[Federal Register Volume 68, Number 162 (Thursday, August 21, 2003)]
[Rules and Regulations]
[Pages 50477-50478]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-21311]


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DEPARTMENT OF DEFENSE

48 CFR Part 252

[DFARS Case 2002-D016]


Defense Federal Acquisition Regulation Supplement; Liability for 
Loss Under Vessel Repair and Alteration Contracts

AGENCY: Department of Defense (DoD).

ACTION: Final rule.

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SUMMARY: DoD has issued a final rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to increase a contractor's 
liability for loss or damage under vessel repair and alteration 
contracts, from $5,000 to $50,000 per incident. The increased dollar 
ceiling is based on adjustments for inflation, the need to provide a 
financial incentive for contractors to minimize loss and damage, and 
common insurance practices.

EFFECTIVE DATE: August 21, 2003.

FOR FURTHER INFORMATION CONTACT: Mr. Euclides Barrera, Defense 
Acquisition Regulations Council, OUSD(AT&L)DPAP(DAR), IMD 3C132,

[[Page 50478]]

3062 Defense Pentagon, Washington, DC 20301-3062. Telephone (703) 602-
0296; facsimile (703) 602-0350. Please cite DFARS Case 2002-D016.

SUPPLEMENTARY INFORMATION: 

A. Background

    DoD uses the clause at DFARS 252.217-7012, Liability and Insurance, 
in master agreements for repair and alteration of vessels. The clause 
holds a contractor liable for loss or damage resulting from defective 
contractor workmanship and materials, and contains a liability ceiling 
for any other contractor-incurred loss or damage. This rule increases 
the contractor's liability ceiling from $5,000 to $50,000 per incident.
    DoD published a proposed rule at 68 FR 7491 on February 14, 2003. 
One respondent submitted comments on the proposed rule. A summary of 
DoD's analysis of the comments is provided below:
    Comment: The respondent took issue with the increase in the 
contractor's liability ceiling from $5,000 to $50,000, and instead 
recommended a ceiling of $7,465 based on actual inflation experienced 
by the shipbuilding industry since 1982 when the $5,000 ceiling was 
established.
    DoD Response: Do not concur. The increase was not based solely on 
inflation factors. The increase from $5,000 to $50,000 was determined 
to be appropriate as a result of a Navy study of incidents of 
contractor-incurred damages under vessel repair and alteration 
contracts during a recent 3-year period, which indicated that 70 
percent of the incidents were for amounts below $50,000, whereas only 
30 percent of the incidents were for amounts of $5,000 or less. The 
objective of the increase is to provide a financial incentive for 
contractors to minimize loss and damage.
    Comment: The respondent does not agree with DoD's position that the 
increased dollar ceiling is necessary to provide a financial incentive 
for contractors to minimize loss or damage. The clause at DFARS 
252.217-7012 already provides a strong financial incentive for 
contractors to minimize loss or damage. Under the clause, the 
Government's assumption of risk is essentially limited to loss or 
damage resulting from accidents. To require contractors to assume more 
of the costs associated with accidental damage to vessels will not 
necessarily result in a reduced number of occurrences, but will force 
contractors to price the costs of assumption of additional risks (due 
to higher ceilings) into their cost proposals for Navy ship repair 
work.
    DoD Response: Do not concur. Increasing the ceiling is consistent 
with the commercial insurance practice of setting a deductible that 
lowers claim frequency, eliminates insubstantial claims, and provides 
an incentive for the insured to avoid losses. Any increased contract 
costs that might result from the higher ceiling should be offset by the 
reduced number of claims submitted to the Government.
    This rule was not subject to Office of Management and Budget review 
under Executive Order 12866, dated September 30, 1993.

B. Regulatory Flexibility Act

    This rule may 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. DoD has prepared a final 
regulatory flexibility analysis, which is summarized as follows:
    This rule increases a contractor's liability for loss or damage to 
a Government vessel, materials, or equipment, from $5,000 to $50,000 
per incident. The rule will apply to small entities that have a master 
agreement with DoD for repair and alteration of vessels. There is no 
available estimate of the total number of small entities that will be 
subject to the rule. However, the Naval Sea Systems Command (NAVSEA), 
which is responsible for the maintenance and repair of the majority of 
vessels, has collected data indicating that, during the period from May 
1997 to October 2002, there were 61 occurrences of contractor-caused 
damages. Of those, 13 occurrences (21 percent) were attributed to small 
entities. Entities with master agreements for repair and alteration of 
vessels will need to increase their insurance coverage from $5,000 to 
$50,000. DoD considered using a liability ceiling of less than $50,000, 
but believes the $50,000 ceiling to be appropriate because--
    1. This ceiling should capture a majority of claims, since a NAVSEA 
study has shown that 70 percent of incidents of contractor-incurred 
damages during a recent 3-year period were for amounts less than 
$50,000;
    2. The increase should provide an incentive for contractors to 
reduce the number of such occurrences, thereby reducing vessel ``down-
time'' for maintenance and repair and making more efficient use of 
scarce maintenance dollars; and
    3. The increase is consistent with the commercial insurance 
practice of setting a deductible that lowers claim frequency, 
eliminates insubstantial claims, and provides an incentive for the 
insured to avoid losses.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the rule does 
not impose any 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 252

    Government procurement.

Michele P. Peterson,
Executive Editor, Defense Acquisition Regulations Council.

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Therefore, 48 CFR Part 252 is amended as follows:
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1. The authority citation for 48 CFR Part 252 continues to read as 
follows:

    Authority: 41 U.S.C. 421 and 48 CFR Chapter 1.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES


252.217-7012   [Amended]

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2. Section 252.217-7012 is amended as follows:
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a. By revising the clause date to read ``(AUG 2003)''; and
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b. In paragraph (b)(6), by removing ``$5,000'' and adding in its place 
``$50,000''.

[FR Doc. 03-21311 Filed 8-20-03; 8:45 am]
BILLING CODE 5001-08-P