[Federal Register Volume 71, Number 70 (Wednesday, April 12, 2006)]
[Rules and Regulations]
[Pages 18671-18673]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-3457]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 232 and 252

[DFARS Case 1990-037]


Defense Federal Acquisition Regulation Supplement; Incremental 
Funding of Fixed-Price Contracts

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Final rule.

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SUMMARY: DoD has adopted as final, with changes, an interim rule 
amending the Defense Federal Acquisition Regulation Supplement (DFARS) 
to address the use of incrementally funded fixed-price contracts. The 
rule contains a contract clause for use in those situations where 
incremental funding of fixed-price contracts is permitted.

DATES: Effective Date: April 12, 2006.

FOR FURTHER INFORMATION CONTACT: Mr. Bill Sain, Defense Acquisition 
Regulations System, OUSD(AT&L)DPAP(DARS), IMD 3C132, 3062 Defense 
Pentagon, Washington, DC 20301-3062. Telephone (703) 602-2022; 
facsimile (703) 602-0350. Please cite DFARS Case 1990-037.

SUPPLEMENTARY INFORMATION:

A. Background

    This rule revises and finalizes the interim rule published at 58 FR 
46091 on September 1, 1993, regarding incremental funding of fixed-
price contracts. Prior to the issuance of the interim rule, 
incrementally funded fixed-price contracts had been used in limited 
situations throughout DoD for a number of years. This technique 
permitted DoD to award fixed-price contracts in specific circumstances

[[Page 18672]]

where full funding was not available and incremental funding was 
statutorily permitted. Use of this technique precluded the need to use 
a cost-type contract when the nature of the requirement was more 
suitable for a fixed-price contract. To implement this technique, a 
number of nonstandard clauses had been developed for use within the 
military departments and defense agencies. In recognition of the need 
for a standard clause for such contracts, DoD issued an interim rule to 
specify those situations where incremental funding of fixed-price 
contracts is permitted. Six sources submitted comments on the interim 
rule. The following is a discussion of the comments and the issues 
relating to the development of the final rule.
    1. Language permitting use of incremental funding. The interim rule 
permitted the use of incremental funding only when the contract was 
funded with research and development appropriations or when Congress 
had otherwise authorized incremental funding. The interim rule further 
required that, for either base services or hazardous/toxic waste 
remediation contracts for which incremental funding had been authorized 
by Congress, the head of the contracting activity must approve the use 
of incremental funding. A number of respondents expressed concern 
regarding this language.
    DoD has revised the rule to specifically address contracts for 
severable services. As provided for in DFARS 232.703-3, contracts 
crossing fiscal years, the contracting officer may enter into a 
contract, exercise an option, or place an order under a contract for 
severable services for a period that begins in one fiscal year and ends 
in the next fiscal year if the period of the contract awarded, option 
exercised, or order placed does not exceed one year (10 U.S.C. 2410a). 
The public comments indicated that this provision may cause confusion 
with regard to the use of incremental funding for severable services. 
Therefore, the final rule contains a new paragraph 232.703-1(i) to 
specifically address incremental funding for severable services.
    2. Head of the contracting activity (HCA) approval. The interim 
rule required the HCA to approve interim funding for base services and 
hazardous/toxic waste remediation contracts. DoD believes that the 
language in the final rule precludes the need for HCA approval. In 
those cases where incremental funding has been authorized by Congress, 
the contracting officer should have the flexibility to use such funding 
without requiring the administrative burden of obtaining HCA approval. 
This is consistent with the DoD policy of empowering contracting 
personnel to the maximum extent practicable. The final rule is 
sufficient for the contracting officer to apply the requirements 
without further approval, as the rule specifies exactly which contracts 
are eligible for incremental funding. The final rule also emphasizes 
the preference for full funding by requiring that incrementally funded 
fixed-price contracts be fully funded as soon as funds are available. 
Therefore, the final rule eliminates the requirement for HCA approval 
for base services or hazardous/toxic waste remediation contracts.
    3. Work without funding. One respondent asserted that the clause at 
DFARS 252.232-7007 encourages contractors to work without funding. The 
respondent stated that the clause is intended as a vehicle for 
contracting officers to circumvent the Anti-Deficiency Act.
    Under the requirements of DFARS 252.232-7007, the contractor agrees 
to perform up to the point at which the total amount payable by the 
Government, including reimbursement in the event of termination for 
convenience, approximates the total amount allotted to the contract; 
the contractor is not obligated to continue work on those items beyond 
that point, and the Government is not obligated to reimburse the 
contractor in excess of the amount allotted to the contract. The clause 
notifies the contractor that continuing work is at the sole risk of the 
contractor. Thus, the clause is not, nor is it intended to be, a 
vehicle for violating the Anti-Deficiency Act. Nevertheless, DoD agrees 
that it would be helpful to revise the language regarding continued 
contract performance to emphasize that the contractor is not authorized 
to continue work. Therefore, the final rule changes the phrase ``The 
Contractor will not be obligated to continue work'' to ``The Contractor 
is not authorized to continue work''. In addition, the final rule 
redesignates paragraph (i) of the clause as paragraph (j) and adds a 
new paragraph (i) to read ``Nothing in this clause shall be construed 
as authorization of voluntary services whose acceptance is otherwise 
prohibited under 31 U.S.C. 1342.''
    This rule was not subject to Office of Management and Budget review 
under Executive Order 12866, dated September 30, 1993.

B. Regulatory Flexibility Act

    DoD has prepared a final regulatory flexibility analysis consistent 
with 5 U.S.C. 604. A copy of the analysis may be obtained from the 
point of contact specified herein. The analysis is summarized as 
follows:
    This rule amends the DFARS to allow incrementally funded fixed-
price contracts in certain limited, and clearly defined, situations. 
The objective of the rule is to encourage the full funding of 
contracts, while recognizing that there are specific situations where 
full funding is not possible, and allowing incremental funding to be 
used in those situations. DoD received no public comments on the 
initial regulatory flexibility analysis. As a result of comments 
received on the interim rule, the final rule contains changes that 
clarify the applicability of the rule and the requirements of the 
contract clause. The rule applies to all entities with incrementally 
funded fixed-priced DoD contracts. DoD believes that the rule has 
little or no economic impact on such entities, since the rule places 
little cost risk on the contractor. This is especially true of the 
final rule, which includes revisions that clarify that a contractor is 
not authorized to continue performance of a contract beyond the amount 
incrementally funded. The final rule maintains the clear preference for 
fully funded fixed-priced contracts; and requires the use of a standard 
clause in clearly defined and limited circumstances permitting DoD to 
award, and the contractor to begin work under, a contract prior to the 
availability of full funding. The rule requires that full funding be 
placed on the contract as soon as funds are available; clearly states 
that the contractor is not authorized to perform work beyond the 
available funds allotted to the contract; and provides specific 
protections to the contractor until full funding is made available. The 
rule requires the contractor to notify the contracting officer at least 
90 days prior to the date when, in the contractor's best judgment, the 
work under the contract will reach the point at which the total amount 
payable by the Government, including any cost for termination for 
convenience, will approximate 85 percent of the total amount allotted 
to the contract. In addition, the contractor must provide information 
regarding additional funding needed to continue performance. This 
information is the minimum needed for the Government to determine the 
appropriate course of action. The required information should be 
readily available to the contractor as part of its normal business 
practices. The policy in the final rule is designed to minimize any 
economic impact on small entities. There are no practical

[[Page 18673]]

alternatives to the rule. The rule is consistent with statutory 
requirements.

C. Paperwork Reduction Act

    The information collection requirements of the clause at DFARS 
252.232-7007, Limitation of Government's Obligation, have been approved 
by the Office of Management and Budget under Clearance Number 0704-0359 
for use through December 31, 2007.

List of Subjects in 48 CFR Parts 232 and 252

    Government procurement.

Michele P. Peterson,
Editor, Defense Acquisition Regulations System.

0
Accordingly, the interim rule amending 48 CFR Parts 232 and 252, which 
was published at 58 FR 46091 on September 1, 1993, is adopted as a 
final rule with the following changes:
0
1. The authority citation for 48 CFR parts 232 and 252 continues to 
read as follows:

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

PART 232--CONTRACT FINANCING

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2. Section 232.001 is added to read as follows:


232.001  Definitions.

    Incremental funding means the partial funding of a contract or an 
exercised option, with additional funds anticipated to be provided at a 
later time.

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3. Section 232.703-1 is revised to read as follows:


232.703-1  General.

    (1) A fixed-price contract may be incrementally funded only if--
    (i) The contract (excluding any options) or any exercised option--
    (A) Is for severable services;
    (B) Does not exceed one year in length; and
    (C) Is incrementally funded using funds available (unexpired) as of 
the date the funds are obligated; or
    (ii) The contract uses funds available from multiple (two or more) 
fiscal years and--
    (A) The contract is funded with research and development 
appropriations; or
    (B) Congress has otherwise authorized incremental funding.
    (2) An incrementally funded fixed-price contract shall be fully 
funded as soon as funds are available.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
4. Section 252.232-7007 is amended as follows:
0
a. By revising the clause date;
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b. In paragraph (b), by revising the second sentence;
0
c. By revising paragraph (i); and
0
d. By adding paragraph (j) to read as follows:


252.232-7007  Limitation of Government's Obligation.

* * * * *
LIMITATION OF GOVERNMENT'S OBLIGATION (APR 2006)
* * * * *
    (b) * * * The Contractor is not authorized to continue work on 
those item(s) beyond that point. * * *
* * * * *
    (i) Nothing in this clause shall be construed as authorization of 
voluntary services whose acceptance is otherwise prohibited under 31 
U.S.C. 1342.
    (j) The parties contemplate that the Government will allot funds to 
this contract in accordance with the following schedule:
    On execution of contract $----
    (month) (day), (year) $----
    (month) (day), (year) $----
    (month) (day), (year) $----
* * * * *
[FR Doc. 06-3457 Filed 4-11-06; 8:45 am]
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