[Federal Register Volume 72, Number 172 (Thursday, September 6, 2007)]
[Rules and Regulations]
[Pages 51189-51191]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-17423]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 216 and 252

RIN 0750-AF44


Defense Federal Acquisition Regulation Supplement; Labor 
Reimbursement on DoD Non-Commercial Time-and-Materials and Labor-Hour 
Contracts (DFARS Case 2006-D030)

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

ACTION: Final rule.

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SUMMARY: DoD has adopted as final, without change, an interim rule 
amending the Defense Federal Acquisition Regulation Supplement (DFARS) 
to provide policy for reimbursing labor costs on competitively awarded 
DoD non-commercial time-and-materials and labor-hour contracts.

EFFECTIVE DATE: September 6, 2007.

FOR FURTHER INFORMATION CONTACT: Ms. Robin Schulze, Defense Acquisition 
Regulations System, OUSD (AT&L) DPAP (CPF), IMD 3D139, 3062 Defense 
Pentagon, Washington, DC 20301-3062.

[[Page 51190]]

Telephone (703) 602-0326; facsimile (703) 602-7887. Please cite DFARS 
Case 2006-D030.

SUPPLEMENTARY INFORMATION:

A. Background

    DoD published an interim rule at 71 FR 74469 on December 12, 2006, 
to clarify payment procedures for non-commercial time-and-materials and 
labor-hour contracts. Two sources submitted comments on the interim 
rule. A discussion of the comments is provided below.
    1. Comment: One source stated that DoD should not require separate 
hourly rates for each category of labor performed by the contractor and 
each subcontractor on every competitively awarded non-commercial time-
and-materials and labor-hour contract, since price competition will 
ensure the hourly rates are fair and reasonable and will eliminate 
potential abuses. The source also stated that the rationale cited in 
the interim rule for requiring separate hourly rates failed to address 
the benefits of adequate price competition and was not relevant to the 
requirement for separate rates. While not cited as rationale for 
requiring separate rates, the source stated that DoD may have adopted 
the rule to ensure subcontract labor meets the qualifications for the 
labor categories specified in the contract. If this is part of the 
rationale, DoD already has the ability to accomplish that objective 
through the subcontract consent provisions of FAR clause 52.244-2, 
which is mandatory for all time-and-materials contracts that exceed the 
simplified acquisition threshold. Another source stated that the rule 
eliminates the flexibility to select the proper approach, considering 
the advantages and disadvantages of the pricing options for hourly 
rates.
    DoD Response: The FAR provisions authorize agencies to select, and 
make mandatory, one of the three options for pricing hourly rates. DoD 
believes it is in the best interest of the Department to select, and 
make mandatory, the FAR option that requires separate fixed hourly 
rates for each category of labor performed by the contractor and each 
subcontractor. DoD believes the rationale cited in the interim rule 
adequately supports the requirement for separate rates. That rationale 
is not based on the benefits of adequate price competition, because 
those benefits are not affected by the requirement for separate hourly 
rates. The rationale is also not based on a need to ensure the 
subcontract labor meets the qualifications for the labor categories 
specified in the contract.
    2. Comment: One source stated that the requirement for separate 
fixed hourly rates for each category of labor performed by the 
contractor and each subcontractor will slow the acquisition process by 
requiring lengthy contract negotiations to establish separate hourly 
rates and contract modifications to add new subcontractors. In 
addition, the requirement will hinder contract performance, will tax 
DoD's acquisition workforce, and will likely prejudice qualified small 
and small disadvantaged businesses that only become known to the prime 
contractor after contract formation. Another source stated that the 
requirement for separate fixed hourly rates for each category of labor 
performed by the contractor and each subcontractor will negatively 
impact contractor invoicing. Hours will have to be billed separately 
for each subcontractor and the prime for each fund cite. As a result, 
contractor indirect rates will increase to absorb the additional 
administrative costs. In addition, the administrative time and expense 
required to modify the contract to add new subcontractors will be 
substantial.
    DoD Response: The FAR authorizes separate fixed hourly rates for 
each category of labor performed by the contractor and each 
subcontractor to recognize there may be circumstances when separate 
rates are required to adequately protect the Government. As stated in 
the preamble to the interim rule, DoD believes it is in the best 
interest of the Department to require separate fixed hourly rates for 
each category of labor performed by the contractor and each 
subcontractor. When making that determination, DoD considered the 
potential administrative burden and costs that may result from the 
rule. In addition, the rule is not intended to prejudice small and 
small disadvantaged businesses. If additional subcontractors, including 
small and small disadvantaged businesses, are needed to perform on the 
contract after the initial contract award, the contract can be modified 
to add the hourly rates for the new subcontractors.
    3. Comment: One source stated that the requirement for separate 
fixed hourly rates for each category of labor performed by the 
contractor and each subcontractor makes it difficult to evaluate 
competing offers during source selection. Offerors will propose 
separate hourly rates for the prime contractor and each subcontractor 
by labor category. Offerors will then apply those rates to the 
projected mix of labor (prime and/or subcontract) to determine the 
overall estimated price for each labor category. The Government will 
then use the average labor rate for the labor categories to evaluate 
competing offers. However, after contract award, the prime contractor 
can change the mix of labor performed by the prime and subcontractors 
for each labor category. As a result, the actual rates that will be 
paid for a labor category may be significantly different than the 
estimated rates used to evaluate the offer during source selection. The 
source also stated that the rule does not provide guidance on how to 
ensure the benefits of competition are maintained and whether cost or 
pricing data is required when new subcontractors are proposed. With 
blended fixed hourly rates, competition establishes the reasonableness 
of the fixed hourly rates, and those rates are used for payment 
regardless of whether the prime or any subcontractors perform the work. 
With the required separate fixed hourly rates for each category of 
labor performed by the contractor and each subcontractor, the benefits 
of competition may be lost, since the rates on the contract apply only 
to the labor identified during the proposal stage.
    DoD Response: DoD acknowledges that certain pricing challenges will 
arise from the use of separate fixed hourly rates for each category of 
labor performed by the contractor and each subcontractor. DoD notes the 
pricing challenges do not originate with this rule. The FAR provisions 
also authorize the use of separate hourly rates for labor performed by 
the contractor and each subcontractor. While the DFARS rule requires 
reimbursement using a different rate for the prime versus the 
subcontractor, a similar difference existed prior to the rule. Under 
the prior FAR provisions, offerors could project a mix of labor (prime 
and subcontractor). After contract award, the prime could change the 
actual mix of labor, potentially resulting in significantly different 
costs than the estimated costs that were used to evaluate the offer 
during source selection. While there are pricing challenges associated 
with time-and-materials contracts, those challenges were not created by 
this rule.
    4. Comment: One source stated that the rule could lead to the 
Government directing subcontract orders to reduce contract costs when 
subcontractors' fixed hourly rates are lower than the prime 
contractor's fixed hourly rates. If the Government directs subcontract 
orders, the prime contractor will lose its ability and responsibility 
to manage its resources and the Government may forfeit certain contract 
remedies.
    DoD Response: In promulgating regulations, the assumption is that 
contracting personnel will follow the

[[Page 51191]]

regulations. Nothing in the rule encourages contracting officers to 
wrongly direct subcontract orders.
    5. Comment: One source stated that some of the subcontractors under 
the prime contract may compete with the prime for other prime 
contracts. The prime contractor may gain a competitive advantage over 
these other contractors on future competitions, since the prime will 
have insight into the composition of their rates.
    DoD Response: Nothing in the rule provides prime contractors 
insight into the composition of their subcontract rates. The prime 
contractor will bill for subcontract labor using its negotiated fixed 
hourly rates for the subcontractor.
    This rule was not subject to Office of Management and Budget review 
under Executive Order 12866, dated September 30, 1993.

B. Regulatory Flexibility Act

    DoD has prepared a final regulatory flexibility analysis consistent 
with 5 U.S.C. 604. A copy of the analysis may be obtained from the 
point of contact specified herein. The analysis is summarized as 
follows:
    This DFARS rule contains a substitute paragraph for use with the 
solicitation provision at FAR 52.216-29. The FAR provision contains 
three options for establishing fixed hourly rates on competitively 
awarded non-commercial time-and-materials and labor-hour contracts. The 
DFARS rule requires use of the FAR option that provides for the 
establishment of separate fixed hourly rates for each category of labor 
performed by the contractor and each subcontractor. The objective of 
the rule is to use the FAR option for establishing labor rates that is 
the most suitable for DoD contracts. The rule will apply to all 
entities interested in receiving DoD competitively awarded non-
commercial time-and-materials and labor-hour contracts. The impact on 
small entities is unknown at this time.

C. Paperwork Reduction Act

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

List of Subjects in 48 CFR Parts 216 and 252

    Government procurement.

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

PART 216--[AMENDED]

Interim Rule Adopted as Final Without Change

0
Accordingly, the interim rule amending 48 CFR parts 216 and 252, which 
was published at 71 FR 74469 on December 12, 2006, is adopted as a 
final rule without change.

 [FR Doc. E7-17423 Filed 9-5-07; 8:45 am]
BILLING CODE 5001-08-P