Federal Register / Vol. 70, No. 189 / Friday, September 30, 2005 / Rules and Regulations 57463 

originally authorized under the Federal 

Acquisition Streamlining Act of 1994 (Public 

Law 103–355, Sec. 7102) expired. This 

provision, as implemented in Federal 

Acquisition Regulation subpart 19.11 

authorized agencies to apply the price 

evaluation adjustment to benefit certain 

small disadvantaged business concerns in 

competitive acquisitions. This change 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 civilian agencies 

(excluding NASA and Coast Guard) will no 

longer have the authority to apply the price 

evaluation adjustment to benefit certain 

small disadvantaged business concerns in 

competitive acquisitions. However, the price 

evaluation adjustment is still authorized for 

the Department of Defense, U.S. Coast Guard, 

and NASA. 

The FAR Secretariat has submitted a 

copy of the IRFA to the Chief Counsel 

for Advocacy of the Small Business 

Administration. Interested parties may 

obtain a copy from the FAR Secretariat. 

The Councils will consider comments 

from small entities concerning the 

affected FAR Part 19 in accordance with 

5 U.S.C. 610. Interested parties must 

submit such comments separately and 

should cite 5 U.S.C 601 et seq. (FAC 

2005–06, FAR case 2005–002), in 

correspondence. 

C. Paperwork Reduction Act 

The Paperwork Reduction Act does 

not apply because the changes to the 

FAR do not impose information 

collection requirements that require the 

approval of the Office of Management 

and Budget under 44 U.S.C. 3501 et seq. 

D. Determination to Issue an Interim 

Rule 

A determination has been made under 

the authority of the Secretary of Defense 

(DoD), the Administrator of General 

Services (GSA), and the Administrator 

of the National Aeronautics and Space 

Administration (NASA) that urgent and 

compelling reasons exist to promulgate 

this interim rule without prior 

opportunity for public comment. This 

action is necessary because the small 

disadvantaged business price evaluation 

adjustment for civilian agencies other 

than NASA and Coast Guard, originally 

authorized under the Federal 

Acquisition Streamlining Act of 1994 

(Public Law 103–355, Sec. 7102) 

expired. This revision to the FAR is 

necessary to ensure that civilian 

agencies (except Coast Guard and 

NASA) are aware that the price 

evaluation adjustment should not be 

applied to their acquisitions. However, 

pursuant to Public Law 98–577 and FAR 

1.501, the Councils will consider public 

comments received in response to this 

interim rule in the formation of the final 

rule. 

List of Subjects in 48 CFR Parts 19 and 

52 

Government procurement. 

Dated: September 22, 2005. 

Julia B. Wise, 

Director, Contract Policy Division. 

■ Therefore, DoD, GSA, and NASA 

amend 48 CFR parts 19 and 52 as set 

forth below: 

■ 1. The authority citation for 48 CFR 

parts 19 and 52 continues to read as 

follows: 

Authority: Authority: 40 U.S.C. 121(c); 10 

U.S.C. chapter 137; and 42 U.S.C. 2473(c). 

PART 19—SMALL BUSINESS 

PROGRAMS 

■ 2. Amend section 19.1102 by 

redesignating paragraphs (a) and (b) as 

(b) and (c), respectively, and adding a 

new paragraph (a) to read as follows: 

19.1102 Applicability. 

(a) This subpart applies to the 

Department of Defense, National 

Aeronautics and Space Administration, 

and the U.S. Coast Guard. Civilian 

agencies do not have the statutory 

authority (originally authorized in the 

Federal Acquisition Streamlining Act of 

1994 (Public Law 103–355, Sec. 7102)) 

for use of the Small Disadvantaged 

Business (SDB) price evaluation 

adjustment. 

* * * * * 

■ 2. Amend section 19.1103 by revising 

paragraph (a)(2) to read as follows: 

19.1103 Procedures. 

(a)* * * 

(2) An otherwise successful offer from 

a historically black college or university 

or minority institution. 

* * * * * 

PART 52—SOLICITATION PROVISIONS 

AND CONTRACT CLAUSES 

■ 3. Amend section 52.212–5 by 

revising the date of the clause and 

paragraph (b)(10)(i) of the clause to read 

as follows: 

52.212–5 Contract Terms and Conditions 

Required to Implement Statutes or 

Executive Orders—Commercial Items. 

* * * * * 

CONTRACT TERMS AND CONDITIONS 

REQUIRED TO IMPLEMENT STATUTES OR 

EXECUTIVE ORDERS—COMMERCIAL 

ITEMS (SEP 2005) 

* * * * * 

(b)* * * 

(10)(i) 52.219–23, Notice of Price 

Evaluation Adjustment for Small 

Disadvantaged Business Concerns (SEP 

2005) (10 U.S.C. 2323) (if the offeror 

elects to waive the adjustment, it shall 

so indicate in its offer). 

* * * * * 

■ 4. Amend section 52.219–23 by 

revising the date of the clause and 

paragraph (b)(1)(ii) of the clause to read 

as follows: 

52.219–23 Notice of Price Evaluation 

Adjustment for Small Disadvantaged 

Business Concerns. 

* * * * * 

NOTICE OF PRICE EVALUATION 

ADJUSTMENT FOR SMALL 

DISADVANTAGED BUSINESS CONCERNS 

(SEP 2005) 

* * * * * 

(b) Evaluation adjustment. (1)* * * 

(ii) An otherwise successful offer from 

a historically black college or university 

or minority institution. 

* * * * * 

[FR Doc. 05–19475 Filed 9–29–05; 8:45 am] 

BILLING CODE 6820–EP–S 

DEPARTMENT OF DEFENSE 

GENERAL SERVICES 

ADMINISTRATION 

NATIONAL AERONAUTICS AND 

SPACE ADMINISTRATION 

48 CFR Part 31 

[FAC 2005–06; FAR Case 2004–006; Item 

IX] 

RIN 9000–AK06 

Federal Acquisition Regulation; 

Accounting for Unallowable Costs 

AGENCIES: Department of Defense (DoD), 

General Services Administration (GSA), 

and National Aeronautics and Space 

Administration (NASA). 

ACTION: Final rule. 

SUMMARY: The Civilian Agency 

Acquisition Council and the Defense 

Acquisition Regulations Council 

(Councils) have agreed on a final rule 

amending the Federal Acquisition 

Regulation (FAR) by revising language 

regarding accounting for unallowable 

costs. The final rule adds language 

which provides specific criteria on the 

use of statistical sampling as a method 

to identify unallowable costs, including 

the applicability of penalties for failure 

to exclude certain projected 

unallowable costs. The final rule also 

revises the language regarding advance 

agreements by adding statistical 

sampling methods as an example for 

which advance agreements between the 

57464 Federal Register / Vol. 70, No. 189 / Friday, September 30, 2005 / Rules and Regulations 

contracting officers and contractors may 

be appropriate. 

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. Jeremy Olson at 

(202) 501–3221. Please cite FAC 2005–

06, FAR case 2004–006. 

SUPPLEMENTARY INFORMATION: 

A. Background 

DoD, GSA, and NASA published a 

proposed FAR rule for public comment 

in the Federal Register at 68 FR 28108, 

May 22, 2003, under FAR case 2002–

006. The proposed rule related to FAR 

31.201–6, Accounting for unallowable 

costs, and to FAR 31.204, Application of 

principles and procedures. No public 

comments were received on the 

proposed rule relating to FAR 31.204, 

and the Councils decided that the FAR 

31.204 proposed rule should be 

converted to a final rule with no 

changes to the proposed rule. Public 

comments were received on the 

proposed rule relating to FAR 31.201–6, 

and the Councils decided to make 

substantive changes to the proposed 

rule and published a second proposed 

rule under separate FAR case 2004–006 

in the Federal Register at 69 FR 58014, 

September 28, 2004, with a request for 

comments by November 29, 2004. 

Five respondents submitted public 

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 to address the concerns raised in 

the public comments. Differences 

between the second proposed rule and 

the final rule are discussed in 

Comments 1, 2, and 3, below. 

Public Comments 

Application of statistical sampling, FAR 

31.201–6(c)(2). 

Comment 1: One respondent 

recommends clarifying paragraph (c)(2) 

to make it clear that this paragraph 

refers to contractors, not the 

Government. The respondent therefore 

recommends revising the first sentence 

to read as follows: 

‘‘Statistical sampling is an acceptable 

practice for contractors to follow in 

accounting for and presenting unallowable 

costs provided the following criteria are 

met.’’

Councils’ response: Concur. The 

Councils believe that the proposed 

change will enhance the clarity of the 

rule and emphasize that it is the 

contractor’s ultimate responsibility for 

complying with the accounting and 

presentation of unallowable costs as 

prescribed in paragraph (c)(1). 

Therefore, the respondent’s proposed 

language is added to FAR 31.201–

6(c)(2). While it is the intent of the 

Councils to specifically state that 

statistical sampling is an acceptable 

method for contractors to comply with 

the identification and segregation 

requirements of this rule, this language 

in no way binds or limits the 

Government from performing their 

responsibilities in fulfilling the 

requirements for establishing indirect 

cost rates in accordance with FAR 

Subpart 42.7, Indirect Cost Rates. 

Application of penalties, FAR 31.201–

6(c)(3). 

Comment 2:Three respondents 

recommend that the proposed paragraph 

(c)(3) be revised. One respondent 

believes that the proposed paragraph 

(c)(3) will cause more confusion than it 

is intended to preclude. This 

respondent states that the penalty 

provisions of FAR 42.709 can be 

invoked in statistical sampling by using 

a simpler paragraph that reads as 

follows: 

‘‘For any cost in the selected sample that 

is subject to the penalty provisions at FAR 

42.709, the amount projected to the sampling 

universe from that sampled cost is also 

subject to the same penalty provisions.’’

The second respondent believes that 

the proposed paragraph (c)(3) should be 

simplified to improve clarity and 

eliminate redundant text from FAR 

42.709. This respondent believes that 

the penalty provisions in FAR 42.709 

can be applied when sampling is used 

with a simpler, more concise paragraph 

that reads as follows: 

‘‘Any unallowable indirect costs that are 

not excluded from the universe, either as part 

of the projection of sample results or separate 

review of transactions, are subject to the 

penalty provisions at FAR 42.709.’’

The third respondent believes that the 

proposed paragraph (c)(3) is rather 

confusing and subject to 

misinterpretation. This respondent 

therefore recommends that the 

paragraph be revised to read as follows: 

‘‘For any cost in the selected sample that 

is subject to the penalty provisions at FAR 

42.709, the associated projected amount to 

the sampling universe derived from that 

sampled item is also subject to the same 

penalty provisions.’’

This respondent states that if the 

proposed language is retained, the 

Councils need to address the following: 

(a) The wording in (c)(3)(i) ‘‘excluded 

from any final indirect rate proposal’’ is 

technically incorrect. The amounts are 

not ‘‘excluded’’ from the ‘‘proposal’’, as 

the proposal would include gross, 

withdrawn, and claimed/recoverable 

costs. The respondent therefore 

recommends that this would need to be 

revised to read ‘‘The following amounts 

must be excluded from any proposed 

final indirect rates or....’’

(b) Proposed paragraph (c)(3)(i)(B) is 

not clear as to what is meant by 

‘‘determined to be unallowable.’’ This 

could relate to paragraph (b) of this cost 

principle or it could relate to FAR 

42.709–3(b) or something else. 

(c) Proposed paragraph (c)(3)(iii) 

appears redundant and unnecessary. 

Paragraph (c)(3)(iii) provides ‘‘...are 

subject to the penalties provisions at 

FAR 42.709.’’ By virtue of this reference 

that includes contract applicability 

language at 42.709–6, it does not appear 

necessary to provide another paragraph 

with the same type of contract 

applicability language. 

Councils’ response: Concur. The 

Councils agree that the proposed 

language was potentially confusing. The 

Councils therefore recommend 

simplifying the language at FAR 31.201–

6(c)(3) to read as follows: 

‘‘For any indirect cost in the selected 

sample that is subject to the penalty 

provisions at FAR 42.709, the amount 

projected to the sampling universe from that 

sampled cost is also subject to the same 

penalty provisions.’’

The Councils note that the intent of 

the subject language in both the 

proposed rule and the final rule is the 

same. 

Advance agreements, FAR 31.201–

6(c)(4) and FAR 31.109. 

Comment 3: Two respondents assert 

that paragraph (c)(4) is written in such 

a way as to suggest there is a 

requirement for an advance agreement. 

One respondent does not believe the 

potentially prescriptive language at 

paragraph (c)(4) is consistent with the 

examples of costs at FAR 31.109(h). 

Therefore, this respondent recommends 

eliminating this paragraph. The 

respondent further notes that if it is 

determined that the advance agreement 

reference must remain, the following 

text would be more acceptable to the 

contracting parties: 

‘‘An advance agreement (see 31.109) with 

respect to compliance with subparagraph 

(c)(3) of this subsection may be useful and 

desirable.’’

The second respondent believes it 

would be more appropriate and 

consistent with the verbiage used in 

other cost principles to simply reference 

FAR 31.109, such as is done in FAR 

31.205–37. This respondent therefore 

recommends that the language at FAR 

31.109(h) include sampling for 

Federal Register / Vol. 70, No. 189 / Friday, September 30, 2005 / Rules and Regulations 57465 

unallowable costs as another example of 

items that may require an advance 

agreement, and that paragraph (c)(4) be 

revised to read as follows: 

‘‘See 31.109 regarding advance 

agreements.’’

Councils’ response: Partially concur. 

The Councils do not believe the 

proposed language requires an advance 

agreement. The proposed language 

states that use of statistical sampling 

should be the subject of an advance 

agreement. While the Councils believe 

that the advance agreement language 

should remain in FAR 31.201–6, the 

Councils do agree that it would be 

helpful to add sampling to FAR 31.109 

as an example of the type of item for 

which an advance agreement may be 

appropriate, and therefore have added 

‘‘statistical sampling methods’’ to FAR 

31.109(a) and 31.109(h)(17). 

Comment 4: One respondent asserts 

that if the proposed rule is enacted, the 

rule should require an advance 

agreement that specifies what an 

adequate sampling plan entails. As 

such, this respondent recommends that 

paragraph (c)(4) require an advance 

agreement that documents the objective 

of the sample, the population, the 

measures, the sampling parameters, the 

confidence level, the precision, the 

sampling design, and the decision rule. 

Councils’ response: Nonconcur. The 

Councils believe the comments 

submitted in response to the proposed 

rule and the second proposed rule 

demonstrate that it is preferable to 

provide general criteria rather than 

specific requirements. The use of 

specific requirements reduce the 

flexibility of the contracting parties to 

apply sampling in a manner that 

maximizes its efficient use while 

continuing to protect the Government 

interests. The Councils believe that the 

requirements for the sample to be a 

reasonable representation of the 

sampling universe, to permit audit 

verification, and to apply penalties to 

any projected amounts provides 

adequate protection for the Government 

without unduly restricting the effective 

use of proper statistical sampling 

techniques. 

In addition, the Councils do not 

believe an advance agreement should be 

required. However, the Councils believe 

it is important that the rule clearly state 

that it is the contractor’s responsibility 

to prove compliance with the sampling 

criteria in FAR 31.201–6(c) when no 

advance agreement exists. When a 

contractor elects to use statistical 

sampling without entering into an 

advance agreement, the contractor is at 

risk that the Government will find the 

sampling plan in noncompliance with 

FAR 31.201–6(c), and the Government 

will perform their own sampling or even 

possibly a 100 percent review of the 

costs at issue. In those cases where the 

contracting officer or contracting 

officer’s representative challenges the 

contractor’s sampling methods, and no 

advance agreement exists, the burden of 

proof should be on the contractor to 

establish that the sampling methods 

comply with the FAR requirements. The 

final rule at paragraph (c)(5) has been 

revised to include this provision. To 

mitigate the potential for disputes 

regarding the acceptability of sampling 

methods, it is generally advisable for the 

contractor and the Government to enter 

into an advance agreement. Since the 

advance agreement has a significant 

impact on the accounting for 

unallowable costs, the final rule at 

paragraph (c)(4) requires that the 

contracting officer request auditor input 

prior to entering into such agreements. 

Directly associated costs, FAR 31.201–

6(e). 

Comment 5: One respondent believes 

that FAR 31.201–6(e) violates CAS 405 

(Accounting for Unallowable Costs) and 

is subject to legal challenge by any 

Government contractor to which a 

procuring or administering agency 

might seek to apply it. This respondent 

believes that the proposed rule sends a 

message to the contracting community 

that contracting agencies follow CAS 

only where it suits them to do so, and 

may disregard CAS where it does not 

suit their interests. This respondent 

asserts that paragraph (e) ‘‘...departs 

from the CAS 405 definition and 

substitutes a ‘materiality’ test for the 

‘but for’ test and further extends the 

materiality test to encompass even more 

factors that are unrelated to the CAS 

definition. While a suitable materiality 

test could itself be reconcilable with the 

CAS ‘but for’ test, the FAR has gone 

well beyond this point to encompass 

additional factors that directly 

contradict the CAS 405 definition.’’ The 

respondent states that the FAR could be 

revised to comply with CAS 405. The 

respondent asserts that ‘‘a point clearly 

comes at which a particular cost 

becomes so significant that common 

sense tells us the ‘but for’ test is 

satisfied. Thus, a test seeking to 

establish that point using the term 

‘materiality’ would be a valid 

implementation of CAS 405.’’ The 

respondent therefore recommends that 

the FAR specify ‘‘a sensible materiality 

test and delete the other two current 

criteria of FAR 31.201–6(e).’’ The 

respondent further noted that it has 

submitted copies of its comments to the 

CAS Board and suggested that the Board 

‘‘review the conflict between CAS and 

FAR in the identification and allocation 

of directly associated cost and take what 

steps it may consider appropriate to 

defend its exclusive jurisdiction in this 

area.’’

Councils’ response: Nonconcur. The 

Councils do not believe the language at 

paragraph (e) conflicts with CAS 405. 

The current language at FAR 31.201–

6(e)(2), which has been in the FAR for 

over twenty years, has not been ruled to 

conflict with CAS 405 by any Court or 

by the CAS Board. The Councils believe 

this is important language, because it 

provides contracting personnel and 

contractors with specific information on 

when to treat salaries and expenses as 

directly associated costs. As such, the 

Councils believe this language should 

be retained. 

Sampling for large dollar transactions, 

FAR 31.201(c)(2)(ii). 

Comment 6: One respondent believes 

that the proposed requirement at FAR 

31.201–6(c)(2)(ii) that ‘‘all large dollar 

and high risk transactions are separately 

reviewed for unallowable costs and 

excluded from the sampling process’’ is 

overly restrictive. This respondent notes 

that its past experience has shown that 

sampling for unallowable costs is most 

efficient and effective for high volume 

accounts with low dollar, low risk 

transactions. Therefore, the respondent 

believes that for a given universe, there 

is often no need or benefit to set aside 

transactions for 100 percent review. The 

respondent notes that identification of 

any transactions requiring 100 percent 

review and the establishment of 

sampling strata or clusters as necessary 

are all inherent requirements of 

developing a sampling plan that 

provides a ‘‘reasonable representation of 

the sampling universe,’’ as required by 

FAR 31.201–6(c)(2)(i). The respondent 

therefore recommends that the language 

in paragraph (c)(2)(ii) be deleted. 

Councils’ response: Nonconcur. The 

Councils agree with the respondent that 

a reasonable representation of the 

sampling universe would require 

elimination of items that due to their 

nature and/or dollar amount are not 

reasonably similar to the other items in 

the universe. However, the Councils 

also believe this is an important area 

that requires clear language to assure 

that all parties understand that large 

dollar and high risk items must be 

removed from the sampling universe. 

Therefore, paragraph (c)(2)(ii) has been 

retained. 

Use of statistical sampling, General. 

Comment 7: A respondent believes 

that the use of statistical sampling will 

57466 Federal Register / Vol. 70, No. 189 / Friday, September 30, 2005 / Rules and Regulations 

result in confusion, inconsistencies, and 

disputes. The respondent believes that 

statistical sampling should not replace 

accounting policies and procedures for 

properly identifying and segregating 

unallowable costs. The respondent 

states that unallowable costs should be 

appropriately identified and excluded 

when they are initially incurred and 

recorded. The respondent asserts that 

this internal control assures that 

unallowable costs are accounted for and 

excluded from a contractor’s 

submission. The respondent states that 

allowing statistical sampling for 

identifying unallowable costs weakens 

this key internal control. The 

respondent further notes that if 

sampling is to be permitted, the 

Government and the contractor must 

develop the expertise in statistical 

sampling to ensure sampling plans are 

adequate and executed properly. 

Councils’ response: Nonconcur. The 

Councils note that CAS 405 (Accounting 

for Unallowable Costs) already permits 

sampling. As such, it would be a 

conflict with the CAS to state that 

sampling is not permitted for CAScovered contracts. While the FAR could 

add a specific provision stating that 

statistical sampling is not permitted for 

non-CAS covered contracts, the 

Councils do not believe this would be 

a prudent business action. The Councils 

believe that the use of statistical 

sampling should apply to all contracts 

covered by FAR Part 31, Contract Cost 

Principles and Procedures. The purpose 

of the proposed rule is to provide some 

general structure to the process. 

Statistical sampling, when properly 

applied, is acceptable for both 

segregating unallowable costs and 

verifying that such costs have been 

properly segregated (either by specific 

identification or using appropriate 

sampling techniques). A properly 

executed sampling plan should 

approximate the total unallowable costs 

from the sample universe. Internal 

controls and procedures established to 

meet the sampling objectives and 

evaluation of the sample selections 

should still be a key component of this 

process. The Councils are also 

concerned that it would be oxymoronic 

to argue that statistical sampling is not 

acceptable for segregating unallowable 

costs but is acceptable for verifying the 

validity of that segregation. As to the 

expertise that needs to be developed, 

the Councils again note that statistical 

sampling is already permitted by CAS, 

and is often used in both industry and 

the Government for many different 

types of applications. Thus, the 

Councils believe the necessary expertise 

for applying statistical sampling already 

exists within both the Government and 

the contractor community. 

Comment 8: One respondent believes 

that the FAR should include guidance 

similar to that issued by the IRS in 

Revenue Procedure 2004–29. This 

respondent states that this Revenue 

Procedure establishes guidelines for 

using statistical sampling methods for 

meals and entertainment expenses. The 

respondent notes that this Revenue 

Procedure covered the sampling plan 

standards, the methods and attributes to 

be used with a sampling plan, the 

sampling documentation standards, and 

the technical formulas. In addition, the 

procedure specified a 95 percent onesided confidence level. 

Councils’ response: Nonconcur. The 

Councils believe that such prescriptive 

language is not necessary. The Councils 

believe that it is preferable to provide 

for more general requirements regarding 

acceptable statistical methods than to 

provide a detailed listing of what must 

be present for each and every situation. 

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 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. 

C. Paperwork Reduction Act 

The Paperwork Reduction Act does 

not apply because the changes to the 

FAR do not impose information 

collection requirements that require the 

approval of the Office of Management 

and Budget under 44 U.S.C. 3501, et 

seq. 

List of Subjects in 48 CFR Part 31 

Government procurement. 

Dated: September 22, 2005. 

Julia B. Wise, 

Director, Contract Policy Division. 

■ Therefore, DoD, GSA, and NASA 

amend 48 CFR part 31 as set forth 

below: 

PART 31–CONTRACT COST 

PRINCIPLES AND PROCEDURES 

■ 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). 

■ 2. Amend section 31.109 by—

■ a. Removing the period from the end 

of the third sentence of paragraph (a) 

and adding ‘‘and on statistical sampling 

methodologies at 31.201–6(c).’’ in its 

place; and 

■ b. Removing from the introductory 

text of paragraph (h) the words ‘‘of 

costs’’; removing from paragraph (h)(15) 

the last word ‘‘and’’; removing the 

period from the end of paragraph (h)(16) 

and adding ‘‘; and’’ in its place; and 

adding paragraph (h)(17) to read as 

follows: 

31.109 Advance agreements. 

* * * * * 

(h) * * * 

(17) Statistical sampling methods (see 

31.201–6(c)(4). 

■ 3. Amend section 31.201–6 by—

■ a. Removing from the second sentence 

of paragraph (a) and the first sentence of 

paragraph (b) the word ‘‘which’’ each 

time it appears (3 times) and adding the 

word ‘‘that’’ in its place; 

■ b. Revising paragraph (c); 

■ c. Removing from the first sentence of 

paragraph (d) the word ‘‘which’’ the first 

time it appears and adding ‘‘that’’ in its 

place; and 

■ d. Removing from the end of 

paragraph (e)(1)(ii) the word ‘‘or’’ and 

adding the word ‘‘and’’ in its place; and 

revising paragraph (e)(3) to read as 

follows: 

31.201–6 Accounting for unallowable 

costs. 

* * * * * 

(c)(1) The practices for accounting for 

and presentation of unallowable costs 

must be those described in 48 CFR 

9904.405, Accounting for Unallowable 

Costs. 

(2) Statistical sampling is an 

acceptable practice for contractors to 

follow in accounting for and presenting 

unallowable costs provided the criteria 

in paragraphs (c)(1)(i), (c)(1)(ii), and 

(c)(1)(iii) of this subsection are met: 

(i) The statistical sampling results in 

an unbiased sample that is a reasonable 

representation of the sampling universe. 

(ii) Any large dollar value or high risk 

transaction is separately reviewed for 

unallowable costs and excluded from 

the sampling process. 

(iii) The statistical sampling permits 

audit verification. 

(3) For any indirect cost in the 

selected sample that is subject to the 

Federal Register / Vol. 70, No. 189 / Friday, September 30, 2005 / Rules and Regulations 57467 

penalty provisions at 42.709, the 

amount projected to the sampling 

universe from that sampled cost is also 

subject to the same penalty provisions. 

(4) Use of statistical sampling 

methods for identifying and segregating 

unallowable costs should be the subject 

of an advance agreement under the 

provisions of 31.109 between the 

contractor and the cognizant 

administrative contracting officer or 

Federal official. The advance agreement 

should specify the basic characteristics 

of the sampling process. The cognizant 

administrative contracting officer or 

Federal official shall request input from 

the cognizant auditor before entering 

into any such agreements. 

(5) In the absence of an advance 

agreement, if an initial review of the 

facts results in a challenge of the 

statistical sampling methods by the 

contracting officer or the contracting 

officer’s representative, the burden of 

proof shall be on the contractor to 

establish that such a method meets the 

criteria in paragraph (c)(2) of this 

subsection. 

* * * * * 

(e)(1) * * * 

(3) When a selected item of cost under 

31.205 provides that directly associated 

costs be unallowable, such directly 

associated costs are unallowable only if 

determined to be material in amount in 

accordance with the criteria provided in 

paragraphs (e)(1) and (e)(2) of this 

subsection, except in those situations 

where allowance of any of the directly 

associated costs involved would be 

considered to be contrary to public 

policy. 

[FR Doc. 05–19476 Filed 9–29–05; 8:45 am] 

BILLING CODE 6820–EP–S 

DEPARTMENT OF DEFENSE 

GENERAL SERVICES 

ADMINISTRATION 

NATIONAL AERONAUTICS AND 

SPACE ADMINISTRATION 

48 CFR Part 31 

[FAC 2005–06; FAR Case 2003–002; Item 

X] 

RIN 9000–AJ81 

Federal Acquisition Regulation; 

Reimbursement of Relocation Costs 

on a Lump-Sum Basis 

AGENCIES: Department of Defense (DoD), 

General Services Administration (GSA), 

and National Aeronautics and Space 

Administration (NASA). 

ACTION: Final rule. 

SUMMARY: The Civilian Agency 

Acquisition Council and the Defense 

Acquisition Regulations Council 

(Councils) have agreed on a final rule 

amending the Federal Acquisition 

Regulation (FAR) by revising the 

relocation cost principle to permit 

contractors the option of being 

reimbursed on a lump-sum basis for 

three types of employee relocation costs: 

costs of finding a new home; costs of 

travel to the new location; and costs of 

temporary lodging. These three types of 

costs are in addition to the 

miscellaneous relocation costs for 

which lump-sum reimbursements are 

already permitted. 

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. Jeremy Olson, 

Procurement Analyst, at (202) 501–

3221. Please cite FAC 2005–06, FAR 

case 2003–002. 

SUPPLEMENTARY INFORMATION: 

A. Background 

The Councils originally considered 

expanding the reimbursement of 

relocation costs on a lump-sum basis 

under FAR case 1997–032, Relocation 

Costs. However, the Councils decided to 

study this issue further under a separate 

case and published a final rule on the 

remainder of FAR case 1997–032 in the 

Federal Register at 67 FR 43516, June 

27, 2002. On October 24, 2002, the 

Councils published a Notice of Request 

for Comments in the Federal Register 

(67 FR 65468) with a list of questions 

regarding the use of a lump-sum 

approach for reimbursing employee 

relocation expenses. After reviewing the 

public comments that were submitted in 

response to that Federal Register notice, 

the Councils held a public meeting on 

February 6, 2003, to further explore the 

views of interested parties on this issue. 

Public comments and the discussions 

at the public meeting revealed that, in 

addition to the miscellaneous relocation 

costs for which lump-sum 

reimbursements are already permitted 

by FAR 31.205–35(b)(4), it is common 

commercial practice to reimburse 

relocating employees on a lump-sum 

basis for their house-hunting, final 

move, and temporary lodging expenses. 

A FAR case was opened to expand the 

relocation cost principle to permit 

lump-sum reimbursements for these 

three types of costs. 

The Councils published a proposed 

FAR rule in the Federal Register at 68 

FR 69264, December 11, 2003, with a 

request for comments by February 9, 

2004. Seven respondents submitted 

comments on the proposed FAR rule. 

Two respondents supported the 

proposed rule, four respondents 

opposed it, and one respondent 

requested clarification. A discussion of 

the 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 proposed rule 

and final rule are discussed in Section 

B, Comment 1, and Section C below. 

B. Public Comments 

No standard for measuring 

reasonableness 

1. Comment: Four respondents 

opposed the proposed rule and 

expressed the concern that with 

contractors spending significant 

amounts on employee relocations, the 

Government would have no objective 

standard for evaluating the 

reasonableness of the new lump-sum 

amounts being claimed. 

After conducting surveys that suggest 

‘‘contractors are incurring hundreds of 

millions of dollars of relocation costs 

annually,’’ the first respondent 

expressed ‘‘significant concern as to 

where an auditor, contracting officer, or 

contractor could turn to gather adequate 

data to make a determination as to the 

appropriateness and reasonableness of 

the lump-sum method or resulting 

amount.’’ The respondent concluded its 

letter by stating it ‘‘believes that paying 

a lump-sum for such significant 

amounts places an unacceptable risk on 

the Government and creates an 

excessive audit task to establish 

allowability of relocation costs.’’

Also citing the above mentioned 

survey of the large amounts of 

relocation costs allocated to cost 

reimbursement contracts each year, the 

second respondent stated that ‘‘allowing 

lump-sum reimbursement of these costs 

without supporting documentation is 

not in the best interests of the 

Government’’ because ‘‘the proposed 

revision would subject millions of 

dollars to a subjective test of 

reasonableness requiring Government 

auditors, contracting officials, attorneys, 

and others to expend significantly more 

resources to determine the 

reasonableness of the claimed costs, 

review the determination, and resolve 

disputes between the Government and 

the contractor involving disallowed 

costs.’’ The respondent went on to 

suggest ‘‘contractors will also incur 

additional expenses in excess of any 

administrative costs saved supporting 

the reasonableness of the relocation 

costs.’’