[Federal Register Volume 68, Number 240 (Monday, December 15, 2003)]
[Rules and Regulations]
[Pages 69631-69632]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30763]


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DEPARTMENT OF DEFENSE

48 CFR Parts 232 and 252

[DFARS Case 2002-D017]


Defense Federal Acquisition Regulation Supplement; Payment 
Withholding

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 provide additional 
flexibility when determining the need to withhold payments under time-
and-materials and labor-hour contracts. The rule clarifies that 
normally there should be no need to withhold payment for a contractor 
with a record of timely submittal of a release discharging the 
Government from all liabilities, obligations, and claims under a 
contract.

EFFECTIVE DATE: December 15, 2003.

FOR FURTHER INFORMATION CONTACT: Mr. Thaddeus Godlewski, Defense 
Acquisition Regulations Council, OUSD(AT&L)DPAP(DAR), IMD 3C132, 3062 
Defense Pentagon, Washington, DC 20301-3062. Telephone (703) 602-2022; 
facsimile (703) 602-0350. Please cite DFARS Case 2002-D017.

SUPPLEMENTARY INFORMATION: 

A. Background

    Federal Acquisition Regulation (FAR) 52.232-7, Payments under Time-
and-Materials and Labor-Hour Contracts, requires the contracting 
officer to withhold 5 percent of the amounts due, up to a maximum of 
$50,000, unless otherwise specified in the contract Schedule. The 
Government retains the withheld amount until the contractor executes 
and delivers, at the time of final payment, a release discharging the 
Government from all liabilities, obligations, and claims arising under 
the contract. This rule adds DFARS 232.111(b) and DFARS 252.232-7006, 
Alternate A, to specify that, normally, there should be no need to 
withhold payment for a contractor with a record of timely submittal of 
such a release.
    DoD published a proposed rule at 68 FR 9627 on February 28, 2003. 
Five sources submitted comments on the proposed rule. A discussion of 
the comments is provided below. Differences between the proposed and 
final rules are addressed in the DoD Response to Comments 5, 6, 7, and 
8 below.
    1. Comment: The rule should specify whether the clause applies 
retroactively or from a specific date forward to all time-and-materials 
and labor-hour contracts.
    DoD Response: Do not concur. Policy on the applicability of DFARS 
changes is provided in DFARS 201.304(6), which states, ``* * * Unless 
guidance accompanying a change states otherwise, contracting officers 
must include any new or revised clauses, provisions, or forms in 
solicitations issued on or after the effective date of the change.'' 
This rule does not deviate from the policy in DFARS 201.304(6) and, 
therefore, requires no additional instructions regarding applicability.
    2. Comment: FAR 52.232-7(a)(2) should be eliminated. If it is not 
eliminated, there should be a graduated scale for the rate of 
withholding and the total to be withheld. For instance, the ceiling 
amount for very small businesses should be reduced to $5,000 and the 
withholding rate should be reduced to 2 percent so that the effects are 
spread over a longer time.
    DoD Response: Do not concur. DoD believes the withhold is an 
important tool for the Government to use when the contractor does not 
have a record of timely submittal of the release discharging the 
Government from all liabilities, obligations, and claims. The withhold 
protects the Government in these circumstances while also providing the 
contractor with an incentive to submit the discharges in a timely 
manner.
    3. Comment: In addition to continuing forward with this DFARS 
revision, the FAR should be revised at the earliest possible date to 
make withholding optional.
    DoD Response: The Defense Acquisition Regulations Council is 
presently working with the Civilian Agency Acquisition Council to 
incorporate similar policy into the FAR.
    4. Comment: The language at 232.111(b)(ii) should be revised to 
indicate that timely submittal of release is only one example where 
there is no need to withhold payment. There are other circumstances 
when the withholding may not be necessary, such as when the contractor 
has demonstrated a satisfactory accounting and billing system and is 
determined to be eligible for direct billings by the Defense Contract 
Audit Agency.
    DoD Response: Do not concur. A satisfactory accounting and billing 
system and eligibility for direct billings indicate that the contractor 
has the necessary internal controls to address periodic billings during 
contract performance. However, they are not determinative as to whether 
the contractor submits timely releases discharging the Government from 
all liabilities, obligations, and claims upon completion of the 
contract. If the contractor does not have a record of submitting these 
discharge documents in a timely manner, the fact that the accounting 
and billing systems are adequate is not sufficient to warrant removing 
the withhold requirement.
    5. Comment: The language at 232.111(b)(iii) should be revised to 
refer to the withholding as ``five percent up to a maximum of $50,000'' 
of the amounts due until a sufficient reserve is established. This 
maximum amount of coverage is addressed properly in the contract 
clause. In addition, 232.111(b)(iii) should be amended to authorize the 
ACO to establish an administrative mechanism for holding contractor 
funds that does not require the withholding of funds on each invoice so 
as to reduce the administrative burden on both the Government and the 
contractor.
    DoD Response: Partially concur. DoD agrees that the $50,000 maximum 
withhold amount should be stated in 232.111(b)(iii) and, accordingly, 
has replaced ``until a sufficient reserve is set aside'' with ``up to a 
maximum of $50,000.''
    As to the suggestion to provide for alternative mechanisms, DoD 
believes that determining whether alternative administrative mechanisms 
are feasible and/or practical is beyond the scope of this case.
    6. Comment: The rule should instruct the contractor to forward all 
vouchers to the Defense Finance and Accounting Service (DFAS) through 
the ACO for approval, until such time that the ACO considers sufficient 
reserves to be set aside to adequately protect the Government 
interests. The ACO must inform DFAS when funds will be withheld from a 
contract, and there must be a process to link the modification with the 
vouchers being submitted to DFAS for payment. The modification should 
specify the percentage of the amounts due up to a maximum dollar 
amount.
    DoD Response: Partially concur. DoD recognizes the need for 
coordination among all parties in the payment process to ensure that 
withholds are

[[Page 69632]]

appropriately made without significantly impacting the payment process. 
However, DoD does not believe requiring ACO approval of each voucher is 
the proper solution for this issue. Requiring the contractor to submit 
all vouchers requiring withholds through the ACO for approval would 
place an unnecessary administrative burden on the ACO and could impact 
the timeliness of payment.
    DoD agrees that the ACO should ensure that the contract specifies 
the percentage and total amount of the withhold, and accordingly, has 
added the following language to DFARS 232.111(b)(iii): ``The ACO shall 
ensure that the modification specifies the percentage and total amount 
of the withhold.''
    DoD also agrees that the ACO should provide DFAS with written 
payment instructions regarding if and when withholds are needed. 
However, DoD does not believe these instructions should be included as 
part of this DFARS rule.
    7. Comment: There is a concern that the rule shifts responsibility 
for withholding from the Government to the contractor. It is important 
that this responsibility remain with the Government.
    DoD Response: Partially concur. While there was no intent to shift 
the burden to the contractor, DoD recognizes that the proposed language 
could be misinterpreted. Therefore, 232.111(b)(iii) and 252.232-7006 
have been revised to clarify that the ACO must issue a modification 
requiring the contractor to withhold amounts from its billings.
    8. Comment: The language 232.111(b)(iii) should be amended to state 
``If the ACO determines that it is necessary to withhold payment to 
protect the Government's interests, written direction should be issued 
to the contractor by modification of the contract directing the 
withholding of 5 percent of amounts due until a sufficient reserve is 
set aside.'' This revised language would be consistent with the 
language in Defense Contract Management Agency Information Memorandum 
03-121 issued on January 14, 2003. Requiring withholds to protect the 
interests of the Government alters the contract terms and conditions 
and, therefore, should be documented through a contract modification.
    DoD Response: Concur in principle. The language at 232.111(b)(iii) 
has been revised to state that the ACO must issue a modification 
requiring the contractor to withhold the amounts due.
    This rule was not subject to Office of Management and Budget review 
under Executive Order 12866, dated September 30, 1993.

B. Regulatory Flexibility Act

    DoD certifies that this final rule will not 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 the rule applies only to time-and-materials and labor-hour 
contracts. Most contracts awarded to small entities use simplified 
acquisition procedures or are awarded on a competitive, fixed-price 
basis.

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 Parts 232 and 252

    Government procurement.

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

0
Therefore, 48 CFR parts 232 and 252 are amended as follows:
0
1. The authority citation for 48 CFR parts 232 and 252 continues to 
read as follows:

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

PART 232--CONTRACT FINANCING

0
2. Section 232.111 is added to read as follows:


232.111  Contract clauses for non-commercial purchases.

    (b) Use the clause at FAR 52.232-7, Payments under Time-and-
Materials and Labor-Hour Contracts, with 252.232-7006, Alternate A, in 
solicitations and contracts when a time-and-materials or labor-hour 
contract is contemplated.
    (i) Alternate A permits the administrative contracting officer 
(ACO) to withhold 5 percent of the amounts due until a reserve is set 
aside in an amount the ACO considers to be necessary, but not to exceed 
$50,000, to protect the Government's interests.
    (ii) Normally, there should be no need to withhold payment for a 
contractor with a record of timely submittal of the release discharging 
the Government from all liabilities, obligations, and claims.
    (iii) If the ACO determines that it is necessary to withhold 
payment to protect the Government's interests, the ACO shall 
unilaterally issue a modification requiring the contractor to withhold 
5 percent of amounts due, up to a maximum of $50,000. The ACO shall 
ensure that the modification specifies the percentage and total amount 
of the withhold.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
3. Section 252.232-7006 is added to read as follows:


252.232-7006  Alternate A.

Alternate A (Dec 2003)

    As prescribed in 232.111(b), substitute the following paragraph 
(a)(2) for paragraph (a)(2) of the clause at FAR 52.232-7:
    (a)(2) The Administrative Contracting Officer (ACO) may 
unilaterally issue a contract modification requiring the Contractor 
to withhold amounts from its billings until a reserve is set aside 
in an amount that the ACO considers necessary to protect the 
Government's interests. The ACO may withhold 5 percent of the 
amounts due under this paragraph (a), but the total amount withheld 
shall not exceed $50,000. The amounts withheld shall be retained 
until the Contractor executes and delivers the release required by 
paragraph (f) of this clause.

[FR Doc. 03-30763 Filed 12-12-03; 8:45 am]
BILLING CODE 5001-08-P