[Federal Register Volume 70, Number 189 (Friday, September 30, 2005)]
[Rules and Regulations]
[Pages 57470-57473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-19478]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 31

[FAC 2005-06; FAR Case 2001-021; Item XI]
RIN 9000-AJ38


Federal Acquisition Regulation; Training and Education Cost 
Principle

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

ACTION: Final rule.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) have agreed on a final rule 
amending the Federal Acquisition Regulation (FAR) by revising the 
``training and education costs'' contract cost principle. The amendment 
streamlines the cost principle and increases clarity by eliminating 
restrictive and confusing language, and by restructuring the rule to 
list only specifically unallowable costs. The final rule eliminates 
several specific limitations on the allowability of costs associated 
with the various categories of education, eliminates the disparate 
treatment of full-time and part-time undergraduate education costs, and 
limits allowable costs to training and education related to the field 
in which the employee is working or may reasonably be expected to work. 
The rule makes job-related training and education costs generally 
allowable, except for six public policy exceptions that are retained 
from the current cost principle. Except for the six expressly 
unallowable cost exceptions, the reasonableness of specific contractor 
training and education costs is assessed by reference to the FAR 
section entitled ``Determining reasonableness.''

DATES: Effective Date: October 31, 2005.

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. Jerry Olson at (202) 501-3221. 
Please cite FAC 2005-06, FAR case 2001-021.

SUPPLEMENTARY INFORMATION:

A. Background

    The Councils published a proposed FAR rule in the Federal Register 
(67 FR 34810) on May 15, 2002, with a request for comments by July 15, 
2002. On June 11, 2002, an amendment was published in the Federal 
Register (67 FR 40136) to correct an error in the Supplementary 
Information section accompanying the proposed rule. Six respondents 
submitted public comments. As a result of the comments received, the 
Councils made significant changes to the proposed FAR rule and 
published a second proposed FAR rule in the Federal Register (69 FR 
4436) on January 29, 2004, with a request for comments by March 29, 
2004.
    Nine respondents submitted comments in response to the second 
proposed FAR rule. A discussion of these public comments is provided 
below. The Councils considered all comments and concluded that the 
proposed rule should be converted to a final rule, with changes to the 
proposed rule. Differences between the second proposed rule and final 
rule are discussed in Section B, Comments 1, 2, 4, and 6, below.

B. Public Comments

Proposed paragraph (a): Education for sole purpose to obtain academic 
degree or qualify for job.

    Comment 1: Seven respondents generally supported the proposed rule; 
however, they strongly recommended that proposed paragraph (a) be 
deleted before issuing a final rule. Several of the respondents pointed 
out that paragraph (a) is inconsistent with the Councils' own Federal 
Register comments that they ``support upward mobility, job retraining, 
and educational advancement.'' In this regard, one respondent stated 
its concern that paragraph (a) would prevent it from providing ``the 
educational opportunities that we have provided for decades.'' Some 
respondents complained that it had ``no idea how one is to discern 
whether the training and education relates `solely' to obtaining an 
academic degree or to a particular position'' and that ``implementation 
of this provision will be burdensome and lead to contested costs; 
hardly a simplification that increases the clarity of the cost 
principle.''
    Several respondents challenged the fundamental notion that the 
allowability of contractor employee training and education costs must 
parallel exactly the treatment afforded Federal employees. One 
respondent wrote--
    ``We believe that utilization of the test of whether the Federal 
Government is willing to reimburse education costs for Federal 
employees is an inappropriate basis for determining cost 
allowability. The

[[Page 57471]]

benchmark for measuring the cost reasonableness of payments for 
education and training should be based on commercial practices that 
encourage the continued training and education of our workforce. 
Accordingly, we recommend that paragraph 31.205-44(a) of the 
proposed rule ... be deleted prior to issuing the final rule.''
    To further support this position, another respondent pointed out 
that Congress has long advocated increased use of commercial practices 
in the Federal acquisition process:
    ``Congress has consistently endorsed and supported the adoption 
of commercial practices--not Government practices--in the Government 
procurement arena. The most recent example is the 2004 DoD 
Authorization Legislation (P.L. 108-136), Section 1423. This section 
prescribes the establishment of a panel to propagate the use of 
commercial practices by, among other things, reviewing all 
regulations.''
    One respondent stated that the proposed paragraph (a) ``will 
decrease industry's ability to assist the U.S. Government in ensuring 
future economic strength'' through private sector training and 
education which often involves employees ``in Government-authorized, 
socioeconomic/disadvantaged programs that encourage upward mobility.'' 
In support of this assessment, the respondent provided a detailed 
description of the benefits that accrue to the company, the Government, 
and society in general from its Employee Scholar Program (ESP):
    ``There are over 9,000 U.S. employees (approximately 25% of whom 
are hourly workers) currently participating in respondent's ESP. 
These people are pursuing degrees from colleges and universities 
that many undoubtedly could not have afforded to fund on their own. 
ESP is encouraging educational pursuits that support social, 
political, and business needs, for example:
    <bullet> Approximately 40% of the respondent's employees 
participating from the aerospace and defense business units in the 
ESP are obtaining first degrees;
    <bullet> Over 80% of the degrees awarded to the respondent's 
employees from the aerospace and defense business units over the 
last 3 years are in the business/management or technical/engineering 
areas (less than 3% of degrees awarded were not in current or 
possible future job-related areas);
    <bullet> Female and Hispanic employees participate in the ESP at 
about 11/2 times their proportion in the respondent's workforce;
    <bullet> ESP participants have increased loyalty and motivation 
to remain with the respondent. They leave their jobs at a lower rate 
than the general population, thereby enhancing retention and 
reducing allowable recruiting, relocation, and job training costs;
    <bullet> ESP graduates are promoted at a higher rate than the 
general population;
    <bullet> The average age of a ESP participant is 39 years old 
(suggesting that most participants are of an age where they are able 
to use their education on the job, and seek further education in the 
future to keep their skills current).''
    Finally, one respondent summarized the confusion expressed by 
several respondents over the purpose and effect of the proposed 
paragraph (a):
    ``However, we are troubled by the statement in the comment 
section that the Councils' intent is also to ''... make it (the 
rule) consistent with recent statutory changes that cover the 
payment of costs for Federal employee academic degree training.'' 
This statement and the resulting proposed paragraph 31.205-44(a) 
nullify the benefits of simplification and adopting commercial 
practices. We are perplexed as to how the costs for allowing and 
encouraging employees to obtain degrees and take classes to provide 
for future opportunities is against public policy and how these 
costs potentially could be classified as unallowable.''
    Councils' response: The Councils agree that the allowability of 
contractor employee training and education costs, to the extent that it 
is job related, should be rooted in sound commercial practices that 
encourage upward mobility in the private sector workforce. The Councils 
also are acutely sensitive to the concern about the appearance of 
disparate treatment of contractor and Federal employees' full-time 
undergraduate level educational expenses. Therefore, the Councils 
carefully examined the comments of the largest Federal employee union, 
the American Federation of Government Employees (AFGE), and noted that 
the inclusion of the statutory limitations on agency payment of Federal 
employee educational costs in paragraph (a) apparently did little to 
temper the union's strong opposition to the proposed rule. Instead, 
AFGE focused its criticism primarily on the lack therein of a job-
relatedness requirement for allowable contractor employee full-time 
undergraduate educational costs, while it asserted that a demonstration 
of job-relatedness would be essential before the Government would pay 
these expenses for a Federal employee (see Comment 6, below). 
Accordingly, the Councils have deleted the proposed paragraph (a) and 
added the following allowability requirement for all training and 
education costs in the introductory sentence of the final rule: ``Costs 
of training and education that are related to the field in which the 
employee is working or may reasonably be expected to work are 
allowable, except as follows:'' The Councils believe that this broad 
accommodation of AFGE's principal criticism of the proposed rule 
constitutes sound public policy.

Proposed paragraph (d): Full-time graduate level education.

    Comment 2: Three respondents expressed concern that the proposed 
paragraph (d) would make currently allowable full-time graduate level 
educational costs unallowable. They pointed out that under the current 
coverage for such education, only the costs in excess of two years or 
the length of the graduate degree program, whichever is less, are 
unallowable. They argued that, in contrast, the proposed paragraph (d) 
would make the entire cost (not just the excess) of the graduate 
program unallowable if it exceeded two years or the length of the 
degree program.
    Councils' response: Concur. There was never any intent to change 
this aspect of the current allowability criteria for full-time graduate 
level educational costs. Accordingly, the Councils have revised this 
coverage (now paragraph (c) of the final rule) to clarify that only the 
costs in excess of two school years or the length of the degree 
program, whichever is less, are unallowable.

Proposed paragraph (e): Grants.

    Comment 3: Two respondents recommended that the proposed paragraph 
(e) on grants to educational or training institutions be deleted 
``because this subject matter is adequately covered by FAR 31.205-8, 
Contributions or donations.''
    Councils' response: Nonconcur. The Councils believe that the 
proposed paragraph (e) (which is essentially the same as the current 
paragraph (g), Grants) provides very helpful guidance regarding 
specific types of unallowable grants to educational or training 
institutions which should be retained. To avoid confusion, the Councils 
have also added back the explanatory words ``are considered 
contributions and'' from the current paragraph (g) to this provision 
(now paragraph (d) of the final rule).

Proposed paragraph (g): Employee dependents college savings plans.

    Comment 4: Three respondents expressed concern that the proposed 
paragraph (g), which makes costs of university and college plans for 
employee dependents unallowable, could be misinterpreted to make the 
administrative costs of such plans unallowable. One of the respondents 
suggested changing the words ``Costs of'' to ``Contractor contributions 
to'' to clarify the intent of this provision.
    Councils' response: Concur. The Federal Register notice 
accompanying

[[Page 57472]]

the January 29, 2004, proposed rule provided the following response to 
essentially this same industry concern:
    ``The cost principle does not address the administrative costs 
of such plans; therefore, the administrative costs are allowable, 
subject to the reasonableness criteria at FAR 31.201-3. However, any 
contributions to the plan by the company for employee dependents 
would be unallowable under the redesignated paragraph (g) in this 
second proposed rule.''
    Even though the Councils are unaware of any problems involving the 
misapplication of this provision to the administrative costs of college 
savings plans, they see no problem in making the suggested clarifying 
change. As stated above, the intent of the proposed paragraph (g) 
(which is the same as that of the current paragraph (j), Employee 
dependent education plans) is to make contractor contributions to 
college savings plans for employee dependents unallowable. Reasonable 
administrative costs for college savings plans funded by employee 
contributions should continue to be allowable. In revising this 
provision (now paragraph (f) of the final rule), the Councils have also 
used the appropriate financial planning term, ``college savings 
plans.''

Current paragraph (h): Advance agreements.

    Comment 5: Two respondents argued that in view of the potential 
changes in the allowability of full-time graduate level educational 
costs in the proposed paragraph (d), it is necessary to retain the 
current paragraph (h), Advance agreements, in order to keep currently 
allowable costs from becoming unallowable. This is because the current 
paragraph (h) permits advance agreements that would make costs 
allowable ``in excess of those otherwise allowable under paragraphs (c) 
and (d)'' of the current cost principle.
    Councils' response: Nonconcur. Since the Councils have revised the 
coverage for full-time graduate level educational costs in the final 
rule to prevent a possible ``all or nothing'' interpretation (see 
Comment 2, above), this should no longer be a concern for industry.

Job-relatedness.

    Comment 6: In opposing the proposed rule, one respondent 
categorized it as ``another attempt on the part of the Director of 
Procurement and Acquisition Policy at DoD to accord contractors and 
contractor employees further benefits not granted to Federal employees 
in similar circumstances.'' Continuing that theme, the respondent 
expressed its principal criticism of the proposed rule as follows:
    ``The proposed rule makes at least one extremely offensive 
change to the contract cost allowability rules that is not accorded 
to Federal employees, despite the misleading statement contained in 
the proposal's preamble. Permitting contractors to claim as an 
allowable cost, the costs of providing employees with full-time 
undergraduate education, amounts to nothing more than a contractor 
scholarship program, at taxpayer expense. While the respondent, as a 
matter of public policy, encourages Federal employees to further 
their education and training, it is well understood, that when 
taxpayers pick up these costs, such education and training must 
reasonably relate to the employee's actual or anticipated duties.''
    Councils' response: Partially concur. The Councils see significant 
benefits to both the Government and industry in publishing the final 
rule in this case. However, the Councils agree with the respondent that 
job-relatedness should be a requirement for allowable contractor 
employee full-time undergraduate level educational costs. In fact, the 
Councils have added such an allowability requirement for all training 
and education costs in the introductory sentence of the recommended 
final rule (see Comment 1, above). The Councils believe this change 
constitutes sound public policy.

Applicability to Federal employees.

    Comment 7: One respondent stated ``The combination of training and 
education for the 1102 series is critical, without the Government 
paying for the required courses and training, most employees could not 
afford to get the degree required.'' The respondent concluded with the 
request to ``Please reconsider and completely fund the education and 
training of current employees.''
    Councils' response: The respondent apparently confused the proposed 
rule as applying to Federal employees. The proposed rule does not apply 
to Federal employees.

C. Regulatory Planning and Review

    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.

D. Regulatory Flexibility Act

    The Department of Defense, the General Services Administration, and 
the National Aeronautics and Space Administration certify that this 
final rule will not 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 most contracts awarded 
to small entities use simplified acquisition procedures or are awarded 
on a competitive, fixed-price basis and do not require application of 
the cost principle discussed in this rule.

E. Paperwork Reduction Act

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

List of Subjects in 48 CFR Part 31

    Government procurement.

    Dated: September 22, 2005.
Julia B. Wise,
Director, Contract Policy Division.

0
Therefore, DoD, GSA, and NASA amend 48 CFR part 31 as set forth below:

PART 31-CONTRACT COST PRINCIPLES AND PROCEDURES

0
1. The authority citation for 48 CFR part 31 continues to read as 
follows:

    Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42 
U.S.C. 2473(c).
0
2. Revise section 31.205-44 to read as follows:


31.205-44   Training and education costs.

    Costs of training and education that are related to the field in 
which the employee is working or may reasonably be expected to work are 
allowable, except as follows:
    (a) Overtime compensation for training and education is 
unallowable.
    (b) The cost of salaries for attending undergraduate level classes 
or part-time graduate level classes during working hours is 
unallowable, except when unusual circumstances do not permit attendance 
at such classes outside of regular working hours.
    (c) Costs of tuition, fees, training materials and textbooks, 
subsistence, salary, and any other payments in connection with full-
time graduate level education are unallowable for any portion of the 
program that exceeds two school years or the length of the degree 
program, whichever is less.
    (d) Grants to educational or training institutions, including the 
donation of facilities or other properties, scholarships, and 
fellowships are considered contributions and are unallowable.
    (e) Training or education costs for other than bona fide employees 
are unallowable, except that the costs incurred for educating employee 
dependents (primary and secondary

[[Page 57473]]

level studies) when the employee is working in a foreign country where 
suitable public education is not available may be included in overseas 
differential pay.
    (f) Contractor contributions to college savings plans for employee 
dependents are unallowable.
[FR Doc. 05-19478 Filed 9-29-05; 8:45 am]
BILLING CODE 6820-EP-S