[Federal Register Volume 67, Number 113 (Wednesday, June 12, 2002)]
[Rules and Regulations]
[Pages 40149-40157]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-14751]


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DEPARTMENT OF TRANSPORTATION

Federal Highway Administration

23 CFR Part 172

[FHWA Docket No. FHWA-98-4350]
RIN 2125-AE45


Administration of Engineering and Design Related Services 
Contracts

AGENCY: Federal Highway Administration (FHWA), DOT.

ACTION: Final rule.

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SUMMARY: This document revises the regulation on the administration of 
engineering and design related services contracts in order to establish 
procedures to be followed when using Federal-aid highway funds for the 
procurement of engineering and design related services, materials, 
equipment, or supplies. The regulation describes procurement methods 
contracting agencies are to use when acquiring these services or 
related items. This rule implements 23 U.S.C. 112(b), as amended, by 
requiring States to award Federal-aid highway engineering and design 
service contracts: In accordance with the provisions of title IX of the 
Federal Property and Administrative Services Act of 1949, by use of 
equivalent State qualifications-based procedures, or unless a State has 
previously established by statute a formal procurement procedure for 
engineering and design related services prior to June 9, 1998. This 
regulation does not apply to design-build contracts, which will be 
covered in another regulation.

DATES: This rule is effective July 12, 2002.

FOR FURTHER INFORMATION CONTACT: Mr. Gary E. Moss, Office of Program 
Administration, (HIPA-10), (202) 366-4654, or Mr. Steven Rochlis, 
Office of the Chief Counsel, (HCC-30), (202) 366-1395, FHWA, 400 
Seventh Street, SW., Washington, DC 20590. Office hours are from 7:45 
a.m. to 4:15 p.m., e.t., Monday through Friday, except Federal 
holidays.

SUPPLEMENTARY INFORMATION:

Electronic Access

    Internet users may access all comments received by the U.S. DOT 
Docket Facility, Room PL-401, by using the URL: http://dms.dot.gov. It 
is available 24 hours each day, 365 days each year. Please follow the 
instructions online for more information and help.
    An electronic copy of this document may be downloaded by using a 
computer, modem and suitable communications software from the 
Government Printing Office's Electronic Bulletin Board at (202) 512-
1661. Internet users may reach the Office of the Federal Register's 
home page at http://www.nara.gov/fedreg and the Government Printing 
Office's web site at: http://www.access.gpo.gov/nara.

Background

    The FHWA issued a notice of proposed rulemaking (NPRM) on July 18, 
2000, at 65 FR 44486. Comments were received from 12 State DOTs, two 
companies, and one organization. The regulation on the administration 
of engineering and design related service contracts, 23 CFR part 172, 
draws its authority from 23 U.S.C. 112. Title 23, U.S.C., section 112 
references the provisions of title IX of the Federal Property and 
Administrative Services Act of 1949 (Public Law 92-582, 86 Stat. 1278 
(1972); 40 U.S.C. 541, et seq.) which provides the qualifications-based 
procedures to be followed for the selection of engineering and design 
related services. Section 307 of the National Highway System 
Designation Act of 1995 (NHS Act), Public Law 104-59, 109 Stat. 568, 
modified 23 U.S.C. 112 by requiring grantees of Federal-aid highway 
funds to accept indirect cost rates for architectural and engineering 
firms as long as these rates are established in accordance with the 
Federal Acquisition Regulations (FAR) (Title 48, Code of Federal 
Regulations) and these rates are accepted by a cognizant Federal or 
State agency if such rates are not under dispute. The law also 
specifies that once a firm's indirect cost rate is accepted, the 
grantee shall apply those indirect cost rates for the purposes of 
contract estimation, negotiation, administration, reporting, and 
contract payment. The NHS Act also provided a period of time in which 
State Departments of Transportation (State DOTs) could adopt statutes 
to allow use of alternate State procedures other than those provided 
for in the NHS Act.
    Section 1205 of the Transportation Equity Act for the 21st Century 
(TEA-21), Public Law 105-178, 112 Stat. 107 (1998), further modified 23 
U.S.C. 112(b) by removing the provision allowing State DOTs to adopt 
alternate procedures for the procurement of design and engineering 
consultants.
    The changes made to 23 U.S.C. 112(b) by these two laws, as well as 
provisions in 23 U.S.C. 106(c) relating to the assumption by the State 
of responsibilities of the Secretary for project design and 
construction, require the FHWA to modify 23 CFR part 172, subpart A--
Procurement Procedures. In addition, the FHWA adds several new

[[Page 40150]]

terms to the definition section to clarify existing terms used in the 
regulation.
    The small purchase procedures section is revised by raising the 
maximum value for small purchases from $25,000 to the value allowed in 
41 U.S.C. 403(11), which is currently $100,000.
    The references to Certification Acceptance (CA), and Sec. 172.15, 
Alternate Procedures, which were incorporated into 23 CFR part 172 to 
implement Certification Acceptance, are removed since Certification 
Acceptance was repealed by section 1601 of the TEA-21.
    Reference to the Secondary Road Plan (SRP) and the Combined Road 
Plan (CRP) demonstration project, are removed since these programs are 
no longer being funded.

Comments on Proposed Regulation

172.1  Purpose and Applicability

    The Michigan DOT requested that a reference be made to 41 U.S.C. 
Subchapter IV, Procurement Provisions, after the reference to the 
common grant rule found at 49 CFR part 18. Title 41, U.S.C., Subchapter 
IV, refers to contracts made directly by the United States Government 
and does not directly apply to grants to States and Counties, 
therefore, this provision was not incorporated into the final rule.

Section 172.3  Definitions

    The Texas DOT requested that the term ``private sector engineer and 
design firms'' be removed from the definition section since the term is 
not used in the regulation. The FHWA agrees with the comment and the 
regulation has been modified accordingly.
    Several comments requested the retention of definitions for ``fixed 
fee'' and ``prenegotiation audit.'' Although still allowed, the 
regulation no longer specifies requirements for the use of ``fixed 
fee'' contracts or the use of a ``prenegotiation audit,'' but instead 
refers to State procedures. Since these terms are no longer used in the 
final rule, they were removed.
    The New York DOT suggested that in the definition of ``cognizant 
agency,'' the term ``State agency'' is too broad and that the term 
``State Highway/Transportation Agency'' would be preferred. The generic 
definition of ``cognizant agency'' is ``Federal or State agency.'' Some 
States may have audit divisions that are not part of the State Highway/
Transportation Agency, therefore the FHWA prefers a broader concept.
    Several commenters requested that the definition of ``cognizant 
agency'' as well as the procedure to get a cognizant agency audit 
should be set forth in greater detail in the regulation. Many 
commenters suggested that the FHWA should adopt the procedure and 
definition approved by the American Association of State Highway and 
Transportation Officials (AASHTO) Audit Subcommittee. The AASHTO Audit 
Subcommittee stated the following:
    A ``cognizant agency'' is any one of the following:
     Federal Agency
     The Home State (i.e., State where the firm's accounting 
and financial records are located)
     A Non-Home State to whom the Home State has transferred 
cognizance in writing for the particular indirect cost audit of a firm.
    Cognizant audit is achieved by any one of the following methods:
     A Cognizant Agency performs or directs the work of a 
Certified Public Accountant (CPA) who performs the indirect cost audit.
     A Non-Home State auditor or CPA working under the State's 
direction issue an audit report and the Home State issues a letter of 
concurrence. If the Home State does not accept the audit of another 
State, the Home State will have 180 days from receipt to issue a 
cognizant audit; otherwise, the Non-Home State audit report will be 
cognizant for the 1 year applicable accounting period.
     An indirect cost audit performed by a CPA hired by the 
firm will become a cognizant audit if one of the following conditions 
is met:
    (a) The Home State reviews the CPA's working papers and the Home 
State issues a letter of concurrence with the audit report.
    (b) A Non-Home State reviews the CPA's working papers and issues a 
letter of concurrence with the CPA's report which is then accepted by 
the Home State. If the Home State does not accept the Non-Home State 
review, the Home State will have 180 days from receipt to complete a 
review of the CPA audit report and either concur with it, modify it, or 
reject it due to a material error requiring re-submittal; otherwise the 
CPA audit report with which the Non-Home State has concurred will be 
cognizant for the 1 year applicable accounting period.
    The FHWA believes that the AASHTO Audit Subcommittee procedures 
have merit, but the FHWA has determined that these procedures should be 
thoroughly tested under implementing guidance to be disseminated to the 
States. Therefore the Audit Subcommittee's approved definition and 
procedure is not included in the final regulation.
    The Oregon DOT was concerned that the one year term for overhead 
rates was not defined. To assist in the use of this regulation a new 
definition was added based on material from the FAR. The new definition 
defines one year applicable accounting period as the annual accounting 
period for which financial statements are regularly prepared for the 
consultant.
    Several commenters recommended that the term ``audit'' be defined 
in the regulation. Some commenters suggested using the definition: ``An 
audit performed in accordance with Governments Auditing Standards 
promulgated by the United States General Accounting Office.'' The FHWA 
added a definition of the term audit to the final rule.

Section 172.5  Methods of Procurement

Section 172.5(a)(1)  Competitive Negotiations
    The Wisconsin DOT was concerned that a key point of the Brooks 
Architect-Engineers Act (40 U.S.C. 541-544) was not included in the 
regulation, i.e., price is not to be a factor in the analysis and 
selection phase. The FHWA agrees that this is a key point in the Brooks 
Bill procedure and, as such, is already covered by the Brooks Bill 
requirements. Due to its importance, and to be clear on this point, we 
have added a sentence in Sec. 172.5(a)(1) restating that price is not 
to be a factor in the analysis and selection phase.
    TransTech Management, Inc. commented on how various States have 
experimented with alternative selection practices, one being the best 
value approach, and stated:

    The premise behind this approach is that the consultants are 
selected in a two-tiered selection process that considers the value 
of a project without compromising quality or safety. In this 
approach the U.S. DOT identifies a short list of qualified firms, 
then the final selection is based on a set of criteria that includes 
qualifications, cost, and possibly other factors.

    TransTech Management also suggested that best value be allowed for 
design consultant selection.
    The Texas Transportation Commission also recommends a best value 
approach be taken rather than a strictly qualifications based selection 
process in the Brooks Bill. In response to these comments, the FHWA 
maintains that 23 U.S.C. 112 requires that the Brooks Bill method be 
used in the selection of design consultants when Federal-aid funds are 
used, except if alternate procedures have been adopted

[[Page 40151]]

by the State prior to enactment of the TEA-21. Accordingly, no change 
was made to the regulation, however the Secretary has authority to 
conduct innovative contracting research under 23 U.S.C. 502(a) on an 
experimental basis.
    The New Jersey DOT recommended that ``the rules should provide the 
flexibility that would allow competitive bids on certain types of fixed 
scope projects.'' The FHWA has allowed a simplified small purchases 
procurement procedure which provides substantial flexibility to the 
State. Nevertheless, for procurement over the small procurement 
threshold, the Brooks Act method is required by law, except if a State 
has adopted an alternative procedure enacted by the State prior to the 
enactment of the TEA-21, therefore, no change was made in the 
regulation.
    The Michigan DOT was concerned that a cost analysis was not 
specifically required for competitive and non-competitive purchase 
procedures. For competitive procedures we require the Brooks Act 
requirements or equivalent State qualifications based procedures unless 
a formal statutory procedure was adopted by State statute prior to 
enactment of the TEA-21. The Brooks Act requires that the value of 
services to be rendered as well as the scope, complexity, and 
professional nature be considered in the negotiations. The FHWA 
believes that these requirements are sufficiently adequate for 
competitive purchase procedures. Non-competitive procurement procedures 
are generally an exception to competitive procurement procedures for 
Federal-aid highway projects and will continue to require review and 
approval by the FHWA before this procedure may be used. This review may 
include a cost analysis as well as a review of other supporting 
material submitted by the State before approval is obtained. Based on 
the above discussion, the FHWA believes that the rule adequately covers 
the concerns expressed in the comment.
    The Michigan DOT requested that we add a section for fixed fees. 
Its comment states: ``The determination of the Fixed Fee shall take 
into account the size, complexity, duration and degree of risk involved 
in the work and shall otherwise comply with 41 U.S.C. 254. The 
establishment of the fixed fee shall be project specific.'' The FHWA 
believes that the Brooks Act procedures that require the value of 
services to be rendered, the scope, the complexity, and the 
professional nature be considered in the negotiations addresses this 
issue for fixed fees used in competitive purchase procedures. The 
material in 41 U.S.C. 254 is intended for Federal contracts rather than 
purchases by grantees using Federal assistance monies, therefore the 
FHWA did not add the requested reference to 41 U.S.C. 254.

Section 172.5(a)(2)  Small Purchase

    The New Jersey DOT suggested that ``consideration should be given 
to raising the $100,000 simplified acquisition threshold to $125,000 to 
allow for inflation.'' The FHWA intends to follow the law for small 
purchase procurement found in 41 U.S.C. 403(11), which currently 
provides that $100,000 is the maximum amount for small purchase 
procurement. However, the FHWA did revise the proposed regulation to 
reference the simplified acquisition threshold in 41 U.S.C. 403(11) 
rather than just listing the current $100,000 amount. When the amount 
is revised in 41 U.S.C. 403(11), as it has been in the past, the 
simplified acquisition threshold in the final rule will also 
automatically reflect that new limit.
    The Wisconsin DOT expressed concern with how the Brooks Act will 
apply to small purchase procedures. The previous regulation allowed 
contractors to use small purchase procedures in 23 CFR 172.7(b). The 
FHWA is continuing this practice by allowing relatively simple and 
informal procurement methods for small purchase design contracts where 
an adequate number of qualified sources are reviewed, as stated in 49 
CFR 18.36 of the common grant rule. Also, the State's own procedures 
for small purchases where it uses with its own funds may be used for 
federally funded projects in accordance with 49 CFR 18.36 and 49 CFR 
18.37 where the total contract amount including contract amendments do 
not exceed the small purchase threshold amount in 41 U.S.C. 403(11).
    The Oregon DOT expressed concern regarding how the FAR audit 
requirements would apply for small purchase procedures. The FHWA's 
interpretation is that since small purchase threshold contracts may 
follow a simplified acquisition consistent with 49 CFR part 18, the FAR 
audit requirements of the final rule at 23 CFR 172.7(a) and (b) are not 
required to be applied to small purchase procedures. If the audits 
required by 23 CFR 172(a) and (b) are readily available they should be 
used. In the final rule, 23 CFR 172.7(e) provides that the States are 
responsible to reasonably assure that proper recordkeeping and 
accounting procedures are followed.

Section 172.5(a)(4)  State Statutory Procedures

    A comment from the HNTB Corporation questioned the use of the TEA-
21 enactment date of June 9, 1998, throughout the regulation rather 
than the date of one year after the enactment of the NHS Act of 
November 28, 1995, to determine when a State could no longer enact 
legislation allowing it to adopt an alternate procedure whereby the 
subparagraphs added by section 307 of the NHS Act did not apply.
    The NHS Act added subsections (b)(2) (C) through (G) to 23 U.S.C. 
112 which included single audit requirements and provided that indirect 
cost rates shall not be limited by administrative or de facto ceilings. 
After the NHS Act was passed, a State had one year or a full State 
legislative cycle to enact laws allowing a State to adopt an alternate 
procedure. However, until the TEA-21 was enacted, States were free to 
adopt by statute a formal procedure for the procurement of design 
services which differed from Brooks Act procurement under 23 U.S.C. 
112(b)(2)(B).
    The FHWA's analysis of the statutory history of 23 U.S.C. 112 is 
that prior to the enactment of TEA-21, the Congress permitted a State 
to enact by State statute an alternate procurement procedure that was 
different from the requirements set forth in the NHS Act; therefore, 
the TEA-21 enactment date of June 9, 1998, is the correct date to use 
in the regulation. Nevertheless, the mere fact that a State adopted a 
formal statutory procedure for procurement of Architectural and 
Engineering services prior to enactment of TEA-21 does not permit a 
State to establish a ceiling on overhead rates where such statute did 
not address overhead ceiling rates.

Section 172.7  Audits

Section 172.7(a)  Performance of Audits

    Several commenters were concerned about the scope of the FAR audit 
requirements in Sec. 172.7(a) and the hardships that States may 
experience from the requirements of numerous audits on contracts and 
subcontracts. Although the law requires that all contracts and 
subcontracts procured in accordance with 23 U.S.C. 112(b)(2)(C) be 
audited in compliance with cost principles contained in the part 31 of 
the FAR, the FHWA has determined that the State should determine the 
scope of those audits in their own procedures. The FHWA modified 
Sec. 172.7 of the final rule to reflect the States' responsibility. The 
section now says: ``When State procedures call for audits of contracts 
or subcontracts for engineering design

[[Page 40152]]

services, the audit shall test compliance with the requirements of the 
cost principles contained in the Federal Acquisition Regulations 
provided in 48 CFR part 31.'' Additionally, in many cases consultants 
selected by the Brooks Act procedure hire other consultants for small 
specialty jobs with State approval. Since these small subconsultant 
contracts were not procured in accordance with 23 U.S.C. 112(b)(2)(A), 
the audit requirements of this section would not apply.
    The Oregon DOT, along with others, commented that 48 CFR part 31 
(FAR 31) does not provide enough guidance. It is not the intent of this 
regulation to clarify the audit procedures in the FAR. However, 
additional guidance on the FAR may be obtained at the following 
internet site http://www.arnet.gov.
    The Oregon DOT also commented that in Sec. 172.7(a), audits are 
performed to standards rather than to principles. The Oregon DOT 
comment states: ``This clause requires that audits comply with the cost 
principals contained in the FARs. Audits comply with audit standards 
rather than cost principles. Audits, while complying with audit 
standards, determine the level at which costs comply with cost 
principles. Changing the wording to read, `* * * the audit shall 
determine compliance with the cost principles *  *  *' (or some similar 
wording) would correct this discrepancy.'' The FHWA agrees with the 
Oregon DOT's comment and has made minor wording changes in the 
regulation to reflect that audits are preformed ``to test'' compliance 
with the cost principles rather than ``to'' compliance with the cost 
principles.

Section 172.7(b)  Audits for Indirect Cost Rate

    The Oregon DOT was concerned that the FHWA has misinterpreted the 
requirements of section 307 of the NHS Act, specifically, 23 U.S.C. 
112(b)(2)(D) and (E) and believes that the requirements for accepting 
the indirect cost rates fall on the consultant rather than on the 
contracting agency.
    The following language from the conference report for the NHS Act 
(H.R. Conference Report No. 104-345, at 82 (1995)) which quotes from 
identical sections in the House (H.R. Rep. No. 104-246, (1995)) and 
Senate report (S. Rep. No. 104-86, (1995)) clarifies the meaning of the 
statute:

    The recipient of Federal funds must accept and use indirect cost 
rates established by a government agency in accordance with Federal 
Acquisition Regulations for one-year applicable accounting periods 
in estimating, negotiating, and administering contracts. Recipients 
must notify affected firms before requesting or using the cost and 
rate data and must keep the information confidential.

    Based on the legislative history of this provision it is clear that 
the government agency, as the recipient of Federal funds, must notify 
the firms of cost data used and the government must establish the 
overhead rates. Therefore, no change was made to the regulation.
    Several commenters were concerned about the requirements that the 
audit for the overhead rate could last for only one year. The Texas DOT 
commented that it does not believe it would be prudent to require an 
audit each year for a multi-year consulting contract if the audited 
indirect rate is acceptable to both contracting parties at the time of 
contract negotiation and execution. The FAR in 48 CFR 31.203(e) states 
that ``* * *, the base period for allocating indirect costs will 
normally be the contractor's fiscal year*  *  *. When a contract is 
performed over an extended period, as many base periods shall be used 
as are required to represent the period of contract performance.''
    The guidance in the FAR would require the use of several base 
periods for a contract that is longer than one year. The language in 49 
CFR 18.36(a) requires the use of State procedures in the administration 
of contracts with Federal grant funds, provided it does not conflict 
with Federal statutes. The FHWA agrees that it is reasonable to allow 
an audit for overhead rates to be valid for contracts longer than a 
year provided the consultant and the State agree to such a longer 
period. The final rule requires the consultant's indirect cost rates 
for its one-year applicable accounting period to be applied to the 
contract, however, once an indirect cost rate is established for a 
contract it may be extended beyond the one year applicable accounting 
period provided all concerned parties agree. Additionally, the final 
rule states that an agreement to the extension of the one-year 
applicable period shall not be a condition of contract award.
    The Wisconsin DOT expressed concern that a State could not accept a 
lower overhead rate freely offered by a consultant firm. The Wisconsin 
DOT believes the proposed rule should be modified to make it clear that 
contracting agencies are not prohibited from using indirect cost rates 
which are unilaterally reduced by consultants. It believes that the 
intent of the law is to prevent contracting agencies from establishing 
ceilings on indirect cost rates, not to prevent firms from offering 
cost reductions. Furthermore, Wisconsin DOT states that occasionally 
firms will experience swings in their business cycles which could 
result in high cost rates preventing them from being able to negotiate 
a reasonable total cost on their contract.
    The FHWA agrees there are many reasons why an overhead rate for a 
firm may be unusually high for a short period of time. In such cases, a 
firm may believe that it would be in its best interest to offer a lower 
rate. The FHWA agrees that a consultant should be free to offer a lower 
overhead rate than the one determined by a cognizant Federal or State 
government agency, and that the contracting agency should be free to 
accept it provided such rate is offered voluntarily by the consultant. 
Under no circumstances, however, shall a contracting agency require a 
lowering of the overhead rate. We have added language to Sec. 172.7(b) 
to address this comment.
    There were several comments concerning the procedure used to arrive 
at a cognizant agency audit. Many comments requested that the procedure 
passed by the AASHTO Subcommittee on Audits, in conjunction with the 
American Consultant Engineers Council (ACEC), be used. The FHWA issued 
an interim procedure to obtain a cognizant agency audit on December 10, 
1997, in the form of a question and answer memorandum which can be 
viewed at the FHWA web site at: http://www.fhwa.dot.gov/programadmin/consultant.html. The FHWA believes that the AASHTO Audit Subcommittee 
procedures have merit, but the FHWA has determined that these 
procedures should be thoroughly tested under implementing guidance to 
be disseminated to the States. Therefore the Audit Subcommittee's 
proposed definition and procedure is not included in the final 
regulation.

Section 172.7(c)  Disputed Audits

    The FHWA received several comments raising a concern that disputed 
audits were not well defined. The FHWA clarifies Sec. 172.7(c) of the 
final rule to address these comments in Sec. 172.7(c) as follows: 
``Only the consultant and the parties involved in performing the 
indirect cost audit may dispute the established indirect cost rate. If 
an error is discovered in the established indirect cost rate, the rate 
may be disputed by any prospective user.''

Section 172.7(d)  Prenotification; Confidentiality of Data

    The Wisconsin DOT was concerned about with whom the State may share 
indirect cost and rate data. The Wisconsin DOT believes that the 
requirement for permission only applies

[[Page 40153]]

exclusively to the release of information to other firms and government 
agencies. Request for information from the press or ordinary citizens 
will be in accordance with State statutes.
    The FHWA determination is that 23 U.S.C. 112(b)(2)(F) allows States 
to share audit information about a consultant with other recipients 
(States) and subrecipients of Federal-aid highway funds. States and 
subrecipients are only required to notify the consultant when such 
information is used or exchanged with another State or subrecipient to 
assist a State or subrecipient in complying with the State or 
subrecpient's acceptance of a consultant's overhead rates pursuant to 
23 U.S.C. 112 and this regulation.
    However when such audit information is sought by a firm or a 
government agency (when the government agency is seeking the 
information for a purpose unrelated to compliance with this 
regulation), the cost data shall not be provided except by written 
permission of the audited firm. Moreover, as pointed out by the 
Wisconsin DOT, the plain language of the law did not exclude ordinary 
citizens or the press from obtaining this data. The FHWA's position 
concerning requests from the press or private citizens for this data is 
that State and Federal information accessability statutes, as 
applicable, will control such release consistent with 23 U.S.C. 
112(b)(2)(F) which provides: ``If prohibited by law, such cost and rate 
data shall not be disclosed under any circumstances.'' The regulation 
was modified at Sec. 172.7(d) to address this issue by adding language 
that prohibits the release of this information if prohibited by law; 
however, should a release be required by law, or court order, the final 
rule states that such release shall make note of the confidential 
nature of the data.

Section 172.9  Approvals

Section 172.9(a)  Written Procedures

    The Texas DOT was concerned that the FHWA division offices were 
going to review all the county and city procedures for subgrants that 
the State may issue. The Texas DOT commented that it appears that the 
FHWA is assuming responsibility for approving all local governmental 
entity contracting procedures and revisions for federally funded 
engineering and design services. In Texas alone, there are 254 counties 
that have adopted various procedures that are subject to review by 
TxDOT through oversight agreement with the FHWA and the State's 
statutes.
    It is not the FHWA's intent to review all county and city 
procedures for State subgrants. Although 49 CFR 18.37 addresses 
subgrants and requires the State ensure that subgrants meet State and 
Federal requirements, the FHWA felt it was necessary to cover the topic 
in the final rule. The FHWA added a new sentence to Sec. 172.1 which 
states, ``Recipients of Federal funds shall ensure that their 
subrecipients comply with Federal regulations'' and made minor 
revisions to Sec. 172.9(a) of the final rule.
    For ease of reference the following distribution table is provided:

------------------------------------------------------------------------
                Old Section                          New Section
------------------------------------------------------------------------
172.1(a)..................................  172.1  Revised.
172.1(b)..................................  172.1  Revised and
                                             172.5(a)(4)
                                            Revised.
172.3.....................................  172.3  Revised.
Audit.....................................  Added.
Cognizant agency..........................  Added.
Competitive negotiation...................  Revised.
Contract modification.....................  Removed.
Extra work................................  Removed.
Fixed fee.................................  Removed.
One-year applicability accounting period..  Added.
Prenegotiation audit......................  Removed.
Private sector engineering and design       Removed.
 firms.
  Scope of work...........................  Removed.
172.5(a)..................................  172.9(d) Revised.
172.5(b)..................................  172.9(a). Revised.
172.5(c)..................................  Removed.
172.5(d)..................................  172.1 Revised.
172.5(e)..................................  172.5(b) Revised.
172.5(f)..................................  172.9(b) Revised.
172.7 introductory paragraph..............  172.5 introductory paragraph
                                             revised and 172.5(a)(1)
                                             Revised.
172.7(a)..................................  172.5(a)(1) Revised.
172.7(a)(3)(ii)(B)........................  172.5(a)(4) Revised.
172.7(b)..................................  172.5(a)(2) Revised.
172.7(c)..................................  172.5(a)(3) Revised.
172.7(c)(1)...............................  172.5(a)(3) Revised.
172.7(c)(1)(i)............................  172.5(a)(3)(i). No change.
172.7(c)(1)(ii)...........................  172.5(a)(3)(ii). No change.
172.7(c)(1)(iii)..........................  172.5(a)(3)(iii). No change.
172.7(c)(2)...............................  Removed.
172.9(a)..................................  172.7(a) Revised.
None......................................  172.7(b) Added.
None......................................  172.7(c) Added.
None......................................  172.7(d) Added.
172.9(b)..................................  Removed.
172.9(c)2.................................  172.5(c) Revised.
172.9(c)(1), (3), (4).....................  Removed.
172.9(d)..................................  Removed.
None......................................  172.9(b) and (c) Added.
172.11....................................  Removed.
172.13....................................  Removed.
172.15....................................  Removed.
172.21, 172.23 and 172.25.................  Removed.
------------------------------------------------------------------------

Section-by-Section Analysis

Section 172.1  Purpose and Applicability

    The statement of purpose and applicability was revised to remove 
the references to the Certification Acceptance Plans that were repealed 
by the TEA-21; to remove an obsolete reference to the Secondary Road 
Plans; and to remove the reference to Combined Road Plans because the 
Secondary and Combined Road programs are no longer being funded. A new 
sentence is added requiring recipients of Federal funds to ensure that 
their subrecipients comply with Federal regulations. Additionally, 
paragraph (b) was revised to limit the use of State statutes for an 
alternate procedure to those enacted into law before June 9, 1998 (the 
date the TEA-21 was enacted), and redesignated as Sec. 172.5(a)(4).

Section 172.3  Definitions

    The term ``audit'' is added to the list of definitions as a review 
to test the contractor's compliance with the requirements of cost 
principles contained in 48 CFR part 31.
    The term ``cognizant agency'' is added to the list of definitions 
and is defined as any Federal or State agency that has conducted and 
issued an audit report of the consultant's indirect cost rate that has 
been developed in accordance with the requirements of the cost 
principles contained in 48 CFR part 31.
    The term ``One-year applicable accounting period'' is added to the 
list of definitions and is defined as the accounting period for which 
annual financial statements are regularly prepared for the consultant.
    The term ``competitive negotiation'' is revised to permit the use 
of procurement procedures enacted into State law prior to the enactment 
of TEA-21 (June 9, 1998).
    The terms ``contract modification,'' ``extra work,'' ``fixed fee,'' 
``prenegotiation audit,'' ``scope of work'' and ``private sector 
engineering and design firms'' were removed since they are not used in 
the new regulation.

Section 172.5  General Principles

    This section is removed from the regulation. Most of the material 
was re-organized and moved to other sections. The provisions of 
paragraph (a), the consultant services in management

[[Page 40154]]

roles, are revised and moved to Sec. 172.9(d).
    Paragraph (b), written procedures, is redesignated as 
Sec. 172.9(a).
    The provisions of paragraph (c), Prenegotiation audits is removed. 
The FHWA received several comments expressing concern over the removal 
of the requirements for prenegotiation audits. These comments indicate 
that prenegotiation reviews may not be allowed or not be eligible for 
Federal-aid funds which may prevent the State from being able to assure 
that the consultant has the proper procedures and an adequate 
accounting system to meet Federal requirements. The FHWA never intended 
to prevent the performance of prenegotiation audits and reviews, but 
wanted to give the States greater control over when they are used. With 
the required use of cognizant audits for overhead rates, the need for 
prenegotiation audits and reviews may be greatly reduced. However, 
prenegotiation audits are appropriate because the Brooks Act clearly 
requires agencies to negotiate contracts at a compensation determined 
to be ``fair and reasonable to the Government.'' Also, a prenegotiation 
audit may be the best way to obtain detailed cost information to 
determine the validity of a firm's cost proposal, and to assure that 
the consultant has adequate knowledge of cost eligibles and 
documentation requirements. The expenses for prenegotiation audits and 
reviews would be eligible for Federal-aid funds under 23 U.S.C. 121 and 
23 CFR 1.11.
    The provisions of paragraph (d), State responsibility in local 
agency contracts, were reduced and included as part of Sec. 172.1.
    The requirements of paragraph (e), the Disadvantaged Business 
Enterprise program, are specified under 49 CFR Part 26. Section 
Sec. 172.5(e), is redesignated as Sec. 172.5(b).
    The requirements of paragraph (f), Contractual responsibilities, 
are revised and moved to Sec. 172.9(b). The section is revised to be 
consistent with 49 CFR 18.36(a) which requires States to use the same 
procurement procedures as if they were procuring with State funds, 
except where such procedures are inconsistent with Federal statutory 
requirements (see 49 CFR 18.4). Because States would be responsible for 
approving contracts and settlements, provided such contracts and 
settlements follow the same policies and procedures as the State would 
follow using State funds, there is a reduced requirement that such 
settlements be approved by the FHWA.

Section 172.7  Methods of Procurement

    This section is redesignated as Sec. 172.5 and revised. Generally, 
this section covers the methods that can be used for procurement of 
design engineering services. The same methods are still in the 
regulations, but have been simplified. The small purchase section is 
revised by raising the maximum amount for procurement by small purchase 
procedures from $25,000 to $100,000 and indexing the amount to conform 
to the simplified acquisition threshold set in 41 U.S.C. 403(11) and 49 
CFR 18.36(d). In a memorandum to the FHWA Regional Administrators, 
dated June 26, 1996, the Director of the FHWA Office of Engineering 
raised the threshold from $25,000 to $100,000. This memo was issued to 
implement the change in the final rule, published on April 19, 1995 (60 
FR 19646), concerning 49 CFR part 18 and the change to 41 U.S.C. 
403(11), which defines the ``simplified acquisition threshold'' to mean 
$100,000.

Section 172.9  Compensation

    The information in paragraph (a) of this section is transferred to 
a new paragraph (a) in Sec. 172.7, Audits, and revised to prohibit 
procedures enacted into State law after June 9, 1998. Paragraphs (b), 
(c), and (d) are removed.

Section 172.11  Contract Modification

    This section is removed to promote uniformity with the common grant 
rule found in 49 CFR part 18.

Section 172.13  Monitoring the Contract Work

    This section is removed to promote uniformity with the common grant 
rule found in 49 CFR part 18. The requirements of this section are 
covered by 49 CFR 18.36 which generally involve State procedures.

Section 172.15  Alternate Procedures

    This section is removed because it implemented 23 U.S.C. 117, 
Certification Acceptance, which was repealed by section 1601 of the 
TEA-21 in 1998.

Sections 172.21, 172.23, and 172.25 of Subpart B

    Subpart B, Private sector involvement program, is removed. This 
section was developed to meet the requirements of the Intermodel 
Surface Transportation Efficiency Act of 1991 (ISTEA), Public law 102-
240, 105 Stat. 1914, section 1060, Private sector involvement program, 
but it has never been funded.

Executive Order 12866 (Regulatory Planning and Review) and U.S. DOT 
Regulatory Policies and Procedures

    The FHWA has determined that this action is not a significant 
regulatory action within the meaning of Executive Order 12866 or 
significant within the meaning of the U.S. Department of 
Transportation's regulatory policies and procedures. This action will 
not adversely affect, in a material way, any sector of the economy. In 
addition, these changes would not interfere with any action taken or 
planned by another agency and will not materially alter the budgetary 
impact of any entitlements, grants, user fees, or loan programs. This 
rulemaking amends current regulations governing the administration of 
engineering and design related service contracts based on changes in 
the law. The FHWA does not anticipate that these changes will affect 
the total Federal funding available under the engineering and design 
related services contracts. Consequently, the economic impact of this 
rulemaking is minimal and a full regulatory evaluation is not required.

Regulatory Flexibility Act

    In compliance with the Regulatory Flexibility Act (5 U.S.C. 601-
612), the FHWA has evaluated the anticipated effects of this rule on 
small entities, such as local governments and businesses. Based on the 
evaluation, the FHWA hereby certifies that this action will not have a 
significant economic impact on a substantial number of small entities.
    Essentially, this rulemaking implements certain changes in 23 
U.S.C. 112, as mandated by recent laws. This rulemaking eliminates 
sections that were removed by the recent laws (NHS Act and TEA-21) and 
other sections that were not required by law or that were outdated. 
Thus, the impact upon the small entities affected is negligible because 
the FHWA is merely updating, simplifying, and clarifying existing 
procedures.

Unfunded Mandates Reform Act of 1995

    This final rule will not impose a Federal mandate resulting in the 
expenditure by State, local, and tribal governments, in the aggregate, 
or by the private sector of $100 million or more in any one year (2 
U.S.C. 1531 et seq.).

Executive Order 13132 (Federalism)

    The action has been analyzed in accordance with the principles and 
criteria contained in Executive Order 13132, dated August 4, 1999, and 
the FHWA has determined that this action

[[Page 40155]]

does not have a substantial direct affect or sufficient federalism 
implications on States that would limit the policymaking discretion of 
the States. Nothing in this document directly preempts any State law or 
regulation.

Executive Order 12372 (Intergovernmental Review)

    Catalog of Federal Domestic Assistance Program Number 20.205, 
Highway Planning and Construction. The regulations implementing 
Executive Order 12372 regarding intergovernmental consultation on 
Federal programs and activities apply to this program.

Paperwork Reduction Act

    This action does not contain a collection of information 
requirement for the purpose of the Paperwork Reduction Act of 1995, 44 
U.S.C. 3501-3520.

National Environmental Policy Act

    The agency has analyzed this action for the purpose of the National 
Environmental Policy Act of 1969 (42 U.S.C. 4321-4347) and has 
determined that this action will not have any effect on the quality of 
the environment.

Executive Order 12630 (Taking of Private Property)

    This rule will not affect a taking of private property or otherwise 
have taking implications under Executive Order 12630, Governmental 
Actions and Interference with Constitutionally Protected Property 
Rights.

Executive Order 12988 (Civil Justice Reform)

    This action meets applicable standards in section 3(a) and 3(b)(2) 
of Executive Order 12988, Civil Justice Reform, to minimize litigation, 
eliminate ambiguity, and reduce burden.

Executive Order 13045 (Protection of Children)

    We have analyzed this action under Executive Order 13045, 
Protection of Children from Environmental Health Risks and Safety 
Risks. This rule is not an economically significant rule and does not 
concern an environmental risk to health or safety that may 
disproportionately affect children.

Executive Order 13175 (Tribal Consultation)

    The FHWA has analyzed this action under Executive Order 13175, 
dated November 6, 2000, and believes it will not have substantial 
direct effects on one or more tribes; will not impose substantial 
direct compliance costs on Indian tribal governments; and will not 
preempt tribal law. This rule primarily involves U.S. Department of 
Transportation grant funds to State, county and city Department of 
Transportation agencies for the construction and maintenance of 
highways. Therefore, this final rule will not have a substantial direct 
impact on one or more Indian tribes and a tribal summary impact 
statement is not required.

Executive Order 13211 (Energy Effects)

    We have analyzed this rule under Executive Order 13211, Actions 
Concerning Regulations That Significantly Affect Energy Supply, 
Distribution, or Use. We have determined that it is a not significant 
energy action under that order because it is not a significant 
regulatory action under Executive Order 12866 and is not likely to have 
a significant adverse effect on the supply, distribution, or use of 
energy. Therefore, a Statement of Energy Effects under Executive Order 
13211 is not required.

Regulation Identification Number

    A regulation identification number (RIN) is assigned to each 
regulatory action listed in the Unified Agenda of Federal Regulations. 
The Regulatory Information Service Center publishes the Unified Agenda 
in April and October of each year. The RIN number contained in the 
heading of this document can be used to cross reference this action 
with the Unified Agenda.

List of Subjects in 23 CFR Part 172

    Government procurement, Grant programs-transportation, Highways and 
roads.

    Issued on: June 5, 2002
Mary E. Peters
Administrator, Federal Highway Administration.

    In consideration of the foregoing, the FHWA revises part 172 of 
title 23, Code of Federal Regulations, to read as set forth below:

PART 172--ADMINISTRATION OF ENGINEERING AND DESIGN RELATED SERVICE 
CONTRACTS

Sec.
172.1   Purpose and applicability.
172.3   Definitions.
172.5   Methods of procurement.
172.7   Audits.
172.9   Approvals.

    Authority: 23 U.S.C. 112, 114(a), 302, 315, and 402; 40 U.S.C. 
541 et seq.; sec.1205(a), Pub. L. 105-178, 112 Stat. 107 (1998); 
sec. 307, Pub. L. 104-59, 109 Stat. 568 (1995); sec. 1060, Pub. L. 
102-240, 105 Stat. 1914, 2003 (1991); 48 CFR 12 and 31; 49 CFR 
1.48(b) and 18.


Sec. 172.1  Purpose and applicability.

    This part prescribes policies and procedures for the administration 
of engineering and design related service contracts under 23 U.S.C. 112 
as supplemented by the common grant rule, 49 CFR part 18. It is not the 
intent of this part to release the grantee from the requirements of the 
common grant rule. The policies and procedures involve federally funded 
contracts for engineering and design related services for projects 
subject to the provisions of 23 U.S.C. 112(a) and are issued to ensure 
that a qualified consultant is obtained through an equitable selection 
process, that prescribed work is properly accomplished in a timely 
manner, and at fair and reasonable cost. Recipients of Federal funds 
shall ensure that their subrecipients comply with this part.


Sec. 172.3  Definitions.

    As used in this part:
    Audit means a review to test the contractor's compliance with the 
requirements of the cost principles contained in 48 CFR part 31.
    Cognizant agency means any Federal or State agency that has 
conducted and issued an audit report of the consultant's indirect cost 
rate that has been developed in accordance with the requirements of the 
cost principles contained in 48 CFR part 31.
    Competitive negotiation means any form of negotiation that utilizes 
the following:
    (1) Qualifications-based procedures complying with title IX of the 
Federal Property and Administrative Services Act of 1949 (Public Law 
92-582, 86 Stat. 1278 (1972));
    (2) Equivalent State qualifications-based procedures; or
    (3) A formal procedure permitted by State statute that was enacted 
into State law prior to the enactment of Public Law 105-178 (TEA-21) on 
June 9, 1998.
    Consultant means the individual or firm providing engineering and 
design related services as a party to the contract.
    Contracting agencies means State Departments of Transportation 
(State DOTs) or local governmental agencies that are responsible for 
the procurement of engineering and design related services.
    Engineering and design related services means program management, 
construction management, feasibility studies, preliminary engineering, 
design, engineering, surveying, mapping, or architectural related 
services with respect to a construction project subject to 23 U.S.C. 
112(a).

[[Page 40156]]

    One-year applicable accounting period means the annual accounting 
period for which financial statements are regularly prepared for the 
consultant.


Sec. 172.5  Methods of procurement.

    (a) Procurement. The procurement of Federal-aid highway contracts 
for engineering and design related services shall be evaluated and 
ranked by the contracting agency using one of the following procedures:
    (1) Competitive negotiation. Contracting agencies shall use 
competitive negotiation for the procurement of engineering and design 
related services when Federal-aid highway funds are involved in the 
contract. These contracts shall use qualifications-based selection 
procedures in the same manner as a contract for architectural and 
engineering services is negotiated under title IX of the Federal 
Property and Administrative Services Act of 1949 (40 U.S.C. 541-544) or 
equivalent State qualifications-based requirements. The proposal 
solicitation (project, task, or service) process shall be by public 
announcement, advertisement, or any other method that assures qualified 
in-State and out-of-State consultants are given a fair opportunity to 
be considered for award of the contract. Price shall not be used as a 
factor in the analysis and selection phase. Alternatively, a formal 
procedure adopted by State Statute enacted into law prior to June 9, 
1998 is also permitted under paragraph (a)(4) of this section.
    (2) Small purchases. Small purchase procedures are those relatively 
simple and informal procurement methods where an adequate number of 
qualified sources are reviewed and the total contract costs do not 
exceed the simplified acquisition threshold fixed in 41 U.S.C. 403(11). 
Contract requirements should not be broken down into smaller components 
merely to permit the use of small purchase requirements. States and 
subrecipients of States may use the State's small purchase procedures 
for the procurement of engineering and design related services provided 
the total contract costs do not exceed the simplified acquisition 
threshold fixed in 41 U.S.C. 403(11).
    (3) Noncompetitive negotiation. Noncompetitive negotiation may be 
used to procure engineering and design related services on Federal-aid 
participating contracts when it is not feasible to award the contract 
using competitive negotiation, equivalent State qualifications-based 
procedures, or small purchase procedures. Contracting agencies shall 
submit justification and receive approval from the FHWA before using 
this form of contracting. Circumstances under which a contract may be 
awarded by noncompetitive negotiation are limited to the following:
    (i) The service is available only from a single source;
    (ii) There is an emergency which will not permit the time necessary 
to conduct competitive negotiations; or
    (iii) After solicitation of a number of sources, competition is 
determined to be inadequate.
    (4) State statutory procedures. Contracting agencies may procure 
engineering and design related services using an alternate selection 
procedure established in State statute enacted into law before June 9, 
1998.
    (b) Disadvantaged Business Enterprise (DBE) program. The 
contracting agency shall give consideration to DBE consultants in the 
procurement of engineering and design related service contracts subject 
to 23 U.S.C. 112(b)(2) in accordance with 49 CFR part 26.
    (c) Compensation. The cost plus a percentage of cost and percentage 
of construction cost methods of compensation shall not be used.


Sec. 172.7  Audits.

    (a) Performance of audits. When State procedures call for audits of 
contracts or subcontracts for engineering design services, the audit 
shall be performed to test compliance with the requirements of the cost 
principles contained in 48 CFR part 31. Other procedures may be used if 
permitted by State statutes that were enacted into law prior to June 9, 
1998.
    (b) Audits for indirect cost rate. Contracting agencies shall use 
the indirect cost rate established by a cognizant agency audit for the 
cost principles contained in 48 CFR part 31 for the consultant, if such 
rates are not under dispute. A lower indirect cost rate may be used if 
submitted by the consultant firm, however the consultant's offer of a 
lower indirect cost rate shall not be a condition of contract award. 
The contracting agencies shall apply these indirect cost rates for the 
purposes of contract estimation, negotiation, administration, 
reporting, and contract payment and the indirect cost rates shall not 
be limited by any administrative or de facto ceilings. The consultant's 
indirect cost rates for its one-year applicable accounting period shall 
be applied to the contract, however once an indirect cost rate is 
established for a contract it may be extended beyond the one year 
applicable accounting period provided all concerned parties agree. 
Agreement to the extension of the one-year applicable period shall not 
be a condition of contract award. Other procedures may be used if 
permitted by State statutes that were enacted into law prior to June 9, 
1998.
    (c) Disputed audits. If the indirect cost rate(s) as established by 
the cognizant audit in paragraph (b) of this section are in dispute, 
the parties of any proposed new contract must negotiate a provisional 
indirect cost rate or perform an independent audit to establish a rate 
for the specific contract. Only the consultant and the parties involved 
in performing the indirect cost audit may dispute the established 
indirect cost rate. If an error is discovered in the established 
indirect cost rate, the rate may be disputed by any prospective user.
    (d) Prenotification; confidentiality of data. The FHWA and 
recipients and subrecipients of Federal-aid highway funds may share the 
audit information in complying with the State or subrecpient's 
acceptance of a consultant's overhead rates pursuant to 23 U.S.C. 112 
and this part provided that the consultant is given notice of each use 
and transfer. Audit information shall not be provided to other 
consultants or any other government agency not sharing the cost data, 
or to any firm or government agency for purposes other than complying 
with the State or subrecpient's acceptance of a consultant's overhead 
rates pursuant to 23 U.S.C. 112 and this part without the written 
permission of the affected consultants. If prohibited by law, such cost 
and rate data shall not be disclosed under any circumstance, however 
should a release be required by law or court order, such release shall 
make note of the confidential nature of the data.


Sec. 172.9  Approvals.

    (a) Written procedures. The contracting agency shall prepare 
written procedures for each method of procurement it proposes to 
utilize. These written procedures and all revisions shall be approved 
by the FHWA for recipients of federal funds. Recipients shall approve 
the written procedures and all revisions for their subrecipients. These 
procedures shall, as appropriate to the particular method of 
procurement, cover the following steps:
    (1) In preparing a scope of work, evaluation factors and cost 
estimate for selecting a consultant;
    (2) In soliciting proposals from prospective consultants;

[[Page 40157]]

    (3) In the evaluation of proposals and the ranking/selection of a 
consultant;
    (4) In negotiation of the reimbursement to be paid to the selected 
consultant;
    (5) In monitoring the consultant's work and in preparing a 
consultant's performance evaluation when completed; and
    (6) In determining the extent to which the consultant, who is 
responsible for the professional quality, technical accuracy, and 
coordination of services, may be reasonably liable for costs resulting 
from errors or deficiencies in design furnished under its contract.
    (b) Contracts. Contracts and contract settlements involving design 
services for projects that have not been delegated to the State under 
23 U.S.C. 106(c), that do not fall under the small purchase procedures 
in Sec. 172.5(a)(2), shall be subject to the prior approval by FHWA, 
unless an alternate approval procedure has been approved by FHWA.
    (c) Major projects. Any contract, revision of a contract or 
settlement of a contract for design services for a project that is 
expected to fall under 23 U.S.C. 106(h) shall be submitted to the FHWA 
for approval.
    (d) Consultant services in management roles. When Federal-aid 
highway funds participate in the contract, the contracting agency shall 
receive approval from the FHWA before hiring a consultant to act in a 
management role for the contracting agency.

[FR Doc. 02-14751 Filed 6-11-02; 8:45 am]
BILLING CODE 4910-22-P