Federal Register / Vol. 75, No. 188 / Wednesday, September 29, 2010 / Rules and Regulations 60261 

DEPARTMENT OF DEFENSE 

GENERAL SERVICES 

ADMINISTRATION 

NATIONAL AERONAUTICS AND 

SPACE ADMINISTRATION 

48 CFR Part 16 

[FAC 2005–46; FAR Case 2008–008; Item 

IV; Docket 2009–0036, Sequence 1] 

RIN 9000–AL42 

Federal Acquisition Regulation; 

Award-Fee Language Revision 

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 adopted as final, with 

changes, the interim rule amending the 

Federal Acquisition Regulation (FAR) to 

implement section 814 of the John 

Warner National Defense Authorization 

Act for Fiscal Year 2007 (Pub. L. 109– 

364), section 867 of the Duncan Hunter 

National Defense Authorization Act for 

Fiscal Year 2009 (Pub. L. 110–417), and 

the Office of Federal Procurement 

Policy guidance memorandum dated 

December 4, 2007 entitled, Appropriate 

Use of Incentive Contracts. 

DATES: Effective Date: October 29, 2010. 

FOR FURTHER INFORMATION CONTACT: For 

clarification of content, contact Mr. 

Edward Chambers, Procurement 

Analyst, at 202–501–3221. For 

information pertaining to status or 

publication schedules, contact the 

Regulatory Secretariat at (202) 501– 

4755. Please cite FAC 2005–46, FAR 

Case 2008–008. 

SUPPLEMENTARY INFORMATION: 

A. Background 

This rule implements the provisions 

of section 814 of the John Warner 

National Defense Authorization Act for 

Fiscal Year 2007 (Pub. L. 109–364), 

section 867 of the Duncan Hunter 

National Defense Authorization Act for 

Fiscal Year 2009 (Pub. L. 110–417), and 

the Office of Federal Procurement 

Policy guidance memorandum dated 

December 4, 2007, entitled ‘‘Appropriate 

Use of Incentive Contracts,’’ by 

amending and/or integrating where 

appropriate, FAR part 7, Acquisition 

Planning, and FAR part 16, Contract 

Types, to improve agency use and 

decision making when using incentive 

contracts. 

This final rule adopts the interim rule 

with one change for clarification. This 

clarification entails the addition of the 

phrase ‘‘in the aggregate’’ to FAR 

16.401(e)(2), Table 16–1, and FAR 

16.401(e)(3)(v), to make it clear that the 

objective is to consider the contractor’s 

cost, schedule, and technical 

performance in the aggregate when 

performing award-fee assessments. 

B. Discussion and Analysis 

An interim rule with request for 

comments was published in the Federal 

Register on October 14, 2009 (74 FR 

52856). The FAR Secretariat received 

seven responses to the interim rule. 

These responses included a total of 22 

comments on 15 issues. Each issue is 

discussed in the following sections. 

1. Change in DFARS Rule Required 

Comment: One respondent wrote that 

this interim rule, without concurrent 

change to DFARS, particularly in 

allowing higher fixed fee, negates the 

value of this rule change. 

Response: DoD is considering a 

possible DFARS case to address this 

concern. The Councils further note that 

the rationale for allowing a higher fixed 

fee is not clear in this comment. In 

reading the comment in total, a 

reasonable inference is that the 

respondent meant to address base fee 

and not fixed fee. 

2. Clarification Regarding Award-Fee 

Rating Definitions 

Comment: Two respondents 

commented on the need to clarify 

whether an unsatisfactory evaluation in 

one category (e.g., cost) requires an 

overall unsatisfactory rating and thus no 

award fee in any category (e.g., schedule 

and technical) for the evaluation period. 

Response: The Council’s intent with 

the use of ‘‘overall cost, schedule, and 

technical performance in the aggregate’’ 

is to avoid the situation where, for 

example, contractors would receive no 

award fee in an evaluation period if they 

were rated below satisfactory on one of 

the criteria (e.g., in schedule 

performance) and above satisfactory in 

other criteria (e.g., technical and cost 

performance). The Councils believe that 

this would not be equitable. In such a 

situation, the contractor could receive a 

reduced percentage of the award-fee 

amount to account for the below 

satisfactory schedule performance, but 

they would not receive 100 percent of 

the award-fee amount, nor would they 

receive zero award fee for that 

evaluation period. The final rule adds 

clarifying language of ‘‘in the aggregate’’ 

to FAR 16.401(e)(2), Table 16–1, and 

FAR 16.401(e)(3)(v), to make it clear that 

the objective is to consider overall cost, 

schedule, and technical performance in 

performing award-fee assessments. 

3. Requested Clarification as to Whether 

Firm Fixed Price Award-Fee Contract Is 

an Incentive Fee Type Contract 

Comment: One respondent 

recommended that the FAR be clarified 

as to whether a firm-fixed-price awardfee contract is an incentive-type contract 

citing that the language in FAR 16.404, 

FAR 16.202–1, and FAR 16.401(a) 

appears to be contradictory. 

Response: The Councils take no 

position on this recommendation 

because it is outside the scope of this 

case, which was limited to the 

implementation of the section 814 of the 

John Warner National Defense 

Authorization Act for Fiscal Year 2007 

(Pub. L. 109–364), section 867 of the 

Duncan Hunter National Defense 

Authorization Act for Fiscal Year 2009 

(Pub. L. 110–417), and the Office of 

Federal Procurement Policy guidance 

memorandum dated December 4, 2007, 

entitled ‘‘Appropriate Use of Incentive 

Contracts.’’ 

4. Permit Use of Rollover Within Certain 

Parameters 

Comment: Three respondents 

recommended that the language 

prohibiting the use of rollover be 

revised to allow rollover under certain 

circumstances and at the discretion of 

the head of the contracting activity. 

Respondents contend that rollover can 

be an effective incentive tool if used 

properly. 

Response: The Councils disagree with 

the respondents. Award fee is structured 

to incentivize contractors to perform 

throughout the contract. Therefore, 

rollover of unearned award fee provides 

a disincentive for contractors to perform 

throughout the entire period of 

performance. If a contractor did not 

perform adequately during an award-fee 

rating period and was rated 

appropriately and then allowed to 

recover that unearned award fee in a 

subsequent period, the incentive for the 

contractor to perform consistently 

throughout the entire contract would be 

reduced. 

5. Interim Rule Presumes Award-Fee 

Determinations Represent Only 

Subjective Measures and Not Objective 

Measures as Well 

Comment: One respondent 

recommended that the language in FAR 

16.401(e)(1)(i) be revised to address the 

concept that in addition to subjective 

award-fee performance measures that 

we also include the use of objective 

performance measures. 


erowe on DSK5CLS3C1PROD with RULES3
60262 Federal Register / Vol. 75, No. 188 / Wednesday, September 29, 2010 / Rules and Regulations 

Response: The Councils disagree with 

this recommendation. A key tenet in 

determining if an award-fee incentive is 

suitable for an acquisition is whether 

one can devise predetermined objective 

incentives applicable to cost, schedule, 

and technical performance. If one can, 

then an award-fee incentive is not 

appropriate and an incentive 

arrangement based on predetermined 

formula-type incentives should be 

utilized instead. 

6. Eliminate Risk and Cost-Benefit 

Analysis 

Comment: Two respondents 

recommended deleting the requirement 

to perform a risk and cost-benefit 

analysis stating that the content and 

methodology for this analysis is not 

specified. 

Response: The Councils disagree with 

this recommendation. The FAR 

currently requires that no award-fee 

contract shall be awarded unless the 

contract amount, performance period, 

and expected benefits are sufficient to 

warrant the additional administrative 

effort. This requirement was reinforced 

in the Office of Federal Procurement 

Policy guidance memorandum dated 

December 4, 2007, entitled ‘‘Appropriate 

Use of Incentive Contracts.’’ The 

Councils believe it is within the 

purview of each Federal agency to 

provide supplemental guidance on how 

to perform this analysis. 

7. Contractor Should Be Allowed To 

Earn Award Fee Even if Performance Is 

Less Than Satisfactory 

Comment: One respondent wrote that 

under an award-fee contract, even when 

performance is less than satisfactory, 

there should be some level of fee 

earnings but potentially at a 

significantly decreased rate of earnings 

since the Government received some 

benefit from the work accomplished. 

The respondent maintained that even 

under a fixed-fee contract, a contractor 

can still earn some amount of fee, even 

when performance is less than 

satisfactory. The respondent 

recommended that Table 16–1 include 

an additional rating category, entitled 

‘‘less than satisfactory,’’ with a 

percentage range from 2 percent–48 

percent as well as changing ‘‘is below 

satisfactory’’ in FAR 16.401(e)(3)(v) to 

‘‘fail to meet the basic requirements of 

the contract’’. 

Response: The Councils disagree with 

this recommendation. Section 814 of the 

John Warner National Defense 

Authorization Act for Fiscal Year 2007 

(Pub. L. 109–364) and section 867 of the 

Duncan Hunter National Defense 

Authorization Act for Fiscal Year 2009 

(Pub. L. 110–417) were very clear that 

the FAR ‘‘shall ensure that no award fee 

may be paid for contractor performance 

that is judged to be below satisfactory 

performance’’. The Councils note that 

the regulations do allow the use of a 

base fee in an award-fee incentive 

arrangement. 

8. Award-Fee Determination Being 

Unilateral Decision 

Comment: One respondent 

recommended that the language in FAR 

16.401(e)(2) regarding the award-fee 

determination being a unilateral 

decision by the Government be struck 

since the Courts have determined that 

such decisions are reviewable under the 

Contract Disputes Act. 

Response: The Councils agree that 

award-fee determinations are reviewable 

under the Contract Disputes Act but the 

language in this section does not 

address that issue. This language in FAR 

16.401(e)(2) was included to point out 

that while the award-fee determination 

may be subject to the Contract Disputes 

Act, it is still a unilateral decision by 

the Government. 

9. Consider Different Language Relative 

to Adjectival Rating Descriptions 

Comment: One respondent 

recommended replacing the word 

‘‘supplement’’ with ‘‘tailor’’ in the FAR 

16.401(e)(3)(iv) sentence, contracting 

officers may supplement the adjectival 

rating description. 

Response: The Councils believe that 

these descriptions cannot be tailored but 

can be supplemented to fit the specific 

needs of the acquisition based upon the 

requirements in section 814 of the John 

Warner National Defense Authorization 

Act for Fiscal Year 2007 (Pub. L. 109– 

364) and section 867 of the Duncan 

Hunter National Defense Authorization 

Act for Fiscal Year 2009 (Pub. L. 110– 

417), which stated: The FAR ‘‘shall 

establish standards for determining the 

percentage of the available award fee, if 

any, which contractors should be paid 

for performance * * * ’’. 

10. Clarification Regarding Adjectival 

Descriptions 

Comment: One respondent wrote that 

the imprecise adjective modifiers in 

Table 16–1 could be problematic since 

what distinguishes ‘‘almost all of’’ from 

‘‘many’’ or what establishes a 

‘‘significant’’ criterion for ‘‘insignificant’’ 

criterion. A second respondent 

recommended revising Table 16–1 to 

delete the requirement to ‘‘exceed’’ 

significant award-fee criteria to earn a 

better than satisfactory rating. 

Response: The Councils disagree and 

maintain that the term ‘‘exceeds’’ is a 

reasonable term to differentiate 

contractor performance between the 

various ratings. In addition, the 

adjectives used in the rating table 

adequately distinguish between the 

different rating levels and provide the 

contracting officer with the flexibility to 

supplement the descriptions as 

appropriate. 

11. Published as Interim Rule 

Comment: One respondent wrote that 

they were disappointed that this rule 

change was published as an interim rule 

and not a proposed rule and 

recommended that the Councils publish 

rules of this magnitude as proposed 

rules in the future. 

Response: The Councils issued a 

statement of urgency which was 

published in the Federal Register notice 

with this interim rule. 

12. Stringent Adjectival Ratings 

Comment: One respondent wrote that 

since Table 16–1 adjectival rating 

descriptions and associated percentages 

are so stringent, the final rule should 

specify that the available award-fee pool 

must be at least 20 percent of estimated 

costs for complex development 

contracts. 

Response: The Councils do not 

believe that a pre-established award-fee 

floor is appropriate since the contracting 

officer negotiates a fair and reasonable 

award-fee pool for each acquisition 

based upon the effort and risk 

associated with that acquisition. 

13. Consider Different Rating Definitions 

Comment: One respondent wrote that 

the final rule should include the rating 

definitions from the Office of the Under 

Secretary of Defense/Acquisition, 

Technology, and Logistics/Defense 

Procurement and Acquisition Policy 

memorandum dated April 24, 2007, 

since these ratings are based on meeting 

a higher percentage of award-fee criteria 

in order to earn higher ratings. 

Response: The Councils disagree. The 

two rating scales are very similar but the 

FAR rating scale provides contracting 

officers with more latitude in assigning 

ratings against subjective criteria. 

14. Utilization of Base Fee 

Comment: Two respondents 

commented on the utilization of base 

fee. One respondent recommended that 

the final rule encourage contracting 

officers to award base fee on cost-plusaward-fee (CPAF) contracts subject only 

to the statutory restrictions on fee cited 

at FAR 15.404–4(c)(4)(i). A second 

respondent suggested that a minimum 

fee be referenced in the base amount of 

fee noted in FAR 16.405–2. 


erowe on DSK5CLS3C1PROD with RULES3
Federal Register / Vol. 75, No. 188 / Wednesday, September 29, 2010 / Rules and Regulations 60263 

Response: The Councils believe that 

the contracting officer negotiates a fair 

and reasonable profit or fee for each 

acquisition based upon the effort and 

risk associated with that acquisition. 

Consequently, it would not be 

appropriate to encourage the use of or 

set a minimum base-fee rate, since the 

establishment of base fee is subject to 

negotiation and the specific 

circumstances of each acquisition. 

15. Eliminate Requirement Relative to 

Completing a Determination and 

Finding 

Comment: One respondent wrote that 

the requirement in the interim rule for 

a determination and finding (D&F) was 

redundant with other FAR requirements 

and increases the workload of 

overburdened contracting officers 

without providing any value added. The 

respondent recommended deleting this 

requirement in the final rule. 

Response: The Councils appreciate 

the respondent’s concern for the 

contracting officer’s workload but 

disagree with eliminating this 

requirement from the final rule. The 

completion of the D&F and Head of 

Contracting Agency approval satisfy the 

requirements in section 814 of the John 

Warner National Defense Authorization 

Act for Fiscal Year 2007 (Pub. L. 109– 

364) and section 867 of the Duncan 

Hunter National Defense Authorization 

Act for Fiscal Year 2009 (Pub. L. 110– 

417) to establish the appropriate 

approval level for using award-fee 

contracts. They are also necessary to 

ensure that the suitability factors to use 

an award-fee contract are properly 

addressed and documented because of 

the large investment of resources 

required to administer an award-fee 

contract. 

C. Regulatory Planning and Review 

This is a significant regulatory action 

and, therefore, was subject to review 

under Section 6(b) of Executive Order 

12866, Regulatory Planning and Review, 

dated September 30, 1933. 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 the 

rule largely covers a broad range of 

aspects of award-fee contracting, whose 

upshot will be a more consistent use 

and administration of award fees 

Governmentwide which will provide a 

small benefit to all entities both large 

and small. In addition, the changes 

promulgated in this final rule do not 

directly affect the current business 

processes of Federal contractors. In the 

matter of the rule’s prohibition on the 

rollover of unearned award fee, the 

Councils believe this will have a 

negligible impact on small businesses 

for the following reasons. First, awardfee contracts are largely the province of 

large businesses with large dollar 

contracts. Second, the ability to roll over 

unearned award fee may have caused 

evaluators in the past to be more 

conservative in their ratings because of 

their awareness that contractors may 

have a second opportunity to earn 

unearned award fees. 

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. chapter 35, 

et seq. 

List of Subjects in 48 CFR Part 16 

Government procurement. 

Dated: September 21, 2010. 

Edward Loeb, 

Director, Acquisition Policy Division. 

■ Accordingly, the interim rule 

published in the Federal Register at 74 

FR 52856 on October 14, 2009, is 

adopted as a final rule with the 

following changes: 

PART 16—TYPES OF CONTRACTS 

■ 1. The authority citation for 48 CFR 

part 16 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). 

16.401 [Amended] 

■ 2. Amend section 16.401 by— 

■ a. Removing from paragraph (e)(2) the 

words ‘‘performance is’’ and adding 

‘‘performance in the aggregate is’’ in its 

place each time it appears (twice); 

■ b. Removing from Table 16–1 that 

follows paragraph (e)(3)(iv) the words 

‘‘contract as’’ and adding ‘‘contract in the 

aggregate as’’ in its place each time it 

appears (five times); and 

■ c. Removing from paragraph (e)(3)(v) 

the words ‘‘performance is’’ and adding 

‘‘performance in the aggregate is’’ in its 

place. 

[FR Doc. 2010–24161 Filed 9–28–10; 8:45 am] 

BILLING CODE 6820–EP–P 

DEPARTMENT OF DEFENSE 

GENERAL SERVICES 

ADMINISTRATION 

NATIONAL AERONAUTICS AND 

SPACE ADMINISTRATION 

48 CFR Part 19 

[FAC 2005–46; FAR Case 2009–020; Item 

V; Docket 2010–0103, Sequence 1] 

RIN 9000–AL68 

Federal Acquisition Regulation; 

Offering a Construction Requirement— 

8(a) Program 

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) are issuing a final rule 

amending the Federal Acquisition 

Regulation (FAR) to revise FAR subpart 

19.8, Contracting with the Small 

Business Administration (The 8(a) 

Program), to conform to the Small 

Business Administration (SBA) 

regulations. The FAR Council did not 

publish this rule for comment because 

this change will not have a significant 

effect beyond the internal operating 

procedures of the Government and will 

not have a significant effect on 

contractors or offerors. Furthermore, 

this requirement has existed in the 

Small Business Administration 

Regulations since January 1, 2009, and 

the FAR is being updated to conform to 

these regulations. This revision changes 

the location for submitting offering 

letters to SBA for a construction 

requirement for which a specific offeror 

is nominated and impacts internal 

procedures that the contracting officer is 

now required to follow. 

DATES: Effective Date: October 29, 2010 

FOR FURTHER INFORMATION CONTACT: For 

clarification of content, contact Mr. 

Karlos Morgan, Procurement Analyst, at 

(202) 501–2364. For information 

pertaining to status or publication 

schedules, contact the Regulatory 

Secretariat at (202) 501–4755. Please 

cite FAC 2005–46, FAR case 2009–020. 

SUPPLEMENTARY INFORMATION: 

A. Background 

This final rule amends the FAR to 

revise FAR 19.804–2(b) to conform to 

the SBA regulation 13 CFR 

124.502(b)(3). The current FAR requires 

sole source offerings for construction 


erowe on DSK5CLS3C1PROD with RULES3