[Federal Register Volume 69, Number 181 (Monday, September 20, 2004)]
[Proposed Rules]
[Pages 56316-56322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-21040]



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Part IV





Department of Defense

General Services Administration

National Aeronautics and Space Administration





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48 CFR Parts 2, 10, 12, 16, and 52



Federal Acquisition Regulation; Additional Commercial Contract Types; 
Proposed Rule

  Federal Register / Vol. 69, No. 181 / Monday, September 20, 2004 / 
Proposed Rules  

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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

 48 CFR Parts 2, 10, 12, 16, and 52

[FAR Case 2003-027]
 RIN 9000-AK07


Federal Acquisition Regulation; Additional Commercial Contract 
Types

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

ACTION: Advance notice of proposed rulemaking and notice of public 
meeting.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) are issuing this advance 
notice of proposed rulemaking (ANPR) to solicit comments that can be 
used to assist in the implementation of section 1432 of the National 
Defense Authorization Act for Fiscal Year 2004 (Public Law 108-136) in 
the Federal Acquisition Regulation (FAR). Section 1432 amends section 
8002(d) of the Federal Acquisition Streamlining Act (FASA) to expressly 
authorize the use of time-and-materials (T&M) and labor-hour (LH) 
contracts for the procurement of commercial services. Implementation of 
section 8002(d) will require certain revisions to the FAR's current 
commercial item policies and associated clauses to ensure they 
effectively address the risks associated with T&M and LH contracting. 
Current policies were designed only to support purchases through firm-
fixed price contracts and fixed-rice contracts with economic price 
adjustments.

DATES: Comment Date: Interested parties should submit comments in 
writing on the ANPR to the address below on or before November 19, 
2004, to be considered in the formulation of any proposed or interim 
rule.
    The Councils, in collaboration with OFPP, invite interested parties 
from both the private and public sector to provide comments on the 
effective use of T&M and LH contracts for the acquisition of commercial 
items and suggestions for implementing the specific requirements of 
section 8002(d). Comments are especially welcome on the specific issues 
discussed in the ``Supplementary Information'' section of this notice. 
See, in particular, the two sets of questions posed under 
``Solicitation of Public Comment'' and the draft regulatory language 
provided under ``Regulatory Amendments Under Consideration.''
    Public Meeting: A public meeting will be held on October 19, 2004, 
from 10:00 a.m. to 4:30 p.m. EST, in the GS Building Auditorium, 1800 F 
Street, NW, Washington, DC, 20405, to facilitate an open dialogue 
between the Government and interested parties on the implementation of 
section 8002(d). Interested parties are encouraged to attend and engage 
in discussions regarding the questions and draft provisions contained 
in this ANPR. To facilitate discussions at the public meeting, 
interested parties are encouraged to provide written comments on issues 
they would like addressed at the public meeting no later than October 
1, 2004. Interested parties may register and submit their input 
electronically at: http://www.acq.osd.mil/dpap/dars/coming.htm. 
Attendees are encouraged but not required to register for the public 
meeting, to ensure adequate room accommodations. Interested parties may 
also offer additional questions for discussion at the public meeting.
    Directions to the meeting can be found at the Web site. 
Participants are encouraged to check the Web site prior to the public 
meeting to ensure the location has not changed as a result of a large 
number of registrants.
    The public meeting is physically accessible to people with 
disabilities. Request for sign language interpretation or other 
auxiliary aids should be directed to Mr. Gerald Zaffos (202-208-6091) 
at least 5 days prior to the meeting.

ADDRESSES: Written comments.Submit comments identified by ANPR, FAR 
case 2003-027, by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Agency Web Site: http://www.acqnet.gov/far/ProposedRules/proposed.htm. Click on the FAR case number to submit comments.
     Mail: [email protected]. Include ANPR, FAR case 2003-
027, in the subject line of the message.
     Fax: 202-501-4067.
     Mail: General Services Administration, Regulatory 
Secretariat (VR), 1800 F Street, NW, Room 4035, ATTN: Laurie Duarte, 
Washington, DC 20405.
    Instructions: Please submit comments only and cite ANPR, FAR case 
2003-027, in all correspondence related to this case. All comments 
received will be posted without change to http://www.acqnet.gov/far/ProposedRules/proposed.htm, including any personal information 
provided.

FOR FURTHER INFORMATION CONTACT: The FAR Secretariat at (202) 501-4755 
for information pertaining to status or publication schedules. For 
clarification of content, contact Mr. Gerald Zaffos, Procurement 
Analyst, at (202) 208-6091. Please cite ANPR, FAR case 2003-027.

SUPPLEMENTARY INFORMATION:

A. Background

    Title XIV of the National Defense Authorization Act for Fiscal Year 
2004 (Public Law 108-136), referred to as the Services Acquisition 
Reform Act (SARA), includes a provision, section 1432, which expressly 
authorizes the use of T&M and LH contracts for the procurement of 
commercial services. Section 1432 amends section 8002(d) (41 U.S.C. 264 
note) of FASA. As amended, section 8002(d) places certain conditions on 
the use of T&M and LH contracts for purchases of commercial services 
under FAR Part 12, namely: (1) The purchase must be made on a 
competitive basis; (2) The service must fall within certain categories 
as prescribed by section 8002(d); (3) The contracting officer must 
execute a determination and findings (D&F) that no other contract type 
is suitable; and (4) The contracting officer must include a ceiling 
price that the contractor exceeds at its own risk and that may be 
changed only upon a determination documented in the contract file that 
the change is in the best interest of the procuring agency. The 
Councils are issuing this ANPR to seek the public's input for how best 
to implement the requirements and authorities of section 8002(d).
    This ANPR is not intended to affect the special ordering procedures 
issued by the GSA pursuant to FAR 8.402 for the procurement of services 
under the Multiple Award Schedules (MAS) Program. MAS policies 
regarding the placement of orders on a T&M and LH basis will be 
conformed to the FAR when FAR coverage is finalized.

B. Solicitation of Public Comment

    The Councils, along with OFPP, wish to ensure that T&M and LH 
contracting is used only when conditions warrant and that the terms and 
conditions incorporated into resulting T&M and LH contracts adequately 
protect the parties' respective interests based on the risk each party 
is being asked to bear. The

[[Page 56317]]

following discussion is intended to facilitate input that can assist 
the Councils in successfully achieving these goals as they develop 
regulations to implement section 8002(d).
    1. Suitability of T&M and LH contracts. Section 8002(d) limits use 
of T&M and LH contracts to the following categories of commercial 
services:
    a. Commercial services procured for support of a commercial item, 
as described in 41 U.S.C. 403(12)(E); and
    b. Any other category of commercial services that is designated by 
the Administrator of OFPP on the basis that--
    (i) The commercial services in such category are of a type of 
commercial services that are commonly sold to the general public 
through use of T&M or LH contracts; and
    (ii) It would be in the best interests of the Federal Government to 
authorize use of T&M or LH contracts for purchases of the commercial 
services in such category.
    2. In furtherance of its responsibility under section 8002(d), OFPP 
seeks to better understand how T&M and LH contracts are used 
commercially and when their use is in the best interest of the 
Government. OFPP has developed questions to obtain this information and 
requested that the Councils pose them as part of this ANPR.
    Accordingly, the Councils invite the public to provide comments 
addressing the appropriate use of T&M and LH contracting in commercial 
item acquisitions and especially welcome feedback to the following 
questions: (In commenting, please include citations, as appropriate, to 
relevant sources of information that may be used to substantiate the 
basis for the response provided.)
    a. What, if any, types of commercial services are sold to the 
general public predominantly on a T&M or LH basis?
    b. What types of commercial services are rarely, if ever, sold to 
the general public on a T&M or LH basis?
    c. What types of commercial services are commonly sold to the 
general public through both a T&M or LH and fixed-price basis?
    d. What conditions typically exist when services are commonly sold 
to the general public through the use of T&M or LH contracts?
    e. Should this rule adopt the same policy set forth in the FAR for 
non-commercial items and in GSA's special ordering procedures for 
acquiring commercial services under the Multiple Award Schedules (MAS) 
(see http://www.gsa.gov; click on ``GSA Schedules'') that restricts T&M 
and LH contracts to situations where it is not possible at the time of 
placing the contract to estimate accurately the extent or duration of 
the work or to anticipate costs with any reasonable degree of 
confidence? Why or why not?
    f. What steps should a contracting officer be required to take to 
establish that a fixed-price contract is not suitable? (Since use of 
cost-type contracts is prohibited under FAR Part 12, a contracting 
officer would not be expected to address why a cost-type contract was 
not suitable prior to using a T&M and LH contract for a commercial item 
acquisition.)
    OFPP intends to share the public's feedback with the advisory panel 
that is being established pursuant to section 1423 of SARA to review 
commercial practices and other acquisition-related issues.
    3. Terms and conditions. The current FAR clauses prescribed for the 
acquisition of commercial items were designed to support firm-fixed 
price contracts and fixed-price contracts with economic price 
adjustments. In shaping these clauses, the FAR drafters gave little 
thought to the risk involved when using flexibly priced contracts. For 
this reason, the Councils are reviewing these clauses to determine 
where refinements might be needed to more appropriately reflect the 
relationship that is created between the Government and a contractor 
under a T&M or LH contract.
    As part of their review, the Councils are considering the 
provisions that have been traditionally incorporated into T&M and LH 
contracts pursuant to FAR Subpart 16.6. In considering changes, the 
Councils recognize that the provisions and clauses established and 
prescribed by Subpart 12.3 are meant to address, to the maximum extent 
practicable, commercial market practices for a wide range of potential 
Government acquisitions of commercial items.
    To assist in this effort, the Councils invite the public, and 
especially small business, to provide comment on industry practices, 
including terms and conditions, relating to commercial use of T&M and 
LH contracts. Comments are especially welcome in response to the 
following questions: (In commenting, please include citations, as 
appropriate, to relevant sources of information that may be used to 
substantiate the basis for the response provided.)
    a. What type of surveillance is conducted under T&M and LH 
commercial contracts (e.g., quality control and inspections)?
    b. What responsibility should the contractor bear for correction of 
non-conforming services under T&M and LH commercial contracts (e.g., 
who should bear the cost of correction or re-performance)? Does the 
burden of responsibility depend on whether the Government has accepted 
the service?
    c. What oversight is used to ensure work is being properly charged 
under T&M and LH contracts (e.g., what type of information is required 
to substantiate payment requests)?
    d. Is consent to subcontract required for subcontracts not 
identified in the original proposal?
    e. How are material handling or subcontract administration rates 
charged under T&M commercial contracts? If material handling or 
subcontract administration rates are reimbursed based on actual rates, 
how can this be done without application of FAR Subpart 31.2?
    f. What is the impact if Cost Accounting Standards apply to these 
contracts?
    g. How often and under what circumstances does the customer provide 
property on a T&M or LH contract? How is the property managed and 
controlled?

C. Regulatory Amendments Under Consideration

    The Councils are considering amendments to commercial items 
policies in FAR Part 12 and associated clauses in FAR Part 52 to ensure 
the effective use of T&M and LH contracts consistent with the 
parameters established in section 8002(d). Changes are also being 
considered for FAR Parts 2, 10, and 16.
    Although the Councils have not yet agreed upon proposed FAR 
amendments, their preliminary thinking on regulatory implementation as 
of the publication of this ANPR is set forth below. The specific shape 
of a proposed or interim rule will not be decided until after the 
public's input has been considered. (For example, this language does 
not attempt to identify categories of services, since, as explained 
above, additional information will be needed to assist OFPP in making 
this determination.) The public is welcome to comment on these 
preliminary changes as part of their comments in response to this 
notice and at the public meeting. The main changes that would be made 
by this draft proposal are described below:
    1. Determination and findings (D&F). Section 8002(d) requires the 
contracting officer to execute a D&F that no other contract type is 
suitable before proceeding with a purchase on a T&M or LH basis. The 
FAR has long relied on contracting officers to execute this type of D&F 
to protect the Government's interests when using a T&M or LH

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contract for the purchase of non-commercial items. The D&F helps to 
ensure that contracting officers give sufficient consideration to 
fixed-price arrangements that will frequently represent a more 
appropriate allocation of risk. This point is underscored by the 
Conference Report (House Report 108-354) (http://Thomas.loc.gov/) 
accompanying SARA. The Conferees make clear that the option to use T&M 
and LH contracts was not intended to supplant the statutory preference 
for performance-based fixed-price task orders established by section 
821 of the Defense Authorization Act for FY 2001 (Public Law 106-398). 
The Conferees state that ``a performance-based contract or task order 
that contains firm-fixed prices for the specific tasks to be performed 
remains the preferred option for the acquisition of either commercial 
or non-commercial items.'' See H. Rept. 108-354 at p. 777.
    The Councils and OFPP generally would expect to find that services 
are likely to be sold on both a T&M or LH and fixed-price basis in many 
instances. In these cases, determining whether fixed-price contracts 
are unsuitable may be more a function of the specific circumstances 
surrounding the acquisition than the specific nature of the service 
being acquired.
    For these reasons, the preliminary draft would require contracting 
officers to describe the market research they have undertaken to 
evaluate contract options and the rationale for concluding, based on 
this research, that fixed-prices for the delivery of completed tasks is 
unsuitable under the circumstances. The preliminary draft would require 
the contracting officer to prepare a D&F that establishes either (1) 
that it is not possible at the time of placing the contract to 
accurately estimate the extent or duration of the work or to anticipate 
costs with any reasonable degree of certainty or, (2) if work is 
sufficiently understood to allow for pricing on a fixed-price basis, 
that fixed pricing would unnecessarily inflate the Government's costs 
or impose unreasonable risk on the contractor. The preliminary draft 
encourages indefinite-delivery contracts that provide for orders to be 
issued on a T&M or LH basis, to also provide for orders to be issued on 
a fixed-price basis. In this situation, a D&F is executed for each T&M 
or LH order. If it is not practicable to provide for both contract 
types, then the D&F is executed for the contract and additionally must 
explain why providing for an alternative fixed-price structure is not 
practicable.
    2. Terms and conditions. The Councils are considering an alternate 
to the standard clause used in commercial contracts, set forth at FAR 
clause 52.212-4, for incorporation into T&M and LH contracts for 
commercial services. This alternative clause would make the following 
modifications to FAR clause 52.212-4:
     Inspection/acceptance. Paragraph (a) of FAR clause 52.212-
4 provides that the Government may require repair or replacement of 
nonconforming supplies or reperformance of nonconforming services at no 
increase in price. The Councils anticipate, based on their initial 
review of commercial contracts, that the requirement at paragraph (a) 
of FAR clause 52.212-4 for reperformance of nonconforming services is 
consistent with commercial practice. However, the Councils also 
determined that, regardless of whether a fixed-price contract or a T&M 
or LH contract is used, reperformance may not correct defects or may 
not be possible. In these cases, the Councils believe that the 
Government should be able to invoke other remedies, such as requiring 
action by the contractor to ensure that future performance conforms to 
contract requirements or acceptance of nonconforming supplies or 
services with appropriate consideration. Accordingly, this 
clarification is included in a draft revision to paragraph (a) of the 
basic terms and conditions clause at 52.212-4 and an alternate that 
would be used for T&M and LH contracts.
     Payment. The payment provision at paragraph (i) of FAR 
clause 52.212-4 provides that payment shall be made for items accepted. 
Generally, FAR 15.403-1(b)(3) exempts contracts for commercial items 
from the submission of cost or pricing data, and 15.209(b)(1)(iii) 
exempts contracts for commercial items from applicability of 52.215-2, 
Audits and Records-Negotiations. As a result of section 1432 of SARA, 
these same exceptions would generally apply to T&M and LH contracts 
used for the acquisition of certain commercial services. However, there 
are some unique aspects of T&M and LH contracts that may require 
Government review. These reviews would be limited to review of the 
labor hours, the actual material costs, and actual subcontract costs. 
The Councils are, therefore, considering an alternate clause that would 
provide a special payment provision for T&M and LH contracts. The 
language of the alternate clause is generally derived from FAR 52.232-
7, the payment clause currently used for non-commercial acquisitions on 
T&M and LH contracts, but has been modified to incorporate commercial 
buying practices. The proposed alternate payment provision requires the 
contractor to provide access to employees and their timecards, labor 
distributions, and material and subcontract invoices. The alternate 
payment provision does not provide for the withholding and retention of 
payments subject to final audit. Since the proposal does not provide 
for reimbursement of actual indirect rates (e.g., a material handling 
or subcontract administration rate), the proposal does not require 
application of FAR Part 31.
    In addition, paragraphs (b)(1) and (b)(4)(iii) of FAR clause 
52.232-7 allow for the reimbursement of reasonable and allocable 
material handling costs and/or subcontract administration costs arising 
from the handling of materials and/or the administration of 
subcontracts (provided these indirect costs are not included in the 
loaded hourly rate). As a result, T&M and LH contracts for non-
commercial items are generally subject to the provisions of FAR Part 31 
and the negotiation of final indirect rates. Since commercial item 
contracts are not subject to FAR Part 31 and final indirect rates, the 
Councils have discussed the possibility of using a predetermined rate 
not subject to any audit and adjustment. However, concerns were raised 
that this would violate the prohibition on cost plus a percentage of 
cost (CPPC) contracting if the factor is any amount greater than the 
actual overhead rate the contractor incurs. As a result, the alternate 
payment provision provides for payment of the direct costs of material 
or subcontracts only and does not allow for the application and payment 
of separate indirect rates for materials and subcontracts.
    Finally, the alternate clause applies the Prompt Payment Act to T&M 
and LH contracts, thus maintaining the application of the Act to 
commercial items acquisitions.
     Termination for convenience. The current termination 
language in paragraph (l) of FAR clause 52.212-4 and the corresponding 
guidance at 12.403(d) do not currently reflect how a contractor would 
be paid under a terminated commercial T&M and LH contract. Rather than 
paying the contractor based on a ``percentage of contract price 
reflecting the percentage of the work performed prior to notice of 
termination,'' the alternate clause would pay the contractor for the 
number of direct labor hours expended before the effective date of 
termination multiplied by the hourly rate(s) in the contract schedule, 
plus reasonable charges directly related to the termination.
     Subcontracts. Currently, FAR Part 12 does not address 
subcontracts i.e., there is no guidance addressing issues

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such as consent to subcontracts and advanced notification 
requirements). However, the Councils believe that the additional risks 
associated with T&M and LH contracting require surveillance, including 
insight into subcontracts. A new FAR section 12.216 and paragraph (u) 
for the alternate clause are being considered that would require the 
contractor to obtain the contracting officer's consent prior to 
awarding certain subcontracts. Similar to FAR 52.244-2, the 
subcontracts clause used for non-commercial acquisitions involving 
either T&M or LH contracts, paragraph (u) of the alternate clause would 
establish standard conditions under which consent is required, and 
would permit the contracting officer to designate or exempt additional 
specific subcontracts or categories of subcontracts for consent. The 
contracting officer would be required to consider the risk, complexity 
and dollar value of anticipated subcontracts when determining the 
consent requirements.
    3. Application of Cost Accounting Standards (CAS). FAR 12.214 
states that CAS does not apply to contracts and subcontracts for the 
acquisition of commercial items when these contracts and subcontracts 
are firm-fixed price or fixed-price with economic price adjustment, 
provided that the price adjustment is not based on actual costs 
incurred. This FAR provision is based on a CAS exemption that was 
promulgated by the Cost Accounting Standards Board (CAS Board) after 
the enactment of the Clinger-Cohen Act (Public Law 104-106) pursuant to 
its authorities in section 26 of the Office of Federal Procurement 
Policy Act (OFPP Act) in general and section 26(f)(2)(B)(i) of the OFFP 
Act in particular (41 U.S.C. 422(f)(2)(B)(i)). The scope of the CAS 
exemption parallels the scope of contract types currently authorized by 
FAR 12.207.
    The need for potential amendments to the current CAS exemption for 
commercial items is being considered. Temporary waivers are subject to 
approval by the CAS Board. Permanent exemptions are subject to the 
regulatory promulgation process and are codified in 48 CFR Chapter 99. 
No changes to FAR 12.214 are reflected in the draft amendment that is 
being published with this notice. However, FAR 12.214 will be revised 
to reflect any actions that are taken by the CAS Board. Any public 
comments addressing CAS will be provided to the CAS Board for 
consideration.

List of Subjects in 48 CFR Parts 2, 10, 12, 16, and 52

    Government procurement.

    Dated: September 13, 2004.
Laura Auletta,
Director, Contract Policy Division.
    Therefore, DoD, GSA, and NASA propose amending 48 CFR parts 2, 10, 
12, 16, and 52 as set forth below:
    1. The authority citation for 48 CFR parts 2, 10, 12, 16, and 52 is 
revised to read as follows:

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

PART 2--DEFINITIONS OF WORDS AND TERMS


2.101  [Amended]

    2. Amend section 2.101 in paragraph (b) in the definition 
``Commercial item'', by removing the second sentence of the 
introductory text of paragraph (6).

PART 10--MARKET RESEARCH


10.001  [Amended]

    3. Amend section 10.001 in paragraph (a)(3)(iv) by adding ``type of 
contract,'' before the word ``terms''.
    4. Amend section 10.002 by revising paragraph (b)(1)(iii) to read 
as follows:


10.002  Procedures.

* * * * *
    (b) * * *
    (1) * * *
    (iii) Customary practices, including warranty, buyer financing, 
discounts, contract type considering the nature and risk associated 
with the requirement, etc., under which commercial sales of the 
products or services are made;
* * * * *

PART 12--ACQUISITION OF COMMERCIAL ITEMS

    5. Revise section 12.207 to read as follows:


12.207  Contract type.

    (a) Except as provided in paragraph (b) of this section, agencies 
shall use firm-fixed-price contracts or fixed-price contracts with 
economic price adjustment for the acquisition of commercial items.
    (b)(1) A time-and-materials contract or labor-hour contract (see 
Subpart 16.6) may be used for the acquisition of commercial services 
when--
    (i) The service is in a category of commercial service identified 
in paragraph (b)(2) of this section;
    (ii) The service is acquired under a contract awarded using 
competitive procedures; and
    (iii) The contracting officer--
    (A) Executes a determination and findings (D&F) for the contract, 
in accordance with paragraph (b)(3) of this section (but see paragraph 
(c) of this section for indefinite-delivery contracts), that no other 
contract type authorized by this subpart is suitable;
    (B) Includes a ceiling price in the contract or order that the 
contractor exceeds at its own risk; and
    (C) Authorizes any subsequent change in the ceiling price only upon 
a determination, documented in the contract file, that it is in the 
best interest of the procuring agency to change the ceiling price.
    (2) The following categories of services may be purchased using a 
time-and-materials or labor-hour contract:
    (i) Commercial services procured for support of a commercial item 
as defined in paragraph (5) of the ``commercial item'' definition at 
2.101.
    (ii) Any other category of commercial services that is identified 
by the Administrator of the Office of Federal Procurement Policy (OFPP) 
on the basis that--
    (A) The commercial services in such category are of a type of 
commercial services that are commonly sold to the general public 
through use of time-and-materials or labor-hour contracts; and
    (B) It would be in the best interests of the Federal Government to 
authorize use of time-and-materials or labor-hour contracts for 
purchases of the commercial services in such category.
    (3) Each D&F required by (b)(1)(iii)(A) shall contain sufficient 
facts and rationale to justify that no other contract type authorized 
by this part is suitable. At a minimum, the D&F shall--
    (i) Include a description of the market research conducted (see 
10.002(e));
    (ii)(A) Establish that it is not possible at the time of placing 
the contract or order to accurately estimate the extent or duration of 
the work or to anticipate costs with any reasonable degree of 
certainty; or
    (B) If work is sufficiently understood to allow for pricing on a 
fixed-price basis, explain why fixed pricing would unnecessarily 
inflate the Government's costs or impose unreasonable risk on the 
contractor; and
    (iii) Establish that the requirement has been structured to 
minimize the use of T&M and LH contracts to the maximum extent 
practicable (e.g., by limiting the value or length of the contract or 
order).
    (c)(1) Indefinite-delivery contracts (see Subpart 16.5) may be used 
when--
    (i) The prices are established based on a firm-fixed-price or 
fixed-price with economic price adjustment; or
    (ii) Rates are established for commercial services acquired on a 
time-and-materials or labor-hour basis.
    (2) When an indefinite-delivery contract is awarded with services 
priced on a time-and-materials or labor-hour

[[Page 56320]]

basis, contracting officers shall, to the maximum extent practicable, 
also structure the contract to allow issuance of orders on a firm-
fixed-price or fixed-price with economic price adjustment basis. In 
such contracts, the contracting officer shall execute the D&F required 
by paragraph (b)(3) of this section at the order level, for each order 
placed on a time-and-materials or labor-hour basis. Placement of orders 
shall be in accordance with Subpart 16.5.
    (3) If an indefinite-delivery contract only allows for the issuance 
of orders on a time-and-materials or labor-hour basis, the D&F required 
by paragraph (b)(3) of this section shall be executed to support the 
basic contract and shall also explain why providing for an alternative 
firm-fixed-price or fixed-price with economic price adjustment pricing 
structure is not practicable. The D&F for this contract shall be 
approved one level above the contracting officer.
    (d) The contract types authorized by this subpart may be used in 
conjunction with an award fee and performance or delivery incentives 
when the award fee or incentive is based solely on factors other than 
cost (see 16.202-1 and 16.203-1).
    (e) Use of any contract type other than those authorized by this 
subpart to acquire commercial items is prohibited.
    6. Add section 12.216 to read as follows:


12.216  Subcontracts.

    When a time-and-materials or labor-hour contract is awarded 
pursuant to 12.207(b), Alternate I to 52.212-4 is used. Alternate I 
includes a subcontract consent provision, which requires the contractor 
to obtain the contracting officer's consent prior to awarding certain 
subcontracts. The contracting officer must identify, in an addendum to 
the clause, subcontracts evaluated during negotiation, any other 
subcontracts requiring consent, and any exceptions to the standard 
consent requirements when a contractor does not have an approved 
purchasing system. The contracting officer shall consider the risk, 
complexity, and dollar value of anticipated subcontracts when 
determining the consent requirements.
    7. Amend section 12.301 in paragraph (b)(3) by adding a new second 
sentence to read as follows:


12.301  Solicitation provisions and contract clauses for the 
acquisition of commercial items.

* * * * *
    (b) * * *
    (3) * * * Use this clause with its Alternate I when a time-and-
materials or labor-hour contract will be awarded. * * *
* * * * *
    8. Amend section 12.403 in paragraph (d)(1) by revising paragraph 
(d)(1)(i);, redesignating paragraph (d)(1)(ii) as (d)(1)(iii); and 
adding a new paragraph (d)(1)(ii) to read as follows:


12.403  Termination.

* * * * *
    (d) * * *
    (1) * * *
    (i) The percentage of the contract price reflecting the percentage 
of the work performed prior to the notice of the termination for fixed 
price or fixed price with economic price adjustment contracts; or
    (ii) An amount for direct labor hours (as defined in the Schedule 
of the contract) determined by multiplying the number of direct labor 
hours expended before the effective date of termination by the hourly 
rate(s) in the Schedule; and
* * * * *

PART 16--TYPES OF CONTRACTS

    9. Amend section 16.601 by adding a sentence to the end of the 
introductory text of paragraph (b) to read as follows:


16.601  Time-and-materials contracts.

* * * * *
    (b) * * * See 12.207(b) for the use of time-and-material contracts 
for certain commercial services.
* * * * *
    10. Amend section 16.602 by adding a sentence to the end of the 
paragraph to read as follows:


16.602  Labor-hour contracts

    * * * See 12.207(b) for the use of labor-hour contracts for certain 
commercial services.

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

    11. Amend section 52.212-4 by revising the date of the clause; 
adding a new fourth sentence to the introductory text of paragraph (a) 
of the clause; and adding Alternate I to read as follows:


52.212-4  Contract Terms and Conditions--Commercial Items.

* * * * *

CONTRACT TERMS AND CONDITIONS--COMMERCIAL ITEMS (DATE)

    (a) * * * If repair/replacement or reperformance will not 
correct the defects or is not possible, the Government may require 
the Contractor to ensure that future performance conforms to 
contract requirements and may seek consideration for acceptance of 
nonconforming supplies or services. * * *
* * * * *
    Alternate I (Date). When a time-and-materials or labor-hour 
contract is contemplated, substitute the following paragraphs (a), 
(i), and (l) for those in the basic clause and add the following 
paragraph (u) to the basic clause:
    (a) Inspection/Acceptance. The Contractor shall only tender for 
acceptance those items that conform to the requirements of this 
contract. The Government reserves the right to inspect or test any 
supplies or services that have been tendered for acceptance. The 
Government may require repair or replacement of nonconforming 
supplies or reperformance of nonconforming services at no increase 
in the cost to the Government. If reperformance will not correct the 
defects or is not possible, the Government may require the 
Contractor to ensure that future performance conforms to contract 
requirements and may seek consideration for acceptance of 
nonconforming supplies or services. The Government must exercise its 
post-acceptance rights--
    (1) Within a reasonable time after the defect was discovered or 
should have been discovered; and
    (2) Before any substantial change occurs in the condition of the 
item, unless the change is due to the defect in the item.
* * * * *
    (i) Payments.--(1) Services accepted. Payment shall be made for 
services accepted by the Government that have been delivered to the 
delivery destination(s) set forth in this contract. The Government 
will pay the Contractor as follows upon the submission of commercial 
invoices approved by the Contracting Officer:
    (i) Hourly rate. (A) The amounts shall be computed by 
multiplying the appropriate hourly rates prescribed in the contract 
by the number of direct labor hours performed. Fractional parts of 
an hour shall be payable on a prorated basis if specified in the 
contract.
    (B) Invoices may be submitted once each month (or at more 
frequent intervals, if approved by the Contracting Officer) to the 
Contracting Officer or designee. When requested by the Contracting 
Officer, the Contractor shall substantiate invoices by evidence of 
individual daily job timecards or other substantiation specified in 
the contract.
    (C) Unless the Schedule prescribes otherwise, the hourly rates 
in the Schedule shall not be varied by virtue of the Contractor 
having performed work on an overtime basis. If no overtime rates are 
provided in the Schedule and overtime work is approved in advance by 
the Contracting Officer, overtime rates shall be negotiated. Failure 
to agree upon these overtime rates shall be treated as a dispute 
under the Disputes clause of this contract. If the Schedule provides 
rates for overtime, the premium portion of those rates will be 
reimbursable only to the extent the overtime is approved by the 
Contracting Officer.
    (ii) Materials costs. (A) Allowable costs of materials are 
limited to the actual cost of direct materials (less any rebates, 
refunds or discounts received by or accrued to the

[[Page 56321]]

contractor). When requested by the Contracting Officer, the 
Contractor shall substantiate any claimed materials costs by 
evidence of invoices and payment of those invoices. Direct 
materials, as used in this clause, are those materials that enter 
directly into the end product, or that are used or consumed directly 
in connection with the furnishing of the end product or service.
    (B) The Government will reimburse the Contractor for the cost of 
direct materials provided such costs are consistent with paragraph 
(i)(1)(ii)(C) and the Contractor--
    (1) Has made payments of cash, checks, or other forms of payment 
for the direct materials costs; or
    (2) Will make these payments determined due--
    (i) In accordance with the terms and conditions of an agreement 
or invoice; and
    (ii) Ordinarily within 30 days of the submission of the 
Contractor's payment request to the Government.
    (C) To the extent able, the Contractor shall--
    (1) Obtain materials at the most advantageous prices available 
with due regard to securing prompt delivery of satisfactory 
materials; and
    (2) Take all cash and trade discounts, rebates, allowances, 
credits, salvage, commissions, and other benefits. When unable to 
take advantage of the benefits, the Contractor shall promptly notify 
the Contracting Officer and give the reasons. The Contractor shall 
give credit to the Government for cash and trade discounts, rebates, 
scrap, commissions, and other amounts that have accrued to the 
benefit of the Contractor, or would have accrued except for the 
fault or neglect of the Contractor. The Contractor shall not deduct 
from gross costs the benefits lost without fault or neglect on the 
part of the Contractor, or lost through fault of the Government.
    (D) If the nature of the work to be performed requires the 
Contractor to furnish material that the Contractor regularly sells 
to the general public in the normal course of business, the price to 
be paid for such material, notwithstanding the other requirements of 
this paragraph (i)(1)(ii), shall be on the basis of an established 
catalog or list price, in effect when the material is furnished, 
less all applicable discounts to the Government, provided that in no 
event shall such price be in excess of the Contractor's sales price 
to its most favored customer for the same item in like quantity, or 
the current market price, whichever is lower.
    (iii) Subcontract costs. The Government shall reimburse the 
Contractor for the actual costs of direct subcontract costs that are 
authorized under paragraph (u), Subcontracts, of this clause, 
provided the Contractor has made or will make payments determined 
due of cash, checks, or other forms of payment to the 
subcontractor--
    (A) In accordance with the terms and conditions of the 
subcontract; and
    (B) Ordinarily within 30 days of the submission of the 
Contractor's payment request to the Government.
    (iv) Total cost. It is estimated that the total cost to the 
Government for the performance of this contract shall not exceed the 
ceiling price set forth in the Schedule and the Contractor agrees to 
use its best efforts to perform the work specified in the Schedule 
and all obligations under this contract within such ceiling price. 
If at any time the Contractor has reason to believe that the hourly 
rate payments, material costs, and subcontract costs that will 
accrue in performing this contract in the next succeeding 30 days, 
if added to all other payments and costs previously accrued, will 
exceed 85 percent of the ceiling price in the Schedule, the 
Contractor shall notify the Contracting Officer giving a revised 
estimate of the total price to the Government for performing this 
contract with supporting reasons and documentation. If at any time 
during performing this contract the Contractor has reason to believe 
that the total price to the Government for performing this contract 
will be substantially greater or less than the then stated ceiling 
price, the Contractor shall so notify the Contracting Officer, 
giving a revised estimate of the total price for performing this 
contract, with supporting reasons and documentation. If at any time 
during performing this contract the Government has reason to believe 
that the work to be required in performing this contract will be 
substantially greater or less than the stated ceiling price, the 
Contracting Officer will so advise the Contractor, giving the then 
revised estimate of the total amount of effort to be required under 
the contract.
    (v) Ceiling price. The Government shall not be obligated to pay 
the Contractor any amount in excess of the ceiling price in the 
Schedule, and the Contractor shall not be obligated to continue 
performance if to do so would exceed the ceiling price set forth in 
the Schedule, unless and until the Contracting Officer shall have 
notified the Contractor in writing that the ceiling price has been 
increased and shall have specified in the notice a revised ceiling 
that shall constitute the ceiling price for performance under this 
contract. When and to the extent that the ceiling price set forth in 
the Schedule has been increased, any hours expended and material 
costs incurred by the Contractor in excess of the ceiling price 
before the increase shall be allowable to the same extent as if the 
hours expended and material costs had been incurred after the 
increase in the ceiling price.
    (2) Access to records. At any time before final payment under 
this contract the Contracting Officer (or authorized representative) 
shall have access to the following (access shall be limited to the 
listing below unless otherwise agreed to by the Contractor and the 
Contracting Officer):
    (i) For labor hours, when the Contracting Officer has required 
timecards as substantiation for payment--
    (A) The original timecards;
    (B) The Contractor's timekeeping procedures;
    (C) Contractor reports that show the distribution of labor 
between jobs or contracts; and
    (D) Employees whose time has been included in any invoice for 
the purpose of verifying that these employees have worked the hours 
shown on the invoices.
    (ii) For material costs--
    (A) Any invoices substantiating direct material costs; and
    (B) Any documents supporting payment of those invoices.
    (iii) For subcontract costs--
    (A) The subcontract agreement;
    (B) Any invoices submitted by the subcontractor; and
    (C) Any documents supporting payment of those invoices.
    (3) Overpayments/underpayments. (i) Each payment previously made 
shall be subject to reduction to the extent of amounts, on preceding 
invoices, that are found by the Contracting Officer not to have been 
properly payable and shall also be subject to reduction for 
overpayments or to increase for underpayments. Any such reduction 
shall be promptly paid by the Contractor within 30 days, unless the 
parties agree otherwise. Any such increases shall be paid by the 
Government within 30 days, unless the parties agree otherwise. 
Payment may be made by check or as adjustment to future invoices. If 
the Contractor becomes aware of a duplicate invoice payment or that 
the Government has otherwise overpaid on an invoice payment, the 
Contractor shall immediately notify the Contracting Officer and 
request instructions for disposition of the overpayment.
    (ii) Upon receipt and approval of the invoice designated by the 
Contractor as the ``completion invoice'' and substantiating 
material, and upon compliance by the Contractor with all terms of 
this contract, any outstanding balances shall be paid within 30 
days, unless the parties agree otherwise. The completion invoice, 
and substantiating material, shall be submitted by the Contractor as 
promptly as practicable following completion of the work under this 
contract, but in no event later than 1 year (or such longer period 
as the Contracting Officer may approve in writing) from the date of 
completion.
    (4) Release of claims. The Contractor, and each assignee under 
an assignment entered into under this contract and in effect at the 
time of final payment under this contract, shall execute and 
deliver, at the time of and as a condition precedent to final 
payment under this contract, a release discharging the Government, 
its officers, agents, and employees of and from all liabilities, 
obligations, and claims arising out of or under this contract, 
subject only to the following exceptions:
    (i) Specified claims in stated amounts, or in estimated amounts 
if the amounts are not susceptible to exact statement by the 
Contractor.
    (ii) Claims, together with reasonable incidental expenses, based 
upon the liabilities of the Contractor to third parties arising out 
of performing this contract, that are not known to the Contractor on 
the date of the execution of the release, and of which the 
Contractor gives notice in writing to the Contracting Officer not 
more than 6 years after the date of the release or the date of any 
notice to the Contractor that the Government is prepared to make 
final payment, whichever is earlier.
    (iii) Claims for reimbursement of costs (other than expenses of 
the Contractor by

[[Page 56322]]

reason of its indemnification of the Government against patent 
liability), including reasonable incidental expenses, incurred by 
the Contractor under the terms of this contract relating to patents.
    (5) Refunds, rebates, and credits. The Contractor agrees that 
any refunds, rebates, or credits (including any related interest) 
accruing to or received by the Contractor or any assignee, that 
arise under the materials or subcontracts portion of this contract 
and for which the Contractor has been paid for or is aware of at the 
time of submission of the completion invoice, shall be paid by the 
Contractor to the Government. The Contractor and each assignee, 
under an assignment entered into under this contract and in effect 
at the time of final payment under this contract, shall execute and 
deliver, at the time of and as a condition precedent to final 
payment under this contract, an assignment to the Government of such 
refunds, rebates, or credits (including any interest) in form and 
substance satisfactory to the Contracting Officer.
    (6) Prompt payment. The Government will make payment in 
accordance with the Prompt Payment Act (31 U.S.C. 3903) and prompt 
payment regulations at 5 CFR part 1315.
    (7) Electronic Funds Transfer (EFT). If the Government makes 
payment by EFT, see 52.212-5(b) for the appropriate EFT clause.
    (8) Discount. In connection with any discount offered for early 
payment, time shall be computed from the date of the invoice. For 
the purpose of computing the discount earned, payment shall be 
considered to have been made on the date which appears on the 
payment check or the specified payment date if an electronic funds 
transfer payment is made.
    (l) Termination for the Government's convenience. The Government 
reserves the right to terminate this contract, or any part hereof, 
for its sole convenience. In the event of such termination, the 
Contractor shall immediately stop all work hereunder and shall 
immediately cause any and all of its suppliers and subcontractors to 
cease work. Subject to the terms of this contract, the Contractor 
shall be paid an amount for direct labor hours (as defined in the 
Schedule of the contract) determined by multiplying the number of 
direct labor hours expended before the effective date of termination 
by the hourly rate(s) in the contract, less any hourly rate payments 
already made to the Contractor plus reasonable charges the 
Contractor can demonstrate to the satisfaction of the Government 
using its standard record keeping system, have resulted from the 
termination. The Contractor shall not be required to comply with the 
cost accounting standards or contract cost principles for this 
purpose. This paragraph does not give the Government any right to 
audit the Contractor's records. The Contractor shall not be paid for 
any work performed or costs incurred which reasonably could have 
been avoided.
* * * * *
    (u) Subcontracts.--(1) Definitions. As used in this clause--
    Approved purchasing system means a Contractor's purchasing 
system that has been reviewed and approved in accordance with Part 
44 of the Federal Acquisition Regulation (FAR).
    Consent to subcontract means the Contracting Officer's written 
consent for the Contractor to enter into a particular subcontract.
    Subcontract means any contract, as defined in FAR Subpart 2.1, 
entered into by a subcontractor to furnish supplies or services for 
performance of the prime contract or a subcontract. It includes, but 
is not limited to, purchase orders, and changes and modifications to 
purchase orders.
    (2) If the Contractor has an approved purchasing system, the 
Contractor shall obtain the Contracting Officer's written consent 
only before placing subcontracts identified in an addendum to this 
clause.
    (3) If the Contractor does not have an approved purchasing 
system, consent to subcontract is required for any subcontract 
that--
    (i) Is of the cost-reimbursement, time-and-materials, or labor-
hour type; or
    (ii) Is fixed-price and exceeds--
     (A) For a contract awarded by the Department of Defense, the 
Coast Guard, or the National Aeronautics and Space Administration, 
the greater of the simplified acquisition threshold or 5 percent of 
the total estimated cost of the contract; or
    (B) For a contract awarded by a civilian agency other than the 
Coast Guard and the National Aeronautics and Space Administration, 
either the simplified acquisition threshold or 5 percent of the 
total estimated cost of the contract.
    (iii) Exceptions to this requirement may be as specified by the 
Contracting Officer in an addendum to this clause.
    (4) The Contractor shall notify the Contracting Officer 
reasonably in advance of placing any subcontract or modification 
thereof for which consent is required under paragraph (u)(2) or 
(u)(3) of this clause, including the following information:
    (i) A description of the supplies or services to be 
subcontracted.
    (ii) Identification of the type of subcontract to be used.
    (iii) Identification of the proposed subcontractor.
    (iv) Extent of competition or basis for determining price 
reasonableness.
    (v) The proposed subcontract amount.
    (vi) If a time-and-materials or labor-hour subcontract, a list 
of the labor categories, corresponding labor rates, and estimated 
hours.
    (5) The Contractor is not required to notify the Contracting 
Officer in advance of entering into any subcontract for which 
consent is not required under paragraph (u)(2) or (u)(3) of this 
clause.
    (6) Unless the consent or approval specifically provides 
otherwise, neither consent by the Contracting Officer to any 
subcontract nor approval of the Contractor's purchasing system shall 
constitute a determination--
    (i) Of the acceptability of any subcontract terms or conditions, 
or
    (ii) Relieve the Contractor of any responsibility for performing 
this contract.
    (7) No subcontract or modification thereof placed under this 
contract shall provide for payment on a cost-plus-a-percentage-of-
cost basis, and any fee payable under cost-reimbursement type 
subcontracts shall not exceed the fee limitations in FAR 15.404-
4(c)(4)(i).
    (8) The Contractor shall give the Contracting Officer immediate 
written notice of any action or suit filed and prompt notice of any 
claim made against the Contractor by any subcontractor or vendor 
that, in the opinion of the Contractor, may result in litigation 
related in any way to this contract, with respect to which the 
Contractor may be entitled to reimbursement from the Government.
    (9) Paragraphs (u)(2) and (u)(3) of this clause do not apply to 
the subcontracts, which were agreed to during negotiations, as set 
forth in an addendum to this clause.
    (10) If the Contractor enters into any subcontract that requires 
consent without obtaining such consent, the Government shall not be 
liable for any costs incurred under that subcontract prior to the 
date the Contractor obtains the required consent. Any payment of 
subcontract costs incurred prior to the date the consent was 
obtained shall be at the sole discretion of the Government.
[FR Doc. 04-21040 Filed 9-17-04; 8:45 am]
BILLING CODE 6820-EP