[Federal Register Volume 59, Number 242 (Monday, December 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31019]


[[Page Unknown]]

[Federal Register: December 19, 1994]


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Part V

Department of Defense

General Services Administration

National Aeronautics and Space Administration
_______________________________________________________________________



48 CFR Parts 31, 42, and 52




Federal Acquisition Regulation; Penalties on Unallowable Indirect 
Costs; Proposed Rule
DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION-

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION-

48 CFR Parts 31, 42, and 52 -

[FAR Case 94-751]-
RIN: 9000-AG20-

 
Federal Acquisition Regulation; Penalties on Unallowable Indirect 
Costs

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule is issued pursuant to the Federal 
Acquisition Streamlining Act of 1994 to implement the requirements for 
penalties for unallowable costs. This regulatory action was not subject 
to Office of Management and Budget review under Executive Order 12866, 
dated September 30, 1993.

DATES: Comments should be submitted on or before February 17, 1995 to 
be considered in the formulation of a final rule.

ADDRESSES: Interested parties should submit written comments to: -
General Services Administration, FAR Secretariat (VRS), 18th & F 
Streets, NW, Room 4037, Attn: Beverly Fayson, Washington, DC 20405.
    Please cite FAR case 94-751 in all correspondence related to this 
case.

FOR FURTHER INFORMATION CONTACT: Mr. Clarence Belton, Cost Principles 
Team Leader, at (703) 602-2357 in reference to this FAR case. For 
general information, contact the FAR Secretariat, Room 4037, GS 
Building, Washington, DC 20405 (202) 501-4755. Please cite FAR case 94-
751.

SUPPLEMENTARY INFORMATION:

A. Background-

    The Federal Acquisition Streamlining Act of 1994, Pub. L. 103-355, 
provides authorities that streamline the acquisition process and 
minimize burdensome Government-unique requirements. Major changes that 
can be expected in the acquisition process as a result of the Federal 
Acquisition Streamlining Act implementation include changes in the 
areas of Commercial Item Acquisition, Simplified Acquisition 
Procedures, the Truth in Negotiations Act, and Introduction of the 
Federal Acquisition Computer Network.-
    This notice announces proposed FAR revisions developed under FAR 
Case 94-751, Penalties on Unallowable Indirect Costs, involving 
Sections 2101 and 2151 of the Federal Acquisition Streamlining Act of 
1994 which change the contract value threshold for assessment of 
penalties on unallowable costs from $100,000 to $500,000 and expand the 
coverage from only the Department of Defense to all executive agencies. 
The proposed rule applies to all executive agencies and recognizes the 
increase in the contract value threshold for inclusion of the contract 
clause. With the exception of the threshold value, the penalty 
provisions in the new law are the same as those implemented in the 
current Defense Federal Acquisition Regulations Supplement. Since there 
are interactions between this proposed rule and the new rule proposed 
under FAR case 94-752 to create a new subsection 42.703-2, the two 
rules should be read together to fully understand the changes.-
    The FAR Council is interested in an exchange of ideas and opinions 
with respect to the regulatory implementation of the Act. For that 
reason, the FAR Council is conducting a series of public meetings. 
However, the FAR Council has not scheduled a public meeting on this 
rule (FAR case 94-751) because of the clarity and non-controversial 
nature of the rule. If the public believes such a meeting is needed 
with respect to this rule, a letter requesting a public meeting and 
outlining the nature of the requested meeting shall be submitted to and 
received by the FAR Secretariat (see ADDRESSES caption) on or before 
January 18, 1995. The FAR Council will consider such requests in 
determining whether a public meeting on this rule should be scheduled.

B. Regulatory Flexibility Act-

    This proposed rule is not expected to have a significant economic 
impact on a substantial number of small entitles within the meaning of 
the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because most 
contracts awarded to small businesses are awarded through sealed 
bidding on a firm-fixed price basis. The penalty provisions apply only 
to contracts which are not firm-fixed price. Also, the proposed rule 
would only apply to contracts in excess of $500,000, eliminating the 
impact on contracts below that threshold. An Initial Regulatory 
Flexibility Analysis has, therefore, not been performed. Comments from 
small entities concerning the affected FAR subpart will be considered 
in accordance with 5 U.S.C. 610 of the Act. Such comments must be 
submitted separately and should cite 5 U.S.C. 601, et seq. (FAR case 
94-751), in correspondence.

C. Paperwork Reduction Act-

    The Paperwork Reduction Act does not apply because the proposed 
changes to the FAR do not impose recordkeeping or information 
collection requirements, or collections of information from offerors, 
contractors, or members of the public which 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 31, 42, and 52-

    Government procurement.

    Dated: December 13, 1994.
Capt. Barry L. Cohen, SC, USN,
Project Manager for the Implementation of the Federal Acquisition 
Streamlining Act of 1994.

    Therefore, it is proposed that 48 CFR Parts 31, 42, and 52 be 
amended as set forth below:
    1. The authority citation for 48 CFR Parts 31, 42, and 52 continues 
to read as follows:

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

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES-

    2. Section 31.110 is added to read as follows:


31.110  Indirect cost rate certification and penalties on unallowable 
costs.-

    Certain contracts require certification of the indirect cost rates 
proposed for progress or billing payment purposes. If unallowable costs 
are included in final indirect cost settlement proposals, penalties may 
be assessed. See 42.703-2 and 42.709 for administrative procedures 
regarding the certification and penalty assessment provisions and for 
related contract clause prescriptions.

PART 42--CONTRACT ADMINISTRATION

    3. and 4. Sections 42.709 thru 42.709-6 are added to read as 
follows:


42.709  Scope.-

    (a) This section implements 10 U.S.C. 2324 (a) through (d) and 41 
U.S.C. 256 (a) through (d). It covers the assessment of penalties 
against contractors which include unallowable indirect costs in--
    (1) Final indirect cost rate proposals, or-
    (2) The final statement of costs incurred or estimated to be 
incurred under a fixed-price incentive contract.-
    (b) This section applies to all contracts in excess of $500,000, 
except fixed-price contracts without cost incentives or any firm-fixed-
price contracts for the purchase of commercial items.


42.709-1  General.-

    (a) The following penalties apply to contracts covered by this 
section:-
    (1) If the indirect cost is expressly unallowable under a cost 
principle in the FAR, or an executive agency supplement to the FAR, 
that defines the allowability of specific selected costs, the penalty 
is equal to--
    (i) The amount of the disallowed costs allocated to contracts that 
are subject to this section for which an indirect cost proposal has 
been submitted, plus-
    (ii) Interest on the paid portion, if any, of the disallowance.-
    (2) If the indirect cost was determined to be unallowable for that 
contractor before proposal submission, the penalty is two times the 
amount in paragraph (a)(1)(i) of this section.-
    (b) These penalties are in addition to other administrative, civil, 
and criminal penalties provided by law.-
    (c) It is not necessary for unallowable costs to have been paid to 
the contractor in order to assess a penalty.


42.709-2  Responsibilities.-

    (a) The contracting officer assigned to administer a contract is 
responsible for--
    (1) Determining whether the penalties in 42.709-1(a) should be 
assessed;-
    (2) Determining whether such penalties should be waived pursuant to 
42.709-5; and-
    (3) Referring the matter to the appropriate criminal investigative 
organization for review and for appropriate coordination of remedies, 
if there is evidence that the contractor knowingly submitted 
unallowable costs.-
    (b) The contract auditor, in the review and/or the determination of 
final indirect costs proposals for contracts subject to this section, 
is responsible for--
    (1) Recommending to the contracting officer which costs may be 
unallowable and subject to the penalties in 42.709-1(a); -
    (2) Providing rationale and supporting documentation for any 
recommendation; and -
    (3) Referring the matter to the appropriate criminal investigative 
organization for review and for appropriate coordination of remedies, 
if there is evidence that the contractor knowingly submitted 
unallowable costs.


42.709-3  Assessing the penalty.

    Unless a waiver is granted pursuant to 42.709-5, the cognizant 
contracting officer shall--
    (a) Assess the penalty in 42.709-1(a)(1), when the submitted cost 
is expressly unallowable under a cost principle in the FAR or an 
executive agency supplement that defines the allowability of specific 
selected costs; or
    (b) Assess the penalty in 42.709-1(a)(2), when the submitted cost 
was determined to be unallowable for that contractor prior to 
submission of the proposal. Prior determinations of unallowability may 
be evidenced by--
    (1) A DCAA Form 1, Notice of Contract Costs Suspended and/or 
Disapproved (see 48 CFR 242.705-2 [Defense FAR Supplement, paragraph 
242.705-2]) which the contractor elected not to appeal and was not 
withdrawn by DCAA, or any similar notice;-
    (2) A contracting officer final decision which was not appealed;-
    (3) A prior executive agency Board of Contract Appeals or court 
decision involving the contractor, which upheld the cost disallowance; 
or-
    (4) A determination or agreement of unallowability under 31.201-6.-
    (c) Issue a final decision (see 33.211) which includes a demand for 
payment of any penalty assessed under paragraphs (a) or (b) of this 
section. The letter shall state that the determination is a final 
decision under the Disputes clause of the contract. (Demanding payment 
of the penalty is separate from demanding repayment of any paid portion 
of the disallowed cost.)


42.709-4  Computing interest. -

    For 42.709-1(a)(1)(ii), compute interest on any paid portion of the 
disallowed cost as follows:-
    (a) Consider the overpayment to have occurred, and interest to have 
begun accumulating, from the midpoint of the contractor's fiscal year. 
Use an alternate equitable method if the cost was not paid evenly over 
the fiscal year.-
    (b) Use the interest rate specified by the Secretary of the 
Treasury pursuant to Pub. L. 92-41 (85 Stat. 97).-
    (c) Compute interest from the date of overpayment to the date of 
the demand letter for payment of the penalty.-
    (d) Determine the paid portion of the disallowed costs in 
consultation with the contract auditor.


42.709-5  Waiver of the penalty. -

    The cognizant contracting officer shall waive the penalties at 
42.709-1(a) when---
    (a) The contractor withdraws the proposal before the Government 
formally initiates an audit of the proposal and the contractor submits 
a revised proposal (An audit will be deemed to be formally initiated 
when the Government provides the contractor with written notice that 
audit work on a specific final indirect cost proposal has begun or the 
Government holds an audit entrance conference with the contractor.);-
    (b) The amount of the unallowable costs under the proposal which 
are subject to the penalty is $10,000 or less (i.e., if the amount of 
expressly or previously determined unallowable costs allocable to the 
contracts specified in 42.709(b) is $10,000 or less); or-
    (c) The contractor demonstrates, to the cognizant contracting 
officer's satisfaction, that---
    (1) It has established policies and personnel training and an 
internal control and review system that provide assurance that 
unallowable costs subject to penalties are precluded from being 
included in the contractor's final indirect cost rate proposals (e.g., 
the types of controls required for satisfactory participation in the 
Department of Defense sponsored self-governance programs, specific 
accounting controls over indirect costs, compliance tests which 
demonstrate that the controls are effective, and Government audits 
which have not disclosed recurring instances of expressly unallowable 
costs); and-
    (2) The unallowable costs subject to the penalty were inadvertently 
incorporated into the proposal; i.e., their inclusion resulted from an 
unintentional error, notwithstanding the exercise of due care.


42.709-6  Contract clause.-

    Use the clause at 52.242-00, Penalties for Unallowable Costs, in 
all solicitations and contracts over $500,000 except fixed-price 
contracts without cost incentives or any firm-fixed-price contract for 
the purchase of commercial items. Generally, covered contracts are 
those which contain one of the clauses at 52.216-7, 52.216-13, 52.216-
16, or 52.216-17, or a similar clause from an executive agency's 
supplement to the FAR.

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES-

    5. Section 52.242-00 is added to read as follows:


52.242-00  Penalties for unallowable costs.-

    As prescribed in 42.709-6, use the following clause:

Penalties for Unallowable Costs (Date)-

    (a) Definition. Proposal means either---
    (1) A final indirect cost rate proposal submitted by the 
Contractor after the expiration of its fiscal year which---
    (i) Relates to any payment made on the basis of billing rates 
or-
    (ii) Will be used in negotiating the final contract price; or-
    (2) The final statement of costs incurred and estimated to be 
incurred under the Incentive Price Revision clause (if applicable), 
which is used to establish the final contract price.-
    (b) Contractors which include unallowable indirect costs in a 
proposal may be subject to penalties. The penalties are prescribed 
in 10 U.S.C. 2324 or 41 U.S.C. 256, as applicable, which is 
implemented in Section 42.709 of the Federal Acquisition Regulation 
(FAR).-
    (c) The Contractor shall not include in any proposal any cost 
which is unallowable, as defined in Part 31 of the FAR, or an 
executive agency supplement to Part 31 of the FAR.-
    (d) If the Contracting Officer determines that a cost submitted 
by the Contractor in its proposal is expressly unallowable under a 
cost principle in the FAR, or an executive agency supplement to the 
FAR, that defines the allowability of specific selected costs, the 
Contractor shall be assessed a penalty equal to--
    (1) The amount of the disallowed cost allocated to this 
contract, plus-
    (2) Simple interest, to be computed--
    (i) On the amount the Contractor was paid (whether as a progress 
or billing payment) in excess of the amount to which the Contractor 
was entitled, and
    (ii) Using the applicable rate effective for each six-month 
interval prescribed by the Secretary of the Treasury pursuant to 
Pub. L. 92-41 (85 Stat. 97).
    (e) If the Contracting Officer determines that a cost submitted 
by the Contractor in its proposal includes a cost previously 
determined to be unallowable for that Contractor, then the 
Contractor will be assessed a penalty in an amount equal to two 
times the amount of the disallowed cost allocated to this contract.-
    (f) Determinations under paragraphs (d) and (e) of this clause 
are final decisions within the meaning of the Contract Disputes Act 
of 1978 (41 U.S.C. 604, et seq.).-
    (g) Pursuant to the criteria in FAR 42.709-5, the Contracting 
Officer may waive the penalties in paragraphs (d) or (e) of this 
clause.-
    (h) Payment by the Contractor of any penalty assessed under this 
clause does not constitute repayment to the Government of any 
unallowable cost which has been paid by the Government to the 
Contractor.

(End of clause)

[FR Doc. 94-31019 Filed 12-16-94; 8:45 am]
BILLING CODE 6820-34-P