[Federal Register Volume 71, Number 124 (Wednesday, June 28, 2006)]
[Rules and Regulations]
[Pages 36927-36930]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-5710]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 15

[FAC 2005-10; FAR Case 2004-035; Item III; Docket 2006-0020, Sequence 
8]
RIN 9000-AK04


Federal Acquisition Regulation; FAR Case 2004-035, Submission of 
Cost or Pricing Data on Noncommercial Modifications of Commercial Items

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) regarding prohibition 
on obtaining cost or pricing data to implement Section 818 of Public 
Law 108-375, the Ronald W. Reagan National Defense Authorization Act 
for Fiscal Year 2005.

DATES: Effective Date: July 28, 2006.

FOR FURTHER INFORMATION CONTACT: For clarification of content, contact 
Mr. Jeremy Olson, at (202) 501-3221. Please cite FAC 2005-10, FAR case 
2004-035. For information pertaining to status or publication 
schedules, contact the FAR Secretariat at (202) 501-4755.

SUPPLEMENTARY INFORMATION:

A. Background

    Section 818 of the Ronald W. Reagan National Defense Authorization 
Act for Fiscal Year 2005 amends 10 U.S.C. 2306a. 10 U.S.C. 2306a 
provides exceptions to the requirement for submission of cost or 
pricing data, including an exception for commercial items. Section 818 
states that the exception for a commercial item does not apply to 
noncommercial modifications of a commercial item that are expected to 
cost, in the aggregate, more than $500,000 or 5 percent of the total 
price of the contract, whichever is greater. Section 818 applies to 
offers submitted, and to modifications of contracts or subcontracts 
made, on or after June 1, 2005.
    An interim rule was published in the Federal Register on June 8, 
2005 (70 FR 33659) to implement the statute.
    In response to the interim rule, comments were received from seven 
respondents. One commenter opposes the rule in its entirety, while the 
other commenters recommend various revisions to the final rule 
regarding thresholds, definition of total cost, definition of 
noncommercial modifications, and waivers.
    Public Comments
    1. Rule fails to recognize the time-honored recognition prohibiting 
obtainment of cost or pricing data for commercial or modified 
commercial items.
    Comment: One commenter asserts that this revision invalidates long 
standing procurement streamlining policies previously promoted by the 
acquisition community. This commenter states that ``The exemption 
allowance from submission of cost or pricing data afforded to providers 
of commercial items should not be abolished on the basis of an 
arbitrary dollar threshold.'' This commenter further states that the 
interim rule will pose an unnecessary burden to a large segment of the 
contracting community, and that concerns may also surface with respect 
to the safeguard from inadvertent disclosure of the required cost or 
pricing data. This commenter urges the abolishment of the rule.
    Councils' Response: The interim rule implements a statutory 
requirement to obtain cost or pricing data for noncommercial 
modifications when the statutory thresholds are met. The Councils do 
not have the authority to decline implementation of the statute. As to 
the concern regarding safeguarding data, the Government has a long-
standing set of procedures that has effectively protected contractor 
proprietary cost and pricing data from unauthorized disclosure. These 
same procedures will apply when cost or pricing data are obtained under 
the subject rule.
    2. Dollar and percentage thresholds.
    a. Comment: Two commenters assert that the interim rule should be 
revised to clearly state that the requirements for submitting certified 
cost or pricing data apply only if both the TINA threshold and the NDAA 
thresholds have been met. These commenters state that Section 818 
created an exception to the commercial item exception, but did not 
change the threshold for TINA. Thus, noncommercial modifications are 
subject to TINA if over the NDAA thresholds, but only if the 
noncommercial modifications also exceed the TINA thresholds.
    Councils' Response: The Councils agree with the commenters and have 
revised the interim rule accordingly.

[[Page 36928]]

 Section 818 states that the exception for commercial items does not 
apply to cost or pricing data on noncommercial modifications that 
exceed the $500,000 or 5 percent threshold (whichever is greater). This 
means that, when the thresholds are exceeded, the commercial item 
exception does not apply. It does not mean that cost or pricing data 
must automatically be submitted. Rather, when the Section 818 
thresholds are exceeded, the TINA requirements for submission of cost 
or pricing data need to be evaluated to determine if the noncommercial 
modifications are otherwise exempt from CAS (e.g., is the cost less 
than $550,000 or are any of the other TINA exceptions present).
    b. Comment: One commenter recommends raising the threshold in the 
interim rule from $500,000 to $550,000 to match the FAR requirement for 
obtaining cost or pricing data at FAR 15.403-4(a)(1). A second 
commenter also recommends changing the $500,000 to $550,000. This 
second commenter notes that, while Section 818 uses the $500,000 figure 
to amend 10 U.S.C. 2306a, subsection (a)(7) of 10 U.S.C. 2306a provides 
for adjustments every five years to the $500,000 threshold. This second 
commenter further states that the threshold is currently adjusted to 
$550,000, and to simplify matters and avoid confusion, other FAR 
sections also use the $550,000. The second commenter recommends a 
similar approach be taken for this rule.
    Councils' Response: The interim rule required cost or pricing data 
if the total price exceeds the $550,000 threshold for the reasons 
stated in comment 2a. The Councils note that the adjustments required 
by subsection (a)(7) do not affect the $500,000 threshold in Section 
818. The requirement to adjust the thresholds every five years is based 
on Section 807 of the Ronald W. Reagan National Defense Authorization 
Act for Fiscal Year 2005 (Pub. L. 108-375), which requires that the FAR 
Council periodically adjust statutory acquisition-related dollar 
thresholds in the FAR for inflation based on the change in the Consumer 
Price Index. However, acquisition-related thresholds in statutes that 
took effect after October 1, 2000, are escalated proportionately for 
the number of months between the effective date of the statute, and 
October 1, 2005. The statute also requires rounding to the nearest 
$50,000 for thresholds between $100,000 and $1,000,000. Application of 
the CPI as of June 1, 2005 (the effective date of Section 818) to 
October 1, 2005 yields a revised threshold of approximately $510,000, 
which when rounded results in no change to the Section 818 threshold of 
$500,000.
    c. Comment: One commenter was concerned about application of the 
rule to a noncommercial modification that was between $500,000 and 5 
percent of the contract. For example, if the proposal price is $100 
million, and the noncommercial modification price is $4.5 million, no 
certified cost or pricing data would be obtained because the 
modification does not exceed 5 percent of the contract price. 
Conversely, if the proposal price was $9 million and the noncommercial 
modification was $600,000, certified cost or pricing data would be 
obtained because the modification exceeds 5 percent of the contract 
price and also exceeds $500,000. This commenter asserts that, from a 
taxpayer's point of view, this defies common sense. The $4,500,000 
modification will most likely yield a bigger cost reduction as a result 
of obtaining cost or pricing data than would a $600,000 modification. 
This commenter therefore recommends substituting a specific dollar 
value of $550,000 in place of the dual thresholds (dollar value and 
percentage) contained in the interim rule.
    Councils' Response: The interim rule required cost or pricing data 
if the total price exceeds $550,000 for the reasons stated in comment 
2a. The interim rule implemented a statutory requirement to obtain cost 
or pricing data for noncommercial modifications when the statutory 
thresholds are met. The commenter is suggesting that the Councils 
revise or eliminate the five percent threshold contained in the 
legislation. The Councils do not have the authority to revise the 
statutorily mandated thresholds.
    3. ``Minor'' modifications.
    Comment: One commenter recommends adding the word ``minor'' in 
front of the word modifications in the paragraphs under FAR 15.403-
1(c)(3)(ii). This commenter states that, although the paragraph at FAR 
15.403-1(c)(3)(ii) defines the applicability of the requirements for 
minor modifications, the addition of the word ``minor'' in each 
paragraph would make the applicability more explicit and minimize the 
possibilities for the paragraphs to be misread in isolation to 
encompass all modifications.
    Councils' Response: The Councils agree that clarification would be 
helpful. However, since paragraph (3)(ii) is applied to ``minor 
modifications defined in paragraph (c)(3)(ii) of the definition of a 
commercial item at 2.101 that do not change the item from a commercial 
item to a noncommercial item,'' simply adding the word ``minor'' could 
cause more confusion than clarity. The Councils therefore have revised 
the language in paragraphs at FAR 15.403-1(c)(3)(ii)(A) thru (C) to add 
the word ``such,'' to minimize the possibility that the paragraphs 
could be misread in isolation.
    4. Expected to ``cost'' more than $500,000.
    Comment: One commenter notes that Section 818 establishes a 
limitation to the cost or pricing exception when the noncommercial 
modifications are expected to ``cost'' more than $500,000 or 5 percent 
of the total ``price'' of the contract. This commenter states that this 
``cost'' should refer to the expected price of the modification, i.e., 
the cost to the Government. This commenter is concerned that the 
language in the interim rule could be construed as ``cost to the 
contractor'', thereby requiring that the expected cost be measured by 
FAR Part 31 to determine whether the noncommercial modification is 
within the dollar/percentage thresholds of the rule.
    Councils' Response: The Councils agree that ``cost'', as used in 
the interim rule and the statute, does not require contractors to 
produce an estimated cost computed in accordance with the requirements 
of FAR part 31 for purposes of applying the thresholds. The term 
``cost'' refers to the cost to the Government, i.e., the price of the 
commercial modifications. The Councils do not believe that the interim 
rule could reasonably be construed to require computation in accordance 
with the requirements of FAR part 31. In addition, the Councils do not 
believe that ``cost to the Government'' would add clarity, since it 
could be misconstrued to the same extent as the term ``cost.'' However, 
the Councils recognize that the term ``cost'' should be clarified. The 
Councils have therefore revised the term ``cost'' to ``price'' in 
paragraphs at FAR 15.401-1(c)(3)(ii)(B) and (C) of the final rule to 
provide clarity while also accurately reflecting the intent of the 
statute.
    5. Definition of ``Noncommercial modification''.
    Comment: Two commenters recommended adding a definition of a 
``noncommercial modification'' to distinguish such modifications from 
commercial modifications. These two commenters assert that a 
modification that merely alters appearance or is ``of a type'' 
requested for commercial use is not a ``noncommercial modification''. 
These two commenters further state that modifications such as 
additional wiring provisions, additional tubing or piping, thicker 
materials or doublers to strengthen structural components are

[[Page 36929]]

not noncommercial modifications even if they are made for the purpose 
of accommodating the later installation of military-specific equipment 
such as missile delivery systems, electronic warfare systems, or aerial 
refueling systems.
    Councils' Response: Modification to the commercial item can be of 
three types. The first is a modification of such magnitude that the 
item no longer meets the definition of a commercial item at FAR 2.101. 
Such modifications are clearly not covered by Section 818. Since the 
item is no longer a commercial item, the established threshold of 
$550,000 for submittal of cost or pricing data would apply.
    The second is a modification of a type customarily available in the 
commercial marketplace. These would be commercial modifications, and as 
such would also not be subject to the requirements of Section 818.
    The third type is a modification defined in paragraph (c)(3)(ii) of 
the definition of a commercial item at FAR 2.101, which states:
    Minor modifications of a type not customarily available in the 
commercial marketplace made to meet Federal Government requirements. 
Minor modifications are those modifications that do not 
significantly alter the nongovernmental function or essential 
physical characteristics of an item or component, or change the 
purpose of a process. Factors to be considered in determining 
whether a modification is minor include the value and size of the 
modification and the comparative value and size of the final 
product. Dollar values and percentages may be used as guideposts, 
but are not conclusive evidence that a modification is minor.
    These minor modifications are the type of modifications the statute 
was intended to address. The Councils do not see any criteria in the 
statute or elsewhere that distinguishes minor modifications based on 
whether such modifications merely alter the appearance or are ``of a 
type'' requested for commercial use. The Councils see no basis for 
adding new criteria that would subdivide the FAR definition of minor 
modifications not available in the commercial marketplace into two new 
categories. The Councils are concerned that any such subdivision would 
result in inappropriate application of the statute by exempting certain 
modifications to which Congress intended the statute to apply.
    6. Application of the rule to paragraph (c)(3)(i) of the definition 
of a commercial item at FAR 2.101.
    Comment: Two commenters state that the statute is not intended to 
apply to the modifications of the type at paragraph (c)(3)(i) of the 
definition of a commercial item at FAR 2.101, and has recommended 
adding regulatory language to clarify that this exception remains.
    Councils' Response: The interim rule specifically referenced 
paragraph (c)(3)(ii) of the definition of a commercial item at FAR 
2.101. The Councils believe the interim rule clearly does not apply to 
paragraph (c)(3)(i) of that definition, since there is no reference to 
that paragraph.
    7. ``Total Cost'' vs. ``In the Aggregate''.
    Comment: Two commenters note that the statute applies the $500,000 
or 5 percent (whichever is greater) threshold ``in the aggregate'', 
whereas the interim rule refers to ``total cost.'' One commentor states 
that any final rule should clarify that the ``total cost'' applies on a 
per-transaction basis, not on a cumulative basis. These two commenters 
state that, if treated cumulatively, the threshold would have to apply 
retroactively, which is impracticable and unfair. Also, if treated 
cumulatively, subsequent modifications of a non-commercial nature might 
be refused by an entity with an accounting system unable to comply with 
the requirements for certified cost or pricing data.
    Councils' Response: The Councils agree that the thresholds should 
not require retroactive determinations of the total cost of all 
noncommercial modifications. The Councils therefore have revised the 
final rule to specify that the thresholds apply to modifications of a 
commercial item for a particular contract action. This is consistent 
with the application of TINA, which is done on an individual contract 
action basis.
    8. Waivers of requirement to submit cost or pricing data.
    Comment: Two commenters state that, where the offeror does not 
have, nor is required to have, an approved Cost Accounting Standards 
compliant system, the requirement for cost or pricing data should be 
waived, as provided for at FAR 15.403-1(c)(4).
    Councils' Response: FAR 15.403-1(c)(4) permits the head of the 
contracting activity to waive the requirement for submission of cost or 
pricing data in exceptional cases.
    This is a case-by-case determination, based on the particular facts 
and circumstances. The Councils do not believe that it is advisable to 
revise this by providing for a blanket exception. The Councils are 
concerned that such an exception would fail to take into account the 
specific facts and circumstances of each case, and could also be 
perceived as circumventing the Congressional intent of the statute. 
Furthermore, such an exception cannot be provided for DoD contracts. 
Exceptional circumstances for DoD contracts are limited by the 
provisions of Section 817 of the National Defense Authorization Act of 
2003. These provisions limit the exceptional circumstances to instances 
in which the property or services cannot reasonably be obtained without 
the waiver, the price can be determined fair and reasonable without 
obtaining the cost or pricing data, and there are demonstrated benefits 
of granting the waiver.
    9. Does the 5 percent threshold apply to the prime contract or to 
the subcontract value when a subcontract is at issue?
    Comment. One commenter asked for clarification about how to apply 
this rule to subcontracts.
    Councils' Response: FAR 15.403-4(a)(1) states that ``Unless an 
exception applies, cost or pricing data are required before 
accomplishing actions expected to exceed the current threshold . . .''. 
The actions include ``. . . (ii) The award of a subcontract at any 
tier, if the contractor and each higher-tier subcontractor were 
required to submit cost or pricing data . . .''. This means that a 
prime contractor, or a higher tier subcontractor, must apply TINA to 
their lower-tiered subcontractors. If one of those lower-tiered 
subcontractors qualifies for an exception to TINA (as outlined in FAR 
15.403-1(b) & (c)) then TINA does not apply to that subcontract.
    Based on this, if the higher tier contractor is required to submit 
cost or pricing data, the application of the $500,000 or 5 percent of 
total contract price threshold applies to the lower tier contractor 
whenever a commercial item being procured is to be modified, regardless 
of the tier, and is calculated using the amounts related to that 
subcontract. For subcontracting purposes, the threshold is based on the 
subcontract amount and not the prime, or higher tier contract amount.
    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 (DoD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA) 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

[[Page 36930]]

Act, 5 U.S.C. 601 et seq., because the number of small entities 
providing commercial items with noncommercial modifications costing 
more than $500,000 is expected to be very low. Although comments 
submitted on the interim rule prompted several technical amendments 
necessary to correct the rule, this expectation remains unchanged.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the rule does 
not impose any 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 Part 15

    Government procurement.

    Dated: June 20, 2006.
Ralph De Stefano,
Director, Contract Policy Division.

0
Therefore, DoD, GSA, and NASA amend 48 CFR part 15 as set forth below:

PART 15--CONTRACTING BY NEGOTIATION

0
1. The authority citation for 48 CFR part 15 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).

0
2. Section 15.403-1 is amended by revising paragraphs (c)(3)(ii)(A), 
(B), and (C) to read as follows:


15.403-1  Prohibition on obtaining cost or pricing data (10 U.S.C. 
2306a and 41 U.S.C. 254b).

* * * * *
    (c) * * *
    (3) Commercial items. (i) * * *
    (ii) * * *
    (A) For acquisitions funded by any agency other than DoD, NASA, or 
Coast Guard, such modifications of a commercial item are exempt from 
the requirement for submission of cost or pricing data.
    (B) For acquisitions funded by DoD, NASA, or Coast Guard, such 
modifications of a commercial item are exempt from the requirement for 
submission of cost or pricing data provided the total price of all such 
modifications under a particular contract action does not exceed the 
greater of $500,000 or 5 percent of the total price of the contract.
    (C) For acquisitions funded by DoD, NASA, or Coast Guard such 
modifications of a commercial item are not exempt from the requirement 
for submission of cost or pricing data on the basis of the exemption 
provided for at FAR 15.403-1(c)(3) if the total price of all such 
modifications under a particular contract action exceeds the greater of 
$500,000 or 5 percent of the total price of the contract.
* * * * *
[FR Doc. 06-5710 Filed 6-27-06; 8:45 am]
BILLING CODE 6820-EP-S