[Federal Register Volume 71, Number 88 (Monday, May 8, 2006)]
[Proposed Rules]
[Pages 26723-26726]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-6736]


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DEPARTMENT OF ENERGY

48 CFR Part 970

RIN 1991-AB67


Acquisition Regulation: Implementation of DOE's Cooperative Audit 
Strategy for Its Management and Operating Contracts

AGENCY: Department of Energy.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Department of Energy (DOE) is proposing to amend the 
Department of Energy Acquisition Regulation (DEAR) to revise and expand 
policy and requirements for contractor internal audits, through the use 
of DOE's Cooperative Audit Strategy. The amendments would ensure that 
internal contractor audits are conducted in a manner that ensures 
reliability.

DATES: Comments should be submitted on or before July 7, 2006.

ADDRESSES: You may submit comments, identified by RIN number 1991-AB67, 
by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include RIN number 
1991-AB67 in the subject line of the message.
     Mail: Helen Oxberger, Mail Code MA-61, U.S. Department of 
Energy, 1000 Independence Avenue, SW., Washington, DC 20585.

FOR FURTHER INFORMATION CONTACT: Helen Oxberger, (202) 287-1332.

SUPPLEMENTARY INFORMATION:

I. Background
II. Section-by-Section Analysis
III. Procedural Requirements
    A. Review Under Executive Order 12866
    B. Review Under the Regulatory Flexibility Act
    C. Review Under the Paperwork Reduction Act
    D. Review Under the National Environmental Policy Act
    E. Review Under Executive Order 13132
    F. Review Under Executive Order 12988
    G. Review Under the Unfunded Mandates Reform Act of 1995
    H. Review Under the Treasury and General Government 
Appropriations Act, 1999
    I. Review Under the Treasury and General Government 
Appropriations Act, 2001
    J. Review Under Executive Order 13211
    K. Approval by the Office of the Secretary

I. Background

    The Department contracts for the management and operation of its 
Government owned or controlled research, development, special 
production, or testing facilities through the use of management and 
operating (M&O) contracts. The Department historically expends 
approximately 80% of its annual appropriations through these M&O prime 
contracts. Thus, it is imperative for the Department to develop 
approaches which permit oversight of M&O expenditures in order for the 
Department to satisfy its oversight responsibility and to ensure that 
DOE funds are expended on allowable and reasonable costs.
    The creation and maintenance of rigorous business, financial, and 
accounting systems by contractors are crucial to assuring the integrity 
and reliability of the cost data used by the DOE's Chief Financial 
Officer (CFO), the Inspector General (IG), and contracting

[[Page 26724]]

officers (COs). To ensure the reliability of these systems, DOE 
requires some of its contractors to maintain an internal audit 
activity, that is, an internal audit organization, which is responsible 
for: (i) Performing operational and financial audits including incurred 
cost audits, and (ii) assessing the adequacy of management control 
systems.
    The Cooperative Audit Strategy is a program that the IG, partnering 
with contractors' internal audit groups, the CFO, and the Office of DOE 
Procurement and Assistance Management, developed and implemented in 
October 1992 to maximize the overall audit coverage of M&O contractors' 
operations and to fulfill the IG's responsibility for auditing the 
costs incurred by major facilities contractors. The Cooperative Audit 
Strategy enhances the DOE's efficient use of available audit resources 
by allowing the IG to rely on the work of contractors' internal audit 
organization. The IG has adopted the Cooperative Audit Strategy at most 
major contractor locations.
    The success of the Cooperative Audit Strategy depends on the IG and 
contractor internal audit groups working closely with DOE. The 
contractor internal audit groups are committed to a continuing 
evaluation of the process and have established the Steering Committee 
for Quality Auditing to address current issues and implement on-going 
improvements.
    Currently, the Cooperative Audit Strategy is implemented under an 
alternative clause in the Accounts, records, and inspection contract 
clause at 970.5232-3. The proposed rule would eliminate the alternative 
and amend the contract clause to require the use of the Cooperative 
Audit Strategy in all M&O contracts.

II. Section-by-Section Analysis

    DOE is proposing to amend the DEAR as follows:
    1. Section 970.5203-1, Management controls, paragraph (a)(4) would 
be amended by adding a sentence which requires the contractor to 
annually, or at other times as directed by the contracting officer, 
provide copies of reports on the status of audit recommendations.
    2. Section 970.5232-3, Accounts, records, and inspection, would be 
amended by removing Alternative II and by adding a new paragraph (i) 
which would establish requirements that:
    A. Upon contract award, exercise of any contract option, or the 
extension of the contract, the contractor shall submit to the 
contracting officer an internal audit implementation design. The audit 
implementation design would describe (i) the internal audit activity's 
placement within the contractor's organization and reporting 
requirements; (ii) the size, experience, and educational standards of 
the internal audit staff; (iii) the relationship of the internal audit 
activity to corporate entities; if any; (iv) the standards to be used 
for conducting the audits; (v) the overall internal audit strategy for 
the performance period of the contract, considering particularly the 
method of auditing costs incurred; (vi) the intended use of external 
audit resources; (vii) the plan for internal audits of subcontracts, 
both pre- and post-award; and (viii) the schedule for peer reviews.
    B. Annually, the contractor shall submit a summary of the previous 
fiscal year's internal audits, reflecting the results of those audits, 
and actions, proposed or taken to resolve any identified weaknesses.
    C. Annually, the contractor shall submit an audit plan for internal 
audits for the next fiscal year.
    D. All such documents shall be satisfactory to the contracting 
officer.
    3. Section 970.5232-3 is amended by adding a new paragraph (j) 
which states that upon discovery the contractor has claimed unallowable 
costs, the contracting officer may (i) direct the contractor to cease 
using, in whole or in part, the DOE special financial institution 
account, (ii) require a refund, (iii) reduce the contractor's fee, or 
(iv) take any other action authorized in law, regulations, or this 
contract.

III. Procedural Requirements

A. Review Under Executive Order 12866

    This regulatory action has been determined not to be a significant 
regulatory action under Executive Order 12866, Regulatory Planning and 
Review (58 FR 51735, October 4, 1993). Accordingly, this proposed rule 
is not subject to review under the Executive Order by the Office of 
Information and Regulatory Affairs (OIRA) within the Office of 
Management and Budget.

B. Review Under the Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires 
preparation of an initial regulatory flexibility analysis for any rule 
that by law must be proposed for public comment, unless the agency 
certifies that the rule, if promulgated, will not have a significant 
economic impact on a substantial number of small entities. As required 
by Executive Order 13272, ``Proper Consideration of Small Entities in 
Agency Rulemaking'' (67 FR 53461, August 16, 2002), DOE published 
procedures and policies to ensure that the potential impacts of its 
draft rules on small entities are properly considered during the 
rulemaking process (68 FR 7990, February 19, 2003), and has made them 
available on the Office of General Counsel's Web site: http://www.gc.doe.gov. DOE has reviewed today's proposed rule under the 
provisions of the Regulatory Flexibility Act and the procedures and 
policies published on February 19, 2003. The proposed rule would amend 
procurement policies that apply only to DOE M&O contracts and would 
impact only DOE's M&O contractors none of whom are small entities. This 
rule would not have a significant economic impact on small entities. On 
the basis of the foregoing, DOE certifies that the proposed rule, if 
promulgated, would not have a significant economic impact on a 
substantial number of small entities. Accordingly, DOE has not prepared 
a regulatory flexibility analysis for this rulemaking.

C. Review Under the Paperwork Reduction Act

    Any additional information collection requirements subject to the 
Paperwork Reduction Act, 44 U.S.C. 3501 et seq., reflected by today's 
regulatory action are insignificant. Existing burdens associated with 
the collection of certain contractor compensation data have been 
previously cleared under OMB control number 1910-4100 which expires on 
April 30, 2008.

D. Review Under the National Environmental Policy Act

    DOE has concluded that promulgation of this proposed rule falls 
into a class of actions that would not individually or cumulatively 
have a significant impact on the human environment, as determined by 
DOE's regulations implementing the National Environmental Policy Act of 
1969 (42 U.S.C. 4321 et seq.). Specifically, this proposed rule deals 
only with agency procedures, and; therefore, is covered under the 
Categorical Exclusion in paragraph A6 to subpart D, 10 CFR part 1021. 
Accordingly, neither an environmental assessment nor an environmental 
impact statement is required.

E. Review Under Executive Order 13132

    Executive Order 13132, ``Federalism'' (64 FR 43255, August 4, 1999) 
imposes certain requirements on agencies formulating and implementing 
policies or regulations that preempt State law or that have federalism 
implications. Agencies are required to examine the

[[Page 26725]]

constitutional and statutory authority supporting any action that would 
limit the policymaking discretion of the States and carefully assess 
the necessity for such actions. The Executive Order also requires 
agencies to have an accountability process to ensure meaningful and 
timely input by State and local officials in the development of 
regulatory policies that have federalism implications. On March 14, 
2000, DOE published a statement of policy describing the 
intergovernmental consultation process it will follow in the 
development of such regulations (65 FR 13735). DOE has examined today's 
proposed rule and has determined that it does not preempt State law and 
does not have a substantial direct effect on the States, on the 
relationship between the national government and the States, or on the 
distribution of power and responsibilities among the various levels of 
government. No further action is required by Executive Order 13132.

F. Review Under Executive Order 12988

    With respect to the review of existing regulations and the 
promulgation of new regulations, section 3(a) of Executive Order 12988, 
``Civil Justice Reform'' (61 FR 4729, February 7, 1996), imposes on 
Federal agencies the general duty to adhere to the following 
requirements: (1) Eliminate drafting errors and ambiguity; (2) write 
regulations to minimize litigation; and (3) provide a clear legal 
standard for affected conduct rather than a general standard and 
promote simplification and burden reduction. Section 3(b) of Executive 
Order 12988 specifically requires that Executive agencies make every 
reasonable effort to ensure that the regulation: (1) Clearly specifies 
the preemptive effect, if any; (2) clearly specifies any effect on 
existing Federal law or regulation; (3) provides a clear legal standard 
for affected conduct while promoting simplification and burden 
reduction; (4) specifies the retroactive effect, if any; (5) adequately 
defines key terms; and (6) addresses other important issues affecting 
clarity and general draftsmanship under any guidelines issued by the 
Attorney General. Section 3(c) of Executive Order 12988 requires 
Executive agencies to review regulations in light of applicable 
standards in section 3(a) and section 3(b) to determine whether they 
are met or it is unreasonable to meet one or more of them. DOE has 
completed the required review and determined that, to the extent 
permitted by law, this proposed rule meets the relevant standards of 
Executive Order 12988.

G. Review Under the Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4) requires each Federal agency to assess the effects of a Federal 
regulatory action on State, local, and tribal governments, and the 
private sector. The Department has determined that today's regulatory 
action does not impose a Federal mandate on State, local or tribal 
governments or on the private sector.

H. Review Under the Treasury and General Government Appropriations Act, 
1999

    Section 654 of the Treasury and General Government Appropriations 
Act, 1999 (Pub. L. 105-277) requires Federal agencies to issue a Family 
Policymaking Assessment for any rule that may affect family well-being. 
This proposed rule would not have any impact on the autonomy or 
integrity of the family as an institution. Accordingly, DOE has 
concluded that it is not necessary to prepare a Family Policymaking 
Assessment.

I. Review Under the Treasury and General Government Appropriations Act, 
2001

    The Treasury and General Government Appropriations Act, 2001 (44 
U.S.C. 3516, note) provides for agencies to review most disseminations 
of information to the public under guidelines established by each 
agency pursuant to general guideline issued by OMB. OMB's guidelines 
were published at 67 FR 8452 (February 22, 2002), and DOE's guidelines 
were published at 67 FR 62446 (October 7, 2002). DOE has reviewed 
today's notice under the OMB and DOE guidelines and has concluded that 
it is consistent with applicable policies in those guidelines.

J. Review Under Executive Order 13211

    Executive Order 13211, ``Actions Concerning Regulations That 
Significantly Affect Energy Supply, Distribution, or Use'' (66 FR 
28355, May 22, 2001) requires Federal agencies to prepare and submit to 
the Office of Information and Regulatory Affairs (OIRA), Office of 
Management and Budget, a Statement of Energy Effects for any proposed 
significant energy action. A ``significant energy action'' is defined 
as any action by an agency that promulgated or is expected to lead to 
promulgation of a final rule, and that: (1) Is a significant regulatory 
action under Executive Order 12866, or any successor order; and (2) is 
likely to have a significant adverse effect on the supply, 
distribution, or use of energy, or (3) is designated by the 
Administrator of OIRA as a significant energy action. For any proposed 
significant energy action, the agency must give a detailed statement of 
any adverse effects on energy supply, distribution, or use should the 
proposal be implemented, and of reasonable alternatives to the action 
and their expected benefits on energy supply, distribution, and use. 
Today's regulatory action is not a significant energy action. 
Accordingly, DOE has not prepared a Statement of Energy Effects.

K. Approval by the Office of the Secretary

    The Office of the Secretary has approved issuance of this proposed 
rule.

List of Subjects in 48 CFR Part 970

    Government procurement.

    Issued in Washington, DC, on April 27, 2006.
Edward R Simpson,
Director, Office of Procurement and Assistance Management, Department 
of Energy.
Robert C. Braden, Jr.,
Director, Office of Procurement and Assistance Management, National 
Nuclear Security Administration.

    For the reasons set forth in the preamble, chapter 9 of title 48 of 
the Code of Federal Regulations is proposed to be amended as set forth 
below:

PART 970--DOE MANAGEMENT AND OPERATING CONTRACTS

    1. The authority citation for part 970 continues to read as 
follows:

    Authority: 42 U.S.C. 2201, 2282a, 2282b, 2282c; 42 U.S.C. 7101 
et seq.; 41 U.S.C. 418b; 50 U.S.C. 2401 et seq.

    2. Section 970.5203-1 is amended by adding a sentence to the end of 
paragraph (a)(4).


970.5203-1  Management controls.

* * * * *
    (a) * * *
    (4) * * * Annually, or at other intervals directed by the 
contracting officer, the contractor shall supply to the contracting 
officer copies of the reports reflecting the status of recommendations 
resulting from management audits performed by its internal audit 
activity and any other audit organization. This requirement may be 
satisfied in part by the reports required under paragraph (i) of DEAR 
970.5232-3, Accounts, records, and inspection.
* * * * *
    3. Section 970.5232-3 is amended by revising the date of the 
clause, adding new paragraphs (i) and (j), and removing

[[Page 26726]]

Alternative II, and adding new paragraphs (i) and (j) to read as 
follows:


970.5232-3  Accounts, records, and inspection.

* * * Accounts, Records, and Inspection (XX XXXX)

* * * * *
    (i) Internal audit. The contractor agrees to design and maintain an 
internal audit plan and an internal audit organization.
    (1) Upon contract award, the exercise of any contract option, or 
the extension of the contract, the contractor must submit to the 
contracting officer for approval an Internal Audit Implementation 
Design to include the overall strategy for the internal audits. The 
Audit Implementation Design must describe:
    (i) The internal audit organization's placement within the 
contractor's organization and its reporting requirements;
    (ii) The audit organization's size and the experience and 
educational standards of its staff;
    (iii) The audit organization's relationship to the corporate 
entities of the contractor;
    (iv) The standards to be used in conducting the internal audits;
    (v) The overall internal audit strategy of this contract, 
considering particularly the method of auditing costs incurred in the 
performance of the contract;
    (vi) The intended use of external audit resources;
    (vii) The plan for audit of subcontracts, both pre-award and post-
award; and
    (viii) The schedule for peer review of internal audits by other 
contractor internal audit organizations.
    (2) By each January 31 of the contract performance period, the 
contractor must submit an annual audit report, providing a summary of 
the audit activities undertaken during the previous fiscal year. That 
report shall reflect the results of the internal audits during the 
previous fiscal year and the actions to be taken to resolve weaknesses 
identified in the contractor's system of business, financial, or 
management controls.
    (3) By each June 30 of the contract performance period, the 
contractor must submit to the contracting officer an annual audit plan 
for the activities to be undertaken by the internal audit organization 
during the next fiscal year that is designed to test the costs incurred 
and contractor management systems described in the internal audit 
design.
    (4) The contracting officer may require revisions to documents 
submitted under paragraphs (i)(1), (i)(2), and (i)(3) of this clause, 
including the design plan for the internal audits, the annual report, 
and the annual internal audits.
    (j) Remedies. If at any time during contract performance, the 
contracting officer determines that unallowable costs were claimed by 
the contractor to the extent of making the contractor's management 
controls suspect, or the contractor's management systems that validate 
the costs incurred and claimed suspect, the contracting officer may, in 
his or her sole discretion, require the contractor to cease using the 
special financial institution account in whole or with regard to 
specified accounts, requiring reimbursable costs to be claimed by 
periodic vouchering. In addition, the contracting officer, where he or 
she deems it appropriate, may; impose a penalty under DEAR 970.5242-1, 
Penalties for unallowable costs; require a refund; reduce the 
contractor's otherwise owed fee; and take such other action as 
authorized in law, regulation, or this contract.

 [FR Doc. E6-6736 Filed 5-5-06; 8:45 am]
BILLING CODE 6450-01-P