[Federal Register Volume 60, Number 161 (Monday, August 21, 1995)]
[Rules and Regulations]
[Pages 43402-43405]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-20663]



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ENVIRONMENTAL PROTECTION AGENCY
48 CFR Parts 1516 and 1552

[FRL-5282-5]


Acquisition Regulation; Cost-Plus-Award Fee Contracts

AGENCY: Environmental Protection Agency.

ACTION: Final rule.

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SUMMARY: This document revises the EPA Acquisition Regulation (EPAAR) 
coverage on cost-plus-award fee (CPAF) contracts. The rule is necessary 
to update and clarify EPA policy regarding CPAF contracts, and to give 
Contracting Officers (COs) greater flexibility in tailoring award fee 
plans to individual contracts.

EFFECTIVE DATE: October 20, 1995.

FOR FURTHER INFORMATION CONTACT: Environmental Protection Agency, 
Office of Acquisition Management (3802F), 401 M Street SW, Washington, 
DC 20460, Attn: Louise Senzel (202) 260-6204.

SUPPLEMENTARY INFORMATION:

A. Background

    The proposed rule was published in the Federal Register (60 FR 
5888) on January 31, 1995, providing for a 30-day comment period. The 
comment period was extended by publication in the Federal Register (60 
FR 10535) on February 27, 1995, for an additional 30 days.
    Interested persons have been afforded an opportunity to participate 
in the making of this rule. Due consideration has been given to the 14 
comments received. The following is a summary of each comment received 
and the Agency's disposition of these comments.
    1. The commentary accompanying the proposed rule says that the 
intent is to encourage contractors to perform at the ``above 
satisfactory'' or ``excellent'' levels. While this is an admirable 
intent, there is no logical reason to provide no reward at all for 
``satisfactory'' performance. EPA should study FAR 15.901 (b) and (c).
    The Agency is aware of the intent of profit as described in FAR 
subparts 15.901 (b) and (c). Contractors that perform on a 
``satisfactory'' basis will still receive base fee. The Agency policy 
is that there is no award fee for this level of performance. The Agency 
is creating a greater incentive for high quality performance. Rewarding 
work that is satisfactory will not achieve this goal.
    2. The proposed rule makes no connection between the ratings 
(frequently determined by averaging inputs from EPA field personnel, 
who are the real ``customers'' of the contract) and the award fee. 
Thus, there would be no accountability for those making award fee 
decisions. The proposed rule is an incentive to take advantage of a 
contractor rather than working to establish a long-term win-win 
relationship. This is a bad approach to business and a worse approach 
to government.
    Agency internal procedures set forth the process for performing 
award fee evaluations, and describe the relationship between the 
ratings of field personnel and the award fee. However, EPA does not 
believe that it is necessary to describe the details of our internal 
processes which establish accountability, in the EPA Acquisition 
Regulation. The EPA disagrees that the rule is an incentive to take 
advantage of a contractor. The proposed rule represents the intent of 
the National Performance Review which calls for elimination of 
unnecessary rulemaking for internal procedures and practices, and 
focuses on outcomes not processes.
    3. What is the purpose of high ratings and low award fee? If the 
ratings and award fee are not correlated to each other, to what do they 
correlate? This approach sends the message to the contractor that the 
award fee process is subjective, rather than objective.
    The EPA does not believe that there will be high ratings and low 
award fee. The EPA will pay equivalent fee for the rating received. 
Award fee is an objective process that requires subjective review of 
the quality of a contractor's performance. No matter how objectively 
and well the process parameters are described, the process must still 
rely on the qualitative judgment of the reviewers in assessing a rating 
for the contractor's performance.
    4. The proposed rule would allow EPA to make unilateral changes to 
the award fee plan after contract award. Thus, performance would not be 
evaluated on the same basis that enticed submission of a proposal. This 
is ``bait and switch'' at its worst. There would be no appeal of these 
changes.
    The award fee process always permitted the Government to make 
unilateral changes to the award fee plan after contract award. However, 
this is not ``bait and switch'' as the rule will require the contractor 
to be notified at least 30 days in advance of the basis for determining 
award fee. Generally, the practice has been to prospectively amend the 
award fee plan, i.e., the new plan will impact the activities performed 
after the change in plan and will not apply retroactively to work 
already performed.
    5. EPA seems to believe that contractors look at base fee and award 
fee as a single number, so that if a contractor received zero award fee 
out of a (3% pool) and 3% base fee, it received 50% of the available 
fee. This is inconsistent with the FAR approach to fee and is ``logic'' 
not subscribed to by any contractor.
    This is not what EPA believes. EPA believes that award fee should 
not be given for work that is satisfactory or less. EPA believes that 
to award ``satisfactory'' work will provide a negative incentive for 
contractors to perform at higher levels of performance.
    6. Government work is already less profitable than other work. A 
typical 

[[Page 43403]]
CPAF contract has a 7% fee (3% base and 4% award), but that is before: 
award fee ratings; award fee erosion due to level of effort; 
unallowable costs; late payment (EPA ignores the Prompt Payment Act); 
arbitrary withholdings, etc. Commercial work profit ranges of 10-30% 
are typical, with little paperwork and few hassles. Reducing the 
likelihood of earning award fee is not the way to attract the highest 
qualified contractors. By removing the financial incentives to 
participate, the proposed rule will drive away innovative and higher 
qualified contractors at just the time EPA needs them most.
    Primarily, commercial work is performed on a fixed price basis not 
a cost reimbursement one. Typically, Government fixed price contracts 
have much higher profit/fees than cost reimbursement work. Fee on cost 
reimbursable contracts is currently limited statutorily. Other Federal 
agencies use these same limits. The EPA believes that by awarding high 
performance, the Agency will continue to attract highly qualified 
contractors who are capable and interested in performing work in 
support of our environmental mission. EPA's payment record under the 
Prompt Payment Act is exemplary. Although an award fee determination 
may be late, this is not a violation of the Prompt Payment Act.
    7. While the words of the proposed rule emphasize quality, the 
numbers (and EPA's consistent behavior) emphasize price.
    The Agency has previously instituted policy to ensure that there is 
a floor for award fee to ensure that there is an appropriate size award 
fee pool even in a competitive acquisition.
    8. The EPA award fee process needs to be re-thought, but the 
proposed rule is a giant step in the wrong direction.
    The EPA believes that this is a step in the right direction to 
incentivize contractor performance.
    9. For the rating levels of ``unsatisfactory'', ``satisfactory'', 
``above satisfactory'', and ``excellent'', specific rating factors or 
criteria must be spelled out under EPAAR 1516.4 since the rule provides 
for unilateral contract modification of the Award Fee Plan. Spelling 
out specific rating factors or criteria would minimize the risk of 
unwarranted or unfair subjectivity on the part of individuals involved 
or responsible for performance evaluations and ratings. Also, it would 
make it clear to contractors what is expected in order to achieve the 
rating levels. Furthermore, it would assure consistency in the 
administration of the rating scheme, rather than leaving it to 
individual discretion and/or case by case variances. The award fee is 
to be considered an incentive to motivate performance for mutual 
benefit with a sense of partnership between the Agency and the 
contractor to help achieve the Agency's program goal, in the public 
interest (FAR 16.404-2(b)(2). ``* * * The criteria and rating plan 
should motivate the contractor to improve performance in the areas 
rated, but not at the expense of at least minimum acceptable 
performance in all other areas''.)
    The recommended guidance for rating levels and factors are included 
in proposed Agency internal guidance procedures. However, there will be 
some latitude on the part of the drafters of an individual acquisition 
to tailor the process to meet the needs of the specific requirement. 
Additionally, the specific information regarding rating factors or 
criteria will be spelled out in detail in the award fee plan which is 
part of the contract. This will notify contractors as to the basis and 
methodology for evaluation of their performance.
    10. The Award Fee Rule must also provide for full disclosure of not 
only the numeric ratings in the Award Fee Plan but, more importantly, 
the actual ratings and bases to the contractor, for both program 
management and technical performance. Furthermore, it should provide 
for an administrative review process prior to the Fee Determination 
Official's (FDO) determination, in addition to contractor self-
evaluation, inasmuch as the proposed rule indicates that the FDO's 
determination is not subject to appeal under the Disputes clause. Oral 
debriefings of the ratings by the Contracting Officer (CO) alone do not 
do full justice to this unilateral process.
    The award fee plan will identify the ratings and bases for 
evaluation. The plan will also identify the manner in which the award 
fee process will be carried out. Agency internal guidance outlines the 
process to be followed. However, there must be latitude for exercise of 
discretion to tailor processes to meet the needs of specific 
acquisitions. There is nothing that limits the CO to provide solely 
oral debriefings on contractor performance. The award fee notice should 
provide ample information for the contractor to understand the basis 
for the award fee determined. Additionally, the CO may choose to 
provide additional debriefings with the assistance of the Project 
Officer or any other individuals that the CO wishes to assist.
    11. The proposed rule does not indicate when the earned award fee 
shall be authorized to be paid. The rule must include a payment 
authorization period such as within sixty (60) days after the last day 
of the performance period.
    Agency internal guidance provides procedures to be followed when 
using the award fee process. The contractor will be notified of 
timeframes in the award fee plan.
    12. In relation to 1552.216-70(b), if and when the FDO disregards 
or otherwise takes exception to the Performance Evaluation Board's 
(PEB) assessment of the quality of contractor performance and reduces 
the recommended fee, the FDO must indicate the reasons thereof to the 
contractor.
    The purpose of the award fee modification is not only to provide 
the amount of fee awarded, but also to provide an understanding to the 
contractor of the evaluation of the quality of their performance. The 
Agency is interested in notifying contractors what they are doing well 
and in what areas they need to improve performance. The FDO would focus 
on the total evaluation of the contractor's performance, not 
necessarily on the difference between contractor's or PEB award fee 
recommendations.
    13. The rule should define the duration of Performance Period. In 
view of the Agency's unilateral policy shift to not award fee for 
``satisfactory'' performance level (albeit it is regarded by the Agency 
as a motivation factor for improved performance) and the resulting 
additional risk of loss of fee, the period of performance should revert 
back to trimester from the current semester system thereby affording 
opportunities to the contractor to demonstrate improvement on a more 
frequent performance review basis.
    The contract amount, performance period, and expected benefits must 
be sufficient to warrant the additional administrative effort and cost 
associated with CPAF contracts. The EPA recognizes that award fee 
evaluations should be conducted as often as reasonable to provide 
contractors with the maximum amount of feedback on performance and 
create the greatest amount of incentive for high quality performance. 
However, the cost of the process should never outweigh the value of the 
feedback. Agency internal procedures recommend timeframes for 
performing award fee evaluations and stress the importance of timely 
processing of these modifications. The individual acqusition should 
determine the frequency of evaluations.
    14. Under 1516.404-271, the effective date of applicability should 
be indicated. Also clarification is needed 

[[Page 43404]]
whether it is the Agency's policy intent to unilaterally modify 
existing CPAF contracts and those that are under evaluation but not yet 
awarded.
    The rule will apply to all solicitations for CPAF contracts issued 
after the effective date of the rule. It does not apply to exercise of 
options for contracts awarded prior to the implementation of the rule. 
The Agency does not intend to unilaterally modify existing contracts 
nor those that are under evaluation, but not yet awarded.
    EPA has not changed the final rule from the proposed rule as a 
result of these comments. This rule replaces Sections 1516.404-270 
through 1516.404-274 and deletes 1516.404-275 through 1516.404-2710 of 
the EPAAR. EPA has determined that codification of the Agency's 
procedures for the award fee process is unnecessary since these 
procedures are internal to EPA. Consequently, EPA will include these 
internal procedures in an Agency Directive. Internal procedures are 
those which encompass any aspect of preparing, establishing, modifying, 
and administering the award fee plan. The revised EPAAR only states the 
Agency's general policy and objectives in using award fee contracts.
    Award fee may be earned only when the contractor's performance is 
rated above satisfactory or excellent. No award fee may be earned if 
performance is rated satisfactory or unsatisfactory. This approach to 
cost-plus-award-fee contracts is designed to motivate contractors to 
achieve excellent performance and to improve cost-plus-award-fee 
contracting at EPA.
    Section 1516.405 is revised and Section 1552.216-75 is added to 
address base and award fee limitations in accordance with the FAR. 
Section 1552.216-70 is revised to clarify EPA's policy on the payment 
of fee under CPAF contracts.

B. Executive Order 12866

    This is not a major rule as defined in Executive Order 12866; 
therefore, no review was required by the Office of Management and 
Budget (OMB).

C. Paperwork Reduction Act

    The rule does not contain any recordkeeping or information 
collection requirements that require the approval of OMB under 44 
U.S.C. 3501 et. seq.

D. Regulatory Flexibility Act

    The rule will not have an impact on small entities within the 
meaning of the Regulatory Flexibility Act, 5 U.S.C. 601 et seq. since 
it does not impose any new requirements for compliance on contractors, 
large or small. The EPA certifies that this rule will not impact small 
entities. Therefore, no regulatory flexibility analysis has been 
prepared.

List of Subjects in 48 CFR Parts 1516 and 1552

    Government Procurement.

    For the reasons set out in the preamble, Parts 1516 and 1552 of 
Title 48 of the Code of Federal Regulations are amended as set forth 
below:
    1. The authority citation for Parts 1516 and 1552 continues to read 
as follows:

    Authority: Sec 205(c), 63 Stat. 390, as amended, 40 U.S.C. 
486(c).

    2. Subpart 1516.4 is amended by revising Sections 1516.404-270 
through 1516.404-274 to read as follows and by removing Sections 
1516.404-275 through 1516.404-2710.


1516.404-270  Scope.

    This subsection establishes the EPA policy for cost-plus- award-fee 
(CPAF) type contracts.


1516.404-271  Applicability.

    Contracting Officers shall consider all contract actions conforming 
to the limitations of FAR 16.404-2(c) as candidates for award as a CPAF 
contract.


1516.404-272  Definitions.

    (a) Performance Evaluation Board (PEB). Group of Government 
officials responsible for assessing the quality of contract performance 
and recommending the appropriate fee.
    (b) Fee Determination Official. Individual responsible for 
reviewing the recommendations of the PEB and making the final 
determination of the amount of award fee to be awarded to the 
contractor.


1516.404-273  Limitations.

    (a) No award fee may be earned if the Fee Determination Official 
determines that contractor performance has been satisfactory or less 
than satisfactory. A contractor may earn award fee only for performance 
rated above satisfactory or excellent. All award fee plans shall 
disclose to offerors the numerical rating necessary to be deemed 
``above satisfactory'' or ``excellent'' for award fee purposes.
    (b) The base fee shall not exceed three percent of the estimated 
cost of the contract, exclusive of the fee.
    (c) Unearned award fee may not be carried forward from one 
performance period into a subsequent performance period unless approved 
by the FDO.
    (d) The payment of award fee on a provisional basis is not 
authorized.


1516.404-274  Waiver.

    The Chief of the Contracting Office may waive the limitations in 
paragraphs (a), (b), and (d) of 1516.404-273 on a case-by-case basis 
when unusual or compelling circumstances exist. The waiver shall be 
supported by a justification and coordinated with the Procurement 
Policy Branch in the Office of Acquisition Management.
    3. Section 1516.405 is revised to read as follows:


1516.405  Contract clauses.

    (a) The Contracting Officer shall insert the clause at 1552.216-70, 
Award Fee (SEPT 1995), in solicitations and contracts when a cost-plus-
award-fee contract is contemplated.
    (b) The Contracting Officer shall insert the clause at 1552.216-75, 
Base Fee and Award Fee Proposal (SEPT 1995), in all solicitations which 
contemplate the award of cost-plus-award-fee contracts. The Contracting 
Officer shall insert the appropriate percentages in accordance with FAR 
15.903(d).
    4. Section 1552.216-70 is revised to read as follows:


1552.216-70  Award Fee.

    As prescribed in 1516.405(a), insert the following clause:

Award Fee (Sept 1995)

    (a) The Government shall pay the contractor a base fee, if any, 
and such additional fee as may be earned, as provided in the award 
fee plan incorporated into the Schedule.
    (b) Award fee determinations made by the Government under this 
contract are unilaterally determined by the Fee Determination 
Official (FDO) and are not subject to appeal under the Disputes 
clause.
    (c) The Government may unilaterally change the award fee plan at 
any time, via contract modification, at least thirty (30) calendar 
days prior to the beginning of the applicable evaluation period. 
Changes issued in a unilateral modification are not subject to 
equitable adjustments, consideration, or any other renegotiation of 
the contract.

(End of Clause)

    5. Section 1552.216-75 is added to read as follows:


1552.216-75  Base Fee and Award Fee Proposal.

    As prescribed in 1516.405(b), insert the following clause.

Base Fee and Award Fee Proposal (Sept 1995)

    For the purpose of this solicitation, offerors shall propose a 
combination of base fee and award fee within the maximum fee limitation 
of ______% as stated in FAR 15.903(d). Base fee shall not exceed 3% of 
the estimated cost, 

[[Page 43405]]
excluding fee, and the award fee shall not be less than ______% of the 
total estimated cost, excluding fee. The combined percentage of base 
and award fee does not exceed ______% of the total estimated cost, 
excluding fee.

(End of Clause)

    Dated: August 7, 1995.
Jeanette Brown,
Acting Director, Office of Acquisition Management.
[FR Doc. 95-20663 Filed 8-18-95; 8:45 am]
BILLING CODE 6560-50-P