[Federal Register Volume 67, Number 78 (Tuesday, April 23, 2002)]
[Proposed Rules]
[Pages 19952-19954]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9665]



[[Page 19951]]

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Part VIII





Department of Defense

General Services Administration

National Aeronautics and Space Administration





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48 CFR Parts 16, 22, et al.



Federal Acquisition Regulation; Compensation Cost Principle; Proposed 
Rule

  Federal Register / Vol. 67, No. 78 / Tuesday, April 23, 2002 / 
Proposed Rules  

[[Page 19952]]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 16, 22, 31, 37, and 52

[FAR Case 2001-008]
RIN 9000-AJ36


Federal Acquisition Regulation; Compensation Cost Principle

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

ACTION: Proposed rule.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) are proposing to amend the 
Federal Acquisition Regulation (FAR) to revise the ``compensation for 
personal services'' cost principle.

DATES: Interested parties should submit comments in writing on or 
before June 24, 2002 to be considered in the formulation of a final 
rule.

ADDRESSES: Submit written comments to: General Services Administration, 
FAR Secretariat (MVP), 1800 F Street, NW, Room 4035, ATTN: Laurie 
Duarte, Washington, DC 20405.
    Submit electronic comments via the Internet to: [email protected]
    Please submit comments only and cite FAR case 2001-008 in all 
correspondence related to this case.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat, Room 4035, GS 
Building, Washington, DC, 20405, at (202)
    501-4755 for information pertaining to status or publication 
schedules. For clarification of content, contact Mr. Jeremy Olson at 
(202) 501-3221. Please cite FAR case 2001-008.

SUPPLEMENTARY INFORMATION:   

A. Background

    The Councils performed an analysis of the cost principle at FAR 
31.205-6, Compensation for personal services. This analysis excluded a 
review of the paragraphs of the cost principle addressing pension costs 
(paragraph (j)), deferred compensation other than pensions (paragraph 
(k)), and postretirement benefits other than pensions (paragraph (o)), 
which the Councils are planning to review at a later date under a 
separate FAR case.
    Specifically, the proposed rule revises FAR 31.205-6 by--
    1. Adding a definition for ``compensation for personal services'' 
at FAR 31.001, Definitions;
    2. Removing as unnecessary the listing of examples of specific 
types of compensation currently located at FAR 31.205-6(a);
    3. Clarifying and moving the current FAR 31.205-6(b)(2)(i) to a new 
paragraph FAR 31.205-6(a)(6), and expanding the new paragraph to cover 
members of ``limited liabilities companies'' since their compensation 
also requires special consideration;
    4. Revising paragraph (b) to consolidate all reasonableness 
provisions, including those dealing with labor-management agreements 
that are currently addressed at FAR 31.205-6(c);
    5. Deleting the language that places the burden of demonstrating 
reasonableness on the contractor, currently found in FAR 31.205-6(b)(1) 
because it is redundant of language currently found in FAR 31.201-3(a). 
By removing this language, the Councils are not intending to imply that 
this burden has shifted to the Government;
    6. Rewriting paragraph (h), as new paragraph (g), entitled 
``Backpay'' to improve its clarity, without changing its meaning, and 
to emphasize that backpay for underpaid work is the only allowable 
retroactive adjustment, except as may be specifically listed in the 
paragraph; and
    7. Making other changes to clarify, improve the structure, and 
remove redundancies throughout the cost principle.
    This is not a significant regulatory action and, therefore, was not 
subject to review under Section 6(b) of Executive Order 12866, 
Regulatory Planning and Review, dated September 30, 1993. This rule is 
not a major rule under 5 U.S.C. 804.

B. Regulatory Flexibility Act

    The Councils do not expect this proposed rule to 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 most contracts awarded to small entities use simplified 
acquisition procedures or are awarded on a competitive, fixed-price 
basis and do not require application of the cost principle discussed in 
this rule. An Initial Regulatory Flexibility Analysis has, therefore, 
not been performed. We invite comments from small businesses and other 
interested parties. The Councils will consider comments from small 
entities concerning the affected FAR parts 16, 22, 31, 37, and 52 in 
accordance with 5 U.S.C. 610. Interested parties must submit such 
comments separately and should cite 5 U.S.C. 601, et seq. (FAR case 
2001-008), in correspondence.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the proposed 
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. 3501, et seq.

List of Subjects in 48 CFR Parts 16, 22, 31, 37, and 52

    Government procurement.

    Dated: April 16, 2002.
Al Matera,
Director, Acquisition Policy Division.
    Therefore, DoD, GSA, and NASA propose amending 48 CFR parts 16, 22, 
31, 37, and 52 as set forth below:
    1. The authority citation for 48 CFR parts 16, 22, 31, 37, 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 16--TYPES OF CONTRACTS


16.203-4  [Amended]

    2. Amend section 16.203-4 in paragraph (c)(4)(ii) by removing 
``31.205-6(m)'' and adding ``31.205-6(l)'' in its place.

PART 22--APPLICATION OF LABOR LAWS TO GOVERNMENT ACQUISITIONS


22.101-2  [Amended]

    3. Amend section 22.101-2 in the last sentence of paragraph (a) by 
removing ``31.205-6(c)'' and adding ``31.205-6(b)'' in its place.

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

    4. Amend section 31.001 by adding, in alphabetical order, the 
definition ``Compensation for personal services'' to read as follows:


31.001  Definitions.

* * * * *
    Compensation for personal services means all remuneration paid 
currently or accrued, in whatever form and whether paid immediately or 
deferred, for services rendered by employees to the contractor.
* * * * *


31.201-5  [Amended]

    5. Amend section 31.201-5 in the last sentence by removing 
``31.205-6(j)(4)'' and adding ``31.205-6(i)(4)'' in its place.
    6. Amend section 31.205-6 by--
    a. Revising paragraphs (a) and (b);

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    b. Removing paragraph (c);
    c. Redesignating paragraphs (d) through (p) as paragraphs (c) 
through (o), respectively;
    d. Revising newly designated paragraphs (c) through (g);
    e. Removing from newly designated paragraph (h)(3) ``paragraph 
(i)'' and adding ``paragraph (h)'' in its place;
    f. Removing from the last sentence of newly designated paragraph 
(i)(2) introductory text the words ``(j)(2)(i) and (j)(3)'' and adding 
``(i)(2)(i) and in paragraphs (i)(3)'' in its place; removing from 
paragraph (i)(2)(iii) ``(j)(7)'' and adding ``(i)(7)'' in its place; 
removing from the second sentence of paragraph (i)(3)(v) introductory 
text ``(j)(4)'' and adding ``(i)(4)'' in its place; removing from the 
last sentence of paragraph (i)(4)(ii) ``paragraph (j)(4)(ii)'' and 
adding ``paragraph (i)(4)(ii)'' in its place; removing from the last 
sentence of paragraph (i)(5) introductory text ``(j)(1)'' and adding 
``(i)(1)'' in its place; removing from paragraph (i)(5)(ii) 
``(j)(3)(ii)'' and adding ``(i)(3)(ii)'' in its place; removing from 
the last sentence of paragraph (i)(7) introductory text ``subdivisions 
(j)(3)(i)'' and adding ``paragraphs (i)(3)(i)'' in its place; and by 
removing from paragraph (i)(8)(iii) ``subdivision (j)(3)(ii) above'' 
and adding ``paragraph (i)(3)(ii) of this subsection'' in its place;
    g. Removing from newly designated paragraph (n)(2) ``(o)(2)(i)'' 
and adding ``(n)(2)(i)'' in its place, and removing ``section'' and 
adding ``subsection'' in its place;
    h. Removing from the first sentence of newly designated paragraph 
(n)(5) ``(o)(2)(iii)'' and adding ``(n)(2)(iii)'' in its place;
    i. Removing from the last sentence of newly designated paragraph 
(o)(1) introductory text ``(p)(2)(ii)'' and adding ``(o)(2)(ii)'' in 
its place; removing the colon at the end of paragraph (o)(2) 
introductory text and adding an em-dash (--) in its place, and by 
removing from paragraph (o)(2)(i) ``(j)(5) and (j)(8)'' and adding 
``(i)(5) and (i)(8)'' in its place.
    The revised text reads as follows:


31.205-6   Compensation for personal services.

    (a) General. Compensation for personal services is allowable 
subject to the following general criteria and additional requirements 
contained in other parts of this cost principle:
    (1) Compensation for personal services must be for work performed 
by the employee in the current year and must not represent a 
retroactive adjustment of prior years' salaries or wages (but see 
paragraphs (f), (g), (i), (j), (l), and (n) of this subsection).
    (2) The total compensation for individual employees or job classes 
of employees must be reasonable for the work performed; however, 
specific restrictions on individual compensation elements apply when 
prescribed.
    (3) The compensation must be based upon and conform to the terms 
and conditions of the contractor's established compensation plan or 
practice followed so consistently as to imply, in effect, an agreement 
to make the payment.
    (4) No presumption of allowability will exist where the contractor 
introduces major revisions of existing compensation plans or new plans 
and the contractor has not provided the cognizant ACO, either before 
implementation or within a reasonable period after it, an opportunity 
to review the allowability of the changes.
    (5) Costs that are unallowable under other paragraphs of this 
Subpart 31.2 are not allowable under this subsection 31.205-6 solely on 
the basis that they constitute compensation for personal services.
    (6) The cognizant ACO must--
    (i) Give special consideration to--
    (A) Owners of closely held corporations, members of limited 
liability companies, partners, sole proprietors, or members of their 
immediate families; and
    (B) Persons who are contractually committed to acquire a 
substantial financial interest in the contractor's enterprise.
    (ii) Ensure that compensation costs covered by this paragraph are 
not--
    (A) A distribution of profits, which is not an allowable contract 
cost; and
    (B) In excess of costs that are deductible as compensation under 
the Internal Revenue Code (26 U.S.C.) and regulations under it.
    (b) Reasonableness--(1) Compensation pursuant to labor-management 
agreements. If costs of compensation established under ``arm's length'' 
labor-management agreements negotiated under the terms of the Federal 
Labor Relations Act or similar state statutes are otherwise allowable, 
the costs are reasonable unless, as applied to work in performing 
Government contracts, the costs are unwarranted by the character and 
circumstances of the work or discriminatory against the Government. The 
application of the provisions of a labor-management agreement designed 
to apply to a given set of circumstances and conditions of employment 
(e.g., work involving extremely hazardous activities or work not 
requiring recurrent use of overtime) is unwarranted when applied to a 
Government contract involving significantly different circumstances and 
conditions of employment (e.g., work involving less hazardous 
activities or work continually requiring use of overtime). It is 
discriminatory against the Government if it results in employee 
compensation (in whatever form or name) in excess of that being paid 
for similar non-Government work under comparable circumstances.
    (2) Compensation not covered by labor-management agreements. 
Compensation for each employee or job class of employees must be 
reasonable for the work performed. Compensation is reasonable if the 
aggregate of each measurable and allowable element sums to a reasonable 
total. In determining the reasonableness of total compensation, 
consider only allowable individual elements of compensation. In 
addition to the provisions of 31.201-3, in testing the reasonableness 
of compensation for particular employees or job classes of employees, 
consider factors determined to be relevant by the contracting officer. 
Factors that may be relevant include, but are not limited to, 
conformity with compensation practices of other firms--
    (i) Of the same size;
    (ii) In the same industry;
    (iii) In the same geographic area; and
    (iv) Engaged in similar non-Government work under comparable 
circumstances.
    (c) Form of payment. (1) Compensation for personal services 
includes compensation paid or to be paid in the future to employees in 
the form of--
    (i) Cash;
    (ii) Corporate securities, such as stocks, bonds, and other 
financial instruments (see paragraph (c)(2) of this subsection 
regarding valuation; or
    (iii) Other assets, products, or services.
    (2) When compensation is paid with securities of the contractor or 
of an affiliate, the following additional restrictions apply:
    (i) Valuation placed on the securities is the fair market value on 
the first date the number of shares awarded is known, determined upon 
the most objective basis available.
    (ii) Accruals for the cost of securities before issuing the 
securities to the employees are subject to adjustment according to the 
possibilities that the employees will not receive the securities and 
that their interest in the accruals will be forfeited.
    (d) Income tax differential pay. (1) Differential allowances for 
additional

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income taxes resulting from foreign assignments are allowable.
    (2) Differential allowances for additional income taxes resulting 
from domestic assignments are unallowable.
    (e) Bonuses and incentive compensation. (1) Bonuses and incentive 
compensation based on production, cost reduction, or efficient 
performance are allowable provided the--
    (i) Awards are paid or accrued under an agreement entered into in 
good faith between the contractor and the employees before the services 
are rendered or pursuant to an established plan or policy followed by 
the contractor so consistently as to imply, in effect, an agreement to 
make such payment; and
    (ii) Basis for the award is supported.
    (2) When the bonus and incentive compensation payments are 
deferred, the costs are subject to the requirements of paragraphs 
(e)(1) and (j) of this subsection.
    (f) Severance pay. (1) Severance pay is a payment in addition to 
regular salaries and wages by contractors to workers whose employment 
is being involuntarily terminated. Payments for early retirement 
incentive plans are covered in paragraph (i)(7) of this subsection.
    (2) Severance pay is allowable only to the extent that, in each 
case, it is required by--
    (i) Law;
    (ii) Employer-employee agreement;
    (iii) Established policy that constitutes, in effect, an implied 
agreement on the contractor's part; or
    (iv) Circumstances of the particular employment.
    (3) Payments made in the event of employment with a replacement 
contractor where continuity of employment with credit for prior length 
of service is preserved under substantially equal conditions of 
employment, or continued employment by the contractor at another 
facility, subsidiary, affiliate, or parent company of the contractor 
are not severance pay and are unallowable.
    (4) Abnormal or mass severance pay is of such a conjectural nature 
that accruals for this purpose are not allowable. However, the 
Government recognizes its obligation to participate, to the extent of 
its fair share, in any specific payment. Thus, the Government will 
consider allowability on a case-by-case basis.
    (5) Under 10 U.S.C. 2324(e)(1)(M) and 41 U.S.C. 256(e)(1)(M), the 
costs of severance payments to foreign nationals employed under a 
service contract performed outside the United States are unallowable to 
the extent that such payments exceed amounts typically paid to 
employees providing similar services in the same industry in the United 
States. Further, under 10 U.S.C. 2324(e)(1)(N) and 41 U.S.C. 
256(e)(1)(N), all such costs of severance payments that are otherwise 
allowable are unallowable if the termination of employment of the 
foreign national is the result of the closing of, or the curtailment of 
activities at, a United States facility in that country at the request 
of the government of that country; this does not apply if the closing 
of a facility or curtailment of activities is made pursuant to a 
status-of-forces or other country-to-country agreement entered into 
with the government of that country before November 29, 1989. 10 U.S.C. 
2324(e)(3) and 41 U.S.C. 256(e)(2) permit the head of the agency to 
waive these cost allowability limitations under certain circumstances 
(see 37.113 and the solicitation provision at 52.237-8).
    (g) Backpay. Backpay is a retroactive adjustment of prior years' 
salaries or wages. Backpay is unallowable except as follows:
    (1) Payments to employees resulting from underpaid work actually 
performed are allowable, if required by a negotiated settlement, order, 
or court decree.
    (2) Payments to union employees for the difference in their past 
and current wage rates for working without a contract or labor 
agreement during labor management negotiation are allowable.
    (3) Payments to nonunion employees based upon results of union 
agreement negotiation are allowable only if--
    (i) A formal agreement or understanding exists between management 
and the employees concerning these payments; or
    (ii) An established policy or practice exists and is followed by 
the contractor so consistently as to imply, in effect, an agreement to 
make such payments.
* * * * *


31.205-7  [Amended]

    7. Amend section 31.205-7 in the last sentence of paragraph (c)(2) 
by removing ``31.205-6(g)'' and adding ``31.205-6(f)'' in its place.


31.205-13  [Amended]

    8. Amend section 31.205-13 in the last sentence of paragraph (b) by 
removing ``31.205-6(f)'' and adding ``31.205-6(e)'' in its place.


31.205-46  [Amended]

    9. Amend section 31.205-46 in the last sentence of paragraph (f) by 
removing ``31.205-6(m)(2)'' and adding ``31.205-6(l)(2)'' in its place.

PART 37--SERVICE CONTRACTING

    10. Amend section 37.113-1 by revising the introductory text of 
paragraph (a) to read as follows:


37.113-1  Waiver of cost allowability limitations.

    (a) The head of the agency may waive the 31.205-6(f)(5) cost 
allowability limitations on severance payments to foreign nationals for 
contracts that--
* * * * *

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES


52.215-18   [Amended]

    11. Amend section 52.215-18 by removing from the clause heading 
``(OCT 1997)'' and adding ``(DATE)'' in its place; and by removing from 
the second sentence of the clause ``31.205-6(o)(6)'' and adding 
``31.205-6(n)(6)'' in its place.


52.237-8  [Amended]

    12. Amend section 52.237-8 by removing from the provision heading 
``(OCT 1995)'' and adding ``(DATE)'' in its place; and by removing from 
paragraph (a) of the provision ``31.205-6(g)(3)'' and adding ``31.205-
6(f)(5)'' in its place.


52.237-9  [Amended]

    13. Amend section 52.237-9 by removing from the clause heading 
``(OCT 1995)'' and adding ``(DATE)'' in its place; and by removing from 
paragraph (a) of the clause ``31.205-6(g)(3)'' and adding ``31.205-
6(f)(5)'' in its place.

[FR Doc. 02-9665 Filed 4-22-02; 8:45 am]
BILLING CODE 6820-EP-P