[Federal Register Volume 61, Number 145 (Friday, July 26, 1996)]
[Rules and Regulations]
[Pages 39203-39207]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18504]


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DEPARTMENT OF DEFENSE-

GENERAL SERVICES ADMINISTRATION-

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION-

48 CFR Parts 17, 22, and 52-

[FAC 90-40; FAR Case 94-712; Item VII]-
RIN 9000-AG72-


Federal Acquisition Regulation; Multiyear Contracting

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

ACTION: Final rule.

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SUMMARY: This rule is issued pursuant to the Federal Acquisition 
Streamlining Act of 1994, Public Law 103-355 (the Act). The Federal 
Acquisition Regulatory Council has agreed on a final rule to amend the 
Federal Acquisition Regulation (FAR) to implement sections 1022 and 
1072 of the Act regarding Multiyear Contracting. This regulatory action 
was subject to Office of

[[Page 39204]]

Management and Budget (OMB) review under Executive Order 12866, dated 
September 30, 1993, but is not a major rule under 5 U.S.C. 804.

EFFECTIVE DATE: July 26, 1996.

FOR FURTHER INFORMATION CONTACT: Mr. Edward McAndrew at (202) 501-1474 
in reference to this FAR case. For general information, contact the FAR 
Secretariat, Room 4037, GS Building, 18th & F Streets, N.W., 
Washington, DC 20405 (202) 501-4755. Please cite FAC 90-40, FAR case 
94-712.

SUPPLEMENTARY INFORMATION:

A. Background-

    The proposed rule covering implementation of sections 1022 and 1072 
of Public Law 103-355 regarding Multiyear Contracting was published as 
part of FAR case 94-710, Special Contracting Methods, in the Federal 
Register at 60 FR 14340, March 16, 1995. The rule permitted agencies to 
enter into multiyear contracts under certain circumstances. After 
disposition of public comments, coverage on multiyear contracting was 
extracted from the 94-710 final rule because several issues remained 
unresolved at the time of publication (60 FR 49720, September 26, 
1995). All remaining issues have now been resolved and this separate 
final rule represents completion of the Special Contracting Methods 
implementation.

B. Regulatory Flexibility Act-

    The Regulatory Flexibility Act, 5 U.S.C. 601, et seq., applies to 
this final rule and a Final Regulatory Flexibility Analysis (FRFA) has 
been performed. A copy of the FRFA may be obtained from the FAR 
Secretariat.

C. Paperwork Reduction Act-

    The Paperwork Reduction Act does not apply because the 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.

D. Public Comments-

    The proposed rule was published in the Federal Register on March 
16, 1995. Eight comments were received, the most significant of which 
raised the issue of ``bundling'' of requirements and its effect on 
small businesses. All comments were considered in the formulation of 
this final rule.

List of Subjects in 48 CFR Parts 17, 22 and 52-

    Government procurement.

    Dated: July 16, 1996.
Edward C. Loeb,
Deputy Project Manager for the Implementation of the Federal 
Acquisition Streamlining Act of 1994.

    -Therefore, 48 CFR Parts 17, 22, and 52 are amended as set forth 
below:-
    1. The authority citation for 48 CFR Parts 17, 22, 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 17--SPECIAL CONTRACTING METHODS-

    2. Subpart 17.1 is revised to read as follows:

Subpart 17.1--Multiyear Contracting

Sec.
17.101  Authority.
17.102  Applicability.
17.103  Definitions.
17.104  General.
17.105  Policy.
17.105-1  Uses.
17.105-2  Objectives.
17.106  Procedures.
17.106-1  General.
17.106-2  Solicitations.
17.106-3  Special procedures applicable to DoD, NASA, and the Coast 
Guard.
17.107  Options.
17.108  Congressional notification.
17.109  Contract clauses.


17.101  Authority.-

    This subpart implements Section 304B of the Federal Property and 
Administrative Services Act of 1949 (41 U.S.C. 254c) and 10 U.S.C. 
2306b and provides policy and procedures for the use of multiyear 
contracting.


17.102  Applicability.-

    For DoD, NASA, and the Coast Guard, the authorities cited in 17.101 
do not apply to contracts for the purchase of supplies to which 40 
U.S.C. 759 applies (information resource management supply contracts).


17.103  Definitions.-

    As used in this subpart---
    Cancellation means the cancellation (within a contractually 
specified time) of the total requirements of all remaining program 
years. Cancellation results when the contracting officer
    (a) Notifies the contractor of nonavailability of funds for 
contract performance for any subsequent program year, or
    (b) Fails to notify the contractor that funds are available for 
performance of the succeeding program year requirement.-
    Cancellation ceiling means the maximum cancellation charge that the 
contractor can receive in the event of cancellation.-
    Cancellation charge means the amount of unrecovered costs which 
would have been recouped through amortization over the full term of the 
contract, including the term canceled.-
    Multiyear contract means a contract for the purchase of supplies or 
services for more than 1, but not more than 5, program years. A 
multiyear contract may provide that performance under the contract 
during the second and subsequent years of the contract is contingent 
upon the appropriation of funds, and (if it does so provide) may 
provide for a cancellation payment to be made to the contractor if 
appropriations are not made. The key distinguishing difference between 
multiyear contracts and multiple year contracts is that multiyear 
contracts, defined in the statutes cited at 17.101, buy more than 1 
year's requirement (of a product or service) without establishing and 
having to exercise an option for each program year after the first.-
    Nonrecurring costs means those costs which are generally incurred 
on a one-time basis and include such costs as plant or equipment 
relocation, plant rearrangement, special tooling and special test 
equipment, preproduction engineering, initial spoilage and rework, and 
specialized work force training.-
    Recurring costs means costs that vary with the quantity being 
produced, such as labor and materials.-
    Termination for convenience means the procedure which may apply to 
any Government contract, including multiyear contracts. As contrasted 
with cancellation, termination can be effected at any time during the 
life of the contract (cancellation is effected between fiscal years) 
and can be for the total quantity or a partial quantity (whereas 
cancellation must be for all subsequent fiscal years' quantities).


17.104  General.-

    (a) Multiyear contracting is a special contracting method to 
acquire known requirements in quantities and total cost not over 
planned requirements for up to 5 years unless otherwise authorized by 
statute, even though the total funds ultimately to be obligated may not 
be available at the time of contract award. This method may be used in 
sealed bidding or contracting by negotiation.-
    (b) Multiyear contracting is a flexible contracting method 
applicable to a wide range of acquisitions. The extent to which 
cancellation terms are used in multiyear contracts will depend on the 
unique circumstances of each contracting action. Accordingly, for 
multiyear contracts, the agency head may authorize modification of the 
requirements of this subpart and the

[[Page 39205]]

clause at 52.217-2, Cancellation Under Multiyear Contracts.-
    (c) Agency funding of multiyear contracts shall conform to the 
policies in OMB Circulars A-11 (Preparation and Submission of Budget 
Estimates) and A-34 (Instructions on Budget Execution) and other 
applicable guidance regarding the funding of multiyear contracts. As 
provided by that guidance, the funds obligated for multiyear contracts 
must be sufficient to cover any potential cancellation and/or 
termination costs; and multiyear contracts for the acquisition of fixed 
assets should be fully funded or funded in stages that are economically 
or programmatically viable.


17.105  Policy.


17.105-1  Uses.-

    (a) Except for DoD, NASA, and the Coast Guard, the contracting 
officer may enter into a multiyear contract if the head of the 
contracting activity determines that--
    (1) The need for the supplies or services is reasonably firm and 
continuing over the period of the contract; and-
    (2) A multiyear contract will serve the best interests of the 
United States by encouraging full and open competition or promoting 
economy in administration, performance, and operation of the agency's 
programs.-
    (b) For DoD, NASA, and the Coast Guard, the head of the agency may 
enter into a multiyear contract for supplies if---
    (1) The use of such a contract will result in substantial savings 
of the total estimated costs of carrying out the program through annual 
contracts;-
    (2) The minimum need to be purchased is expected to remain 
substantially unchanged during the contemplated contract period in 
terms of production rate, procurement rate, and total quantities;-
    (3) There is a stable design for the supplies to be acquired, and 
the technical risks associated with such supplies are not excessive;-
    (4) There is a reasonable expectation that, throughout the 
contemplated contract period, the head of the agency will request 
funding for the contract at a level to avoid contract cancellation; 
and-
    (5) The estimates of both the cost of the contract and the cost 
avoidance through the use of a multiyear contract are realistic.-
    (c) The multiyear contracting method may be used for the 
acquisition of supplies or services.-
    (d) If funds are not appropriated to support the succeeding years' 
requirements, the agency must cancel the contract.


17.105-2  Objectives.-

    Use of multiyear contracting is encouraged to take advantage of one 
or more of the following:-
    (a) Lower costs.-
    (b) Enhancement of standardization.-
    (c) Reduction of administrative burden in the placement and 
administration of contracts.-
    (d) Substantial continuity of production or performance, thus 
avoiding annual startup costs, preproduction testing costs, make-ready 
expenses, and phaseout costs.-
    (e) Stabilization of contractor work forces.-
    (f) Avoidance of the need for establishing quality control 
techniques and procedures for a new contractor each year.-
    (g) Broadening the competitive base with opportunity for 
participation by firms not otherwise willing or able to compete for 
lesser quantities, particularly in cases involving high startup costs.-
    (h) Providing incentives to contractors to improve productivity 
through investment in capital facilities, equipment, and advanced 
technology.


17.106  Procedures.


17.106-1  General.-

    (a) Method of contracting. The nature of the requirement should 
govern the selection of the method of contracting, since the multiyear 
procedure is compatible with sealed bidding, including two-step sealed 
bidding, and negotiation.-
    (b) Type of contract. Given the longer performance period 
associated with multiyear acquisition, consideration in pricing fixed-
priced contracts should be given to the use of economic price 
adjustment terms and profit objectives commensurate with contractor 
risk and financing arrangements.-
    (c) Cancellation procedures. (1) All program years except the first 
are subject to cancellation. For each program year subject to 
cancellation, the contracting officer shall establish a cancellation 
ceiling. Ceilings must exclude amounts for requirements included in 
prior program years. The contracting officer shall reduce the 
cancellation ceiling for each program year in direct proportion to the 
remaining requirements subject to cancellation. For example, consider 
that the total nonrecurring costs (see
15.804-6) are estimated at 10 percent of the total multiyear price, and 
the percentages for each of the program year requirements for 5 years 
are (i) 30 in the first year, (ii) 30 in the second, (iii) 20 in the 
third, (iv) 10 in the fourth, and (v) 10 in the fifth. The cancellation 
percentages, after deducting 3 percent for the first program year, 
would be 7, 4, 2, and 1 percent of the total price applicable to the 
second, third, fourth, and fifth program years, respectively.-
    (2) In determining cancellation ceilings, the contracting officer 
must estimate reasonable preproduction or startup, labor learning, and 
other nonrecurring costs to be incurred by an ``average'' prime 
contractor or subcontractor, which would be applicable to, and which 
normally would be amortized over, the items or services to be furnished 
under the multiyear requirements. Nonrecurring costs include such 
costs, where applicable, as plant or equipment relocation or 
rearrangement, special tooling and special test equipment, 
preproduction engineering, initial rework, initial spoilage, pilot 
runs, allocable portions of the costs of facilities to be acquired or 
established for the conduct of the work, costs incurred for the 
assembly, training, and transportation to and from the job site of a 
specialized work force, and unrealized labor learning. They shall not 
include any costs of labor or materials, or other expenses (except as 
indicated above), which might be incurred for performance of subsequent 
program year requirements. The total estimate of the above costs must 
then be compared with the best estimate of the contract cost to arrive 
at a reasonable percentage or dollar figure. To perform this 
calculation, the contracting officer should obtain in-house engineering 
cost estimates identifying the detailed recurring and nonrecurring 
costs, and the effect of labor learning.-
    (3) The contracting officer shall establish cancellation dates for 
each program year's requirements regarding production lead time and the 
date by which funding for these requirements can reasonably be 
established. The contracting officer shall include these dates in the 
schedule, as appropriate.-
    (d) Cancellation ceilings. Cancellation ceilings and dates may be 
revised after issuing the solicitation if necessary. In sealed bidding, 
the contracting officer shall change the ceiling by amending the 
solicitation before bid opening. In two-step sealed bidding, 
discussions conducted during the first step may indicate the need for 
revised ceilings and dates which may be incorporated in step two. In a 
negotiated acquisition, negotiations with offerors may provide 
information requiring a change in

[[Page 39206]]

cancellation ceilings and dates before final negotiation and contract 
award.-
    (e) Payment of cancellation charges. If cancellation occurs, the 
Government's liability will be determined by the terms of the 
applicable contract. -
    (f) Presolicitation or pre-bid conferences. To ensure that all 
interested sources of supply are thoroughly aware of how multiyear 
contracting is accomplished, use of presolicitation or pre-bid 
conferences may be advisable.
    (g) Payment limit. The contracting officer shall limit the 
Government's payment obligation to an amount available for contract 
performance. The contracting officer shall insert the amount for the 
first program year in the contract upon award and modify it for 
successive program years upon availability of funds.
    (h) Termination payment. If the contract is terminated for the 
convenience of the Government in whole, including requirements subject 
to cancellation, the Government's obligation shall not exceed the 
amount specified in the Schedule as available for contract performance, 
plus the cancellation ceiling.


17.106-2  Solicitations.

    Solicitations for multiyear contracts shall reflect all the factors 
to be considered for evaluation, specifically including the following:-
    (a) The requirements, by item of supply or service, for the--
    (1) First program year; and-
    (2) Multiyear contract including the requirements for each program 
year.-
    (b) Criteria for comparing the lowest evaluated submission on the 
first program year requirements to the lowest evaluated submission on 
the multiyear requirements.
    (c) A provision that, if the Government determines before award 
that only the first program year requirements are needed, the 
Government's evaluation of the price or estimated cost and fee shall 
consider only the first year.-
    (d) A provision specifying a separate cancellation ceiling (on a 
percentage or dollar basis) and dates applicable to each program year 
subject to a cancellation (see 17.106-1 (c) and (d)).
    (e) A statement that award will not be made on less than the first 
program year requirements.
    (f) The Government's administrative costs of annual contracting may 
be used as a factor in the evaluation only if they can be reasonably 
established and are stated in the solicitation.
    (g) The cancellation ceiling shall not be an evaluation factor.


17.106-3  Special procedures applicable to DoD, NASA, and the Coast 
Guard.-

    (a) Participation by subcontractors, suppliers, and vendors. In 
order to broaden the defense industrial base, to the maximum extent 
practicable--
    (1) Multiyear contracting shall be used in such a manner as to 
seek, retain, and promote the use under such contracts of companies 
that are subcontractors, suppliers, and vendors; and-
    (2) Upon accrual of any payment or other benefit under such a 
multiyear contract to any subcontractor, supplier, or vendor company 
participating in such contract, such payment or benefit shall be 
delivered to such company in the most expeditious manner practicable.-
    (b) Protection of existing authority. To the extent practicable, 
multiyear contracting shall not be carried out in a manner to preclude 
or curtail the existing ability of the Department or agency to provide 
for termination of a prime contract, the performance of which is 
deficient with respect to cost, quality, or schedule.-
    (c) Cancellation or termination for insufficient funding. In the 
event funds are not made available for the continuation of a multiyear 
contract awarded using the procedures in this section, the contract 
shall be canceled or terminated.-
    (d) Contracts awarded under the multiyear procedure shall be firm-
fixed-price, fixed-price with economic price adjustment, or fixed-price 
incentive.-
    (e) Recurring costs in cancellation ceiling. The inclusion of 
recurring costs in cancellation ceilings is an exception to normal 
contract financing arrangements and requires approval by the agency 
head.-
    (f) Annual and multiyear proposals. Obtaining both annual and 
multiyear offers provides reduced lead time for making an annual award 
in the event that the multiyear award is not in the Government's 
interest. Obtaining both also provides a basis for the computation of 
savings and other benefits. However, the preparation and evaluation of 
dual offers may increase administrative costs and workload for both 
offerors and the Government, especially for large or complex 
acquisitions. The head of a contracting activity may authorize the use 
of a solicitation requesting only multiyear prices, provided it is 
found that such a solicitation is in the Government's interest, and 
that dual proposals are not necessary to meet the objectives in 17.105-
2.-
    (g) Level unit prices. Multiyear contract procedures provide for 
the amortization of certain costs over the entire contract quantity 
resulting in identical (level) unit prices (except when the economic 
price adjustment terms apply) for all items or services under the 
multiyear contract. If level unit pricing is not in the Government's 
interest, the head of a contracting activity may approve the use of 
variable unit prices, provided that for competitive proposals there is 
a valid method of evaluation.


17.107  Options.-

    Benefits may accrue by including options in a multiyear contract. 
In that event, contracting officers must follow the requirements of 
subpart 17.2. Options should not include charges for plant and 
equipment already amortized, or other nonrecurring charges which were 
included in the basic contract.


17.108  Congressional notification.-

    (a) Except for DoD, NASA, and the Coast Guard, a multiyear contract 
which includes a cancellation ceiling in excess of $10 million may not 
be awarded until the head of the agency gives written notification of 
the proposed contract and of the proposed cancellation ceiling for that 
contract to the committees on appropriations of the House of 
Representatives and Senate and the appropriate oversight committees of 
the House and Senate for the agency in question. Information on such 
committees may not be readily available to contracting officers. 
Accordingly, agencies should provide such information through its 
internal regulations. The contract may not be awarded until the thirty-
first day after the date of notification.-
    (b) For DoD, NASA, and the Coast guard, a multiyear contract which 
includes a cancellation ceiling in excess of $100 million may not be 
awarded until the head of the agency gives written notification of the 
proposed contract and of the proposed cancellation ceiling for that 
contract to the committees on armed services and on appropriations of 
the House of Representative and Senate. The contract may not be awarded 
until the thirty-first day after the date of notification.


17.109  Contract clauses.-

    (a) The contracting officer shall insert the clause at 52.217-2, 
Cancellation Under Multiyear Contracts, in solicitations and contracts 
when a multiyear contract is contemplated.-
    (b) Economic price adjustment clauses. Economic price adjustment 
clauses are adaptable to multiyear contracting needs. When the period 
of production is likely to warrant a labor

[[Page 39207]]

and material costs contingency in the contract price, the contracting 
officer should normally use an economic price adjustment clause (see 
16.203). When contracting for services, the contracting officer--
    (1) Shall add the clause at 52.222-43, Fair Labor Standards Act and 
Service Contract Act-Price Adjustment (Multiple Year and Option 
Contracts), when the contract includes the clause at 52.222-41, Service 
Contract Act of 1965, as amended;-
    (2) May modify the clause at 52.222-43 in overseas contracts when 
laws, regulations, or international agreements require contractors to 
pay higher wage rates; or-
    (3) May use an economic price adjustment clause authorized by 
16.203, when potential fluctuations require coverage and are not 
included in cost contingencies provided for by the clause at 52.222-43.

PART 22--APPLICATION OF LABOR LAWS TO GOVERNMENT ACQUISITIONS


22.1001   [Amended]-

    3. Section 22.1001 is amended in the second sentence of the 
definition of ``Multiple year contracts,'' by removing the phrase 
``with a term of more than 1 year (see 17.101)'' and inserting ``(see 
17.103)'' in its place.

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES


52.217-1  [Reserved]

    4. Section 52.217-1 is removed and reserved.
    5. Section 52.217-2 is revised to read as follows:


52.217-2  Cancellation Under Multiyear Contracts.

    As prescribed in 17.109(a), insert the following clause:

CANCELLATION UNDER MULTIYEAR CONTRACTS (JUL 1996)-

    (a) Cancellation, as used in this clause, means that the Government 
is canceling its requirements for all supplies or services in program 
years subsequent to that in which notice of cancellation is provided. 
Cancellation shall occur by the date or within the time period 
specified in the Schedule, unless a later date is agreed to, if the 
Contracting Officer (1) notifies the Contractor that funds are not 
available for contract performance for any subsequent program year, or 
(2) fails to notify the Contractor that funds are available for 
performance of the succeeding program year requirement. -
    (b) Except for cancellation under this clause or termination under 
the Default clause, any reduction by the Contracting Officer in the 
requirements of this contract shall be considered a termination under 
the Termination for Convenience of the Government clause.-
    (c) If cancellation under this clause occurs, the Contractor will 
be paid a cancellation charge not over the cancellation ceiling 
specified in the Schedule as applicable at the time of cancellation.
    (d) The cancellation charge will cover only (1) costs (i) incurred 
by the Contractor and/or subcontractor, (ii) reasonably necessary for 
performance of the contract, and (iii) that would have been equitably 
amortized over the entire multiyear contract period but, because of the 
cancellation, are not so amortized, and (2) a reasonable profit or fee 
on the costs.
    (e) The cancellation charge shall be computed and the claim made 
for it as if the claim were being made under the Termination for 
Convenience of the Government clause of this contract. The Contractor 
shall submit the claim promptly but no later than 1 year from the date 
(1) of notification of the nonavailability of funds, or (2) specified 
in the Schedule by which notification of the availability of additional 
funds for the next succeeding program year is required to be issued, 
whichever is earlier, unless extensions in writing are granted by the 
Contracting Officer.-
    (f) The Contractor's claim may include--
    (1) Reasonable nonrecurring costs (see Subpart 15.8 of the Federal 
Acquisition Regulation) which are applicable to and normally would have 
been amortized in all supplies or services which are multiyear 
requirements;-
    (2) Allocable portions of the costs of facilities acquired or 
established for the conduct of the work, to the extent that it is 
impracticable for the Contractor to use the facilities in its 
commercial work, and if the costs are not charged to the contract 
through overhead or otherwise depreciated;-
    (3) Costs incurred for the assembly, training, and transportation 
to and from the job site of a specialized work force; and-
    (4) Costs not amortized solely because the cancellation had 
precluded anticipated benefits of Contractor or subcontractor 
learning.-
    (g) The claim shall not include--
    (1) Labor, material, or other expenses incurred by the Contractor 
or subcontractors for performance of the canceled work;-
    (2) Any cost already paid to the Contractor;-
    (3) Anticipated profit or unearned fee on the canceled work; or-
    (4) For service contracts, the remaining useful commercial life of 
facilities. ``Useful commercial life'' means the commercial utility of 
the facilities rather than their physical life with due consideration 
given to such factors as location of facilities, their specialized 
nature, and obsolescence. -
    (h) This contract may include an Option clause with the period for 
exercising the option limited to the date in the contract for 
notification that funds are available for the next succeeding program 
year. If so, the Contractor agrees not to include in option quantities 
any costs of a startup or nonrecurring nature that have been fully set 
forth in the contract. The Contractor further agrees that the option 
quantities will reflect only those recurring costs and a reasonable 
profit or fee necessary to furnish the additional option quantities.-
    (i) Quantities added to the original contract through the Option 
clause of this contract shall be included in the quantity canceled for 
the purpose of computing allowable cancellation charges.

(End of clause)

[FR Doc. 96-18504 Filed 7-25-96; 8:45 am]
BILLING CODE 6820-EP-P