[Federal Register Volume 68, Number 190 (Wednesday, October 1, 2003)]
[Proposed Rules]
[Pages 56613-56616]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24855]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 16 and 39

[FAR Case 2003-008]
RIN 9000-AJ74


Federal Acquisition Regulation; Share-in-Savings Contracting

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

ACTION: Advance notice of proposed rulemaking.

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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 solicit comments to assist in 
the implementation of section 210 of the E-Government Act of 2002, 
Public Law 107-347. Section 210 authorizes Governmentwide use of Share-
in-Savings (SIS) contracts for information technology (IT). SIS 
contracts offer an innovative approach for encouraging industry to 
share creative technology solutions with the Government. Through a 
properly structured SIS contract, agencies may lower costs and improve 
service delivery without large ``up front'' investments by having the 
contractor provide the technology investment and allowing the 
contractor to share with the Government in the savings achieved. The 
Councils seek the public's comment on the challenges associated with 
SIS contracts, such as the establishment of quantifiable baselines and 
a reasonable return on investment (ROI) over the life-cycle of the 
investment, so that this tool can be applied effectively to improve 
mission performance.

DATES: Interested parties should submit comments in writing on or 
before October 31, 2003, to be considered in the formulation of a final 
rule.

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 [email protected].
    Please submit comments only and cite ANPR FAR case 2003-008 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. Craig R. Goral, Procurement Analyst, at (202) 501-
3856. Please cite FAR case 2003-008.

SUPPLEMENTARY INFORMATION:

A. Background

    Section 210 of the E-Government Act amends the Armed Services 
Procurement Act and the Federal Property and Administrative Services 
Act to authorize the use of SIS contracts for IT. Share-in-Savings is 
an innovative, performance-based concept that is intended to help an 
agency leverage its limited resources to improve or accelerate mission-
related or administrative processes and lower costs for the taxpayer. 
Under an SIS contract, the contractor finances the work and then shares 
with the agency in the savings generated from contract performance. 
Pursuant to the authority in section 210, which sunsets at the end of 
fiscal year 2005, agencies are permitted to enter into SIS contracts 
for up to 5 years, and, with appropriate approval, up to 10 years. 
Agencies are obligated to pay the contractor for services performed 
only if savings are realized and, in such cases, only a portion of the 
total savings realized. The agency may retain its share of the savings, 
with certain exceptions.
    Section 210 authorizes the Federal Government to award any number 
of SIS IT contracts where funds are available and sufficient to make 
payments with respect to the first fiscal

[[Page 56614]]

year of the contract and cover termination or cancellation costs. 
Section 210 also authorizes award of up to 10 contracts (i.e., 5 for 
DOD, NASA, and the Coast guard, and 5 for other agencies) during fiscal 
years 2003, 2004, and 2005 when funds are not made specifically 
available for the full costs of cancellation or termination of the 
contract--provided that the amount of unfunded contingent liability 
associated with cancellation and termination does not exceed the lesser 
of (a) 25 percent of the estimated costs of a cancellation or 
termination or (b) $5 million. In signing the E-Government Act into 
law, the President stated that the executive branch shall ``limit 
authorized waivers for funding of potential termination costs to 
appropriate circumstances, so as to minimize the financial risk to the 
government'' and ensure SIS contracts are operated according to sound 
fiscal policy.
    This past winter, the General Accounting Office (GAO) released a 
report examining non-federal entities' experience with SIS contracts. 
See CONTRACT MANAGEMENT: Commercial Use of Share-in-Savings 
Contracting, GAO-03-327 (January 2003). The GAO found that SIS 
contracting can be highly effective in motivating contractors to 
generate savings and revenues for their clients. At the same time, the 
GAO cautioned that contracting parties must be ``specific and in 
agreement in their goals and objectives as well as how to achieve 
them.'' The GAO identified several specific elements that are necessary 
for Share-in-Savings contracts to be successful, namely: (1) A clearly 
specified expected outcome, (2) defined incentives, (3) a baseline and 
good performance measures to gauge exactly what savings or revenues are 
being achieved, and (4) the commitment of senior level management. The 
GAO emphasized that effective planning is critical: ``[Parties] need to 
carefully consider the potential risks and rewards of an SIS 
arrangement and whether the conditions that facilitate success are 
present--something that may not be easily achievable in Government, 
which is frequently unable to calculate a baseline.''
    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. Solicitation of Public Comment

    The Councils, along with the Office of Management and Budget (OMB), 
wish to ensure the necessary guidance is in place--in the FAR and other 
documents as appropriate--for agencies to effectively motivate 
contractors and successfully capture the benefits of an SIS contract. 
Given the Government's limited experience with this tool and the GAO's 
cautions, the Councils are soliciting public comment for consideration 
in drafting implementing FAR regulations. Comments received may also be 
shared with Federal agencies for related guidance (regulatory or 
nonregulatory) that they may wish to issue to address SIS contracting. 
Respondents are welcome to share any insights that may assist in 
managing the use of SIS contracts, but are especially encouraged to 
comment on the following issues:
    [sbull] Proposal preparation. What type of information or guidance 
will vendors need in the solicitation to adequately prepare a proposal 
for an SIS contract?
    [sbull] Share ratios. What criteria should be taken into account in 
developing an appropriate share ratio and schedule for payment? Should 
ROIs be market-based? In light of the generally short life cycle of IT, 
can the Government's interests be adequately protected if it does not 
share in savings each year?
    [sbull] Baselines. What general factors or criteria should be 
considered in determining a quantifiable baseline?
    [sbull] Cancellation and termination costs. How, if at all, should 
the determination of cancellation and termination costs differ from 
that used in connection with multi-year contracts (see FAR 17.106-
1(c))?
    [sbull] Ownership rights. Should ownership rights of hardware or 
property acquired under the SIS contract be addressed in the FAR (e.g., 
in the coverage on cancellation costs or in a standard contract 
clause)?
    [sbull] Applicability of requirements. What contract valuation 
method should be used to determine the applicability of various FAR 
requirements that are triggered by the dollar amount of the 
acquisitions?
    [sbull] Contract structure. Should there be a preference for 
structuring SIS contracts as firm-fixed price or fixed-price with 
economic price adjustment? Under what, if any, circumstances would 
other contract types be appropriate?
    [sbull] Use of FAR 37.6. Which, if any, of the policies pertaining 
to performance-based contracting in FAR Subpart 37.6 should not be 
applicable to an SIS contract, and why?
    [sbull] Potential projects. What types of activities in the IT 
arena might be especially conducive to SIS contracting?

C. Regulatory Amendments Under Consideration.

    The Councils are currently planning to amend FAR part 39 to 
establish a new subpart on SIS contracting for IT. FAR subpart 16.4, 
addressing incentive contracts, would also be amended to add a cross-
reference both to the new subpart 39.3 as well as FAR 23.204, which 
provides guidance on energy-savings performance contracts, a type of 
Share-in-Savings contract authorized by the National Energy 
Conservation Policy Act, 42 U.S.C. 8287.
    Although the Councils have not yet agreed upon FAR amendments, 
their preliminary thinking on regulatory implementation as of the 
publication of this notice is set forth below. The public is welcome to 
comment on these preliminary changes as part of their comments in 
response to this notice.

List of Subjects in 48 CFR Parts 16 and 39

    Government procurement.

Laura Auletta,
Director, Acquisition Policy Division.

    Therefore, DoD, GSA, and NASA propose amending 48 CFR parts 16 and 
39 as set forth below:
    1. The authority citation for 48 CFR parts 16 and 39 is revised to 
read as follows:

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

PART 16--TYPES OF CONTRACTS


16.401  [Amended]

    2. Amend section 16.401 by adding paragraph (e) to read as follows:


16.401  General.

* * * * *
    (e) For related incentive concepts, refer to Subpart 39.3, Share-
in-Savings Contracting, and 23.204, Energy-savings performance 
contracts.

PART 39--ACQUISITION OF INFORMATION TECHNOLOGY

Subpart 39.3 [Added]

    3. Add subpart 39.3 consisting of sections 39.300 through 39.309, 
to read as follows:

Subpart 39.3--Share-in-Savings Contracting


39.300  Scope of subpart.

    This subpart implements section 210 of the E-Government Act of 2002 
(Public Law 107-347) by prescribing policies and procedures for Share-
in-Savings contracts for information technology.

[[Page 56615]]

39.301  Definitions.

    As used in this subpart--
    Cancellation means the cancellation (within a contractually 
specified time) of the total requirements of all remaining program 
years. Cancellation results when the contracting officer--
    (i) Notifies the contractor of nonavailability of funds for 
contract performance for any subsequent program year; or
    (ii) Fails to notify the contractor that funds are available for 
performance of the succeeding program year requirement.
    Savings means--
    (1) Monetary savings to an agency; or
    (2) Savings in time or other quantifiable benefits realized by the 
agency, including enhanced revenues (other than enhanced revenues from 
the collection of fees, taxes, debts, claims, or other amounts owed the 
Federal Government).
    Share-in-Savings contract means a contract under which--
    (1) A contractor provides solutions for improving the agency's 
mission-related or administrative processes or for accelerating the 
achievement of agency missions; and
    (2) The Government pays the contractor an amount equal to a portion 
of the quantifiable savings derived by the agency from--
    (i) Any improvements in mission-related or administrative processes 
that result from implementation of the solution; or
    (ii) Acceleration of achievement of agency missions.


39.302  Authority.

    The E-Government Act of 2002 (Public Law 107-347) authorizes the 
head of an agency to enter into a Share-in-Savings contract for 
information technology. This authority expires on September 30, 2005.


39.303  Applicability.

    This subpart applies only to information technology projects that 
are appropriate for Share-in-Savings contracting techniques.
    (a) In general, use of Share-in-Savings contracts should be 
considered only for projects involving significant innovation or 
process transformation.
    (b) Agencies intending to use this subpart are encouraged to 
complete the ``Share-in-Savings Project Screening Template'' at: http://www.gsa/gov/shareinsavings. The information provided in this template 
will help the General Services Administration to assist agencies in 
determining the potential effectiveness of using the authority of this 
subpart.
    (c)(1) The capital programming requirements of OMB Circular A-11 
shall apply to--
    (i) Share-in-Savings projects for which funds are not being made 
specifically available for the full costs of cancellation or 
termination; and
    (ii) Other Share-in-Savings projects that qualify as major IT 
investments, as provided in the Circular.
    (2) Share-in-Savings projects not covered by paragraph (c)(1) shall 
be the subject of a business case appropriate for the size and 
complexity of the project as determined by the agency and the Office of 
Management and Budget.


39.304  Limitations on Share-in-Savings contract period of performance.

    (a) Except as provided in paragraph (b) of this section, a Share-
in-Savings contract shall be awarded for a period of not more than 5 
years.
    (5) A Share-in-Savings contract may be awarded for a period greater 
than 5 years, but not more than 10 years, if other applicable 
requirements do not otherwise limit the length of the contract and the 
head of the agency determines in writing prior to award of the contract 
that--
    (1) The level of risk to be assumed and the investment to be 
undertaken by the contractor is likely to inhibit the Government from 
obtaining the needed information technology competitively at a fair and 
reasonable price if the contract is limited in duration to a period of 
5 years of less; and
    (2) Use of the information technology to be acquired is likely to 
continue for a period of time sufficient to generate reasonable benefit 
for the Government.


39.305  Use of performance-based contracts.

    Share-in-Savings contracts shall be performance-based contracts. 
Objective outcomes and performance standards shall be used to measure 
achievements and milestones that must be met before payment is made 
(see subpart 37.6).


39.306  Share-in-Savings baseline.

    (a) Share-in-Savings contracts shall include a clause containing a 
quantifiable baseline that is to be the basis upon which a saving share 
ratio is established to govern the amount of payment a contractor is to 
receive under a contract.
    (b) Before award of a Share-in-Savings contract, the agency senior 
procurement executive shall determine in writing that the terms of the 
baseline clause are quantifiable and will likely yield value to the 
Government.


39.307  Managing retained savings.

    (a) Agencies may retain savings in excess of the total amount of 
savings paid to the contractor under the contract, but may not retain 
any portion of such savings that is attributable to a decrease in the 
number of civilian employees of the Federal Government performing the 
function. Except as provided in paragraph (b) of this section, savings 
shall be credited to the appropriation or fund against which charges 
were made to carry out the contract and shall be used for information 
technology.
    (b) Amounts retained by the agency under this subpart shall--
    (1) Without further appropriation, remain available until expended; 
and
    (2) Be applied first to fund any cancellation or termination 
liabilities associated with Share-in-Savings procurements that are not 
fully funded.


39.308  Cancellation or termination.


39.308-1  Paying for cancellation or termination.

    (a) The amount payable in the event of cancellation or termination 
of a Share-in-Savings contract shall be negotiated with the contractor 
at the time of contract award.
    (b) If funds are not made available for the continuation of a 
Share-in-Savings contract in a subsequent fiscal year, the contract 
shall be cancelled or terminated. The costs of cancellation or 
termination may be paid out of--
    (1) Appropriations available for the performance of the contract;
    (2) Appropriations available for acquisition of the information 
technology procured under the contract, and not otherwise obligated; or
    (3) Funds subsequently appropriated for payments of costs of 
cancellation or termination, subject to the limitations in 39.308-2.


39.308-2  Funding of cancellation or termination liability.

    (a) Except as provided in paragraph (b) of this subsection, the 
funds obligated for Share-in-Savings contracts must be sufficient to 
cover any potential cancellation and/or termination costs.
    (b)(1) The head of an agency may enter into Share-in-Savings 
contracts even if funds are not made specifically available for the 
full costs of cancellation or termination of the contract provided 
that--
    (i) The action is approved as provided in paragraph (b)(1)(iii) of 
this subsection;
    (ii) Funds are available and sufficient to make payments with 
respect to the first fiscal year of the contract; and

[[Page 56616]]

    (iii) The following conditions are met regarding the funding of 
cancellation and termination liability:
    (A) The amount of unfunded liability does not exceed the lesser of 
25 percent of the estimated costs of a cancellation or termination, or 
$5 million.
    (B) An unfunded cancellation or termination liability in excess of 
$1 million has been approved by the Director of the Office of 
Management and Budget.
    (C) Notification has been provided to OMB in accordance with 
paragraph (c) of this subsection.
    (2) The aggregate number of Share-in-Savings contracts that may be 
entered into under this paragraph may not exceed 5 in each of fiscal 
years 2003, 2004, and 2005 for each of the following groups of 
agencies:
    (i) The Department of Defense, NASA, and the Coast Guard.
    (ii) All other agencies.
    (c) In addition to the requirements specified in paragraph (b) of 
this subsection, an agency planning to award a Share-in-Savings 
contract having an unfunded cancellation or termination liability in 
any amount must notify the Office of Management and Budget at least 30 
days prior to solicitation issuance.


39.309  Solicitation requirements.

    (a) Solicitations for Share-in-Savings contracts shall use 
competitive procedures to the maximum extent practicable. Each 
solicitation shall include provisions and evaluation criteria ensuring 
that--
    (1) The contractor's share of savings reflects the risks involved 
and market conditions; and
    (2) The Government will realize best value from the contract.
    (b) Contracting officers should consider the use of a technology 
refreshment clause to ensure the information technology provided under 
the contract incorporates desired technological advancements throughout 
the entire period of contract performance. In developing such a clause, 
contracting officers should consider similar terms and conditions 
available on the commercial market.
    (c) Contracting officers may include other appropriate clauses not 
specifically prescribed in the FAR to ensure that the goals of the 
Share-in-Savings contract are attained, provided that such clauses are 
consistent with applicable statutes and regulations.

[FR Doc. 03-24855 Filed 9-30-03; 8:45 am]
BILLING CODE 6820-EP-M