[Federal Register Volume 71, Number 238 (Tuesday, December 12, 2006)]
[Rules and Regulations]
[Pages 74667-74680]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-9613]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

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

[FAC 2005-15; FAR Case 2003-027; Item II; Docket 2006-0020, Sequence 
22]
RIN 9000-AK07


Federal Acquisition Regulation; FAR Case 2003-027, Additional 
Commercial Contract Types

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) to implement section 
1432 of the National Defense Authorization Act for Fiscal Year 2004. 
Title XIV of the Act, referred to as the Services Acquisition Report 
Act of 2003 (SARA), amended section 8002(d) of the Federal Acquisition 
Streamlining Act of

[[Page 74668]]

1994 (FASA) to expressly authorize the use of time-and-materials (T&M) 
and labor-hour (LH) contracts for certain commercial services under 
specified conditions.

DATES: Effective Date: February 12, 2007.

FOR FURTHER INFORMATION CONTACT: For clarification of content, contact 
Mr. Jeremy Olson, at (202) 501-3221. Please cite FAC 2005-15, FAR case 
2003-027. For information pertaining to status or publication 
schedules, contact the FAR Secretariat at (202) 501-4755.

SUPPLEMENTARY INFORMATION:

A. Background

    This final rule amends the Federal Acquisition Regulation to 
implement section 1432 of the National Defense Authorization Act for 
Fiscal Year 2004 (Pub. L. 108-136). Title XIV of the Act, referred to 
as the Services Acquisition Reform Act of 2003 (SARA), amended section 
8002(d) of the Federal Acquisition Streamlining Act of 1994 (FASA) 
(Pub. L. 103-355, 41 U.S.C. 264) to expressly authorize the use of 
time-and-materials (T&M) and labor-hour (LH) contracts for commercial 
services under specified conditions.
    Section 8002(d)(3) of the Act limits use of T&M and LH contracts to 
the following categories of commercial services:
     Commercial services procured for support of a commercial 
item, as described in 41 U.S.C. 403(12)(E).
     Any other category of commercial services that is 
designated by the Administrator of Office of Federal Procurement Policy 
(OFPP) on the basis that--
    1. The commercial services in such category are of a type of 
commercial services that are commonly sold to the general public 
through use of T&M or LH contracts; and
    2. It would be in the best interests of the Federal Government to 
authorize use of T&M or LH contracts for purchase of the commercial 
services in such category.
    In furtherance of its statutory responsibilities, OFPP worked in 
coordination with the Councils on a series of questions for the advance 
notice of proposed rulemaking (ANPR), the proposed rule, and the 
notices of public meeting published in the Federal Register at 69 FR 
56316 on September 20, 2004 and at 70 FR 56318 on September 26, 2005, 
to obtain information describing how T&M and LH contracts are used 
commercially. In particular, the questions elicited information on the 
types of services that are commonly acquired on this basis and the 
circumstances under which these arrangements are used. Interested 
parties offered a variety of written observations in response to the 
ANPR and proposed rule. See the Federal Register at 70 FR 56320 on 
September 26, 2005. In addition, a number of interested parties 
provided oral comments during the public meetings that were held on 
October 19, 2004 and October 18, 2005, to facilitate an open dialogue 
with Government procurement policy officials.
    OFPP and several Council staff members also received a briefing 
from the Government Accountability Office (GAO) on a survey the GAO 
conducted late last year to determine how often commercial companies 
use T&M and LH contracts in their commercial practices, either as a 
buyer or a provider. The GAO received 23 responses to its survey. Some 
of the responses came from Fortune 500 companies. Although responses 
were limited, the GAO indicated that they represented buying practices 
from a relatively wide range of industries, including airline, 
automotive and truck manufacturers, automotive and truck parts, 
business services, communications equipment, computer hardware, 
computer services, electric utilities, insurance, major drugs 
(pharmaceutical), money center bank, non-profit financial services, oil 
and gas, regional bank, retail (grocery and technology), scientific and 
technical instruments, and semiconductor.
    Finally, OFPP reviewed testimony offered to the Acquisition 
Advisory Panel established pursuant to section 1423 of SARA to evaluate 
commercial practices and other acquisition-related issues. The Panel 
specifically sought input regarding industry's use of T&M and LH 
contracts. See http://www.acquisition.gov/comp/aap/index.html.
    OFPP made three main findings from these inputs. First, commercial 
services are commonly sold on a T&M and LH basis in the marketplace 
when requirements are not sufficiently well understood to complete a 
well-defined scope of work and when risk can be managed by maintaining 
surveillance of costs and contractor performance. Second, these same 
services are also commonly sold on a fixed-price basis. Third, a few 
types of services are sold predominantly on a T&M and LH basis--
specifically, emergency repair services. By their nature, emergency 
repair services are difficult to capture in a well-defined scope of 
work and therefore are not generally conducive to purchase on a fixed-
price basis. Industry associations, representing a wide range of 
service industries, supported these findings in their comments in 
response to the ANPR, proposed rule, public meetings, and SARA Panel 
hearings.
    OFPP advised the Councils that it is designating all categories of 
services (i.e., any service) as being available for acquisition on a 
T&M and LH basis because the findings made in conjunction with the 
rulemaking indicate that: (1) services under any general categorization 
of services, such as those examined by the GAO, are commonly sold to 
the general public on a T&M and LH basis under certain conditions; and 
(2) use of T&M and LH contracts under these conditions may be in the 
Government's best interest. However, OFPP further advised that its 
designation is limited to the same circumstances that exist when T&M 
and LH contracting is commonly used to sell services to the general 
public and where the other prerequisites set forth in section 8002(d) 
have been met. OFPP concluded, in view of the findings, that the 
identification of effective boundaries for the use of T&M and LH 
contracts is a function of the specific circumstances surrounding the 
acquisition rather than the specific type of service being sold. OFPP 
requested that the Councils reflect its designation in the final FAR 
rule.
    Specifically, OFPP requested that the rule allow an agency to 
purchase any commercial service on a T&M or LH basis if it has 
completed a determination and findings (D&F) containing sufficient 
facts and rationale to justify that a firm-fixed pricing arrangement is 
not suitable. With respect to the contents of the required D&F, OFPP 
advised the Councils that the rationale supporting use of a T&M or LH 
contract for commercial services must establish that a T&M or LH 
contract is being used under the same conditions where the private 
sector would commonly rely on these arrangements--namely, where it is 
not possible at the time of placing the contract or order to accurately 
estimate the extent or duration of the work or to anticipate costs with 
any reasonable degree of certainty. In addition, if the need is of a 
recurring nature and is being acquired through a contract extension or 
renewal, OFPP expects, consistent with FAR 7.103(r), that the D&F 
reflect why knowledge gained from the prior acquisition could not be 
used to further refine requirements and acquisition strategies in a 
manner that would enable purchase on a fixed-price basis.
    OFPP reminded the Councils that agencies will also need to comply 
with the other limitations set forth in 8002(d)--i.e., the service is 
acquired under a contract awarded using competitive procedures, the 
contract or

[[Page 74669]]

order includes a ceiling price that the contractor exceeds at its own 
risk, and any subsequent change in the ceiling price is authorized only 
upon a determination, documented in the contract file, that it is in 
the best interest of the procuring agency to change the ceiling price. 
Finally, OFPP requested that the rule include appropriate additional 
mechanisms that help agencies manage risk by maintaining surveillance 
of costs and contractor performance, since effective surveillance is 
emphasized in commercial use of T&M and LH contracts.
    The Councils concur with OFPP's findings and conclusions and have 
shaped the rule accordingly.
    DoD, GSA, and NASA published an advance notice of public rulemaking 
(ANPR) in the Federal Register at 69 FR 56316 on September 20, 2004 and 
a proposed rule at 70 FR 56318 on September 26, 2005. Comments were 
received from 13 respondents in response to the proposed rule. The 
Councils considered all of the comments and recommendations in 
developing the final rule. The Councils made the following changes to 
the rule as a result of the public comments and deliberations:
    (1) 16.601(d)--Added a requirement for the head of contracting 
activity to approve any D&Fs that would extend the period of 
performance beyond five years for both commercial and non-commercial 
T&M contracts to help ensure T&M contracts are only used when no other 
type of contract is suitable, to maximize the use of fixed price 
commercial contracts consistent with the statute, and to avoid 
protracted use of non-commercial time-and-materials contracts after 
experience provides a basis for firmer pricing.
    (2) Clause 52.212-4 Alternate I--
    (a) Paragraph (i)(1)(ii)(B)--Eliminate the provisions that only 
permitted reimbursement of subcontract costs at the hourly rates in the 
contract schedule when the subcontractors are listed in contract 
because the provisions were problematic and contrary to standard 
commercial practice (see Comment 4.b.(6)(a)). Instead added provisions 
that require the subcontract to be reimbursed at the hourly rates 
prescribed in the contract except when the employees performing the 
work do not meet the qualifications specified in the contract.
    (b) Paragraph (i)(1)(ii)(C)(2)--Eliminated the provisions that 
required commercial contractors to give the Government credit for 
rebates, refunds, or discounts that ``accrued to'' the contractor 
because the provision could have imposed unique Government accounting 
requirements on commercial T&M contracts (see Comment 4.b.(7)(b)).
    (c) Paragraph (i)(1)(ii)(C)--Excluded indirect costs as a type of 
cost that could be reimbursed at actual costs since the indirect costs 
will be reimbursed at the fixed amount in the schedule(see Comment 
4.b.(8)(a)).
    (d) Paragraph (i)(1)(ii)(D)(1)--Revised the rule to allow 
contracting officers to establish the types of other direct costs (ODC) 
that will be reimbursed at actual costs and the fixed amounts for 
indirect costs at the order level on indefinite delivery indefinite 
quantity (IDIQ) contracts. The type of ODC that will be needed to 
perform an order and any fixed amount for indirect costs may need to be 
established on an order-by-order basis (see Comment 4.b.(8)(a)).
    (e) Paragraph (i)(4)(ii)(A)--Revised the rule to recognize that 
companies use both paper-based and electronic timecards (see Comment 
4.b.(9)(b)).
    (f) Paragraph (u)--Eliminated the subcontract consent provisions 
because the provisions were unduly restrictive, inappropriate, and the 
provisions could have permitted the Government to inappropriately 
impact a company's commercial reputation (see Comment 4.b.(6)(a)).
Public Comment
    The public comments are discussed below:
    Comment: Commercial Item Definition. Agree with deleting the 
exclusion of ``services that are sold based on hourly rates without an 
established catalog or market price for a specific service performed or 
a specific outcome to be achieved'' from the definition of a commercial 
item to be consistent with SARA.
    Comment: Market Research. Agree with adding ``type of contract'' to 
the examples provided for determining practices of firms engaged in 
producing, distributing, and supporting commercial items because it 
assists with the implementation of SARA.
Appropriate Use
    Comment: Support OFPP's decision to restrict commercial T&M/LH 
contracts to circumstances where no other contract type is suitable 
instead of developing a list of commercial services commonly sold on a 
T&M/LH basis. The conditions for using commercial T&M/LH contracts 
(i.e., the contracting officer executes a determination and finding 
that no other contract type is suitable, the contract includes a 
ceiling price that the contractor exceeds at its own risk, and 
subsequent changes in the ceiling price only authorized upon a 
determination that it is in the best interest of the Government) 
implement the statute in a clear and concise manner.
    Comment: Support OFPP's conclusion that the use of T&M/LH contracts 
should not be limited to a list of specific categories of services. 
Many types of commercial services are sold and purchased on both T&M/LH 
and firm fixed-price (FFP) basis depending on the circumstances of the 
particular project. There are no general rules or practices that 
restrict use of T&M/LH to any specific service categories. Regardless 
of the service type, there are often times when work cannot be 
sufficiently defined at contract award to provide for meaningful firm-
fixed prices.
    Comment: Limit as much as possible the types of services eligible 
to be procured on a commercial T&M/LH basis. A list of the types of 
services commonly sold using commercial T&M vehicles would help 
contracting officers chose the appropriate contract type and draft the 
required D&F.
    Response: As discussed above, OFPP's decision is based on its 
findings that-- (a) commercial services are commonly sold on a T&M and 
LH basis in the marketplace when requirements are not sufficiently well 
understood to complete a well-defined scope of work and when risk can 
be managed by maintaining surveillance of costs and contractor 
performance; (b) these same services are also generally offered on a 
fixed-price basis; and (c) a few types of services are sold 
predominantly on a T&M and LH basis--specifically, emergency repair 
services. Based on these findings, OFPP recommended to the Councils 
that the rule allow an agency to purchase any commercial service on a 
T&M or LH basis if it has completed a determination and findings (D&F) 
containing sufficient facts and rationale to justify that a firm-fixed 
pricing arrangement is not suitable. OFPP stated that this conclusion 
is consistent with the statutory requirement in section 8002(d) that 
contracting officers must execute a D&F that establishes that no 
contract type is suitable before pursuing one of these arrangements. 
The Councils agree with OFPP's finding and shaped the rule accordingly. 
The Councils do not believe it is practical or feasible to develop and 
maintain a comprehensive list of services sold on a T&M/LH basis 
because many services may be sold on both a T&M/LH and fixed price 
basis depending on the circumstances of the acquisition. The rule 
clearly provides that commercial T&M/LH contracts can only be used when 
the other commercial services' contract types are not suitable.

[[Page 74670]]

    Comment: Clarify whether competitive procedures means ``full and 
open competition'' or ``limited competition'' when the competition is 
conducted with as many sources as practicable under one of the 
authorities listed in FAR 6.302.
    Response: Sole source commercial T&M/LH contracts are not 
authorized. Commercial T&M/LH contracts may be awarded under the 
statutory authorities that permit contracting without providing for 
full and open competition. When these authorities are used, contracting 
officers are required to solicit offers from as many potential sources 
as is practicable under the circumstances. Nothing in this rule 
requires ``full and open'' competition.
    Comment: Restrict the use of T&M contracts to when it is not 
``practicable'' instead of not ``possible'' at the time of placing the 
contract or order to accurately estimate the extent or duration of the 
work or to anticipate costs with any reasonable degree of certainty. It 
may be ``possible'' to estimate the duration and cost of work but 
impracticable given the time and effort that would be required, the 
urgency of the work, and the agencies competing priorities.
    Response: T&M contracts comprise the highest contract type risk to 
the Government. As such, they should only be used when it is not 
possible at the time of award to estimate accurately the extent or 
duration of the work or to anticipate costs with any reasonable degree 
of confidence. Also, restricting the use of T&M contracts to when it is 
not ``possible'' is consistent with the requirements for non-commercial 
T&M contracts.

Determination and Finding (D&F)

    Comment: Delete the minimum D&F requirements for justifying no 
other contract type is suitable because specifying the minimum 
requirements imposes a potentially greater burden on contracting 
officers than the corresponding provisions for non-commercial T&M/LH 
contracts. Delete the requirement to execute a D&F for each order when 
the indefinite-delivery contract is priced on a T&M/LH or FFP basis 
because it is inconsistent with FAR 1.602-2 which stipulates 
``contracting officers should be allowed wide latitude to exercise 
business judgment.'' SARA requires a D&F to justify the contract type, 
not the use of the contract once justified.
    Comment: Eliminate the requirement for approval one level above the 
contracting officer for a commercial T&M/LH IDIQ contract that only 
allows for issuance of orders on a T&M/LH basis to be consistent with 
non-commercial T&M/LH contracts. Commercial T&M/LH contracts pose no 
greater risk to the Government than non-commercial T&M/LH contracts.
    Comment: The rule contradicts and goes beyond the intent of SARA by 
potentially creating, in practice and effect, a prohibition on the use 
of T&M contracts. Specifically, the rule adds administrative burden and 
procedural complication to the use of T&M contracts which would inhibit 
the use of these contracts as a practical contracting tool, e.g., 
requiring a D&F for each T&M task order is beyond the intent of Section 
1432 and appears to show little confidence in the business judgment of 
contracting officers.
    Comment: Develop an approval level for D&Fs commensurate with the 
risk to the Government.
    Response: The Councils acknowledge that the rule contains 
additional requirements for commercial T&M/LH IDIQ D&Fs than those 
required for noncommercial T&M/LH IDIQ D&Fs. While the Councils 
recognize these additional requirements may be more burdensome, the 
Councils believe the additional requirements are needed to encourage 
the preference for the use of fixed price contracts for commercial 
items. In addition, the Councils believe additional controls are needed 
to ensure both commercial and non-commercial T&M contracts are only 
used when no other type of contract is suitable. The Councils revised 
the rule to require head of contracting activity approval for any D&Fs 
that extend the performance period beyond five years for both 
commercial and non-commercial T&M contracts.
    Comment: Establish a $100,000 threshold for D&F to recognize a 
reasonable level at which tangible deliverable would be expected.
    Comment: Exempt small purchases at or below the five million dollar 
commercial item threshold at FAR 12.203 from the D&F requirements. This 
threshold allows agencies to use simplified acquisition procedures up 
to five million dollars for commercial item acquisitions. The Councils 
have discretion to implement the statutory provisions addressing D&Fs. 
See Chevron, U.S.A. v. Natural Resources Defense Council, Inc., 467 
U.S. 837, 844 (1984).
    Response: When a statute is silent or ambiguous with respect to a 
certain issue, agencies have discretion to interpret the statute in a 
reasonable manner, consistent with its legislative history. However, 
the statute is not ambiguous and the legislative history contains 
nothing which would support an interpretation that the D&F condition 
can be limited to a dollar threshold. The statute requires a D&F for 
T&M/LH contracts regardless of the dollar amount.
Nonconforming
    Comment: Paying for reperformance, excluding profit, is a 
significant improvement over the ANPR and properly reflects commercial 
practices. The parties will be permitted to tailor the provision 
pursuant to FAR 12.302 when customary commercial practices provide 
different warranty terms.
    Comment: Except for the default 10 percent profit rate, the 
proposed provisions are the same as those used for non-commercial T&M 
contracts. These provisions contain significant departures from terms 
typically found in the commercial marketplace. The proposed 10 percent 
default profit rate is irrelevant if the contracting officer knows the 
contractor's profit rate. Contracting officers could terminate the 
contract or retain another contractor to complete the work as provided 
in FAR 52.246-6(f) and (g) if a contractor is expending best efforts 
and still not performing properly. Require contracting officers to 
better focus on the requirements of FAR 7.105, Contents of Written 
Acquisition Plans, rather than adopting the proposed inspection and 
acceptance clause.
    Comment: Contractors are under less budgetary pressure to perform 
under a T&M contract than a FFP contract and should be held to as 
stringent quality standards as FFP contracts. Paying for rework will 
not discourage ``shoddy work'' since the contractor will be reimbursed, 
without profit, for its costs. Develop an appropriate profit percentage 
based on historical data or some other measure to avoid a potential 
unintended consequence of establishing a 10 percent profit standard for 
T&M contracts. A 10 percent profit may be excessive for low risk T&M 
contracts.
    Response: The comments reflect a varying set of commercial 
practices for nonconforming supplies and services. The ANPR required 
contractors to repair or replace rejected supplies or reperform 
rejected services at no cost to the Government. Public commenters on 
the ANPR said requiring contractors to repair or replace rejected 
supplies or reperform rejected services at no cost to the Government 
imposed more contract risk on the contractor than the non-commercial 
clause. The Government is essentially imposing a fixed-price level of 
risk. Combining a ceiling price that contractors exceed at their own 
risk and a requirement that the contractor use ``best efforts'' to 
perform within the

[[Page 74671]]

ceiling price means contractors are required accomplish a certain 
result (i.e., performance of the work specified in the Schedule) within 
a specified dollar amount (i.e., the ceiling price). The Councils 
agreed that contractors are generally only required to use ``best 
efforts'' to accomplish the desired results within the established 
ceiling price on both commercial and non-commercial T&M contracts as 
opposed to FFP contracts which requires contractors to accomplish 
stated results within the fixed price. Therefore, the Councils revised 
the proposed rule to be consistent with the non-commercial T&M 
requirements. The 10 percent default profit rate will only be used when 
the contracting officer does not know the contractor's actual profit 
rate, which may be commonplace in competitive awards. Contractors are 
under less budgetary pressure to perform under a T&M than a FFP 
contract. However, it is not appropriate to hold contractors to the 
same standards used on FFP contracts. The risk of ``shoddy work'' is 
inherent to all ``best efforts'' type contracts. Accordingly, T&M/LH 
contracts are only authorized when no other contract type is suitable. 
The 10 percent default profit rate is arbitrary, not necessarily 
representative of the actual profit rates. However, the rate is 
intended to protect the Government by helping to ensure profit is not 
paid for replacement or reperformance.
    Comment: The proposed rule does not address reimbursement of costs 
for providing accommodations to the Government for testing and 
inspections at contractor and subcontractors' facility. Fairness 
dictates that the Government reimburse contractors and subcontractors 
for reasonable costs incurred for the required accommodations.
    Response: The costs for providing accommodations to the Government 
for testing and inspecting at contractor and subcontractors' facilities 
are generally included in the fully burdened labor rate.
Subcontracts and Interdivisional Labor
    Comment: Reimburse subcontract labor at the schedule labor rates 
without listing the subcontractors in the contract for standard 
commercial services, e.g., ``on-call'' IT installation and repair 
services in support of commercial IT products. Reimburse subcontract 
labor at the schedule labor rates without listing the subcontractors in 
the contract when the contractor's proposal indicates that some of the 
work may be performed by subcontractors that meet the contract's 
qualification requirements and that the price for that ``type of work'' 
will be the prime contract's labor rate which may be blended or other 
rate. Reimburse subcontract labor at the schedule labor rates without 
subcontract consent when the subcontractor personnel satisfy the 
qualification and other requirements for the labor categories for which 
the contractor is seeking compensation. T&M/LH contracts specify the 
required labor qualifications. Whether the person filling the position 
is an employee of the prime or a subcontractor, the qualifications must 
be met. The Government has already determined the price for the ``type 
of work'' to be fair and reasonable by competition. Include 
interdivisional transfers and subcontracted labor costs as elements of 
``time'' instead of ``materials'' to allow prime contractors to recover 
adequate compensation for the time and resources it expends on 
administering subcontracts and for the financial exposure is assumes 
for its subcontractor's performance.
    Comment: Appreciate the Councils efforts to clarify the treatment 
for subcontracts and interdivisional transfers but recommends 
reimbursing all subcontract labor at the schedule labor rates to avoid 
confusion over whether the costs are reimbursable as ``material'' or 
``labor.'' Separately address the proper treatment for subcontracts and 
interdivisional labor to avoid inevitable disputes over whether the 
costs should be treated as ``labor'' or ``material.'' Contractors 
frequently require use of subcontractors for any number of reasons 
included to:
    (a) Secure specific skill sets;
    (b) Augment an existing workforce;
    (c) Use small and/or small, disadvantaged businesses to meet 
socioeconomic goals;
    (d) Incorporate small business innovative solutions; and
    (e) Replace subcontractors during contract performance for failure 
to achieve the prime contractor's performance standards.
    Prime contractors may not know which subcontractors will be used to 
perform the work since T&M contracts are used when it is not possible 
to estimate accurately the extent or duration of work at the time of 
award. Contractors will not know at the time of award which 
subcontractors may be used to fulfill ``on call'' or ``on demand'' 
services. It is unfair to require contractors to perform services 
without knowing in advance whether the necessary subcontractors can be 
brought to task and how the contractor will be reimbursed. Expand the 
definition of ``subcontract'' to clarify that subcontracts on 
commercial contracts includes ``transfers of commercial items between 
divisions, subsidiaries, or affiliates of a contractor or 
subcontractor'' to be consistent with FASA which specified 
interdivisional transfers for commercial items are to be treated as 
subcontracts (see FAR 12.001). Clarify the provisions that allow 
contractors to be reimbursed for its own material at the contractor's 
established catalog or the market price includes services that meet the 
definition of a commercial item at FAR 2.101. Do not object to 
appropriate subcontractor disclosure requirements when the contractor 
does not have an approved purchasing system and the subcontract will be 
cost-reimbursement, time-and-materials, labor-hour, or letter contract 
(see FAR 44.201(b)(1)) but the Government should not interject its 
authority over the prime contractor's determination of how to 
accomplish the work being bid and awarded. Recommend the Councils 
instead consider a notification requirement without the need for formal 
contract amendment. In the commercial world, sellers are generally free 
to delegate their duties to subcontractors as they see fit. In the 
Government world, agencies make these determinations in the evaluation 
of a contractor's proposal and through oversight of awarded work. The 
Government could be exposed to claims for delay or disruption when the 
contractor is attempting to substitute one qualified subcontractor for 
another and approvals are improperly denied or unreasonable delayed. 
The Councils concerns that the basis for ``best value'' determination 
used to award the contract may be altered by contractors adding or 
substituting subcontractors after award do not justify the provisions 
that limit reimbursement of subcontract costs to those listed in the 
contract or those subsequently approved by the contracting officer. The 
question is not one of reimbursement but of Government payment for 
services rendered. The attendant administrative procedures in the 
proposed rule might impede the contractor's ability to deliver services 
in accordance with the terms of the contract. The ``consent to 
subcontract'' provisions and payment limitations significantly increase 
the risk to contractors for meeting contract deliverables. The 
administrative and financial burden of establishing and maintaining a 
list of subcontractors that can be reimbursed at the hourly schedule 
rates increases contract execution risk.

[[Page 74672]]

    Comment: Consent to subcontract is inconsistent with the underlying 
intent of commercial acquisitions.
    Coalition and Comment: Reimburse interdivisional transfers at the 
schedule hourly rates like subcontract labor. The proposed rule 
restricts reimbursement for interdivisional transfers (e.g., transfers 
from divisions, subsidiaries, and affiliates under the common control 
of the commercial contractor) to cost, without profit or fee, unless 
the interdivisional transfer meets the definition of a commercial item 
at FAR 2.101. Commercial contractors will be required to identify the 
actual costs, potentially subjecting their allowability to a 
determination under the cost principles. Commercial contractors should 
have the ability to use any of their resources without penalty of 
profit erosion. These contracts have commercial market reference points 
and disallowing profit discourages vendors from using their best 
employees to meet the Government's needs.
    Comment: Revise the instructions for reimbursing subcontracts at 
the schedule rate to clearly permit the listing of actual or 
``potential'' subcontractor name(s) since the subcontractors listed for 
reimbursement at the schedule hourly rates may reflect a pool of 
``potential'' subcontractors that may or may not actually work on the 
contract.
    Comment: Reimburse all subcontract costs at the schedule hourly 
rates without requiring contracting officer consent to be consistent 
with commercial practices.
    Comment: Reimburse subcontract efforts requiring consent only if 
proper advance consent is obtained. Do not allow contracting officers 
to retroactively grant consent for subcontracts.
    Comment: Restrict reimbursement of subcontract costs to actual 
costs because the prime contractor could subsequently negotiate lower 
rates with subcontractors that were authorized to be paid at the 
schedule rates and the Government would pay excessive prices for 
subcontracted effort that may be of a level less than that envisioned 
by the Government. Reimbursement at the schedule rates encourages 
contractors to maximize profit by subcontracting out more of the effort 
at lower subcontract rates. Government will expend additional resources 
to monitor the quality and efficiency of subcontract labor since the 
subcontract effort will not be readily apparent when billed at the 
schedule rates.
    Comment: Restrict reimbursement of subcontract costs to actual 
costs as long as those costs do not exceed the prime's rates. 
Subcontractors have reported primes charging prime contractor labor 
rates for the subcontractor's labor while paying the subcontractors 
significantly lower rates. Vendors should make a reasonable profit on 
services provided to the Government but there is no justification for 
unduly enriching contractors by allowing them to charge their own 
higher rates for subcontract effort. Permitting contractors to bill 
their established rates for work they subcontract out will likely have 
the unintended consequence of creating new vendor organizations 
developed solely to extract higher profits from Government projects. 
Contractors that believe the Government is best served by permitting 
the wide use of subcontracts are free to do so in FFP agreements. 
Revise or restate in a clearer fashion the provisions regarding 
reimbursement for subcontract efforts at proposed FAR 52.212-
4(i)(1)(ii)(B) because the provisions are difficult to follow.
    Response: The methodology in the proposed rule was problematic and 
contrary to standard commercial practice.
    First, the rule permitted reimbursement of commercial materials, 
including subcontracts and interdivisional transfers, at the 
contractor's established catalog or market price. At the same time, the 
rule limited reimbursement of qualifying commercial subcontracts to 
actual costs unless the subcontracts were listed in the contract for 
reimbursement at the hourly schedule rates. For some commercial 
companies, the established catalog or market price for its commercial 
material (including subcontracts and interdivisional transfers) is the 
prime contractor's established catalog or market price for labor. 
Reimbursing commercial materials at actual cost is inconsistent with 
commercial practices and contrary to the statutory preference for 
acquisitions of commercial items and the intent of FASA, i.e., 
established acquisition policies more closely resembling those of the 
commercial marketplace. In addition, subcontracts under FAR Part 12 
include transfers of commercial items between divisions, subsidiaries, 
or affiliates of a contractor or subcontractor. While the actual costs 
for subcontracts other than interdivisional transfers can be easily 
determined from an independent third party invoice, actual costs for 
interdivisional transfers can only be determined using the procedures 
of FAR Part 31. Imposing FAR Part 31 requirements on commercial 
interdivisional transfers is contrary to commercial practices and the 
intent of FASA. Further, the proposed rule failed to fully consider the 
implications of subsequently altering the elements included in the 
catalog or market prices. The catalog or market prices will be 
determined fair and reasonable based on competition. Subsequent 
modifications to the elements of those prices could impact the overall 
pricing integrity and the fair and reasonable determination. Finally, 
limiting reimbursement to actual costs discourages subcontracting and 
would have a negative impact on small businesses. Small businesses 
traditionally receive approximately 35 percent of subcontracts on 
Government prime contracts and only 24 percent of prime Government 
contracts. Reimbursing subcontracts at actual costs is not consistent 
with the treatment on all other flexibly priced Government contracts 
where prime contractors are paid profit on subcontract costs. 
Restricting reimbursement of subcontract costs to actual costs ``as 
long as those costs do not exceed the prime's rates'' is not equitable 
or fair. Upon further consideration, the Councils believe it is 
appropriate to reimburse commercial subcontracts at the schedule labor 
rates without listing the subcontracts when the contractor's 
established catalog or market price includes the price of its 
subcontracts for the reasons discussed above. The Councils revised the 
rule accordingly. In addition, the Councils believe imposing 
subcontract consent requirements on these commercial subcontracts is 
unduly restrictive and inappropriate and revised the rule accordingly. 
If a contracting officer failed to provide a timely consent or 
disagreed with the subcontract award, the Government could wrongly 
affect contract performance and potentially impact a company's 
commercial reputation. The Councils also revised the rule to recognize 
that subcontracts under FAR Part 12 include transfers of commercial 
items between divisions, subsidiaries, and affiliates of a contractor 
or subcontractor to be consistent with FAR 12.001. Finally, the 
Councils did not believe it was necessary to clarify that qualifying 
services are commercial items since the definition of commercial items 
at FAR 2.101 clearly identifies the services that meet the definition 
of commercial services.
    Comment: Agree subcontract consent applies only to costs that are 
directly charged to the contract and not overhead expenses and G&A but 
recommend explicitly stating so in the final rule to avoid future 
questions about the application of this provision.

[[Page 74673]]

    Response: As noted above, the final rule does not require 
subcontract consents.
Material Costs
    Comment: Agree there should be no ``most favored customer'' pricing 
requirement because it is a barrier for market entry and inconsistent 
with the Government pricing policies at FAR Subpart 15.4.
    Comment: Refunds. Reimbursement of material at actual costs less 
any rebates, refunds, or discounts received by or accrued to the 
contractor is contrary to commercial practice which does not rely on 
cost accounting information. If an accrual entry is made at all, the 
accrual is typically identified to more global considerations (e.g., 
total volume of purchases), not individual contract actions. The 
reference to accruals and other cost accounting data is not 
appropriate.
    Comment: Delete the requirement for commercial companies to give 
the Government credit for rebates from interdivisional labor since the 
divisions will likely have little visibility into the other business 
units.
    Comment: Delete the requirement to provide the Government credit 
for rebates on commercial T&M contracts. Vendors typically provide some 
services (e.g., maintenance on standard equipment) through the 
organizational resources of their commercial business. Federal entities 
have little visibility into those business units, creating a dilemma as 
to how to account for a rebate.
    Response: The Councils do not believe it is appropriate to require 
unique Government accounting requirements for materials on commercial 
T&M/LH contracts. The Councils revised the rule to only require 
contractors to reduce the costs of material for any rebates, refunds, 
or discounts that are identifiable to the contract.
    Comment: Revise the proposed provisions to say modification to 
items that meet the definition of commercial items at FAR 2.101 are 
reimbursed at ``price'' instead of ``actual costs'' for to be 
consistent with FAR Subpart 15.4.
    Response: Depending on the circumstance of a particular 
acquisition, it may be appropriate to pay ``price'' instead of 
``costs'' for modifications to commercial items. To provide maximum 
flexibility to the contracting officer, the Councils revised the rule 
to permit reimbursement at either price or cost.
Indirect Costs and Other Direct Costs
    Comment: Exclude indirect costs from the definition of material 
costs to eliminate the two contradictory methods for reimbursing 
indirect costs. The proposed rule permits reimbursement at a fixed 
amount but also defines indirect costs as an element of material costs 
that can only be reimbursed at actual costs unless the material meets 
the definition of commercial item.
    Response: The Councils revised the rule to eliminate the 
contradictory methods. Instead of excluding indirect costs from the 
definition of materials, the Councils revised the provisions in the 
alternate clause at FAR 52.212-4, Alternate I (i)(1)(ii)(D)(2) to 
exclude indirect costs from being reimbursed at actual cost.
    Comment: Agree with the provisions that permit reimbursement of 
indirect costs at a fixed price on a pro-rata basis over the period of 
contract performance but recommend clarifying that the fixed price 
could be adjusted as new work is added and also allowing contractors to 
be reimbursed at the Government approved percentage mark-up for non-
commercial contracts. Cost Accounting Standards (CAS) covered 
contractors are required to allocate material handling in accordance 
with their approved accounting practices. Material handling rates are 
well-recognized in Federal and commercial markets. The Councils are 
proposing to reimburse indirect costs at a fixed price because of 
concerns over violating the cost-plus-a-percentage-of-cost prohibition. 
Material handling rates do not add fee or any other price component to 
cost and therefore could not be considered a cost-plus-a-percentage-of-
cost violation. Recommend revising the coverage to permit contractors 
to recover material handling provided it is excluded from the hourly 
rates.
    Response: If new work is added, a fixed amount may be added for 
indirect expenses if appropriate. Nothing in the rule prevents contract 
changes. The approved percentage mark-up for non-commercial contracts 
is subject to the allowability provisions of FAR Part 31. The Councils 
believe it is more appropriate to reimburse indirect costs without 
imposing the requirements of FAR Part 31 to be consistent with 
commercial practices. While the commenter disagrees, the Councils 
believe use of a fixed rate violates the cost plus percentage of cost 
contract prohibition. CAS covered contractors already allocate material 
handling and other indirect costs to commercial and non-commercial FFP 
contracts in accordance with their disclosed accounting practices. 
While the costs are allocated to those FFP contracts, the allocation 
may be different from the amounts recovered under the contracts for 
those elements of cost.
    Comment: Clarify which contracting officer (the contracting officer 
who awards the contract or the one that awards the task order) has the 
authority and ability to make determination on the method for 
reimbursing subcontract efforts and the allowability of ODC and 
indirect costs for IDIQ or Multiple Award Schedule (MAS) contracts.
    Response: As stated in the alternate clause at (i)(1)(ii)(D)(1) and 
(2) of 52.212-4, Alternate I, the contracting officer awarding the 
indefinite delivery contract can authorize other contracting officers 
to determine how ODC and indirect costs will be reimbursed.
    Comment: Revise the rule to clarify ODC and indirect costs will 
only be recovered as stand alone elements of costs if the amounts are 
not also included in the loaded labor rates.
    Response: ODC and indirect costs should only be recovered as 
separate elements of costs if they are excluded from the schedule labor 
rates. However, contracting officers will not always know the elements 
of costs included in the schedule labor rates since commercial T&M/LH 
contracts can only be awarded using competitive procedures. Generally, 
contracting officers are precluded from obtaining detailed cost 
information on these types of acquisitions. However, contracting 
officers will know the proposed amount for indirect expenses and the 
types of ODC proposed to be reimbursed at actual costs for each 
competing contractor during the proposal evaluation phase.
Government Oversight
    Comment: The right to interview contractor employees is 
unreasonable intrusive and contrary to customary commercial practice. 
Notwithstanding a statement by the Councils to the contrary, no similar 
right exists in the FAR for any contract type. The audit clause at FAR 
52.215-2 gives the contracting officer the right to examine ``records 
and other evidence'' to verify claimed costs. Records are not defined 
to include interviews and it is hard to believe ``other evidence'' 
includes employee interviews. This new right lacks precedent in the 
FAR. Not even the Offices of Inspector General under the Inspectors 
General Act has this authority. The Government does not need this newly 
created contractual right because the Government already has this right 
in cases of alleged fraud or wrongdoing pursuant to its subpoena powers 
under applicable statutes. The Government should rely on the invoices 
which are required, under penalty of

[[Page 74674]]

law, to be accurate. The right to interview employees is not required 
by SARA or any other law. This authority also conflicts with FASA which 
requires commercial item contracts contain only those terms and 
conditions that are required by law or customary in the commercial 
marketplace. There is no provision in SARA for this approach, a fact 
recognized by Defense Contract Audit Agency (DCAA) in its April 9, 2004 
``GSA Schedule'' memorandum.
    Comment: Commercial T&M/LH contracts are subject to a strict 
oversight process performed by company project managers that are 
accountable for the successful completion of the work.
    Comment: Oppose the rule because commercial contracts will not be 
subject to full oversight and audit provisions. To protect taxpayer 
interests, commercial T&M/LH contracts should be subject to full 
oversight, audits, and CAS. Additionally, the commercial T&M contracts 
need clauses for refunds or price reduction so the Government can 
recoup overages identified in the audit.
    Comment: Remove the restriction that limits the Government's access 
to records to those listed in the contract because the Government 
should not limit its access to records.
    Response: The rule permits, but does not require, contracting 
officers to have access to contractor employees. While such access may 
not be a standard commercial practice, the Councils believe employee 
interviews may be necessary in some cases to verify the hours claimed 
by the contractor. According to one commenter in response to the ANPR, 
requiring access to contractor employees is a standard commercial 
practice for T&M contracting. The provisions for access to contractor 
employees are no broader than what is currently provided for under non-
commercial T&M contracts. FAR 52.215-2, Audit and Records--Negotiation, 
provides the Government the right to examine and audit all records and 
other evidence sufficient to reflect properly all cost claimed to have 
been incurred or anticipated to be incurred directly or indirectly in 
performance of the contract. The Government routinely conducts employee 
interviews and other audit procedures to verify that labor costs at 
contractor locations having fixed-price, cost-reimbursement, incentive, 
non-commercial time-and-material and labor hour, commercial, or price 
redeterminable contracts are charged to the correct contract and not 
inappropriately shifted to the flexibly priced Government contracts. 
Employee interviews are part of DCAA's normal surveillance of 
Government contracts and are required by DCAA's Mandatory Annual Audit 
Requirements (MAARs). The Government should not have to allege 
wrongdoing to interview contractor employees when their labor hours are 
included on invoices submitted to the Government. The Councils do not 
believe that SARA or FASA requires the Government to make payments 
based on actual hours incurred without being able to verify the 
employees actually worked the hours charged. The Councils have 
carefully considered existing requirements for T&M contracts as well as 
differences between commercial and non-commercial contracts. The 
Councils believe that the rule provides the proper balance between the 
need to verify compliance with contract terms and the need to minimize 
access to contractor records. Finally, the Councils believe the 
oversight provided in the rule will provide sufficient information to 
verify the validity of amounts claimed on the contract without the 
oversight requirements in FAR and CAS that are imposed on noncommercial 
T&M/LH contracts.
    Comment: Define the term ``original timecards'' broadly enough to 
encompass both paper-based and electronic timecards because many 
companies use electronic timecards.
    Response: The Councils revised the final rule to provide access to 
original timecards (paper-based or electronic).
    Comment: Provide contracting officers specific guidance regarding 
what prime oversight efforts are adequate for subcontracts listed in 
the contract and reimbursed at the schedule rates. Contracting officers 
may lack the expertise or time to assess the existence or quality of a 
contractor's mechanism to oversee the qualifications and hours worked 
by subcontractor employees. The only way to substantiate qualifications 
and hours worked is through examination of payrolls and resumes for 
each subcontractor.
    Response: The prime contractor is responsible for the oversight of 
its subcontractors. When requested by the Government, the contractors 
are required to substantiate invoices (including any subcontractor 
hours reimbursed at the hourly rate in the schedule) by evidence of 
actual payment, individual daily job timecards, records that verify the 
employees meet the qualifications for the labor categories specified in 
the contract, or other substantiation specified in the contract. 
Contracting officers can seek the advice of the cognizant audit office 
when needed. Training would be more appropriately addressed in agency 
training materials.
Withholds
    Comment: Explicitly state contracting officers cannot withhold on 
commercial T&M/LH contracts because some contracting officers may elect 
to withhold even though the practice is not specifically allowed by the 
payment clause.
    Response: We do not contemplate withholds in commercial contracts 
but there may be circumstances, at the contracting officer's 
discretion, where withholds are appropriate.
Contractor Purchasing System Review (CPSR)
    Comment: The proposed rule prohibits contractors with firm fixed-
price (FFP) or FFP with economic price adjustment (EPA) contracts from 
obtaining approved purchasing systems thereby creating a ``class of 
contractor'' that can never obtain an approved purchasing system. This 
new class of contractors will have more oversight in terms of 
subcontractor approval and approval of subcontract modifications. These 
contractors are currently exempt from the subcontract approval 
process--an exemptions supported by FASA and FARA.
    Comment: Do not impose CPSR on commercial contractors because doing 
so may deter commercial companies from doing business with the 
Government. Commercial contractors may not perform sufficient 
Government business to justify the establishment of a CPSR.
    Response: The objective of a contractor purchasing system review 
(CPSR) is to evaluate the efficiency and effectiveness with which the 
contractor spends Government funds. The review provides the cognizant 
contracting officer a basis for granting, withholding, or withdrawing 
approval of the contractor's purchasing system. Under the existing FAR 
requirements, the Government does not review a contractor's purchasing 
system if all the contractor's Governments sales are commercial FFP and 
FFP EPA contracts. The same is true if all a contractor's Government 
sales are non-commercial competitively awarded firm-fixed-price and 
competitively awarded fixed-price with economic price adjustment 
contracts. For these types of contracts, the Government has no reason 
to evaluate the efficiency and effectiveness with which the contractor 
spends Government funds since the amounts paid to the contractor are 
not affected by the efficiency and effectiveness of the contractors' 
purchasing practices. The

[[Page 74675]]

proposed rule did not impose a CPSR requirement but simply recognized 
that contractors who otherwise have approved purchasing systems require 
less oversight of their subcontractors because the contractor's overall 
system provides adequate controls and procedures to protect the 
Government. However, the Councils revised the rule to eliminate the 
subcontract consent requirement which means subcontracts for T&M 
contracts awarded pursuant to FAR Part 12 will be excluded from CPSRs.
Cost Accounting Standards (CAS)
    Comment: Do not apply CAS and other onerous Government-only 
requirements to commercial T&M/LH contracts because doing so is counter 
to acquisition reform legislation that envisions the Government 
purchasing more like its commercial counterparts. Congress exempted 
commercial item contracts from CAS; however, the CAS Board only 
exempted FFP and FFP EPA contracts. Agree the Councils lack the 
authority to make CAS changes but recommend the Councils implement the 
statute and treat T&M contracts as covered by the existing CAS 
exclusions.
    Response: The decision as to whether CAS applies to commercial T&M/
LH contracts rests with the CAS Board. The Councils have limited the 
imposition of other Government-only requirements to the maximum extent 
practicable. The Councils do not believe commercial T&M/LH contracts 
are currently exempted by any CAS exemption and therefore cannot simply 
waive the requirements of CAS.
Total Cost
    Comment: The rule establishes a notification procedure much like 
the limitation of cost and limitation of funds clauses for non-
commercial items. Since this rule involves contracts for commercial 
items, suggest it instead refer to ``Total Price.''
    Response: While the rule relates to commercial T&M/LH contracts, 
some material and ODC will be reimbursed at ``cost'' not ``price.'' 
Therefore, the Councils did not revise the title as suggested.
General Comments
    Comment: Do not support the rule in its present form.
    Comment: In a number of areas, the proposed rule simply imports 
into this commercial items regulation many of the terms and conditions 
already used by the Government when purchasing non-commercial T&M/LH 
contracts. This action results in the inclusion of provisions that are 
significant departures from standard commercial practices, contrary to 
the spirit of FASA and in violation of FAR 12.301(a)(2) that require 
commercial item contracts to only include those clauses determined to 
be consistent with customary commercial practices. Other provisions of 
the rule extend the Government's audit and oversight inappropriately 
and unnecessary. Deeply concerned that the proposed rule will undercut 
the intent of SARA by creating what effectively amounts to a 
prohibition on the use of T&M contracts. The rule adds significant 
administrative burden, procedural complications, and certain 
significant financial disincentives. Recommend the Councils reconsider 
the entire approach to T&M contracting and the expansive rulemaking in 
the proposed rule. Also, recommend the Councils hold additional public 
meetings to provide the public additional opportunities to explain the 
submitted comments. Recommend delaying issuance of a final rule until 
the Acquisition Advisory Panel has released its report and 
recommendations since there may be a conflict between their 
recommendations and this rule.
    Response: The Councils reviewed public comments and held two public 
meetings, obtaining a very complete picture of the views of interested 
parties on this rule, and have determined it is appropriate to go 
forward with a final rule. It is highly unlikely that further comments 
or public meetings would provide any information or opinions not 
already provided and evaluated.
    Comment: Concur.
    Comment: Industry does not prefer T&M contracts and would avoid 
them for IT work.
    Response: T&M/LH contracts represent the highest contract type risk 
and industry, like the Government, avoids using them to the maximum 
extent practicable. However, there are circumstances when these 
contract types are needed and used.
    Comment: The main difference between the commercial market and the 
rule is the rule only requires the contractor to use its ``best 
efforts'' to perform within the ceiling. There is no consumer in the 
commercial market that would blindly allow a car repair shop to work on 
their car for up to $1,000 without any guarantee that the car will be 
fixed.
    Response: T&M/LH contracts, commercial and non-commercial, are 
``best effort'' contracts that can only be used when it is not possible 
at the time of placing the contract or order to accurately estimate the 
extent or duration of the work or to anticipate costs with any 
reasonable degree of certainty. If it is possible to estimate the 
extent or duration of work or anticipate costs with a reasonable degree 
of certainty, T&M/LH contracts should not be used.
    Comment: The use of the term ``schedule'' may be confusing to some 
who understand it to refer to MAS or FSSs contracts. The subcontract 
reimbursement provisions that permit reimbursement of subcontracts at 
the hourly rates prescribed in the schedule could be interpreted to 
mean there are separate subcontract rates on MAS contracts. Clarify the 
final rule the term is not meant to connote MAS contracts.
    Response: The term is used throughout the FAR and widely understood 
by contracting professionals. The Councils are unaware of any issues 
with its interpretation and does not believe changing the term could be 
confusing to contracting professionals.
    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 Regulatory Flexibility Act, 5 U.S.C. 601, et seq., applies to 
this final rule. The Councils prepared a Final Regulatory Flexibility 
Analysis (FRFA), and it is summarized as follows:
    1. Statement of need for, and objectives of, the rule.
    This final rule revises the Federal Acquisition Regulation to 
allow contracting officers to award Time and Material and Labor Hour 
(T&M/LH) contracts when procuring commercial items. This FAR case 
was initiated to implement Section 1432 of the National Defense 
Authorization Act for Fiscal Year 2004 (Pub. L. 108-136).
    2. Summary of significant issues raised by the public comments 
in response to the Initial Regulatory Flexibility Analysis (IRFA), a 
summary of the assessment of the agency of such issues, and a 
statement of any changes made in the proposed rule as a result of 
such comments.
    Thirteen (13) comments were received from the public in response 
to the proposed rule. One of the most significant areas of 
controversy in the proposed rule issued for public comment concerned 
the matter of labor provided by subcontractors. The proposed rule 
required that the prime contractor be reimbursed at actual cost for 
all subcontractors providing labor under the contract, unless a 
subcontractor was specifically authorized under the prime contract 
by inclusion on a list of subcontractors to be reimbursed at the 
prime contract labor hour rate. Public commenters complained that 
this procedure created major administrative burdens and, because 
reimbursement at actual cost did not permit

[[Page 74676]]

prime contractors to obtain profit of those subcontracts, it would 
significantly reduce the use of subcontractors. The commenters 
pointed out that the subcontractors at issue are commonly small 
businesses.
    The final rule eliminates this feature regarding payment of 
labor subcontractors at actual cost and use of a list of approved 
subcontractors. The final rule provides that a prime contractor can 
provide qualifying labor hours under the contract through use of 
subcontractors and the government will pay the prime contract labor 
hour rate, without use of any pre-authorization list in the 
contract. Prime contractors will be able to include profit on this 
labor and there will be no special administrative approvals 
required. The final rule approach eliminates the part of the 
proposed rule that was most objectionable to small entities.
    3. Description of, and an estimate of the number of, small 
entities to which the rule will apply or an explanation of why no 
such estimate is available.
    This rule will apply to small and large entities that accept 
Time-and-Material or Labor-Hour contracts for commercial items. 
Because this rule is the first FAR authorization for use of these 
types of contracts for commercial items, no history is available on 
the number of awards made to small businesses. However, the Federal 
Procurement Data System (FPDS) data from FY 2004 show that small 
businesses received approximately 50 percent of the 42,840 
noncommercial item T&M/LH awards made and approximately 30% of the 
$17 Billion obligated under those awards.
    4. Description of the projected reporting, recordkeeping, and 
other compliance requirements of the rule, including an estimate of 
the classes of small entities which will be subject to the 
requirement and the type of professional skills necessary for 
preparation of the report or record.
    The rule would require contractors to maintain records to 
support invoices presented to the Government for payment. Such 
records would include original timecards, the contractor's 
timekeeping procedures, distribution of labor, invoices for 
material, and so forth. These are standard records maintained by any 
company, large or small, and the fact that the contract would 
require that these records be made available to the Government 
should not place any additional record keeping burden on the entity.
    5. Description of steps the agency has taken to minimize 
significant economic impact on small entities consistent with the 
stated objectives of applicable statutes, including a statement of 
the factual, policy, and legal reasons for selecting the alternative 
adopted in the final rule and why each of the other significant 
alternatives to the rule considered by the agency was rejected.
    Public comments submitted in response to the proposed rule were 
reviewed and substantial policy adjustments to the rule were made as 
a result. One of the most significant areas of controversy in the 
proposed rule issued for public comment concerned the matter of 
labor provided by subcontractors. The proposed rule required that 
the prime contractor be reimbursed at actual cost for all 
subcontractors providing labor under the contract, unless a 
subcontractor was specifically authorized under the prime contract 
by inclusion on a list of subcontractors to be reimbursed at the 
prime contract labor hour rate. Public commenters complained that 
this procedure created major administrative burdens and, because 
reimbursement at actual cost did not permit prime contractors to 
obtain profit of those subcontracts, it would significantly reduce 
the use of subcontractors. The commenters pointed out that the 
subcontractors at issue are commonly small businesses.
    The final rule eliminates this feature regarding payment of 
labor subcontractors at actual cost and use of a list of approved 
subcontractors. The final rule provides that a prime contractor can 
provide qualifying labor hours under the contract through use of 
subcontractors and the government will pay the prime contract labor 
hour rate, without use of any pre-authorization list in the 
contract. Prime contractors will be able to include profit on this 
labor and there will be no special administrative approvals 
required. The final rule approach eliminates the part of the 
proposed rule that was most objectionable to small entities.
    Interested parties may obtain a copy of the FRFA from the FAR 
Secretariat. The FAR Secretariat has submitted a copy of the FRFA to 
the Chief Counsel for Advocacy of the Small Business Administration.

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, 10, 12, 16, and 52

    Government procurement.

    Dated: December 4, 2006.
Linda K. Nelson,
Deputy Director, Contract Policy Division.

0
Therefore, DoD, GSA, and NASA amend 48 CFR parts 2, 10, 12, 16, and 52 
as set forth below:
0
1. The authority citation for 48 CFR parts 2, 10, 12, 16, and 52 
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


2.101   [Amended]

0
2. Amend section 2.101 in paragraph (b), in the definition ``Commercial 
item'', by removing the second sentence in the introductory text of 
paragraph (6).

PART 10--MARKET RESEARCH


10.001   [Amended]

0
3. Amend section 10.001 by removing from paragraph (a)(3)(iv) ``as 
terms'' and adding ``as type of contract, terms'' in its place.
0
4. Amend section 10.002 by revising paragraph (b)(1)(iii) to read as 
follows:


10.002   Procedures.

* * * * *
    (b) * * *
    (1) * * *
    (iii) Customary practices, including warranty, buyer financing, 
discounts, contract type considering the nature and risk associated 
with the requirement, etc., under which commercial sales of the 
products or services are made;
* * * * *

PART 12--ACQUISITION OF COMMERCIAL ITEMS

0
5. Revise section 12.207 to read as follows:


12.207   Contract type.

    (a) Except as provided in paragraph (b) of this section, agencies 
shall use firm-fixed-price contracts or fixed-price contracts with 
economic price adjustment for the acquisition of commercial items.
    (b)(1) A time-and-materials contract or labor-hour contract (see 
Subpart 16.6) may be used for the acquisition of commercial services 
when--
    (i) The service is acquired under a contract awarded using--
    (A) Competitive procedures (e.g., the procedures in 6.102, the set-
aside procedures in Subpart 19.5, or competition conducted in 
accordance with Part 13);
    (B) The procedures for other than full and open competition in 6.3 
provided the agency receives offers that satisfy the Government's 
expressed requirement from two or more responsible offerors; or
    (C) The fair opportunity procedures in 16.505, if placing an order 
under a multiple award delivery-order contract; and
    (ii) The contracting officer--
    (A) Executes a determination and findings (D&F) for the contract, 
in accordance with paragraph (b)(2) of this section (but see paragraph 
(c) of this section for indefinite-delivery contracts), that no other 
contract type authorized by this subpart is suitable;
    (B) Includes a ceiling price in the contract or order that the 
contractor exceeds at its own risk; and
    (C) Authorizes any subsequent change in the ceiling price only upon 
a determination, documented in the

[[Page 74677]]

contract file, that it is in the best interest of the procuring agency 
to change the ceiling price.
    (2) Each D&F required by paragraph (b)(1)(ii)(A) of this section 
shall contain sufficient facts and rationale to justify that no other 
contract type authorized by this subpart is suitable. At a minimum, the 
D&F shall--
    (i) Include a description of the market research conducted (see 
10.002(e));
    (ii) Establish that it is not possible at the time of placing the 
contract or order to accurately estimate the extent or duration of the 
work or to anticipate costs with any reasonable degree of certainty; 
and
    (iii) Establish that the requirement has been structured to 
maximize the use of firm-fixed-price or fixed-price with economic price 
adjustment contracts (e.g., by limiting the value or length of the 
time-and-material/labor-hour contract or order; establishing fixed 
prices for portions of the requirement) on future acquisitions for the 
same or similar requirements.
    (iv) Describe actions planned to maximize the use of firm-fixed-
price or fixed-price with economic price adjustment contracts on future 
acquisitions for the same requirements.
    (3) See 16.601(d)(1) for additional approval required for contracts 
expected to extend beyond three years.
    (c)(1) Indefinite-delivery contracts (see Subpart 16.5) may be used 
when--
    (i) The prices are established based on a firm-fixed-price or 
fixed-price with economic price adjustment; or
    (ii) Rates are established for commercial services acquired on a 
time-and-materials or labor-hour basis.
    (2) When an indefinite-delivery contract is awarded with services 
priced on a time-and-materials or labor-hour basis, contracting 
officers shall, to the maximum extent practicable, also structure the 
contract to allow issuance of orders on a firm-fixed-price or fixed-
price with economic price adjustment basis. For such contracts, the 
contracting officer shall execute the D&F required by paragraph (b)(2) 
of this section, for each order placed on a time-and-materials or 
labor-hour basis. Placement of orders shall be in accordance with 
Subpart 8.4 or 16.5, as applicable.
    (3) If an indefinite-delivery contract only allows for the issuance 
of orders on a time-and-materials or labor-hour basis, the D&F required 
by paragraph (b)(2) of this section shall be executed to support the 
basic contract and shall also explain why providing for an alternative 
firm-fixed-price or fixed-price with economic price adjustment pricing 
structure is not practicable. The D&F for this contract shall be 
approved one level above the contracting officer. Placement of orders 
shall be in accordance with Subpart 16.5.
    (d) The contract types authorized by this subpart may be used in 
conjunction with an award fee and performance or delivery incentives 
when the award fee or incentive is based solely on factors other than 
cost (see 16.202-1 and 16.203-1).
    (e) Use of any contract type other than those authorized by this 
subpart to acquire commercial items is prohibited.
0
6. Amend section 12.301 by adding a sentence after the first sentence 
in paragraph (b)(3) to read as follows:


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

* * * * *
    (b) * * *
    (3) * * * Use this clause with its Alternate I when a time-and-
materials or labor-hour contract will be awarded. * * *
* * * * *
0
7. Amend section 12.403 by revising paragraph (d)(1)(i) to read as 
follows:


12.403   Termination.

* * * * *
    (d) * * *
    (1) * * *
    (i)(A) The percentage of the contract price reflecting the 
percentage of the work performed prior to the notice of the termination 
for fixed-price or fixed-price with economic price adjustment 
contracts; or
    (B) An amount for direct labor hours (as defined in the Schedule of 
the contract) determined by multiplying the number of direct labor 
hours expended before the effective date of termination by the hourly 
rate(s) in the Schedule; and
* * * * *

PART 16--TYPES OF CONTRACTS

0
8. Amend section 16.601 by adding a sentence to the end of paragraph 
(c) introductory text and revising paragraph (d) to read as follows:


16.601  Time-and-materials contracts.

* * * * *
    (c) Application. * * * See 12.207(b) for the use of time-and-
material contracts for certain commercial services.
* * * * *
    (d) Limitations. A time-and-materials contract may be used only 
if--
    (1) The contracting officer prepares a determination and findings 
that no other contract type is suitable. The determination and finding 
shall be--
    (i) Signed by the contracting officer prior to the execution of the 
base period or any option periods of the contracts; and
    (ii) Approved by the head of the contracting activity prior to the 
execution of the base period when the base period plus any option 
periods exceeds three years; and
    (2) The contract includes a ceiling price that the contractor 
exceeds at its own risk. The contracting officer shall document the 
contract file to justify the reasons for and amount of any subsequent 
change in the ceiling price. Also see 12.207(b) for further limitations 
on use of Time-and-Materials or Labor Hour contracts for acquisition of 
commercial items.
* * * * *
0
9. Revise section 16.602 to read as follows:


16.602   Labor-hour contracts.

    Description. A labor-hour contract is a variation of the time-and-
materials contract, differing only in that materials are not supplied 
by the contractor. See 12.207(b), 16.601(c), and 16.601(d) for 
application and limitations, for time-and-materials contracts that also 
apply to labor-hour contracts. See 12.207(b) for the use of labor-hour 
contracts for certain commercial services.

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
10. Amend section 52.212-4 by--
0
a. Revising the date of the clause;
0
b. Adding a new sentence after the third sentence in the introductory 
text of paragraph (a); and
0
c. Adding Alternate I;
0
The revised and added text reads as follows:


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

* * * * *
    CONTRACT TERMS AND CONDITIONS--COMMERCIAL ITEMS (FEB 2007)
    (a) Inspection/Acceptance. * * * If repair/replacement or 
reperformance will not correct the defects or is not possible, the 
Government may seek an equitable price reduction or adequate 
consideration for acceptance of nonconforming supplies or services. 
* * *
* * * * *
    (End of clause)
    Alternate I (FEB 2007). When a time-and-materials or labor-hour 
contract is contemplated, substitute the following paragraphs (a), 
(e), (i) and (l) for those in the basic clause.
    (a) Inspection/Acceptance. (1) The Government has the right to 
inspect and test all materials furnished and services performed 
under this contract, to the extent practicable at all places and 
times, including

[[Page 74678]]

the period of performance, and in any event before acceptance. The 
Government may also inspect the plant or plants of the Contractor or 
any subcontractor engaged in contract performance. The Government 
will perform inspections and tests in a manner that will not unduly 
delay the work.
    (2) If the Government performs inspection or tests on the 
premises of the Contractor or a subcontractor, the Contractor shall 
furnish and shall require subcontractors to furnish all reasonable 
facilities and assistance for the safe and convenient performance of 
these duties.
    (3) Unless otherwise specified in the contract, the Government 
will accept or reject services and materials at the place of 
delivery as promptly as practicable after delivery, and they will be 
presumed accepted 60 days after the date of delivery, unless 
accepted earlier.
    (4) At any time during contract performance, but not later than 
6 months (or such other time as may be specified in the contract) 
after acceptance of the services or materials last delivered under 
this contract, the Government may require the Contractor to replace 
or correct services or materials that at time of delivery failed to 
meet contract requirements. Except as otherwise specified in 
paragraph (a)(6) of this clause, the cost of replacement or 
correction shall be determined under paragraph (i) of this clause, 
but the ``hourly rate'' for labor hours incurred in the replacement 
or correction shall be reduced to exclude that portion of the rate 
attributable to profit. Unless otherwise specified below, the 
portion of the ``hourly rate'' attributable to profit shall be 10 
percent. The Contractor shall not tender for acceptance materials 
and services required to be replaced or corrected without disclosing 
the former requirement for replacement or correction, and, when 
required, shall disclose the corrective action taken. [Insert 
portion of labor rate attributable to profit.]
    (5)(i) If the Contractor fails to proceed with reasonable 
promptness to perform required replacement or correction, and if the 
replacement or correction can be performed within the ceiling price 
(or the ceiling price as increased by the Government), the 
Government may--
    (A) By contract or otherwise, perform the replacement or 
correction, charge to the Contractor any increased cost, or deduct 
such increased cost from any amounts paid or due under this 
contract; or
    (B) Terminate this contract for cause.
    (ii) Failure to agree to the amount of increased cost to be 
charged to the Contractor shall be a dispute under the Disputes 
clause of the contract.
    (6) Notwithstanding paragraphs (a)(4) and (5) above, the 
Government may at any time require the Contractor to remedy by 
correction or replacement, without cost to the Government, any 
failure by the Contractor to comply with the requirements of this 
contract, if the failure is due to--
    (i) Fraud, lack of good faith, or willful misconduct on the part 
of the Contractor's managerial personnel; or
    (ii) The conduct of one or more of the Contractor's employees 
selected or retained by the Contractor after any of the Contractor's 
managerial personnel has reasonable grounds to believe that the 
employee is habitually careless or unqualified.
    (7) This clause applies in the same manner and to the same 
extent to corrected or replacement materials or services as to 
materials and services originally delivered under this contract.
    (8) The Contractor has no obligation or liability under this 
contract to correct or replace materials and services that at time 
of delivery do not meet contract requirements, except as provided in 
this clause or as may be otherwise specified in the contract.
    (9) Unless otherwise specified in the contract, the Contractor's 
obligation to correct or replace Government-furnished property shall 
be governed by the clause pertaining to Government property.
    (e) Definitions. (1) The clause at FAR 52.202-1, Definitions, is 
incorporated herein by reference. As used in this clause--
    (i) Direct materials means those materials that enter directly 
into the end product, or that are used or consumed directly in 
connection with the furnishing of the end product or service.
    (ii) Hourly rate means the rate(s) prescribed in the contract 
for payment for labor that meets the labor category qualifications 
of a labor category specified in the contract that are--
    (A) Performed by the contractor;
    (B) Performed by the subcontractors; or
    (C) Transferred between divisions, subsidiaries, or affiliates 
of the contractor under a common control.
    (iii) Materials means--
    (A) Direct materials, including supplies transferred between 
divisions, subsidiaries, or affiliates of the contractor under a 
common control;
    (B) Subcontracts for supplies and incidental services for which 
there is not a labor category specified in the contract;
    (C) Other direct costs (e.g., incidental services for which 
there is not a labor category specified in the contract, travel, 
computer usage charges, etc.);
    (D) The following subcontracts for services which are 
specifically excluded from the hourly rate: [Insert any subcontracts 
for services to be excluded from the hourly rates prescribed in the 
schedule.]; and
    (E) Indirect costs specifically provided for in this clause.
    (iv) Subcontract means any contract, as defined in FAR Subpart 
2.1, entered into with a subcontractor to furnish supplies or 
services for performance of the prime contract or a subcontract 
including transfers between divisions, subsidiaries, or affiliates 
of a contractor or subcontractor. It includes, but is not limited 
to, purchase orders, and changes and modifications to purchase 
orders.
    (i) Payments. (1) Services accepted. Payment shall be made for 
services accepted by the Government that have been delivered to the 
delivery destination(s) set forth in this contract. The Government 
will pay the Contractor as follows upon the submission of commercial 
invoices approved by the Contracting Officer:
    (i) Hourly rate.
    (A) The amounts shall be computed by multiplying the appropriate 
hourly rates prescribed in the contract by the number of direct 
labor hours performed. Fractional parts of an hour shall be payable 
on a prorated basis.
    (B) The rates shall be paid for all labor performed on the 
contract that meets the labor qualifications specified in the 
contract. Labor hours incurred to perform tasks for which labor 
qualifications were specified in the contract will not be paid to 
the extent the work is performed by individuals that do not meet the 
qualifications specified in the contract, unless specifically 
authorized by the Contracting Officer.
    (C) Invoices may be submitted once each month (or at more 
frequent intervals, if approved by the Contracting Officer) to the 
Contracting Officer or the authorized representative.
    (D) When requested by the Contracting Officer or the authorized 
representative, the Contractor shall substantiate invoices 
(including any subcontractor hours reimbursed at the hourly rate in 
the schedule) by evidence of actual payment, individual daily job 
timecards, records that verify the employees meet the qualifications 
for the labor categories specified in the contract, or other 
substantiation specified in the contract.
    (E) Unless the Schedule prescribes otherwise, the hourly rates 
in the Schedule shall not be varied by virtue of the Contractor 
having performed work on an overtime basis.
    (1) If no overtime rates are provided in the Schedule and the 
Contracting Officer approves overtime work in advance, overtime 
rates shall be negotiated.
    (2) Failure to agree upon these overtime rates shall be treated 
as a dispute under the Disputes clause of this contract.
    (3) If the Schedule provides rates for overtime, the premium 
portion of those rates will be reimbursable only to the extent the 
overtime is approved by the Contracting Officer.
    (ii) Materials.
    (A) If the Contractor furnishes materials that meet the 
definition of a commercial item at FAR 2.101, the price to be paid 
for such materials shall be the contractor's established catalog or 
market price, adjusted to reflect the--
    (1) Quantities being acquired; and
    (2) Any modifications necessary because of contract 
requirements.
    (B) Except as provided for in paragraph (i)(1)(ii)(A) and (D)(2) 
of this clause, the Government will reimburse the Contractor the 
actual cost of materials (less any rebates, refunds, or discounts 
received by the contractor that are identifiable to the contract) 
provided the Contractor--
    (1) Has made payments for materials in accordance with the terms 
and conditions of the agreement or invoice; or
    (2) Makes these payments within 30 days of the submission of the 
Contractor's payment request to the Government and such payment is 
in accordance with the terms and conditions of the agreement or 
invoice.
    (C) To the extent able, the Contractor shall--
    (1) Obtain materials at the most advantageous prices available 
with due regard to securing prompt delivery of satisfactory 
materials; and

[[Page 74679]]

    (2) Give credit to the Government for cash and trade discounts, 
rebates, scrap, commissions, and other amounts that are identifiable 
to the contract.
    (D) Other Costs. Unless listed below, other direct and indirect 
costs will not be reimbursed.
    (1) Other Direct Costs. The Government will reimburse the 
Contractor on the basis of actual cost for the following, provided 
such costs comply with the requirements in paragraph (i)(1)(ii)(B) 
of this clause: [Insert each element of other direct costs (e.g., 
travel, computer usage charges, etc. Insert ``None'' if no 
reimbursement for other direct costs will be provided. If this is an 
indefinite delivery contract, the Contracting Officer may insert 
``Each order must list separately the elements of other direct 
charge(s) for that order or, if no reimbursement for other direct 
costs will be provided, insert `None''.']
    (2) Indirect Costs (Material Handling, Subcontract 
Administration, etc.). The Government will reimburse the Contractor 
for indirect costs on a pro-rata basis over the period of contract 
performance at the following fixed price: [Insert a fixed amount for 
the indirect costs and payment schedule. Insert ``$0'' if no fixed 
price reimbursement for indirect costs will be provided. (If this is 
an indefinite delivery contract, the Contracting Officer may insert 
``Each order must list separately the fixed amount for the indirect 
costs and payment schedule or, if no reimbursement for indirect 
costs, insert `None').'']
    (2) Total cost. It is estimated that the total cost to the 
Government for the performance of this contract shall not exceed the 
ceiling price set forth in the Schedule and the Contractor agrees to 
use its best efforts to perform the work specified in the Schedule 
and all obligations under this contract within such ceiling price. 
If at any time the Contractor has reason to believe that the hourly 
rate payments and material costs that will accrue in performing this 
contract in the next succeeding 30 days, if added to all other 
payments and costs previously accrued, will exceed 85 percent of the 
ceiling price in the Schedule, the Contractor shall notify the 
Contracting Officer giving a revised estimate of the total price to 
the Government for performing this contract with supporting reasons 
and documentation. If at any time during the performance of this 
contract, the Contractor has reason to believe that the total price 
to the Government for performing this contract will be substantially 
greater or less than the then stated ceiling price, the Contractor 
shall so notify the Contracting Officer, giving a revised estimate 
of the total price for performing this contract, with supporting 
reasons and documentation. If at any time during performance of this 
contract, the Government has reason to believe that the work to be 
required in performing this contract will be substantially greater 
or less than the stated ceiling price, the Contracting Officer will 
so advise the Contractor, giving the then revised estimate of the 
total amount of effort to be required under the contract.
    (3) Ceiling price. The Government will not be obligated to pay 
the Contractor any amount in excess of the ceiling price in the 
Schedule, and the Contractor shall not be obligated to continue 
performance if to do so would exceed the ceiling price set forth in 
the Schedule, unless and until the Contracting Officer notifies the 
Contractor in writing that the ceiling price has been increased and 
specifies in the notice a revised ceiling that shall constitute the 
ceiling price for performance under this contract. When and to the 
extent that the ceiling price set forth in the Schedule has been 
increased, any hours expended and material costs incurred by the 
Contractor in excess of the ceiling price before the increase shall 
be allowable to the same extent as if the hours expended and 
material costs had been incurred after the increase in the ceiling 
price.
    (4) Access to records. At any time before final payment under 
this contract, the Contracting Officer (or authorized 
representative) will have access to the following (access shall be 
limited to the listing below unless otherwise agreed to by the 
Contractor and the Contracting Officer):
    (i) Records that verify that the employees whose time has been 
included in any invoice meet the qualifications for the labor 
categories specified in the contract;
    (ii) For labor hours (including any subcontractor hours 
reimbursed at the hourly rate in the schedule), when timecards are 
required as substantiation for payment--
    (A) The original timecards (paper-based or electronic);
    (B) The Contractor's timekeeping procedures;
    (C) Contractor records that show the distribution of labor 
between jobs or contracts; and
    (D) Employees whose time has been included in any invoice for 
the purpose of verifying that these employees have worked the hours 
shown on the invoices.
    (iii) For material and subcontract costs that are reimbursed on 
the basis of actual cost--
    (A) Any invoices or subcontract agreements substantiating 
material costs; and
    (B) Any documents supporting payment of those invoices.
    (5) Overpayments/Underpayments. (i) Each payment previously made 
shall be subject to reduction to the extent of amounts, on preceding 
invoices, that are found by the Contracting Officer not to have been 
properly payable and shall also be subject to reduction for 
overpayments or to increase for underpayments. The Contractor shall 
promptly pay any such reduction within 30 days unless the parties 
agree otherwise. The Government within 30 days will pay any such 
increases, unless the parties agree otherwise. The contractor's 
payment will be made by check. If the Contractor becomes aware of a 
duplicate invoice payment or that the Government has otherwise 
overpaid on an invoice payment, the Contractor shall immediately 
notify the Contracting Officer and request instructions for 
disposition of the overpayment.
    (ii) Upon receipt and approval of the invoice designated by the 
Contractor as the ``completion invoice'' and supporting 
documentation, and upon compliance by the Contractor with all terms 
of this contract, any outstanding balances will be paid within 30 
days unless the parties agree otherwise. The completion invoice, and 
supporting documentation, shall be submitted by the Contractor as 
promptly as practicable following completion of the work under this 
contract, but in no event later than 1 year (or such longer period 
as the Contracting Officer may approve in writing) from the date of 
completion.
    (6) Release of claims. The Contractor, and each assignee under 
an assignment entered into under this contract and in effect at the 
time of final payment under this contract, shall execute and 
deliver, at the time of and as a condition precedent to final 
payment under this contract, a release discharging the Government, 
its officers, agents, and employees of and from all liabilities, 
obligations, and claims arising out of or under this contract, 
subject only to the following exceptions.
    (i) Specified claims in stated amounts, or in estimated amounts 
if the amounts are not susceptible to exact statement by the 
Contractor.
    (ii) Claims, together with reasonable incidental expenses, based 
upon the liabilities of the Contractor to third parties arising out 
of performing this contract, that are not known to the Contractor on 
the date of the execution of the release, and of which the 
Contractor gives notice in writing to the Contracting Officer not 
more than 6 years after the date of the release or the date of any 
notice to the Contractor that the Government is prepared to make 
final payment, whichever is earlier.
    (iii) Claims for reimbursement of costs (other than expenses of 
the Contractor by reason of its indemnification of the Government 
against patent liability), including reasonable incidental expenses, 
incurred by the Contractor under the terms of this contract relating 
to patents.
    (7) Prompt payment. The Government will make payment in 
accordance with the Prompt Payment Act (31 U.S.C. 3903) and prompt 
payment regulations at 5 CFR part 1315.
    (8) Electronic Funds Transfer (EFT). If the Government makes 
payment by EFT, see 52.212-5(b) for the appropriate EFT clause.
    (9) Discount. In connection with any discount offered for early 
payment, time shall be computed from the date of the invoice. For 
the purpose of computing the discount earned, payment shall be 
considered to have been made on the date that appears on the payment 
check or the specified payment date if an electronic funds transfer 
payment is made.
    (l) Termination for the Government's convenience. The Government 
reserves the right to terminate this contract, or any part hereof, 
for its sole convenience. In the event of such termination, the 
Contractor shall immediately stop all work hereunder and shall 
immediately cause any and all of its suppliers and subcontractors to 
cease work. Subject to the terms of this contract, the Contractor 
shall be paid an amount for direct labor hours (as defined in the 
Schedule of the contract) determined by multiplying the number of 
direct labor hours expended before the effective date of termination 
by the hourly rate(s) in the contract, less any hourly rate payments 
already made to the Contractor

[[Page 74680]]

plus reasonable charges the Contractor can demonstrate to the 
satisfaction of the Government using its standard record keeping 
system that have resulted from the termination. The Contractor shall 
not be required to comply with the cost accounting standards or 
contract cost principles for this purpose. This paragraph does not 
give the Government any right to audit the Contractor's records. The 
Contractor shall not be paid for any work performed or costs 
incurred that reasonably could have been avoided.
[FR Doc. 06-9613 Filed 12-6-06; 8:45 am]
BILLING CODE 6820-EP-S