[Federal Register Volume 70, Number 143 (Wednesday, July 27, 2005)]
[Rules and Regulations]
[Pages 43580-43581]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-14668]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 14, 32, and 52

[FAC 2005-05; FAR Case 2004-003; Item III]
RIN 9000-AJ94


Federal Acquisition Regulation; Payment Withholding

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

ACTION: Final rule.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) have agreed on a final rule 
amending the Federal Acquisition Regulation (FAR) by removing the 
mandatory requirement that a contracting officer withhold 5 percent of 
the payments due under a time-and-materials contract, unless it is 
necessary to withhold payment to protect the Government's interest or 
otherwise prescribed in the contract schedule. The final rule also 
amends FAR guidance that requires the use of a contract modification to 
withhold payment and to state that the withhold is to be made by the 
contractor.

DATES: Effective Date: August 26, 2005.

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. Jeremy Olson, at (202) 501-3221. 
Please cite FAC 2005-05, FAR case 2004-003.

SUPPLEMENTARY INFORMATION:

A. Background

    DoD, GSA, and NASA published a proposed rule in the Federal 
Register at 69 FR 29838, May 25, 2004, with request for public 
comments. The proposed rule would permit contracting officers to use 
their judgment regarding whether to withhold payments under time-and-
materials and labor-hour contracts so that the withhold would be 
applied only when necessary to protect the Government's interests. The 
proposed rule also made it clear that normally there should not be a 
need to withhold payments when dealing with contractual release 
requirements in a timely manner. Six respondents submitted comments on 
the proposed FAR rule. Three of the six respondents supported the 
proposed rule, two of the six respondents supported it but with certain 
additional changes that would align it with the Defense Federal 
Acquisition Regulations Supplement (DFARS) rule that was published in 
the Federal Register at 68 FR 69631, December 15, 2003, and one of the 
six respondents requested clarification. A discussion of the comments 
is provided below. The Councils considered all comments and concluded 
that the proposed rule should be converted to a final rule with changes 
to the proposed rule. Differences between the proposed rule and final 
rule are discussed in Comments 1 and 2, below.

    Align With DFARS

    1. Comment: While five respondents supported the proposed rule, two 
stated that it is not consistent with the changes to relax the 
requirements included in the DFARS rule published in the Federal 
Register at 68 FR 69631, December 15, 2003. That rule stated that, if 
it was necessary to withhold payment to protect the Government's 
interest, the contracting officer would issue a modification requiring 
the contractor to withhold 5 percent of the amount due, up to a maximum 
of $50,000. One of the respondents stated the DFARS guidance should be 
applicable Governmentwide ``because requiring withholds to protect the 
interests of the Government is a serious matter, necessitating, in our 
opinion, the execution of a formal contract modification.'' In 
addition, the same respondent believes that, in most situations, it 
would be more efficient and less costly for both contractors and the 
Government if contractors take the withhold prior to submission of 
their invoices.
    Councils' response: Concur. The Councils believes that, based on 
the analysis performed for the DFARS rule, it would be more efficient 
and less costly for both contractors and the Government if contractors 
take the withhold prior to the submission of their vouchers. In 
addition, in order to make it clear that the Government is exercising 
its right to a payment withhold to protect its interests, a contract 
modification should be issued requiring the withhold of payment under 
time-and-materials and labor-hour contracts. Therefore, the Councils 
have revised the guidance at FAR 32.111(a)(7)(iii) and the clause at 
FAR 52.232-7(a)(2) to require the use of a modification to withhold 
payment and to allow for the withhold to be made by the contractor 
instead of by the Government payment office. The Councils note that 
this clause does not preclude the Government from withholding other 
amounts due to non-performance, delivery of non-conforming goods, or 
other failure(s) to comply with contract requirements.

    Task Order Versus Entire Contract

    2. Comment: A respondent stated that the proposed rule is unclear 
as to whether the $50,000 ceiling on withholding applies to an 
individual task or to an entire contract. It recommended the proposed 
rule be clarified to identify the basis for application of the ceiling. 
The respondent added that it had previously recommended in an audit 
report that the $50,000 ceiling be applied to each order where orders 
are closed separately. The respondent's recommendation is based on the 
belief that the clarification will assist contracting officers in 
performing their jobs.
    Councils' response: The Councils agree that it would assist both 
contractors and the Government if the proposed rule were clarified as 
to whether the withhold ceiling applies to an entire contract or to 
individual orders. Such a clarification would reduce any possible 
confusion by either party as to the applicability of the ceiling and 
thus remove the potential for disagreements. The Councils agree that 
the withhold ceiling applies to the entire contract. Therefore, the 
Councils have revised the guidance at FAR 32.111(a)(7)(iii) and the 
clause at FAR 52.232-7(a)(2) to clarify that the withhold ceiling 
applies to the total contract.
    This is not a significant regulatory action and, therefore, was not 
subject to review under Section 6(b) of Executive Order 12866, 
Regulatory Planning and Review, dated September 30, 1993. This rule is 
not a major rule under 5 U.S.C. 804.

B. Regulatory Flexibility Act

    The Department of Defense, the General Services Administration, and 
the National Aeronautics and Space Administration certify 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. Time-and-

[[Page 43581]]

materials or labor-hour contracts with small business represent only 
approximately 2 percent of all contracts. In addition, the rule eases 
the impact of the current FAR by permitting the contracting officer to 
use judgment in deciding whether to withhold payments, thus the number 
of contracts affected is a subset of the 2 percent figure. This change 
is expected to have a small but beneficial impact on small businesses.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the changes to 
the FAR do not impose information collection requirements that require 
the approval of the Office of Management and Budget under 44 U.S.C. 
3501, et seq.

List of Subjects in 48 CFR Parts 14, 32, and 52

    Government procurement.

    Dated: July 20, 2005.
Julia B. Wise,
Director, Contract Policy Division.

0
Therefore, DoD, GSA, and NASA amend 48 CFR parts 14, 32, and 52 as set 
forth below:
0
1. The authority citation for 48 CFR parts 14, 32, 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 14--SEALED BIDDING


14.408-3  [Amended]

0
2. Amend section 14.408-3 in paragraph (b) by removing ``See 
32.111(c)(1),'' and adding ``See 32.111(b)(1),'' in its place.

PART 32--CONTRACT FINANCING

0
3. Amend section 32.111 by--
0
a. Removing from the end of paragraph (a)(5) the word ``and'';
0
b. Removing the period from the end of paragraph (a)(6) and adding ``; 
and'' in its place;
0
c. Adding paragraph (a)(7);
0
d. Removing paragraph (b); and
0
e. Redesignating paragraphs (c) and (d) as (b) and (c), respectively.
    The added text reads as follows:


32.111  Contract clauses for non-commercial purchases.

    (a) * * *
    (7) The clause at 52.232-7, Payments under Time-and-Materials and 
Labor-Hour Contracts, in solicitations and contracts when a time-and-
materials or labor-hour contract is contemplated.
    (i) If the nature of the work to be performed requires the 
contractor to furnish material that is regularly sold to the general 
public in the normal course of business by the contractor and the price 
is under the limitations prescribed in 16.601(b)(3), the contracting 
officer shall use the clause with its Alternate I.
    (ii) If a labor-hour contract is contemplated, and if no specific 
reimbursement for materials furnished is intended, the contracting 
officer may use the clause with its Alternate II.
    (iii) If the contracting officer determines that it is necessary to 
withhold payment to protect the Government's interests, paragraph 
(a)(2) of the clause permits the contracting officer to unilaterally 
issue a modification requiring the contractor to withhold 5 percent of 
amounts due, up to a maximum of $50,000 under the contract. The 
contracting officer shall ensure that the modification specifies the 
percentage and total amount of the withhold payment. 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, as required by paragraph (f) of 
the clause.
* * * * *

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
4. Amend section 52.232-7 by--
0
a. Removing from the introductory text ``32.111(b)'' and adding 
``32.111(a)(7)'' in its place;
0
b. Revising the date of the clause; and
0
c. Revising paragraph (a)(2).
    The revised text reads as follows:


52.232-7  Payments under Time-and-Materials and Labor-Hour Contracts.

* * * * *

PAYMENTS UNDER TIME-AND-MATERIALS AND LABOR-HOUR CONTRACTS (AUG 2005)

* * * * *
    (a) * * *
    (2) Unless otherwise prescribed in the Schedule, the Contracting 
Officer 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 Contracting Officer considers necessary to 
protect the Government's interests. The Contracting Officer may require 
a withhold of 5 percent of the amounts due under paragraph (a), but the 
total amount withheld for the contract 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.
* * * * *


52.232-8  [Amended]

0
5. In the introductory text of section 52.232-8, remove 
``32.111(c)(1)'' and add ``32.111(b)(1)'' in its place.


52.232-9  [Amended]

0
6. In the introductory text of section 52.232-9, remove 
``32.111(c)(2)'' and add ``32.111(b)(2)'' in its place.


52.232-10  [Amended]

0
7. In the introductory text of section 52.232-10, remove 
``32.111(d)(1)'' and add ``32.111(c)(1)'' in its place.


52.232-11  [Amended]

0
8. In the introductory text of section 52.232-11, remove 
``32.111(d)(2)'' and add ``32.111(c)(2)'' in its place.
[FR Doc. 05-14668 Filed 7-26-05; 8:45 am]
BILLING CODE 6820-EP-S