definition. Agree with deleting the 

exclusion of ‘‘services that are sold 

based on hourly rates without an 

established catalog or market price for a 

specific service performed or a specific 

outcome to be achieved’’ from the 

definition of a commercial item to be 

consistent with SARA. 

Comment: Market Research. Agree 

with adding ‘‘type of contract’’ to the 

examples provided for determining 

practices of firms engaged in producing, 

distributing, and supporting commercial 

items because it assists with the 

implementation of SARA. 

Appropriate Use 

Comment: Support OFPP’s decision to 

restrict commercial T&M/LH contracts 

to circumstances where no other 

contract type is suitable instead of 

developing a list of commercial services 

commonly sold on a T&M/LH basis. The 

conditions for using commercial T&M/ 

LH contracts (i.e., the contracting officer 

executes a determination and finding 

that no other contract type is suitable, 

the contract includes a ceiling price that 

the contractor exceeds at its own risk, 

and subsequent changes in the ceiling 

price only authorized upon a 

determination that it is in the best 

interest of the Government) implement 

the statute in a clear and concise 

manner. 

Comment: Support OFPP’s conclusion 

that the use of T&M/LH contracts 

should not be limited to a list of specific 

categories of services. Many types of 

commercial services are sold and 

purchased on both T&M/LH and firm 

fixed-price (FFP) basis depending on the 

circumstances of the particular project. 

There are no general rules or practices 

that restrict use of T&M/LH to any 

specific service categories. Regardless of 

the service type, there are often times 

when work cannot be sufficiently 

defined at contract award to provide for 

meaningful firm-fixed prices. 

Comment: Limit as much as possible 

the types of services eligible to be 

procured on a commercial T&M/LH 

basis. A list of the types of services 

commonly sold using commercial T&M 

vehicles would help contracting officers 

chose the appropriate contract type and 

draft the required D&F. 

Response: As discussed above, 

OFPP’s decision is based on its findings 

that— (a) commercial services are 

commonly sold on a T&M and LH basis 

in the marketplace when requirements 

are not sufficiently well understood to 

complete a well-defined scope of work 

and when risk can be managed by 

maintaining surveillance of costs and 

contractor performance; (b) these same 

services are also generally offered on a 

fixed-price basis; and (c) a few types of 

services are sold predominantly on a 

T&M and LH basis—specifically, 

emergency repair services. Based on 

these findings, OFPP recommended to 

the Councils that the rule allow an 

agency to purchase any commercial 

service on a T&M or LH basis if it has 

completed a determination and findings 

(D&F) containing sufficient facts and 

rationale to justify that a firm-fixed 

pricing arrangement is not suitable. 

OFPP stated that this conclusion is 

consistent with the statutory 

requirement in section 8002(d) that 

contracting officers must execute a D&F 

that establishes that no contract type is 

suitable before pursuing one of these 

arrangements. The Councils agree with 

OFPP’s finding and shaped the rule 

accordingly. The Councils do not 

believe it is practical or feasible to 

develop and maintain a comprehensive 

list of services sold on a T&M/LH basis 

because many services may be sold on 

both a T&M/LH and fixed price basis 

depending on the circumstances of the 

acquisition. The rule clearly provides 

that commercial T&M/LH contracts can 

only be used when the other 

commercial services’ contract types are 

not suitable. 


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74670 Federal Register / Vol. 71, No. 238 / Tuesday, December 12, 2006 / Rules and Regulations 

Comment: Clarify whether 

competitive procedures means ‘‘full and 

open competition’’ or ‘‘limited 

competition’’ when the competition is 

conducted with as many sources as 

practicable under one of the authorities 

listed in FAR 6.302. 

Response: Sole source commercial 

T&M/LH contracts are not authorized. 

Commercial T&M/LH contracts may be 

awarded under the statutory authorities 

that permit contracting without 

providing for full and open competition. 

When these authorities are used, 

contracting officers are required to 

solicit offers from as many potential 

sources as is practicable under the 

circumstances. Nothing in this rule 

requires ‘‘full and open’’ competition. 

Comment: Restrict the use of T&M 

contracts to when it is not ‘‘practicable’’

instead of not ‘‘possible’’ at the time of 

placing the contract or order to 

accurately estimate the extent or 

duration of the work or to anticipate 

costs with any reasonable degree of 

certainty. It may be ‘‘possible’’ to 

estimate the duration and cost of work 

but impracticable given the time and 

effort that would be required, the 

urgency of the work, and the agencies 

competing priorities. 

Response: T&M contracts comprise 

the highest contract type risk to the 

Government. As such, they should only 

be used when it is not possible at the 

time of award to estimate accurately the 

extent or duration of the work or to 

anticipate costs with any reasonable 

degree of confidence. Also, restricting 

the use of T&M contracts to when it is 

not ‘‘possible’’ is consistent with the 

requirements for non-commercial T&M 

contracts. 

Determination and Finding (D&F) 

Comment: Delete the minimum D&F 

requirements for justifying no other 

contract type is suitable because 

specifying the minimum requirements 

imposes a potentially greater burden on 

contracting officers than the 

corresponding provisions for noncommercial T&M/LH contracts. Delete 

the requirement to execute a D&F for 

each order when the indefinite-delivery 

contract is priced on a T&M/LH or FFP 

basis because it is inconsistent with 

FAR 1.602–2 which stipulates 

‘‘contracting officers should be allowed 

wide latitude to exercise business 

judgment.’’ SARA requires a D&F to 

justify the contract type, not the use of 

the contract once justified. 

Comment: Eliminate the requirement 

for approval one level above the 

contracting officer for a commercial 

T&M/LH IDIQ contract that only allows 

for issuance of orders on a T&M/LH 

basis to be consistent with noncommercial T&M/LH contracts. 

Commercial T&M/LH contracts pose no 

greater risk to the Government than noncommercial T&M/LH contracts. 

Comment: The rule contradicts and 

goes beyond the intent of SARA by 

potentially creating, in practice and 

effect, a prohibition on the use of T&M 

contracts. Specifically, the rule adds 

administrative burden and procedural 

complication to the use of T&M 

contracts which would inhibit the use of 

these contracts as a practical contracting 

tool, e.g., requiring a D&F for each T&M 

task order is beyond the intent of 

Section 1432 and appears to show little 

confidence in the business judgment of 

contracting officers. 

Comment: Develop an approval level 

for D&Fs commensurate with the risk to 

the Government. 

Response: The Councils acknowledge 

that the rule contains additional 

requirements for commercial T&M/LH 

IDIQ D&Fs than those required for 

noncommercial T&M/LH IDIQ D&Fs. 

While the Councils recognize these 

additional requirements may be more 

burdensome, the Councils believe the 

additional requirements are needed to 

encourage the preference for the use of 

fixed price contracts for commercial 

items. In addition, the Councils believe 

additional controls are needed to ensure 

both commercial and non-commercial 

T&M contracts are only used when no 

other type of contract is suitable. The 

Councils revised the rule to require 

head of contracting activity approval for 

any D&Fs that extend the performance 

period beyond five years for both 

commercial and non-commercial T&M 

contracts. 

Comment: Establish a $100,000 

threshold for D&F to recognize a 

reasonable level at which tangible 

deliverable would be expected. 

Comment: Exempt small purchases at 

or below the five million dollar 

commercial item threshold at FAR 

12.203 from the D&F requirements. This 

threshold allows agencies to use 

simplified acquisition procedures up to 

five million dollars for commercial item 

acquisitions. The Councils have 

discretion to implement the statutory 

provisions addressing D&Fs. See 

Chevron, U.S.A. v. Natural Resources 

Defense Council, Inc., 467 U.S. 837, 844 

(1984). 

Response: When a statute is silent or 

ambiguous with respect to a certain 

issue, agencies have discretion to 

interpret the statute in a reasonable 

manner, consistent with its legislative 

history. However, the statute is not 

ambiguous and the legislative history 

contains nothing which would support 

an interpretation that the D&F condition 

can be limited to a dollar threshold. The 

statute requires a D&F for T&M/LH 

contracts regardless of the dollar 

amount. 

Nonconforming 

Comment: Paying for reperformance, 

excluding profit, is a significant 

improvement over the ANPR and 

properly reflects commercial practices. 

The parties will be permitted to tailor 

the provision pursuant to FAR 12.302 

when customary commercial practices 

provide different warranty terms. 

Comment: Except for the default 10 

percent profit rate, the proposed 

provisions are the same as those used 

for non-commercial T&M contracts. 

These provisions contain significant 

departures from terms typically found 

in the commercial marketplace. The 

proposed 10 percent default profit rate 

is irrelevant if the contracting officer 

knows the contractor’s profit rate. 

Contracting officers could terminate the 

contract or retain another contractor to 

complete the work as provided in FAR 

52.246–6(f) and (g) if a contractor is 

expending best efforts and still not 

performing properly. Require 

contracting officers to better focus on 

the requirements of FAR 7.105, Contents 

of Written Acquisition Plans, rather 

than adopting the proposed inspection 

and acceptance clause. 

Comment: Contractors are under less 

budgetary pressure to perform under a 

T&M contract than a FFP contract and 

should be held to as stringent quality 

standards as FFP contracts. Paying for 

rework will not discourage ‘‘shoddy 

work’’ since the contractor will be 

reimbursed, without profit, for its costs. 

Develop an appropriate profit 

percentage based on historical data or 

some other measure to avoid a potential 

unintended consequence of establishing 

a 10 percent profit standard for T&M 

contracts. A 10 percent profit may be 

excessive for low risk T&M contracts. 

Response: The comments reflect a 

varying set of commercial practices for 

nonconforming supplies and services. 

The ANPR required contractors to repair 

or replace rejected supplies or reperform 

rejected services at no cost to the 

Government. Public commenters on the 

ANPR said requiring contractors to 

repair or replace rejected supplies or 

reperform rejected services at no cost to 

the Government imposed more contract 

risk on the contractor than the noncommercial clause. The Government is 

essentially imposing a fixed-price level 

of risk. Combining a ceiling price that 

contractors exceed at their own risk and 

a requirement that the contractor use 

‘‘best efforts’’ to perform within the 


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ceiling price means contractors are 

required accomplish a certain result 

(i.e., performance of the work specified 

in the Schedule) within a specified 

dollar amount (i.e., the ceiling price). 

The Councils agreed that contractors are 

generally only required to use ‘‘best 

efforts’’ to accomplish the desired 

results within the established ceiling 

price on both commercial and noncommercial T&M contracts as opposed 

to FFP contracts which requires 

contractors to accomplish stated results 

within the fixed price. Therefore, the 

Councils revised the proposed rule to be 

consistent with the non-commercial 

T&M requirements. The 10 percent 

default profit rate will only be used 

when the contracting officer does not 

know the contractor’s actual profit rate, 

which may be commonplace in 

competitive awards. Contractors are 

under less budgetary pressure to 

perform under a T&M than a FFP 

contract. However, it is not appropriate 

to hold contractors to the same 

standards used on FFP contracts. The 

risk of ‘‘shoddy work’’ is inherent to all 

‘‘best efforts’’ type contracts. 

Accordingly, T&M/LH contracts are 

only authorized when no other contract 

type is suitable. The 10 percent default 

profit rate is arbitrary, not necessarily 

representative of the actual profit rates. 

However, the rate is intended to protect 

the Government by helping to ensure 

profit is not paid for replacement or 

reperformance. 

Comment: The proposed rule does not 

address reimbursement of costs for 

providing accommodations to the 

Government for testing and inspections 

at contractor and subcontractors’

facility. Fairness dictates that the 

Government reimburse contractors and 

subcontractors for reasonable costs 

incurred for the required 

accommodations. 

Response: The costs for providing 

accommodations to the Government for 

testing and inspecting at contractor and 

subcontractors’ facilities are generally 

included in the fully burdened labor 

rate. 

Subcontracts and Interdivisional Labor 

Comment: Reimburse subcontract 

labor at the schedule labor rates without 

listing the subcontractors in the contract 

for standard commercial services, e.g., 

‘‘on-call’’ IT installation and repair 

services in support of commercial IT 

products. 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. 

Reimburse subcontract labor at the 

schedule labor rates without subcontract 

consent when the subcontractor 

personnel satisfy the qualification and 

other requirements for the labor 

categories for which the contractor is 

seeking compensation. 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 the 

price for the ‘‘type of work’’ to be fair 

and reasonable by competition. Include 

interdivisional transfers and 

subcontracted labor costs as elements of 

‘‘time’’ instead of ‘‘materials’’ to allow 

prime contractors to recover adequate 

compensation for the time and resources 

it expends on administering 

subcontracts and for the financial 

exposure is assumes for its 

subcontractor’s performance. 

Comment: Appreciate the Councils 

efforts to clarify the treatment for 

subcontracts and interdivisional 

transfers but recommends reimbursing 

all subcontract labor at the schedule 

labor rates to avoid confusion over 

whether the costs are reimbursable as 

‘‘material’’ or ‘‘labor.’’ Separately 

address the proper treatment for 

subcontracts and interdivisional labor to 

avoid inevitable disputes over whether 

the costs should be treated as ‘‘labor’’ or 

‘‘material.’’ Contractors frequently 

require use of subcontractors for any 

number of reasons included to: 

(a) Secure specific skill sets; 

(b) Augment an existing workforce; 

(c) Use small and/or small, 

disadvantaged businesses to meet 

socioeconomic goals; 

(d) Incorporate small business 

innovative solutions; and 

(e) Replace subcontractors during 

contract performance for failure to 

achieve the prime contractor’s 

performance standards. 

Prime contractors may not know 

which subcontractors will be used to 

perform the work since T&M contracts 

are used when it is not possible to 

estimate accurately the extent or 

duration of work at the time of award. 

Contractors will not know at the time of 

award which subcontractors may be 

used to fulfill ‘‘on call’’ or ‘‘on demand’’

services. It is unfair to require 

contractors to perform services without 

knowing in advance whether the 

necessary subcontractors can be brought 

to task and how the contractor will be 

reimbursed. Expand the definition of 

‘‘subcontract’’ to clarify that 

subcontracts on commercial contracts 

includes ‘‘transfers of commercial items 

between divisions, subsidiaries, or 

affiliates of a contractor or 

subcontractor’’ to be consistent with 

FASA which specified interdivisional 

transfers for commercial items are to be 

treated as subcontracts (see FAR 

12.001). Clarify the provisions that 

allow contractors to be reimbursed for 

its own material at the contractor’s 

established catalog or the market price 

includes services that meet the 

definition of a commercial item at FAR 

2.101. Do not object to appropriate 

subcontractor disclosure requirements 

when the contractor does not have an 

approved purchasing system and the 

subcontract will be cost-reimbursement, 

time-and-materials, labor-hour, or letter 

contract (see FAR 44.201(b)(1)) but the 

Government should not interject its 

authority over the prime contractor’s 

determination of how to accomplish the 

work being bid and awarded. 

Recommend the Councils instead 

consider a notification requirement 

without the need for formal contract 

amendment. In the commercial world, 

sellers are generally free to delegate 

their duties to subcontractors as they see 

fit. In the Government world, agencies 

make these determinations in the 

evaluation of a contractor’s proposal 

and through oversight of awarded work. 

The Government could be exposed to 

claims for delay or disruption when the 

contractor is attempting to substitute 

one qualified subcontractor for another 

and approvals are improperly denied or 

unreasonable delayed. The Councils 

concerns that the basis for ‘‘best value’’

determination used to award the 

contract may be altered by contractors 

adding or substituting subcontractors 

after award do not justify the provisions 

that limit reimbursement of subcontract 

costs to those listed in the contract or 

those subsequently approved by the 

contracting officer. The question is not 

one of reimbursement but of 

Government payment for services 

rendered. The attendant administrative 

procedures in the proposed rule might 

impede the contractor’s ability to 

deliver services in accordance with the 

terms of the contract. The ‘‘consent to 

subcontract’’ provisions and payment 

limitations significantly increase the 

risk to contractors for meeting contract 

deliverables. The administrative and 

financial burden of establishing and 

maintaining a list of subcontractors that 

can be reimbursed at the hourly 

schedule rates increases contract 

execution risk. 


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74672 Federal Register / Vol. 71, No. 238 / Tuesday, December 12, 2006 / Rules and Regulations 

Comment: Consent to subcontract is 

inconsistent with the underlying intent 

of commercial acquisitions. 

Coalition and Comment: Reimburse 

interdivisional transfers at the schedule 

hourly rates like subcontract labor. The 

proposed rule restricts reimbursement 

for interdivisional transfers (e.g., 

transfers from divisions, subsidiaries, 

and affiliates under the common control 

of the commercial contractor) to cost, 

without profit or fee, unless the 

interdivisional transfer meets the 

definition of a commercial item at FAR 

2.101. Commercial contractors will be 

required to identify the actual costs, 

potentially subjecting their allowability 

to a determination under the cost 

principles. Commercial contractors 

should have the ability to use any of 

their resources without penalty of profit 

erosion. These contracts have 

commercial market reference points and 

disallowing profit discourages vendors 

from using their best employees to meet 

the Government’s needs. 

Comment: Revise the instructions for 

reimbursing subcontracts at the 

schedule rate to clearly permit the 

listing of actual or ‘‘potential’’

subcontractor name(s) since the 

subcontractors listed for reimbursement 

at the schedule hourly rates may reflect 

a pool of ‘‘potential’’ subcontractors that 

may or may not actually work on the 

contract. 

Comment: Reimburse all subcontract 

costs at the schedule hourly rates 

without requiring contracting officer 

consent to be consistent with 

commercial practices. 

Comment: Reimburse subcontract 

efforts requiring consent only if proper 

advance consent is obtained. Do not 

allow contracting officers to 

retroactively grant consent for 

subcontracts. 

Comment: 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. Reimbursement at the 

schedule rates encourages contractors to 

maximize profit by subcontracting out 

more of the effort at lower subcontract 

rates. Government will expend 

additional resources to monitor the 

quality and efficiency of subcontract 

labor since the subcontract effort will 

not be readily apparent when billed at 

the schedule rates. 

Comment: Restrict reimbursement of 

subcontract costs to actual costs as long 

as those costs do not exceed the prime’s 

rates. Subcontractors have reported 

primes charging prime contractor labor 

rates for the subcontractor’s labor while 

paying the subcontractors significantly 

lower rates. Vendors should make a 

reasonable profit on services provided 

to the Government but there is no 

justification for unduly enriching 

contractors by allowing them to charge 

their own higher rates for subcontract 

effort. Permitting contractors to bill their 

established rates for work they 

subcontract out will likely have the 

unintended consequence of creating 

new vendor organizations developed 

solely to extract higher profits from 

Government projects. Contractors that 

believe the Government is best served 

by permitting the wide use of 

subcontracts are free to do so in FFP 

agreements. Revise or restate in a clearer 

fashion the provisions regarding 

reimbursement for subcontract efforts at 

proposed FAR 52.212–4(i)(1)(ii)(B) 

because the provisions are difficult to 

follow. 

Response: The methodology in the 

proposed rule was problematic and 

contrary to standard commercial 

practice. 

First, the rule permitted 

reimbursement of commercial materials, 

including subcontracts and 

interdivisional transfers, at the 

contractor’s established catalog or 

market price. At the same time, the rule 

limited reimbursement of qualifying 

commercial subcontracts to actual costs 

unless the subcontracts were listed in 

the contract for reimbursement at the 

hourly schedule rates. For some 

commercial companies, the established 

catalog or market price for its 

commercial material (including 

subcontracts and interdivisional 

transfers) is the prime contractor’s 

established catalog or market price for 

labor. Reimbursing commercial 

materials at actual cost is inconsistent 

with commercial practices and contrary 

to the statutory preference for 

acquisitions of commercial items and 

the intent of FASA, i.e., established 

acquisition policies more closely 

resembling those of the commercial 

marketplace. In addition, subcontracts 

under FAR Part 12 include transfers of 

commercial items between divisions, 

subsidiaries, or affiliates of a contractor 

or subcontractor. While the actual costs 

for subcontracts other than 

interdivisional transfers can be easily 

determined from an independent third 

party invoice, actual costs for 

interdivisional transfers can only be 

determined using the procedures of FAR 

Part 31. Imposing FAR Part 31 

requirements on commercial 

interdivisional transfers is contrary to 

commercial practices and the intent of 

FASA. Further, the proposed rule failed 

to fully consider the implications of 

subsequently altering the elements 

included in the catalog or market prices. 

The catalog or market prices will be 

determined fair and reasonable based on 

competition. Subsequent modifications 

to the elements of those prices could 

impact the overall pricing integrity and 

the fair and reasonable determination. 

Finally, limiting reimbursement to 

actual costs discourages subcontracting 

and would have a negative impact on 

small businesses. Small businesses 

traditionally receive approximately 35 

percent of subcontracts on Government 

prime contracts and only 24 percent of 

prime Government contracts. 

Reimbursing subcontracts at actual costs 

is not consistent with the treatment on 

all other flexibly priced Government 

contracts where prime contractors are 

paid profit on subcontract costs. 

Restricting reimbursement of 

subcontract costs to actual costs ‘‘as 

long as those costs do not exceed the 

prime’s rates’’ is not equitable or fair. 

Upon further consideration, the 

Councils believe it is appropriate to 

reimburse commercial subcontracts at 

the schedule labor rates without listing 

the subcontracts when the contractor’s 

established catalog or market price 

includes the price of its subcontracts for 

the reasons discussed above. The 

Councils revised the rule accordingly. In 

addition, the Councils believe imposing 

subcontract consent requirements on 

these commercial subcontracts is 

unduly restrictive and inappropriate 

and revised the rule accordingly. If a 

contracting officer failed to provide a 

timely consent or disagreed with the 

subcontract award, the Government 

could wrongly affect contract 

performance and potentially impact a 

company’s commercial reputation. The 

Councils also revised the rule to 

recognize that subcontracts under FAR 

Part 12 include transfers of commercial 

items between divisions, subsidiaries, 

and affiliates of a contractor or 

subcontractor to be consistent with FAR 

12.001. Finally, the Councils did not 

believe it was necessary to clarify that 

qualifying services are commercial 

items since the definition of commercial 

items at FAR 2.101 clearly identifies the 

services that meet the definition of 

commercial services. 

Comment: Agree subcontract consent 

applies only to costs that are directly 

charged to the contract and not 

overhead expenses and G&A but 

recommend explicitly stating so in the 

final rule to avoid future questions 

about the application of this provision. 


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Response: As noted above, the final 

rule does not require subcontract 

consents. 

Material Costs 

Comment: Agree there should be no 

‘‘most favored customer’’ pricing 

requirement because it is a barrier for 

market entry and inconsistent with the 

Government pricing policies at FAR 

Subpart 15.4. 

Comment: Refunds. Reimbursement 

of material at actual costs less any 

rebates, refunds, or discounts received 

by or accrued to the contractor is 

contrary to commercial practice which 

does not rely on cost accounting 

information. If an accrual entry is made 

at all, the accrual is typically identified 

to more global considerations (e.g., total 

volume of purchases), not individual 

contract actions. The reference to 

accruals and other cost accounting data 

is not appropriate. 

Comment: Delete the requirement for 

commercial companies to give the 

Government credit for rebates from 

interdivisional labor since the divisions 

will likely have little visibility into the 

other business units. 

Comment: Delete the requirement to 

provide the Government credit for 

rebates on commercial T&M contracts. 

Vendors typically provide some services 

(e.g., maintenance on standard 

equipment) through the organizational 

resources of their commercial business. 

Federal entities have little visibility into 

those business units, creating a dilemma 

as to how to account for a rebate. 

Response: The Councils do not 

believe it is appropriate to require 

unique Government accounting 

requirements for materials on 

commercial T&M/LH contracts. The 

Councils revised the rule to only require 

contractors to reduce the costs of 

material for any rebates, refunds, or 

discounts that are identifiable to the 

contract. 

Comment: Revise the proposed 

provisions to say modification to items 

that meet the definition of commercial 

items at FAR 2.101 are reimbursed at 

‘‘price’’ instead of ‘‘actual costs’’ for to 

be consistent with FAR Subpart 15.4. 

Response: Depending on the 

circumstance of a particular acquisition, 

it may be appropriate to pay ‘‘price’’

instead of ‘‘costs’’ for modifications to 

commercial items. To provide 

maximum flexibility to the contracting 

officer, the Councils revised the rule to 

permit reimbursement at either price or 

cost. 

Indirect Costs and Other Direct Costs 

Comment: Exclude indirect costs from 

the definition of material costs to 

eliminate the two contradictory 

methods for reimbursing indirect costs. 

The proposed rule permits 

reimbursement at a fixed amount but 

also defines indirect costs as an element 

of material costs that can only be 

reimbursed at actual costs unless the 

material meets the definition of 

commercial item. 

Response: The Councils revised the 

rule to eliminate the contradictory 

methods. Instead of excluding indirect 

costs from the definition of materials, 

the Councils revised the provisions in 

the alternate clause at FAR 52.212–4, 

Alternate I (i)(1)(ii)(D)(2) to exclude 

indirect costs from being reimbursed at 

actual cost. 

Comment: Agree with the provisions 

that permit reimbursement of indirect 

costs at a fixed price on a pro-rata basis 

over the period of contract performance 

but recommend clarifying that the fixed 

price could be adjusted as new work is 

added and also allowing contractors to 

be reimbursed at the Government 

approved percentage mark-up for noncommercial contracts. Cost Accounting 

Standards (CAS) covered contractors are 

required to allocate material handling in 

accordance with their approved 

accounting practices. Material handling 

rates are well-recognized in Federal and 

commercial markets. The Councils are 

proposing to reimburse indirect costs at 

a fixed price because of concerns over 

violating the cost-plus-a-percentage-ofcost prohibition. Material handling rates 

do not add fee or any other price 

component to cost and therefore could 

not be considered a cost-plus-apercentage-of-cost violation. 

Recommend revising the coverage to 

permit contractors to recover material 

handling provided it is excluded from 

the hourly rates. 

Response: If new work is added, a 

fixed amount may be added for indirect 

expenses if appropriate. Nothing in the 

rule prevents contract changes. The 

approved percentage mark-up for noncommercial contracts is subject to the 

allowability provisions of FAR Part 31. 

The Councils believe it is more 

appropriate to reimburse indirect costs 

without imposing the requirements of 

FAR Part 31 to be consistent with 

commercial practices. While the 

commenter disagrees, the Councils 

believe use of a fixed rate violates the 

cost plus percentage of cost contract 

prohibition. CAS covered contractors 

already allocate material handling and 

other indirect costs to commercial and 

non-commercial FFP contracts in 

accordance with their disclosed 

accounting practices. While the costs 

are allocated to those FFP contracts, the 

allocation may be different from the 

amounts recovered under the contracts 

for those elements of cost. 

Comment: Clarify which contracting 

officer (the contracting officer who 

awards the contract or the one that 

awards the task order) has the authority 

and ability to make determination on 

the method for reimbursing subcontract 

efforts and the allowability of ODC and 

indirect costs for IDIQ or Multiple 

Award Schedule (MAS) contracts. 

Response: As stated in the alternate 

clause at (i)(1)(ii)(D)(1) and (2) of 

52.212–4, Alternate I, the contracting 

officer awarding the indefinite delivery 

contract can authorize other contracting 

officers to determine how ODC and 

indirect costs will be reimbursed. 

Comment: Revise the rule to clarify 

ODC and indirect costs will only be 

recovered as stand alone elements of 

costs if the amounts are not also 

included in the loaded labor rates. 

Response: ODC and indirect costs 

should only be recovered as separate 

elements of costs if they are excluded 

from the schedule labor rates. However, 

contracting officers will not always 

know the elements of costs included in 

the schedule labor rates since 

commercial T&M/LH contracts can only 

be awarded using competitive 

procedures. Generally, contracting 

officers are precluded from obtaining 

detailed cost information on these types 

of acquisitions. However, contracting 

officers will know the proposed amount 

for indirect expenses and the types of 

ODC proposed to be reimbursed at 

actual costs for each competing 

contractor during the proposal 

evaluation phase. 

Government Oversight 

Comment: The right to interview 

contractor employees is unreasonable 

intrusive and contrary to customary 

commercial practice. Notwithstanding a 

statement by the Councils to the 

contrary, no similar right exists in the 

FAR for any contract type. The audit 

clause at FAR 52.215–2 gives the 

contracting officer the right to examine 

‘‘records and other evidence’’ to verify 

claimed costs. Records are not defined 

to include interviews and it is hard to 

believe ‘‘other evidence’’ includes 

employee interviews. This new right 

lacks precedent in the FAR. Not even 

the Offices of Inspector General under 

the Inspectors General Act has this 

authority. The Government does not 

need this newly created contractual 

right because the Government already 

has this right in cases of alleged fraud 

or wrongdoing pursuant to its subpoena 

powers under applicable statutes. The 

Government should rely on the invoices 

which are required, under penalty of 


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74674 Federal Register / Vol. 71, No. 238 / Tuesday, December 12, 2006 / Rules and Regulations 

law, to be accurate. The right to 

interview employees is not required by 

SARA or any other law. This authority 

also conflicts with FASA which requires 

commercial item contracts contain only 

those terms and conditions that are 

required by law or customary in the 

commercial marketplace. There is no 

provision in SARA for this approach, a 

fact recognized by Defense Contract 

Audit Agency (DCAA) in its April 9, 

2004 ‘‘GSA Schedule’’ memorandum. 

Comment: Commercial T&M/LH 

contracts are subject to a strict oversight 

process performed by company project 

managers that are accountable for the 

successful completion of the work. 

Comment: Oppose the rule because 

commercial contracts will not be subject 

to full oversight and audit provisions. 

To protect taxpayer interests, 

commercial T&M/LH contracts should 

be subject to full oversight, audits, and 

CAS. Additionally, the commercial 

T&M contracts need clauses for refunds 

or price reduction so the Government 

can recoup overages identified in the 

audit. 

Comment: Remove the restriction that 

limits the Government’s access to 

records to those listed in the contract 

because the Government should not 

limit its access to records. 

Response: The rule permits, but does 

not require, contracting officers to have 

access to contractor employees. While 

such access may not be a standard 

commercial practice, the Councils 

believe employee interviews may be 

necessary in some cases to verify the 

hours claimed by the contractor. 

According to one commenter in 

response to the ANPR, requiring access 

to contractor employees is a standard 

commercial practice for T&M 

contracting. The provisions for access to 

contractor employees are no broader 

than what is currently provided for 

under non-commercial T&M contracts. 

FAR 52.215–2, Audit and Records—

Negotiation, provides the Government 

the right to examine and audit all 

records and other evidence sufficient to 

reflect properly all cost claimed to have 

been incurred or anticipated to be 

incurred directly or indirectly in 

performance of the contract. The 

Government routinely conducts 

employee interviews and other audit 

procedures to verify that labor costs at 

contractor locations having fixed-price, 

cost-reimbursement, incentive, noncommercial time-and-material and labor 

hour, commercial, or price 

redeterminable contracts are charged to 

the correct contract and not 

inappropriately shifted to the flexibly 

priced Government contracts. Employee 

interviews are part of DCAA’s normal 

surveillance of Government contracts 

and are required by DCAA’s Mandatory 

Annual Audit Requirements (MAARs). 

The Government should not have to 

allege wrongdoing to interview 

contractor employees when their labor 

hours are included on invoices 

submitted to the Government. The 

Councils do not believe that SARA or 

FASA requires the Government to make 

payments based on actual hours 

incurred without being able to verify the 

employees actually worked the hours 

charged. The Councils have carefully 

considered existing requirements for 

T&M contracts as well as differences 

between commercial and noncommercial contracts. The Councils 

believe that the rule provides the proper 

balance between the need to verify 

compliance with contract terms and the 

need to minimize access to contractor 

records. Finally, the Councils believe 

the oversight provided in the rule will 

provide sufficient information to verify 

the validity of amounts claimed on the 

contract without the oversight 

requirements in FAR and CAS that are 

imposed on noncommercial T&M/LH 

contracts. 

Comment: Define the term ‘‘original 

timecards’’ broadly enough to 

encompass both paper-based and 

electronic timecards because many 

companies use electronic timecards. 

Response: The Councils revised the 

final rule to provide access to original 

timecards (paper-based or electronic). 

Comment: Provide contracting officers 

specific guidance regarding what prime 

oversight efforts are adequate for 

subcontracts listed in the contract and 

reimbursed at the schedule rates. 

Contracting officers may lack the 

expertise or time to assess the existence 

or quality of a contractor’s mechanism 

to oversee the qualifications and hours 

worked by subcontractor employees. 

The only way to substantiate 

qualifications and hours worked is 

through examination of payrolls and 

resumes for each subcontractor. 

Response: The prime contractor is 

responsible for the oversight of its 

subcontractors. When requested by the 

Government, the contractors are 

required to substantiate invoices 

(including any subcontractor hours 

reimbursed at the hourly rate in the 

schedule) by evidence of actual 

payment, individual daily job 

timecards, records that verify the 

employees meet the qualifications for 

the labor categories specified in the 

contract, or other substantiation 

specified in the contract. Contracting 

officers can seek the advice of the 

cognizant audit office when needed. 

Training would be more appropriately 

addressed in agency training materials. 

Withholds 

Comment: Explicitly state contracting 

officers cannot withhold on commercial 

T&M/LH contracts because some 

contracting officers may elect to 

withhold even though the practice is not 

specifically allowed by the payment 

clause. 

Response: We do not contemplate 

withholds in commercial contracts but 

there may be circumstances, at the 

contracting officer’s discretion, where 

withholds are appropriate. 

Contractor Purchasing System Review 

(CPSR) 

Comment: The proposed rule 

prohibits contractors with firm fixedprice (FFP) or FFP with economic price 

adjustment (EPA) contracts from 

obtaining approved purchasing systems 

thereby creating a ‘‘class of contractor’’

that can never obtain an approved 

purchasing system. This new class of 

contractors will have more oversight in 

terms of subcontractor approval and 

approval of subcontract modifications. 

These contractors are currently exempt 

from the subcontract approval process—

an exemptions supported by FASA and 

FARA. 

Comment: Do not impose CPSR on 

commercial contractors because doing 

so may deter commercial companies 

from doing business with the 

Government. Commercial contractors 

may not perform sufficient Government 

business to justify the establishment of 

a CPSR. 

Response: The objective of a 

contractor purchasing system review 

(CPSR) is to evaluate the efficiency and 

effectiveness with which the contractor 

spends Government funds. The review 

provides the cognizant contracting 

officer a basis for granting, withholding, 

or withdrawing approval of the 

contractor’s purchasing system. Under 

the existing FAR requirements, the 

Government does not review a 

contractor’s purchasing system if all the 

contractor’s Governments sales are 

commercial FFP and FFP EPA contracts. 

The same is true if all a contractor’s 

Government sales are non-commercial 

competitively awarded firm-fixed-price 

and competitively awarded fixed-price 

with economic price adjustment 

contracts. For these types of contracts, 

the Government has no reason to 

evaluate the efficiency and effectiveness 

with which the contractor spends 

Government funds since the amounts 

paid to the contractor are not affected by 

the efficiency and effectiveness of the 

contractors’ purchasing practices. The 


jlentini on PROD1PC65 with RULES4
Federal Register / Vol. 71, No. 238 / Tuesday, December 12, 2006 / Rules and Regulations 74675 

proposed rule did not impose a CPSR 

requirement but simply recognized that 

contractors who otherwise have 

approved purchasing systems require 

less oversight of their subcontractors 

because the contractor’s overall system 

provides adequate controls and 

procedures to protect the Government. 

However, the Councils revised the rule 

to eliminate the subcontract consent 

requirement which means subcontracts 

for T&M contracts awarded pursuant to 

FAR Part 12 will be excluded from 

CPSRs. 

Cost Accounting Standards (CAS) 

Comment: Do not apply CAS and 

other onerous Government-only 

requirements to commercial T&M/LH 

contracts because doing so is counter to 

acquisition reform legislation that 

envisions the Government purchasing 

more like its commercial counterparts. 

Congress exempted commercial item 

contracts from CAS; however, the CAS 

Board only exempted FFP and FFP EPA 

contracts. Agree the Councils lack the 

authority to make CAS changes but 

recommend the Councils implement the 

statute and treat T&M contracts as 

covered by the existing CAS exclusions. 

Response: The decision as to whether 

CAS applies to commercial T&M/LH 

contracts rests with the CAS Board. The 

Councils have limited the imposition of 

other Government-only requirements to 

the maximum extent practicable. The 

Councils do not believe commercial 

T&M/LH contracts are currently 

exempted by any CAS exemption and 

therefore cannot simply waive the 

requirements of CAS. 

Total Cost 

Comment: The rule establishes a 

notification procedure much like the 

limitation of cost and limitation of 

funds clauses for non-commercial items. 

Since this rule involves contracts for 

commercial items, suggest it instead 

refer to ‘‘Total Price.’’

Response: While the rule relates to 

commercial T&M/LH contracts, some 

material and ODC will be reimbursed at 

‘‘cost’’ not ‘‘price.’’ Therefore, the 

Councils did not revise the title as 

suggested. 

General Comments 

Comment: Do not support the rule in 

its present form. 

Comment: In a number of areas, the 

proposed rule simply imports into this 

commercial items regulation many of 

the terms and conditions already used 

by the Government when purchasing 

non-commercial T&M/LH contracts. 

This action results in the inclusion of 

provisions that are significant 

departures from standard commercial 

practices, contrary to the spirit of FASA 

and in violation of FAR 12.301(a)(2) that 

require commercial item contracts to 

only include those clauses determined 

to be consistent with customary 

commercial practices. Other provisions 

of the rule extend the Government’s 

audit and oversight inappropriately and 

unnecessary. Deeply concerned that the 

proposed rule will undercut the intent 

of SARA by creating what effectively 

amounts to a prohibition on the use of 

T&M contracts. The rule adds 

significant administrative burden, 

procedural complications, and certain 

significant financial disincentives. 

Recommend the Councils reconsider the 

entire approach to T&M contracting and 

the expansive rulemaking in the 

proposed rule. Also, recommend the 

Councils hold additional public 

meetings to provide the public 

additional opportunities to explain the 

submitted comments. Recommend 

delaying issuance of a final rule until 

the Acquisition Advisory Panel has 

released its report and 

recommendations since there may be a 

conflict between their recommendations 

and this rule. 

Response: The Councils reviewed 

public comments and held two public 

meetings, obtaining a very complete 

picture of the views of interested parties 

on this rule, and have determined it is 

appropriate to go forward with a final 

rule. It is highly unlikely that further 

comments or public meetings would 

provide any information or opinions not 

already provided and evaluated. 

Comment: Concur. 

Comment: Industry does not prefer 

T&M contracts and would avoid them 

for IT work. 

Response: T&M/LH contracts 

represent the highest contract type risk 

and industry, like the Government, 

avoids using them to the maximum 

extent practicable. However, there are 

circumstances when these contract 

types are needed and used. 

Comment: The main difference 

between the commercial market and the 

rule is the rule only requires the 

contractor to use its ‘‘best efforts’’ to 

perform within the ceiling. There is no 

consumer in the commercial market that 

would blindly allow a car repair shop to 

work on their car for up to $1,000 

without any guarantee that the car will 

be fixed. 

Response: T&M/LH contracts, 

commercial and non-commercial, are 

‘‘best effort’’ contracts that can only be 

used when it is not possible at the time 

of placing the contract or order to 

accurately estimate the extent or 

duration of the work or to anticipate 

costs with any reasonable degree of 

certainty. If it is possible to estimate the 

extent or duration of work or anticipate 

costs with a reasonable degree of 

certainty, T&M/LH contracts should not 

be used. 

Comment: The use of the term 

‘‘schedule’’ may be confusing to some 

who understand it to refer to MAS or 

FSSs contracts. The subcontract 

reimbursement provisions that permit 

reimbursement of subcontracts at the 

hourly rates prescribed in the schedule 

could be interpreted to mean there are 

separate subcontract rates on MAS 

contracts. Clarify the final rule the term 

is not meant to connote MAS contracts. 

Response: The term is used 

throughout the FAR and widely 

understood by contracting professionals. 

The Councils are unaware of any issues 

with its interpretation and does not 

believe changing the term could be 

confusing to contracting professionals. 

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), 

and it is summarized as follows: 

1. Statement of need for, and objectives of, 

the rule. 

This final rule revises the Federal 

Acquisition Regulation to allow contracting 

officers to award Time and Material and 

Labor Hour (T&M/LH) contracts when 

procuring commercial items. This FAR case 

was initiated to implement Section 1432 of 

the National Defense Authorization Act for 

Fiscal Year 2004 (Pub. L. 108–136). 

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. 

Thirteen (13) comments were received 

from the public in response to the proposed 

rule. One of the most significant areas of 

controversy in the proposed rule issued for 

public comment concerned the matter of 

labor provided by subcontractors. The 

proposed rule required that the prime 

contractor be reimbursed at actual cost for all 

subcontractors providing labor under the 

contract, unless a subcontractor was 

specifically authorized under the prime 

contract by inclusion on a list of 

subcontractors to be reimbursed at the prime 

contract labor hour rate. Public commenters 

complained that this procedure created major 

administrative burdens and, because 

reimbursement at actual cost did not permit 


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prime contractors to obtain profit of those 

subcontracts, it would significantly reduce 

the use of subcontractors. The commenters 

pointed out that the subcontractors at issue 

are commonly small businesses. 

The final rule eliminates this feature 

regarding payment of labor subcontractors at 

actual cost and use of a list of approved 

subcontractors. The final rule provides that a 

prime contractor can provide qualifying labor 

hours under the contract through use of 

subcontractors and the government will pay 

the prime contract labor hour rate, without 

use of any pre-authorization list in the 

contract. Prime contractors will be able to 

include profit on this labor and there will be 

no special administrative approvals required. 

The final rule approach eliminates the part 

of the proposed rule that was most 

objectionable to small entities. 

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. 

This rule will apply to small and large 

entities that accept Time-and-Material or 

Labor-Hour contracts for commercial items. 

Because this rule is the first FAR 

authorization for use of these types of 

contracts for commercial items, no history is 

available on the number of awards made to 

small businesses. However, the Federal 

Procurement Data System (FPDS) data from 

FY 2004 show that small businesses received 

approximately 50 percent of the 42,840 

noncommercial item T&M/LH awards made 

and approximately 30% of the $17 Billion 

obligated under those awards. 

4. Description of the projected reporting, 

recordkeeping, and other compliance 

requirements of the 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 rule would require contractors to 

maintain records to support invoices 

presented to the Government for payment. 

Such records would include original 

timecards, the contractor’s 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 steps the agency has 

taken to minimize significant economic 

impact on small entities consistent with the 

stated objectives of applicable statutes, 

including a statement of the factual, policy, 

and legal reasons for selecting the 

alternative adopted in the final rule and why 

each of the other significant alternatives to 

the rule considered by the agency was 

rejected. 

Public comments submitted in response to 

the proposed rule were reviewed and 

substantial policy adjustments to the rule 

were made as a result. One of the most 

significant areas of controversy in the 

proposed rule issued for public comment 

concerned the matter of labor provided by 

subcontractors. The proposed rule required 

that the prime contractor be reimbursed at 

actual cost for all subcontractors providing 

labor under the contract, unless a 

subcontractor was specifically authorized 

under the prime contract by inclusion on a 

list of subcontractors to be reimbursed at the 

prime contract labor hour rate. Public 

commenters complained that this procedure 

created major administrative burdens and, 

because reimbursement at actual cost did not 

permit prime contractors to obtain profit of 

those subcontracts, it would significantly 

reduce the use of subcontractors. The 

commenters pointed out that the 

subcontractors at issue are commonly small 

businesses. 

The final rule eliminates this feature 

regarding payment of labor subcontractors at 

actual cost and use of a list of approved 

subcontractors. The final rule provides that a 

prime contractor can provide qualifying labor 

hours under the contract through use of 

subcontractors and the government will pay 

the prime contract labor hour rate, without 

use of any pre-authorization list in the 

contract. Prime contractors will be able to 

include profit on this labor and there will be 

no special administrative approvals required. 

The final rule approach eliminates the part 

of the proposed rule that was most 

objectionable to small entities. 

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 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 2, 10, 

12, 16, and 52 

Government procurement. 

Dated: December 4, 2006. 

Linda K. Nelson, 

Deputy Director, Contract Policy Division. 

■ Therefore, DoD, GSA, and NASA 

amend 48 CFR parts 2, 10, 12, 16, and 

52 as set forth below: 

■ 1. The authority citation for 48 CFR 

parts 2, 10, 12, 16, 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 2—DEFINITIONS OF WORDS 

AND TERMS 

2.101 [Amended] 

■ 2. Amend section 2.101 in paragraph 

(b), in the definition ‘‘Commercial 

item’’, by removing the second sentence 

in the introductory text of paragraph (6). 

PART 10—MARKET RESEARCH 

10.001 [Amended] 

■ 3. Amend section 10.001 by removing 

from paragraph (a)(3)(iv) ‘‘as terms’’ and 

adding ‘‘as type of contract, terms’’ in its 

place. 

■ 4. Amend section 10.002 by revising 

paragraph (b)(1)(iii) to read as follows: 

10.002 Procedures. 

* * * * * 

(b) * * * 

(1) * * * 

(iii) Customary practices, including 

warranty, buyer financing, discounts, 

contract type considering the nature and 

risk associated with the requirement, 

etc., under which commercial sales of 

the products or services are made; 

* * * * * 

PART 12—ACQUISITION OF 

COMMERCIAL ITEMS 

■ 5. Revise section 12.207 to read as 

follows: 

12.207 Contract type. 

(a) Except as provided in paragraph 

(b) of this section, agencies shall use 

firm-fixed-price contracts or fixed-price 

contracts with economic price 

adjustment for the acquisition of 

commercial items. 

(b)(1) A time-and-materials contract or 

labor-hour contract (see Subpart 16.6) 

may be used for the acquisition of 

commercial services when—

(i) The service is acquired under a 

contract awarded using—

(A) Competitive procedures (e.g., the 

procedures in 6.102, the set-aside 

procedures in Subpart 19.5, or 

competition conducted in accordance 

with Part 13); 

(B) The procedures for other than full 

and open competition in 6.3 provided 

the agency receives offers that satisfy 

the Government’s expressed 

requirement from two or more 

responsible offerors; or 

(C) The fair opportunity procedures in 

16.505, if placing an order under a 

multiple award delivery-order contract; 

and 

(ii) The contracting officer—

(A) Executes a determination and 

findings (D&F) for the contract, in 

accordance with paragraph (b)(2) of this 

section (but see paragraph (c) of this 

section for indefinite-delivery 

contracts), that no other contract type 

authorized by this subpart is suitable; 

(B) Includes a ceiling price in the 

contract or order that the contractor 

exceeds at its own risk; and 

(C) Authorizes any subsequent change 

in the ceiling price only upon a 

determination, documented in the 


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contract file, that it is in the best interest 

of the procuring agency to change the 

ceiling price. 

(2) Each D&F required by paragraph 

(b)(1)(ii)(A) of this section shall contain 

sufficient facts and rationale to justify 

that no other contract type authorized 

by this subpart is suitable. At a 

minimum, the D&F shall—

(i) Include a description of the market 

research conducted (see 10.002(e)); 

(ii) Establish that it is not possible at 

the time of placing the contract or order 

to accurately estimate the extent or 

duration of the work or to anticipate 

costs with any reasonable degree of 

certainty; and 

(iii) Establish that the requirement has 

been structured to maximize the use of 

firm-fixed-price or fixed-price with 

economic price adjustment contracts 

(e.g., by limiting the value or length of 

the time-and-material/labor-hour 

contract or order; establishing fixed 

prices for portions of the requirement) 

on future acquisitions for the same or 

similar requirements. 

(iv) Describe actions planned to 

maximize the use of firm-fixed-price or 

fixed-price with economic price 

adjustment contracts on future 

acquisitions for the same requirements. 

(3) See 16.601(d)(1) for additional 

approval required for contracts expected 

to extend beyond three years. 

(c)(1) Indefinite-delivery contracts 

(see Subpart 16.5) may be used when—

(i) The prices are established based on 

a firm-fixed-price or fixed-price with 

economic price adjustment; or 

(ii) Rates are established for 

commercial services acquired on a timeand-materials or labor-hour basis. 

(2) When an indefinite-delivery 

contract is awarded with services priced 

on a time-and-materials or labor-hour 

basis, contracting officers shall, to the 

maximum extent practicable, also 

structure the contract to allow issuance 

of orders on a firm-fixed-price or fixedprice with economic price adjustment 

basis. For such contracts, the 

contracting officer shall execute the D&F 

required by paragraph (b)(2) of this 

section, for each order placed on a timeand-materials or labor-hour basis. 

Placement of orders shall be in 

accordance with Subpart 8.4 or 16.5, as 

applicable. 

(3) If an indefinite-delivery contract 

only allows for the issuance of orders on 

a time-and-materials or labor-hour basis, 

the D&F required by paragraph (b)(2) of 

this section shall be executed to support 

the basic contract and shall also explain 

why providing for an alternative firmfixed-price or fixed-price with economic 

price adjustment pricing structure is not 

practicable. The D&F for this contract 

shall be approved one level above the 

contracting officer. Placement of orders 

shall be in accordance with Subpart 

16.5. 

(d) The contract types authorized by 

this subpart may be used in conjunction 

with an award fee and performance or 

delivery incentives when the award fee 

or incentive is based solely on factors 

other than cost (see 16.202–1 and 

16.203–1). 

(e) Use of any contract type other than 

those authorized by this subpart to 

acquire commercial items is prohibited. 

■ 6. Amend section 12.301 by adding a 

sentence after the first sentence in 

paragraph (b)(3) to read as follows: 

12.301 Solicitation provisions and 

contract clauses for the acquisition of 

commercial items. 

* * * * * 

(b) * * * 

(3) * * * Use this clause with its 

Alternate I when a time-and-materials or 

labor-hour contract will be awarded. * 

* * 

* * * * * 

■ 7. Amend section 12.403 by revising 

paragraph (d)(1)(i) to read as follows: 

12.403 Termination. 

* * * * * 

(d) * * * 

(1) * * * 

(i)(A) The percentage of the contract 

price reflecting the percentage of the 

work performed prior to the notice of 

the termination for fixed-price or fixedprice with economic price adjustment 

contracts; or 

(B) An amount for direct labor hours 

(as defined in the Schedule of the 

contract) determined by multiplying the 

number of direct labor hours expended 

before the effective date of termination 

by the hourly rate(s) in the Schedule; 

and 

* * * * * 

PART 16—TYPES OF CONTRACTS 

■ 8. Amend section 16.601 by adding a 

sentence to the end of paragraph (c) 

introductory text and revising paragraph 

(d) to read as follows: 

16.601 Time-and-materials contracts. 

* * * * * 

(c) Application. * * * See 12.207(b) 

for the use of time-and-material 

contracts for certain commercial 

services. 

* * * * * 

(d) Limitations. A time-and-materials 

contract may be used only if—

(1) The contracting officer prepares a 

determination and findings that no 

other contract type is suitable. The 

determination and finding shall be—

(i) Signed by the contracting officer 

prior to the execution of the base period 

or any option periods of the contracts; 

and 

(ii) Approved by the head of the 

contracting activity prior to the 

execution of the base period when the 

base period plus any option periods 

exceeds three years; and 

(2) 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. 

* * * * * 

■ 9. Revise section 16.602 to read as 

follows: 

16.602 Labor-hour contracts. 

Description. A labor-hour contract is a 

variation of the time-and-materials 

contract, differing only in that materials 

are not supplied by the contractor. See 

12.207(b), 16.601(c), and 16.601(d) for 

application and limitations, for timeand-materials contracts that also apply 

to labor-hour contracts. See 12.207(b) 

for the use of labor-hour contracts for 

certain commercial services. 

PART 52—SOLICITATION PROVISIONS 

AND CONTRACT CLAUSES 

■ 10. Amend section 52.212–4 by—

■ a. Revising the date of the clause; 

■ b. Adding a new sentence after the 

third sentence in the introductory text 

of paragraph (a); and 

■ c. Adding Alternate I; 

■ The revised and added text reads as 

follows: 

52.212–4 Contract Terms and 

Conditions—Commercial Items. 

* * * * * 

CONTRACT TERMS AND CONDITIONS—

COMMERCIAL ITEMS (FEB 2007) 

(a) Inspection/Acceptance. * * * If repair/ 

replacement or reperformance will not 

correct the defects or is not possible, the 

Government may seek an equitable price 

reduction or adequate consideration for 

acceptance of nonconforming supplies or 

services. * * * 

* * * * * 

(End of clause) 

Alternate I (FEB 2007). When a time-andmaterials or labor-hour contract is 

contemplated, substitute the following 

paragraphs (a), (e), (i) and (l) for those in the 

basic clause. 

(a) Inspection/Acceptance. (1) The 

Government has the right to inspect and test 

all materials furnished and services 

performed under this contract, to the extent 

practicable at all places and times, including 


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the period of performance, and in any event 

before acceptance. The Government may also 

inspect the plant or plants of the Contractor 

or any subcontractor engaged in contract 

performance. The Government will perform 

inspections and tests in a manner that will 

not unduly delay the work. 

(2) If the Government performs inspection 

or tests on the premises of the Contractor or 

a subcontractor, the Contractor shall furnish 

and shall require subcontractors to furnish all 

reasonable facilities and assistance for the 

safe and convenient performance of these 

duties. 

(3) Unless otherwise specified in the 

contract, the Government will accept or reject 

services and materials at the place of delivery 

as promptly as practicable after delivery, and 

they will be presumed accepted 60 days after 

the date of delivery, unless accepted earlier. 

(4) At any time during contract 

performance, but not later than 6 months (or 

such other time as may be specified in the 

contract) after acceptance of the services or 

materials last delivered under this contract, 

the Government may require the Contractor 

to replace or correct services or materials that 

at time of delivery failed to meet contract 

requirements. Except as otherwise specified 

in paragraph (a)(6) of this clause, the cost of 

replacement or correction shall be 

determined under paragraph (i) of this 

clause, but the ‘‘hourly rate’’ for labor hours 

incurred in the replacement or correction 

shall be reduced to exclude that portion of 

the rate attributable to profit. Unless 

otherwise specified below, the portion of the 

‘‘hourly rate’’ attributable to profit shall be 10 

percent. The Contractor shall not tender for 

acceptance materials and services required to 

be replaced or corrected without disclosing 

the former requirement for replacement or 

correction, and, when required, shall disclose 

the corrective action taken. [Insert portion of 

labor rate attributable to profit.] 

(5)(i) If the Contractor fails to proceed with 

reasonable promptness to perform required 

replacement or correction, and if the 

replacement or correction can be performed 

within the ceiling price (or the ceiling price 

as increased by the Government), the 

Government may—

(A) By contract or otherwise, perform the 

replacement or correction, charge to the 

Contractor any increased cost, or deduct such 

increased cost from any amounts paid or due 

under this contract; or 

(B) Terminate this contract for cause. 

(ii) Failure to agree to the amount of 

increased cost to be charged to the Contractor 

shall be a dispute under the Disputes clause 

of the contract. 

(6) Notwithstanding paragraphs (a)(4) and 

(5) above, the Government may at any time 

require the Contractor to remedy by 

correction or replacement, without cost to the 

Government, any failure by the Contractor to 

comply with the requirements of this 

contract, if the failure is due to—

(i) Fraud, lack of good faith, or willful 

misconduct on the part of the Contractor’s 

managerial personnel; or 

(ii) The conduct of one or more of the 

Contractor’s employees selected or retained 

by the Contractor after any of the Contractor’s 

managerial personnel has reasonable grounds 

to believe that the employee is habitually 

careless or unqualified. 

(7) This clause applies in the same manner 

and to the same extent to corrected or 

replacement materials or services as to 

materials and services originally delivered 

under this contract. 

(8) The Contractor has no obligation or 

liability under this contract to correct or 

replace materials and services that at time of 

delivery do not meet contract requirements, 

except as provided in this clause or as may 

be otherwise specified in the contract. 

(9) Unless otherwise specified in the 

contract, the Contractor’s obligation to 

correct or replace Government-furnished 

property shall be governed by the clause 

pertaining to Government property. 

(e) Definitions. (1) The clause at FAR 

52.202–1, Definitions, is incorporated herein 

by reference. As used in 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) 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—

(A) Performed by the contractor; 

(B) Performed by the subcontractors; or 

(C) Transferred between divisions, 

subsidiaries, or affiliates of the contractor 

under a common control. 

(iii) 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.); 

(D) The following subcontracts for services 

which are specifically excluded from the 

hourly rate: [Insert any subcontracts for 

services to be excluded from the hourly rates 

prescribed in the schedule.]; and 

(E) Indirect costs specifically provided for 

in this clause. 

(iv) Subcontract means any contract, as 

defined in FAR Subpart 2.1, entered into 

with a subcontractor to furnish supplies or 

services for performance of the prime 

contract or a subcontract including transfers 

between divisions, subsidiaries, or affiliates 

of a contractor or subcontractor. It includes, 

but is not limited to, purchase orders, and 

changes and modifications to purchase 

orders. 

(i) Payments. (1) Services accepted. 

Payment shall be made for services accepted 

by the Government that have been delivered 

to the delivery destination(s) set forth in this 

contract. The Government will pay the 

Contractor as follows upon the submission of 

commercial invoices approved by the 

Contracting Officer: 

(i) Hourly rate. 

(A) The amounts shall be computed by 

multiplying the appropriate hourly rates 

prescribed in the contract by the number of 

direct labor hours performed. Fractional parts 

of an hour shall be payable on a prorated 

basis. 

(B) The 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 individuals that do not 

meet the qualifications specified in the 

contract, unless specifically authorized by 

the Contracting Officer. 

(C) Invoices may be submitted once each 

month (or at more frequent intervals, if 

approved by the Contracting Officer) to the 

Contracting Officer or the authorized 

representative. 

(D) When requested by the Contracting 

Officer or the authorized representative, the 

Contractor shall substantiate invoices 

(including any subcontractor hours 

reimbursed at the hourly rate in the 

schedule) by evidence of actual payment, 

individual daily job timecards, records that 

verify the employees meet the qualifications 

for the labor categories specified in the 

contract, or other substantiation specified in 

the contract. 

(E) 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. 

(1) If no overtime rates are provided in the 

Schedule and the Contracting Officer 

approves overtime work in advance, overtime 

rates shall be negotiated. 

(2) Failure to agree upon these overtime 

rates shall be treated as a dispute under the 

Disputes clause of this contract. 

(3) 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. 

(ii) Materials. 

(A) If the Contractor furnishes materials 

that meet the definition of a commercial item 

at FAR 2.101, the price to be paid for such 

materials shall be the contractor’s established 

catalog or market price, adjusted to reflect 

the—

(1) Quantities being acquired; and 

(2) Any modifications necessary because of 

contract requirements. 

(B) Except as provided for in paragraph 

(i)(1)(ii)(A) and (D)(2) of this clause, the 

Government will reimburse the Contractor 

the actual cost of materials (less any rebates, 

refunds, or discounts received by the 

contractor that are identifiable to the 

contract) provided the Contractor—

(1) Has made payments for materials in 

accordance with the terms and conditions of 

the agreement or invoice; or 

(2) 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. 

(C) To the extent able, the Contractor 

shall—

(1) Obtain materials at the most 

advantageous prices available with due 

regard to securing prompt delivery of 

satisfactory materials; and 


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(2) Give credit to the Government for cash 

and trade discounts, rebates, scrap, 

commissions, and other amounts that are 

identifiable to the contract. 

(D) Other Costs. Unless listed below, other 

direct and indirect costs will not be 

reimbursed. 

(1) Other Direct Costs. The Government 

will reimburse the Contractor on the basis of 

actual cost for the following, provided such 

costs comply with the requirements in 

paragraph (i)(1)(ii)(B) of this clause: [Insert 

each element of other direct costs (e.g., travel, 

computer usage charges, etc. Insert ‘‘None’’

if no reimbursement for other direct costs will 

be provided. If this is an indefinite delivery 

contract, the Contracting Officer may insert 

‘‘Each order must list separately the elements 

of other direct charge(s) for that order or, if 

no reimbursement for other direct costs will 

be provided, insert ‘None’’.’] 

(2) Indirect Costs (Material Handling, 

Subcontract Administration, etc.). The 

Government will reimburse the Contractor 

for indirect costs on a pro-rata basis over the 

period of contract performance at the 

following fixed price: [Insert a fixed amount 

for the indirect costs and payment schedule. 

Insert ‘‘$0’’ if no fixed price reimbursement 

for indirect costs will be provided. (If this is 

an indefinite delivery contract, the 

Contracting Officer may insert ‘‘Each order 

must list separately the fixed amount for the 

indirect costs and payment schedule or, if no 

reimbursement for indirect costs, insert 

‘None’).’’] 

(2) 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 the performance of 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 performance of 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. 

(3) 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. 

(4) Access to records. At any time before 

final payment under this contract, the 

Contracting Officer (or authorized 

representative) will have access to the 

following (access shall be limited to the 

listing below unless otherwise agreed to by 

the Contractor and the Contracting Officer): 

(i) Records that verify that the employees 

whose time has been included in any invoice 

meet the qualifications for the labor 

categories specified in the contract; 

(ii) For labor hours (including any 

subcontractor hours reimbursed at the hourly 

rate in the schedule), when timecards are 

required as substantiation for payment—

(A) The original timecards (paper-based or 

electronic); 

(B) The Contractor’s timekeeping 

procedures; 

(C) Contractor records that show the 

distribution of labor between jobs or 

contracts; and 

(D) Employees whose time has been 

included in any invoice for the purpose of 

verifying that these employees have worked 

the hours shown on the invoices. 

(iii) For material and subcontract costs that 

are reimbursed on the basis of actual cost—

(A) Any invoices or subcontract 

agreements substantiating material costs; and 

(B) Any documents supporting payment of 

those invoices. 

(5) Overpayments/Underpayments. (i) Each 

payment previously made shall be subject to 

reduction to the extent of amounts, on 

preceding invoices, that are found by the 

Contracting Officer not to have been properly 

payable and shall also be subject to reduction 

for overpayments or to increase for 

underpayments. The Contractor shall 

promptly pay any such reduction within 30 

days unless the parties agree otherwise. The 

Government within 30 days will pay any 

such increases, unless the parties agree 

otherwise. The contractor’s payment will be 

made by check. If the Contractor becomes 

aware of a duplicate invoice payment or that 

the Government has otherwise overpaid on 

an invoice payment, the Contractor shall 

immediately notify the Contracting Officer 

and request instructions for disposition of the 

overpayment. 

(ii) Upon receipt and approval of the 

invoice designated by the Contractor as the 

‘‘completion invoice’’ and supporting 

documentation, and upon compliance by the 

Contractor with all terms of this contract, any 

outstanding balances will be paid within 30 

days unless the parties agree otherwise. The 

completion invoice, 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. 

(6) 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. 

(i) Specified claims in stated amounts, or 

in estimated amounts if the amounts are not 

susceptible to exact statement by the 

Contractor. 

(ii) 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. 

(iii) 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. 

(7) Prompt payment. 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. 

(8) Electronic Funds Transfer (EFT). If the 

Government makes payment by EFT, see 

52.212–5(b) for the appropriate EFT clause. 

(9) Discount. In connection with any 

discount offered for early payment, time shall 

be computed from the date of the invoice. For 

the purpose of computing the discount 

earned, payment shall be considered to have 

been made on the date that appears on the 

payment check or the specified payment date 

if an electronic funds transfer payment is 

made. 

(l) Termination for the Government’s 

convenience. The Government reserves the 

right to terminate this contract, or any part 

hereof, for its sole convenience. In the event 

of such termination, the Contractor shall 

immediately stop all work hereunder and 

shall immediately cause any and all of its 

suppliers and subcontractors to cease work. 

Subject to the terms of this contract, the 

Contractor shall be paid an amount for direct 

labor hours (as defined in the Schedule of the 

contract) determined by multiplying the 

number of direct labor hours expended 

before the effective date of termination by the 

hourly rate(s) in the contract, less any hourly 

rate payments already made to the Contractor 


jlentini on PROD1PC65 with RULES4
74680 Federal Register / Vol. 71, No. 238 / Tuesday, December 12, 2006 / Rules and Regulations 

plus reasonable charges the Contractor can 

demonstrate to the satisfaction of the 

Government using its standard record 

keeping system that have resulted from the 

termination. The Contractor shall not be 

required to comply with the cost accounting 

standards or contract cost principles for this 

purpose. This paragraph does not give the 

Government any right to audit the 

Contractor’s records. The Contractor shall not 

be paid for any work performed or costs 

incurred that reasonably could have been 

avoided. 

[FR Doc. 06–9613 Filed 12–6–06; 8:45 am] 

BILLING CODE 6820–EP–S 

DEPARTMENT OF DEFENSE 

GENERAL SERVICES 

ADMINISTRATION 

NATIONAL AERONAUTICS AND 

SPACE ADMINISTRATION 

48 CFR Chapter 1 

[Docket FAR—2006—0023, Sequence 8] 

Federal Acquisition Regulation; 

Federal Acquisition Circular 2005–15; 

Small Entity Compliance Guide 

AGENCIES: Department of Defense (DoD), 

General Services Administration (GSA), 

and National Aeronautics and Space 

Administration (NASA). 

ACTION: Small Entity Compliance Guide. 

SUMMARY: This document is issued 

under the joint authority of the 

Secretary of Defense, the Administrator 

of General Services and the 

Administrator of the National 

Aeronautics and Space Administration. 

This Small Entity Compliance Guide 

has been prepared in accordance with 

Section 212 of the Small Business 

Regulatory Enforcement Fairness Act of 

1996. It consists of a summary of rules 

appearing in Federal Acquisition 

Circular (FAC) 2005–15 which amend 

the FAR. An asterisk (*) next to a rule 

indicates that a regulatory flexibility 

analysis has been prepared. Interested 

parties may obtain further information 

regarding these rules by referring to FAC 

2005–15 which precedes this document. 

These documents are also available via 

the Internet at http:// 

www.regulations.gov. 

FOR FURTHER INFORMATION CONTACT

Laurieann Duarte, FAR Secretariat, (202) 

501–4225. For clarification of content, 

contact the analyst whose name appears 

in the table below. 

LIST OF RULES IN FAC 2005–15 

Item Subject FAR case Analyst 

*I ........... Payments Under Time-and-Materials and Labor-Hour Contracts ................................................... 2004–015 Olson. 

*II .......... Additional Commercial Contract Types ........................................................................................... 2003–027 Olson. 

SUPPLEMENTARY INFORMATION: 

Summaries for each FAR rule follow. 

For the actual revisions and/or 

amendments to these FAR cases, refer to 

the specific item number and subject set 

forth in the documents following these 

item summaries. 

FAC 2005–15 amends the FAR as 

specified below: 

Item I—Payments Under Time-andMaterials and Labor-Hour Contracts 

(FAR Case 2004–015) 

This final rule revises and clarifies 

policies related to award and 

administration of noncommercial item 

Time-and-Materials (T&M) and LaborHour (LH) contracts and the policies 

regarding payments made under those 

contracts. The objectives of the changes 

are to ensure fair and reasonable prices 

under T&M and LH contracts and to 

eliminate confusion related to payment 

amounts for subcontractor provided 

labor. 

Item II—Additional Commercial 

Contract Types (FAR Case 2003–027) 

This final rule implements section 

1432 of the National Defense 

Authorization Act for Fiscal Year 2004 

(Pub. L. 108–136). Title XIV of the Act, 

referred to as the Services Acquisition 

Reform Act of 2003 (SARA), amended 

section 8002(d) of the Federal 

Acquisition Streamlining Act of 1994 

(FASA) (Pub. L. 103–355, 41 U.S.C. 264) 

to expressly authorize the use of Time–

and–Materials (T&M) and Labor–Hour 

(LH) contracts for commercial services 

under specified conditions. 

Dated: December 4, 2006. 

Linda K. Nelson, 

Deputy Director, Contract Policy Division. 

[FR Doc. 06–9612 Filed 12–6–06; 8:45 am] 

BILLING CODE 6820–EP–S 


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