```

[Federal Register Volume 72, Number 98 (Tuesday, May 22, 2007)]
[Proposed Rules]
[Pages 28654-28662]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-9734]

[[Page 28654]]

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

DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Chapter 2

Contract Closeout; Systemic Issues

AGENCY: Defense Acquisition Regulations System, Department of Defense.

ACTION: Response to public comments.

-----------------------------------------------------------------------

SUMMARY: The Director of Defense Procurement and Acquisition Policy 
(DPAP) recently completed an assessment of public input on systemic 
issues related to contract closeout that were identified in a public 
meeting held on September 21, 2005. This assessment has resulted in 
recommendations for revisions to policy, guidance, and training related 
to contract closeout responsibilities.

FOR FURTHER INFORMATION CONTACT: Ms. Pat West, DPAP CPF Directorate, by 
telephone at (703) 602-8387, or by e-mail at [email protected].

SUPPLEMENTARY INFORMATION: In June 2005, the Department of Defense 
(DoD) formed a Contract Closeout Systemic Issues Team to develop 
recommendations for improving the contract closeout process. During 
June/July 2005, the Team engaged with respondents to DoD's September 
24, 2002, Federal Register notice (67 FR 59799) requesting public input 
on how to improve the contract closeout process. On September 21, 2005, 
DoD held a public meeting to discuss potential opportunities to 
streamline the closeout process for DoD contracts (70 FR 46824, August 
11, 2005). At the public meeting, interested parties provided input on 
23 primary issue areas. The public meeting was attended by Government 
and industry representatives, and the issues discussed during the 
public meeting are published at http://www.acq.osd.mil/dpap/general/cost-pricing.htm.
    DPAP has reviewed the public comments and plans to pursue 
recommended revisions to the Federal Acquisition Regulation (FAR), the 
Defense FAR Supplement (DFARS) and its companion Procedures, Guidance, 
and Information (PGI), User Guides, and DoD training resources. DPAP 
plans to take the following actions to enhance the contract closeout 
process:
     Open a DFARS case on contract closeout to establish a 
comprehensive PGI section to address contract closeout and to assess 
whether regulatory clarification/revision is needed to address the 
following:

--Cumulative Allowable Cost Worksheets.
--Quick closeout.
--Subcontract closeout.
--Final indirect cost rate proposals.
--Periods of performance.
--Government property.
--Alternate contract closing methods.
--Contractor compliance with data submission requirements related to 
contract closeout.

 Identify and make available best practices used by the 
military departments and defense agencies in completing contract 
closeouts.
 Identify any additional training that should be provided on 
contract closeout.
    The following is a discussion of the public comments/
recommendations received and the DPAP response and/or planned

1. Final Vouchers

a. Waiver of Final Voucher Audits

    Comment: The following recommendations were received relating to 
the waiver of final voucher audits:
    (1) Provide the administrative contracting officer (ACO) waiver 
authority.
    (2) Clearly identify the Government representative that has the 
authority to waive the audit (ACO versus procuring contracting officer 
(PCO)).
    (3) Waive the audit for contracts less than a specified amount 
(e.g., $10 million).
    (4) Provide specific risk assessment guidance to the ACO for use in 
determining whether a waiver of audit is appropriate.
    (5) Include factors in addition to the dollar value in determining 
when final voucher audits should be waived, such as the size of the 
company, the number of contracts, and consideration of the contractor's 
corrective actions with respect to system inadequacies.
    (6) Permit the Government and the contractor to agree to waive the 
final voucher audit when money owed is below a stipulated amount (e.g., 
less than $1,000).
    (7) Require final voucher audits for cost-type contracts only on an 
exception basis for those contractors having billing systems that meet 
specified standards. Audits may be required when adverse circumstances 
exist, such as inadequate internal control systems, contracts exceeding 
a specified dollar threshold, recent frequency of audits, and previous 
audit exceptions.
    (8) Allow for application of the audit waiver requirements at the 
delivery order level.
    DPAP Response: In cases where final indirect cost rates have not 
been negotiated, FAR 42.708 provides for a quick closeout procedure 
when certain other criteria have been met. These criteria may warrant 
expansion based on particular facts and circumstances. Therefore, the 
DFARS case on contract closeout will include a review of whether it is 
appropriate to amend the FAR and/or DFARS to expand on the existing 
quick closeout FAR criteria. Depending on the results of this review, 
DPAP may consider revisions to the DFARS and/or may make 
recommendations to the FAR Council for revisions to the current FAR 
language on quick closeout.
    In those cases where final indirect cost rates have been 
negotiated, DPAP does not believe a broad-based waiver of audits of 
final vouchers would facilitate the contract closeout process. Instead, 
DPAP believes that the contract closeout process is significantly 
reduced if contractors submit a Cumulative Allowable Cost Worksheet 
(CACWS) after the indirect cost rates are finalized. The CACWS allows 
the ACO to close out a contract without requesting an audit of the 
contractor's final voucher. Therefore, the DFARS case on contract 
closeout will include a review to determine if, and to what extent, the 
CACWS should be required and/or encouraged in the regulations. This 
review will also include an assessment of how the CACWS is or should be 
structured to best meet contract closeout needs without imposing 
significant administrative burden on the contractor or the Government.

b. Use of Bilateral Modifications

    Comment: It was recommended that contracting officers be permitted 
to use a bilateral modification to close out a contract, rather than 
requiring a final voucher, when no money is owed to the Government and 
specific risk criteria are met.
    DPAP Response: The DFARS case on contract closeout will include a 
review of the quick closeout criteria in the FAR. DPAP will also review 
the feasibility of permitting bilateral modifications, in lieu of final 
vouchers, when certain criteria are met. Depending on the results of 
this review, DPAP may consider revisions to the DFARS and/or may make 
recommendations to the FAR Council for revisions to the current FAR 
language.

c. Issuance of Demand Letters

    Comment: It was recommended that a demand letter be issued if 
monies are owed the Government and a final voucher is not submitted 
within the required timeframes. Under the recommendation, this demand 
letter

[[Page 28655]]

would state that interest will be assessed as of a specified date, and 
would identify why payment is delayed and the reasons the contractor 
has not submitted a final voucher (e.g., extension of period of 
performance). Other respondents opined that issuance of a demand letter 
may further delay the process and may also trigger a Treasury 
Department offset. They also noted that it would be difficult, absent a 
final voucher, for the Government to determine whether or not monies 
are owed.
    DPAP Response: FAR 42.705(b) and (c) permit the contracting officer 
to unilaterally close out a contract when the contractor fails to 
submit a final voucher. The DFARS case on contract closeout will 
consider if and when a demand letter should be issued for contractors 
that fail to submit final vouchers in accordance with FAR 42.705(b). 
The review also will consider how the Government could/would determine 
if monies are owed and will evaluate the impact of any potential delays 
in the contract closeout process that the use of a demand letter may 
create.

d. Prime Contract Closeout in Advance of Subcontract Closeout

    Comment: A recommendation was made to permit closeout of a prime 
contract even though a subcontract or subcontracts under that prime 
contract have not been closed. It was further recommended that such a 
process include adequate notice to the subcontractor. Conversely, a 
concern was expressed that such a closeout of a prime contract may 
result in the prime contractor's unilateral closeout of subcontracts 
and elimination of the Government reimbursement of any additional 
subcontract costs, thereby inhibiting the subcontractor's negotiation 
with the prime contractor.
    DPAP Response: The DFARS case on contract closeout will evaluate 
if/when it may be appropriate to permit prime contract closeout when 
one or more subcontracts have not been closed.

2. Final Invoices--Fixed-Price Contracts

a. Timing of Submission of a Final Invoice

    Comment: Recommendations were made to require submittal of a final 
invoice within 60 days of Government acceptance, or to establish a one-
year time limit for contractors to submit the final invoice, after 
which time the contracting officer can unilaterally close the contract 
without further payment to the contractor.
    DPAP Response: DPAP believes that this issue is adequately 
addressed in FAR 4.804-1, which authorizes the contracting officer to 
close out fixed-price contracts within six months after the date on 
which the contracting officer receives evidence of physical completion. 
No evidence has been presented that indicates the six-month period is 
causing a significant delay in closing out contracts.

b. Clarification of Requirement to Submit Final Vouchers

    Comment: A recommendation was made to clarify regulations regarding 
the need to submit a final invoice when a DD Form 250, Material 
Inspection and Receiving Report, is submitted. A second recommendation 
was made to provide an exception to the requirement for submission of a 
final voucher for contracts outside the continental United States 
(OCONUS).
    DPAP Response: While Appendix F of the DFARS currently provides 
guidance on the use of DD Form 250, DPAP believes it may also be 
helpful to include guidance in the PGI section on contract closeout to 
address the relationship between the DD Form 250 and the final voucher. 
Therefore, the DFARS case on contract closeout will include an 
assessment of whether additional exceptions are needed for OCONUS 
contracts.

c. Waiver of the Requirement to Submit Final Vouchers

    Comment: A recommendation was made to waive the requirement for 
submission of a final invoice if the amount due to the contractor is 
less than $1,000 and less than 10 percent of the contract value. In 
such cases, the respondent recommended that the contracting officer be 
permitted to unilaterally deobligate any remaining funds.
    DPAP Response: DPAP does not believe it is advisable to preclude 
payment to a contractor when monies are due. DPAP also does not believe 
there is a legal basis for the Government to extinguish its debt solely 
on the basis of the dollar amount involved. Thus, submission of a final 
invoice in such cases is necessary to ensure that proper payments are 
made under the terms of each contract.

3. Final Indirect Cost Rates

a. Timely Submission of Final Indirect Cost Rate Proposals

    Comment: The following recommendations were made to encourage 
timely submission of indirect cost rate proposals:
    (1) Increase the withhold amount (a specified percentage and/or 
specified amount, e.g., 15 percent or $100,000). One respondent 
recommended analyzing major vs. non-major contractors to identify 
problems preventing timely submission before enacting such a withhold. 
Another respondent stated that increased withholdings will cause 
problems in obtaining additional monies due to cancelled funds.
    (2) Provide incentives, rather than penalize contractors, for 
timely submission of indirect cost rate proposals.
    (3) Include a contract provision that permits the contracting 
officer to extend the indirect cost rate proposal submission date.
    DPAP Response: The DFARS case on contract closeout will include a 
review of the current provisions addressing the submission of final 
indirect cost rate proposals to ascertain whether any adjustments 
(positive and/or negative incentives) to the current regulatory 
coverage are warranted.
    DPAP does not believe action is necessary regarding the proposal 
submission date, because FAR 52.216-7(d) currently authorizes the 
contracting officer to extend the submission due date if exceptional 
circumstances exist.

b. Contract Closeout Using Rates Other Than Established Final Indirect 
Cost Rates

    Comment: Recommendations were made to allow contract closeout using 
indirect cost rates in the forward pricing rate agreement, provisional 
rates, or certified year-end rates rather than final indirect cost 
rates, when final indirect cost rates are not established on a timely 
basis. One respondent further noted that the use of any such rates 
should be by contractor and Government mutual agreement only. Another 
respondent noted that the contractor's past history of costs questioned 
should be considered in determining whether to use such rates.
    DPAP Response: The DFARS case on contract closeout will review if/
when the use of forward pricing, provisional, or certified year-end 
rates would be acceptable when final indirect cost rates are not 
available. The review will also address the issue of mutual agreement 
in using any such rates for contract closeout.

c. Content of Final Indirect Cost Rate Proposals

    Comment: A number of recommendations were made regarding the 
required content of an adequate indirect cost rate proposal. These

[[Page 28656]]

recommendations included the following:
    (1) Review the content requirements for indirect cost rate 
proposals to determine if/where they could be streamlined.
    (2) Establish different content requirements based on dollar 
thresholds.
    (3) Provide flexibility so that the proposal is not rejected when 
it is not exactly the same as the content requirements, particularly 
when there are only format issues/problems.
    (4) Do not require submission of Cumulative Allowable Cost 
Worksheets at the time of submission of the indirect cost rate proposal 
(permit these worksheets to be submitted at a later date).
    DPAP Response: The DFARS case on contract closeout will include a 
review of the current requirements regarding the content of an adequate 
indirect cost rate proposal to determine if/how they could be 
streamlined, and the extent to which additional flexibility should be 
provided. DPAP will evaluate the need for the addition of DFARS/PGI 
language regarding such content, as well as PGI references to relevant 
Defense Contract Audit Agency (DCAA), Defense Contract Management 
Agency (DCMA), and other agency materials on this subject. This review 
will also assess whether regulatory language is needed to address if/
when Cumulative Allowable Cost Worksheets must be submitted to permit 
timely audit and negotiation of indirect cost rates and contract 
closeout.

d. Separate Proposals for Final Direct and Indirect Costs

    Comment: One recommendation would permit the separate submission of 
final direct and indirect cost proposals when the ACO believes separate 
submissions would facilitate the contract closeout process.
    DPAP Response: DPAP does not see the value in permitting separate 
proposals. DPAP believes that separate proposals would impose an 
administrative burden on both the Government and the contractor, since 
both proposals and multiple final vouchers would be required for the 
same contract (one for direct costs, one for indirect costs). When 
final indirect cost rates have not been negotiated, the use of quick 
closeout procedures is a more feasible solution than submission of 
separate direct and indirect cost proposals. In addition, DPAP believes 
it is inadvisable to permit the separate submission of direct and 
indirect costs, since both are required to determine indirect cost 
rates, and any reclassification of costs between direct and indirect 
would be made administratively more cumbersome by separate proposals.

e. Lump Sum Settlements

    Comment: One recommendation called for providing lump sum 
settlement guidance to the contracting officer.
    DPAP Response: DPAP does not see value in providing guidance on a 
lump sum settlement; nor does DPAP believe it is prudent to do so, 
since any such guidance will ultimately tie back to the actual incurred 
costs. A contracting officer must have a basis for determining the 
final amount due. The basis for this amount is the annual allowable 
incurred costs of the contractor and the final negotiated indirect cost 
rates.

4. Lack of Government Resources and/or Timely Action

a. Utilization of Government Resources

    Comment: Various recommendations were made regarding the best 
utilization of Government resources in performing contract closeout 
functions. These recommendations included the following:
    (1) Assign an individual or team at each agency to be responsible 
for reducing and eliminating the backlog of open contracts, provide 
training for individuals to effectively reduce the backlog, and provide 
promotion opportunities.
    (2) Make the contract closeout function an integral part of 
contract administration rather than a separate function.
    (3) Establish Government Centers of Excellence for contract 
reconciliations, establishment of final indirect cost rates, and 
expiring funds to assist in resolving contract closeout issues.
    (4) Create a contract closeout contracting officer, similar to the 
termination contracting officer, who would be a specialist in closing 
out contracts.
    (5) Outsource the contract closeout function to contractors.
    DPAP Response: DPAP will review the current processes used by the 
military departments and defense agencies to identify best practices 
for utilizing resources in performing contract closeout. These best 
practices will be made available to the military departments and 
defense agencies for their consideration.

b. Line Item Within the DoD Budget for Contract Closeout

    Comment: One respondent recommended establishing a separate line 
item in the DoD budget dedicated to contract closeout activities.
    DPAP Response: DPAP does not believe it would be beneficial to 
establish a separate budget line item for contract closeout activities 
for the military departments and defense agencies. Its establishment 
would impose the significant administrative burden of capturing the 
individual activities associated with contract closeout in the DoD cost 
accounting systems, which are not designed to capture costs associated 
with discrete work activities across the Department. The intention of 
the separate line item would be to force the military departments and 
defense agencies to spend sufficient monies to support the closeout 
effort. However, it could be easily reduced or eliminated and, by 
itself, would provide no assurance that contract closeouts would be 
completed, since it most likely would not change the closeout process 
but would have the adverse effect of reducing flexibility. DPAP 
believes the key to successful utilization of resources is to provide a 
set of best practices to the departments and agencies, and to let the 
departments and agencies apply those practices in a manner that best 
meets their particular situations.

c. Timeline for DCAA Audits of Final Indirect Cost Rates

    Comment: A recommendation was made to establish a timeline by which 
DCAA audits of indirect cost rate proposals should be completed. Under 
this recommendation, if the audit is not completed by the date 
specified, the contracting officer would have the authority to use a 
third party to conduct the audit, and the cost of the audit could be 
reimbursed to the contractor or paid directly by the Government to the 
third party auditor.
    DPAP Response: DPAP believes that the key to timely audit of 
indirect cost rate proposals is the timely submission of an adequate 
final indirect cost rate proposal by the contractor. DoD has internal 
mechanisms in place to monitor and take actions when indirect cost rate 
proposals have been submitted but no audit action has been taken. 
However, in recognition of the need to ensure that the contracting 
officer and the auditor maintain adequate communication, the DFARS case 
on contract closeout will review whether PGI should include information 
regarding the action to be taken when a contracting officer believes an 
audit is not being performed on a timely basis.

[[Page 28657]]

d. Training Opportunities in Contract Closeout

    Comment: Recommendations were made to--
    (1) Increase training to Government and contractor personnel in the 
area of contract closeout; and
    (2) Establish a section in the Defense Acquisition University (DAU) 
Community of Practice Lessons Learned for contract closeout and 
reference it in PGI.
    DPAP Response: As part of the review of best practices, DPAP will 
work with DAU to determine if/what training needs to be expanded in the 
area of contract closeout and to establish a community of practice that 
can provide the best contract closeout practices for use by DoD 
contracting personnel.

e. Delineate the Roles and Responsibilities of Parties in the Contract 
Closeout Process

    Comment: The following recommendations were made to delineate roles 
and responsibilities of all parties to contract closeout:
    (1) Describe in the DFARS or PGI the roles and responsibilities for 
all parties involved in the contract closeout process.
    (2) Designate the ACO as the central control point for closeout of 
a contract and for use of the quick closeout process. One respondent 
noted that this could be problematic, since the ACO is not as 
knowledgeable as the PCO, and the PCO is a critical player in resolving 
issues related to older contracts and contract funding (e.g., cancelled 
funds).
    (3) Specifically identify the roles and responsibilities for cost 
reconciliations and the final determination of contract value when 
there are discrepancies between the Government's and the contractor's 
accounting records.
    DPAP Response: DPAP agrees that such delineation would help 
facilitate the contract closeout process. Therefore, as part of the 
DFARS case, the PGI will be amended to describe the contract closeout 
process and to delineate the roles and responsibilities of all parties 
involved in that process.
    Regarding contracts for which there are discrepancies in cost 
reconciliations, DoD has legislative authority to close out contracts 
entered into prior to October 1, 1996, that have an unreconciled 
balance of $100,000 or less. Absent additional legislative authority, 
DPAP does not believe it can provide contracting officers with the 
authority to close out such contracts.

f. Contract Closeout in the Absence of Defense Finance and Accounting 
Service (DFAS) Approval

    Comment: A recommendation was made to allow the ACO to close out 
the contract if, after notifying DFAS that a contract is 
administratively complete, no response is received within 60 days of 
the notification.
    DPAP Response: Since DFAS has the accounting responsibility within 
DoD, it would not be appropriate to close out the contract without DFAS 
approval. However, the DFARS case on contract closeout will include a 
review of whether PGI/DFARS language is needed to address the actions 
to be taken when the contracting officer believes a timely response has 
not been received from DFAS.

5. Submission of Contract Closeout Data

a. Contract Closeout as a Condition for Future Awards or as an Element 
of Past Performance

    Comment: One respondent recommended including contractor 
performance in submitting closeout data, in the contractor's past 
performance ratings. Another respondent noted that any data submitted 
for past performance must distinguish between contractor performance in 
submitting the closeout documents and Government-controlled actions. A 
third respondent recommended precluding the award of future contracts 
for contractors that continually fail to submit the required contract 
closeout items.
    DPAP Response: The Office of Federal Procurement Policy Guide on 
Best Practices for Collecting and Using Current and Past Performance 
Information (May 2000) includes consideration of timely completion of 
all administrative requirements under ``Business Relations'' as a 
criterion for evaluating past performance. The DFARS case on contract 
closeout will review whether contract closeout should be a more 
specific past performance element. Depending on the results of this 
review, DPAP may consider revisions to the DFARS and/or may make 
recommendations to the FAR Council for revisions to the current FAR 
language on contract closeout.
    DPAP does not believe it would be appropriate to broadly prohibit 
the award of future contracts to contractors with any history of 
failing to submit contract closeout items. To do so would be tantamount 
to debarment, and DPAP does not believe that failure to submit contract 
closeout items meets the debarment criteria at FAR 9.406-2.

b. Incentives for Fulfillment of Contractor Closeout Requirements

    Comment: The following recommendations were made to encourage 
contractors to complete contract closeout activities:
    (1) Include specific contractual terms that provide positive and/or 
negative consequences for the fulfillment of contractor closeout 
commitments.
    (2) Provide award fees or profit factors based on the submission of 
contract closeout documents.
    (3) Include submittal of contract closeout documents a milestone 
for receiving a performance-based payment.
    (4) Include contract closeout activities as a separately priced 
contract line item. A specific recommendation was made to address the 
allowability of contractor costs associated with required contract cost 
and payment reconciliations.
    DPAP Response: The DFARS case on contract closeout will review 
whether regulatory clarification/revisions are needed to provide 
additional incentives (positive and/or negative) for encouraging 
submission of contractor closeout data. This will include a review of 
the criteria for determining whether to impose a withhold, the approval 
or denial of direct billing authority, the potential impact on 
contractor past performance evaluations, and the inclusion of a 
contract closeout milestone in determining performance-based payments.
    DPAP does not believe that award fees or other profit factors are 
appropriate means by which to compel the contractor to complete 
contract closeout responsibilities, since award fee and profit criteria 
are intended to focus on cost, quality, and technical performance. They 
are not intended to be a means to further reward contractors for 
satisfying basic contract administration responsibilities.
    DPAP also does not believe it is advisable to include contract 
closeout activities as a separately priced contract line item. This 
would most likely be perceived as increasing the cost or price of the 
contract, rather than simply encouraging submittal of the closeout 
data. Similarly, DPAP does not believe that it is necessary to 
promulgate specific cost allowability rules related to contractor 
reconciliation efforts. The contractor should consider the cost of 
normal contract closeout (including reconciliations) when submitting 
proposals for contracts and/or indirect cost rates. Furthermore, in 
those instances where unusual circumstances require the contractor to 
expend effort that is charged as a direct cost beyond

[[Page 28658]]

the current contract period of performance, the contractor should 
request a contract modification to address these costs, including any 
necessary extension to the period of performance.

6. Missing Documentation

a. Determination That a Contract Is Administratively Complete

    Comment: A recommendation was made to authorize the ACO to issue a 
final determination that a contract is administratively complete if the 
Government and the contractor agree that no additional services or 
products will be received by the Government and there are no 
outstanding actions.
    DPAP Response: DPAP believes that the current listing of actions at 
FAR 4.804 for determining that a contract is administratively closed 
provides sufficient criteria for the contracting officer. Ensuring that 
the items in this listing are all complete is akin to ensuring that 
there are no outstanding actions. Thus, DPAP does not plan further 
action with regard to this recommendation.

b. Adequacy of the Government's Contract Files

    Comment: A recommendation was made to specify in the regulations 
and/or PGI what constitutes an adequate contract file (e.g., 
modifications, DD 250's, invoices, payment vouchers) for purposes of 
contract closeout, and to require that contracting officers maintain 
such a file.
    DPAP Response: The DFARS case will review whether guidance should 
be added to PGI to address what constitutes an adequate contract file 
(see response to Comment 6.a. above). Currently, FAR Subpart 4.8 
delineates the applicable contract file documentation requirements 
depending on the product or service acquired and contract type and 
complexity. FAR 4.802 allows agencies to retain contract files in any 
medium (paper, electronic, microfilm, etc.) or any combination of 
media. The Electronic Data Access (EDA) system is DoD's electronic file 
cabinet containing electronic versions of contractual documents, 
including modifications, and is accessible via the Internet 24 hours a 
day at http://eda.ogden.disa.mil. Also, DFAS has an ongoing Voucher 
attachment system initiative that uploads supporting documentation for 
disbursing vouchers in EDA. However, it may be advisable to include 
these requirements, as well as any other applicable contract file 
documentation information, in PGI.

7. Quick Closeout Procedures

a. Broaden the Use of Quick Closeout Procedures

    Comment: Three respondents recommended broadening the use of quick 
closeout procedures by raising the dollar threshold and/or percentage 
limitations currently in the regulations and by extending the existing 
DCMA deviation. Two respondents recommended considering mandating the 
use of quick closeout procedures for low-dollar value contracts and 
making a thorough analysis to determine the numbers of contracts that 
would be affected by such a mandate.
    DPAP Response: The DFARS case on contract closeout will review 
whether it is appropriate to amend the DFARS to expand on the existing 
quick closeout criteria at FAR 42.708. In addition, depending on the 
results of this review, DPAP also may make recommendations to the FAR 
Council for revisions to the current FAR language on quick closeout.

b. Require Mutual Agreement To Use Quick Closeout Procedures

    Comment: A recommendation was made to provide for the quick 
closeout process to be one of mutual agreement between the Government 
and the contractor.
    DPAP Response: DPAP believes that the FAR already clearly requires 
mutual agreement between the Government and the contractor in order to 
use quick closeout procedures. FAR 42.708 requires the contracting 
officer to ``negotiate'' the settlement of indirect costs for a 
specific contract, in advance of the determination of the final 
indirect cost rates. In addition, FAR 42.708 allows the use of quick 
closeout procedures only if ``agreement'' can be reached on a 
reasonable estimate of allocable dollars. Thus, DPAP does not believe 
any further action is needed regarding this recommendation.

c. Justification for Not Using Quick Closeout Procedures

    Comment: A recommendation was made to require that an ACO perform a 
risk assessment to justify not using quick closeout procedures, when 
final indirect cost rates have not been established. In conjunction 
with this recommendation, one respondent recommended that the risk 
assessment include a cost/benefit analysis of applying quick closeout 
procedures.
    DPAP Response: DPAP believes it is unnecessarily burdensome to 
require a risk assessment whenever quick closeout procedures are not 
used and final indirect cost rates have not been established. However, 
the DFARS case will review whether regulatory revisions are needed to 
address the criteria a contracting officer should consider for applying 
quick closeout procedures. Depending on the results of this review, 
DPAP may consider revisions to the DFARS and/or may make 
recommendations to the FAR Council for revisions to the current FAR 
language on quick closeout.

d. Evaluation of the Use of Quick Closeout Procedures

    Comment: A recommendation was made to evaluate instances in which 
the criteria for using quick closeout applied, but the quick closeout 
procedure was not used by the ACO.
    DPAP Response: As part of the DFARS case on contract closeout, 
input will be obtained from contracting personnel as to if/why 
contracting officers do not apply quick closeout procedures when the 
facts/circumstances satisfy the FAR criteria for use of such 
procedures. This input will be considered in determining whether any 
regulatory revisions are needed regarding the quick closeout 
procedures.

8. Subcontracts

a. Closeout Plan for Subcontracts

    Comment: A recommendation was made to require a contract closeout 
plan as part of the subcontracting plan.
    DPAP Response: DPAP does not believe there would be significant 
benefit to requiring a specific contract closeout plan as part of the 
subcontracting plan. However, the DFARS case on contract closeout will 
include a review to determine whether existing regulations should be 
amended to emphasize contract closeout in discussing contractor 
responsibilities for managing subcontracts.

b. Require the Use of Quick Closeout Procedures for Subcontracts

    Comment: A recommendation was made to require the use of quick 
closeout procedures for subcontracts, including interdivisional 
transfers, to the maximum extent possible.
    DPAP Response: FAR 42.202 states that it is the prime contractor's 
responsibility to manage its subcontracts under existing regulations. 
However, the DFARS case on contract closeout will review whether 
regulatory revisions are needed to address subcontracts.

c. Waiver of Final Subcontract Assist Audits

    Comment: A recommendation was made to establish a threshold for 
assist audits and to permit prime contractors

[[Page 28659]]

to waive audits for subcontracts that are below this established 
threshold when the lack of negotiated subcontractor indirect rates is 
preventing closeout of the prime contract.
    DPAP Response: The DFARS case on contract closeout will review if/
how subcontracts should be closed when subcontract final indirect cost 
rates have not been negotiated. Since DPAP believes that the contract 
closeout process is significantly reduced if contractors (including 
subcontractors when required) submit an adequate final indirect cost 
rate proposal and prepare a Cumulative Allowable Cost Worksheet (CACWS) 
when the indirect cost rates are finalized, the DFARS case will also 
review the extent to which a final indirect cost rate proposal and a 
CACWS should be required and/or encouraged for subcontractors/
subcontracts.

d. Requirement for Audit Coordination Between the Prime Contractor and 
DCAA

    Comment: A recommendation was made to require DCAA to provide 
feedback to prime contractors on the status of assist audits.
    DPAP Response: The DFARS case on contract closeout will review the 
current process to assess whether DFARS revisions are needed to address 
the steps a prime contractor can take to determine the status of DCAA 
assist audits of subcontract costs.

e. Use of Third-Party Auditors to Complete Subcontract Assist Audits

    Comment: A recommendation was made to use third-party auditors for 
subcontract audits where the Government does not already have a 
presence, similar to the policy on Other Transactions.
    DPAP Response: DPAP does not believe that any action is needed with 
regard to this comment. In accordance with DoD Directive 5105.36, 
Defense Contract Audit Agency (DCAA), DCAA is responsible for 
performing all contract audits required in the negotiation, 
administration, and settlement of DoD contracts and subcontracts. 
Should the prime contractor have any issues related to audits of 
subcontractors, those issues should be raised with the cognizant DCAA 
auditor.

9. Reconciliations

a. Require Annual Reconciliation of Contract Payments

    Comment: A recommendation was made to encourage or require that the 
Government and the contractor reconcile payments on an annual basis.
    DPAP Response: The DFARS case on contract closeout will review if/
when it would be feasible to establish an annual contract 
reconciliation process.

b. Establish Thresholds for Performing Contract Reconciliations

    Comment: A recommendation was made to consider establishing dollar 
thresholds for performing contract reconciliations.
    DPAP Response: DPAP does not believe it would be statutorily 
permitted to establish dollar thresholds below which contract 
reconciliations would not be required. Absent statutory authority, DPAP 
does not believe it can provide the contracting officer with the 
authority to close out unreconciled contracts.

c. Require Replacement Funds Be Acquired on a Timely Basis

    Comment: A recommendation was made to require that replacement 
funds be obtained on a timely basis.
    DPAP Response: The DFARS case on contract closeout will consider 
whether to add specific language to PGI emphasizing the need for 
agencies to obtain replacement funds on a timely basis.

d. Require That DFAS Notify Contractors of Payment Offsets

    Comment: A recommendation was made to require that DFAS notify the 
contractor when there is an offset to a contractor payment.
    DPAP Response: DFAS currently notifies contractors by letter and/or 
telephone when there is an offset. The DFARS case on contract closeout 
will include a review of whether the DFARS/PGI should be amended to 
describe this process.

e. Require the Update of Cumulative Accounting Classification Reference 
Number (ACRN)/Contract Line Item Numbering (CLIN) Schedules After Each 
Contract Modification

    Comment: A recommendation was made to require the updating of the 
cumulative ACRN/CLIN schedule each time a modification is issued.
    DPAP Response: The DFARS case on contract closeout will review 
whether PGI language is needed to emphasize the importance of 
maintaining an updated ACRN/CLIN schedule.

f. Provide Contractors Access to Contract ACRN and Mechanization of 
Contract Administration Services (MOCAS) Data, and Consider Simplifying 
ACRN/CLIN Accounting

    Comment: A recommendation was made that DoD should provide 
contractors with read-only access to their contract ACRN data, allow 
visibility to all modifications, add CLIN data to MOCAS, and consider 
alternatives to and simplify the ACRN/CLIN accounting.
    DPAP Response: DPAP does not believe any action is needed with 
regard to this recommendation, because the access described is already 
available. A contractor can request access to the contract ACRN data by 
contacting the cognizant paying office identified on the DFAS Web site 
at http://www.defenselink.mil/dfas/about/Contacts.html. In addition, 
contract information, including modifications, can be accessed on the 
Internet via the Electronic Document Access system at http://eda.ogden.disa.mil. Furthermore, the ACRN/CLIN data is already included 
in MOCAS.
    With regard to simplifying the ACRN/CLIN accounting, DoD is working 
to develop a comprehensive data structure that will support the 
requirements for budgeting, financial accounting, cost/performance 
management, and external reporting throughout the Department. This 
effort is intended to standardize categorization of financial 
information along several dimensions to support financial management 
and reporting functions and, when implemented, will provide a common 
foundation to track, process, and report DoD business transactions.

g. Automated Structuring of Contract CLINS/SubCLINS

    Comment: A recommendation was made to not allow agency accounting 
systems to drive how contracts are structured, i.e., systems 
automatically add SubCLINs to a CLIN.
    DPAP Response: DPAP believes the DFARS adequately addresses this 
issue. The criteria for establishing CLINs are specified in DFARS 
204.7103 and 204.7104.

10. Contract vs. Delivery Order Basis

a. Clearance of Government Property, Final Patent Reports, Security 
Release, etc.

    Comment: A recommendation was made to clear the Government 
property, final patent report, security release, and other pertinent 
documents one time against the contract instead of on an order-by-order 
basis.
    DPAP Response: The DFARS case on contract closeout will review if/
when it may be appropriate to provide for a one-time clearance of the 
Government property, final patent report, security release, and other 
pertinent documents instead of on an order-by-order basis.

[[Page 28660]]

b. Close Contracts by Task Order

    Comment: Two recommendations were made to close out all task orders 
as they are completed instead of waiting until the end of the contract, 
or to explore best practice options.
    DPAP Response: The DFARS case on contract closeout will review 
whether DFARS/PGI language is needed to specifically address the 
closeout of task orders. Note that DCMA currently has a process to 
close out task orders as they are completed to facilitate closeout of 
indefinite-delivery, indefinite-quantity contracts.

c. Contract Period of Performance

    Comment: A recommendation was made to clarify language on the 
period of performance for a task order versus that specified in the 
basic contract, i.e., if and when the task order period of performance 
may fall outside the period of performance specified in the basic 
contract.
    DPAP Response: The DFARS case will review whether the regulations 
should be revised to specifically address issues regarding contract and 
task order periods of performance.

11. Time-and-Materials (T&M) Contracts

a. Streamline Closeout Procedures

    Comment: A recommendation was made to streamline closeout 
procedures for T&M contracts that are valued at less than a specified 
amount (e.g., $1 million).
    DPAP Response: The DFARS case on contract closeout will review if 
and when streamlined closeout procedures would be appropriate for T&M 
contracts. Note that the May 17, 2005, DCAA memorandum, Audit Guidance 
on Low Risk Time and Material/Labor Hour Contract Closeout Initiative, 
provides audit procedures for expediting the closeout of T&M contracts 
valued at $1 million or less when contractors meet certain low risk 
criteria. The memorandum (05-PPD-037(R)) is available at http://www.dcaa.mil/.

b. Verification of Employee Qualifications

    Comment: A recommendation was made for DoD guidance to provide 
extra focus on employee qualifications when closing out T&M contracts.
    DPAP Response: The review of employee qualifications should be a 
part of the contracting officer representative and/or audit 
responsibilities during contract performance so as to ensure that 
employees are properly qualified before they perform contract work. 
DPAP is currently working to provide PGI guidance to delineate the 
duties of all parties in the contract administration process. The 
review of employee qualifications will be an integral part of this 
delineation of duties. Thus, while the Government is not precluded from 
reviewing employee qualifications at the end of the contract, DPAP 
believes this issue is better addressed in the guidance on 
administering T&M contracts, rather than any specific guidance on 
contract closeout.

12. Classified Contracts

    Comment: Two recommendations were made for the use of quick 
closeout procedures, or certified year-end rates, for all classified 
contracts.
    DPAP Response: DPAP does not believe it would be advisable to 
provide blanket quick closeout authority for all classified contracts. 
However, the DFARS case on contract closeout will review whether there 
are any particular characteristics of classified contracts that would 
warrant more extensive use of quick closeout procedures than is 
provided for non-classified contracts.

13. Classified Documents

    Comment: Two recommendations were made to develop a contract clause 
that provides clear instructions for the disposition of classified 
documents, and to allow the contracting officer the authority to 
transfer classified documents to other contracts.
    DPAP Response: The DFARS case on contract closeout will review 
whether language on classified contracts should be added to PGI. In 
DoD, the security classification management program implements the 
requirements of the National Industrial Security Program Operating 
Manual (NISPOM). The security office receives, evaluates, interprets, 
and obtains clarification and changes to classification guidance for 
contracts and proposals, and issues classification guidance. 
Classification and distribution guidance is available at https://intranet.acq.osd.mil/intranet/admin/security/secguide/Implemnt/Altrnats/Classif.htm. In DoD contracts, the DD Form 254, Department of 
Defense Contract Security Classification Specification, establishes 
security classification levels of classified information and hardware, 
downgrading, and declassification instructions, public dissemination 
instructions for information related to the contract, and other special 
security requirements. If a DD Form 254 is not provided with a 
solicitation or contract, the security office and the contracting 
office are required to jointly take the actions necessary to obtain 
one.

14. Government Property

    Comment: The following recommendations were made relating to 
Government property:
    (1) Distinguish between the role of the ACO and that of the 
Government property administrator.
    (2) Provide contracting personnel with disposition authority for 
special tooling, special test equipment, and other property with an 
acquisition value of $5,000 or less, and be specific in identifying who 
has disposition authority (i.e., Government property administrator).
    (3) Provide contracting officers with the authority to make the 
determination as to whether property should be reutilized or scrapped, 
and to scrap military unique items that have been rejected for 
reutilization by the buying agency. There is little value in retaining 
these items if they have been rejected by the buying agency.
    (4) Delegate authority to the Government property administrator to 
transfer property to other contracts (e.g., to follow-on contracts to 
reduce costs).
    (5) Permit the Government property administrator to grant 
accountability relief on the spot for recorded property that was not 
found at contract completion if (a) the contractor has an approved 
property system, (b) the lost item has an acquisition date of five 
years or later, and (c) the lost item has an acquisition cost of 
$100,000 or less. The Government property administrator would retain 
the right to a full Lost/Damaged/Destroyed Report.
    (6) Establish a site property and/or plant-wide disposition 
contract for each business element location. As each contract is 
completed, all property would be automatically transferred to the 
disposition contract. Each respective buying office could fund a line 
item on the disposition contract for disposal of its property, or the 
predominant agency could fund the entire contract.
    (7) Transfer accountability for property to the Government for 
purposes of contract closeout once property is submitted on an 
inventory schedule. This is an efficient method, because it removes 
property from the contract.
    (8) Consider a system to allow the capture of data related to DoD 
property in the possession of contractors, since DD Form 1662 was 
discontinued after fiscal year 2005.
    (9) Develop a contract clause that provides clear instructions for 
the disposition of Government property.
    (10) Provide contracting officers with the authority to remove the 
property clauses from contracts where there is no

[[Page 28661]]

probability of issues in these areas (e.g., service contracts with 
little or no property).
    (11) Set a timeframe (e.g., 90 days) at the end of the contract for 
disposition of lost property.
    (12) Clarify an apparent inconsistency between final contract 
closeout and the timeframe for overall closeout of Government property.
    DPAP Response: DPAP anticipates that a final rule revising FAR 
coverage on Government property will be issued in early 2007. The FAR 
rule is anticipated to include a number of changes to existing 
Government property rules. As such, DPAP believes it would be premature 
to attempt to address the specific recommendations provided with regard 
to Government property in advance of issuance of that final rule. Upon 
issuance of the rule, DPAP will review whether the above comments 
warrant any additional regulatory or PGI coverage.

15. Patents

a. Contract Closeout Based on Negative Interim and Final Patent Reports

    Comment: A recommendation was made to allow the contracting officer 
to proceed with contract closeout within a specified timeframe (e.g., 
30 days), if a contractor has submitted a negative report on all 
interim and final patent right reports, unless the contracting officer 
receives notification that there are patent issues precluding such 
closeout.
    DPAP Response: The DFARS case on contract closeout will review 
whether DFARS/PGI language should be added to address if/when a 
contract could or should be closed out if all interim reports and the 
final patent reports are negative. Note that current DCMA contract 
closeout procedures provide a structured timeframe of 60 days for 
proceeding with closeout when patent reports containing a negative 
reply are received.

b. Omission of Patent Clauses From Contracts

    Comment: Three recommendations were made to provide contracting 
officers with the authority to remove the patent clauses from contracts 
where there is no probability of issues in these areas (e.g. service 
contracts with no patent issues), to clarify PGI as to when the clause 
is needed, and to reconsider how often to issue negative reports on 
patents. Currently, a negative report is required every 12 months.
    DPAP Response: DPAP does not believe any guidance is needed in the 
area of contract closeout to address this issue. However, DPAP notes 
that DoD has a current DFARS case regarding patents, data, and 
copyrights. Thus, DPAP will forward this recommendation to the 
cognizant DFARS committee for consideration.

c. Review FAR 52.301 Matrix for Mandatory and Discretionary Clauses

    Comment: A recommendation was made to review the FAR 52.301 matrix, 
which identifies contract clauses that are mandatory versus those that 
are discretionary, to ensure that clauses are not being included in 
contracts unnecessarily.
    DPAP Response: The current matrix at FAR 52.301 indicates when a 
FAR clause is required, required as applicable, or optional. Thus, DPAP 
does not believe any further action is necessary with regard to this 
recommendation.

16. Planning

    Comment: A recommendation was made to require a contract closeout 
plan as part of the acquisition plan. The contract closeout plan should 
consider the up-front effort, perceived benefit, and dollar threshold. 
The plan should also include a memorandum of agreement between the 
contractor and the Government that weighs the costs and benefits of a 
closeout plan.
    DPAP Response: DPAP does not believe that there would be 
significant benefit to requiring a specific contract closeout plan as 
part of the acquisition plan. However, the DFARS case on contract 
closeout will review whether the DFARS/PGI should be revised to address 
how contract closeout should be considered in developing the 
acquisition plan.

17. Mechanization of Contract Administration Services (MOCAS)

    Comment: A recommendation was made to revise MOCAS so that it is 
automatically updated to reflect the current performance period when 
the contract period is extended.
    DPAP Response: DPAP will work with DCMA to ensure that MOCAS 
capabilities include providing current contract period of performance 
information.

18. Electronic Submission

    Comment: Two recommendations were made to study Wide Area WorkFlow 
(WAWF) for duplication, because DD Form 1594, Contract Completion 
Statement, and DD Form 1597, Contract Closeout Checklist, duplicate the 
current electronic closeout processes being done in Procurement Defense 
Desktop (PD2).
    DPAP Response: DPAP does not believe any action is needed with 
regard to this recommendation, because the use of WAWF does not 
duplicate PD2. DD Form 1597 is needed, because not all contracting 
offices use PD2. When the forms are generated electronically in PD2, 
the forms do not have to be completed manually. However, PD2 does 
permit manual closeout using DD Form 1597 and DD Form 1594 for orders 
under blanket purchase agreements.

19. Allowability of Contract Closeout Costs

a. Definition of ``Period of Performance'' and Guidance on the 
Allowability of Costs Incurred After the Period of Performance

    Comment: Four recommendations were made to clarify the regulations 
to specify what is meant by the period of performance, or to provide 
regulations or guidance as to the allowability of costs incurred for 
contract closeout after the end of the performance period, such as 
subcontractor costs billed and paid outside the period of performance, 
or material transfers that occur after the period of performance.
    DPAP Response: DPAP does not believe it is necessary or advisable 
to provide blanket guidance regarding this issue. The circumstances 
noted in the recommendation must be addressed on a case-by-case basis. 
DPAP believes the current regulations adequately address this issue. 
FAR 31.201-2, Determining Allowability, states that a cost is allowable 
only when the cost is reasonable, is allocable, complies with 
applicable Cost Accounting Standards or generally accepted accounting 
principles, complies with the terms of the contract, and complies with 
the specific provisions in FAR Subpart 31.2. In reading these 
allowability criteria, the key criteria for this particular issue are 
the terms of the contract. The contractor should consider the cost of 
normal contract closeout when submitting proposals for contracts and/or 
indirect cost rates. Furthermore, when unusual circumstances will 
require the contractor to expend effort that is charged as a direct 
cost beyond the current contract period of performance, the contractor 
should request a contract modification to extend the period of 
performance. With regard to subcontract costs and material transfers, 
when the contractor becomes aware that such costs may be incurred 
outside the period of performance, the contractor should notify the 
contracting officer and should request an appropriate contract 
modification to the existing period of performance.

[[Page 28662]]

b. Guidance on Determining ``Physical Completeness''

    Comment: One recommendation was made to provide guidance on 
``physical completion.''
    DPAP Response: DPAP does not believe additional guidance on this 
issue is necessary. FAR 4.804-4 provides specific criteria that must 
exist for a contract to be physically complete.

20. Statute of Limitations

    Comment: Two recommendations were made to shorten the statute of 
limitations for submission of a claim (currently six years) to mitigate 
issues concerning expired funds, lost documentation, software changes, 
and Government/contractor storage costs; and to consider that reducing 
the period would set precedence to reduce the time requirements in 
other areas.
    DPAP Response: The length of time allowed for the submission of a 
claim is directly related to the period specified in the Contract 
Disputes Act (41 U.S.C. 605), which was amended upon enactment of the 
Clinger-Cohen Act in 1996. Any revision to this period would require a 
change to existing statutes. DPAP believes this issue is better 
addressed by focusing on the systemic issues that hinder contract 
closeout rather than pursuing a legislative change.

21. Transportation Clause

    Comment: A recommendation was made to revise the clause at DFARS 
252.247-7023, Transportation of Supplies by Sea, to reduce the needless 
inclusion of this clause in contracts or to consider issuing guidance 
specifying when the clause needs to be used. Currently it is often 
included when obviously unnecessary.
    DPAP Response: DPAP will refer this issue to the DFARS 
Transportation Committee to review whether the current clause 
prescription should be revised.

22. Settlement of Contract Debts

    Comment: A recommendation was made to permit the contracting 
officer to negotiate the settlement of contract debts across a number 
of contracts. This would avoid the need to find replacement funds, 
which often takes years and substantially delays the closeout process.
    DPAP Response: DPAP does not believe any guidance is needed in the 
area of contract closeout to address this issue. However, DPAP notes 
that there is a current FAR case that is focusing on the contract debt 
process. Therefore, this recommendation will be forwarded to the 
cognizant FAR team for consideration.

23. Consolidation of Guidance on Contract Closeout

    Comment: A number of recommendations were made that the DCAA 
Contract Audit Closeout Guide be incorporated into PGI to establish a 
single reference source for contracting personnel, and that the PGI be 
supported with training.
    DPAP Response: DPAP agrees that providing a consolidated resource 
for contract closeout guidance will facilitate the process. Thus, the 
DFARS case on contract closeout will include PGI language on contract 
closeout. In addition to providing basic guidance addressing the 
contract closeout process, this PGI section will also include links to 
agency guidebooks, training, and any other relevant information.

Michele P. Peterson,
Editor, Defense Acquisition Regulations System.
[FR Doc. E7-9734 Filed 5-21-07; 8:45 am]
BILLING CODE 5001-08-P
```