[Federal Register Volume 62, Number 163 (Friday, August 22, 1997)]
[Rules and Regulations]
[Pages 44813-44817]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21492]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 7, 16, 37, 42, 46, and 52

[FAC 97-01; FAR Case 95-311; Item VII]
RIN 9000-AH14


Federal Acquisition Regulation; Service Contracting

AGENCIES: Department of Defense (DoD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).


[[Page 44814]]


ACTION: Final rule.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council have agreed on a final rule amending 
the Federal Acquisition Regulation (FAR) to implement Office of Federal 
Procurement Policy (OFPP) Policy Letter 91-2, Service Contracting. The 
OFPP policy letter prescribes policies and procedures for use of 
performance-based contracting methods. This regulatory action was not 
subject to Office of Management and Budget review under Executive Order 
12866, dated September 30, 1993. This action is not a major rule under 
5 U.S.C. 804.

EFFECTIVE DATE: October 21, 1997.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, Room 4035, GS 
Building, Washington, DC 20405 (202) 501-4755 for information 
pertaining to status or publication schedules. For clarification of 
content, contact Mr. Jack O'Neill, Procurement Analyst, at (202) 501-
3856. Please cite FAC 97-01, FAR case 95-311.

SUPPLEMENTARY INFORMATION:

A. Background

    This final rule amends FAR Parts 7, 16, 37, 42, 46, and 52 to 
establish policy for the Government's acquisition of services through 
the use of performance-based contracting methods.
    A proposed rule was published in the Federal Register at 61 FR 
40284, August 1, 1996. Thirty-three comments were received from nine 
respondents. All comments were considered in developing the final rule.

B. Regulatory Flexibility Act

    A Final Regulatory Flexibility Analysis has been performed. The 
analysis is summarized as follows:

    The rule revises the Federal Acquisition Regulation (FAR) to 
implement the Office of Federal Procurement Policy (OFPP) Policy 
Letter 91-2, Service Contracting. It also implements the statutory 
requirements of Section 834, Public Law 101-510 by adding language 
concerning uncompensated overtime and a prescription for use of a 
new solicitation provision, ``Identification of Uncompensated 
Overtime.'' Offerors are required to identify uncompensated overtime 
hours and the uncompensated overtime rate per hour, whether at the 
prime or subcontract level, when submitting a proposal responding to 
a solicitation estimated at $100,000 or more, for services being 
acquired on the basis of the number of hours to be provided rather 
than on the task to be performed. The final rule applies to all 
businesses, large and small that submit offers of $100,000 or more 
on service contracts that are based on the number of hours to be 
provided.
    The adoption of the DoD provision concerning uncompensated 
overtime in the FAR conforms with the goals of the OFPP policy 
letter to avoid problems commonly found with service contracts 
resulting from: (1) Unnecessarily vague statements of work, which 
increase costs or make it difficult to control costs; (2) 
Insufficient use of fixed-price and incentive fee pricing 
arrangements for repetitive requirements, resulting in increased 
costs and inadequate incentive to improve performance; and (3) 
Inadequate contract administration plans, which lead to unauthorized 
commitments by the Government and delayed contract completion. The 
primary purpose for obtaining the information and using it during 
the source selection process is to discourage the use of mandatory 
uncompensated overtime in proposals from the entire professional and 
technical services industry. The provision regarding uncompensated 
overtime applies equally to large and small business entities and 
provides an additional method to improve the Government's ability to 
acquire services of the requisite quality and to assess contractor 
performance and price. Because both large and small business 
concerns must be dealt with equally in this matter, we believe that 
the rule does not create a disproportionate burden on small 
entities.

C. Paperwork Reduction Act

    The Paperwork Reduction Act is deemed to apply because the final 
rule contains information collection requirements. Accordingly, a 
request for approval of a new information collection requirement 
concerning service contracting was submitted to the Office of 
Management and Budget under 44 U.S.C. 3501, et seq., and approved under 
OMB Control No. 9000-0152. Public comments concerning this request were 
invited through the Federal Register notice published at 61 FR 40288, 
August 1, 1996.

List of Subjects in 48 CFR Parts 7, 16, 37, 42, 46, and 52

    Government procurement.

    Dated: August 7, 1997.
Edward C. Loeb,
Director, Federal Acquisition Policy Division.

    Therefore, 48 CFR Parts 7, 16, 37, 42, 46, and 52 are amended as 
set forth below:
    1. The authority citation for 48 CFR Parts 7, 16, 37, 42, 46, and 
52 continues to read as follows:

    Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42 
U.S.C. 2473(c).

PART 7--ACQUISITION PLANNING

    2. Section 7.103 is amended by adding paragraph (q) to read as 
follows:


7.103  Agency-head responsibilities.

* * * * *
    (q) Ensuring that knowledge gained from prior acquisitions is used 
to further refine requirements and acquisition strategies. For 
services, greater use of performance-based contracting methods and, 
therefore, fixed-price contracts (see 37.602-5) should occur for 
follow-on acquisitions.

    3. Section 7.105 is amended in the introductory text by adding a 
sentence at the end of the paragraph; by revising paragraphs (a)(1), 
(a)(4), and (b)(6); by redesignating paragraphs (b)(18) through (b)(20) 
as (b)(19) through (b)(21) and adding a new (b)(18) to read as follows:


7.105  Contents of written acquisition plans.

    * * * Acquisition plans for service contracts shall describe the 
strategies for implementing performance-based contracting methods or 
shall provide rationale for not using those methods (see subpart 37.6).
    (a) Acquisition background and objectives--(1) Statement of need. 
Introduce the plan by a brief statement of need. Summarize the 
technical and contractual history of the acquisition. Discuss feasible 
acquisition alternatives, the impact of prior acquisitions on those 
alternatives, and any related in-house effort.
* * * * *
    (4) Capability or performance. Specify the required capabilities or 
performance characteristics of the supplies or the performance 
standards of the services being acquired and state how they are related 
to the need.
* * * * *
    (b) * * *
    (6) Product or service descriptions. Explain the choice of product 
or service description types (including performance-based contracting 
descriptions) to be used in the acquisition.
* * * * *
    (18) Contract administration. Describe how the contract will be 
administered. In contracts for services, include how inspection and 
acceptance corresponding to the work statement's performance criteria 
will be enforced.
* * * * *

PART 16--TYPES OF CONTRACTS

    4. Section 16.104 is amended by adding paragraph (k) to read as 
follows:


16.104  Factors in selecting contract types.

* * * * *
    (k) Acquisition history. Contractor risk usually decreases as the 
requirement is repetitively acquired. Also, product descriptions or 
descriptions of services

[[Page 44815]]

to be performed can be defined more clearly.

    5. Section 16.402-2 is amended by revising the heading and 
paragraph (a); by redesignating paragraphs (b) through (g) as (c) 
through (h) and adding a new paragraph (b); and by revising the newly 
designated paragraph (e) to read as follows:


16.402-2   Performance incentives.

    (a) Performance incentives may be considered in connection with 
specific product characteristics (e.g., a missile range, an aircraft 
speed, an engine thrust, or a vehicle maneuverability) or other 
specific elements of the contractor's performance. These incentives 
should be designed to relate profit or fee to results achieved by the 
contractor, compared with specified targets.
    (b) To the maximum extent practicable, positive and negative 
performance incentives shall be considered in connection with service 
contracts for performance of objectively measurable tasks when quality 
of performance is critical and incentives are likely to motivate the 
contractor.
* * * * *
    (e) Performance tests and/or assessments of work performance are 
generally essential in order to determine the degree of attainment of 
performance targets. Therefore, the contract must be as specific as 
possible in establishing test criteria (such as testing conditions, 
instrumentation precision, and data interpretation) and performance 
standards (such as the quality levels of services to be provided).
* * * * *
    6. Section 16.405-1 is amended by revising the introductory text of 
paragraph (b)(1), and the last sentence of paragraph (b)(2) to read as 
follows:


16.405-1   Cost-plus-incentive-fee contracts.

* * * * *
    (b) Application. (1) A cost-plus-incentive-fee contract is 
appropriate for services or development and test programs when--
* * * * *
    (2) * * * This approach also may apply to other acquisitions, if 
the use of both cost and technical performance incentives is desirable 
and administratively practical.
* * * * *

PART 37--SERVICE CONTRACTING

    7. Section 37.000 is amended by adding the following text as a new 
third sentence:


37.000   Scope of part.

    * * * This part requires the use of performance-based contracting 
to the maximum extent practicable and prescribes policies and 
procedures for use of performance-based contracting methods (see 
subpart 37.6). * * *
    8. Section 37.101 is amended by adding, in alphabetical order, the 
definition ``Performance-based contracting'' to read as follows:


37.101   Definitions.

* * * * *
    Performance-based contracting means structuring all aspects of an 
acquisition around the purpose of the work to be performed as opposed 
to either the manner by which the work is to be performed or broad and 
imprecise statements of work.
* * * * *
    9. Section 37.102 is amended by redesignating paragraphs (a) 
through (g) as (b) through (h) and adding a new paragraph (a) to read 
as follows:


37.102   Policy.

    (a) Agencies shall use performance-based contracting methods (see 
subpart 37.6), to the maximum extent practicable, for the acquisition 
of services, including those acquired under supply contracts, except--
    (1) Architect-engineer services acquired in accordance with 40 
U.S.C. 541-544, as amended (see part 36);
    (2) Construction (see part 36);
    (3) Utility services (see part 41); or
    (4) Services that are incidental to supply purchases.
* * * * *
    10. Section 37.103 is amended by redesignating paragraphs ``(c)'' 
and ``(d)'' as ``(d)'' and ``(e)'' respectively, and adding a new 
paragraph (c) to read as follows:


37.103   Contracting officer responsibility.

* * * * *
    (c) Ensure that performance-based contracting methods are used to 
the maximum extent practicable when acquiring services.
* * * * *
    11. Section 37.106 is amended by adding paragraph (c) to read as 
follows:


37.106   Funding and term of service contracts.

* * * * *
    (c) Agencies with statutory multiyear authority shall consider the 
use of this authority to encourage and promote economical business 
operations when acquiring services.
    12. Sections 37.115 through 37.115-3 are added to read as follows:


37.115   Uncompensated overtime.


37.115-1   Scope.

    The policies in this section are based on Section 834 of Public Law 
101-510 (10 U.S.C. 2331).


37.115-2   General policy.

    (a) Use of uncompensated overtime is not encouraged.
    (b) When professional or technical services are acquired on the 
basis of the number of hours to be provided, rather than on the task to 
be performed, the solicitation shall require offerors to identify 
uncompensated overtime hours and the uncompensated overtime rate for 
direct charge Fair Labor Standards Act--exempt personnel included in 
their proposals and subcontractor proposals. This includes 
uncompensated overtime hours that are in indirect cost pools for 
personnel whose regular hours are normally charged direct.


37.115-3   Solicitation provision.

    The contracting officer shall insert the provision at 52.237-10, 
Identification of Uncompensated Overtime, in all solicitations valued 
above the simplified acquisition threshold, for professional or 
technical services to be acquired on the basis of the number of hours 
to be provided.
    13. Subpart 37.6, consisting of sections 37.600 through 37.602-5, 
is added to read as follows:

Subpart 37.6--Performance-Based Contracting

Sec.
37.600  Scope of subpart.
37.601  General.
37.602  Elements of performance-based contracting.
37.602-1  Statements of work.
37.602-2  Quality assurance.
37.602-3  Selection procedures.
37.602-4  Contract type.
37.602-5  Follow-on and repetitive requirements.

Subpart 37.6--Performance-Based Contracting


37.600   Scope of subpart.

    This subpart prescribes policies and procedures for use of 
performance-based contracting methods. It implements OFPP Policy Letter 
91-2, Service Contracting.


37.601   General.

    Performance-based contracting methods are intended to ensure that 
required performance quality levels are achieved and that total payment 
is related to the degree that services performed meet contract 
standards. Performance-based contracts--

[[Page 44816]]

    (a) Describe the requirements in terms of results required rather 
than the methods of performance of the work;
    (b) Use measurable performance standards (i.e., terms of quality, 
timeliness, quantity, etc.) and quality assurance surveillance plans 
(see 46.103(a) and 46.401(a));
    (c) Specify procedures for reductions of fee or for reductions to 
the price of a fixed-price contract when services are not performed or 
do not meet contract requirements (see 46.407); and
    (d) Include performance incentives where appropriate.


37.602   Elements of performance-based contracting.


37.602-1   Statements of work.

    (a) Generally, statements of work shall define requirements in 
clear, concise language identifying specific work to be accomplished. 
Statements of work must be individually tailored to consider the period 
of performance, deliverable items, if any, and the desired degree of 
performance flexibility (see 11.105). In the case of task order 
contracts, the statement of work for the basic contract need only 
define the scope of the overall contract (see 16.504(a)(4)(iii)). The 
statement of work for each task issued under a task order contract 
shall comply with paragraph (b) of this subsection. To achieve the 
maximum benefits of performance-based contracting, task order contracts 
should be awarded on a multiple award basis (see 16.504(c) and 
16.505(b)).
    (b) When preparing statements of work, agencies shall, to the 
maximum extent practicable--
    (1) Describe the work in terms of ``what'' is to be the required 
output rather than either ``how'' the work is to be accomplished or the 
number of hours to be provided (see 11.002(a)(2) and 11.101);
    (2) Enable assessment of work performance against measurable 
performance standards;
    (3) Rely on the use of measurable performance standards and 
financial incentives in a competitive environment to encourage 
competitors to develop and institute innovative and cost-effective 
methods of performing the work; and
    (4) Avoid combining requirements into a single acquisition that is 
too broad for the agency or a prospective contractor to manage 
effectively.


37.602-2   Quality assurance.

    Agencies shall develop quality assurance surveillance plans when 
acquiring services (see 46.103 and 46.401(a)). These plans shall 
recognize the responsibility of the contractor (see 46.105) to carry 
out its quality control obligations and shall contain measurable 
inspection and acceptance criteria corresponding to the performance 
standards contained in the statement of work. The quality assurance 
surveillance plans shall focus on the level of performance required by 
the statement of work, rather than the methodology used by the 
contractor to achieve that level of performance.


37.602-3   Selection procedures.

    Agencies shall use competitive negotiations when appropriate to 
ensure selection of services that offer the best value to the 
Government, cost and other factors considered (see 15.605).


37.602-4   Contract type.

    Contract types most likely to motivate contractors to perform at 
optimal levels shall be chosen (see subpart 16.1 and, for research and 
development contracts, see 35.006). To the maximum extent practicable, 
performance incentives, either positive or negative or both, shall be 
incorporated into the contract to encourage contractors to increase 
efficiency and maximize performance (see subpart 16.4). These 
incentives shall correspond to the specific performance standards in 
the quality assurance surveillance plan and shall be capable of being 
measured objectively. Fixed-price contracts are generally appropriate 
for services that can be defined objectively and for which the risk of 
performance is manageable (see subpart 16.1).


37.602-5   Follow-on and repetitive requirements.

    When acquiring services that previously have been provided by 
contract, agencies shall rely on the experience gained from the prior 
contract to incorporate performance-based contracting methods to the 
maximum extent practicable. This will facilitate the use of fixed-price 
contracts for such requirements for services. (See 7.105 for 
requirement to address performance-based contracting strategies in 
acquisition plans. See also 16.104(k).)

PART 42--CONTRACT ADMINISTRATION

    14. Section 42.1102 is amended by adding the following sentence to 
the end of the paragraph:


42.1102   Applicability.

    * * * See part 37, especially subpart 37.6, regarding surveillance 
of contracts for services.

PART 46--QUALITY ASSURANCE

    15. Section 46.103 is amended by revising paragraph (a) to read as 
follows:


46.103   Contracting office responsibilities.

* * * * *
    (a) Receiving from the activity responsible for technical 
requirements any specifications for inspection, testing, and other 
contract quality requirements essential to ensure the integrity of the 
supplies or services (the activity responsible for technical 
requirements is responsible for prescribing contract quality 
requirements, such as inspection and testing requirements or, for 
service contracts, a quality assurance surveillance plan);
* * * * *
    16. Section 46.401 is amended by revising paragraph (a) to read as 
follows:


46.401   General.

    (a) Government contract quality assurance shall be performed at 
such times (including any stage of manufacture or performance of 
services) and places (including subcontractors' plants) as may be 
necessary to determine that the supplies or services conform to 
contract requirements. Quality assurance surveillance plans should be 
prepared in conjunction with the preparation of the statement of work. 
The plans should specify--
    (1) All work requiring surveillance; and
    (2) The method of surveillance.
* * * * *
    17. Section 46.407 is amended in the introductory text of paragraph 
(f) by adding new second and third sentences to read as follows:


46.407   Nonconforming supplies or services.

* * * * *
    (f) * * * For services, the contracting officer can consider 
identifying the value of the individual work requirements or tasks 
(subdivisions) that may be subject to price or fee reduction. This 
value may be used to determine an equitable adjustment for 
nonconforming services. * * *
* * * * *

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

    18. Section 52.237-10 is added to read as follows:


52.237-10   Identification of Uncompensated Overtime.

    As prescribed in 37.115-3, insert the following provision:

[[Page 44817]]

Identification of Uncompensated Overtime (Oct 1997)

    (a) Definitions. As used in this provision--
    Uncompensated overtime means the hours worked without additional 
compensation in excess of an average of 40 hours per week by direct 
charge employees who are exempt from the Fair Labor Standards Act. 
Compensated personal absences such as holidays, vacations, and sick 
leave shall be included in the normal work week for purposes of 
computing uncompensated overtime hours.
    Uncompensated overtime rate is the rate that results from 
multiplying the hourly rate for a 40-hour work week by 40, and then 
dividing by the proposed hours per week. For example, 45 hours 
proposed on a 40-hour work week basis at $20 per hour would be 
converted to an uncompensated overtime rate of $17.78 per hour 
($20.00 x 40 divided by 45=$17.78).
    (b) For any proposed hours against which an uncompensated 
overtime rate is applied, the offeror shall identify in its proposal 
the hours in excess of an average of 40 hours per week, by labor 
category at the same level of detail as compensated hours, and the 
uncompensated overtime rate per hour, whether at the prime or 
subcontract level. This includes uncompensated overtime hours that 
are in indirect cost pools for personnel whose regular hours are 
normally charged direct.
    (c) The offeror's accounting practices used to estimate 
uncompensated overtime must be consistent with its cost accounting 
practices used to accumulate and report uncompensated overtime 
hours.
    (d) Proposals that include unrealistically low labor rates, or 
that do not otherwise demonstrate cost realism, will be considered 
in a risk assessment and will be evaluated for award in accordance 
with that assessment.
    (e) The offeror shall include a copy of its policy addressing 
uncompensated overtime with its proposal.

(End of provision)

[FR Doc. 97-21492 Filed 8-21-97; 8:45 am]
BILLING CODE 6820-EP-P