[Federal Register Volume 62, Number 109 (Friday, June 6, 1997)]
[Rules and Regulations]
[Pages 31294-31296]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14775]



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Part IV



Office of Management and Budget



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Office of Federal Procurement Policy



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48 Cost Part 9903



Cost Accounting Standards Board; Applicability of Cost Accounting 
Standards Coverage; Final Rule

  Federal Register  / Vol. 62, No. 109 / Friday, June 6, 1997 / Rules 
and Regulations  

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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9903


Cost Accounting Standards Board; Applicability of Cost Accounting 
Standards Coverage

AGENCY: Cost Accounting Standards Board, Office of Federal Procurement 
Policy, OMB.

ACTION: Final rule.

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SUMMARY: The Cost Accounting Standards (CAS) Board is revising the 
applicability criteria for application of CAS to negotiated Federal 
contracts. This rulemaking is authorized pursuant to Section 26 of the 
Office of Federal Procurement Policy Act, 41 U.S.C. Sec. 422. The Board 
is taking action on this topic to adjust CAS applicability requirements 
in accordance with Section 4205 of Pub. L. 104-106, the ``Federal 
Acquisition Reform Act of 1996.''

EFFECTIVE DATE: This rule is effective June 6, 1997.
FOR FURTHER INFORMATION CONTACT: Richard C. Loeb, Executive Secretary, 
Cost Accounting Standards Board (telephone: 202-395-3254).

SUPPLEMENTARY INFORMATION:

A. Background

    On July 29, 1996, the Cost Accounting Standards Board (CASB) issued 
an interim rule with request for comment, 61 FR 39360, implementing 
Section 4205 of Pub. L. 104-106, the ``Federal Acquisition Reform Act 
of 1996'' (FARA), also known as the ``Clinger-Cohen Act''. This law 
amends 41 U.S.C. Sec. 422(f)(2)(B) to revise clause (i) and delete 
clause (iii). The phase ``contracts or subcontracts where the price 
negotiated is based on established catalog or market prices of 
commercial items sold in substantial quantities to the general public'' 
has been replaced with the phase ``contracts or subcontracts for the 
acquisition of commercial items.'' The CAS Board is today finalizing it 
interim applicability regulations, solicitation provision and contract 
clauses in recognition of this change. As amended, firm fixed-price 
contracts and subcontracts as well as fixed-price contracts and 
subcontracts with economic price adjustment (provided that adjustments 
are not based on actual costs incurred), for the acquisition of 
commercial items (see 48 CFR, Chap. 1, Part 12) will be exempt from CAS 
requirements. This exemption (b)(6) supersedes all other exemptions for 
the acquisition of commercial items under 9903.201-2.
    To accomplish these changes, the Board is finalizing the interim 
amendments to Section 9903.201-1(b)(6) of its rules. Additionally, the 
interim solicitation provision found at 9903.201-3, the contract 
clauses at 9903.201-4, and the definition found at 9903.301 are 
finalized to reflect this change.
    The Conference Report to Pub. L. 104-106 directs the CAS Board, in 
consultation with the Director of the Defense Contract Audit Agency, to 
issue guidance, consistent with commercial accounting systems and 
practices, to ensure that contractors appropriately assign costs to 
commercial item contracts, other than firm fixed-price commercial item 
contracts. At the present time, however, commercial item contracts are 
limited by regulation to the firm fixed-price and fixed-price with 
economic price adjustment (FPEA) variety. The Board recognizes that one 
of the three varieties of FPEA contracts authorized for use provides 
for adjustment of price based upon actual incurred costs for labor and 
material. Consequently, in order to reconcile the Conference Report 
language with the expansion of this CAS exemption to cover FPEA 
contracts, the Board's exemption for FPEA contracts does not include 
those contracts where adjustment is based on actual costs incurred (see 
FAR 16.203-1(b)).
    The Board's inquiry of a number of Federal procuring agencies, 
including the Department of Defense, has indicated that FPEA contracts 
with adjustments based on actual costs incurred are rarely, if ever, 
used (DOD could not identify any contract awards of this type that had 
been made in the last year). Accordingly, after further consideration 
and review of this issue, the Board has concluded that development of 
the requested guidance should appropriately await the time when other 
than firm fixed-price or fixed-price with economic price adjustment 
commercial item contracts are authorized, or until another need for 
such guidance arises. At the time that a need arises for guidance to 
address the allocation of costs to other than firm fixed-price or 
fixed-price with economic price adjustment commercial item contracts as 
exempted by this rule, the Board will, of course, pursue the 
development of guidance to address the issue.

B. Paperwork Reduction Act

    The Paperwork Reduction Act, Public Law 96-511, does not apply to 
this rulemaking, because this rule imposes no paperwork burden on 
offerors, affected contractors and subcontractors, or members of the 
public which require the approval of OMB under 44 U.S.C. 3501, et seq.

C. Executive Order 12866 and the Regulatory Flexibility Act

    The economic impact of this rule on contractors and subcontractors 
is expected to be minor. As a result, the Board has determined that 
this final rule will not result in the promulgation of a ``major rule'' 
under the provisions of Executive Order 12866, and that a regulatory 
impact analysis will not be required. Furthermore, this rule will not 
have a significant impact on a substantial number of small businesses 
because small businesses are exempt from the application of the Cost 
Accounting Standards. Therefore, this rule does not require a 
regulatory flexibility analysis under the Regulatory Flexibility Act of 
1980.

D. Public Comments

    This final rule is based upon the Board's interim rule that was 
issued on July 29, 1996, 61 FR 39360. Six public comments were 
received, including five timely comments, and one late comment. The 
comments received and the Board's actions taken in response thereto are 
summarized below:
    Comment: Four commenters, representing industry associations, the 
private bar and Government, supported the issuance of the interim rule.
    Response: The Board thanks the commenters for their supportive 
comments.
    Comment: Two commenters opposed the rule. They stated that there 
was no cost accounting basis for the rule. These commenters argued that 
whether a contract was subject to DAS should be dependent on the size 
of the contract (dollar amount) and whether contractor cost information 
had been submitted to assist or support contract negotiations or 
contract pricing, and not the product description or nomenclature used 
to describe the Government's intended purchase; i.e., a ``commercial 
item''.
    Response: The Board believes that the commenters raise valid 
conceptual accounting concerns. However, inasmuch as Congress has given 
the Board what it believes to be direction to create this new CAS 
exemption, the Board believes it would be remiss if it were not to 
implement the Congressional initiative. In addition, the Board believes 
that the absence of any agency audit clause from ``commercial item'' 
contracts renders an enforceability and compliance scheme

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for CAS, as applied to this contract type, a moot issue.
    Comment: Three commenters, including the private bar, objected to 
or questioned the Board's procedural process for issuing an interim 
rule. Two of the three commenters believe that the Board must use its 
statutory ``four-step'' rulemaking process in issuing the new 
exemption. Another commenter requested a more specific explanation of 
the authority for issuance of the interim rule.
    Response: The Board agrees that it would normally have processed a 
new regulatory exemption to CAS coverage in accordance with the ``four-
step'' rulemaking process normally appertaining to CAS rules. However, 
in this specific instance, the Board believes that it was following 
Congressional direction, as embodied in new statutory language 
contained in FARA, increasing the subject CAS exemption. In this 
instance, in which a statutory authorization has changed, the Board 
believes that it is merely implementing a Congressional initiative with 
respect to CAS. As such, the Board regards the new statutory language 
as representing a specific circumstance that creates an exception to 
the Board's regular ``four-step'' rulemaking process.
    Comment: Two commenters, representing industry associations, 
recommended that the Board authorize contracting officers to waive all 
CAS requirements, for all commercial item contracts, entered into since 
October 13, 1994, the date of enactment of the Federal Acquisition 
Streamlining Act (FASA), Pub. L. 103-355.
    Response: The Board believes that the present CAS exemption for 
commercial item contracts, as well as the agency CAS waiver authority 
that was previously in effect prior to the promulgation of the interim 
rule, were sufficient to address CAS commercial item contracting issues 
under both FASA and FARA. In this regard, the Board notes that the 
effective date of the interim rule was some five months prior to the 
effective date of the commercial item contracting changes made in the 
FAR as a result of the enactment of FARA. In addition, the Board is 
unaware of any contracts in which CAS has served as an impediment with 
respect to the acquisition of commercial items since the effective date 
of the FASA commercial item contracting rule on October 1, 1995.
    Comment: Two commenters, representing Government and the private 
bar, recommended that the CAS commercial item exemption be expanded to 
include both firm fixed-price contracts and fixed-price contracts with 
economic price adjustment (FPEA). These commenters pointed out that 
only these two contract types are authorized for the acquisition of 
commercial items.
    Response: The Board agrees with the commenters. However, the Board 
again notes that the Conference Report to Pub. L. 104-106 directs the 
CAS Board, in consultation with the Director of the Defense Contract 
Audit Agency, to issue guidance, consistent with commercial accounting 
systems and practices, to ensure that contractors appropriately assign 
costs to commercial item contracts, other than firm fixed-price 
commercial item contracts. In promulgating the interim rule, the Board 
chose not to issue this guidance, at the present time, on the basis 
that it is unnecessary, provided that the CAS commercial item exemption 
is limited to firm fixed-price commercial item contracts.
    However, the Board is also persuaded that failure to include FPEA 
contracts within the CAS commercial item exemption might tend to 
contract rather than expand the intent of the Board's previous 
``catalog or market price'' exemption for commercial items that was in 
effect prior to the passage of FARA. Moreover, the Board recognizes 
that one of the three varieties of FPEA contracts authorized for use, 
provides for adjustment of price based upon actual incurred costs for 
labor and material. In order to reconcile the Conference Report 
language with the expansion of this CAS exemption to cover FPEA 
contracts, the Board is expanding the exemption provided in the interim 
rule to include a CAS exemption for FPEA contracts, provided that price 
adjustments are not based on actual costs incurred (see FAR 16.203-
1(b)). The Board believes that this approach to FPEA contracts comports 
with both the intent of the statute and the Conference Report by 
expanding the CAS commercial item exemption to FPEA contracts in a 
manner that will avoid the allocation of costs to cost objectives based 
on actual contractor incurred costs.

List of Subjects in 48 CFR Part 9903

    Costs accounting standards, Government procurement.
Richard C. Loeb
Executive Secretary, Cost Accounting Standards Board.
    Accordingly, the interim rule amending 48 CFR Part 9903 which was 
published at 61 FR 39360 on July 29, 1996, is adopted as a final rule 
with the following changes:

PART 9903--CONTRACT COVERAGE

Subpart 9903.2--CAS Program Requirements

    1. The authority citation for part 9903 of chapter 99 of title 48 
continues to read as follows:

    Authority: Pub. L. 100-679, 102 Stat 4056, 41 U.S.C. Sec. 422.

    2. Section 9903.201-1 is amended by revising paragraph (b)(6) to 
read as follows:


Sec. 9903.201-1  CAS applicability.

* * * * *
    (b) * * *
    (6) Firm fixed-priced and fixed-price with economic price 
adjustment (provided that price adjustment is not based on actual costs 
incurred) contracts and subcontracts for the acquisition of commercial 
items.
* * * * *
    3. Section 9903.201-4 is amended by revising the clause heading and 
paragraph (d) of the clause entitled Cost Accounting Standards; and by 
revising paragraph (d)(1) of the clause entitled Disclosure and 
Consistency of Cost Accounting Practices, to read as follows:


Sec. 9903.201-4  Contract clauses.

* * * * *

Cost Accounting Standards

(May 1997)

* * * * *
    (d) The contractor shall include in all negotiated subcontracts 
which the Contractor enters into, the substance of this clause, 
except paragraph (b), and shall require such inclusion in all other 
subcontracts, of any tier, including the obligation to comply with 
all CAS in effect on the subcontractor's award date or if the 
subcontractor has submitted cost or pricing data, on the date of 
final agreement on price as shown on the subcontractor's signed 
Certificate of Current Cost or Pricing Data. If the subcontract is 
awarded to a business unit which pursuant to 9903.201-2 is subject 
to other types of CAS coverage, the substance of the applicable 
clause set forth in 9903.201-4 shall be inserted. This requirement 
shall apply only to negotiated subcontracts in excess of $500,000, 
except that the requirement shall not apply to negotiated 
subcontracts otherwise exempt from the requirement to include a CAS 
clause as specified in 9903.201-1.

(End of clause)

* * * * *

Disclosure and Consistency of Cost Accounting Practices

(May 1997)

* * * * *
    (d) * * *
    (1) If the subcontract is awarded to a business unit which 
pursuant to 9903.201-2

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is subject to other types of CAS coverage, the substance of the 
applicable clause set forth in 9903.201-4 shall be inserted.
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[FR Doc. 97-14775 Filed 6-5-97; 8:45 am]
BILLING CODE 3110-01-M