[Federal Register Volume 70, Number 185 (Monday, September 26, 2005)]
[Proposed Rules]
[Pages 56318-56337]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-18965]



[[Page 56318]]

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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 2, 10, 12, 16, 44, and 52

[FAR Case 2003-027]
RIN 9000-AK07


Federal Acquisition Regulation; Additional Contract Types

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

ACTION: Proposed rule.

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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 implement section 1432 of the 
National Defense Authorization Act for Fiscal Year 2004. Title XIV of 
the Act, referred to as the Services Acquisition Reform Act of 2003 
(SARA), amended section 8002(d) of the Federal Acquisition Streamlining 
Act of 1994 (FASA) to expressly authorize the use of time-and-materials 
(T&M) and labor-hour (LH) contracts for certain categories of 
commercial services under specified conditions.

DATES: Interested parties should submit written comments to the FAR 
Secretariat on or before November 25, 2005, to be considered in the 
formulation of a final rule.
    Public Meeting: A public meeting will be held on Tuesday, October 
18, 2005, from 9 a.m. to 4 p.m. Eastern Time, in the GS Building 
Auditorium, 1800 F Street NW, Washington, DC 20405, to facilitate an 
open dialogue between the Government and parties interested in the 
implementation of section 8002(d). Because they are so closely related, 
the public meeting will also cover proposed rule, FAR case 2004-015, 
Payment Under Time-and-Materials and Labor-Hour Contracts. FAR case 
2004-015 is published as the next item following this publication. 
Interested parties are encouraged to attend and engage in discussions 
regarding these proposed rules.
    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 Tuesday, October 11, 
2005. Interested parties may register and submit their input 
electronically at http://www.acq.osd.mil/dpap/dars/index.htm. Attendees 
are encouraged, but not required, to register for the public meeting, 
to ensure adequate accommodations.
    Directions to the meeting can be found at the Web site. 
Participants are encouraged to check with the Web site prior to the 
public meeting to ensure the location has not been changed as a result 
of a large number of registrants. The public meeting is physically 
accessible to people with disabilities. Requests for sign language 
interpretation or other auxiliary aids should be directed to Mr. Jeremy 
Olson at 202-501-3221 at least 5 days prior to the meeting.

ADDRESSES: Submit comments identified by 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.
     E-mail: [email protected]. Include FAR case 2003-
027 in the subject line of the message.
     Fax: 202-501-4067.
     Mail: General Services Administration, Regulatory 
Secretariat (VIR), 1800 F Street, NW, Room 4035, ATTN: Laurieann 
Duarte, Washington, DC 20405.
    Instructions: Please submit comments only and cite 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 and/or business 
confidential 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. Jeremy Olson at (202) 501-3221. 
Please cite FAR case 2003-027.

SUPPLEMENTARY INFORMATION:

A. Background

    Section 8002(d) limits use of T&M and LH contracts to the following 
categories of commercial services:
     Commercial services procured for support of a commercial 
item, as described in 41 U.S.C. 403(12)(E); and
     Any other category of commercial services that is 
designated by the Administrator of OFPP on the basis that--
    1. 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
    2. It would be in the best interests of the Federal Government to 
authorize use of T&M or LH contracts for purchase of the commercial 
services in such category.
    In furtherance of its statutory responsibilities, OFPP worked in 
coordination with the Councils on a series of questions for the Advance 
notice of proposed rulemaking and notice of public meeting published in 
the Federal Register on September 20, 2004 (69 FR 56316), to obtain 
information describing how T&M and LH contracts are used commercially. 
In particular, the questions elicited information on the types of 
services that are commonly acquired on this basis and the circumstances 
under which these arrangements are used. Interested parties offered a 
variety of written observations in response to these questions. The 
public comments are discussed in greater detail below. In addition, a 
number of interested parties provided oral comments during a public 
meeting that was held on October 19, 2004, to facilitate an open 
dialogue with Government procurement policy officials.
    OFPP and several members of the Acquisition Strategy Team also 
received an oral briefing from the Government Accountability Office 
(GAO) on a survey the GAO conducted late last year to determine how 
often commercial companies use T&M and LH contracts in their commercial 
practices, either as a buyer or a provider. The GAO received 23 
responses to its survey. Some of the responses came from Fortune 500 
companies. Although responses were limited, the GAO indicated that they 
represented buying practices from a relatively wide range of 
industries, including: airline, automotive and truck manufacturers, 
automotive and truck parts, business services, communications 
equipment, computer hardware, computer services, electric utilities, 
insurance, major drugs (pharmaceutical), money center bank, non-profit 
financial services, oil and gas, regional bank, retail (grocery and 
technology), scientific and technical instruments, and semiconductor.
    OFPP made three main findings from these inputs. First, commercial 
services are commonly sold on a T&M and LH basis in the marketplace 
when requirements are not sufficiently well understood to complete a 
well-defined scope of work and when risk can be managed by maintaining 
surveillance of costs and contractor performance. Second, these same 
services are also

[[Page 56319]]

generally offered on a fixed-price basis. Third, a few types of 
services are sold predominantly on a T&M and LH basis-specifically, 
emergency repair services.
    Based on these findings, OFPP recommended to the Councils that the 
proposed rule allow an agency to purchase any commercial service on a 
T&M or LH basis if it has completed a determination and findings (D&F) 
containing sufficient facts and rationale to justify that a firm-fixed 
pricing arrangement is not suitable. OFPP stated that this conclusion 
is consistent with the statutory requirement in 8002(d) that 
contracting officers must execute a D&F that establishes that no 
contract type other than a T&M and LH contract is suitable before 
pursuing one of these arrangements. The agency would also need to 
comply with the other limitations set forth in 8002(d)-i.e., the 
service is acquired under a contract awarded using competitive 
procedures, the contract or order includes a ceiling price that the 
contractor exceeds at its own risk, and any subsequent change in the 
ceiling price is authorized 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.
    With respect to the contents of the D-F, OFPP advised the Councils 
that the rationale supporting use of a T&M or LH contract for 
commercial services should 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. As noted in the findings above, this condition 
typically appears to exist in circumstances where the private sector 
commonly turns to T&M and LH contracting. And, this condition always 
appears to exist for services that are predominantly purchased on a T&M 
and LH basis, such as emergency repair services-i.e., emergency repair 
services, by their very nature, are difficult to capture in a well-
defined scope of work and therefore are not generally conducive to 
purchase on a fixed-price basis. In addition, if the need is of a 
recurring nature and is being acquired through a contract extension or 
renewal, OFPP expects, consistent with FAR 7.104(h), that the D&F 
reflect why knowledge gained from the prior acquisition could not be 
used to further refine requirements and acquisition strategies in a 
manner that would enable purchase on a fixed-price basis. OFPP believes 
that these steps will help ensure that T&M and LH contracts are used 
only when in the best interests of the government, as envisioned by 
section 8002(d)(3)(B)(ii).
    Finally, the Councils invite the public to provide additional 
comment that might further inform OFPP's findings and conclusions. 
Respondents are encouraged to include citations, as appropriate, to 
relevant sources of information that may be used to substantiate the 
basis for the response provided.
    The Councils have shaped the proposed rule to reflect OFPP's 
recommendations.
    Comments were received from 23 respondents in response to the ANPR. 
The Councils considered all of the comments and recommendations in 
developing the proposed rule. The Councils made the following changes 
to the rule as a result of the public comments and Council 
deliberations:
    1. REVISED FAR 12.207(b) to be consistent with OFPP's determination 
not to develop a list of commercial services that are commonly sold to 
the general public on a T&M basis.
    2. REVISED FAR 12.207(b)(3) to be consistent with the requirements 
for noncommercial T&M/LH contracts and to emphasize that requirements 
should be structured so as to ``maximize the use of fixed price 
contracts'' to be consistent with the statutory language.
    3. REVISED FAR 12.301(b)(3) to prohibit tailoring of the consent to 
subcontract provisions in paragraph (u) of Alternate I of the FAR 
clause at 52.212-4 (except to require individual orders to be addressed 
individually under indefinite delivery contracts) because the Councils 
believe tailored subcontract provisions may not adequately protect the 
Government.
    4. REVISED FAR 44.303 to specify that only firm-fixed price or 
fixed-price with economic price adjustment contracts awarded for 
commercial items under FAR Part 12 are excluded from Contractor 
Purchasing System Reviews (CPSR) to assure that the CPSR includes 
commercial T&M/LH contracts thereby providing contractors the 
flexibility to award commercial T&M/LH subcontracts without the 
otherwise required subcontract consent.
    5. DELETED the language in paragraph (a) of the FAR clause at 
52.212-4 that allowed the Government to require the contractor to 
ensure future performance conforms to contract requirements because the 
Councils believe that this language is unnecessary since the Government 
already has this right through the use of a cure notice and ADD 
language to clarify that the Government may seek either ``an equitable 
price adjustment'' or ``adequate consideration'' for acceptance on 
nonconforming supplies or services.
    6. Alternate I to FAR clause 52.212-4--
    a. REVISED paragraph (a) to allow contractors to be paid for 
reperformance, without profit, up to the ceiling price to be consistent 
with the provisions for noncommercial T&M contracts, i.e., paragraphs 
(c) through (k) of the FAR clause at 52.246-6, Inspection--Time-and-
Material and Labor-Hour. However, since contracting officers will not 
necessarily know the portion of profit in the labor rates for these 
competitive awards, the Councils revised paragraph (a)(4) of the clause 
to require contracting officers to identify the portion of profit in 
the ``hourly rate'' and included a 10 percent default if not otherwise 
specified in the clause. The Councils note that 10 percent default is 
arbitrary and not necessarily representative of the actual portion of 
profit in the labor rates; however, the Councils believe it is 
advisable to establish a default for instances where contracting 
officers fail to provide a specific decrement.
    b. RELOCATED definitions previously located in paragraph (u) to 
paragraph (e) to be consistent with the new format of the basis clause 
and ADDED a new definition for ``materials'' to recognize that the term 
has different meaning for T&M contracts, i.e., materials include other 
direct and indirect costs.
    c. DELETED the requirement in paragraph (i)(1)(i)(A) that only 
permitted reimbursement of fractional hours if the contract 
specifically authorized fractional hours because the Councils believe 
contractors should be paid for fractional hours on a prorated basis.
    d. REVISED paragraph (i)(1)(i)(B) to specify that contractors shall 
substantiate subcontractor hours reimbursed at the hourly rate in the 
schedule when requested by the contracting officer and to specify the 
payment records that may be requested to substantiate the labor.
    e. REVISED the material cost provisions at paragraph (i)(1)(ii) 
to--
    1. Permit payment at the contractor's established catalog or market 
price for materials that meet the definition of a commercial item.
    2. Permit reimbursement of subcontract costs at the hourly rate 
specified in the schedule in certain situations.
    3. Delete the requirement to take all discounts, rebates, 
allowances, etc. to be more consistent with commercial practices. 
However, when the contractor receives the benefit of such discounts, 
rebates, or allowances, the Government must receive appropriate credit.

[[Page 56320]]

    4. Eliminate the ``most favored customer'' requirement to be 
consistent with the allowability provision for material costs at 
31.205-26(f).
    5. Add provisions to permit reimbursement of other direct costs on 
a cost basis only to the extent such costs are listed in the contract 
clause so the Government will know the ``types of costs'' a contractor 
might subsequently bill as other direct costs.
    6. Add provisions for reimbursement of indirect costs at a fixed 
amount to the extent such reimbursement are listed in the contract 
clause to permit reimbursement without imposing the requirements of FAR 
Part 31.
    f. REVISED the access to records provisions at paragraph (4) to 
allow the Government to review records of employee qualifications and 
changed terminology from ``records of distribution of labor'' versus 
``labor distribution reports'' to be more consistent with commercial 
practices.
    g. ELIMINATED the requirements at paragraph (i)(5) for Assignment 
of Refunds, Rebates and Credits because the Councils believe the 
applicable credits are adequately covered in paragraph (i)(1)(ii).
    h. REVISED paragraph (u)(8), to clarify that payment of subcontract 
costs incurred prior to the date of any required subcontract consent 
will only be reimbursed if the contracting officer subsequently 
provides the consent.

Disposition of Public Comments

    1. Types of Commercial Services Sold on a T&M/LH Basis.
    a. Predominately Sold on T&M or LH Basis. One commenter said that 
T&M contracts are predominately used when the work effort to complete 
is extremely difficult or impossible to determine at the time the 
contract is executed and when the customer does not have a complete 
definition of the final or expected result. Another commenter said 
commercial T&M/LH contracts are appropriate when it is not possible for 
the buyer/seller to estimate accurately the resources required for 
performing and neither party can assume the financial risks for 
performance. Another commenter said the commercial marketplace 
regularly acquires support on a fixed rate per day or hours basis. In 
addition, various commenters identified the following specific services 
as a type of commercial service predominately sold on a T&M or LH 
basis:
    1. Emergency Response.
    2. Repairs.
    3. Information Technology.
    4. Professional.
    5. System Integration.
    6. Program Management.
    7. Software Development.
    8. Facilities.
    9. Legal.
    10. Accounting and Auditing.
    11. Cleaning.
    12. Consulting.
    13. Business Advisory.
    14. Financial Management.
    15. Project Management.
    16. Training.
    17. Certain building trades (e.g., painters).
    18. Quality Assurance.
    19. Moving.
    20. Installation.
    21. Support.
    22. Engineering.
    23. Wind Tunnels.
    24. Troubleshooting.
    25. Miscellaneous Testing.
    26. Pilot.
    b. Rarely Sold on a T&M or LH Basis. One commenter said T&M/LH 
contracts are rarely used when the extent of the work effort to 
complete is clearly understood and definable, i.e., the customer is 
able to clearly and accurately define the work.
    c. Commonly Sold as Both T&M/LH and Fixed Price. One commenter said 
commonly sold commercial T&M/LH services can also be sold as fixed-
price, under different circumstances, and that the customer's ability 
to specify required services/needs should be the basis for determining 
the use of commercial T&M/LH contracts. Another commenter said 
professional architectural and engineering design services, and 
consulting services are commonly sold on both a T&M/LH and fixed price 
basis.
    Response: The Councils appreciate the public input and has fully 
considered it in formulating the types of services that are appropriate 
for commercial T&M/LH contracts.
    2. Appropriate Use.
    a. One commenter said the Government should conduct a thorough 
review of actual commercial buying practices to substantiate that T&M/
LH contracts are used in the private sector rather than assuming and 
asserting that the use of T&M/LH contracts are a standard commercial 
practice.
    Response: The FAR rule implements the statute that authorizes the 
use of T&M contracts for commercial services. The Councils note that 
the ANPR requested information from the public to better ensure that 
the implementation applies only to services that are commonly sold on a 
commercial basis as required by the statute. The Councils believe the 
public's input and the statute provide a sufficient basis for 
developing appropriate FAR coverage.
    b. One commenter said the language at FAR 12.207(b)(3)(iii) that 
minimizes the use of T&M and LH contracts to the maximum extent 
practicable comes close to defeating the purpose of the original 
legislation. The commenter also said that the rule does not convey 
Congress's intent because the SARA legislation required maximum use of 
fixed price contracts and the ANPR indicates that the D&F is to 
demonstrate that a Government requirement is described in such a way as 
to minimize the use of T&M and LH contracts.
    Response: The Councils recognize that the language should focus on 
maximizing fixed price contracts for commercial items. Therefore, the 
Councils revised the rule to establish the requirement in a way that 
will maximize the use of fixed price contracts, e.g., by limiting the 
value or length of the current T&M/LH contracts or orders.
    c. One commenter questioned the need to restrict commercial T&M and 
LH contracts to competitive circumstances because there may be 
situations where sufficient controls are in place to acquire services 
using procedures other than competition.
    Response: Section 1423 of Public Law 108-136 stipulates commercial 
T&M and LH contracts must be made on a competitive basis.
    d. One commenter recommended that the Councils clarify that the 
fair opportunity requirements of FAR 16.505 apply to commercial task 
order T&M contracts.
    Response: The provisions at FAR 16.505 apply to commercial task 
order T&M contracts. Nothing in this rule requires that each task order 
be subject to full and open competition.
    e. One commenter said the FAR Council solicited responses at the 
public meeting regarding whether commercial services task orders 
awarded on a noncompetitive basis should be eligible to be awarded 
under T&M/LH vehicles. The commenter has legal and policy objections to 
sole-source procurements being awarded under T&M/LH vehicles since SARA 
extended only to competitive procurements.
    Response: The Councils acknowledge noncompetitive contract awards 
were discussed at the public meeting; however, noncompetitive awards 
were only discussed to obtain input on what constitutes competition. As 
stated in the ANPR and the rule, the awards must be made on a 
competitive basis.
    f. One commenter said that use of competition and a ceiling does 
not adequately protect the Government from abuse because competition is 
an ``illusionary protection'' as

[[Page 56321]]

demonstrated by the General Services' schedules and task orders under 
IDIQs since ``in practice, they are mostly awarded on a sole source 
basis.''
    Response: The commenter is concerned about compliance with the rule 
rather than promulgation of the rule itself. The rule requires use of 
competition in accordance with the statutory requirement for use of T&M 
contracts for commercial services. The commenter did not state that 
true competition is a problem, but merely assumes that such competition 
will not be obtained, i.e., procuring components will not comply with 
the FAR requirements. Issues regarding compliance with the FAR are 
beyond the scope of the Councils; however, the Councils note that the 
assumption in promulgating the FAR is that it will be properly applied.
    g. One commenter recommended eliminating the phrase ``of a type'' 
in FAR 12.207(b)(2)(ii)(A) since it cannot be uniformly defined and is 
confusing. The commenter believes eliminating the phrase will ensure 
that the services being purchased are truly commercial and not just a 
stretch of someone's imagination.
    Response: The term ``of a type'' is part of the regulatory 
definition of a commercial item and also part of the statutory 
requirement that provides for use of T&M contracts for commercial 
items. Therefore, the Councils believe it is not appropriate to 
eliminate this phrase from this rule or FAR.
    h. One commenter said the rule should limit services bought on T&M 
and LH contracts under FAR Part 12 to those that are truly commercial 
in nature and commonly sold in the commercial markets and restrict the 
use of commercial item T&M/LH contracts for requirements with large 
material components.
    Response: The rule restricts the use to commercial services that 
are commonly sold to the general public through use of a T&M/LH 
contract. The Councils agree a commercial T&M/LH contract may not be 
the most suitable contract type when material costs are a significant 
cost of the acquisition. However, the Councils believe imposing strict 
limits on the material component would unnecessarily restrict the 
contracting officer's flexibility and discretion when responding to a 
specific requirement. The Councils note that the rule adopts the same 
procedures for noncommercial T&M contracts in FAR Subpart 16.6.
    i. One commenter said the definition of what qualifies as a 
commercial service should be broad in scope and recommended requiring 
an affirmative determination by the contracting officer instead of 
developing a comprehensive list. Another commenter recommended adding 
the type(s) of service to a general list of subject areas to be 
considered when choosing a T&M or LH contract but not adding examples 
(consulting, training, etc.) because doing so might result in premature 
decisions for T&M or LH applicability. Another commenter recommended 
using broad categories, such as Federal supply codes or three-digit 
NAICS, so as not to limit implementation of public law because there 
are innumerable services that could be procured on a T&M/LH basis. 
Conversely, one commenter recommended adding a clear definition of 
commercial service with concrete examples. Another commenter said SARA 
requires OFPP to formulate a list of services typically sold on a T&M/
LH basis commercially and that the list is needed because some 
contracting officers may be limited in their ability to properly 
determine whether the service could be bought on a T&M/LH basis. 
Another commenter said the rule should not go beyond the statutory 
language in describing the type of service(s) that may be procured 
under T&M contracts. Another commenter said the rule is incomplete 
because the rule authorizes use of T&M/LH contracts to acquire any 
other category of commercial services identified by OFPP but the rule 
does not identify where the OFPP determination will be posted or how it 
will be communicated to agencies.
    Response: The Council note that many of the attendees at the public 
meeting expressed the view that a comprehensive list of commercial 
services would be overly restrictive and impractical. The Councils 
agree that developing and maintaining a comprehensive list is not 
practical or feasible because many services may be sold on both a T&M/
LH and fixed price basis depending on the circumstances of the 
acquisition. Further, the Councils note that the ANPR did not identify 
a location for the ``OFPP determination'' because the Councils intended 
to revise the rule when OFPP made its determination. As OFPP has now 
made its determination, the Councils revised the rule to reflect that 
determination, i.e., the rule allows agencies to purchase any 
commercial service on a T&M/LH basis when the agency has completed a 
D&F containing sufficient facts and rationale to justify that a FFP 
arrangement is not suitable.
    j. One commenter said the term ``predominantly'' should not be used 
in lieu of the term ``commonly'' since they have distinctively 
different meanings.
    Response: The Federal Register notice requested input on T&M 
services ``predominately'' and ``commonly'' sold on a T&M/LH basis to 
obtain additional insight into the use of T&M contracts for commercial 
services. The Councils agree the terms have different meaning and notes 
that the term ``predominately'' is not used in the provisions discussed 
in the ANPR or the rule.
    k. One commenter suggested adding the ``type of work'' or ``type of 
skills needed'' to the list of considerations for deciding whether 
other contract types authorized by FAR 12.207 are suitable instead of 
limiting the determination to situations where it is not possible at 
the time of award to estimate accurately the extent or duration of work 
stating many times the Government's requirements quickly evolve after 
award. Another commenter said the rule should not adopt the rule in the 
GSA Multiple Award Schedule because T&M and LH contracts are 
advantageous to the Government since profit is defined and limited. 
Another commenter recommended revising the coverage at FAR 
12.207(b)(3)(ii)(A) for when a T&M/LH contract is suitable by inserting 
either the word ``some'' or ``certain'' in front of the word ``costs'' 
at the beginning of the fifth line to specify that only ``some'' or 
``certain'' costs cannot be anticipated with a reasonable degree or 
certainty since contracting officers are required to determine that the 
contract award amount is fair and reasonable. Three commenters said the 
situations when T&M/LH contracts can be used should be the same for 
commercial and noncommercial acquisitions.
    Response: The ANPR language at FAR 12.207(b)(3)(ii)(B) that would 
have allowed use of commercial T&M/LH contracts when the work is 
sufficiently understood to allow for fixed pricing was intended to 
clarify that there were only two pricing arrangements for commercial 
items, fixed price (i.e., firm-fixed price and fixed price with 
economic price adjustment) and T&M/LH. The Councils agree the 
situations for appropriate use of commercial T&M/LH contracts should be 
the same as the situations that permit noncommercial T&M/LH contracts. 
As the additional language appears to have caused confusion, the 
Councils eliminated the requirements at FAR 12.207(b)(3)(ii)(B). The 
rule is now identical to the requirements to FAR Subpart 16.6 
(noncommercial) and MAS special ordering procedures which restrict T&M 
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 
to

[[Page 56322]]

anticipate costs with any reasonable degree of confidence.
    l. Two commenters said the Government should not assume that T&M 
contracts can only be used when the entire effort is T&M since 
contracts that are predominately firm-fixed price can also include T&M 
items.
    Response: Neither the FAR, nor this rule, preclude the use of 
``hybrid'' contracts, i.e., contracts with mixed contract types. 
Therefore, additional authority is not needed. However, the Councils 
note that contracting officers must adequately document why no other 
contract type is suitable for the T&M portion of the contract in the 
supporting D&F.
    m. One commenter said offerors should be allowed the flexibility to 
propose both fixed price and T&M solutions and that the contracting 
officer could analyze and decide which offer is most cost effective and 
advantageous to the Government.
    Response: The Councils believe contracting officers will conduct 
adequate market research to determine the appropriate contract type and 
notes that T&M contracts are only authorized when no other contract 
type is suitable. The solicitation must identify the anticipated 
contract type so offerors will know the terms and conditions that apply 
to the solicitation and can price their offers accordingly. 
Additionally, the solicitation must specify the evaluation factors that 
will be used to determine the successful offeror so that all offerors 
are on equal footing since evaluation factors, like proposed prices, 
vary depending on the contract type. The Councils note that existing 
FAR provisions allow contracting officers to solicit alternate 
proposals.
    n. One commenter noted that T&M contracts represent more risk to 
the buyer than firm fixed price contracts and said differences in 
Federal and State court interpretations of critical performance 
aspects, especially the ability of the buyer to enforce firm 
deliverables and warranties, may explain why the rule limits the use of 
T&M or LH contracts to when ``no other contract type is suitable.'' The 
commenter said that Federal courts have often found that the buyer 
cannot enforce firm deliverables or warranties under T&M and LH 
contracts, which makes these contract types inherently risky for the 
Government. Conversely, State courts, applying the principles of the 
Uniform Commercial Code, typically do not make distinctions between 
T&M/LH and FFP contracts in regard to the buyer's rights to firm 
deliverables and warranties. The commenter further recognized that a 
continued bias in favor of fixed price contracts for acquisition of 
commercial services under FAR Part 12 is in order. However, the 
commenter recommended that the Councils fully understand the important 
distinctions made by the Courts before implementing the rule.
    Response: The Councils agree that T&M contracts comprise the 
highest contract type risk to the Government. As such, they should only 
be used when no other contract type is suitable. The Councils recognize 
there are Court opinions regarding deliverables and warranties. 
However, the issue of deliverables and warranties does not factor into 
the decision to use a T&M contract. The key factor in deciding to use a 
T&M contract is the ability to accurately estimate the extent or 
duration of the work or anticipate costs with any reasonable degree of 
certainty.
    o. One commenter said there is a clear separation between projects 
that are obviously suited for FFP (defined scope development or 
implementation) and those suited for T&M (design consulting services, 
quality assurance, security, auditing, etc.) and that there is little 
chance that the rule would drive contracts away from FFP.
    Response: Since commercial T&M contracts are not currently 
authorized by the FAR, the Councils are unable to determine whether the 
rule will ``drive contracts away from FFP.'' In accordance with the 
rule, T&M/LH contracts are only authorized when the contracting officer 
determines that no other contract type is suitable which should assure 
that the rule does not ``drive contracts away from FFP''.
    p. One commenter said contracting officers should be provided 
guidance on sources and specific instructions for conducting market 
research to evaluate options and rationale for not using fixed-prices 
for delivery of services.
    Response: The discussion of market research is included in FAR Part 
10, Market Research. The FAR does not provide specific instructions or 
sources for conducting market research since this will vary with 
different types of acquisitions. Such specific instructions and sources 
are more appropriately contained in agency training materials and 
guidance.
    q. One commenter said the rule should be revised to emphasize that 
market research is performed to establish why T&M is the appropriate 
contract type for a particular requirement. Another commenter said the 
market research procedures in FAR Part 10 will be an effective way to 
determine whether it is feasible to purchase services on a fixed-price 
basis or a T&M/ LH basis. Another commenter said market research should 
be limited to a determination of whether the desired services are 
commercial which could result in solicitation of both fixed-price and 
T&M contracts. Another commenter noted that contracting officers should 
rely on market analysis to identify services typically sold 
commercially since market analysis, coupled with documentation that the 
scope or duration of work is not sufficiently clear, should be 
sufficient to establish that a fixed-price contract is not suitable.
    Response: The Councils agree market research is an effective way to 
determine whether purchases can be made on a T&M/LH or FFP basis and 
notes that the ANPR and the proposed rule require agencies to determine 
commercial practices, including contract type, during market research. 
The Councils do not believe additional coverage is needed.
    r. One commenter recommended revising FAR Parts 7 and 37 to require 
Government personnel to evaluate the existing requirements and market 
conditions and adapt the strategy needed to address them.
    Response: Government personnel are required to conduct market 
research, which includes evaluating the existing requirements and 
market conditions, to determine the most suitable approach to 
acquiring, distributing, and supporting the needed supplies or 
services. The Councils do not believe additional coverage is needed.
    s. One commenter recommended that the Councils amend Part 12 to 
exclude applied research since established catalog or market prices 
cannot exist because the primary objective of this type of research is 
to advance scientific knowledge not yet existing in the marketplace. 
The commenter noted that the Deputy Inspector General for Auditing had 
previously identified the inappropriate use of FAR Part 12 in 
procurement of applied research in Report No. D2001-051, ``Use of 
Federal Acquisition Regulation (FAR) Part 12 Contracts for Applied 
Research,'' dated February 15, 2001.
    Response: Applied research is a service that is performed on a T&M/
LH basis in the commercial marketplace. The acquired scientific 
knowledge is the result of the research services.
    t. One commenter said contracting officer should be given 
discretion in making an award on the basis of an overall evaluation of 
the proposal, which presumably includes rates, technical approach to 
performing the work, price, etc., and that price alone should not be 
the deciding factor.

[[Page 56323]]

    Response: The Councils agree that price alone is not necessarily 
the sole or key factor in making an award. However, the rule does not 
need to be changed since FAR Part 12 already requires the contracting 
officer to use the provisions in FAR 15.101 and 15.304, which provide 
criteria to be used in making the award. The criteria states that the 
relative importance of price will vary with different types of 
acquisitions.
    u. One commenter believes award fees and performance or delivery 
incentives fees provisions at FAR 12.207(d) should only be used in 
contracts for commercial services when use of such fees are consistent 
with commercial practices.
    Response: The Councils see no reason to limit the use of award fees 
and performance or delivery incentives to be consistent with commercial 
practices. The Government uses award fees and incentives to motivate 
contractor efforts that might not otherwise be emphasized in order to 
meet specific acquisition objectives. While the use of award fees and 
incentives may not be customary in all commercial industries, the 
Councils believe similar incentives are generally used in the 
commercial marketplace when appropriate.
    v. One commenter encouraged the ``abandonment of CPFF contracts for 
commercial services in favor of T&M'' and urged approval of the rule.
    Response: Cost type commercial contracts are prohibited by statute.
    w. One commenter at the public meeting said the rule should apply 
only at the prime contract level since the commercial sector does not 
compete awards at the subcontract level.
    Response: The rule does not change how commercial contractors price 
subcontracts. As always, commercial contractors can use T&M contracts. 
However, the Councils believe commercial contractors often award 
subcontracts on a competitive basis.
    x. One commenter at the public meeting asked how contracting 
officers determine what is ``in scope'' for the purpose of issuing 
change orders since T&M contracts do not always specify an outcome.
    Response: The procedures for determining what is ``in scope'' for 
commercial T&M contracts are the same as those used for noncommercial 
T&M contracts. While T&M contracts do not always specify an outcome, 
they do specify the contract requirements. Determining whether the 
change is ``in scope'' or ``out of scope'' will be based on the 
requirements in the contract. The Councils note that work is within the 
scope of the contract if it is regarded as having been fairly and 
reasonably within the contemplation of the parties when the contract 
was entered into.
    y. One commenter at the Public Meeting asked if fixed-price 
contracts with prospective price redetermination contracts could serve 
the same purpose for many contracts that are awarded on a T&M basis.
    Response: Fixed-price contracts with prospective price 
redeterminations may be used in acquisitions of quantity production or 
services when it is possible to negotiate a fair and reasonable firm 
fixed price for an initial period, but not for subsequent periods of 
contract performance (see FAR 16.205-2). Conversely, a T&M contract can 
only be used when 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 (see FAR 
16.601(b)). The appropriate contract type will be based on the specific 
circumstances of the acquisition.
    3. Determination and Finding (D&F).
    a. One commenter said the requirement for a D&F for every CLIN or 
order would be unduly burdensome to contracting officers and instead 
recommended revising the acquisition planning process and associated 
documentation requirements to address the possibility or probability 
for using T&M and LH based on the analysis of the requirement and 
market research. Another commenter said a D&F is needed for each task 
order. Another commenter said that the rule could be drafted to make it 
less onerous for developing and approving D&Fs and that the requirement 
for a D&F for each order when the IDIQ contract provides for both FP 
and T&M orders would be redundant and wasteful and that it is not 
necessary to require approval one level above the contracting officer 
for a D&F for an IDIQ authorizing only T&M and LH contracts. Another 
commenter said separate D&Fs should be issued for each task order under 
an IDIQ contract when all task orders will be issued as T&M/LH. Another 
commenter said a D&F should be executed by the contracting officer only 
as currently required under the FAR, i.e., a D&F should not be required 
for each order.
    Response: The Councils note that there is no requirement for a D&F 
for each CLIN and that there is no requirement for a D&F for fixed 
price orders. The Councils acknowledge that the proposed rule contains 
additional requirements for commercial T&M/LH IDIQ D&Fs than those 
required for noncommercial T&M/LH IDIQ D&Fs. While the Councils 
recognize these additional requirements may be more burdensome, the 
Councils believe the additional requirements are needed to encourage 
the preference for the use of fixed price contracts for commercial 
items as required by the statute.
    b. One commenter said the rule should make clear that a D&F will 
not be required prior to issuing a solicitation inviting both fixed 
price and T&M/LH proposals and that a D&F should only be required if 
the ultimate award is T&M or LH. Three commenters recommended setting a 
D&F threshold to limit the burden for small dollar acquisitions.
    Response: FAR 12.207(b)(1) only requires a D&F before award. It 
does not require a D&F before issuance of a solicitation. The Councils 
also note that statute requires a D&F for T&M/LH contracts regardless 
of the dollar amount.
    c. One commenter suggested adding a requirement for the D&F to 
address the specific reasons why a FFP contract was eliminated instead 
of allowing high-level generalities as explanations. The commenter also 
said the D&F should explain the boundaries of the requirement so the 
performance risk to the Government is reduced or the contract value or 
contract length is limited. Another commenter recommended changing the 
word suitable to a phrase more like ``a determination and findings 
(D&F) that the use of commercial items is not suitable if it is not 
used''.
    Response: The content of a D&F is addressed in the rule at FAR 
12.207(b). The rule requires that ``each D&F shall contain sufficient 
facts and rationale to justify that no other contract type authorized 
by this part is suitable.'' The Councils believe the rule provides 
adequate guidance to contracting officers as to the required content of 
the D&F. Sufficient facts and rationale include any necessary 
information regarding contract value and length. The D&F required by 
the statute and the rule relate to contract type only and not the 
determination of whether ``use of commercial items is not suitable.''
    d. One commenter said the D&F process appears to be adequate and 
appropriate but the commenter recommended adding a requirement to 
analyze the need to definitively control the profit level when 
determining whether a fixed price contract is appropriate.
    Response: The ``need to definitively control the profit level'' is 
not a criterion for determining whether a fixed price contract is 
suitable. T&M/LH contracts are only used ``when it is not possible at 
the time of placing the

[[Page 56324]]

contract to estimate accurately the extent or duration of the work or 
to anticipate costs with any reasonable degree of confidence.''
    e. One commenter recommended adding a requirement to FAR 
12.207(b)(1) for the contracting officer to obtain higher-level D&F 
approval before taking any actions to extend or renew the contract 
beyond five years because the Deputy Inspector General for Auditing has 
previously identified problems with service contracts such as T&M/LH 
contracts that have been extended or renewed for 10, 20, and even 30 
years with no attempt to use available historical information to 
transform the T&M/LH contract to FFP.
    Response: The Councils believe current FAR provisions adequately 
cover the commenter's recommendations. Actions to extend the contract 
or order beyond the limits established in FAR 17.204(e) require 
approval in accordance with agency procedures. In addition, FAR 
7.103(r) requires that agency heads ensure that knowledge gained on 
prior acquisitions is used to further refine requirements and 
acquisition strategies. Furthermore, the rule requires that actions be 
taken to maximize the use of fixed price contracts, including limiting 
the contract length for T&M/LH contracts.
    4. Payment.
    a. One commenter asked the Councils to consider revising the last 
sentence of FAR 52.212-4, Alternate I (a)(i)(B) (sic, paragraph 
(i)(1)(i)(B)) from ``or other substantiation specified in the 
contract'' to ``or other substantiation required by the contracting 
officer'' because the commenter believes that the specific type of 
substantiation necessary may not be apparent until after award.
    Response: The Councils do not believe it would be prudent to leave 
the contract terms open to the unilateral discretion of the contracting 
officer. The Councils believe it is imperative for commercial 
contractors to know what will be required to receive reimbursement. 
Leaving the contract terms open-ended will discourage competition and 
possibly lead to disputes. Should the parties agree after contract 
performance has begun that additional or alternative substantiation is 
needed, the contract can be appropriately modified.
    b. One commenter said payment of partial hours should not be 
dependent on specific language allowing payment and recommended payment 
for work performed unless the contract specifically provides otherwise.
    Response: The Councils agree that partial hours should be paid on a 
pro-rated basis and revised the rule to provide for payment of partial 
hours on a pro-rata basis.
    c. One commenter said the Government's unilateral right to dispute 
a payment and withhold money under the Overpayments/Underpayments 
portion of the clause is inconsistent with commercial practices and 
that disputes should be subject to the Contracts Disputes procedures.
    Response: The Councils believe that the rule is consistent with 
commercial practices since commercial companies withhold payments when 
the supplier does not comply with the terms of the contract. The 
Councils note that the Overpayments/Underpayments provisions protect 
both the Government and contractors and those contractors have full 
rights under the disputes clause of the contract to file claims and 
recover monies, including applicable interest.
    d. One commenter said the payment clause on withholds for non-
commercial T&M contracts at FAR clause 52.232-7 is not appropriate for 
commercial T&M contracts and the proposed payment provisions in 
paragraph (i) of the proposed alternate clause are acceptable.
    Response: The Councils agree that withhold provisions at FAR clause 
52.232-7 are not necessary for commercial T&M contracts and notes that 
the rule, like the ANPR, does not include the withhold provisions.
    e. One commenter said it is common for a contractor to subcontract 
for labor categories when the contractor does not have the labor 
category identified in the contract and questioned what the contractor 
will be permitted to bill and what the Government will be required to 
pay the contractor for subcontract labor, i.e., schedule rates or 
actual costs. The commenter also said clear guidance is needed on how 
to treat subcontract labor costs for both commercial and non-commercial 
T&M/LH contracts. Another commenter said the common commercial practice 
is to negotiate and pay vendors one hourly rate per labor category 
regardless of whether the work is performed by the prime or 
subcontractor employees, i.e., ``blended rates'' which include 
subcontract rates.
    Response: The Councils believe that the contract should clearly 
address how the contractor will be reimbursed for subcontract costs and 
revised the rule to provide for reimbursement of subcontractor costs at 
actual cost unless the contract specifies that the subcontract cost are 
reimbursable at the hourly rates prescribed in the schedule.
    5. Ceiling Price.
    a. One commenter said the not-to-exceed (NTE) requirements of the 
proposed rule and continued auditing of labor rates and internal costs 
by DCAA make long-standing fears about T&M contracts unrealistic.
    Response: T&M contracts will continue to comprise the highest 
contract type risk to the Government since they provide the least 
incentive for contractors to perform efficiently and economically. The 
NTE ceiling for commercial T&M contracts, like the ceiling for non-
commercial T&M contracts, simply limits the Government's risk. The 
Councils note that, like non-commercial T&M contracts, labor hours and 
not labor rates are subject to Government audit after contract award. 
The Councils further note that the Government's audit rights under the 
rule are limited to verification of labor hours and employee 
qualifications (when reimbursed on an actual cost basis), direct 
material, subcontract, and other direct costs.
    b. One commenter said the ceiling prices may be established with 
the expectation of completion even if the contractor exceeds the 
ceiling price. Another commenter said the provision will encourage 
contractors to perform services on the Government's ``promise'' to 
extend ceiling prices thereby creating additional disputes and 
controversies. The same commenter also said that the Government should 
increase the ceiling price on a timely basis because the commenter 
believes the provisions that allow contractors to be paid after the 
fact for services provided prior to the obligation of money may violate 
the Anti-Deficiency Act (ADA).
    Response: The provisions in the rule for commercial T&M contracts, 
like those for non-commercial T&M contracts, clearly state that the 
Government is not obligated to pay, and the contractor is not obligated 
to perform, after the ceiling price is reached. The Councils recognize 
that some contractors have continued to perform on noncommercial T&M 
contracts beyond the established ceiling based on a Government 
employee's belief that the ceiling price will be increased and agrees 
that this practice has led to many disputes and controversies. The 
Councils agree that the Government should increase the ceiling price on 
a timely basis when the Government intends to continue performance 
beyond the existing ceiling price and notes this is why contractors are 
required to notify the Government when they expect to exceed 85 percent 
of the ceiling price. The ADA prohibits the Government from taking any 
action to obligate the Government prior to obligating sufficient funds 
to the contract. The Councils further agree that

[[Page 56325]]

these provisions may result in a contractor being paid after the fact 
for services provided prior to the obligation of additional funds to 
increase the ceiling. However, since the Government has no obligation 
to pay for services rendered after the ceiling is reached and before 
additional monies are obligated, there is no ADA violation. After 
additional funds are obligated, the issue is allowability.
    c. One commenter said requiring the contractor to track and report 
costs against a NTE value is inconsistent with commercial practices and 
that changes to its business systems to accommodate these government-
unique requirements would not likely be justified since commercial 
customers do not need a ceiling price or notification of 85 percent of 
the NTE. The commenter said that the incentive to deliver high-quality 
support services at a reasonable price in the commercial marketplace is 
to retain a competitive advantage and maintain a reputation for 
responsive, high quality customer support. Another commenter said the 
provisions requiring notification to the Government when contractors 
believe they may exceed 85 percent of the ceiling price or that the 
total price to the Government will be substantially greater or less 
than the ceiling price in the contract makes the commercial provider 
responsible for Government management of the contract and requires 
systems and reports that are inconsistent with commercial practices. 
The commenter said this is a shift of responsibility and costs without 
justification and that commercial contractors are at risk since breach 
of this provision can result in non-payment for services rendered. 
Another commenter recommended not requiring ceiling prices when 
contracting under emergency procurement procedures.
    Response: The Councils recognize there may be unique situations in 
the commercial marketplace where commercial companies agree to open 
ended commitments; however, statute prohibits the Government from doing 
so. As discussed in b above, the Government is prohibited from taking 
any action that obligates the Government prior to obligating sufficient 
funds to the contract. The same is true even for emergency 
procurements. The Councils note that these provisions also protect 
contractors from nonpayment for services rendered by ensuring 
sufficient funds are available if the contracting officer determines 
the ceiling price should be increased. Unless notified by the 
contractor, the Government will have no way of knowing when the 
contractor will exceed the ceiling since the Government does not know 
the price for work performed and not billed or the price of work 
planned to be performed in the current period. While systems and 
reports will vary between commercial providers, the Councils believe 
commercial providers generally track and measure performance against 
negotiated contract values and can therefore report projected 
expenditures and cumulative services rendered.
    d. Another commenter said the ceiling price should equal the 
available funds since the total contract costs cannot be reasonably 
determined with any degree of confidence.
    Response: The ceiling price is required by statute. While 
establishing a ceiling price is not an exact science, the ceiling 
represents the Government's best estimate of the contract price. If the 
estimated price increases during contract performance, the contracting 
officer will only obligate additional funds when it is in the 
Government's best interest to do so.
    6. Advance Consent for Overtime. One commenter said the advance 
consent for payment of overtime is inconsistent with commercial 
practice and that commercial customers expect repair teams to work as 
necessary to complete repairs expeditiously. Another commenter believes 
that commercial standards should be utilized for overtime payment 
because requiring the contracting officer to approve overtime may delay 
the project and end up costing the Government more than results from 
contracting officer approval.
    Response: The Councils believe the consent is needed to ensure 
overtime is only used when the Government agrees the additional costs 
of overtime are justified and necessary to meet the Government's 
objective. The clause provides the flexibility for the contracting 
officer to authorize overtime at the time of contract award if deemed 
necessary to meet essential delivery and performance schedules; make up 
for delays beyond the Contractor's control; or to eliminate extended 
production bottlenecks or project delays.
    7. Materials Costs.
    a. Material Handling. One commenter recommended using loaded rates 
or a fixed charge to allow contractors to recover material handling and 
subcontract administration costs without imposing the requirements of 
FAR Part 31. Another commenter said reimbursing contractors for 
material handling does not violate the cost plus a percentage of cost 
prohibition imposed by Congress because the material handling costs are 
not a ``fee'' of the type Congress prohibited. Another commenter said 
instead of using a percentage markup, which raises cost plus percentage 
of cost contracting concerns, the rule should permit the contractor to 
charge the Government a fixed fee for providing material that will 
compensate the contractor for its indirect costs. Another commenter 
said since the work is being awarded competitively, the rule should 
allow contractors to mark up their subcontractor's T&M or LH service 
rates as long as the amount of the mark-up is fully disclosed to the 
government and the total rate, including the mark-up, does not exceed 
the contractor's own rate for the same service thereby avoiding the 
application of Part 31 and concerns over cost-plus-percentage-of-cost 
contracting. Another commenter said material handling and subcontract 
administration costs are normally marked up a percentage rate as 
mutually agreed to and negotiated by the contractor and client. Two 
other commenters said customers are charged the catalog price that 
includes material handling charge. One commenter said basing material 
handling or subcontract administration fees on actual costs is rare in 
the commercial marketplace. Another commenter said that many commercial 
contractors do not add a separate material handling fee or subcontract 
administration costs on top of their fully burdened labor rates. 
Another commenter said payment of separate indirect rates for material 
and subcontracts should not be allowed for commercial purchases. 
Another commenter said contractors that are otherwise CAS covered will 
have to allocate the indirect cost for the direct materials on FAR Part 
12 T&M contracts to those contracts even though the contractor will not 
be paid for the indirect costs and will suffer an overall loss. Another 
commenter concurred with the ANPR's proposed prohibition on mark-ups on 
materials costs.
    Response: The comments reflect a varying set of commercial 
practices for material handling and subcontract administration costs. 
The Councils believe it is important to provide as much flexibility as 
possible without violating the cost plus percentage of cost 
prohibition. The Councils believe use of a fixed rate violates the cost 
plus percentage of cost contract prohibition. Therefore, the rule does 
not permit application of a fixed rate. The Councils believe use of a 
fixed amount may be appropriate and revised the rule accordingly. 
However, the fixed amounts for indirect costs should exclude any 
amounts already included in the schedule labor rates. Finally, the

[[Page 56326]]

Councils note that while the ANPR did not permit direct reimbursement 
for material handling, nothing in the ANPR or rule prevents contractors 
from including material handling in the fully burdened labor rates.
    b. Most Favored Customer Terms. One commenter cautioned against use 
of the mandated ``most favorable customer'' terms for materials the 
contractor sells rather than purchasing from outside vendors. Another 
commenter said the ``most favored customer'' price clauses pose 
numerous compliance risks to industry and are inconsistent with 
commercial practices. The commenter said it cannot ensure that the 
catalog price for a part is no higher than the market price or the 
``most favored customer'' price.
    Response: The Councils note ``most favored customer'' pricing is 
consistent with the provisions for noncommercial T&M/LH contracts but 
not consistent with the general allowability provisions for material 
costs at FAR 31.205-26(f) and that the Councils are currently 
considering changes to the provisions for noncommercial T&M contracts. 
The Councils believe the provisions at FAR 31.205-27(e) are more 
appropriate for commercial contracts and revised the rule to permit 
reimbursement at the catalog or market price when the materials 
furnished by the contractor meet the definition of a commercial item at 
FAR 2.101. In addition, the Councils note that the ANPR failed to 
address interdivisional transfers. The Councils also revised the rule 
to specify the procedures for interdivisional transfers on commercial 
T&M/LH contracts consistent with the provisions of FAR 31.205-26(e).
    c. Most Advantageous Pricing. One commenter said requiring ``most 
advantageous prices'' for purchases of material from outside vendors is 
inconsistent with commercial practices and the Government's own ``best 
value'' requirement. The commenter believes Government auditors will 
interpret ``most advantageous'' to mean lowest price when there are 
sound business reasons to procure from other than lowest price. The 
commenter said when prices are set by the initial competition, no 
further Government action should be taken. Further, the commenter said 
if the Government is concerned about product pricing, the Government 
should furnish the materials to the contractor so the Government, and 
not the contractor, will incur the unnecessary costs and risks 
associated with the proposed standards of most advantageous prices.
    Response: The Councils believe the rule is consistent with 
commercial practices and the Government's ``best value'' determination 
because the rule, like commercial practice and the best value 
determinations, considers factors other than lowest price, i.e., prompt 
delivery and quality materials. Since the rule specifically identifies 
factors other than lowest price, the Councils believe Government 
auditors will properly consider these other factors. In addition, the 
Councils agree additional Government action would not be needed if the 
material prices were set by the initial competition; however, the 
material price for commercial T&M contracts are not set at time of 
contract award. Instead, the Government reimburses contractors based on 
actual costs or catalog or market prices for the materials furnished by 
the contractors. Finally, the Councils do not believe contractors will 
incur additional costs or risks to buy materials at the most 
advantageous price because the Councils believe commercial companies 
already consider the price, quality, and availability before acquiring 
materials. The rule requires the contractor to obtain materials at the 
most advantageous prices ``to the extent able.''
    d. Refunds. One commenter said requiring contractors to give the 
Government credit for cash and trade discounts, rebates, scrap, 
commissions, and other amounts that have accrued to the benefit of the 
contractor is inconsistent with commercial practices. The commenter 
also said commercial companies apply commercial pricing standards for 
its labor and spares catalog pricing for materials. Another commenter 
said the Government is arbitrarily establishing a method of pricing 
materials that is inconsistent with commercial practices and requires 
accounting of ``rebates, refunds and discounts that are received or 
accrued to the contractor.'' The commenter believes this tracking is 
unjustified, would be very costly, and ultimately result in many 
disputes that in turn would be costly for both Government and 
commercial services contractors for audits, disputes and legal fees. 
The commenter recommended that the Government rely on competition as 
means to determine the price is fair and reasonable. Another commenter 
said that if a contracting officer is responsible for enforcing this 
requirement of giving the Government credit for all discounts and 
rebates, it may be advisable to consider allowing the CO to require 
supporting information from the contractor. Another commenter 
recommends that these contracts include refund or price reduction 
clauses allowing the Government to recoup any overages identified 
through surveillance of the contract.
    Response: The Councils recognize that reducing the price of 
materials for any possible applicable credits may not be customary in 
the commercial marketplace. The Councils note that the credits only 
apply when the Government reimburses the contractor at his actual 
costs, which, if such credits are received, are reduced accordingly. 
However, to be more consistent with commercial practices, the Councils 
revised the rule to limit the requirements to credits received by or 
accrued to the contractor.
    e. General. One commenter said limiting the ``allowable material 
costs'' to actual costs focused on ``costs'' rather than ``price'' 
which is fundamentally inconsistent with commercial practices.
    Response: While reimbursement for actual costs may be inconsistent 
with commercial practices, the Councils believe payment of the actual 
cost is necessary to protect the Government when the material being 
sold to the Government does not meet the definition of a commercial 
item at FAR 2.101. The Councils note when the material is a commercial 
item, the rule provides that the contractor will be paid on the basis 
of an established catalog or market price.
    8. Consent to Subcontract.
    a. Several commenters said the consent to subcontract requirements 
should not apply to commercial contracts because they are inconsistent 
with commercial practice. One commenter said that the consent to 
subcontract requirement is generally limited and does not apply when a 
prime contractor requires subcontracting to an affiliate. Two 
commenters said the consent to subcontract is necessary and agreed with 
the proposed language in paragraph (u) of Alternate I at FAR clause 
52.212-4. Another commenter said the normal practice is that the 
contractor is not allowed to assign any portion of its responsibilities 
or rights under the contract without first obtaining the written 
approval of the client. Two commenters said the subcontract consent 
requirement is contrary to the FASA's intended purpose of simplifying 
commercial item contracting. Another commenter said the requirement 
will add administrative effort and costs with no value added to 
contractors and little benefit to the Government. Another commenter 
said that once an authorized determination has been made to allow a T&M 
contract type, further authorizations for T&M should not be required 
for subcontracts

[[Page 56327]]

under an approved overall contract. The commenter said it should be 
presumed that the approval of T&M for the prime contract flows to all 
subcontracts under it. Another commenter said since commercial 
contractors are not likely to have government-approved purchasing 
systems, the contractors would be subject to the proposed subcontract 
consent provisions which is not practicable in commercial contracts and 
is not a commercial practice. Another commenter said the costs outweigh 
benefits when the choice is to either create/maintain approved 
purchasing system or delay performance pending Government approval. The 
same commenter also said a fair & reasonable determination can be made 
at contract award because use of T&M is limited to contracts awarded 
through competition.
    Response: When contractors add or substitute subcontractors after 
award, the basis for the best value determination used to award the 
contract may have been altered. Therefore, the Government must have the 
right to approve changes in subcontractors to maintain best value. As 
indicated by some of the comments, some commercial companies reserve 
the right to approve or deny changes in subcontractors. In fact, one 
commenter stated ``the normal practice is that the contractor is not 
allowed to assign any portion of its responsibilities or rights under 
the contract without first obtaining the written approval of the 
client.'' The Councils do not believe subcontract consent will add 
significant administrative effort but will protect the Government from 
potential subcontractor substitution issues.
    b. One commenter recommended revising the proposed paragraph at FAR 
12.216 as follows because all contractors should be required to get the 
contracting officer's consent prior to using foreign subcontractors to 
prevent contractors from negotiating labor hours and rates based upon 
its local workforce and subsequently subcontracting with a foreign 
contractor with much lower rates.
    (1) Add the following after the second sentence in proposed FAR 
12.216:
    Any subcontract with a foreign company when the work will be 
physically performed outside the United States or Canada requires 
the contracting officer's consent.
    (2) Add the following phrase at the end of the proposed last 
sentence:
    . . . except for subcontracts with a foreign companies as 
described above.
    (3) Add the following new coverage to the proposed FAR clause at 
52.212-4, Alternate I (u), to enact the revised requirements discussed 
above:
    (2) The Contractor must obtain the contracting officer's written 
consent for any subcontract with a foreign company when the work 
will be performed outside the United States or Canada.
    Response: Such provisions are not provided for non-commercial T&M 
contracts. The Councils do not believe it is advisable to add more 
stringent requirements for commercial T&M contracts than are used for 
non-commercial T&M contracts. The Councils are not aware of any 
problems in this area under existing T&M contracts.
    c. One commenter said the rule should (as the ANPR proposes) 
require contractors to obtain the contracting officer's consent to 
subcontract. The Government should know what entity is providing 
services on a T&M or LH basis. However, the requirement to obtain 
consent to subcontract should apply only to charges that are directly 
charged to the contract, as opposed to overhead expenses and general 
and administrative expenses. Many commercial companies have corporate-
wide agreements with vendors to perform those functions.
    Response: The Councils agree that the consent to subcontract 
applies only to costs that are directly charged to the contract and 
does not apply to overhead expenses and G&A expenses. The provisions in 
the proposed rule are the same as the consent to subcontract 
requirements for non-commercial T&M contracts. Therefore, there is no 
need to provide additional language.
    d. One commenter assumed that the clause at FAR 52.212-4, Alt. I, 
paragraph (u) can be tailored to conform to commercial practices in the 
industry as provided under FAR 12.302(b) and recommends acknowledging 
such in the final rule.
    Response: The tailoring provisions at FAR 12.302 do not apply to 
the proposed FAR clause at 52.212-4, Alternate I, paragraph (u), 
because the Councils believe tailored subcontract provisions may not 
adequately protect the Government's interests. While some commercial 
companies may allow assignment of rights and responsibilities under the 
contract without the approval of the client, the Councils do not 
believe commercial industries, as a whole, generally allow unknown or 
unapproved changes to the contract. The Councils believe the Government 
should retain the right to approve such changes to protect the 
Government's interest in achieving best value. The Councils revised FAR 
12.301(b)(3) to clarify that the Alternate clause is not subject to the 
tailoring authorities of FAR 12.302.
    9. Contractor Purchasing System Reviews (CPSR). One commenter said 
imposing CPSRs requirements on commercial T&M or LH contracts would 
stop many small businesses and small disadvantaged businesses from 
providing commercial services since these businesses may not need, nor 
have, the sophisticated infrastructure required to successfully 
complete a CPSR.
    Response: The rule does not impose a CPSR requirement but simply 
recognizes that contractors with approved purchasing systems require 
less oversight because the contractor's overall system provides 
adequate controls and procedures to protect the Government.
    10. Other Direct Costs (ODC). One commenter said ODC may include 
travel, software license fees, software subscription fees, and other 
categories of other direct costs outside the normal definition of 
materials and subcontracts. The commenter suggested not defining the 
elements of ODC so that these other types of other direct costs could 
be proposed and evaluated. Another commenter asked whether travel would 
be considered ``materials'' under a T&M contract or be perceived as a 
cost reimbursement item requiring non-commercial procedures. Another 
commenter noted that the ANPR appears to only allow materials costs and 
subcontract costs to be charged as ODC. The commenter suggested 
limiting the definition of materials costs to preclude direct charging 
of intangible types of costs and force vendors to include such costs in 
their loaded labor rates.
    Response: The Councils believe that it is important to provide as 
much flexibility as possible. However, it is also imperative that the 
contract clearly articulates what costs are reimbursable outside of the 
fixed hourly labor rate(s) set forth in the contract. To clarify the 
issue, the Councils revised the rule to allow reimbursement of ODC 
based on actual costs for the types of ODC specified in the contract 
thereby allowing flexibility to negotiate reimbursable ODC on a case-
by-case basis.
    11. Government Property.
    One commenter said customers do not normally furnish property for 
commercial T&M or LH airplane repair contracts. Another commenter said 
customer provided property is not the ``norm'', but if property is 
supplied, the owner's standard procedures should apply. Another 
commenter said GFP should be listed in the contract and tracked by the 
agency's property management process. Another commenter said the 
proposed Alternate I to the FAR clause at 52.212-4 should

[[Page 56328]]

also contain a provision requiring any property or equipment submitted 
for reimbursement under the contract as ODC to be designated as 
Government property and treated accordingly. Another commenter said 
this does not occur often on professional A&E services contracts. When 
it does, it normally is in the form of Project Record Documents for 
existing facilities that the customer wishes to remodel or modify. Such 
Project Record Documents are managed and controlled by our staff as if 
they were our own. Upon completion of the contract, such documents are 
returned to the customer in their original condition. They can be 
either in hard copy or electronic medium.
    Response: As with any acquisition, the need to furnish Government 
property will depend on the nature of the requirements, e.g. military 
equipment repair. However, when property is furnished, the contract 
must include the appropriate Part 45 property clauses. The Councils 
note that the Councils are revising Part 45 and the associated clauses 
to reflect accepted industry practices for property management. 
Finally, the Councils note documents, such as project record documents, 
are not considered Government property under FAR Part 45.
    12. Government Oversight.
    a. One commenter recommended that the Government hold the prime 
contractor accountable for proper record keeping and invoicing and not 
require copies of a commercial subcontracting agreement and 
subcontractor invoices because the Government has no privity with the 
subcontractors. The commenter believes requesting such information is 
clearly inappropriate and that the Government has no need to routinely 
obtain and review subcontractor's documentation since the Government 
presumably evaluated and accepted the prime's proposal. Another 
commenter asserted that subcontract costs should be the responsibility 
of the prime for competitive procurements and there should be no 
Government involvement.
    Response: The Councils agree that the Government generally will not 
need access to the subcontractor's books and records. The Councils 
believe there are two possible scenarios regarding subcontract costs. 
The first scenario is where the contract provides for subcontract costs 
to be reimbursed at actual costs to the prime contractor. In this case, 
the Government would need to verify that the prime contractor has 
actually made the payments in the ordinary course of business and that 
such payments were made in accordance with the subcontract agreement 
(the Government would not need access to the subcontractor books and 
records, only to a copy of the subcontract agreement maintained by the 
prime contractor and verification to the prime contractors records that 
payment was made). The second is where the contract provides for the 
subcontract costs to be reimbursed at the prime contract fixed hourly 
labor rates. In this case, the Government needs to have some assurance 
that the prime contractor has verified the hours worked by the 
subcontractor. To address this situation, the Councils have revised the 
rule to require that subcontractor hours be substantiated by actual 
payment, individual timecards, employee qualifications, or other 
substantiation specified in the contract.
    b. One commenter said the proposed Alternate I to FAR clause 
52.212-4 creates issues related to the governments audit rights such as 
whether the government has the right to interview contractor employees 
about work they have performed. Another commenter said access to 
contractor employees is not consistent with commercial practices and 
should not be permitted.
    Response: The rule permits, but does not require, contracting 
officers to have access to contractor employees. While such access may 
not be a standard commercial practice, the Councils believe employee 
interviews may be necessary in some cases to verify the hours claimed 
by the contractor.
    c. One commenter advocates including protections, above those 
currently required in commercial items purchases, for commercial 
services bought on a T&M/LH basis. The commenter suggested a provision 
which would authorize the CO to request substantiation for hourly rates 
charged under the task orders stating that such a provision would allow 
for substantiation of hours worked, access to original timecards, 
timekeeping procedures, labor distribution reports, and assigned 
employees. The commenter also said documents such as employees' resumes 
or other personnel records of employees, to verify that employees have 
the contractually required qualifications and experience, should be 
made available for Government review. The commenter also suggested 
identifying labor distribution reports as ``records of distribution of 
labor'' to avoid confusion at contractors that do not maintain formal 
reports, but do maintain records relating to their distribution of 
labor.
    Response: The Councils believe that access to employee timecards, 
labor distributions, and the ability to interview the employees should 
provide sufficient information to verify the validity of hours claimed 
on the contract. However, the Councils believe that there may also be a 
need to assess employee qualifications to verify that the employee 
meets the qualifications of the labor category to which he/she has been 
charged. Therefore, the Councils revised the rule to also provide 
access to records that substantiate employee qualifications. In 
addition, the Councils revised the rule to say ``records of 
distribution of labor'' versus ``labor distribution reports'' to be 
more consistent with commercial practices.
    d. One commenter said that additional controls and oversights are 
used in the commercial marketplace since T&M/LH contracts do represent 
more risk to the buyer, e.g., verification of labor hours performed 
versus billed, labor categories utilized versus billed, and adequate 
accounting systems so the buyer could validate costs billed. The 
commenter also said that existing oversight methods and controls for 
Federal non-commercial T&M/LH contracts are a good basis for crafting 
the methods and controls to apply to Part 12 T&M/LH contracts and that 
the proposed rule appears to have carefully examined those terms and 
conditions that should be applied to the new authority under FAR Part 
12. Another commenter said that allowing contracting officers to 
negotiate access to other types of documents on task orders, where 
circumstances merit such access, is warranted. Another commenter said 
that access to commercial contractor records or audit rights is 
uncommon, limited in scope or nonexistent and that surveillance, if 
any, was generally limited to verification of hours or expenses billed. 
Another commenter said in the commercial marketplace, the contractor is 
responsible for providing sufficient information to support billings 
for hours charged, materials used, and subcontracts performed.
    Response: The Councils believe that the ANPR carefully considered 
existing requirements for T&M contracts as well as differences between 
the commercial marketplace and non-commercial contracts. The Councils 
believe the rule provides the proper balance between the need to verify 
compliance with contract terms and the need to minimize access 
contractor records.
    e. Two commenters said the payment provision in the FAR clause at 
52.212-4 and the proposed alternate provisions are inconsistent with 
commercial practices. One of the commenters also said commercial 
companies do not

[[Page 56329]]

provide access to time cards, actual material or subcontract costs, 
employees or employee time cards and that this access would not be 
provided to the Government and that oversight is not used to ensure 
work is being properly charged. Another commenter said it is a 
customary commercial practice for the seller to grant limited access to 
records and limited audit rights, i.e., time sheets, invoices, expense 
reimbursement receipts, etc. This commenter and another commenter said 
the Government should not have access to contractor employees. Another 
commenter said it is normal practice for the client to request copies 
of time cards, along with detailed invoices outlining which individual 
performed the services, the amount of time that individual spent on 
those services during the period of the invoice. In addition, the time 
card would have the respective supervisor approval indicating that the 
time was properly recorded. The clients also normally require that they 
have the ability to audit the contractor's records if they so choose.
    Response: The Councils believe the Government must have some 
assurance that the number of hours claimed by the contractor accurately 
reflects the time spent by the appropriate labor category performing 
work on the contract and that the amounts paid to the contractor based 
on actual costs accurately reflect the actual costs paid by the 
contractor for materials, subcontracts, and other direct costs. Some 
commenters said their commercial companies do require access to time 
cards, actual material, and subcontract costs as a condition for T&M 
contracting. The Councils believe that the rule minimizes access to 
records to only those documents that are necessary to verify compliance 
with the contract terms. The Councils do not believe it is appropriate 
for the Government to simply accept the submitted hours and material/
subcontract costs as valid without some type of verification.
    f. One commenter noted that the ANPR failed to include sufficient 
oversight mechanisms to protect the taxpayers' interests. The commenter 
recommended establishing periodic audits and reporting requirements on 
the use of D&F in commercial T&M/LH contracts, and requiring approval 
of the D&F by the head of the contracting authority. Further, the 
commenter recommended that the Government have access to the contractor 
books and records; FAR clause 52.215-2, Audit and Records--Negotiation, 
should be included in all T&M/LH contracts; and contracts should be 
subject to the cost principles found in FAR Part 31, Contract Cost 
Principles and Procedures. Another commenter is not opposed to T&M and 
LH contracts, but opposes the proposed rule because it does not make 
them subject to full oversight and audit provisions.
    Response: The FAR does not provide for periodic audits of 
contracting officer decisions. The frequency and scope of such audits 
are under the purview of the agency Inspector General, not the FAR 
Council. In regards to the application of FAR Part 31, the Councils do 
not believe such access is necessary because the proposed rule does not 
provide for reimbursement of indirect costs using actual indirect cost 
rates. In addition, the rule does provide access to those records 
necessary to verify those costs that are reimbursed on an actual basis. 
There is no benefit to extending such access to include all records 
that are normally accessible for non-commercial contracts. In fact, 
extending such access would essentially nullify the concept of a 
commercial contract.
    g. One commenter believes substantiation of invoices should be 
based on commercial practices, rather than relying upon a time card 
system, ``as presumably identified'' in the DCAA manual. This commenter 
also believes this is inconsistent with commercial practices regarding 
audits of cost by requiring timecards pursuant to Government procedures 
and that SARA does not authorize this extension of Government rights to 
provide auditors with ``free range with disrupting employees and 
subcontractor relationships.'' Another commenter asserts that the 
``Proposed rule does not include any of the protections that are in the 
commercial market.'' This commenter believes these ``contract vehicles 
are high risk and do not include adequate cost controls.''
    Response: While these commenters refer to using commercial 
practices for protection (e.g., for substantiation of invoices), 
neither commenter provides a description of what that protection is, 
i.e., how does the commercial customer know the hours or actual costs 
are a proper reflection of the amounts actually incurred? The Councils 
believe there must be some verification, and believes that the proposed 
rule provides the minimum access to records needed to perform that 
verification. The Councils do not believe that SARA requires the 
Government to make payments based on actual hours and/or actual costs 
incurred without some form of verification. The Councils note some 
commenters said requiring access to time cards, invoices, and 
subcontract agreements is a standard commercial practice for T&M 
contracting.
    h. One commenter believes that quality assurance is not sufficient 
to protect taxpayers and that post award audits are necessary. The 
commenter also expressed concern that currently paragraph (e) of FAR 
clause 52.232-7 allows for contracting officer requests for audit prior 
to final payment and that this may contradict other provisions for 
commercial audits that are not subject to post award audits. 
Additionally, the commenter said there may be a conflict between 41 
U.S.C. 254d(a)(1) and 10 U.S.C. 2313(a) (which allows post award 
audits) and the FAR provision (which does not expressly allow audits 
for commercial items). The commenter believes that if a post award 
audit provision is not included, the contracting officer should be 
required to provide written justification why one was not included. 
Further, the commenter said the audit should occur when the contractor 
notifies the Government that the costs will exceed 85 percent of 
ceiling. The commenter recommended a price reduction clause to recoup 
overages identified in audit.
    Response: Post-award audits for commercial items are necessary for 
T&M contracts. The contract clause requires the contractor to 
substantiate the labor hours and material, subcontract, and other 
direct costs. The rule provides the necessary access to records to 
verify compliance with these contract terms.
    i. One commenter said the ANPR's suggestion of describing the types 
of information that may be audited to verify material and subcontract 
costs (rather than merely repeating the vague ``substantiating 
material'' description) makes sense. The commenter also said government 
access to the contractor's employees to verify hours charged is 
unnecessary, inconsistent with commercial practices, and substantially 
broader than the Government's rights under the existing T&M payment 
clause. In the absence of indicia of fraud or other wrongdoing, 
timecards should be sufficient evidence of hours actually worked. Given 
the time and expense associated with conducting interviews, the 
government would likely interview employees only when there was a basis 
to investigate alleged wrongdoing. In those circumstances, the 
government could obtain information through subpoenas; a contract 
clause is therefore unnecessary.
    Response: According to some commenters, requiring access to 
contractor employees is a standard commercial practice for T&M 
contracting. In addition, the proposed provisions for access to 
contractor

[[Page 56330]]

employees are no broader than what is currently provided for under non-
commercial T&M contracts. The relevant access to records provision for 
current T&M contracts is not the T&M payment clause, but instead is the 
clause at FAR 52.215-2, Audit and Records--Negotiation, which provides 
the Government with access to contractor employees. The Government 
should not have to allege wrongdoing to interview contractor employees 
when their labor hours are included on invoices submitted to the 
Government.
    j. Commenters at the public meeting said commercial companies do 
not keep payment records three years after contract completion.
    Response: The requirement at paragraph (d)(2) of FAR clause 52.212-
5 for contractors to maintain the payment records three years after 
contract completion is a statutory requirement that provides for 
Comptroller General examination of records under contracts for 
commercial items.
    13. Nonconforming.
    a. One commenter said it may be extremely difficult for the 
Government to enforce the defects language after the contractor 
invoices and the Government accepts the labor, as opposed to accepting 
the tangible products generated by the labor, because the Government 
will have a difficult time proving, after the fact, that the labor was 
defective or otherwise unacceptable unless the Government can prove 
fraudulent timekeeping practices or sloth on the part of the contractor 
or its employees can be proven. The commenter also said if the 
contractor provides the correct mix of labor skills and the service is 
provided in accordance with the statement of work, the contractor 
should bear no burden for corrections and that it would be hard to 
reject or prove the services were non-conforming after payment since 
the Government evaluates, interviews, and approves contractor 
personnel. Another commenter said it is reasonable to expect the 
contractor to be responsible for the correction of any non-conforming 
contract requirement, if it is determined to be the fault of the 
contractor.
    Response: The Councils agree that it may be difficult to prove 
services are nonconforming on a commercial T&M/LH contract after the 
contractor has invoiced the Government and the Government has accepted 
and paid for the labor. The Councils note the current FAR coverage, 
while previously applicable only to commercial FFP contracts, provides 
post acceptance remedies for nonconforming services. The rule simply 
adds additional remedies to address situations when reperformance will 
not correct the defect or is not possible to reperform.
    b. One commenter recommended replacing the word ``may'' with 
``should'' in the third and sixth lines of paragraph (a) at FAR clause 
52.212-4 because Government officials should be encouraged to seek 
consideration for nonconforming services and should be required to 
ensure that the contractor's future performance conforms to the 
contract requirements. The commenter also recommended revising proposed 
paragraph 52.212-4, Alternate I (a), to include the word ``should'' 
instead of ``may'' in the seventh, twelfth, and fifteenth lines for the 
same reasons.
    Response: The use of the term ``may'' is consistent with the 
existing terminology for commercial FFP contracts, i.e., paragraph (a) 
at FAR clause 52.212-4, which states the ``Government may require 
repair or replacement of nonconforming supplies or reperformance of 
nonconforming services at no increase in contract price.'' The 
Government should seek consideration when appropriate. However, the 
Councils believe the term ``may'' provides the contracting officer 
sufficient latitude to exercise their judgment while managing the 
contract. The Councils did, however, revise the rule to clarify that 
the Government may seek either ``an equitable price adjustment or 
adequate'' consideration and deleted the language that allowed the 
Government to require the contractor to ensure future performance 
conforms to contract requirements because the Councils believe that 
this language is unnecessary since the Government already has this 
right through the use of a cure notice.
    c. One commenter said commercial T&M agreements include a warranty 
and a disclaimer of any other remedies as permitted under the UCC. 
Another commenter said seeking consideration for acceptance of 
nonconforming supplies or services is a right of the Government under 
common law so there is no need to include such a provision in the 
clause.
    Response: Remedies, including warranty provisions, vary by 
industry, service and products. The FAR routinely includes rights 
covered under common law in contract clauses to ensure all parties are 
cognizant of their rights and responsibilities.
    d. One commenter said the requirement for contractors to repair or 
replace rejected supplies or reperform rejected services at no cost to 
the Government imposes more contract risk on the contractor than the 
non-commercial clause which does not require repair or reperformance at 
no cost to the Government, essentially imposing a fixed-price level of 
risks. The commenter further said combining a ceiling price that 
contractors exceed at their own risk and a requirement that the 
contractor use ``best efforts'' to perform within the ceiling price may 
result in contractors interpreting the clause to requirement to mean 
accomplish a certain result, i.e., ``performance of the work specified 
in the Schedule'' within a specified dollar amount, i.e., the ceiling 
price. The commenter recommended allowing contracting officers, where 
appropriate, to compensate contractors for reperformance or repair of 
deficient services or supplies up to the ceiling price, but not 
including profit, to be consistent with the non-commercial clause and 
to more accurately reflect standard commercial practices. Two 
commenters also recommended that replacement of nonconforming supplies 
or re-performance should be at no increase in contract price, allowing 
the contractor to re-perform up to the agreed upon ceiling price. 
Another commenter said the proposed rule establishes a contractor-
friendly threshold because the contractor is agreeing to use its best 
efforts to perform work and T&M contracts pay for time or money spent, 
not milestones reached or work completed. Commenter states this is main 
difference between commercial practices and proposed rule.
    Response: The Councils agree that contractors are generally only 
required to use ``best efforts'' to accomplish the desired results 
within the established ceiling price on both commercial and non-
commercial T&M contracts as opposed to FFP contracts which requires 
contractors to accomplish stated results within the fixed price. The 
non-commercial T&M/LH clause does allow contractor to be paid for 
reperformance, without profit, up to the ceiling price (or the ceiling 
price as increased by the Government) unless the contractor fails to 
proceed with reasonable promptness to reperform within the ceiling 
price (or the ceiling price as increased by the Government), in which 
case, the Government may charge the contractor reperformance costs or 
terminate the contract for default. Additionally, the noncommercial 
clause only allows the Government to require the contractor to remedy 
without reimbursement in very limited situations such as fraud and 
willful misconduct. Since contractors are only required to use ``best 
efforts'' within the established ceiling price for

[[Page 56331]]

T&M and LH contracts, the Councils agree contractors should be paid for 
reperformance, without profit, up to the ceiling price. The Councils 
revised the proposed rule to be consistent with the provisions for 
noncommercial T&M contracts at FAR clause 52.246-6. However, since 
contracting officers will not necessarily know the proposed profit in 
competitive awards, the Councils revised the noncommercial T&M 
provisions to require contracting officers to specify a profit 
decrement in paragraph (a)(4) of the clause. Unless otherwise specified 
by the contracting officer, the labor rates will be reduced by 10 
percent to exclude profit.
    e. Another commenter said that its commercial contracts include 
normal commercial warranties that cover workmanship and materials. 
Under these provisions, a buyer can make a warranty claim and, if 
deemed valid, the servicing company would re-perform the work at no 
charge. Another commenter said surveillance/QC/Inspections for T&M and 
LH commercial contracts versus those of commercial FP contracts do not 
vary. Contractors are responsible for performance to minimum stated 
levels of completion and quality. Reviews of performance by the 
customer are the same regardless of the type of contract executed.
    Response: When the commercial warranties adequately cover 
workmanship and materials, there is generally no need to include 
additional requirements addressing non-conforming supplies or services. 
In other instances, commercial warranties may not exist or may not 
adequately address the contract requirements. In such cases, the 
Government needs provisions to address non-conforming supplies and 
services. As such, the rule provides remedies for non-conforming 
supplies and services that are consistent with those provided for under 
non-commercial contracts.
    14. Termination.
    a. One commenter recommended revising FAR 12.403 to specify the 
amounts recoverable upon termination for convenience of a T&M or LH 
contract for commercial services because the ANPR did not adequately 
address a contractor's need to recover material costs in a termination 
for convenience.
    Response: As provided in FAR 12.403(d)(ii), which also applies to 
commercial FFP contracts, contractors can recover ``any charges the 
contractor can demonstrate directly resulted from the termination.'' 
While material costs are not specifically addressed in this coverage, a 
contractor would recover the costs if the contractor is able to 
demonstrate the costs were incurred in support of the contract and the 
costs are otherwise allowable in accordance with the proposed language 
at paragraph (i)(1)(ii) of FAR clause 52.212-7.
    b. One commenter said the concept of termination for convenience is 
inconsistent with commercial practices and would be considered a breach 
of contract, with damages, in the commercial marketplace. The commenter 
also said amount of damages would be negotiated or established in a 
lawsuit and would not be limited to reasonable charges the contractor 
can demonstrate to the satisfaction of the Government using its 
standard record keeping system. Another commenter said few, if any, 
commercial T&M contracts include right of immediate termination as is 
proposed. Further, the commenter said the Government should compensate 
for additional costs beyond hours worked as is provided for in FAR 
12.403(d)(ii) and that the termination clause should mirror those used 
in the commercial marketplace which generally require 30 to 90 days 
termination notice with no cap on compensation.''
    Response: The Councils recognize that terminations for convenience 
are not standard commercial practice. However, to protect the public's 
interest, the Government must retain the right to terminate a contract 
when the product or service is no longer needed or funds are not 
available. The Councils note the FAR already contains the provisions 
for terminating commercial contracts at the Government's convenience. 
The proposed rule simply provides the basis for calculating labor costs 
on a terminated commercial T&M/LH contract.
    15. CAS Applicability.
    a. One commenter said CAS coverage needs to be extended to 
commercial contracts when the contractor is already CAS covered. 
Another commenter said many commercial companies do not require 
employees to record all time worked and that these companies' labor 
charging systems will not be tied to a CAS compliant accounting system. 
The commenter said requiring commercial companies to comply with CAS 
flies in the face of commercial item reform. Another commenter stated 
that CAS should continue to apply to all T&M/LH contracts to protect 
taxpayers' interests by ensuring consistent accounting treatment, 
proper allocation of costs to contracts, and preparation of reliable 
cost estimates. Another commenter said application of CAS is 
unnecessary and would have adverse consequences. This commenter noted 
that commercial contractors that sell exclusively in the commercial 
marketplace most likely do not have accounting systems configured to 
comply with CAS and may decline to perform commercial services for the 
government on a T&M or LH basis. Accordingly, CAS rules should be 
amended to exempt commercial services purchased under T&M or LH 
contracts from its coverage. Another commenter said they see no 
particular difference between the contract types as to the 
applicability of CAS. Another commenter said commercial systems are set 
up to support commercial transactions, not to comply with CAS clauses 
in Government contracts. Thus, this commenter asserted, such clauses 
would not be acceptable. One commenter stated CAS should not apply to 
commercial item acquisitions and that the CAS Board did not fully 
implement FARA since FARA exempted all contract for commercial items 
from CAS requirements. Another commenter said that if CAS applies to 
commercial T&M/LH contracts, the government will effectively eliminate 
most commercial contractors from competition for these types of 
contracts. Another commenter said that CAS should not apply and all 
that should be required from contractors is an adequate accounting 
system for recording hours and material purchases.
    Response: Revisions to CAS requirements is beyond the scope of this 
case. The Councils will forward the comments to the CAS Board for the 
Board's consideration.
    b. One commenter said that the ``Councils'' infer that they (the 
Councils) have some authority to amend or interpret CAS, as evidenced 
by the Councils soliciting public comments based on the assumption that 
CAS will not apply to commercial T&M/LH contracts.
    Response: The Federal Register notice is very clear that any 
actions regarding the Cost Accounting Standards would need to be taken 
by the CAS Board. In paragraph (3) of Section C, Regulatory Amendments 
under Consideration, the Notice states the following:
    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.
    16. General Comments.

[[Page 56332]]

    a. One commenter said the Councils were too restrictive when they 
implemented Section 8002(d) of FASA (Pub. L. 103-355) because there is 
no statutory prohibition against the use of T&M/LH contracts. The 
commenter requested the Councils to take this opportunity to revisit 
this question and amend the FAR to permit use of T&M/LH contracts to 
acquire any commercial item.
    Response: Congress was well aware of the FAR requirements that 
limit the available contract types for commercial items when it drafted 
Section 1432 of the National Defense Authorization Act for Fiscal Year 
2004. If Congress disagreed with the Council implementation of FASA, 
the Councils believe Congress would have expanded Section 1432 to 
specifically authorize T&M/LH contracts for commercial items. The 
Councils do not believe it is appropriate to expand contract types for 
commercial items without specific statutory authority.
    b. One commenter questioned why the minutes posted by the Councils 
from the Public Meeting did not include the detailed questions and 
answers discussed at the Public Meeting. Specifically, the commenter 
was concerned that the minutes failed to recognize the discussion on 
how to conduct market research to determine if the service was sold in 
the commercial marketplace using T&M or LH contracts.
    Response: The purpose of the public meeting was to allow the public 
to provide input on the effective use of T&M and LH contracts for the 
acquisition of commercial items and suggestions for implementing the 
provisions of the SARA legislation for the Council's consideration. 
While the Councils did record and post the general topics that were 
discussed at the meeting, the Councils did not record or post the 
detailed discussions from the meeting. The ANPR and the proposed rule 
contain provisions that require the contracting officer to consider 
various customary practices, including contract type, when conducting 
market research. Detailed instructions for how to conduct market 
research are not contained in the FAR because the instructions would 
vary based on the unique aspects of the acquisition. More specific 
instructions are appropriately contained in agency training materials.
    c. One commenter said that the proposed rulemaking should be 
designated as a major rule under the Congressional Review Act and 
economically significant under Executive Order 12866. The commenter 
also states that the assessment of benefits, costs and reasonable 
alternatives should be conducted assuming applicability and 
inapplicability of Cost Accounting Standards (CAS) and reviewed by 
Agency attorneys, economists, engineers and scientists.
    Response: As required in the regulatory process, OMB's Office of 
Information Regulatory Affairs reviewed the rule to ensure the 
requirements of Executive Order 12866 were fully met.
    d. One commenter noted that the ANPR failed to eliminate what the 
commenter considers the current illegal use of commercial T&M/LH 
contracts by GSA by declaring commercial T&M/LH contracts executed in 
violation of FAR 12.207 null and void.
    Response: The rule implements Section 1432 of Public Law 108-136. 
Questions over legality of actions agencies may have taken prior to 
this authority are beyond the scope and authority of the Councils.
    e. One commenter said the FAR Council has exceeded its statutory 
authority under SARA by adding clauses and requirements that are not 
consistent with the requirements of Section 8002 of Public Law 103-355 
which limit the contract clauses, to the maximum extent practicable, to 
those required to implement provisions of law or executive orders or 
those determined to be consistent with standard commercial practice.
    Response: The Councils believe it limited the contract clauses to 
the ``maximum extent practicable'' to those required to implement the 
SARA legislation for commercial T&M and LH contracts. The Councils 
acknowledge it added a limited number of provisions not specifically 
mandated by the SARA legislation (such as consent to subcontract); 
however, the Councils believe that the provisions are needed to protect 
the Government and are, to the maximum extent practicable, consistent 
with commercial practice. FASA acknowledges that additional contract 
clauses may be required by including the phrase ``to the maximum extent 
practicable.''
    f. One commenter identified industry best practices of close 
communication and cooperation between buyer and seller, using a project 
management team that is well versed in the types of services involved, 
and establishing Forward Pricing Rate Agreements with firms frequently 
contracted with for T&M/LH to reduce the time and effort involved in 
contract formation and administration.
    Response: The Councils thank the commenter for the identified best 
practices. The Councils agree close communication, cooperation, and 
knowledge of the type of services are necessary for any successful 
procurement. The Councils note, however, that commercial T&M and LH 
contracts will be awarded using competitive procedures and establishing 
forward pricing rate agreements is not necessary and contrary to 
competitive procedures.
    g. One commenter requested that the Councils consider customary 
commercial pricing concepts for acquiring commercial services to be 
consistent with the tenets of FAR Part 12 and existing statutes. FAR 
Part 12 encourages the consideration of commercial practices when 
acquiring commercial services. As an example, the commenter identified 
GSA's recent multi-channel contact center contract, which involved 
acquiring commercial telecommunication services on a price per unit or 
price per minute basis.
    Response: The rule does not prohibit the use of a wide variety of 
commercial pricing practices including the example given by the 
commenter.
    h. Two commenters recommended that the final rule explicitly state 
that the rule only applies to contracts executed on or after the 
effective date of the rule. In addition, one of the commenters said the 
rule should not apply to task orders under IDIQ commercial contracts in 
existence at the time of the rule's effective date unless mutually 
agreed to in writing by all parties.
    Response: The standard FAR conventions at FAR 1.108(d) apply. As 
the rule does not specify otherwise, the FAR changes apply to 
solicitations issued after the effective date of the change. However, 
the Councils note the FAR allows contracting officers to make changes 
in existing contracts with appropriate considerations and mutual 
consent of the parties.
    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 changes may have a significant economic impact on a substantial 
number of small entities within the meaning of the Regulatory 
Flexibility Act, 5 U.S.C. 601, et seq., because small entities that 
have not bid on non-commercial T&M/LH contracts in the past may be 
induced to bid on commercial T&M/LH contracts. An Initial Regulatory 
Flexibility Analysis (IRFA) has been prepared. The analysis is 
summarized as follows:

[[Page 56333]]

Initial Regulatory Flexibility Analysis

    1. Description of the reasons why action by the agency is being 
considered. This proposed rule would revise the Federal Acquisition 
Regulation to allow contracting officers to award Time and Material 
and Labor Hour (T&M/LH) contracts when procuring commercial items. 
The proposed rule is required by Section 1432 of the National 
Defense Authorization Act for Fiscal Year 2004 (Pub. L. 108-136).
    2. Succinct statement of the objectives of, and legal basis for, 
the proposed rule. This proposed rule implements Section 1432 of the 
National Defense Authorization Act for Fiscal Year 2004 (Pub. L. 
108-136), which authorized the use of Time and Material or Labor 
Hour (T&M or LH) contracts for commercial services acquired in 
support of a commercial item, and any other category of services 
that is designated by the Administrator of OFPP as being of a type 
commonly sold to the general public on a T&M or LH basis, and would 
be in the best interest of the Government to acquire such services 
on a T&M or LH basis.
    3. Description of, and, where feasible, estimate of the number 
of small entities to which the proposed rule will apply. The changes 
may have a significant economic impact on a substantial number of 
small entities within the meaning of the Regulatory Flexibility Act, 
5 U.S.C. 601, et seq., because the use of commercial practices will 
allow additional small businesses that do not maintain records that 
are adequate for cost reimbursement contracting to compete for 
commercial T&M/LH contracts. At this time, there is no way to 
predict the number of procurements that will be awarded using 
commercial T&M/LH contracts, nor is there a method available to 
estimate the number of small entities that may be influenced by this 
change to begin competing for these types of contracts.
    4. Description of projected reporting, record keeping, and other 
compliance requirements of the proposed rule, including an estimate 
of the classes of small entities which will be subject to the 
requirement and the type of professional skills necessary for 
preparation of the report or record. The rule would require 
contractors to maintain records to support invoices presented to the 
Government for payment. Such records would include original 
timecards, the contractor's timekeeping procedures, distribution of 
labor, invoices for material, and so forth. These are standard 
records maintained by any company, large or small, and the fact that 
the contract would require that these records be made available to 
the Government should not place any additional record keeping burden 
on the entity.
    5. Identification, to the extent practicable, of all relevant 
Federal rules which may duplicate, overlap, or conflict with the 
proposed rule. There are no Federal rules that duplicate, overlap or 
conflict with the proposed rule.
    6. Description of any significant alternatives to the proposed 
rule which accomplish the stated objectives of applicable statutes 
and which minimize any significant economic impact of the proposed 
rule on small entities. There are not any alternatives to publishing 
this proposed rule that will accomplish the stated objectives of 
Section 1432 of the National Defense Authorization Act for Fiscal 
Year 2004 (Pub. L. 108-136). The rule includes only FAR text 
revisions required to implement the statute cited herein.
    The FAR Secretariat has submitted a copy of the IRFA to the Chief 
Counsel for Advocacy of the Small Business Administration. A copy of 
the IRFA may be obtained from the FAR Secretariat. The Councils will 
consider comments from small entities concerning the affected FAR parts 
2, 10, 12, 16, 44, and 52, in accordance with 5 U.S.C. 610. Comments 
must be submitted separately and should cite 5 U.S.C. 601, et seq. (FAR 
case 2003-027), in correspondence.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the proposed 
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 2, 10, 12, 16, 44, and 52

    Government procurement.

    Dated: September 16, 2005.
Julia B. Wise,
Director, Contract Policy Division.
    Therefore, DoD, GSA, and NASA propose amending 48 CFR parts 2, 10, 
12, 16, 44, and 52 as set forth below:
    1. The authority citation for 48 CFR parts 2, 10, 12, 16, 44, 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 in the 
introductory text of paragraph (6).

PART 10--MARKET RESEARCH


10.001  [Amended]

    3. Amend section 10.001 by removing from paragraph (a)(3)(iv) ``as 
terms'' and adding ``as type of contract, terms'' in its place.
    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 acquired under a contract awarded using 
competitive procedures; and
    (ii) The contracting officer--
    (A) Executes a determination and findings (D&F) for the contract, 
in accordance with paragraph (b)(2) 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) Each D&F required by paragraph (b)(1)(ii)(A) of this section 
shall contain sufficient facts and rationale to justify that no other 
contract type authorized by this subpart is suitable. At a minimum, the 
D&F shall--
    (i) Include a description of the market research conducted (see 
10.002(e));
    (ii) 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; 
and
    (iii) Establish that the requirement has been structured to 
maximize the use of fixed price contracts (e.g., by limiting the value 
or length of the Time and Material/Labor Hour contract or order) on 
future acquisitions for the same or similar requirements.
    (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

[[Page 56334]]

    (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 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. For such contracts, the 
contracting officer shall execute the D&F required by paragraph (b)(2) 
of this section, 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)(2) 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. Placement of orders 
shall be in accordance with Subpart 16.5.
    (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  Subcontract consent.

    (a) When a time and materials or labor hour contract is awarded 
pursuant to 12.207(b), Alternate I to the clause at 52.212-4 is used. 
Alternate I includes a subcontract consent provision that requires the 
contractor to obtain the contracting officer's consent prior to 
awarding certain subcontracts.
    (b) When the contractor has an approved purchasing system, the 
contracting officer shall identify, in an addendum to the clause, those 
subcontracts that will require consent.
    (c) When the contractor does not have an approved purchasing 
system, the contracting officer shall identify, in an addendum to the 
clause--
    (1) Those subcontracts reviewed during proposal evaluation for 
which consent is not required after contract award;
    (2) Those subcontracts for which consent is not required by the 
clause, but which the contracting officer has determined that an 
individual consent action is required to protect the Government; and
    (3) Any other exceptions to the standard consent requirements.
    (d) The contracting officer shall consider the risk, complexity and 
dollar value of anticipated subcontracts when determining the consent 
requirements.
    7. Amend section 12.301 by revising paragraph (b)(3) to read as 
follows:


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

* * * * *
    (b)* * *
    (3) The clause at 52.212-4, Contract Terms and Conditions--
Commercial Items. This clause includes terms and conditions which are, 
to the maximum extent practicable, consistent with customary commercial 
practices and is incorporated in the solicitation and contract by 
reference (see Block 27, SF 1449). Use this clause with its Alternate I 
when a time and materials or labor hour contract will be awarded. The 
contracting officer may tailor this clause in accordance with 12.302, 
except that paragraph (u) of Alternate I may be tailored only for 
indefinite delivery contracts and only to indicate that subcontract 
consent requirements apply to individual orders and not the basic 
contract.
* * * * *
    8. Amend section 12.403 by revising paragraph (d)(1)(i) to read as 
follows:


12.403  Termination.

* * * * *
    (d)* * *
    (1)* * *
    (i)(A) 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
    (B) 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 at the end of the 
introductory text of paragraph (b) to read as follows:


16.601  Time-and-materials contracts.

* * * * *
    (b) Application. * * * 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 at 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 44--SUBCONTRACTING POLICIES AND PROCEDURES

    11. Amend section 44.302 by revising the second sentence of 
paragraph (a) to read as follows:


44.302  Requirements.

    (a)* * * If a contractor's sales to the Government (excluding 
competitively awarded firm-fixed-price and competitively awarded fixed-
price with economic price adjustment contracts and firm-fixed price or 
fixed-price with economic price adjustment sales of commercial items 
pursuant to Part 12) are expected to exceed $25 million during the next 
12 months, perform a review to determine if a CPSR is needed.* * *
* * * * *
    12. Amend section 44.303 by revising the second sentence of the 
introductory paragraph to read as follows:


44.303  Extent of review.

    * * * Unless segregation of subcontracts is impracticable, this 
evaluation shall not include subcontracts awarded by the contractor 
exclusively in support of Government contracts that are competitively 
awarded firm-fixed-price, competitively awarded fixed-price with 
economic price adjustment, or firm-fixed price or fixed-price with 
economic price adjustment awarded for commercial items pursuant to Part 
12.* * *
* * * * *

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

    13. Amend section 52.212-4 by--
    a. Revising the date of the clause;
    b. Adding a new fourth sentence to the introductory text of 
paragraph (a) of the clause; and
    c. Adding Alternate I to read as follows:


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

* * * * *
    CONTRACT TERMS AND CONDITIONS--COMMERCIAL ITEMS (DATE)
    (a) Inspection/Acceptance.* * * If repair/replacement or 
reperformance will not correct the defects or is not possible, the

[[Page 56335]]

Government may seek an equitable price reduction or adequate 
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), 
(e), (i) and (l) for those in the basic clause and add the following 
paragraph (u) to the basic clause.
    (a) Inspection/Acceptance. (1) The Government has the right to 
inspect and test all materials furnished and services performed 
under this contract, to the extent practicable at all places and 
times, including the period of performance, and in any event before 
acceptance. The Government may also inspect the plant or plants of 
the Contractor or any subcontractor engaged in contract performance. 
The Government will perform inspections and tests in a manner that 
will not unduly delay the work.
    (2) If the Government performs inspection or tests on the 
premises of the Contractor or a subcontractor, the Contractor shall 
furnish and shall require subcontractors to furnish all reasonable 
facilities and assistance for the safe and convenient performance of 
these duties.
    (3) Unless otherwise specified in the contract, the Government 
will accept or reject services and materials at the place of 
delivery as promptly as practicable after delivery, and they will be 
presumed accepted 60 days after the date of delivery, unless 
accepted earlier.
    (4) At any time during contract performance, but not later than 
6 months (or such other time as may be specified in the contract) 
after acceptance of the services or materials last delivered under 
this contract, the Government may require the Contractor to replace 
or correct services or materials that at time of delivery failed to 
meet contract requirements. Except as otherwise specified in 
paragraph (a)(6) of this clause, the cost of replacement or 
correction shall be determined under paragraph (i) of this clause, 
but the ``hourly rate'' for labor hours incurred in the replacement 
or correction shall be reduced to exclude that portion of the rate 
attributable to profit. Unless otherwise specified below, the 
portion of the ``hourly rate'' attributable to profit shall be 10 
percent. The Contractor shall not tender for acceptance materials 
and services required to be replaced or corrected without disclosing 
the former requirement for replacement or correction, and, when 
required, shall disclose the corrective action taken.
    [Insert portion of labor rate attributable to profit.]
    (5)(i) If the Contractor fails to proceed with reasonable 
promptness to perform required replacement or correction, and if the 
replacement or correction can be performed within the ceiling price 
(or the ceiling price as increased by the Government), the 
Government may--
    (A) By contract or otherwise, perform the replacement or 
correction, charge to the Contractor any increased cost, or deduct 
such increased cost from any amounts paid or due under this 
contract; or
    (B) Terminate this contract for cause.
    (ii) Failure to agree to the amount of increased cost to be 
charged to the Contractor shall be a dispute under the Disputes 
clause of the contract.
    (6) Notwithstanding paragraphs (a)(4) and (a)(5) of this clause, 
the Government may at any time require the Contractor to remedy by 
correction or replacement, without cost to the Government, any 
failure by the Contractor to comply with the requirements of this 
contract, if the failure is due to--
    (i) Fraud, lack of good faith, or willful misconduct on the part 
of the Contractor's managerial personnel; or
    (ii) The conduct of one or more of the Contractor's employees 
selected or retained by the Contractor after any of the Contractor's 
managerial personnel has reasonable grounds to believe that the 
employee is habitually careless or unqualified.
    (7) This clause applies in the same manner and to the same 
extent to corrected or replacement materials or services as to 
materials and services originally delivered under this contract.
    (8) The Contractor has no obligation or liability under this 
contract to correct or replace materials and services that at time 
of delivery do not meet contract requirements, except as provided in 
this clause or as may be otherwise specified in the contract.
    (9) Unless otherwise specified in the contract, the Contractor's 
obligation to correct or replace Government-furnished property shall 
be governed by the clause pertaining to Government property.
* * * * *
    (e) Definitions. (1) The clause at FAR 52.202-1, Definitions, is 
incorporated herein by reference. 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.
    Direct materials means 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.
    Materials means--
    (1) Direct materials, including supplies and services 
transferred between divisions, subsidiaries, or affiliates of the 
contractor under a common control;
    (2) Subcontracts for supplies and services;
    (3) Other direct costs (e.g., travel, computer usage charges, 
etc.); or
    (4) Indirect costs specifically provided for in this clause.
    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.
* * * * *
    (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. 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. Invoices may be submitted once 
each month (or at more frequent intervals, if approved by the 
Contracting Officer) to the Contracting Officer or the Contracting 
Officer's representative. When requested by the Contracting Officer 
or the Contracting Officer's representative, the Contractor shall 
substantiate invoices (including any subcontractor hours reimbursed 
at the hourly rate in the schedule) by evidence of actual payment, 
individual daily job timecards, records that verify the employees 
meet the qualifications for the labor categories specified in the 
contract, or other substantiation specified in the contract. 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 the Contracting Officer approves overtime work in 
advance, 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. (A) If the Contractor furnishes its own 
materials that meet the definition of a commercial item at 2.101, 
the price to be paid for such materials shall be the Contractor's 
established catalog or the market price, adjusted to reflect the--
    (1) Quantities being acquired; and
    (2) Actual cost of any modifications necessary because of 
contract requirements.
    (B) Subcontracts. (1) Unless the subcontractor is listed in 
paragraph (i)(1)(ii)(B)(2) of this clause, subcontract costs will be 
reimbursed at actual costs as specified in (i)(1)(ii)(C) of this 
clause.
    (2) Provided the subcontract agreement requires the contractor 
to substantiate the subcontract hours and employee qualification, 
the contractor shall be reimbursed at the hourly rates prescribed in 
the schedule for the following subcontractors: [Insert subcontractor 
name(s) or, if no subcontracts are to be reimbursed at the hourly 
rates prescribed in the schedule, ``None.'' If this is an indefinite 
delivery contract, the Contracting Officer may insert ``Each order 
must list separately the subcontractor(s) for that order or, if no 
subcontracts under that order are to be reimbursed at the hourly 
rates prescribed in the schedule, insert `None'.'']
    (C) Except as provided for in paragraphs (i)(1)(ii)(A) and (B) 
of this clause, the Government will reimburse the Contractor the 
actual cost of materials (less any rebates, refunds, or discounts 
received by or accrued to the contractor) provided the Contractor--
    (1) Has made payments for materials in accordance with the terms 
and conditions of the agreement or invoice; or

[[Page 56336]]

    (2) Makes these payments within 30 days of the submission of the 
Contractor's payment request to the Government and such payment is 
in accordance with the terms and conditions of the agreement or 
invoice.
    (D) 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) 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.
    (E) Other Costs. Unless listed below, other direct and indirect 
costs will not be reimbursed.
    (1) Other Direct Costs. The Government will reimburse the 
Contractor on the basis of actual cost for the following, provided 
such costs comply with the requirements in paragraph (i)(1)(ii)(C) 
of this clause: [Insert each element of other direct costs (e.g., 
travel, computer usage charges, etc.) Insert ``None'' if no 
reimbursement for other direct costs will be provided.]
    (2) Indirect Costs (Material Handling, Subcontract 
Administration, etc.). The Government will reimburse the Contractor 
for indirect costs on a pro-rata basis over the period of contract 
performance at the following fixed price: [Insert a fixed amount for 
the indirect costs and payment schedule. Insert ``$0'' if no fixed 
price reimbursement for indirect costs will be provided.]
    (2) 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 and material 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 the performance of 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.
    (3) Ceiling price. The Government will 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 notifies the 
Contractor in writing that the ceiling price has been increased and 
specifies 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.
    (4) Access to records. At any time before final payment under 
this contract, the Contracting Officer (or authorized 
representative) will 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) Records that verify the employees whose time has been 
included in any invoice meet the qualifications for the labor 
categories specified in the contract;
    (ii) For labor hours (including any subcontractor hours 
reimbursed at the hourly rate in the schedule), when timecards are 
required as substantiation for payment--
    (A) The original timecards;
    (B) The Contractor's timekeeping procedures;
    (C) Contractor records 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.
    (iii) For material and subcontract costs that are reimbursed on 
the basis of actual cost--
    (A) Any invoices or subcontract agreements substantiating 
material costs; and
    (B) Any documents supporting payment of those invoices.
    (5) 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. The Contractor shall 
promptly pay any such reduction within 30 days unless the parties 
agree otherwise. The Government within 30 days will pay any such 
increases, unless the parties agree otherwise. Payment will be made 
by check. 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 supporting 
documentation, and upon compliance by the Contractor with all terms 
of this contract, any outstanding balances will be paid within 30 
days unless the parties agree otherwise. The completion invoice, and 
supporting documentation, 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.
    (6) 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 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.
    (7) 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.
    (8) Electronic Funds Transfer (EFT). If the Government makes 
payment by EFT, see paragraph (b) of the FAR clause at 52.212-5 for 
the appropriate EFT clause.
    (9) 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 that 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

[[Page 56337]]

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 that 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 that reasonably could have been avoided.
* * * * *
    (u) Subcontracts. (1) 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.
    (2) 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.
    (3) 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)(1) or 
(u)(2) 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.
    (4) 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)(1) or (u)(2) of this 
clause.
    (5) 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.
    (6) 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).
    (7) 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.
    (8) If the contractor enters into any subcontract that requires 
consent without obtaining such consent, the Government will 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 of the consent will be 
reimbursed only if the Contracting Officer subsequently provides the 
consent required by paragraph (u) of this clause.
[FR Doc. 05-18965 Filed 9-23-05; 8:45 am]
BILLING CODE 6820-EP-S