[Federal Register Volume 71, Number 1 (Tuesday, January 3, 2006)]
[Rules and Regulations]
[Pages 211-218]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-24548]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 2, 7, 11, 12, 16, 37, and 39

[FAC 2005-07; FAR Case 2003-018; Item III]
RIN 9000-AK00


Federal Acquisition Regulation; Change to Performance-based 
Acquisition

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

ACTION: Final rule.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) have agreed on a final rule 
amending the Federal Acquisition Regulation (FAR) by changing the terms 
``performance-based contracting (PBC)'' and ``performance-based service 
contracting (PBSC)'' to ``performance-based acquisition (PBA)'' 
throughout the FAR; adding applicable PBA definitions of ``Performance 
Work Statement (PWS)'' and ``Statement of Objectives (SOO)'' and 
describing their uses; clarifying the order of precedence for 
requirements; eliminating redundancy where found; modifying the 
regulation to broaden the scope of PBA and give agencies more 
flexibility in applying PBA methods to contracts and orders of varying 
complexity; and reducing the burden of force-fitting contracts and 
orders into PBA, when it is not appropriate. The title of the rule has 
also been changed to reflect the deletion of ``service.''

DATES: Effective Date: February 2, 2006.

FOR FURTHER INFORMATION CONTACT: For clarification of content, contact 
Mr. Michael Jackson, Procurement Analyst, at (202) 208-4949. Please 
cite FAC 2005-07, FAR case 2003-018. For information pertaining to 
status or publication schedules, contact the FAR Secretariat at (202) 
501-4755.

SUPPLEMENTARY INFORMATION:

A. Background

    DoD, GSA, and NASA published a proposed rule in the Federal 
Register at 69 FR 43712 on July 21, 2004, to which 15 commenters 
responded. In addition, three respondents submitted comments in 
response to FAR Case 2004-004, Incentive for Use of Performance-Based 
Contracting for Services, that the Councils determined are more 
relevant to this FAR case. The major changes to the proposed rule that 
resulted from the public comments and Council deliberations are:
    (1) FAR 2.101 Definitions. REVISED the definition of PBA to clarify 
its meaning.
    (2) FAR 2.101 Definitions. REVISED the definition of PWS to clarify 
its meaning.
    (3) FAR 2.101 Definitions. REVISED the definition of SOO to clarify 
its meaning.
    (4) FAR 7.103(r) Agency-head responsibilities. DELETED ``and, 
therefore, fixed-price contracts'' from the statement ``For services, 
greater use of performance-based acquisition methods and, therefore, 
fixed-price contracts * * * should occur for follow-on acquisitions'' 
because the Councils

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believe the appropriate contract type is based on the level of risk and 
not the acquisition method.
    (5) FAR 11.101(a)(2) Order of precedence for requirements 
documents. DELETED ``or function'' because the Councils concluded that 
the term ``function'' could be confused with ``detailed design-oriented 
documents'' at 11.101(a)(3) thus confusing the order of precedence for 
requirements documents.
    (6) FAR 16.505(a)(3) Ordering (IDIQ). CHANGED ``performance work 
statements must be used to the maximum extent practicable'' to 
``performance-based acquisition methods must be used to the maximum 
extent practicable'' since either a SOO or PWS can be used in the 
solicitation.
    (7) FAR 37.000 Scope of subpart. ADDED ``or orders'' after 
``contracts'' to clarify the Subpart applies to contracts and orders.
    (8) Various Subparts in Part 37. CHANGED the terminology from 
``performance-based service acquisitions'' to ``performance-based 
acquisitions'' since Part 37 only relates to service acquisitions.
    (9) FAR 37.102(e), Agency program officialsresponsibility. ADDED a 
requirement that the agency program officials describe the need to be 
filled using performance-based acquisition methods to the maximum 
extent practicable to facilitate performance-based acquisitions.
    (10) FAR 37.601, Performance-based acquisitions. General provisions 
as follows:
    (a) REBASELINED the rule to the current baseline. Updated baseline 
used in the proposed rule to reflect the current FAR baseline.
    (b) DELETED 37.601(a) of the proposed rule which stated the 
principal objectives of PBAs since the principal objectives are 
addressed in the definition.
    (c) RELOCATED and revised the detailed provisions for performance 
standards to a new FAR section, 37.603, to permit expanded coverage. 
The Councils clarified the language to indicate that performance 
standards must be measurable and ADDED ``method of assessing contractor 
performance'' to the required elements of a PBA since the quality 
assurance surveillance plan is not a mandatory element and contractors 
should know how they will be assessed during contract performance.
    (d) REVISED the performance incentives coverage to simply refer to 
the provisions at 16.402-2 since the only unique requirement for PBAs 
is the requirement that performance incentives correspond to the 
performance standards.
    (11) FAR 37.602, Performance work statements:
    (a) In paragraph (b) REVERTED back to the existing FAR coverage 
with minor modifications because the Councils believe the prior 
coverage correctly detailed the requirements.
    (b) In paragraph (c), REVISED SOO coverage to clarify that the SOO 
is a solicitation document and that performance objectives are the 
required results.
    (12) FAR 37.603, Performance standards. ADDED coverage to clarify 
that performance standards must be measurable and structured to permit 
assessment of the contractor's performance.
    (13) FAR 37.604, Quality Assurance:
    (a) RETITLED the section to Quality Assurance Surveillance Plans to 
be consistent with FAR terminology.
    (b) REVISED the coverage to simply refer to Subpart 46.4 since the 
same requirements apply for PBAs.
    (c) ADDED coverage to clarify that the Government prepares the 
quality assurance surveillance plan when the solicitation uses a PWS 
and that contractors may be required to submit a quality assurance 
surveillance plan when the solicitation uses a SOO.
    (14) FAR 37.602-3, Selection procedures. DELETED the coverage since 
there are no unique requirements for PBAs.
    (15) FAR 37.602-4, Contract type. DELETED the coverage since there 
are no unique requirements for selecting contract type for PBAs.
    (16) FAR 37.602-5, Follow-on and repetitive requirements. DELETED 
the coverage since there are no unique requirements for PBAs.
    The Councils made changes based on the belief that performance-
based acquisitions share many of the features of non-performance-based 
acquisitions. Only those features that are unique to PBA are set forth 
in subpart 37.6. Features that are similar, such as the Government's 
ability to take deductions for poor performance or non-performance of 
contract requirements under the Inspections clause, were not included. 
Therefore, the absence of a specific authority in subpart 37.6 should 
not be construed as meaning that the authority does not exist under 
another part of the FAR.

Disposition of Public Comments

    a. Definitions FAR 2.101.
    Comment(s): Performance-Based Acquisition. One commenter said the 
definition of performance-based acquisitions is unclear, wordy and 
obscure and that the demand for ``clear, specific, and objective terms 
with measurable outcomes'' was especially troublesome. The same 
commenter also said the definition appears to encompass both supplies 
and services and asked if ``structuring all aspects'' means 
``describing service requirements.'' Another commenter said a 
performance-based service acquisition is a subset of performance-based 
acquisitions and recommended developing a separate definition for 
performance-based service acquisitions and deleting the last sentence 
from the definition of performance-based acquisitions. Another 
commenter recommended revising the definition to permit ``objective or 
subjective terms'' since 37.601(c)(2) clearly permits the use of 
subjective standards.
    Disposition: The Councils revised the definition to state 
performance-based acquisition ``means an acquisition structured around 
the results to be achieved as opposed to the manner by which the work 
is to be performed.'' The Councils note the performance-based 
acquisition definition does encompass both supplies and services; 
however, the Councils do not believe a separate definition for 
performance-based service acquisitions is needed and believe adding a 
definition for performance-based service acquisition would necessitate 
a new definition for performance-based supply acquisition with the only 
difference being one definition would say ``service'' and the other 
would say ``supply.''
    Comment(s): Performance Work Statement (PWS). (a) One commenter 
recommended defining a PWS as ``a statement of work that describes 
service requirements in terms of the results that the contractor must 
produce instead of the processes that it must use when performing.'' 
The same commenter also questioned the difference between technical, 
functional, and performance characteristics and said it will be hard to 
implement the requirement for ``clarity, specificity, and objectivity'' 
at the working level ``especially for long term contracts (one year or 
longer).'' Another commenter recommended defining a PWS as ``a 
statement that identifies the agency's requirements in clear, specific, 
measurable, and objective terms that describe technical, functional, 
and performance characteristics'' because many PWSs are vague and 
impossible to measure and the lack of measurable outcomes allows the 
Government to apply subjective judgment that may lead to unfair 
contractor penalties. Another commenter recommended changing the 
definition to specifically state that the

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PWS is a type of SOW so that readers would understand that they are 
essentially the same type of document and replacing ``objective terms 
that describe'' with ``that identifies the agency requirements in clear 
specific, outcome or results-based terms, and with specific 
deliverables and tasks identified''. The same commenter also questioned 
how to ``describe a requirement objectively.''
    Disposition: The Councils revised the definition to say ``a 
statement of work for performance-based acquisitions that describes the 
required results in clear, specific, and objective terms with 
measurable outcomes.'' The Councils believe the results must be 
described in ``clear, specific, and objective terms'' to ensure both 
parties understand the requirements. The Councils also agree that the 
outcomes must be measurable and revised the rule at FAR 37.602-2 (now 
37.603) to require that performance standards be measurable and 
structured in a way to permit assessment of the contractor's 
performance.
    (b) One commenter said the ``desired outcome and/or performance 
objectives'' terminology at 37.601(d) for performance incentives was 
inconsistent with the definition of a performance work statement at 
2.101.
    Disposition: The Councils agree the terminology was inconsistent. 
Instead of revising the language, the Councils deleted that part of the 
coverage since performance incentives are covered at FAR 16.402-2. When 
performance incentives are used, the rule at 37.601(b)(3) requires that 
the performance incentives correspond to the performance standards set 
forth in the contract.
    Comment(s): Statement of Objectives (SOO). One commenter said the 
proposed definition could lead requirements and contracting personnel 
to think that a contract need contain only a SOO instead of a PWS. 
Another commenter said the definition is so broad that it is 
meaningless. The same commenter questioned the meaning of ``high-
level'' and recommended adding ``as they relate to the instant 
procurement'' after ``key agency objectives.''
    Disposition: The Councils revised 37.602 to clarify that the SOO is 
a Government prepared document for use in a solicitation that will form 
the basis for a PWS.
    Comment(s): Quality Assurance Surveillance Plans. One commenter 
recommended adding a definition for quality assurance surveillance plan 
to be consistent with the July 2003 Interagency Task Force on 
Performance-Based Service Acquisition.
    Disposition: Quality assurance surveillance plans are clearly 
addressed in FAR 46.401. The Councils are not aware of any issues 
related to the requirements in FAR 46.401. As these same requirements 
apply to Part 37, the Councils do not believe a new definition is 
necessary.
    b. Agency-head responsibilities, FAR 7.103(r).
    Comment(s): Three commenters said the assumption at 7.103(r) that 
greater use of performance-based service acquisitions methods and, 
therefore, fixed-price contracts should occur for follow-on acquisition 
was incorrect since the determination of appropriate contract type is 
based on level of risk and not the acquisition method, i.e., 
performance-based service acquisitions.
    Disposition: The Councils agree the appropriate contract type is 
based on the level of risk and not the acquisition method and revised 
the rule accordingly.
    Comment(s): One commenter asked what checks are in place to ensure 
that agency heads actually prescribe procedures for ensuring that 
knowledge gained from prior acquisitions is used to further refine 
requirements and acquisition strategies.
    Disposition: Issues of compliance with the FAR are beyond the scope 
of this rulemaking. The Councils note that the Government 
Accountability Office and other agency auditing functions (e.g., DoD 
Inspector General) have responsibility for assessing agency compliance 
with the established regulations.
    c. Content of written acquisition plans, FAR 7.105.
    Comment(s): One commenter recommended revising the rule at FAR 
7.105 to require an explanation of the agency's compliance with the 
order of precedence for requirement documents at Part 11.101(a).
    Disposition: Contracting officers are required to document the 
choice of product or services description types used in the acquisition 
plan - see FAR 7.105(b)(6). Therefore, additional coverage is not 
needed.
    Comment(s): One commenter said the requirement at FAR 
7.105(b)(4)(i) to ``provide rationale if a performance-based service 
acquisitions will not be used or if a performance-based service 
acquisitions is contemplated on other than a firm-fixed price basis'' 
should be changed since determining the appropriate contract type is 
independent of the acquisition approach used.
    Disposition: The Councils agree that determining contract type is 
independent of the acquisition method used; however, the Councils 
believe it is appropriate to document why performance-based acquisition 
methods and firm-fixed prices were not used given the statutory order 
of precedence reflected in FAR 37.102(a)(2). The Councils note that 
these provisions were not changed by this rule.
    d. Describing agency needs, FAR 11.101. One commenter said the rule 
revised the order of precedence for requirements documents by elevating 
function-oriented documents above detailed design-oriented documents 
and other standards or specifications. The commenter also recommended 
adding example of PWS or SOO to clarify the performance and function-
oriented documents.
    Disposition: The Councils did not intend to change the order of 
precedence at FAR 11.101. The Councils added ``function-oriented'' to 
``performance-oriented'' documents to attempt to differentiate between 
a PWS and a SOO. Based on this comment, and after further deliberation, 
the Councils concluded that the term ``function'' could be confused 
with ``detailed design-oriented documents'' thus potentially changing 
the order of precedence for requirements documents. To avoid further 
confusion, the Councils deleted the term ``function-oriented.'' The 
Councils also added examples of what is meant by a ``performance-
oriented document.''
    e. Types of contracts, FAR 16.505. One commenter said the rule at 
FAR 16.505(a)(3) that requires performance work statements to be used 
to the maximum extent practicable contradicts the reason for defining 
the SOO in the FAR. Another commenter said the provision should say 
performance-based service acquisitions must be used to the maximum 
extent possible instead of PWS since both PWS and SOO are acceptable 
alternative methods for solicitations.
    Disposition: The Councils agree ``performance-based acquisitions'' 
not ``performance work statements'' should be used to the maximum 
extent practical and the rule was revised accordingly.
    f. Scope of Part 37. One commenter recommended revising the rule at 
FAR 37.000 to reflect a ``preference'' instead of a ``requirement'' for 
the use of performance-based service acquisitions to be consistent with 
the statutory provisions.
    Disposition: The Councils believe ``requiring'' performance-based 
acquisition methods to the maximum

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extent practicable has the same meaning as the statutory ``preference'' 
for performance-based acquisition. The Councils note the provisions 
discussed above were not changed by this rule.
    g. Service contracts policy, FAR 37.102. One commenter recommended 
revising the rule at FAR 37.102(a)(1) to say ``performance work 
statements and quality assurance surveillance plans'' instead of 
``performance-based service acquisition methods'' because the term 
``performance-based service acquisitions methods'' is needlessly vague.
    Disposition: While performance work statements and quality 
assurance surveillance plans are important elements of performance-
based acquisitions, they are not the only elements, e.g. SOO, 
performance standards. The Councils believe it would be redundant to 
list all of the elements of performance-based acquisition each time the 
term is used.
    h. Contracting officer responsibility FAR 37.102. One commenter 
recommend revising the rule at FAR 37.103(c) to clarify that the 
technical/program personnel initiating the procurement must provide 
input to the contracting officer to enable the contracting officer to 
ensure performance-based contracting is used to the maximum extent 
possible.
    Disposition: DoD, GSA, and NASA agree that the program personnel 
initiating the procurement need to describe the need to be filled using 
performance-based acquisition methods and revised the rule accordingly. 
However, the Councils revised FAR 37.102(e) instead of FAR 37.103(c) as 
suggested by the commenter since agency program official 
responsibilities are described in FAR 37.102(e).
    i. Scope of subpart for performance-based service acquisition, FAR 
37.600. One commenter recommended revising the rule at FAR 37.600 to 
specify that the subpart is applicable to ``delivery'' orders as well 
as ``task'' orders since performance-based service acquisitions are not 
limited to service acquisitions.
    Disposition: While performance-based acquisitions encompass both 
supplies and services, the provisions in Part 37 only relate to 
contracts for services. Therefore, a reference to ``delivery'' orders 
in Part 37 is inappropriate because ``delivery'' orders are used to 
acquire supplies see FAR 16.501-1. The rule at FAR 37.000 has been 
revised to indicate that FAR Part 37 applies to orders for services, as 
well as contracts.
    j. General provisions for performance-based service acquisition, 
FAR 37.601.
    Comment(s): One commenter recommended revising the language at FAR 
37.601(a) of the proposed rule to say ``describing the Government's 
requirements in terms of the results that the contractor must produce 
instead of the processes that it must use when performing'' instead of 
``expressing the Government's needs in terms of required performance 
objectives and/or desired outcomes, rather than the method of 
performance.''
    Disposition: The Councils agree the requirements should be 
expressed in terms of the results the contractor is expected to achieve 
and revised the terminology throughout the rule.
    Comment(s): One commenter said the rule ignores the provisions the 
Councils recently added to FAR 37.601(a) to implement Section 1431 of 
the Services Acquisition Reform Act of 2003 (SARA) which provided 
governmentwide authority to treat certain performance-based contracts 
or task orders for services as commercial items under certain 
circumstances.
    Disposition: The commenter is addressing provisions the Councils 
added in FAR case 2004-004, Incentives for Use of Performance-Based 
Contracting for Services, which implemented sections 1431 and 1433 of 
the National Defense Authorization Act for Fiscal Year 2004. That rule 
reorganized the existing provision at FAR 37.601 into a new paragraph 
(a) and added a new paragraph (b) which references FAR 12.102(g) for 
the use of Part 12 procedures for performance-based contracting. The 
Councils acknowledge the proposed rule did not properly reflect the 
changes made by FAR case 2004-004. The Councils have revised the rule 
to reflect the provisions added in FAR case 2004-004 modified to 
reflect the revised terminology, i.e., change performance-based 
contracting to performance-based acquisitions.
    Comment(s): One commenter recommended changing the proposed rule at 
FAR 37.601(c)(1) to say a PBSA contract or order shall include ``PWS or 
SOO.''
    Disposition: While solicitations can include either a PWS or a SOO, 
the resulting contract or order must include only a PWS. Therefore, the 
Councils did not revise the rule as recommended.
    Comment(s): One commenter recommended replacing ``measurable 
performance standards'' with ``clear performance standards.'' Another 
commenter recommended revising the rule to require use of commercial 
language and practices when establishing performance standards and 
measuring performance against standards. Another commenter suggested 
using the terms ``quantitative'' and ``qualitative'' in lieu of 
``objective'' and ``subjective'' because the terms are more appropriate 
and less open to misinterpretation. Another commenter said the rule 
addressed the critical element of measurable performance standards but 
recommended additional provisions to require the standards to be 
practicable, reliable, and valid and where feasible, use customary 
commercial language and practices.
    Disposition: Performance standards must be measurable to enable 
assessment of the services performed. The Councils agree the 
performance standards can be quantitative or qualitative but believes 
it is not necessary to say so. As to using customary commercial 
language and practices, the Councils believe customary commercial 
language and practices may not always fully satisfy the Government's 
needs. Therefore, the Councils did not mandate their use; however, the 
Councils note nothing in the rule precludes their use.
    Comment(s): Performance incentives, FAR 37.601.(a) One commenter 
said the rule eliminates the link between performance and payment since 
incentives and disincentives are now optional which means contractors 
can be paid in full when performance is less than acceptable as long as 
the Government describes its requirements objectively. Another 
commenter said that ``to have a PBSC without incentives is to render 
the whole concept of measuring performance meaningless - especially if 
by default the only available remedy for sub par performance is 
termination for default.'' The same commenter also said the rule should 
use ``damages'' instead of ``negative incentives'' because the term 
``negative incentives''implies penalties that are not necessarily 
proportionate to the damage done to the Government. Another commenter 
said the ``Inspections of Services'' clauses dating from 1984 and 1993 
mandate negative incentives and the proposed rule suggests that 
negative incentives are optional.
    Disposition: The requirements for using performance incentives for 
performance-based acquisitions are no different than those for any 
other acquisition method, i.e., performance incentives should be used 
when the quality of performance is critical and the incentives will 
likely motivate the contractor's performance. As stated in FAR 16.402-
2(a), the performance incentives should relate profit or fee to the 
results achieved by the contractor compared with the specified targets, 
i.e., the performance standards in the contract. The Councils note that 
performance incentives relate the

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amount of profit or fee payable under the contract to the contractor's 
performance, not the Government's actual ``damages'', and that the term 
``negative incentives'' is used in the provisions at FAR 16.402-2(b). 
Performance incentives, when included in a contract, are in addition to 
the Governments rights under the Inspection of Services clause. The 
Councils revised the rule to clarify that performance incentives for 
performance-based service acquisitions are the same as performance 
incentives for non-performance-based contracts.
    (b) One commenter said the rule should refer to FAR Subpart 16.4 if 
other types of incentive such as cost incentives apply and recommended 
clarifying that performance incentives are not always needed for 
performance-based service acquisitions contracts.
    Disposition: Incentives other than performance incentives may be 
appropriate for performance-based service acquisitions and the rule 
does not preclude the use of those other incentives. The rule addresses 
performance incentives because the Councils believe it is necessary to 
ensure that, when used, the performance incentives are tied to the 
performance standards specified in the performance work statement. The 
Councils agree that performance incentives are not always appropriate 
for performance-based service acquisitions and notes that the rule does 
not mandate their use, i.e., the rule says ``if used.''
    Comment(s): One commenter applauded the change to remove the 
requirement for price or fee reduction since the ``Inspection of 
Services'' clause gives the Government adequate recourse.
    Disposition: The Councils agree that price or fee reduction flows 
from the inspection, warranty, and other clauses and that additional 
coverage is not needed in Part 37.
    k. Performance work statements and statements of objectives, FAR 
37.602.
    Comment(s): One commenter recommended a more complete description 
of the SOO to clarify that the resulting PWS is included in the 
contract. Another commenter recommended using the language in the 
proposed rule at FAR 37.602-1(c) as the definition of a SOO in FAR 
2.101 because the language at FAR 37.602-1(c) is clearer and more 
detailed and meaningful.
    Disposition: The Councils revised the rule to clarify that a SOO is 
only used in the solicitation and that the resulting contract must 
include a PWS. The Councils also revised the definition of SOO to 
clarify its meaning; however, the revised definition does not identify 
the elements of a SOO as suggested by the commenter because the 
Councils believe simply listing the elements would not adequately 
define the meaning of a SOO.
    Comment(s): Another commenter recommended making the proposed 
coverage for performance work statements consistent with the definition 
at FAR 2.101 to avoid confusion.
    Disposition: The final rule revises the wording of FAR 37.602(b) to 
emphasize that the purpose of the performance work statement is to 
express the results the Government desires.
    Comment(s): One commenter said the Government is writing 
performance work statements with ``100% of the time'' as the target 
performance and the rule should address when 100 percent is 
appropriate, e.g., for mission critical systems.
    Disposition: Contracting officers and program personnel must have 
the flexibility to decide the appropriate level of performance based on 
the specifics of the acquisition. The Councils do not believe it is 
feasible or necessary to define when ``100%'' is the appropriate 
performance level.
    Comment(s): One commenter said that while implied in the proposed 
rule at FAR 37.601(b) and 37.601(c), the rule does not specifically 
state that a PWS must be developed and incorporated into the contract 
or order when the solicitation includes a SOO.
    Disposition: The Councils note that the proposed rule at FAR 
37.601(c) and the final rule at FAR 37.601(b)(1) both require 
performance-based contracts, including orders, include a PWS; however, 
the final rule at FAR 37.602 clearly states that the SOO does not 
become part of the contract.
    l. Quality assurance surveillance plans, FAR 37.604
    Comment(s): One commenter recommended revising the rule to say 
quality assurance surveillance plans are internal government documents 
that should not be incorporated into contracts because the Government 
should not make its quality assurance plan contractually binding or 
disclose the plan to the contractor since unannounced inspections are 
often essential to sound quality assurance. Two other commenters 
recommended making quality assurance surveillance plans mandatory 
elements of performance-based acquisition. One of the commenters also 
said the rule does not clearly state whether or not quality assurance 
surveillance plans are required and questioned whether the quality 
assurance surveillance plans were required for non-performance-based 
acquisitions procurement.
    Disposition: The Councils agree the FAR should not require 
inclusion of quality assurance surveillance plans in all performance-
based acquisitions; however, the Councils believe there may be 
circumstances when it could be appropriate to include the quality 
assurance surveillance plans in the contract, e.g., the quality 
assurance surveillance plans outlines the method of assessing 
contractor performance against the performance standards. The Councils 
note that nothing in the rule requires that the QASP be incorporated in 
the contract. While the Councils believe the FAR should not mandate 
inclusion of a quality assurance surveillance plans in all performance-
based acquisitions, the Councils do believe all performance-based 
acquisitions should contain the method of assessing contractor 
performance against performance standards and the Councils revised the 
rule accordingly. Lastly, the Councils believe the quality assurance 
coverage in FAR Subpart 37.6 has led to significant confusion and notes 
that much of the quality assurance coverage in FAR Subpart 37.6 
duplicates coverage in FAR Subpart 46.4, Government Contract Quality 
Assurance. As the same requirements apply to performance-based 
acquisitions, the Councils eliminated the duplicative coverage from FAR 
Subpart 37.6.
    Comment(s): One commenter recommended replacing the term ``desired 
outcomes'' with ``requirements'' to be consistent with the definition 
of a performance work statement at FAR 2.101.
    Disposition: The Councils agree the terminology was inconsistent 
with the performance work statement definition and the rule no longer 
uses the terminology.
    Comment(s): One commenter recommended adding the responsibilities 
of the Government, including the responsibility to provide performance 
feedback to the contractor on a regular basis and in an objective 
fashion, to the rule.
    Disposition: The Councils believe Government personnel notify 
contractors when they believe the contractors are not meeting the 
contract quality requirements in the contract; however, the contractor, 
not the Government, is responsible for meeting the contract quality 
requirements. As with any acquisition, the level of contract quality 
requirements and Government contract quality assurance surveillance 
will vary based on the

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particular acquisition. In some cases, the quality assurance 
surveillance may be limited to inspection at time of acceptance.
    Comment(s): One commenter recommended changing the title of FAR 
37.602-2 from ``Quality Assurance'' to ``Quality Assurance Surveillance 
Plan'' (QASP) to be consistent with the ``Seven Steps Guide'' or 
changing the title to ``Performance Management Plan'' or ``Performance-
Based Management Plan'' to ensure the plans do not become checklists to 
measure performance.
    Disposition: The Councils renamed the section of the rule to 
``Quality Assurance Surveillance Plan'' to be consistent with FAR 
terminology. The Councils do not understand how changing the title 
would ensure that the plans were not used as checklists.
    m. Selection procedures, FAR 37.602-3. One commenter said requiring 
agencies to use competitive negotiations when appropriate suggests that 
competitive negotiations is better than other contracting methods when 
it comes to obtaining best value which seems to be inconsistent with 
the definition of best value in FAR 2.101 and 6.401(b).
    Disposition: The Councils agree the rule was inconsistent with the 
definition of best value and the provisions at FAR 6.401 that permit 
use of competitive proposals when sealed bids are not appropriate. The 
Councils deleted the provisions at FAR 37.602-3 because they believe 
the competition requirements and best value are adequately addressed in 
FAR 6.401(b) and 2.101, respectively.
    n. Contract type and follow-on and repetitive requirements, FAR 
37.602-4 and 37.602-5. One commenter said assuming that services that 
can be ``defined objectively'' lend themselves more readily to fixed 
pricing than other services, has no basis in contracting fact or 
theory. Another commenter recommended deleting the first sentence of 
the proposed FAR 37.602-4 because it is critical to continue to stress 
the importance of selecting a contract type that motivates a contractor 
to perform at optimal levels while complying with the order of 
precedence. Another commenter said contract type should not limit 
performance-based service acquisitions use. Another commenter said the 
proposed language at FAR 37.602-4 (Contract Type) and 37.602-5 (Follow-
on and repetitive requirements) adds to the general misconception that 
fixed-price contracts or task orders go hand-in-hand with performance-
based service acquisitions. The commenter recommended changing both 
references to say the type of contract or order issued should be 
appropriate for the type of work to be performed.
    Disposition: The Councils agree that the rationale for selecting 
the appropriate contract type for performance-based acquisitions is no 
different than the rationale for selecting the appropriate contract 
type for non-performance-based acquisitions. Fixed-price contracts are 
appropriate when the risk involved is minimal or can be predicted with 
an acceptable degree of certainty and a reasonable basis for firm 
pricing exists. While recognizing the statutory order of precedence at 
FAR 37.102(a)(2), nothing in the statutory order of precedence changes 
the rationale for selecting contract type. To avoid further confusion, 
the Councils eliminated the coverage from Subpart 37.6.
    o. General.
    Comment(s): One commenter expressed concern that the September 7, 
2004, Office of Federal Procurement Policy(OFFP) memorandum, entitled 
``Increasing the Use of Performance-Based Service Acquisition,'' 
rescinded the 1998 OFPP ``Guide to Best Practices for Performance-Based 
Service Contracting'' without any suitable replacement. The commenter 
said the Seven Steps to PBSA Guide does not provide sufficient guidance 
to meet the demonstrated needs of the agencies and entire acquisition 
community. The commenter hopes the Services Contracting Center of 
Excellence required by the SARA will provide meaningful information to 
assist Federal agencies with their performance-based service 
acquisitions efforts.
    Disposition: The OFPP memorandum, guide, and Acquisition Center of 
Excellence for Service Contracting are beyond the scope of the 
Councils. They note OFPP is working with an interagency team to 
incorporate current policy, regulations, and vetted samples into the 
Government-wide PBSA guide, Seven Steps to PBSA. The Councils sent this 
recommendation to OFPP for its consideration.
    Comment(s): One commenter recommended repealing the term 
``performance-based contracting'' because the rule does not clearly 
override the current FAR terminology.
    Disposition: As detailed in the summary of the proposed rule in the 
Federal Register, the Councils are changing the term from 
``performance-based contracting'' to ``performance-based acquisition.'' 
Additionally, once the final rule is published, the FAR will no longer 
have a definition for performance-based contracting.
    Comment(s): One commenter said that performance-based acquisitions 
is broader than PBSC and could be used for more innovative ways of 
procurement but just changing the name will not get people to do more 
performance-based work. Another commenter said the proposed rule is a 
strong and needed step toward clarifying actions and responsibilities, 
especially in addressing definitions and acquisition planning. Another 
commenter commends the Councils on this proposed guidance particularly 
on the encouragement of fixed-price contracts.
    Disposition: The Councils agree that simply changing the name will 
not increase the use of performance-based acquisition; however, the 
rule also clarifies performance-based terms and elements. The Councils 
intend these clarifications to help increase the use of performance-
based acquisition. Also, they revised the rule to clarify that the 
rationale for determining contract type is no different for 
performance-based acquisition than any other acquisition. While the 
Councils encourage the use of fixed-price contracts whenever 
appropriate, the Councils do not encourage the use of fixed-price 
contracts when it is not appropriate (i.e., too much risk or no 
reasonable basis for firm pricing).
    Comment(s): One commenter said the rule should contain a strong 
statement to emphasize that performance-based contracting requires an 
end product or service that can be measured and that labor hour 
instruments are level-of-effort contracts with no definite deliverable.
    Disposition: By definition, all contracts require delivery of 
supplies or performance of services. The deciding factor for 
performance-based acquisitions is whether or not the contract has 
measurable performance standards. The Councils believe that T&M/LH 
contracts can have measurable performance standards. Therefore, the 
rule does not preclude the use of T&M/LH contracts for performance-
based acquisitions.
    Comment(s): Two commenters recommended consistent use of ``contract 
or order'' throughout the entire proposed rule.
    Disposition: The Councils do not believe it is necessary to state 
``or order'' after each use of ``contract,'' and to simplify the rule, 
the Councils identified orders in the Scope of part.
    Comment(s): One commenter said use of the term ``to the maximum 
extent practicable'' is vague and will provide an easy way to avoid 
performance-based acquisitions.
    Disposition: The Councils believe the term ``to the maximum extent

[[Page 217]]

practicable'' provides Contracting Officers the appropriate flexibility 
to determine when performance-based acquisition methods should be used 
to fulfill the agency's requirements.
    Comment(s): One commenter said the rule does not address 
performance plans which are highlighted in AFI 63-124. The commenter 
also said the rule addresses contractor assessment but fails to address 
contract assessment and oversight which is required in Public Law 107-
107. The Air Force uses a performance plan to document both contract 
and contractor assessment. Suggest you address contract oversight in 
this section.
    Disposition: The requirements of Section 801 of Public Law 107-107 
are unique to DoD. DoD unique requirements are addressed in the Defense 
Federal Acquisition Regulations and are beyond the scope of this rule.
    Comment(s): One commenter stated ``low-bid contracting'' is 
valuable for purchasing services in the context of fair pre-
qualification requirements and that the rule does not clearly provide 
for the two-step process. The commenter requested the Councils clarify 
when low-bid would be appropriate for performance-based acquisitions.
    Disposition: The Councils assume the commenter is referring to 
sealed bidding procedures. Under those procedures, ``low-bid'' is only 
appropriate when the award will be based on price and price-related 
factors.
    p. The following comments were submitted under FAR case 2004-004, 
but pertain to this FAR case.
    Comment(s): One commenter recommended changing the term ``quality 
assurance'' with ``performance assessment'' in FAR 37.601(a)(2) to be 
consistent with DoD's ``Guidebook for Performance-Based Services 
Acquisitions.''
    Disposition: Quality assurance is the term consistently used 
throughout the FAR to monitor contractor performance and to ensure 
compliance with contract requirements. The instructions contained in 
the referenced Guidebook pertain only to the Department of Defense.
    Comment(s): One commenter suggested that the Councils move the 
reference to quality assurance surveillance plans from FAR 37.601(a)(2) 
and make it a new subparagraph (5) to emphasize the importance of 
quality assurance surveillance plans.
    Disposition: See paragraph l for the discussion of changes to the 
rule for quality assurance surveillance plans.
    Comment(s): One commenter recommended changing the language in FAR 
12.102(g)(1)(iv) to: ``Includes appropriate quality assurance 
provisions (see 12.208)'' instead of ``includes a quality assurance 
surveillance plan.''
    Disposition: The Councils deleted the requirement to include a 
quality assurance surveillance plan in the contract to be consistent 
with provisions in Part 37.
    Comment(s): One commenter recommended revisions to FAR 37.601(a) to 
provide for additional flexibility when using performance-based 
contracts for services.
    Disposition: FAR 37.601(a) was revised to provide clarification to 
agencies and the acquisition community on the use of performance-based 
service acquisitions techniques.
    This is not a significant regulatory action and, therefore, was not 
subject to review under Section 6(b) of Executive Order 12866, 
Regulatory Planning and Review, dated September 30, 1993. This rule is 
not a major rule under 5 U.S.C. 804.

B. Regulatory Flexibility Act

    The Department of Defense, the General Services Administration, and 
the National Aeronautics and Space Administration certify that this 
final rule will not have a significant economic impact on a substantial 
number of small entities within the meaning of the Regulatory 
Flexibility Act, 5 U.S.C. 601, et seq., because the rule does not 
impose any costs on either small or large businesses.

C. Paperwork Reduction Act

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

List of Subjects in 48 CFR Parts 2, 7, 11, 12, 16, 37, and 39

    Government procurement.

    Dated: December 22, 2005.
Gerald Zaffos,
Director, Contract Policy Division.

0
Therefore, DoD, GSA, and NASA amend 48 CFR parts 2, 7, 11, 12, 16, 37, 
and 39 as set forth below:
0
1. The authority citation for 48 CFR parts 2, 7, 11, 12, 16, 37, and 39 
continues 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

0
2. Amend section 2.101 in paragraph (b)(2) by removing the definition 
``Performance-based contracting'' and adding, in alphabetical order, 
the definitions ``Performance-based acquisition (PBA)'', ``Performance 
Work Statement'', and ``Statement of Objectives (SOO)'' to read as 
follows:


2.101   Definitions.

* * * * *
    (b) * * *
    (2) * * *
    Performance-based acquisition (PBA) means an acquisition structured 
around the results to be achieved as opposed to the manner by which the 
work is to be performed.
    Performance Work Statement (PWS) means a statement of work for 
performance-based acquisitions that describes the required results in 
clear, specific and objective terms with measurable outcomes.
* * * * *
    Statement of Objectives (SOO) means a Government-prepared document 
incorporated into the solicitation that states the overall performance 
objectives. It is used in solicitations when the Government intends to 
provide the maximum flexibility to each offeror to propose an 
innovative approach.
* * * * *

PART 7--ACQUISITION PLANNING

0
3. Amend section 7.103 by revising paragraph (r) to read as follows:


7.103  Agency-head responsibilities.

* * * * *
    (r) Ensuring that knowledge gained from prior acquisitions is used 
to further refine requirements and acquisition strategies. For 
services, greater use of performance-based acquisition methods should 
occur for follow-on acquisitions.
* * * * *
0
4. Amend section 7.105 by--
0
a. Removing from the last sentence of the introductory text 
``contracting'' and adding ``acquisition'' in its place;
0
b. Revising the last sentence in paragraph (b)(4)(i); and
0
c. Removing from paragraph (b)(6) ``contracting'' and adding 
``acquisition'' in its place.
    The revised text reads as follows:


7.105  Contents of written acquisition plans.

* * * * *
    (b) * * *
    (4) Acquisition considerations.
    (i) * * * Provide rationale if a performance-based acquisition

[[Page 218]]

will not be used or if a performance-based acquisition for services is 
contemplated on other than a firm-fixed-price basis (see 37.102(a), 
16.103(d), and 16.505(a)(3)).
* * * * *

PART 11--DESCRIBING AGENCY NEEDS

0
5. Amend section 11.101 by revising paragraph (a)(2) to read as 
follows:


11.101  Order of precedence for requirements documents.

    (a) * * *
    (2) Performance-oriented documents (e.g., a PWS or SOO). (See 
2.101.)
* * * * *

PART 12--ACQUISITION OF COMMERCIAL ITEMS


12.102  [Amended]

0
6. Amend section 12.102 in paragraph (g)(1)(iii) by removing 
``contracting'' and adding ``acquisition'' in its place.

PART 16--TYPES OF CONTRACTS

0
7. Amend section 16.505 by revising paragraph (a)(3) to read as 
follows:


16.505  Ordering.

    (a) * * *
    (3) Performance-based acquisition methods must be used to the 
maximum extent practicable, if the contract or order is for services 
(see 37.102(a) and Subpart 37.6).
* * * * *

PART 37--SERVICE CONTRACTING

0
8. Amend section 37.000 by revising the second and third sentences to 
read as follows:


37.000  Scope of part.

    * * * This part applies to all contracts and orders for services 
regardless of the contract type or kind of service being acquired. This 
part requires the use of performance-based acquisitions for services to 
the maximum extent practicable and prescribes policies and procedures 
for use of performance-based acquisition methods (see Subpart 37.6). * 
* *
0
9. Amend section 37.102 by--
0
a. Removing from the first sentence of the introductory text of 
paragraph (a) ``contracting'' and adding ``acquisition'' in its place; 
and removing from the second sentence ``contracts,'' and adding 
``contracts or orders,'' in its place;
0
b. Removing from paragraph (a)(1) ``contracting'' and adding 
``acquisition'' in its place; and
0
c. Adding a sentence to the end of paragraph (e) to read as follows:


37.102  Policy.

* * * * *
    (e) * * * To the maximum extent practicable, the program officials 
shall describe the need to be filled using performance-based 
acquisition methods.
* * * * *


37.103  [Amended]

0
10. Amend section 37.103 by removing from paragraph (c) ``contracting'' 
and adding ``acquisition'' in its place.
0
11. Revise Subpart 37.6 to read as follows:

Subpart 37.6--Performance-Based Acquisition

Sec.
37.600 Scope of subpart.
37.601 General.
37.602 Performance work statement.
37.603 Performance standards.
37.604 Quality assurance surveillance plans.


37.600  Scope of subpart.

    This subpart prescribes policies and procedures for acquiring 
services using performance-based acquisition methods.


37.601  General.

    (a) Solicitations may use either a performance work statement or a 
statement of objectives (see 37.602).
    (b) Performance-based contracts for services shall include--
    (1) A performance work statement (PWS);
    (2) Measurable performance standards (i.e., in terms of quality, 
timeliness, quantity, etc.) and the method of assessing contractor 
performance against performance standards; and
    (3) Performance incentives where appropriate. When used, the 
performance incentives shall correspond to the performance standards 
set forth in the contract (see 16.402-2).
    (c) See 12.102(g) for the use of Part 12 procedures for 
performance-based acquisitions.


37.602  Performance work statement.

    (a) A Performance work statement (PWS) may be prepared by the 
Government or result from a Statement of objectives (SOO) prepared by 
the Government where the offeror proposes the PWS.
    (b) Agencies shall, to the maximum extent practicable--
    (1) Describe the work in terms of the required results rather than 
either ``how'' the work is to be accomplished or the number of hours to 
be provided (see 11.002(a)(2) and 11.101);
    (2) Enable assessment of work performance against measurable 
performance standards;
    (3) Rely on the use of measurable performance standards and 
financial incentives in a competitive environment to encourage 
competitors to develop and institute innovative and cost-effective 
methods of performing the work.
    (c) Offerors use the SOO to develop the PWS; however, the SOO does 
not become part of the contract. The SOO shall, at a minimum, include--
    (1) Purpose;
    (2) Scope or mission;
    (3) Period and place of performance;
    (4) Background;
    (5) Performance objectives, i.e., required results; and
    (6) Any operating constraints.


37.603  Performance standards.

    (a) Performance standards establish the performance level required 
by the Government to meet the contract requirements. The standards 
shall be measurable and structured to permit an assessment of the 
contractor's performance.
    (b) When offerors propose performance standards in response to a 
SOO, agencies shall evaluate the proposed standards to determine if 
they meet agency needs.


37.604  Quality assurance surveillance plans.

    Requirements for quality assurance and quality assurance 
surveillance plans are in Subpart 46.4. The Government may either 
prepare the quality assurance surveillance plan or require the offerors 
to submit a proposed quality assurance surveillance plan for the 
Government's consideration in development of the Government's plan.

PART 39--ACQUISITION OF INFORMATION TECHNOLOGY


39.104  [Amended]

0
12. Amend section 39.104 by removing from paragraph (b) ``contract'' 
and adding ``acquisition'' in its place.
[FR Doc. 05-24548 Filed 12-30-05; 8:45 am]
BILLING CODE 6820-EP-S