[Federal Register Volume 68, Number 99 (Thursday, May 22, 2003)]
[Proposed Rules]
[Pages 28107-28109]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-12892]

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Part V

Department of Defense

General Services Administration

National Aeronautics and Space Administration


48 CFR Part 31

Federal Acquisition Regulation; Application of Cost Pr

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inciples and Procedures and Accounting for Unallowable Costs; Proposed 

Federal Register / Vol. 68, No. 99 / Thursday, May 22, 2003 / 
Proposed Rules




48 CFR Part 31

[FAR Case 2002-006]
RIN: 9000-AJ65

Federal Acquisition Regulation; Application of Cost Principles 
and Procedures and Accounting for Unallowable Costs

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

ACTION: Proposed rule.


SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) are proposing to amend the 
Federal Acquisition Regulation (FAR) sections relating to accounting 
for unallowable costs and application of cost principles and 

DATES: Interested parties should submit comments in writing on or 
before July 21, 2003 to be considered in the formulation of a final 

ADDRESSES: Submit written comments to--General Services Administration, 
FAR Secretariat (MVA), 1800 F Street, NW., Room 4035, Attn: Laurie 
Duarte, Washington, DC 20405.
    Submit electronic comments via the Internet to--farcase.2002-
[email protected]
    Please submit comments only and cite FAR case 2002-006 in all 
correspondence related to this case.

Building, Washington, DC, 20405, at (202) 501-4755 for information 
pertaining to status or publication schedules. For clarification of 
content, contact Mr. Edward Loeb at (202) 501-0650. Please cite FAR 
case 2002-006.


A. Background

    The DoD Director of Defense Procurement established a special 
interagency ad hoc committee to perform a comprehensive review of 
policies and procedures in FAR Part 31, Contract Cost Principles and 
Procedures, related to cost measurement, assignment, and allocation to 
evaluate the need for each specific requirement in light of the 
evolution of generally accepted accounting principles and experience 
gained from implementation.
    The Director of Defense Procurement announced a series of public 
meetings in the Federal Register at 66 FR 13712, March 7, 2001 (with a 
``correction to notice'' published in the Federal Register at 66 FR 
16186, March 23, 2001). Attendees at the public meetings (held on April 
19, 2001, May 10-11, 2001, and June 12, 2001) included representatives 
from industry, Government, and other interested parties who provided 
views on potential areas for revision in FAR part 31. The ad hoc 
committee reviewed the cost principles and procedures and the public 
comments; identified potential changes to the FAR; and submitted 
several reports, including draft proposed rules for consideration by 
the Councils.
    The Councils have reviewed the reports related to FAR 31.201-6, 
Accounting for unallowable costs, and FAR 31.204, Application of 
principles and procedures, and propose the following revisions:
    [sbull] Add paragraph (c)(2) to FAR 31.201-6 to provide specific 
criteria on the use of sampling as a method to identify unallowable 
costs and the acceptability of contractor sampling methods.
    [sbull] Revise the current paragraph (b) of FAR 31.204, which 
addresses the allowability of subcontract costs, to clarify the 
    [sbull] Make a number of editorial changes.
    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 principles and 
procedures that are 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 part 31 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 2002-006), 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 Part 31

    Government procurement.

    Dated: May 16, 2003.
Laura G. Smith,
Director, Acquisition Policy Division.

    Therefore, DoD, GSA, and NASA propose amending 48 CFR part 31 as 
set forth below:


    1. The authority citation for 48 CFR part 31 is revised to read as 

    Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42 
U.S.C. 2473(c).

    2. Revise section 31.201-6 to read as follows:

31.201-6  Accounting for unallowable costs.

    (a) Costs that are expressly unallowable or mutually agreed to be 
unallowable, including mutually agreed to be unallowable directly 
associated costs, shall be identified and excluded from any billing, 
claim, or proposal applicable to a Government contract. A directly 
associated cost is any cost that is generated solely as a result of 
incurring another cost, and that would not have been incurred had the 
other cost not been incurred. When an unallowable cost is incurred, its 
directly associated costs are also unallowable.
    (b) Costs that specifically become designated as unallowable or as 
unallowable directly associated costs of unallowable costs as a result 
of a written decision furnished by a contracting officer shall be 
identified if included in or used in computing any billing, claim, or 
proposal applicable to a Government contract. This identification 
requirement applies also to any costs incurred for the same purpose 
under like circumstances as the costs specifically identified as 
unallowable under either this paragraph or paragraph (a) of this 
    (c)(1) The practices for accounting for and presentation of 
unallowable costs must be those described in 48 CFR 9904.405, 
Accounting for Unallowable Costs.
    (2) Statistical sampling is an acceptable practice for accounting 

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presenting unallowable costs provided--
    (i) The statistical sampling results in an unbiased sample that 
accurately represents the sampling universe; and
    (ii) The statistical sampling permits audit verification.
    (d) If a directly associated cost is included in a cost pool that 
is allocated over a base that includes the unallowable cost with which 
it is associated, the directly associated cost shall remain in the cost 
pool. Since the unallowable costs will attract their allocable share of 
costs from the cost pool, no further action is required to assure 
disallowance of the directly associated costs. In all other cases, the 
directly associated costs, if material in amount, must be purged from 
the cost pool as unallowable costs.
    (e)(1) In determining the materiality of a directly associated 
cost, consideration should be given to the significance of--
    (i) The actual dollar amount;
    (ii) The cumulative effect of all directly associated costs in a 
cost pool; and
    (iii) The ultimate effect on the cost of Government contracts.
    (2) Salary expenses of employees who participate in activities that 
generate unallowable costs shall be treated as directly associated 
costs to the extent of the time spent on the proscribed activity, 
provided the costs are material in accordance with paragraph (f)(1) of 
this subsection (except when such salary expenses are, themselves, 
unallowable). The time spent in proscribed activities should be 
compared to total time spent on company activities to determine if the 
costs are material. Time spent by employees outside the normal working 
hours should not be considered except when it is evident that an 
employee engages so frequently in company activities during periods 
outside normal working hours as to indicate that such activities are a 
part of the employee's regular duties.
    (3) When a selected item of cost under 31.205 provides that 
directly associated costs be unallowable, such directly associated 
costs are unallowable only if determined to be material in amount in 
accordance with the criteria provided in paragraphs (f)(1) and (f)(2) 
of this subsection, except in those situations where allowance of any 
of the directly associated costs involved would be considered to be 
contrary to public policy.
    3. Amend section 31.204 in the first sentence of paragraph (a) by 
removing ``shall be allowed'' and adding ``are allowable'' in its 
place; revising paragraph (b); and redesignating paragraph (c) as 
paragraph (d) and adding a new paragraph (c) to read as follows:

31.204  Application of principles and procedures.

* * * * *
    (b)(1) For the following subcontract types, costs incurred as 
reimbursements or payments to a subcontractor are allowable to the 
extent the reimbursements or payments are for costs incurred by the 
subcontractor that are consistent with part 31:
    (i) Cost-reimbursement.
    (ii) Fixed-price incentive.
    (iii) Price redeterminable (i.e., fixed-price contracts with 
prospective price redetermination and fixed-ceiling-price contracts 
with retroactive price redetermination).
    (2) The requirements of paragraph (b)(1) of this section apply to 
any tier above the first firm-fixed-price subcontract or fixed-price 
subcontract with economic price adjustment provisions.
    (c) Costs incurred as payments under firm-fixed-price subcontracts 
or fixed-price subcontracts with economic price adjustment provisions 
or modifications thereto, for which subcontract cost analysis was 
performed, are allowable if the price was negotiated in accordance with 
* * * * *
[FR Doc. 03-12892 Filed 5-21-03; 8:45 am]