56318 Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 

DEPARTMENT OF DEFENSE 

GENERAL SERVICES 

ADMINISTRATION 

NATIONAL AERONAUTICS AND 

SPACE ADMINISTRATION 

48 CFR Parts 2, 10, 12, 16, 44, and 52 

[FAR Case 2003–027] 

RIN 9000–AK07 

Federal Acquisition Regulation; 

Additional Contract Types 

AGENCIES: Department of Defense (DoD), 

General Services Administration (GSA), 

and National Aeronautics and Space 

Administration (NASA). 

ACTION: Proposed rule. 

SUMMARY: The Civilian Agency 

Acquisition Council and the Defense 

Acquisition Regulations Council 

(Councils) are proposing to amend 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 Reform 

Act of 2003 (SARA), amended section 

8002(d) of the Federal Acquisition 

Streamlining Act of 1994 (FASA) to 

expressly authorize the use of time-andmaterials (T&M) and labor-hour (LH) 

contracts for certain categories of 

commercial services under specified 

conditions. 

DATES: Interested parties should submit 

written comments to the FAR 

Secretariat on or before November 25, 

2005, to be considered in the 

formulation of a final rule. 

Public Meeting: A public meeting will 

be held on Tuesday, October 18, 2005, 

from 9 a.m. to 4 p.m. Eastern Time, in 

the GS Building Auditorium, 1800 F 

Street NW, Washington, DC 20405, to 

facilitate an open dialogue between the 

Government and parties interested in 

the implementation of section 8002(d). 

Because they are so closely related, the 

public meeting will also cover proposed 

rule, FAR case 2004–015, Payment 

Under Time-and-Materials and LaborHour Contracts. FAR case 2004–015 is 

published as the next item following 

this publication. Interested parties are 

encouraged to attend and engage in 

discussions regarding these proposed 

rules. 

To facilitate discussions at the public 

meeting, interested parties are 

encouraged to provide written 

comments on issues they would like 

addressed at the public meeting no later 

than Tuesday, October 11, 2005. 

Interested parties may register and 

submit their input electronically at 

http://www.acq.osd.mil/dpap/dars/ 

index.htm. Attendees are encouraged, 

but not required, to register for the 

public meeting, to ensure adequate 

accommodations. 

Directions to the meeting can be 

found at the Web site. Participants are 

encouraged to check with the Web site 

prior to the public meeting to ensure the 

location has not been changed as a 

result of a large number of registrants. 

The public meeting is physically 

accessible to people with disabilities. 

Requests for sign language 

interpretation or other auxiliary aids 

should be directed to Mr. Jeremy Olson 

at 202–501–3221 at least 5 days prior to 

the meeting. 

ADDRESSES: Submit comments 

identified by FAR case 2003–027 by any 

of the following methods: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Agency Web Site: http:// 

www.acqnet.gov/far/ProposedRules/ 

proposed.htm. Click on the FAR case 

number to submit comments. 

• E-mail: farcase.2003–027@gsa.gov. 

Include FAR case 2003–027 in the 

subject line of the message. 

• Fax: 202–501–4067. 

• Mail: General Services 

Administration, Regulatory Secretariat 

(VIR), 1800 F Street, NW, Room 4035, 

ATTN: Laurieann Duarte, Washington, 

DC 20405. 

Instructions: Please submit comments 

only and cite FAR case 2003–027 in all 

correspondence related to this case. All 

comments received will be posted 

without change to http:// 

www.acqnet.gov/far/ProposedRules/ 

proposed.htm, including any personal 

and/or business confidential 

information provided. 

FOR FURTHER INFORMATION CONTACT: The 

FAR Secretariat at (202) 501–4755 for 

information pertaining to status or 

publication schedules. For clarification 

of content, contact Mr. Jeremy Olson at 

(202) 501–3221. Please cite FAR case 

2003–027. 

SUPPLEMENTARY INFORMATION: 

A. Background 

Section 8002(d) 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); and 

• Any other category of commercial 

services that is designated by the 

Administrator of 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 and 

notice of public meeting published in 

the Federal Register on September 20, 

2004 (69 FR 56316), 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 these 

questions. The public comments are 

discussed in greater detail below. In 

addition, a number of interested parties 

provided oral comments during a public 

meeting that was held on October 19, 

2004, to facilitate an open dialogue with 

Government procurement policy 

officials. 

OFPP and several members of the 

Acquisition Strategy Team also received 

an oral 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. 

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 

Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 56319 

generally offered on a fixed-price basis. 

Third, a few types of services are sold 

predominantly on a T&M and LH basisspecifically, emergency repair services. 

Based on these findings, OFPP 

recommended to the Councils that the 

proposed 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 8002(d) 

that contracting officers must execute a 

D&F that establishes that no contract 

type other than a T&M and LH contract 

is suitable before pursuing one of these 

arrangements. The agency would 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 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. 

With respect to the contents of the D–

F, OFPP advised the Councils that the 

rationale supporting use of a T&M or LH 

contract for commercial services should 

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. As noted in the findings 

above, this condition typically appears 

to exist in circumstances where the 

private sector commonly turns to T&M 

and LH contracting. And, this condition 

always appears to exist for services that 

are predominantly purchased on a T&M 

and LH basis, such as emergency repair 

services-i.e., emergency repair services, 

by their very nature, are difficult to 

capture in a well-defined scope of work 

and therefore are not generally 

conducive to purchase on a fixed-price 

basis. 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 

7.104(h), 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 

believes that these steps will help 

ensure that T&M and LH contracts are 

used only when in the best interests of 

the government, as envisioned by 

section 8002(d)(3)(B)(ii). 

Finally, the Councils invite the public 

to provide additional comment that 

might further inform OFPP’s findings 

and conclusions. Respondents are 

encouraged to include citations, as 

appropriate, to relevant sources of 

information that may be used to 

substantiate the basis for the response 

provided. 

The Councils have shaped the 

proposed rule to reflect OFPP’s 

recommendations. 

Comments were received from 23 

respondents in response to the ANPR. 

The Councils considered all of the 

comments and recommendations in 

developing the proposed rule. The 

Councils made the following changes to 

the rule as a result of the public 

comments and Council deliberations: 

1. REVISED FAR 12.207(b) to be 

consistent with OFPP’s determination 

not to develop a list of commercial 

services that are commonly sold to the 

general public on a T&M basis. 

2. REVISED FAR 12.207(b)(3) to be 

consistent with the requirements for 

noncommercial T&M/LH contracts and 

to emphasize that requirements should 

be structured so as to ‘‘maximize the use 

of fixed price contracts’’ to be consistent 

with the statutory language. 

3. REVISED FAR 12.301(b)(3) to 

prohibit tailoring of the consent to 

subcontract provisions in paragraph (u) 

of Alternate I of the FAR clause at 

52.212–4 (except to require individual 

orders to be addressed individually 

under indefinite delivery contracts) 

because the Councils believe tailored 

subcontract provisions may not 

adequately protect the Government. 

4. REVISED FAR 44.303 to specify 

that only firm-fixed price or fixed-price 

with economic price adjustment 

contracts awarded for commercial items 

under FAR Part 12 are excluded from 

Contractor Purchasing System Reviews 

(CPSR) to assure that the CPSR includes 

commercial T&M/LH contracts thereby 

providing contractors the flexibility to 

award commercial T&M/LH 

subcontracts without the otherwise 

required subcontract consent. 

5. DELETED the language in 

paragraph (a) of the FAR clause at 

52.212–4 that allowed the Government 

to require the contractor to ensure future 

performance conforms to contract 

requirements because the Councils 

believe that this language is unnecessary 

since the Government already has this 

right through the use of a cure notice 

and ADD language to clarify that the 

Government may seek either ‘‘an 

equitable price adjustment’’ or 

‘‘adequate consideration’’ for acceptance 

on nonconforming supplies or services. 

6. Alternate I to FAR clause 52.212–

4—

a. REVISED paragraph (a) to allow 

contractors to be paid for 

reperformance, without profit, up to the 

ceiling price to be consistent with the 

provisions for noncommercial T&M 

contracts, i.e., paragraphs (c) through (k) 

of the FAR clause at 52.246–6, 

Inspection—Time-and-Material and 

Labor-Hour. However, since contracting 

officers will not necessarily know the 

portion of profit in the labor rates for 

these competitive awards, the Councils 

revised paragraph (a)(4) of the clause to 

require contracting officers to identify 

the portion of profit in the ‘‘hourly rate’’

and included a 10 percent default if not 

otherwise specified in the clause. The 

Councils note that 10 percent default is 

arbitrary and not necessarily 

representative of the actual portion of 

profit in the labor rates; however, the 

Councils believe it is advisable to 

establish a default for instances where 

contracting officers fail to provide a 

specific decrement. 

b. RELOCATED definitions previously 

located in paragraph (u) to paragraph (e) 

to be consistent with the new format of 

the basis clause and ADDED a new 

definition for ‘‘materials’’ to recognize 

that the term has different meaning for 

T&M contracts, i.e., materials include 

other direct and indirect costs. 

c. DELETED the requirement in 

paragraph (i)(1)(i)(A) that only 

permitted reimbursement of fractional 

hours if the contract specifically 

authorized fractional hours because the 

Councils believe contractors should be 

paid for fractional hours on a prorated 

basis. 

d. REVISED paragraph (i)(1)(i)(B) to 

specify that contractors shall 

substantiate subcontractor hours 

reimbursed at the hourly rate in the 

schedule when requested by the 

contracting officer and to specify the 

payment records that may be requested 

to substantiate the labor. 

e. REVISED the material cost 

provisions at paragraph (i)(1)(ii) to—

1. Permit payment at the contractor’s 

established catalog or market price for 

materials that meet the definition of a 

commercial item. 

2. Permit reimbursement of 

subcontract costs at the hourly rate 

specified in the schedule in certain 

situations. 

3. Delete the requirement to take all 

discounts, rebates, allowances, etc. to be 

more consistent with commercial 

practices. However, when the contractor 

receives the benefit of such discounts, 

rebates, or allowances, the Government 

must receive appropriate credit. 

56320 Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 

4. Eliminate the ‘‘most favored 

customer’’ requirement to be consistent 

with the allowability provision for 

material costs at 31.205–26(f). 

5. Add provisions to permit 

reimbursement of other direct costs on 

a cost basis only to the extent such costs 

are listed in the contract clause so the 

Government will know the ‘‘types of 

costs’’ a contractor might subsequently 

bill as other direct costs. 

6. Add provisions for reimbursement 

of indirect costs at a fixed amount to the 

extent such reimbursement are listed in 

the contract clause to permit 

reimbursement without imposing the 

requirements of FAR Part 31. 

f. REVISED the access to records 

provisions at paragraph (4) to allow the 

Government to review records of 

employee qualifications and changed 

terminology from ‘‘records of 

distribution of labor’’ versus ‘‘labor 

distribution reports’’ to be more 

consistent with commercial practices. 

g. ELIMINATED the requirements at 

paragraph (i)(5) for Assignment of 

Refunds, Rebates and Credits because 

the Councils believe the applicable 

credits are adequately covered in 

paragraph (i)(1)(ii). 

h. REVISED paragraph (u)(8), to 

clarify that payment of subcontract costs 

incurred prior to the date of any 

required subcontract consent will only 

be reimbursed if the contracting officer 

subsequently provides the consent. 

Disposition of Public Comments 

1. Types of Commercial Services Sold 

on a T&M/LH Basis. 

a. Predominately Sold on T&M or LH 

Basis. One commenter said that T&M 

contracts are predominately used when 

the work effort to complete is extremely 

difficult or impossible to determine at 

the time the contract is executed and 

when the customer does not have a 

complete definition of the final or 

expected result. Another commenter 

said commercial T&M/LH contracts are 

appropriate when it is not possible for 

the buyer/seller to estimate accurately 

the resources required for performing 

and neither party can assume the 

financial risks for performance. Another 

commenter said the commercial 

marketplace regularly acquires support 

on a fixed rate per day or hours basis. 

In addition, various commenters 

identified the following specific services 

as a type of commercial service 

predominately sold on a T&M or LH 

basis: 

1. Emergency Response. 

2. Repairs. 

3. Information Technology. 

4. Professional. 

5. System Integration. 

6. Program Management. 

7. Software Development. 

8. Facilities. 

9. Legal. 

10. Accounting and Auditing. 

11. Cleaning. 

12. Consulting. 

13. Business Advisory. 

14. Financial Management. 

15. Project Management. 

16. Training. 

17. Certain building trades (e.g., 

painters). 

18. Quality Assurance. 

19. Moving. 

20. Installation. 

21. Support. 

22. Engineering. 

23. Wind Tunnels. 

24. Troubleshooting. 

25. Miscellaneous Testing. 

26. Pilot. 

b. Rarely Sold on a T&M or LH Basis. 

One commenter said T&M/LH contracts 

are rarely used when the extent of the 

work effort to complete is clearly 

understood and definable, i.e., the 

customer is able to clearly and 

accurately define the work. 

c. Commonly Sold as Both T&M/LH 

and Fixed Price. One commenter said 

commonly sold commercial T&M/LH 

services can also be sold as fixed-price, 

under different circumstances, and that 

the customer’s ability to specify 

required services/needs should be the 

basis for determining the use of 

commercial T&M/LH contracts. Another 

commenter said professional 

architectural and engineering design 

services, and consulting services are 

commonly sold on both a T&M/LH and 

fixed price basis. 

Response: The Councils appreciate 

the public input and has fully 

considered it in formulating the types of 

services that are appropriate for 

commercial T&M/LH contracts. 

2. Appropriate Use. 

a. One commenter said the 

Government should conduct a thorough 

review of actual commercial buying 

practices to substantiate that T&M/LH 

contracts are used in the private sector 

rather than assuming and asserting that 

the use of T&M/LH contracts are a 

standard commercial practice. 

Response: The FAR rule implements 

the statute that authorizes the use of 

T&M contracts for commercial services. 

The Councils note that the ANPR 

requested information from the public 

to better ensure that the implementation 

applies only to services that are 

commonly sold on a commercial basis 

as required by the statute. The Councils 

believe the public’s input and the 

statute provide a sufficient basis for 

developing appropriate FAR coverage. 

b. One commenter said the language 

at FAR 12.207(b)(3)(iii) that minimizes 

the use of T&M and LH contracts to the 

maximum extent practicable comes 

close to defeating the purpose of the 

original legislation. The commenter also 

said that the rule does not convey 

Congress’s intent because the SARA 

legislation required maximum use of 

fixed price contracts and the ANPR 

indicates that the D&F is to demonstrate 

that a Government requirement is 

described in such a way as to minimize 

the use of T&M and LH contracts. 

Response: The Councils recognize 

that the language should focus on 

maximizing fixed price contracts for 

commercial items. Therefore, the 

Councils revised the rule to establish 

the requirement in a way that will 

maximize the use of fixed price 

contracts, e.g., by limiting the value or 

length of the current T&M/LH contracts 

or orders. 

c. One commenter questioned the 

need to restrict commercial T&M and 

LH contracts to competitive 

circumstances because there may be 

situations where sufficient controls are 

in place to acquire services using 

procedures other than competition. 

Response: Section 1423 of Public Law 

108–136 stipulates commercial T&M 

and LH contracts must be made on a 

competitive basis. 

d. One commenter recommended that 

the Councils clarify that the fair 

opportunity requirements of FAR 16.505 

apply to commercial task order T&M 

contracts. 

Response: The provisions at FAR 

16.505 apply to commercial task order 

T&M contracts. Nothing in this rule 

requires that each task order be subject 

to full and open competition. 

e. One commenter said the FAR 

Council solicited responses at the public 

meeting regarding whether commercial 

services task orders awarded on a 

noncompetitive basis should be eligible 

to be awarded under T&M/LH vehicles. 

The commenter has legal and policy 

objections to sole-source procurements 

being awarded under T&M/LH vehicles 

since SARA extended only to 

competitive procurements. 

Response: The Councils acknowledge 

noncompetitive contract awards were 

discussed at the public meeting; 

however, noncompetitive awards were 

only discussed to obtain input on what 

constitutes competition. As stated in the 

ANPR and the rule, the awards must be 

made on a competitive basis. 

f. One commenter said that use of 

competition and a ceiling does not 

adequately protect the Government from 

abuse because competition is an 

‘‘illusionary protection’’ as 

Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 56321 

demonstrated by the General Services’

schedules and task orders under IDIQs 

since ‘‘in practice, they are mostly 

awarded on a sole source basis.’’

Response: The commenter is 

concerned about compliance with the 

rule rather than promulgation of the rule 

itself. The rule requires use of 

competition in accordance with the 

statutory requirement for use of T&M 

contracts for commercial services. The 

commenter did not state that true 

competition is a problem, but merely 

assumes that such competition will not 

be obtained, i.e., procuring components 

will not comply with the FAR 

requirements. Issues regarding 

compliance with the FAR are beyond 

the scope of the Councils; however, the 

Councils note that the assumption in 

promulgating the FAR is that it will be 

properly applied. 

g. One commenter recommended 

eliminating the phrase ‘‘of a type’’ in 

FAR 12.207(b)(2)(ii)(A) since it cannot 

be uniformly defined and is confusing. 

The commenter believes eliminating the 

phrase will ensure that the services 

being purchased are truly commercial 

and not just a stretch of someone’s 

imagination. 

Response: The term ‘‘of a type’’ is part 

of the regulatory definition of a 

commercial item and also part of the 

statutory requirement that provides for 

use of T&M contracts for commercial 

items. Therefore, the Councils believe it 

is not appropriate to eliminate this 

phrase from this rule or FAR. 

h. One commenter said the rule 

should limit services bought on T&M 

and LH contracts under FAR Part 12 to 

those that are truly commercial in 

nature and commonly sold in the 

commercial markets and restrict the use 

of commercial item T&M/LH contracts 

for requirements with large material 

components. 

Response: The rule restricts the use to 

commercial services that are commonly 

sold to the general public through use 

of a T&M/LH contract. The Councils 

agree a commercial T&M/LH contract 

may not be the most suitable contract 

type when material costs are a 

significant cost of the acquisition. 

However, the Councils believe imposing 

strict limits on the material component 

would unnecessarily restrict the 

contracting officer’s flexibility and 

discretion when responding to a specific 

requirement. The Councils note that the 

rule adopts the same procedures for 

noncommercial T&M contracts in FAR 

Subpart 16.6. 

i. One commenter said the definition 

of what qualifies as a commercial 

service should be broad in scope and 

recommended requiring an affirmative 

determination by the contracting officer 

instead of developing a comprehensive 

list. Another commenter recommended 

adding the type(s) of service to a general 

list of subject areas to be considered 

when choosing a T&M or LH contract 

but not adding examples (consulting, 

training, etc.) because doing so might 

result in premature decisions for T&M 

or LH applicability. Another commenter 

recommended using broad categories, 

such as Federal supply codes or threedigit NAICS, so as not to limit 

implementation of public law because 

there are innumerable services that 

could be procured on a T&M/LH basis. 

Conversely, one commenter 

recommended adding a clear definition 

of commercial service with concrete 

examples. Another commenter said 

SARA requires OFPP to formulate a list 

of services typically sold on a T&M/LH 

basis commercially and that the list is 

needed because some contracting 

officers may be limited in their ability 

to properly determine whether the 

service could be bought on a T&M/LH 

basis. Another commenter said the rule 

should not go beyond the statutory 

language in describing the type of 

service(s) that may be procured under 

T&M contracts. Another commenter said 

the rule is incomplete because the rule 

authorizes use of T&M/LH contracts to 

acquire any other category of 

commercial services identified by OFPP 

but the rule does not identify where the 

OFPP determination will be posted or 

how it will be communicated to 

agencies. 

Response: The Council note that 

many of the attendees at the public 

meeting expressed the view that a 

comprehensive list of commercial 

services would be overly restrictive and 

impractical. The Councils agree that 

developing and maintaining a 

comprehensive list is not practical or 

feasible because many services may be 

sold on both a T&M/LH and fixed price 

basis depending on the circumstances of 

the acquisition. Further, the Councils 

note that the ANPR did not identify a 

location for the ‘‘OFPP determination’’

because the Councils intended to revise 

the rule when OFPP made its 

determination. As OFPP has now made 

its determination, the Councils revised 

the rule to reflect that determination, 

i.e., the rule allows agencies to purchase 

any commercial service on a T&M/LH 

basis when the agency has completed a 

D&F containing sufficient facts and 

rationale to justify that a FFP 

arrangement is not suitable. 

j. One commenter said the term 

‘‘predominantly’’ should not be used in 

lieu of the term ‘‘commonly’’ since they 

have distinctively different meanings. 

Response: The Federal Register notice 

requested input on T&M services 

‘‘predominately’’ and ‘‘commonly’’ sold 

on a T&M/LH basis to obtain additional 

insight into the use of T&M contracts for 

commercial services. The Councils agree 

the terms have different meaning and 

notes that the term ‘‘predominately’’ is 

not used in the provisions discussed in 

the ANPR or the rule. 

k. One commenter suggested adding 

the ‘‘type of work’’ or ‘‘type of skills 

needed’’ to the list of considerations for 

deciding whether other contract types 

authorized by FAR 12.207 are suitable 

instead of limiting the determination to 

situations where it is not possible at the 

time of award to estimate accurately the 

extent or duration of work stating many 

times the Government’s requirements 

quickly evolve after award. Another 

commenter said the rule should not 

adopt the rule in the GSA Multiple 

Award Schedule because T&M and LH 

contracts are advantageous to the 

Government since profit is defined and 

limited. Another commenter 

recommended revising the coverage at 

FAR 12.207(b)(3)(ii)(A) for when a 

T&M/LH contract is suitable by 

inserting either the word ‘‘some’’ or 

‘‘certain’’ in front of the word ‘‘costs’’ at 

the beginning of the fifth line to specify 

that only ‘‘some’’ or ‘‘certain’’ costs 

cannot be anticipated with a reasonable 

degree or certainty since contracting 

officers are required to determine that 

the contract award amount is fair and 

reasonable. Three commenters said the 

situations when T&M/LH contracts can 

be used should be the same for 

commercial and noncommercial 

acquisitions. 

Response: The ANPR language at FAR 

12.207(b)(3)(ii)(B) that would have 

allowed use of commercial T&M/LH 

contracts when the work is sufficiently 

understood to allow for fixed pricing 

was intended to clarify that there were 

only two pricing arrangements for 

commercial items, fixed price (i.e., firmfixed price and fixed price with 

economic price adjustment) and T&M/ 

LH. The Councils agree the situations 

for appropriate use of commercial T&M/ 

LH contracts should be the same as the 

situations that permit noncommercial 

T&M/LH contracts. As the additional 

language appears to have caused 

confusion, the Councils eliminated the 

requirements at FAR 12.207(b)(3)(ii)(B). 

The rule is now identical to the 

requirements to FAR Subpart 16.6 

(noncommercial) and MAS special 

ordering procedures which restrict T&M 

contracts to situations where it is not 

possible at the time of placing the 

contract to estimate accurately the 

extent or duration of the work to 

56322 Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 

anticipate costs with any reasonable 

degree of confidence. 

l. Two commenters said the 

Government should not assume that 

T&M contracts can only be used when 

the entire effort is T&M since contracts 

that are predominately firm-fixed price 

can also include T&M items. 

Response: Neither the FAR, nor this 

rule, preclude the use of ‘‘hybrid’’

contracts, i.e., contracts with mixed 

contract types. Therefore, additional 

authority is not needed. However, the 

Councils note that contracting officers 

must adequately document why no 

other contract type is suitable for the 

T&M portion of the contract in the 

supporting D&F. 

m. One commenter said offerors 

should be allowed the flexibility to 

propose both fixed price and T&M 

solutions and that the contracting officer 

could analyze and decide which offer is 

most cost effective and advantageous to 

the Government. 

Response: The Councils believe 

contracting officers will conduct 

adequate market research to determine 

the appropriate contract type and notes 

that T&M contracts are only authorized 

when no other contract type is suitable. 

The solicitation must identify the 

anticipated contract type so offerors will 

know the terms and conditions that 

apply to the solicitation and can price 

their offers accordingly. Additionally, 

the solicitation must specify the 

evaluation factors that will be used to 

determine the successful offeror so that 

all offerors are on equal footing since 

evaluation factors, like proposed prices, 

vary depending on the contract type. 

The Councils note that existing FAR 

provisions allow contracting officers to 

solicit alternate proposals. 

n. One commenter noted that T&M 

contracts represent more risk to the 

buyer than firm fixed price contracts 

and said differences in Federal and 

State court interpretations of critical 

performance aspects, especially the 

ability of the buyer to enforce firm 

deliverables and warranties, may 

explain why the rule limits the use of 

T&M or LH contracts to when ‘‘no other 

contract type is suitable.’’ The 

commenter said that Federal courts have 

often found that the buyer cannot 

enforce firm deliverables or warranties 

under T&M and LH contracts, which 

makes these contract types inherently 

risky for the Government. Conversely, 

State courts, applying the principles of 

the Uniform Commercial Code, typically 

do not make distinctions between T&M/ 

LH and FFP contracts in regard to the 

buyer’s rights to firm deliverables and 

warranties. The commenter further 

recognized that a continued bias in 

favor of fixed price contracts for 

acquisition of commercial services 

under FAR Part 12 is in order. However, 

the commenter recommended that the 

Councils fully understand the important 

distinctions made by the Courts before 

implementing the rule. 

Response: The Councils agree that 

T&M contracts comprise the highest 

contract type risk to the Government. As 

such, they should only be used when no 

other contract type is suitable. The 

Councils recognize there are Court 

opinions regarding deliverables and 

warranties. However, the issue of 

deliverables and warranties does not 

factor into the decision to use a T&M 

contract. The key factor in deciding to 

use a T&M contract is the ability to 

accurately estimate the extent or 

duration of the work or anticipate costs 

with any reasonable degree of certainty. 

o. One commenter said there is a clear 

separation between projects that are 

obviously suited for FFP (defined scope 

development or implementation) and 

those suited for T&M (design consulting 

services, quality assurance, security, 

auditing, etc.) and that there is little 

chance that the rule would drive 

contracts away from FFP. 

Response: Since commercial T&M 

contracts are not currently authorized 

by the FAR, the Councils are unable to 

determine whether the rule will ‘‘drive 

contracts away from FFP.’’ In 

accordance with the rule, T&M/LH 

contracts are only authorized when the 

contracting officer determines that no 

other contract type is suitable which 

should assure that the rule does not 

‘‘drive contracts away from FFP’’. 

p. One commenter said contracting 

officers should be provided guidance on 

sources and specific instructions for 

conducting market research to evaluate 

options and rationale for not using 

fixed-prices for delivery of services. 

Response: The discussion of market 

research is included in FAR Part 10, 

Market Research. The FAR does not 

provide specific instructions or sources 

for conducting market research since 

this will vary with different types of 

acquisitions. Such specific instructions 

and sources are more appropriately 

contained in agency training materials 

and guidance. 

q. One commenter said the rule 

should be revised to emphasize that 

market research is performed to 

establish why T&M is the appropriate 

contract type for a particular 

requirement. Another commenter said 

the market research procedures in FAR 

Part 10 will be an effective way to 

determine whether it is feasible to 

purchase services on a fixed-price basis 

or a T&M/ LH basis. Another commenter 

said market research should be limited 

to a determination of whether the 

desired services are commercial which 

could result in solicitation of both fixedprice and T&M contracts. Another 

commenter noted that contracting 

officers should rely on market analysis 

to identify services typically sold 

commercially since market analysis, 

coupled with documentation that the 

scope or duration of work is not 

sufficiently clear, should be sufficient to 

establish that a fixed-price contract is 

not suitable. 

Response: The Councils agree market 

research is an effective way to 

determine whether purchases can be 

made on a T&M/LH or FFP basis and 

notes that the ANPR and the proposed 

rule require agencies to determine 

commercial practices, including 

contract type, during market research. 

The Councils do not believe additional 

coverage is needed. 

r. One commenter recommended 

revising FAR Parts 7 and 37 to require 

Government personnel to evaluate the 

existing requirements and market 

conditions and adapt the strategy 

needed to address them. 

Response: Government personnel are 

required to conduct market research, 

which includes evaluating the existing 

requirements and market conditions, to 

determine the most suitable approach to 

acquiring, distributing, and supporting 

the needed supplies or services. The 

Councils do not believe additional 

coverage is needed. 

s. One commenter recommended that 

the Councils amend Part 12 to exclude 

applied research since established 

catalog or market prices cannot exist 

because the primary objective of this 

type of research is to advance scientific 

knowledge not yet existing in the 

marketplace. The commenter noted that 

the Deputy Inspector General for 

Auditing had previously identified the 

inappropriate use of FAR Part 12 in 

procurement of applied research in 

Report No. D2001–051, ‘‘Use of Federal 

Acquisition Regulation (FAR) Part 12 

Contracts for Applied Research,’’ dated 

February 15, 2001. 

Response: Applied research is a 

service that is performed on a T&M/LH 

basis in the commercial marketplace. 

The acquired scientific knowledge is the 

result of the research services. 

t. One commenter said contracting 

officer should be given discretion in 

making an award on the basis of an 

overall evaluation of the proposal, 

which presumably includes rates, 

technical approach to performing the 

work, price, etc., and that price alone 

should not be the deciding factor. 

Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 56323 

Response: The Councils agree that 

price alone is not necessarily the sole or 

key factor in making an award. 

However, the rule does not need to be 

changed since FAR Part 12 already 

requires the contracting officer to use 

the provisions in FAR 15.101 and 

15.304, which provide criteria to be 

used in making the award. The criteria 

states that the relative importance of 

price will vary with different types of 

acquisitions. 

u. One commenter believes award fees 

and performance or delivery incentives 

fees provisions at FAR 12.207(d) should 

only be used in contracts for 

commercial services when use of such 

fees are consistent with commercial 

practices. 

Response: The Councils see no reason 

to limit the use of award fees and 

performance or delivery incentives to be 

consistent with commercial practices. 

The Government uses award fees and 

incentives to motivate contractor efforts 

that might not otherwise be emphasized 

in order to meet specific acquisition 

objectives. While the use of award fees 

and incentives may not be customary in 

all commercial industries, the Councils 

believe similar incentives are generally 

used in the commercial marketplace 

when appropriate. 

v. One commenter encouraged the 

‘‘abandonment of CPFF contracts for 

commercial services in favor of T&M’’

and urged approval of the rule. 

Response: Cost type commercial 

contracts are prohibited by statute. 

w. One commenter at the public 

meeting said the rule should apply only 

at the prime contract level since the 

commercial sector does not compete 

awards at the subcontract level. 

Response: The rule does not change 

how commercial contractors price 

subcontracts. As always, commercial 

contractors can use T&M contracts. 

However, the Councils believe 

commercial contractors often award 

subcontracts on a competitive basis. 

x. One commenter at the public 

meeting asked how contracting officers 

determine what is ‘‘in scope’’ for the 

purpose of issuing change orders since 

T&M contracts do not always specify an 

outcome. 

Response: The procedures for 

determining what is ‘‘in scope’’ for 

commercial T&M contracts are the same 

as those used for noncommercial T&M 

contracts. While T&M contracts do not 

always specify an outcome, they do 

specify the contract requirements. 

Determining whether the change is ‘‘in 

scope’’ or ‘‘out of scope’’ will be based 

on the requirements in the contract. The 

Councils note that work is within the 

scope of the contract if it is regarded as 

having been fairly and reasonably 

within the contemplation of the parties 

when the contract was entered into. 

y. One commenter at the Public 

Meeting asked if fixed-price contracts 

with prospective price redetermination 

contracts could serve the same purpose 

for many contracts that are awarded on 

a T&M basis. 

Response: Fixed-price contracts with 

prospective price redeterminations may 

be used in acquisitions of quantity 

production or services when it is 

possible to negotiate a fair and 

reasonable firm fixed price for an initial 

period, but not for subsequent periods 

of contract performance (see FAR 

16.205–2). Conversely, a T&M contract 

can only be used when it is not possible 

at the time of placing the contract to 

estimate accurately the extent or 

duration of the work or to anticipate 

costs with any reasonable degree of 

confidence (see FAR 16.601(b)). The 

appropriate contract type will be based 

on the specific circumstances of the 

acquisition. 

3. Determination and Finding (D&F). 

a. One commenter said the 

requirement for a D&F for every CLIN or 

order would be unduly burdensome to 

contracting officers and instead 

recommended revising the acquisition 

planning process and associated 

documentation requirements to address 

the possibility or probability for using 

T&M and LH based on the analysis of 

the requirement and market research. 

Another commenter said a D&F is 

needed for each task order. Another 

commenter said that the rule could be 

drafted to make it less onerous for 

developing and approving D&Fs and 

that the requirement for a D&F for each 

order when the IDIQ contract provides 

for both FP and T&M orders would be 

redundant and wasteful and that it is 

not necessary to require approval one 

level above the contracting officer for a 

D&F for an IDIQ authorizing only T&M 

and LH contracts. Another commenter 

said separate D&Fs should be issued for 

each task order under an IDIQ contract 

when all task orders will be issued as 

T&M/LH. Another commenter said a 

D&F should be executed by the 

contracting officer only as currently 

required under the FAR, i.e., a D&F 

should not be required for each order. 

Response: The Councils note that 

there is no requirement for a D&F for 

each CLIN and that there is no 

requirement for a D&F for fixed price 

orders. The Councils acknowledge that 

the proposed 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 as required by the statute. 

b. One commenter said the rule 

should make clear that a D&F will not 

be required prior to issuing a 

solicitation inviting both fixed price and 

T&M/LH proposals and that a D&F 

should only be required if the ultimate 

award is T&M or LH. Three commenters 

recommended setting a D&F threshold 

to limit the burden for small dollar 

acquisitions. 

Response: FAR 12.207(b)(1) only 

requires a D&F before award. It does not 

require a D&F before issuance of a 

solicitation. The Councils also note that 

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

contracts regardless of the dollar 

amount. 

c. One commenter suggested adding a 

requirement for the D&F to address the 

specific reasons why a FFP contract was 

eliminated instead of allowing highlevel generalities as explanations. The 

commenter also said the D&F should 

explain the boundaries of the 

requirement so the performance risk to 

the Government is reduced or the 

contract value or contract length is 

limited. Another commenter 

recommended changing the word 

suitable to a phrase more like ‘‘a 

determination and findings (D&F) that 

the use of commercial items is not 

suitable if it is not used’’. 

Response: The content of a D&F is 

addressed in the rule at FAR 12.207(b). 

The rule requires that ‘‘each D&F shall 

contain sufficient facts and rationale to 

justify that no other contract type 

authorized by this part is suitable.’’ The 

Councils believe the rule provides 

adequate guidance to contracting 

officers as to the required content of the 

D&F. Sufficient facts and rationale 

include any necessary information 

regarding contract value and length. The 

D&F required by the statute and the rule 

relate to contract type only and not the 

determination of whether ‘‘use of 

commercial items is not suitable.’’

d. One commenter said the D&F 

process appears to be adequate and 

appropriate but the commenter 

recommended adding a requirement to 

analyze the need to definitively control 

the profit level when determining 

whether a fixed price contract is 

appropriate. 

Response: The ‘‘need to definitively 

control the profit level’’ is not a 

criterion for determining whether a 

fixed price contract is suitable. T&M/LH 

contracts are only used ‘‘when it is not 

possible at the time of placing the 

56324 Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 

contract to estimate accurately the 

extent or duration of the work or to 

anticipate costs with any reasonable 

degree of confidence.’’

e. One commenter recommended 

adding a requirement to FAR 

12.207(b)(1) for the contracting officer to 

obtain higher-level D&F approval before 

taking any actions to extend or renew 

the contract beyond five years because 

the Deputy Inspector General for 

Auditing has previously identified 

problems with service contracts such as 

T&M/LH contracts that have been 

extended or renewed for 10, 20, and 

even 30 years with no attempt to use 

available historical information to 

transform the T&M/LH contract to FFP. 

Response: The Councils believe 

current FAR provisions adequately 

cover the commenter’s 

recommendations. Actions to extend the 

contract or order beyond the limits 

established in FAR 17.204(e) require 

approval in accordance with agency 

procedures. In addition, FAR 7.103(r) 

requires that agency heads ensure that 

knowledge gained on prior acquisitions 

is used to further refine requirements 

and acquisition strategies. Furthermore, 

the rule requires that actions be taken to 

maximize the use of fixed price 

contracts, including limiting the 

contract length for T&M/LH contracts. 

4. Payment. 

a. One commenter asked the Councils 

to consider revising the last sentence of 

FAR 52.212–4, Alternate I (a)(i)(B) (sic, 

paragraph (i)(1)(i)(B)) from ‘‘or other 

substantiation specified in the contract’’

to ‘‘or other substantiation required by 

the contracting officer’’ because the 

commenter believes that the specific 

type of substantiation necessary may not 

be apparent until after award. 

Response: The Councils do not 

believe it would be prudent to leave the 

contract terms open to the unilateral 

discretion of the contracting officer. The 

Councils believe it is imperative for 

commercial contractors to know what 

will be required to receive 

reimbursement. Leaving the contract 

terms open-ended will discourage 

competition and possibly lead to 

disputes. Should the parties agree after 

contract performance has begun that 

additional or alternative substantiation 

is needed, the contract can be 

appropriately modified. 

b. One commenter said payment of 

partial hours should not be dependent 

on specific language allowing payment 

and recommended payment for work 

performed unless the contract 

specifically provides otherwise. 

Response: The Councils agree that 

partial hours should be paid on a prorated basis and revised the rule to 

provide for payment of partial hours on 

a pro-rata basis. 

c. One commenter said the 

Government’s unilateral right to dispute 

a payment and withhold money under 

the Overpayments/Underpayments 

portion of the clause is inconsistent 

with commercial practices and that 

disputes should be subject to the 

Contracts Disputes procedures. 

Response: The Councils believe that 

the rule is consistent with commercial 

practices since commercial companies 

withhold payments when the supplier 

does not comply with the terms of the 

contract. The Councils note that the 

Overpayments/Underpayments 

provisions protect both the Government 

and contractors and those contractors 

have full rights under the disputes 

clause of the contract to file claims and 

recover monies, including applicable 

interest. 

d. One commenter said the payment 

clause on withholds for non-commercial 

T&M contracts at FAR clause 52.232–7 

is not appropriate for commercial T&M 

contracts and the proposed payment 

provisions in paragraph (i) of the 

proposed alternate clause are 

acceptable. 

Response: The Councils agree that 

withhold provisions at FAR clause 

52.232–7 are not necessary for 

commercial T&M contracts and notes 

that the rule, like the ANPR, does not 

include the withhold provisions. 

e. One commenter said it is common 

for a contractor to subcontract for labor 

categories when the contractor does not 

have the labor category identified in the 

contract and questioned what the 

contractor will be permitted to bill and 

what the Government will be required 

to pay the contractor for subcontract 

labor, i.e., schedule rates or actual costs. 

The commenter also said clear guidance 

is needed on how to treat subcontract 

labor costs for both commercial and 

non-commercial T&M/LH contracts. 

Another commenter said the common 

commercial practice is to negotiate and 

pay vendors one hourly rate per labor 

category regardless of whether the work 

is performed by the prime or 

subcontractor employees, i.e., ‘‘blended 

rates’’ which include subcontract rates. 

Response: The Councils believe that 

the contract should clearly address how 

the contractor will be reimbursed for 

subcontract costs and revised the rule to 

provide for reimbursement of 

subcontractor costs at actual cost unless 

the contract specifies that the 

subcontract cost are reimbursable at the 

hourly rates prescribed in the schedule. 

5. Ceiling Price. 

a. One commenter said the not-toexceed (NTE) requirements of the 

proposed rule and continued auditing of 

labor rates and internal costs by DCAA 

make long-standing fears about T&M 

contracts unrealistic. 

Response: T&M contracts will 

continue to comprise the highest 

contract type risk to the Government 

since they provide the least incentive 

for contractors to perform efficiently 

and economically. The NTE ceiling for 

commercial T&M contracts, like the 

ceiling for non-commercial T&M 

contracts, simply limits the 

Government’s risk. The Councils note 

that, like non-commercial T&M 

contracts, labor hours and not labor 

rates are subject to Government audit 

after contract award. The Councils 

further note that the Government’s audit 

rights under the rule are limited to 

verification of labor hours and employee 

qualifications (when reimbursed on an 

actual cost basis), direct material, 

subcontract, and other direct costs. 

b. One commenter said the ceiling 

prices may be established with the 

expectation of completion even if the 

contractor exceeds the ceiling price. 

Another commenter said the provision 

will encourage contractors to perform 

services on the Government’s ‘‘promise’’

to extend ceiling prices thereby creating 

additional disputes and controversies. 

The same commenter also said that the 

Government should increase the ceiling 

price on a timely basis because the 

commenter believes the provisions that 

allow contractors to be paid after the 

fact for services provided prior to the 

obligation of money may violate the 

Anti-Deficiency Act (ADA). 

Response: The provisions in the rule 

for commercial T&M contracts, like 

those for non-commercial T&M 

contracts, clearly state that the 

Government is not obligated to pay, and 

the contractor is not obligated to 

perform, after the ceiling price is 

reached. The Councils recognize that 

some contractors have continued to 

perform on noncommercial T&M 

contracts beyond the established ceiling 

based on a Government employee’s 

belief that the ceiling price will be 

increased and agrees that this practice 

has led to many disputes and 

controversies. The Councils agree that 

the Government should increase the 

ceiling price on a timely basis when the 

Government intends to continue 

performance beyond the existing ceiling 

price and notes this is why contractors 

are required to notify the Government 

when they expect to exceed 85 percent 

of the ceiling price. The ADA prohibits 

the Government from taking any action 

to obligate the Government prior to 

obligating sufficient funds to the 

contract. The Councils further agree that 

Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 56325 

these provisions may result in a 

contractor being paid after the fact for 

services provided prior to the obligation 

of additional funds to increase the 

ceiling. However, since the Government 

has no obligation to pay for services 

rendered after the ceiling is reached and 

before additional monies are obligated, 

there is no ADA violation. After 

additional funds are obligated, the issue 

is allowability. 

c. One commenter said requiring the 

contractor to track and report costs 

against a NTE value is inconsistent with 

commercial practices and that changes 

to its business systems to accommodate 

these government-unique requirements 

would not likely be justified since 

commercial customers do not need a 

ceiling price or notification of 85 

percent of the NTE. The commenter said 

that the incentive to deliver high-quality 

support services at a reasonable price in 

the commercial marketplace is to retain 

a competitive advantage and maintain a 

reputation for responsive, high quality 

customer support. Another commenter 

said the provisions requiring 

notification to the Government when 

contractors believe they may exceed 85 

percent of the ceiling price or that the 

total price to the Government will be 

substantially greater or less than the 

ceiling price in the contract makes the 

commercial provider responsible for 

Government management of the contract 

and requires systems and reports that 

are inconsistent with commercial 

practices. The commenter said this is a 

shift of responsibility and costs without 

justification and that commercial 

contractors are at risk since breach of 

this provision can result in nonpayment for services rendered. Another 

commenter recommended not requiring 

ceiling prices when contracting under 

emergency procurement procedures. 

Response: The Councils recognize 

there may be unique situations in the 

commercial marketplace where 

commercial companies agree to open 

ended commitments; however, statute 

prohibits the Government from doing 

so. As discussed in b above, the 

Government is prohibited from taking 

any action that obligates the 

Government prior to obligating 

sufficient funds to the contract. The 

same is true even for emergency 

procurements. The Councils note that 

these provisions also protect contractors 

from nonpayment for services rendered 

by ensuring sufficient funds are 

available if the contracting officer 

determines the ceiling price should be 

increased. Unless notified by the 

contractor, the Government will have no 

way of knowing when the contractor 

will exceed the ceiling since the 

Government does not know the price for 

work performed and not billed or the 

price of work planned to be performed 

in the current period. While systems 

and reports will vary between 

commercial providers, the Councils 

believe commercial providers generally 

track and measure performance against 

negotiated contract values and can 

therefore report projected expenditures 

and cumulative services rendered. 

d. Another commenter said the ceiling 

price should equal the available funds 

since the total contract costs cannot be 

reasonably determined with any degree 

of confidence. 

Response: The ceiling price is 

required by statute. While establishing a 

ceiling price is not an exact science, the 

ceiling represents the Government’s best 

estimate of the contract price. If the 

estimated price increases during 

contract performance, the contracting 

officer will only obligate additional 

funds when it is in the Government’s 

best interest to do so. 

6. Advance Consent for Overtime. One 

commenter said the advance consent for 

payment of overtime is inconsistent 

with commercial practice and that 

commercial customers expect repair 

teams to work as necessary to complete 

repairs expeditiously. Another 

commenter believes that commercial 

standards should be utilized for 

overtime payment because requiring the 

contracting officer to approve overtime 

may delay the project and end up 

costing the Government more than 

results from contracting officer 

approval. 

Response: The Councils believe the 

consent is needed to ensure overtime is 

only used when the Government agrees 

the additional costs of overtime are 

justified and necessary to meet the 

Government’s objective. The clause 

provides the flexibility for the 

contracting officer to authorize overtime 

at the time of contract award if deemed 

necessary to meet essential delivery and 

performance schedules; make up for 

delays beyond the Contractor’s control; 

or to eliminate extended production 

bottlenecks or project delays. 

7. Materials Costs. 

a. Material Handling. One commenter 

recommended using loaded rates or a 

fixed charge to allow contractors to 

recover material handling and 

subcontract administration costs 

without imposing the requirements of 

FAR Part 31. Another commenter said 

reimbursing contractors for material 

handling does not violate the cost plus 

a percentage of cost prohibition 

imposed by Congress because the 

material handling costs are not a ‘‘fee’’

of the type Congress prohibited. 

Another commenter said instead of 

using a percentage markup, which raises 

cost plus percentage of cost contracting 

concerns, the rule should permit the 

contractor to charge the Government a 

fixed fee for providing material that will 

compensate the contractor for its 

indirect costs. Another commenter said 

since the work is being awarded 

competitively, the rule should allow 

contractors to mark up their 

subcontractor’s T&M or LH service rates 

as long as the amount of the mark-up is 

fully disclosed to the government and 

the total rate, including the mark-up, 

does not exceed the contractor’s own 

rate for the same service thereby 

avoiding the application of Part 31 and 

concerns over cost-plus-percentage-ofcost contracting. Another commenter 

said material handling and subcontract 

administration costs are normally 

marked up a percentage rate as mutually 

agreed to and negotiated by the 

contractor and client. Two other 

commenters said customers are charged 

the catalog price that includes material 

handling charge. One commenter said 

basing material handling or subcontract 

administration fees on actual costs is 

rare in the commercial marketplace. 

Another commenter said that many 

commercial contractors do not add a 

separate material handling fee or 

subcontract administration costs on top 

of their fully burdened labor rates. 

Another commenter said payment of 

separate indirect rates for material and 

subcontracts should not be allowed for 

commercial purchases. Another 

commenter said contractors that are 

otherwise CAS covered will have to 

allocate the indirect cost for the direct 

materials on FAR Part 12 T&M contracts 

to those contracts even though the 

contractor will not be paid for the 

indirect costs and will suffer an overall 

loss. Another commenter concurred 

with the ANPR’s proposed prohibition 

on mark-ups on materials costs. 

Response: The comments reflect a 

varying set of commercial practices for 

material handling and subcontract 

administration costs. The Councils 

believe it is important to provide as 

much flexibility as possible without 

violating the cost plus percentage of cost 

prohibition. The Councils believe use of 

a fixed rate violates the cost plus 

percentage of cost contract prohibition. 

Therefore, the rule does not permit 

application of a fixed rate. The Councils 

believe use of a fixed amount may be 

appropriate and revised the rule 

accordingly. However, the fixed 

amounts for indirect costs should 

exclude any amounts already included 

in the schedule labor rates. Finally, the 

56326 Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 

Councils note that while the ANPR did 

not permit direct reimbursement for 

material handling, nothing in the ANPR 

or rule prevents contractors from 

including material handling in the fully 

burdened labor rates. 

b. Most Favored Customer Terms. One 

commenter cautioned against use of the 

mandated ‘‘most favorable customer’’

terms for materials the contractor sells 

rather than purchasing from outside 

vendors. Another commenter said the 

‘‘most favored customer’’ price clauses 

pose numerous compliance risks to 

industry and are inconsistent with 

commercial practices. The commenter 

said it cannot ensure that the catalog 

price for a part is no higher than the 

market price or the ‘‘most favored 

customer’’ price. 

Response: The Councils note ‘‘most 

favored customer’’ pricing is consistent 

with the provisions for noncommercial 

T&M/LH contracts but not consistent 

with the general allowability provisions 

for material costs at FAR 31.205–26(f) 

and that the Councils are currently 

considering changes to the provisions 

for noncommercial T&M contracts. The 

Councils believe the provisions at FAR 

31.205–27(e) are more appropriate for 

commercial contracts and revised the 

rule to permit reimbursement at the 

catalog or market price when the 

materials furnished by the contractor 

meet the definition of a commercial 

item at FAR 2.101. In addition, the 

Councils note that the ANPR failed to 

address interdivisional transfers. The 

Councils also revised the rule to specify 

the procedures for interdivisional 

transfers on commercial T&M/LH 

contracts consistent with the provisions 

of FAR 31.205–26(e). 

c. Most Advantageous Pricing. One 

commenter said requiring ‘‘most 

advantageous prices’’ for purchases of 

material from outside vendors is 

inconsistent with commercial practices 

and the Government’s own ‘‘best value’’

requirement. The commenter believes 

Government auditors will interpret 

‘‘most advantageous’’ to mean lowest 

price when there are sound business 

reasons to procure from other than 

lowest price. The commenter said when 

prices are set by the initial competition, 

no further Government action should be 

taken. Further, the commenter said if 

the Government is concerned about 

product pricing, the Government should 

furnish the materials to the contractor so 

the Government, and not the contractor, 

will incur the unnecessary costs and 

risks associated with the proposed 

standards of most advantageous prices. 

Response: The Councils believe the 

rule is consistent with commercial 

practices and the Government’s ‘‘best 

value’’ determination because the rule, 

like commercial practice and the best 

value determinations, considers factors 

other than lowest price, i.e., prompt 

delivery and quality materials. Since the 

rule specifically identifies factors other 

than lowest price, the Councils believe 

Government auditors will properly 

consider these other factors. In addition, 

the Councils agree additional 

Government action would not be 

needed if the material prices were set by 

the initial competition; however, the 

material price for commercial T&M 

contracts are not set at time of contract 

award. Instead, the Government 

reimburses contractors based on actual 

costs or catalog or market prices for the 

materials furnished by the contractors. 

Finally, the Councils do not believe 

contractors will incur additional costs 

or risks to buy materials at the most 

advantageous price because the 

Councils believe commercial companies 

already consider the price, quality, and 

availability before acquiring materials. 

The rule requires the contractor to 

obtain materials at the most 

advantageous prices ‘‘to the extent 

able.’’

d. Refunds. One commenter said 

requiring contractors to give the 

Government credit for cash and trade 

discounts, rebates, scrap, commissions, 

and other amounts that have accrued to 

the benefit of the contractor is 

inconsistent with commercial practices. 

The commenter also said commercial 

companies apply commercial pricing 

standards for its labor and spares catalog 

pricing for materials. Another 

commenter said the Government is 

arbitrarily establishing a method of 

pricing materials that is inconsistent 

with commercial practices and requires 

accounting of ‘‘rebates, refunds and 

discounts that are received or accrued to 

the contractor.’’ The commenter 

believes this tracking is unjustified, 

would be very costly, and ultimately 

result in many disputes that in turn 

would be costly for both Government 

and commercial services contractors for 

audits, disputes and legal fees. The 

commenter recommended that the 

Government rely on competition as 

means to determine the price is fair and 

reasonable. Another commenter said 

that if a contracting officer is 

responsible for enforcing this 

requirement of giving the Government 

credit for all discounts and rebates, it 

may be advisable to consider allowing 

the CO to require supporting 

information from the contractor. 

Another commenter recommends that 

these contracts include refund or price 

reduction clauses allowing the 

Government to recoup any overages 

identified through surveillance of the 

contract. 

Response: The Councils recognize 

that reducing the price of materials for 

any possible applicable credits may not 

be customary in the commercial 

marketplace. The Councils note that the 

credits only apply when the 

Government reimburses the contractor 

at his actual costs, which, if such credits 

are received, are reduced accordingly. 

However, to be more consistent with 

commercial practices, the Councils 

revised the rule to limit the 

requirements to credits received by or 

accrued to the contractor. 

e. General. One commenter said 

limiting the ‘‘allowable material costs’’

to actual costs focused on ‘‘costs’’ rather 

than ‘‘price’’ which is fundamentally 

inconsistent with commercial practices. 

Response: While reimbursement for 

actual costs may be inconsistent with 

commercial practices, the Councils 

believe payment of the actual cost is 

necessary to protect the Government 

when the material being sold to the 

Government does not meet the 

definition of a commercial item at FAR 

2.101. The Councils note when the 

material is a commercial item, the rule 

provides that the contractor will be paid 

on the basis of an established catalog or 

market price. 

8. Consent to Subcontract. 

a. Several commenters said the 

consent to subcontract requirements 

should not apply to commercial 

contracts because they are inconsistent 

with commercial practice. One 

commenter said that the consent to 

subcontract requirement is generally 

limited and does not apply when a 

prime contractor requires 

subcontracting to an affiliate. Two 

commenters said the consent to 

subcontract is necessary and agreed 

with the proposed language in 

paragraph (u) of Alternate I at FAR 

clause 52.212–4. Another commenter 

said the normal practice is that the 

contractor is not allowed to assign any 

portion of its responsibilities or rights 

under the contract without first 

obtaining the written approval of the 

client. Two commenters said the 

subcontract consent requirement is 

contrary to the FASA’s intended 

purpose of simplifying commercial item 

contracting. Another commenter said 

the requirement will add administrative 

effort and costs with no value added to 

contractors and little benefit to the 

Government. Another commenter said 

that once an authorized determination 

has been made to allow a T&M contract 

type, further authorizations for T&M 

should not be required for subcontracts 

Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 56327 

under an approved overall contract. The 

commenter said it should be presumed 

that the approval of T&M for the prime 

contract flows to all subcontracts under 

it. Another commenter said since 

commercial contractors are not likely to 

have government-approved purchasing 

systems, the contractors would be 

subject to the proposed subcontract 

consent provisions which is not 

practicable in commercial contracts and 

is not a commercial practice. Another 

commenter said the costs outweigh 

benefits when the choice is to either 

create/maintain approved purchasing 

system or delay performance pending 

Government approval. The same 

commenter also said a fair & reasonable 

determination can be made at contract 

award because use of T&M is limited to 

contracts awarded through competition. 

Response: When contractors add or 

substitute subcontractors after award, 

the basis for the best value 

determination used to award the 

contract may have been altered. 

Therefore, the Government must have 

the right to approve changes in 

subcontractors to maintain best value. 

As indicated by some of the comments, 

some commercial companies reserve the 

right to approve or deny changes in 

subcontractors. In fact, one commenter 

stated ‘‘the normal practice is that the 

contractor is not allowed to assign any 

portion of its responsibilities or rights 

under the contract without first 

obtaining the written approval of the 

client.’’ The Councils do not believe 

subcontract consent will add significant 

administrative effort but will protect the 

Government from potential 

subcontractor substitution issues. 

b. One commenter recommended 

revising the proposed paragraph at FAR 

12.216 as follows because all contractors 

should be required to get the contracting 

officer’s consent prior to using foreign 

subcontractors to prevent contractors 

from negotiating labor hours and rates 

based upon its local workforce and 

subsequently subcontracting with a 

foreign contractor with much lower 

rates. 

(1) Add the following after the second 

sentence in proposed FAR 12.216: 

Any subcontract with a foreign company 

when the work will be physically performed 

outside the United States or Canada requires 

the contracting officer’s consent. 

(2) Add the following phrase at the 

end of the proposed last sentence: 

. . . except for subcontracts with a foreign 

companies as described above. 

(3) Add the following new coverage to 

the proposed FAR clause at 52.212–4, 

Alternate I (u), to enact the revised 

requirements discussed above: 

(2) The Contractor must obtain the 

contracting officer’s written consent for any 

subcontract with a foreign company when 

the work will be performed outside the 

United States or Canada. 

Response: Such provisions are not 

provided for non-commercial T&M 

contracts. The Councils do not believe 

it is advisable to add more stringent 

requirements for commercial T&M 

contracts than are used for noncommercial T&M contracts. The 

Councils are not aware of any problems 

in this area under existing T&M 

contracts. 

c. One commenter said the rule 

should (as the ANPR proposes) require 

contractors to obtain the contracting 

officer’s consent to subcontract. The 

Government should know what entity is 

providing services on a T&M or LH 

basis. However, the requirement to 

obtain consent to subcontract should 

apply only to charges that are directly 

charged to the contract, as opposed to 

overhead expenses and general and 

administrative expenses. Many 

commercial companies have corporatewide agreements with vendors to 

perform those functions. 

Response: The Councils agree that the 

consent to subcontract applies only to 

costs that are directly charged to the 

contract and does not apply to overhead 

expenses and G&A expenses. The 

provisions in the proposed rule are the 

same as the consent to subcontract 

requirements for non-commercial T&M 

contracts. Therefore, there is no need to 

provide additional language. 

d. One commenter assumed that the 

clause at FAR 52.212–4, Alt. I, 

paragraph (u) can be tailored to conform 

to commercial practices in the industry 

as provided under FAR 12.302(b) and 

recommends acknowledging such in the 

final rule. 

Response: The tailoring provisions at 

FAR 12.302 do not apply to the 

proposed FAR clause at 52.212–4, 

Alternate I, paragraph (u), because the 

Councils believe tailored subcontract 

provisions may not adequately protect 

the Government’s interests. While some 

commercial companies may allow 

assignment of rights and responsibilities 

under the contract without the approval 

of the client, the Councils do not believe 

commercial industries, as a whole, 

generally allow unknown or 

unapproved changes to the contract. 

The Councils believe the Government 

should retain the right to approve such 

changes to protect the Government’s 

interest in achieving best value. The 

Councils revised FAR 12.301(b)(3) to 

clarify that the Alternate clause is not 

subject to the tailoring authorities of 

FAR 12.302. 

9. Contractor Purchasing System 

Reviews (CPSR). One commenter said 

imposing CPSRs requirements on 

commercial T&M or LH contracts would 

stop many small businesses and small 

disadvantaged businesses from 

providing commercial services since 

these businesses may not need, nor 

have, the sophisticated infrastructure 

required to successfully complete a 

CPSR. 

Response: The rule does not impose a 

CPSR requirement but simply 

recognizes that contractors with 

approved purchasing systems require 

less oversight because the contractor’s 

overall system provides adequate 

controls and procedures to protect the 

Government. 

10. Other Direct Costs (ODC). One 

commenter said ODC may include 

travel, software license fees, software 

subscription fees, and other categories 

of other direct costs outside the normal 

definition of materials and subcontracts. 

The commenter suggested not defining 

the elements of ODC so that these other 

types of other direct costs could be 

proposed and evaluated. Another 

commenter asked whether travel would 

be considered ‘‘materials’’ under a T&M 

contract or be perceived as a cost 

reimbursement item requiring noncommercial procedures. Another 

commenter noted that the ANPR 

appears to only allow materials costs 

and subcontract costs to be charged as 

ODC. The commenter suggested limiting 

the definition of materials costs to 

preclude direct charging of intangible 

types of costs and force vendors to 

include such costs in their loaded labor 

rates. 

Response: The Councils believe that it 

is important to provide as much 

flexibility as possible. However, it is 

also imperative that the contract clearly 

articulates what costs are reimbursable 

outside of the fixed hourly labor rate(s) 

set forth in the contract. To clarify the 

issue, the Councils revised the rule to 

allow reimbursement of ODC based on 

actual costs for the types of ODC 

specified in the contract thereby 

allowing flexibility to negotiate 

reimbursable ODC on a case-by-case 

basis. 

11. Government Property. 

One commenter said customers do not 

normally furnish property for 

commercial T&M or LH airplane repair 

contracts. Another commenter said 

customer provided property is not the 

‘‘norm’’, but if property is supplied, the 

owner’s standard procedures should 

apply. Another commenter said GFP 

should be listed in the contract and 

tracked by the agency’s property 

management process. Another 

commenter said the proposed Alternate 

I to the FAR clause at 52.212–4 should 

56328 Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 

also contain a provision requiring any 

property or equipment submitted for 

reimbursement under the contract as 

ODC to be designated as Government 

property and treated accordingly. 

Another commenter said this does not 

occur often on professional A&E 

services contracts. When it does, it 

normally is in the form of Project 

Record Documents for existing facilities 

that the customer wishes to remodel or 

modify. Such Project Record Documents 

are managed and controlled by our staff 

as if they were our own. Upon 

completion of the contract, such 

documents are returned to the customer 

in their original condition. They can be 

either in hard copy or electronic 

medium. 

Response: As with any acquisition, 

the need to furnish Government 

property will depend on the nature of 

the requirements, e.g. military 

equipment repair. However, when 

property is furnished, the contract must 

include the appropriate Part 45 property 

clauses. The Councils note that the 

Councils are revising Part 45 and the 

associated clauses to reflect accepted 

industry practices for property 

management. Finally, the Councils note 

documents, such as project record 

documents, are not considered 

Government property under FAR Part 

45. 

12. Government Oversight. 

a. One commenter recommended that 

the Government hold the prime 

contractor accountable for proper record 

keeping and invoicing and not require 

copies of a commercial subcontracting 

agreement and subcontractor invoices 

because the Government has no privity 

with the subcontractors. The commenter 

believes requesting such information is 

clearly inappropriate and that the 

Government has no need to routinely 

obtain and review subcontractor’s 

documentation since the Government 

presumably evaluated and accepted the 

prime’s proposal. Another commenter 

asserted that subcontract costs should 

be the responsibility of the prime for 

competitive procurements and there 

should be no Government involvement. 

Response: The Councils agree that the 

Government generally will not need 

access to the subcontractor’s books and 

records. The Councils believe there are 

two possible scenarios regarding 

subcontract costs. The first scenario is 

where the contract provides for 

subcontract costs to be reimbursed at 

actual costs to the prime contractor. In 

this case, the Government would need 

to verify that the prime contractor has 

actually made the payments in the 

ordinary course of business and that 

such payments were made in 

accordance with the subcontract 

agreement (the Government would not 

need access to the subcontractor books 

and records, only to a copy of the 

subcontract agreement maintained by 

the prime contractor and verification to 

the prime contractors records that 

payment was made). The second is 

where the contract provides for the 

subcontract costs to be reimbursed at 

the prime contract fixed hourly labor 

rates. In this case, the Government 

needs to have some assurance that the 

prime contractor has verified the hours 

worked by the subcontractor. To address 

this situation, the Councils have revised 

the rule to require that subcontractor 

hours be substantiated by actual 

payment, individual timecards, 

employee qualifications, or other 

substantiation specified in the contract. 

b. One commenter said the proposed 

Alternate I to FAR clause 52.212–4 

creates issues related to the 

governments audit rights such as 

whether the government has the right to 

interview contractor employees about 

work they have performed. Another 

commenter said access to contractor 

employees is not consistent with 

commercial practices and should not be 

permitted. 

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. 

c. One commenter advocates 

including protections, above those 

currently required in commercial items 

purchases, for commercial services 

bought on a T&M/LH basis. The 

commenter suggested a provision which 

would authorize the CO to request 

substantiation for hourly rates charged 

under the task orders stating that such 

a provision would allow for 

substantiation of hours worked, access 

to original timecards, timekeeping 

procedures, labor distribution reports, 

and assigned employees. The 

commenter also said documents such as 

employees’ resumes or other personnel 

records of employees, to verify that 

employees have the contractually 

required qualifications and experience, 

should be made available for 

Government review. The commenter 

also suggested identifying labor 

distribution reports as ‘‘records of 

distribution of labor’’ to avoid confusion 

at contractors that do not maintain 

formal reports, but do maintain records 

relating to their distribution of labor. 

Response: The Councils believe that 

access to employee timecards, labor 

distributions, and the ability to 

interview the employees should provide 

sufficient information to verify the 

validity of hours claimed on the 

contract. However, the Councils believe 

that there may also be a need to assess 

employee qualifications to verify that 

the employee meets the qualifications of 

the labor category to which he/she has 

been charged. Therefore, the Councils 

revised the rule to also provide access 

to records that substantiate employee 

qualifications. In addition, the Councils 

revised the rule to say ‘‘records of 

distribution of labor’’ versus ‘‘labor 

distribution reports’’ to be more 

consistent with commercial practices. 

d. One commenter said that 

additional controls and oversights are 

used in the commercial marketplace 

since T&M/LH contracts do represent 

more risk to the buyer, e.g., verification 

of labor hours performed versus billed, 

labor categories utilized versus billed, 

and adequate accounting systems so the 

buyer could validate costs billed. The 

commenter also said that existing 

oversight methods and controls for 

Federal non-commercial T&M/LH 

contracts are a good basis for crafting 

the methods and controls to apply to 

Part 12 T&M/LH contracts and that the 

proposed rule appears to have carefully 

examined those terms and conditions 

that should be applied to the new 

authority under FAR Part 12. Another 

commenter said that allowing 

contracting officers to negotiate access 

to other types of documents on task 

orders, where circumstances merit such 

access, is warranted. Another 

commenter said that access to 

commercial contractor records or audit 

rights is uncommon, limited in scope or 

nonexistent and that surveillance, if 

any, was generally limited to 

verification of hours or expenses billed. 

Another commenter said in the 

commercial marketplace, the contractor 

is responsible for providing sufficient 

information to support billings for hours 

charged, materials used, and 

subcontracts performed. 

Response: The Councils believe that 

the ANPR carefully considered existing 

requirements for T&M contracts as well 

as differences between the commercial 

marketplace and non-commercial 

contracts. The Councils believe the rule 

provides the proper balance between the 

need to verify compliance with contract 

terms and the need to minimize access 

contractor records. 

e. Two commenters said the payment 

provision in the FAR clause at 52.212–

4 and the proposed alternate provisions 

are inconsistent with commercial 

practices. One of the commenters also 

said commercial companies do not 

Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 56329 

provide access to time cards, actual 

material or subcontract costs, employees 

or employee time cards and that this 

access would not be provided to the 

Government and that oversight is not 

used to ensure work is being properly 

charged. Another commenter said it is a 

customary commercial practice for the 

seller to grant limited access to records 

and limited audit rights, i.e., time 

sheets, invoices, expense 

reimbursement receipts, etc. This 

commenter and another commenter said 

the Government should not have access 

to contractor employees. Another 

commenter said it is normal practice for 

the client to request copies of time 

cards, along with detailed invoices 

outlining which individual performed 

the services, the amount of time that 

individual spent on those services 

during the period of the invoice. In 

addition, the time card would have the 

respective supervisor approval 

indicating that the time was properly 

recorded. The clients also normally 

require that they have the ability to 

audit the contractor’s records if they so 

choose. 

Response: The Councils believe the 

Government must have some assurance 

that the number of hours claimed by the 

contractor accurately reflects the time 

spent by the appropriate labor category 

performing work on the contract and 

that the amounts paid to the contractor 

based on actual costs accurately reflect 

the actual costs paid by the contractor 

for materials, subcontracts, and other 

direct costs. Some commenters said 

their commercial companies do require 

access to time cards, actual material, 

and subcontract costs as a condition for 

T&M contracting. The Councils believe 

that the rule minimizes access to 

records to only those documents that are 

necessary to verify compliance with the 

contract terms. The Councils do not 

believe it is appropriate for the 

Government to simply accept the 

submitted hours and material/ 

subcontract costs as valid without some 

type of verification. 

f. One commenter noted that the 

ANPR failed to include sufficient 

oversight mechanisms to protect the 

taxpayers’ interests. The commenter 

recommended establishing periodic 

audits and reporting requirements on 

the use of D&F in commercial T&M/LH 

contracts, and requiring approval of the 

D&F by the head of the contracting 

authority. Further, the commenter 

recommended that the Government 

have access to the contractor books and 

records; FAR clause 52.215–2, Audit 

and Records—Negotiation, should be 

included in all T&M/LH contracts; and 

contracts should be subject to the cost 

principles found in FAR Part 31, 

Contract Cost Principles and 

Procedures. Another commenter is not 

opposed to T&M and LH contracts, but 

opposes the proposed rule because it 

does not make them subject to full 

oversight and audit provisions. 

Response: The FAR does not provide 

for periodic audits of contracting officer 

decisions. The frequency and scope of 

such audits are under the purview of the 

agency Inspector General, not the FAR 

Council. In regards to the application of 

FAR Part 31, the Councils do not believe 

such access is necessary because the 

proposed rule does not provide for 

reimbursement of indirect costs using 

actual indirect cost rates. In addition, 

the rule does provide access to those 

records necessary to verify those costs 

that are reimbursed on an actual basis. 

There is no benefit to extending such 

access to include all records that are 

normally accessible for non-commercial 

contracts. In fact, extending such access 

would essentially nullify the concept of 

a commercial contract. 

g. One commenter believes 

substantiation of invoices should be 

based on commercial practices, rather 

than relying upon a time card system, 

‘‘as presumably identified’’ in the DCAA 

manual. This commenter also believes 

this is inconsistent with commercial 

practices regarding audits of cost by 

requiring timecards pursuant to 

Government procedures and that SARA 

does not authorize this extension of 

Government rights to provide auditors 

with ‘‘free range with disrupting 

employees and subcontractor 

relationships.’’ Another commenter 

asserts that the ‘‘Proposed rule does not 

include any of the protections that are 

in the commercial market.’’ This 

commenter believes these ‘‘contract 

vehicles are high risk and do not 

include adequate cost controls.’’

Response: While these commenters 

refer to using commercial practices for 

protection (e.g., for substantiation of 

invoices), neither commenter provides a 

description of what that protection is, 

i.e., how does the commercial customer 

know the hours or actual costs are a 

proper reflection of the amounts 

actually incurred? The Councils believe 

there must be some verification, and 

believes that the proposed rule provides 

the minimum access to records needed 

to perform that verification. The 

Councils do not believe that SARA 

requires the Government to make 

payments based on actual hours and/or 

actual costs incurred without some form 

of verification. The Councils note some 

commenters said requiring access to 

time cards, invoices, and subcontract 

agreements is a standard commercial 

practice for T&M contracting. 

h. One commenter believes that 

quality assurance is not sufficient to 

protect taxpayers and that post award 

audits are necessary. The commenter 

also expressed concern that currently 

paragraph (e) of FAR clause 52.232–7 

allows for contracting officer requests 

for audit prior to final payment and that 

this may contradict other provisions for 

commercial audits that are not subject to 

post award audits. Additionally, the 

commenter said there may be a conflict 

between 41 U.S.C. 254d(a)(1) and 10 

U.S.C. 2313(a) (which allows post award 

audits) and the FAR provision (which 

does not expressly allow audits for 

commercial items). The commenter 

believes that if a post award audit 

provision is not included, the 

contracting officer should be required to 

provide written justification why one 

was not included. Further, the 

commenter said the audit should occur 

when the contractor notifies the 

Government that the costs will exceed 

85 percent of ceiling. The commenter 

recommended a price reduction clause 

to recoup overages identified in audit. 

Response: Post-award audits for 

commercial items are necessary for T&M 

contracts. The contract clause requires 

the contractor to substantiate the labor 

hours and material, subcontract, and 

other direct costs. The rule provides the 

necessary access to records to verify 

compliance with these contract terms. 

i. One commenter said the ANPR’s 

suggestion of describing the types of 

information that may be audited to 

verify material and subcontract costs 

(rather than merely repeating the vague 

‘‘substantiating material’’ description) 

makes sense. The commenter also said 

government access to the contractor’s 

employees to verify hours charged is 

unnecessary, inconsistent with 

commercial practices, and substantially 

broader than the Government’s rights 

under the existing T&M payment clause. 

In the absence of indicia of fraud or 

other wrongdoing, timecards should be 

sufficient evidence of hours actually 

worked. Given the time and expense 

associated with conducting interviews, 

the government would likely interview 

employees only when there was a basis 

to investigate alleged wrongdoing. In 

those circumstances, the government 

could obtain information through 

subpoenas; a contract clause is therefore 

unnecessary. 

Response: According to some 

commenters, requiring access to 

contractor employees is a standard 

commercial practice for T&M 

contracting. In addition, the proposed 

provisions for access to contractor 

56330 Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 

employees are no broader than what is 

currently provided for under noncommercial T&M contracts. The 

relevant access to records provision for 

current T&M contracts is not the T&M 

payment clause, but instead is the 

clause at FAR 52.215–2, Audit and 

Records—Negotiation, which provides 

the Government with access to 

contractor employees. The Government 

should not have to allege wrongdoing to 

interview contractor employees when 

their labor hours are included on 

invoices submitted to the Government. 

j. Commenters at the public meeting 

said commercial companies do not keep 

payment records three years after 

contract completion. 

Response: The requirement at 

paragraph (d)(2) of FAR clause 52.212–

5 for contractors to maintain the 

payment records three years after 

contract completion is a statutory 

requirement that provides for 

Comptroller General examination of 

records under contracts for commercial 

items. 

13. Nonconforming. 

a. One commenter said it may be 

extremely difficult for the Government 

to enforce the defects language after the 

contractor invoices and the Government 

accepts the labor, as opposed to 

accepting the tangible products 

generated by the labor, because the 

Government will have a difficult time 

proving, after the fact, that the labor was 

defective or otherwise unacceptable 

unless the Government can prove 

fraudulent timekeeping practices or 

sloth on the part of the contractor or its 

employees can be proven. The 

commenter also said if the contractor 

provides the correct mix of labor skills 

and the service is provided in 

accordance with the statement of work, 

the contractor should bear no burden for 

corrections and that it would be hard to 

reject or prove the services were nonconforming after payment since the 

Government evaluates, interviews, and 

approves contractor personnel. Another 

commenter said it is reasonable to 

expect the contractor to be responsible 

for the correction of any nonconforming contract requirement, if it is 

determined to be the fault of the 

contractor. 

Response: The Councils agree that it 

may be difficult to prove services are 

nonconforming on a commercial T&M/ 

LH contract after the contractor has 

invoiced the Government and the 

Government has accepted and paid for 

the labor. The Councils note the current 

FAR coverage, while previously 

applicable only to commercial FFP 

contracts, provides post acceptance 

remedies for nonconforming services. 

The rule simply adds additional 

remedies to address situations when 

reperformance will not correct the 

defect or is not possible to reperform. 

b. One commenter recommended 

replacing the word ‘‘may’’ with 

‘‘should’’ in the third and sixth lines of 

paragraph (a) at FAR clause 52.212–4 

because Government officials should be 

encouraged to seek consideration for 

nonconforming services and should be 

required to ensure that the contractor’s 

future performance conforms to the 

contract requirements. The commenter 

also recommended revising proposed 

paragraph 52.212–4, Alternate I (a), to 

include the word ‘‘should’’ instead of 

‘‘may’’ in the seventh, twelfth, and 

fifteenth lines for the same reasons. 

Response: The use of the term ‘‘may’’

is consistent with the existing 

terminology for commercial FFP 

contracts, i.e., paragraph (a) at FAR 

clause 52.212–4, which states the 

‘‘Government may require repair or 

replacement of nonconforming supplies 

or reperformance of nonconforming 

services at no increase in contract 

price.’’ The Government should seek 

consideration when appropriate. 

However, the Councils believe the term 

‘‘may’’ provides the contracting officer 

sufficient latitude to exercise their 

judgment while managing the contract. 

The Councils did, however, revise the 

rule to clarify that the Government may 

seek either ‘‘an equitable price 

adjustment or adequate’’ consideration 

and deleted the language that allowed 

the Government to require the 

contractor to ensure future performance 

conforms to contract requirements 

because the Councils believe that this 

language is unnecessary since the 

Government already has this right 

through the use of a cure notice. 

c. One commenter said commercial 

T&M agreements include a warranty and 

a disclaimer of any other remedies as 

permitted under the UCC. Another 

commenter said seeking consideration 

for acceptance of nonconforming 

supplies or services is a right of the 

Government under common law so 

there is no need to include such a 

provision in the clause. 

Response: Remedies, including 

warranty provisions, vary by industry, 

service and products. The FAR 

routinely includes rights covered under 

common law in contract clauses to 

ensure all parties are cognizant of their 

rights and responsibilities. 

d. One commenter said the 

requirement for contractors to repair or 

replace rejected supplies or reperform 

rejected services at no cost to the 

Government imposes more contract risk 

on the contractor than the noncommercial clause which does not 

require repair or reperformance at no 

cost to the Government, essentially 

imposing a fixed-price level of risks. 

The commenter further said combining 

a ceiling price that contractors exceed at 

their own risk and a requirement that 

the contractor use ‘‘best efforts’’ to 

perform within the ceiling price may 

result in contractors interpreting the 

clause to requirement to mean 

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 

commenter recommended allowing 

contracting officers, where appropriate, 

to compensate contractors for 

reperformance or repair of deficient 

services or supplies up to the ceiling 

price, but not including profit, to be 

consistent with the non-commercial 

clause and to more accurately reflect 

standard commercial practices. Two 

commenters also recommended that 

replacement of nonconforming supplies 

or re-performance should be at no 

increase in contract price, allowing the 

contractor to re-perform up to the agreed 

upon ceiling price. Another commenter 

said the proposed rule establishes a 

contractor-friendly threshold because 

the contractor is agreeing to use its best 

efforts to perform work and T&M 

contracts pay for time or money spent, 

not milestones reached or work 

completed. Commenter states this is 

main difference between commercial 

practices and proposed rule. 

Response: The Councils agree that 

contractors are generally only required 

to use ‘‘best efforts’’ to accomplish the 

desired results within the established 

ceiling price on both commercial and 

non-commercial T&M contracts as 

opposed to FFP contracts which 

requires contractors to accomplish 

stated results within the fixed price. The 

non-commercial T&M/LH clause does 

allow contractor to be paid for 

reperformance, without profit, up to the 

ceiling price (or the ceiling price as 

increased by the Government) unless 

the contractor fails to proceed with 

reasonable promptness to reperform 

within the ceiling price (or the ceiling 

price as increased by the Government), 

in which case, the Government may 

charge the contractor reperformance 

costs or terminate the contract for 

default. Additionally, the 

noncommercial clause only allows the 

Government to require the contractor to 

remedy without reimbursement in very 

limited situations such as fraud and 

willful misconduct. Since contractors 

are only required to use ‘‘best efforts’’

within the established ceiling price for 

Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 56331 

T&M and LH contracts, the Councils 

agree contractors should be paid for 

reperformance, without profit, up to the 

ceiling price. The Councils revised the 

proposed rule to be consistent with the 

provisions for noncommercial T&M 

contracts at FAR clause 52.246–6. 

However, since contracting officers will 

not necessarily know the proposed 

profit in competitive awards, the 

Councils revised the noncommercial 

T&M provisions to require contracting 

officers to specify a profit decrement in 

paragraph (a)(4) of the clause. Unless 

otherwise specified by the contracting 

officer, the labor rates will be reduced 

by 10 percent to exclude profit. 

e. Another commenter said that its 

commercial contracts include normal 

commercial warranties that cover 

workmanship and materials. Under 

these provisions, a buyer can make a 

warranty claim and, if deemed valid, the 

servicing company would re-perform 

the work at no charge. Another 

commenter said surveillance/QC/ 

Inspections for T&M and LH 

commercial contracts versus those of 

commercial FP contracts do not vary. 

Contractors are responsible for 

performance to minimum stated levels 

of completion and quality. Reviews of 

performance by the customer are the 

same regardless of the type of contract 

executed. 

Response: When the commercial 

warranties adequately cover 

workmanship and materials, there is 

generally no need to include additional 

requirements addressing nonconforming supplies or services. In 

other instances, commercial warranties 

may not exist or may not adequately 

address the contract requirements. In 

such cases, the Government needs 

provisions to address non-conforming 

supplies and services. As such, the rule 

provides remedies for non-conforming 

supplies and services that are consistent 

with those provided for under noncommercial contracts. 

14. Termination. 

a. One commenter recommended 

revising FAR 12.403 to specify the 

amounts recoverable upon termination 

for convenience of a T&M or LH 

contract for commercial services 

because the ANPR did not adequately 

address a contractor’s need to recover 

material costs in a termination for 

convenience. 

Response: As provided in FAR 

12.403(d)(ii), which also applies to 

commercial FFP contracts, contractors 

can recover ‘‘any charges the contractor 

can demonstrate directly resulted from 

the termination.’’ While material costs 

are not specifically addressed in this 

coverage, a contractor would recover the 

costs if the contractor is able to 

demonstrate the costs were incurred in 

support of the contract and the costs are 

otherwise allowable in accordance with 

the proposed language at paragraph 

(i)(1)(ii) of FAR clause 52.212–7. 

b. One commenter said the concept of 

termination for convenience is 

inconsistent with commercial practices 

and would be considered a breach of 

contract, with damages, in the 

commercial marketplace. The 

commenter also said amount of damages 

would be negotiated or established in a 

lawsuit and would not be limited to 

reasonable charges the contractor can 

demonstrate to the satisfaction of the 

Government using its standard record 

keeping system. Another commenter 

said few, if any, commercial T&M 

contracts include right of immediate 

termination as is proposed. Further, the 

commenter said the Government should 

compensate for additional costs beyond 

hours worked as is provided for in FAR 

12.403(d)(ii) and that the termination 

clause should mirror those used in the 

commercial marketplace which 

generally require 30 to 90 days 

termination notice with no cap on 

compensation.’’

Response: The Councils recognize 

that terminations for convenience are 

not standard commercial practice. 

However, to protect the public’s 

interest, the Government must retain the 

right to terminate a contract when the 

product or service is no longer needed 

or funds are not available. The Councils 

note the FAR already contains the 

provisions for terminating commercial 

contracts at the Government’s 

convenience. The proposed rule simply 

provides the basis for calculating labor 

costs on a terminated commercial T&M/ 

LH contract. 

15. CAS Applicability. 

a. One commenter said CAS coverage 

needs to be extended to commercial 

contracts when the contractor is already 

CAS covered. Another commenter said 

many commercial companies do not 

require employees to record all time 

worked and that these companies’ labor 

charging systems will not be tied to a 

CAS compliant accounting system. The 

commenter said requiring commercial 

companies to comply with CAS flies in 

the face of commercial item reform. 

Another commenter stated that CAS 

should continue to apply to all T&M/LH 

contracts to protect taxpayers’ interests 

by ensuring consistent accounting 

treatment, proper allocation of costs to 

contracts, and preparation of reliable 

cost estimates. Another commenter said 

application of CAS is unnecessary and 

would have adverse consequences. This 

commenter noted that commercial 

contractors that sell exclusively in the 

commercial marketplace most likely do 

not have accounting systems configured 

to comply with CAS and may decline to 

perform commercial services for the 

government on a T&M or LH basis. 

Accordingly, CAS rules should be 

amended to exempt commercial services 

purchased under T&M or LH contracts 

from its coverage. Another commenter 

said they see no particular difference 

between the contract types as to the 

applicability of CAS. Another 

commenter said commercial systems are 

set up to support commercial 

transactions, not to comply with CAS 

clauses in Government contracts. Thus, 

this commenter asserted, such clauses 

would not be acceptable. One 

commenter stated CAS should not apply 

to commercial item acquisitions and 

that the CAS Board did not fully 

implement FARA since FARA exempted 

all contract for commercial items from 

CAS requirements. Another commenter 

said that if CAS applies to commercial 

T&M/LH contracts, the government will 

effectively eliminate most commercial 

contractors from competition for these 

types of contracts. Another commenter 

said that CAS should not apply and all 

that should be required from contractors 

is an adequate accounting system for 

recording hours and material purchases. 

Response: Revisions to CAS 

requirements is beyond the scope of this 

case. The Councils will forward the 

comments to the CAS Board for the 

Board’s consideration. 

b. One commenter said that the 

‘‘Councils’’ infer that they (the Councils) 

have some authority to amend or 

interpret CAS, as evidenced by the 

Councils soliciting public comments 

based on the assumption that CAS will 

not apply to commercial T&M/LH 

contracts. 

Response: The Federal Register notice 

is very clear that any actions regarding 

the Cost Accounting Standards would 

need to be taken by the CAS Board. In 

paragraph (3) of Section C, Regulatory 

Amendments under Consideration, the 

Notice states the following: 

The need for potential amendments to the 

current CAS exemption for commercial items 

is being considered. Temporary waivers are 

subject to approval by the CAS Board. 

Permanent exemptions are subject to the 

regulatory promulgation process and are 

codified in 48 CFR Chapter 99. No changes 

to FAR 12.214 are reflected in the draft 

amendment that is being published with this 

notice. However, FAR 12.214 will be revised 

to reflect any actions that are taken by the 

CAS Board. Any public comments addressing 

CAS will be provided to the CAS Board for 

consideration. 

16. General Comments. 

56332 Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 

a. One commenter said the Councils 

were too restrictive when they 

implemented Section 8002(d) of FASA 

(Pub. L. 103–355) because there is no 

statutory prohibition against the use of 

T&M/LH contracts. The commenter 

requested the Councils to take this 

opportunity to revisit this question and 

amend the FAR to permit use of T&M/ 

LH contracts to acquire any commercial 

item. 

Response: Congress was well aware of 

the FAR requirements that limit the 

available contract types for commercial 

items when it drafted Section 1432 of 

the National Defense Authorization Act 

for Fiscal Year 2004. If Congress 

disagreed with the Council 

implementation of FASA, the Councils 

believe Congress would have expanded 

Section 1432 to specifically authorize 

T&M/LH contracts for commercial 

items. The Councils do not believe it is 

appropriate to expand contract types for 

commercial items without specific 

statutory authority. 

b. One commenter questioned why 

the minutes posted by the Councils from 

the Public Meeting did not include the 

detailed questions and answers 

discussed at the Public Meeting. 

Specifically, the commenter was 

concerned that the minutes failed to 

recognize the discussion on how to 

conduct market research to determine if 

the service was sold in the commercial 

marketplace using T&M or LH contracts. 

Response: The purpose of the public 

meeting was to allow the public to 

provide input on the effective use of 

T&M and LH contracts for the 

acquisition of commercial items and 

suggestions for implementing the 

provisions of the SARA legislation for 

the Council’s consideration. While the 

Councils did record and post the general 

topics that were discussed at the 

meeting, the Councils did not record or 

post the detailed discussions from the 

meeting. The ANPR and the proposed 

rule contain provisions that require the 

contracting officer to consider various 

customary practices, including contract 

type, when conducting market research. 

Detailed instructions for how to conduct 

market research are not contained in the 

FAR because the instructions would 

vary based on the unique aspects of the 

acquisition. More specific instructions 

are appropriately contained in agency 

training materials. 

c. One commenter said that the 

proposed rulemaking should be 

designated as a major rule under the 

Congressional Review Act and 

economically significant under 

Executive Order 12866. The commenter 

also states that the assessment of 

benefits, costs and reasonable 

alternatives should be conducted 

assuming applicability and 

inapplicability of Cost Accounting 

Standards (CAS) and reviewed by 

Agency attorneys, economists, engineers 

and scientists. 

Response: As required in the 

regulatory process, OMB’s Office of 

Information Regulatory Affairs reviewed 

the rule to ensure the requirements of 

Executive Order 12866 were fully met. 

d. One commenter noted that the 

ANPR failed to eliminate what the 

commenter considers the current illegal 

use of commercial T&M/LH contracts by 

GSA by declaring commercial T&M/LH 

contracts executed in violation of FAR 

12.207 null and void. 

Response: The rule implements 

Section 1432 of Public Law 108–136. 

Questions over legality of actions 

agencies may have taken prior to this 

authority are beyond the scope and 

authority of the Councils. 

e. One commenter said the FAR 

Council has exceeded its statutory 

authority under SARA by adding 

clauses and requirements that are not 

consistent with the requirements of 

Section 8002 of Public Law 103–355 

which limit the contract clauses, to the 

maximum extent practicable, to those 

required to implement provisions of law 

or executive orders or those determined 

to be consistent with standard 

commercial practice. 

Response: The Councils believe it 

limited the contract clauses to the 

‘‘maximum extent practicable’’ to those 

required to implement the SARA 

legislation for commercial T&M and LH 

contracts. The Councils acknowledge it 

added a limited number of provisions 

not specifically mandated by the SARA 

legislation (such as consent to 

subcontract); however, the Councils 

believe that the provisions are needed to 

protect the Government and are, to the 

maximum extent practicable, consistent 

with commercial practice. FASA 

acknowledges that additional contract 

clauses may be required by including 

the phrase ‘‘to the maximum extent 

practicable.’’

f. One commenter identified industry 

best practices of close communication 

and cooperation between buyer and 

seller, using a project management team 

that is well versed in the types of 

services involved, and establishing 

Forward Pricing Rate Agreements with 

firms frequently contracted with for 

T&M/LH to reduce the time and effort 

involved in contract formation and 

administration. 

Response: The Councils thank the 

commenter for the identified best 

practices. The Councils agree close 

communication, cooperation, and 

knowledge of the type of services are 

necessary for any successful 

procurement. The Councils note, 

however, that commercial T&M and LH 

contracts will be awarded using 

competitive procedures and establishing 

forward pricing rate agreements is not 

necessary and contrary to competitive 

procedures. 

g. One commenter requested that the 

Councils consider customary 

commercial pricing concepts for 

acquiring commercial services to be 

consistent with the tenets of FAR Part 

12 and existing statutes. FAR Part 12 

encourages the consideration of 

commercial practices when acquiring 

commercial services. As an example, the 

commenter identified GSA’s recent 

multi-channel contact center contract, 

which involved acquiring commercial 

telecommunication services on a price 

per unit or price per minute basis. 

Response: The rule does not prohibit 

the use of a wide variety of commercial 

pricing practices including the example 

given by the commenter. 

h. Two commenters recommended 

that the final rule explicitly state that 

the rule only applies to contracts 

executed on or after the effective date of 

the rule. In addition, one of the 

commenters said the rule should not 

apply to task orders under IDIQ 

commercial contracts in existence at the 

time of the rule’s effective date unless 

mutually agreed to in writing by all 

parties. 

Response: The standard FAR 

conventions at FAR 1.108(d) apply. As 

the rule does not specify otherwise, the 

FAR changes apply to solicitations 

issued after the effective date of the 

change. However, the Councils note the 

FAR allows contracting officers to make 

changes in existing contracts with 

appropriate considerations and mutual 

consent of the parties. 

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 changes may have a significant 

economic impact on a substantial 

number of small entities within the 

meaning of the Regulatory Flexibility 

Act, 5 U.S.C. 601, et seq., because small 

entities that have not bid on noncommercial T&M/LH contracts in the 

past may be induced to bid on 

commercial T&M/LH contracts. An 

Initial Regulatory Flexibility Analysis 

(IRFA) has been prepared. The analysis 

is summarized as follows: 

Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 56333 

Initial Regulatory Flexibility Analysis 

1. Description of the reasons why action 

by the agency is being considered. This 

proposed rule would revise the Federal 

Acquisition Regulation to allow contracting 

officers to award Time and Material and 

Labor Hour (T&M/LH) contracts when 

procuring commercial items. The proposed 

rule is required by Section 1432 of the 

National Defense Authorization Act for Fiscal 

Year 2004 (Pub. L. 108–136). 

2. Succinct statement of the objectives of, 

and legal basis for, the proposed rule. This 

proposed rule implements Section 1432 of 

the National Defense Authorization Act for 

Fiscal Year 2004 (Pub. L. 108–136), which 

authorized the use of Time and Material or 

Labor Hour (T&M or LH) contracts for 

commercial services acquired in support of a 

commercial item, and any other category of 

services that is designated by the 

Administrator of OFPP as being of a type 

commonly sold to the general public on a 

T&M or LH basis, and would be in the best 

interest of the Government to acquire such 

services on a T&M or LH basis. 

3. Description of, and, where feasible, 

estimate of the number of small entities to 

which the proposed rule will apply. The 

changes may have a significant economic 

impact on a substantial number of small 

entities within the meaning of the Regulatory 

Flexibility Act, 5 U.S.C. 601, et seq., because 

the use of commercial practices will allow 

additional small businesses that do not 

maintain records that are adequate for cost 

reimbursement contracting to compete for 

commercial T&M/LH contracts. At this time, 

there is no way to predict the number of 

procurements that will be awarded using 

commercial T&M/LH contracts, nor is there 

a method available to estimate the number of 

small entities that may be influenced by this 

change to begin competing for these types of 

contracts. 

4. Description of projected reporting, 

record keeping, and other compliance 

requirements of the proposed rule, including 

an estimate of the classes of small entities 

which will be subject to the requirement and 

the type of professional skills necessary for 

preparation of the report or record. The 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. Identification, to the extent practicable, 

of all relevant Federal rules which may 

duplicate, overlap, or conflict with the 

proposed rule. There are no Federal rules 

that duplicate, overlap or conflict with the 

proposed rule. 

6. Description of any significant 

alternatives to the proposed rule which 

accomplish the stated objectives of 

applicable statutes and which minimize any 

significant economic impact of the proposed 

rule on small entities. There are not any 

alternatives to publishing this proposed rule 

that will accomplish the stated objectives of 

Section 1432 of the National Defense 

Authorization Act for Fiscal Year 2004 (Pub. 

L. 108–136). The rule includes only FAR text 

revisions required to implement the statute 

cited herein. 

The FAR Secretariat has submitted a 

copy of the IRFA to the Chief Counsel 

for Advocacy of the Small Business 

Administration. A copy of the IRFA may 

be obtained from the FAR Secretariat. 

The Councils will consider comments 

from small entities concerning the 

affected FAR parts 2, 10, 12, 16, 44, and 

52, in accordance with 5 U.S.C. 610. 

Comments must be submitted separately 

and should cite 5 U.S.C. 601, et seq. 

(FAR case 2003–027), in 

correspondence. 

C. Paperwork Reduction Act 

The Paperwork Reduction Act does 

not apply because the proposed 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, 44, and 52 

Government procurement. 

Dated: September 16, 2005. 

Julia B. Wise, 

Director, Contract Policy Division. 

Therefore, DoD, GSA, and NASA 

propose amending 48 CFR parts 2, 10, 

12, 16, 44, and 52 as set forth below: 

1. The authority citation for 48 CFR 

parts 2, 10, 12, 16, 44, and 52 is revised 

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 competitive 

procedures; 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 

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 

fixed price contracts (e.g., by limiting 

the value or length of the Time and 

Material/Labor Hour contract or order) 

on future acquisitions for the same or 

similar requirements. 

(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 

56334 Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 

(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 16.5. 

(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. Add section 12.216 to read as 

follows: 

12.216 Subcontract consent. 

(a) When a time and materials or labor 

hour contract is awarded pursuant to 

12.207(b), Alternate I to the clause at 

52.212–4 is used. Alternate I includes a 

subcontract consent provision that 

requires the contractor to obtain the 

contracting officer’s consent prior to 

awarding certain subcontracts. 

(b) When the contractor has an 

approved purchasing system, the 

contracting officer shall identify, in an 

addendum to the clause, those 

subcontracts that will require consent. 

(c) When the contractor does not have 

an approved purchasing system, the 

contracting officer shall identify, in an 

addendum to the clause—

(1) Those subcontracts reviewed 

during proposal evaluation for which 

consent is not required after contract 

award; 

(2) Those subcontracts for which 

consent is not required by the clause, 

but which the contracting officer has 

determined that an individual consent 

action is required to protect the 

Government; and 

(3) Any other exceptions to the 

standard consent requirements. 

(d) The contracting officer shall 

consider the risk, complexity and dollar 

value of anticipated subcontracts when 

determining the consent requirements. 

7. Amend section 12.301 by revising 

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

12.301 Solicitation provisions and 

contract clauses for the acquisition of 

commercial items. 

* * * * * 

(b)* * * 

(3) The clause at 52.212–4, Contract 

Terms and Conditions—Commercial 

Items. This clause includes terms and 

conditions which are, to the maximum 

extent practicable, consistent with 

customary commercial practices and is 

incorporated in the solicitation and 

contract by reference (see Block 27, SF 

1449). Use this clause with its Alternate 

I when a time and materials or labor 

hour contract will be awarded. The 

contracting officer may tailor this clause 

in accordance with 12.302, except that 

paragraph (u) of Alternate I may be 

tailored only for indefinite delivery 

contracts and only to indicate that 

subcontract consent requirements apply 

to individual orders and not the basic 

contract. 

* * * * * 

8. 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 fixed 

price 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 

9. Amend section 16.601 by adding a 

sentence at the end of the introductory 

text of paragraph (b) to read as follows: 

16.601 Time-and-materials contracts. 

* * * * * 

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

for the use of time-and-material 

contracts for certain commercial 

services. 

* * * * * 

10. Amend section 16.602 by adding 

a sentence at the end of the paragraph 

to read as follows: 

16.602 Labor-hour contracts. 

* * * See 12.207(b) for the use of 

labor hour contracts for certain 

commercial services. 

PART 44—SUBCONTRACTING 

POLICIES AND PROCEDURES 

11. Amend section 44.302 by revising 

the second sentence of paragraph (a) to 

read as follows: 

44.302 Requirements. 

(a)* * * If a contractor’s sales to the 

Government (excluding competitively 

awarded firm-fixed-price and 

competitively awarded fixed-price with 

economic price adjustment contracts 

and firm-fixed price or fixed-price with 

economic price adjustment sales of 

commercial items pursuant to Part 12) 

are expected to exceed $25 million 

during the next 12 months, perform a 

review to determine if a CPSR is 

needed.* * * 

* * * * * 

12. Amend section 44.303 by revising 

the second sentence of the introductory 

paragraph to read as follows: 

44.303 Extent of review. 

* * * Unless segregation of 

subcontracts is impracticable, this 

evaluation shall not include 

subcontracts awarded by the contractor 

exclusively in support of Government 

contracts that are competitively 

awarded firm-fixed-price, competitively 

awarded fixed-price with economic 

price adjustment, or firm-fixed price or 

fixed-price with economic price 

adjustment awarded for commercial 

items pursuant to Part 12.* * * 

* * * * * 

PART 52—SOLICITATION PROVISIONS 

AND CONTRACT CLAUSES 

13. Amend section 52.212–4 by—

a. Revising the date of the clause; 

b. Adding a new fourth sentence to 

the introductory text of paragraph (a) of 

the clause; and 

c. Adding Alternate I to read as 

follows: 

52.212–4 Contract Terms and 

Conditions—Commercial Items. 

* * * * * 

CONTRACT TERMS AND CONDITIONS—

COMMERCIAL ITEMS (DATE) 

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

replacement or reperformance will not 

correct the defects or is not possible, the 

Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 56335 

Government may seek an equitable price 

reduction or adequate consideration for 

acceptance of nonconforming supplies or 

services.* * * 

* * * * * 

Alternate I (Date). When a time and 

materials or labor-hour contract is 

contemplated, substitute the following 

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

basic clause and add the following paragraph 

(u) to 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 

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 

(a)(5) of this clause, 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—

Approved purchasing system means a 

Contractor’s purchasing system that has been 

reviewed and approved in accordance with 

Part 44 of the Federal Acquisition Regulation 

(FAR). 

Consent to subcontract means the 

Contracting Officer’s written consent for the 

Contractor to enter into a particular 

subcontract. 

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. 

Materials means—

(1) Direct materials, including supplies and 

services transferred between divisions, 

subsidiaries, or affiliates of the contractor 

under a common control; 

(2) Subcontracts for supplies and services; 

(3) Other direct costs (e.g., travel, computer 

usage charges, etc.); or 

(4) Indirect costs specifically provided for 

in this clause. 

Subcontract means any contract, as defined 

in FAR Subpart 2.1, entered into by a 

subcontractor to furnish supplies or services 

for performance of the prime contract or a 

subcontract. 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. 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. Invoices may be 

submitted once each month (or at more 

frequent intervals, if approved by the 

Contracting Officer) to the Contracting 

Officer or the Contracting Officer’s 

representative. When requested by the 

Contracting Officer or the Contracting 

Officer’s 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. 

Unless the Schedule prescribes otherwise, 

the hourly rates in the Schedule shall not be 

varied by virtue of the Contractor having 

performed work on an overtime basis. If no 

overtime rates are provided in the Schedule 

and the Contracting Officer approves 

overtime work in advance, overtime rates 

shall be negotiated. Failure to agree upon 

these overtime rates shall be treated as a 

dispute under the Disputes clause of this 

contract. If the Schedule provides rates for 

overtime, the premium portion of those rates 

will be reimbursable only to the extent the 

overtime is approved by the Contracting 

Officer. 

(ii) Materials. (A) If the Contractor 

furnishes its own materials that meet the 

definition of a commercial item at 2.101, the 

price to be paid for such materials shall be 

the Contractor’s established catalog or the 

market price, adjusted to reflect the—

(1) Quantities being acquired; and 

(2) Actual cost of any modifications 

necessary because of contract requirements. 

(B) Subcontracts. (1) Unless the 

subcontractor is listed in paragraph 

(i)(1)(ii)(B)(2) of this clause, subcontract costs 

will be reimbursed at actual costs as 

specified in (i)(1)(ii)(C) of this clause. 

(2) Provided the subcontract agreement 

requires the contractor to substantiate the 

subcontract hours and employee 

qualification, the contractor shall be 

reimbursed at the hourly rates prescribed in 

the schedule for the following 

subcontractors: [Insert subcontractor name(s) 

or, if no subcontracts are to be reimbursed at 

the hourly rates prescribed in the schedule, 

‘‘None.’’ If this is an indefinite delivery 

contract, the Contracting Officer may insert 

‘‘Each order must list separately the 

subcontractor(s) for that order or, if no 

subcontracts under that order are to be 

reimbursed at the hourly rates prescribed in 

the schedule, insert ‘None’.’’] 

(C) Except as provided for in paragraphs 

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

Government will reimburse the Contractor 

the actual cost of materials (less any rebates, 

refunds, or discounts received by or accrued 

to the contractor) provided the Contractor—

(1) Has made payments for materials in 

accordance with the terms and conditions of 

the agreement or invoice; or 

56336 Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 

(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. 

(D) 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 

(2) 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. 

(E) 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)(C) 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.] 

(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.] 

(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 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. 

(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 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; 

(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. 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 

paragraph (b) of the FAR clause at 52.212–

5 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 

Federal Register / Vol. 70, No. 185 / Monday, September 26, 2005 / Proposed Rules 56337 

before the effective date of termination by the 

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

rate payments already made to the Contractor 

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. 

* * * * * 

(u) Subcontracts. (1) If the Contractor has 

an approved purchasing system, the 

Contractor shall obtain the Contracting 

Officer’s written consent only before placing 

subcontracts identified in an addendum to 

this clause. 

(2) If the Contractor does not have an 

approved purchasing system, consent to 

subcontract is required for any subcontract 

that—

(i) Is of the cost-reimbursement, time-andmaterials, or labor-hour type; or 

(ii) Is fixed-price and exceeds—

(A) For a contract awarded by the 

Department of Defense, the Coast Guard, or 

the National Aeronautics and Space 

Administration, the greater of the simplified 

acquisition threshold or 5 percent of the total 

estimated cost of the contract; or 

(B) For a contract awarded by a civilian 

agency other than the Coast Guard and the 

National Aeronautics and Space 

Administration, either the simplified 

acquisition threshold or 5 percent of the total 

estimated cost of the contract. 

(iii) Exceptions to this requirement may be 

as specified by the Contracting Officer in an 

addendum to this clause. 

(3) The Contractor shall notify the 

Contracting Officer reasonably in advance of 

placing any subcontract or modification 

thereof for which consent is required under 

paragraph (u)(1) or (u)(2) of this clause, 

including the following information: 

(i) A description of the supplies or services 

to be subcontracted. 

(ii) Identification of the type of subcontract 

to be used. 

(iii) Identification of the proposed 

subcontractor. 

(iv) Extent of competition or basis for 

determining price reasonableness. 

(v) The proposed subcontract amount. 

(vi) If a time-and-materials or labor-hour 

subcontract, a list of the labor categories, 

corresponding labor rates and estimated 

hours. 

(4) The Contractor is not required to notify 

the Contracting Officer in advance of entering 

into any subcontract for which consent is not 

required under paragraph (u)(1) or (u)(2) of 

this clause. 

(5) Unless the consent or approval 

specifically provides otherwise, neither 

consent by the Contracting Officer to any 

subcontract nor approval of the Contractor’s 

purchasing system shall constitute a 

determination—

(i) Of the acceptability of any subcontract 

terms or conditions; or 

(ii) Relieve the Contractor of any 

responsibility for performing this contract. 

(6) No subcontract or modification thereof 

placed under this contract shall provide for 

payment on a cost-plus-a-percentage-of-cost 

basis, and any fee payable under costreimbursement type subcontracts shall not 

exceed the fee limitations in FAR 15.404–

4(c)(4)(i). 

(7) The Contractor shall give the 

Contracting Officer immediate written notice 

of any action or suit filed and prompt notice 

of any claim made against the Contractor by 

any subcontractor or vendor that, in the 

opinion of the Contractor, may result in 

litigation related in any way to this contract, 

with respect to which the Contractor may be 

entitled to reimbursement from the 

Government. 

(8) If the contractor enters into any 

subcontract that requires consent without 

obtaining such consent, the Government will 

not be liable for any costs incurred under that 

subcontract prior to the date the contractor 

obtains the required consent. Any payment of 

subcontract costs incurred prior to the date 

of the consent will be reimbursed only if the 

Contracting Officer subsequently provides 

the consent required by paragraph (u) of this 

clause. 

[FR Doc. 05–18965 Filed 9–23–05; 8:45 am] 

BILLING CODE 6820–EP–S