[Federal Register Volume 74, Number 197 (Wednesday, October 14, 2009)]
[Rules and Regulations]
[Pages 52853-52856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-24586]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 15, 31, and 52

[FAC 2005-37; FAR Case 2008-031; Item V; Docket 2009-0034, Sequence 1]
RIN 9000-AL27


Federal Acquisition Regulation; FAR Case 2008-031, Limitations on 
Pass-Through Charges

AGENCIES: Department of Defense (DoD), General Services Administration 
(GSA), and National Aeronautics and Space Administration (NASA).

ACTION: Interim rule with request for comments.

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SUMMARY: The Civilian Agency Acquisition Council and the Defense 
Acquisition Regulations Council (Councils) are issuing an interim rule 
amending the Federal Acquisition Regulation (FAR) to implement section 
866 of the Duncan Hunter National Defense Authorization Act (NDAA) for 
Fiscal Year (FY) 2009 which applies to Executive Agencies other than 
DoD. The DoD is subject to section 852 of the John Warner NDAA for FY 
2007 which is also being implemented in this interim rule. Section 866 
requires the Councils to amend the FAR and section 852 requires the 
Secretary of Defense to prescribe regulations to minimize excessive 
pass-through charges by contractors from subcontractors, or of tiers of 
subcontractors, that add no or negligible value, and to ensure that 
neither a contractor nor a subcontractor receives indirect costs or 
profit/fee (i.e., pass-through charges) on work performed by a lower-
tier subcontractor to which the higher-tier contractor or subcontractor 
adds no, or negligible, value. Since both statutory provisions address 
excessive pass-through charges and the multiple tiering of 
subcontracting, the Councils decided to combine both provisions in this 
FAR rule.

DATES: Effective Date: October 14, 2009.
    Comment Date: Interested parties should submit written comments to 
the Regulatory Secretariat on or before December 14, 2009 to be 
considered in the formulation of a final rule.

ADDRESSES: Submit comments identified by FAC 2005-37, FAR case 2008-
031, by any of the following methods:
     Regulations.gov: http://www.regulations.gov.
    Submit comments via the Federal eRulemaking portal by inputting 
``FAR Case 2008-031'' under the heading ``Comment or Submission''. 
Select the link ``Send a Comment or Submission'' that corresponds with 
FAR Case 2008-031. Follow the instructions provided to complete the 
``Public Comment and Submission Form''. Please include your name, 
company name (if any), and ``FAR Case 2008-031'' on your attached 
document.
     Fax: 202-501-4067.
     Mail: General Services Administration, Regulatory 
Secretariat (VPR), 1800 F Street, NW., Room 4041, ATTN: Hada Flowers, 
Washington, DC 20405.
    Instructions: Please submit comments only and cite FAC 2005-37, FAR 
case 2008-031, in all correspondence related to this case. All comments 
received will be posted without change to http://www.regulations.gov, 
including any personal and/or business confidential information 
provided.

FOR FURTHER INFORMATION CONTACT: Mr. Edward Chambers, Procurement 
Analyst, at (202) 501-3221 for clarification of content. For 
information pertaining to status or publication schedules, contact the 
Regulatory Secretariat at (202) 501-4755. Please cite FAC 2005-37, FAR 
case 2008-031.

SUPPLEMENTARY INFORMATION:

[[Page 52854]]

A. Background

    This interim rule is published to implement section 866 of the 
Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 
(Pub. L. 110-417) as well as section 852 of the John Warner National 
Defense Authorization Act for Fiscal Year 2007 (Pub. L. 109-364). 
Section 866 requires the Councils to amend the FAR to minimize 
excessive pass-through charges by contractors from subcontractors, or 
of tiers of subcontractors, that add no or negligible value, and to 
ensure that neither a contractor nor a subcontractor receives indirect 
costs or profit/fee (i.e., pass-through charges) on work performed by a 
lower-tier subcontractor to which the higher-tier contractor or 
subcontractor adds no, or negligible, value.
    To enable agencies to ensure that pass-through charges are not 
excessive, this interim rule includes a solicitation provision and a 
contract clause requiring offerors and contractors to identify the 
percentage of work that will be subcontracted, and when subcontract 
costs will exceed 70 percent of the total cost of work to be performed, 
to provide information on indirect costs and profit/fee and value added 
with regard to the subcontract work. Seventy percent was selected as 
the threshold for this information requirement, because it represents a 
substantial amount of subcontracting.
    The rule is intended to protect the interests of the Government 
when there appears to be an agreement with a contractor to perform the 
contract scope of work, including managing subcontractors, then after 
award, the contractor subcontracts substantially all the effort without 
providing the required value-added subcontract management functions 
that were expected. There is no intent in this rule to disrupt the 
subcontracting process or other arrangements for firms that furnish 
supplies and services.
    To ensure that the Government can make a determination as to 
whether or not pass-through charges are excessive, the rule 
incorporates a reporting threshold that affords the contracting officer 
the ability to understand what functions the contractor will perform 
(e.g., consistent with the contractor's disclosed practice) and thus 
will provide added value, whether it be before award, or if the 
contractor subsequently decides to subcontract substantially all of the 
effort. The rule provides a recovery mechanism for those situations in 
which a contractor subcontracts all, or substantially all, of the 
performance of the contract, and does not perform the subcontract 
management functions, or other value-added functions, that were charged 
to the Government through indirect costs and related profit/fee.
    The intent of the reporting threshold is for the contracting 
officer to make a determination that pass-through charges at the time 
of award are not excessive, when at least 70 percent of the work will 
be subcontracted, based on contractor demonstrated functions. It also 
incorporates a requirement for the contractor to notify the contracting 
officer, in writing, if the contractor decides after award to 
subcontract more than 70 percent of the total cost of the work to be 
performed, and to verify in that document that the contractor will add 
value consistent with the definition in the contract clause. If the 
contractor does not perform the demonstrated functions or does not add 
value, the rule makes the excessive pass-through charges unallowable 
and provides for recoupment of the excessive pass-through charges 
consistent with the legislation. A further intent of the reporting 
threshold is to avoid requiring the contracting officer to re-address 
this determination during contract performance. To that end, this 
interim rule includes an Alternate I to the clause at FAR 52.215-23 to 
address those instances in which the contracting officer has made a 
determination prior to contract award.
    The rule is to be applied consistent with existing Cost Accounting 
Standard (CAS) and FAR rules related to subcontract management, 
indirect cost allocation, and profit analysis. While the definitions in 
the provisions are similar, the applicability differs.
    For civilian agencies the rule applies to any cost-reimbursement 
type contract, task or delivery order in an amount greater than the 
simplified acquisition threshold (as defined by section 4 of the Office 
of Federal Procurement Policy Act (41 U.S.C. 403)).
    For DoD, this rule applies to an amount greater than the threshold 
to obtain cost or pricing data in FAR 15.403-3 and cost-reimbursement 
type contracts as well as fixed-price contracts in accordance with 
section 852 of the FY 2007 NDAA.
    This is a significant regulatory action and, therefore, was 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

    This interim rule is not expected to have a significant economic 
impact on a substantial number of small entities within the meaning of 
the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because the 
Councils do not expect a significant number of entities to propose 
excessive pass-through charges under contracts or subcontracts, and the 
information required from offerors and contractors regarding pass-
through charges is minimal. Therefore, an Initial Regulatory 
Flexibility Analysis has not been performed. The Councils will consider 
comments from small entities concerning the affected FAR parts 15, 31, 
and 52 in accordance with 5 U.S.C. 610. Interested parties must submit 
such comments separately and should cite 5 U.S.C 601, et seq. (FAC 
2005-37, FAR case 2008-031), in all correspondence.

C. Paperwork Reduction Act

    The Paperwork Reduction Act (Pub. L. 104-13) applies because the 
interim rule contains information collection requirements. Accordingly, 
the Regulatory Secretariat has forwarded an emergency request for 
approval of a new information collection requirement concerning 
``Limitations on Pass-Through Charges'' to the Office of Management and 
Budget (OMB) under 44 U.S.C. Chapter 35, et seq. The OMB has 
preapproved this information collection under OMB Control Number 9000-
0173.
    Annual Reporting Burden:
    To enable contracting officers to verify that pass-through charges 
are not excessive, this FAR revision will include a requirement for an 
offeror submitting a proposal for a contract, task order, or delivery 
order to provide the following information with its proposals:
    (1) The cost of work the offeror intends to perform and the cost of 
work expected to be performed by each subcontractor.
    (2) If the offeror intends to subcontract more than 70 percent of 
the total cost of work to be performed--
    (i) The amount of the offeror's indirect costs and profit/fee 
applicable to the work to be performed by the subcontractor(s); and
    (ii) A description of the value added by the offeror as related to 
the work to be performed by the subcontractor(s).
    (3) If any subcontractor intends to subcontract to a lower-tier 
subcontractor more than 70 percent of the total cost of work to be 
performed under its subcontract--
    (i) The amount of the subcontractor's indirect costs and profit/fee 
applicable to the work to be performed by the lower-tier 
subcontractor(s); and
    (ii) A description of the added value provided by the subcontractor 
as related

[[Page 52855]]

to the work to be performed by the lower-tier subcontractor(s).
    In addition, if the amount of the effort to be subcontracted by the 
contractor or a subcontractor changes from the amount identified in the 
proposal such that it exceeds 70 percent of the total cost of work to 
be performed, the contractor must provide the revised cost of effort 
and verification that the contractor (or subcontractor) will provide 
added value.
    The annual reporting burden is estimated as follows:
    Respondents: 25,380.
    Responses per respondent: 1.
    Total annual responses: 25,760.
    Preparation hours per response: .5.
    Total response burden hours: 13,260.

D. Request for Comments Regarding Paperwork Burden

    Submit comments, including suggestions for reducing this burden, 
not later than December 14, 2009 to: FAR Desk Officer, OMB, Room 10102, 
NEOB, Washington, DC 20503, and a copy to the General Services 
Administration, Regulatory Secretariat (VPR), 1800 F Street, NW., Room 
4041, Washington, DC 20405.
    Public comments are particularly invited on: whether this 
collection of information is necessary for the proper performance of 
functions of the FAR, and will have practical utility; whether our 
estimate of the public burden of this collection of information is 
accurate, and based on valid assumptions and methodology; ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and ways in which we can minimize the burden of the 
collection of information on those who are to respond, through the use 
of appropriate technological collection techniques or other forms of 
information technology.
    Requester may obtain a copy of the justification from the General 
Services Administration, Regulatory Secretariat (VPR), Room 4041, 
Washington, DC 20405, telephone (202) 501-4755. Please cite OMB Control 
Number 9000-0173 in all correspondence.

E. Determination to Issue an Interim Rule

    A determination has been made under the authority of the Secretary 
of Defense (DoD), the Administrator of General Services (GSA), and the 
Administrator of the National Aeronautics and Space Administration 
(NASA) that urgent and compelling reasons exist to promulgate this 
interim rule without prior opportunity for public comment. This action 
is necessary because section 866 of the FY 2009 NDAA, which was enacted 
October 14, 2008, requires that the FAR be revised to implement this 
provision no later than one year after the date of enactment. If this 
change is not implemented agencies will not be able to comply with 
section 866 of the FY 2009 NDAA. However, pursuant to Pub. L. 98-577 
and FAR 1.501, the Councils will consider public comments received in 
response to this interim rule in the formation of the final rule.

List of Subjects in 48 CFR Parts 15, 31, and 52

    Government procurement.

    Dated: October 5, 2009.
Al Matera,
Director, Acquisition Policy Division.

0
Therefore, DoD, GSA, and NASA amend 48 CFR parts 15, 31, and 52 as set 
forth below:

0
1. The authority citation for 48 CFR parts 15, 31, 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 15--CONTRACTING BY NEGOTIATION

0
2. Amend section 15.408 by adding paragraph (n) to read as follows:


15.408  Solicitation provisions and contract clauses.

* * * * *
    (n) Limitations on Pass-Through Charges. (1) The contracting 
officer shall insert the provision at 52.215-22, Limitations on Pass-
Through Charges--Identification of Subcontract Effort, in solicitations 
containing the clause at 52.215-23.
    (2)(i) Except as provided in paragraph (n)(2)(ii) of this section, 
the contracting officer shall insert the clause 52.215-23, Limitations 
on Pass-Through Charges, in solicitations and contracts including task 
or delivery orders as follows:
    (A) For civilian agencies, insert the clause when--
    (1) The total estimated contract or order value exceeds the 
simplified acquisition threshold as defined in section 2.101 and
    (2) The contemplated contract type is expected to be a cost-
reimbursement type contract as defined in Subpart 16.3; or
    (B) For DoD, insert the clause when--
    (1) The total estimated contract or order value exceeds the 
threshold for obtaining cost or pricing data in 15.403-4; and
    (2) The contemplated contract type is expected to be any contract 
type except--
    (i) A firm-fixed-price contract awarded on the basis of adequate 
price competition;
    (ii) A fixed-price contract with economic price adjustment awarded 
on the basis of adequate price competition;
    (iii) A firm-fixed-price contract for the acquisition of a 
commercial item; or
    (iv) A fixed-price contract with economic price adjustment, for the 
acquisition of a commercial item.
    (ii) The clause may be used when the total estimated contract or 
order value is below the thresholds identified in 15.408(n)(2)(i) and 
for any contract type, when the contracting officer determines that 
inclusion of the clause is appropriate.
    (iii) Use the clause 52.215-23 with its Alternate I when the 
contracting officer determines that the prospective contractor has 
demonstrated that its functions provide added value to the contracting 
effort and there are no excessive pass-through charges.
* * * * *

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

0
3. Amend section 31.203 by adding paragraph (i) to read as follows:


31.203  Indirect costs.

* * * * *
    (i) Indirect costs that meet the definition of ``excessive pass-
through charge'' in 52.215-23, are unallowable.

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
4. Add sections 52.215-22 and 52.215-23 to read as follows:


52.215-22  Limitations on Pass-Through Charges--Identification of 
Subcontract Effort.

    As prescribed in 15.408(n)(1), use the following provision:
    LIMITATIONS ON PASS-THROUGH CHARGES--IDENTIFICATION OF SUBCONTRACT 
EFFORT (OCT 2009)
    (a) Definitions. Added value, excessive pass-through charge, 
subcontract, and subcontractor, as used in this provision, are 
defined in the clause of this solicitation entitled ``Limitations on 
Pass-Through Charges'' (FAR 52.215-23).
    (b) General. The offeror's proposal shall exclude excessive 
pass-through charges.
    (c) Performance of work by the Contractor or a subcontractor. 
(1) The offeror shall identify in its proposal the total cost of the 
work to be performed by the offeror, and the total cost of the work 
to be performed by each subcontractor, under the contract, task 
order, or delivery order.
    (2) If the offeror intends to subcontract more than 70 percent 
of the total cost of work to be performed under the contract, task 
order, or delivery order, the offeror shall identify in its 
proposal--

[[Page 52856]]

    (i) The amount of the offeror's indirect costs and profit/fee 
applicable to the work to be performed by the subcontractor(s); and
    (ii) A description of the added value provided by the offeror as 
related to the work to be performed by the subcontractor(s).
    (3) If any subcontractor proposed under the contract, task 
order, or delivery order intends to subcontract to a lower-tier 
subcontractor more than 70 percent of the total cost of work to be 
performed under its subcontract, the offeror shall identify in its 
proposal--
    (i) The amount of the subcontractor's indirect costs and profit/
fee applicable to the work to be performed by the lower-tier 
subcontractor(s); and
    (ii) A description of the added value provided by the 
subcontractor as related to the work to be performed by the lower-
tier subcontractor(s).
    (End of provision)


52.215-23  Limitations on Pass-Through Charges.

    As prescribed in 15.408(n)(2), use the following clause:
    LIMITATIONS ON PASS-THROUGH CHARGES (OCT 2009)
    (a) Definitions. As used in this clause--
    Added value means that the Contractor performs subcontract 
management functions that the Contracting Officer determines are a 
benefit to the Government (e.g., processing orders of parts or 
services, maintaining inventory, reducing delivery lead times, managing 
multiple sources for contract requirements, coordinating deliveries, 
performing quality assurance functions).
    Excessive pass-through charge, with respect to a Contractor or 
subcontractor that adds no or negligible value to a contract or 
subcontract, means a charge to the Government by the Contractor or 
subcontractor that is for indirect costs or profit/fee on work 
performed by a subcontractor (other than charges for the costs of 
managing subcontracts and any applicable indirect costs and associated 
profit/fee based on such costs).
    No or negligible value means the Contractor or subcontractor cannot 
demonstrate to the Contracting Officer that its effort added value to 
the contract or subcontract in accomplishing the work performed under 
the contract (including task or delivery orders).
    Subcontract means any contract, as defined in FAR 2.101, entered 
into by a subcontractor to furnish supplies or services for performance 
of the contract or a subcontract. It includes but is not limited to 
purchase orders, and changes and modifications to purchase orders.
    Subcontractor, as defined in FAR 44.101, means any supplier, 
distributor, vendor, or firm that furnishes supplies or services to or 
for a prime Contractor or another subcontractor.
    (b) General. The Government will not pay excessive pass-through 
charges. The Contracting Officer shall determine if excessive pass-
through charges exist.
    (c) Reporting. Required reporting of performance of work by the 
Contractor or a subcontractor. The Contractor shall notify the 
Contracting Officer in writing if--
    (1) The Contractor changes the amount of subcontract effort after 
award such that it exceeds 70 percent of the total cost of work to be 
performed under the contract, task order, or delivery order. The 
notification shall identify the revised cost of the subcontract effort 
and shall include verification that the Contractor will provide added 
value; or
    (2) Any subcontractor changes the amount of lower-tier 
subcontractor effort after award such that it exceeds 70 percent of the 
total cost of the work to be performed under its subcontract. The 
notification shall identify the revised cost of the subcontract effort 
and shall include verification that the subcontractor will provide 
added value as related to the work to be performed by the lower-tier 
subcontractor(s).
    (d) Recovery of excessive pass-through charges. If the Contracting 
Officer determines that excessive pass-through charges exist;
    (1) For other than fixed-price contracts, the excessive pass-
through charges are unallowable in accordance with the provisions in 
FAR subpart 31.2; and
    (2) For applicable DoD fixed-price contracts, as identified in 
15.408(n)(2)(i)(B), the Government shall be entitled to a price 
reduction for the amount of excessive pass-through charges included in 
the contract price.
    (e) Access to records. (1) The Contracting Officer, or authorized 
representative, shall have the right to examine and audit all the 
Contractor's records (as defined at FAR 52.215-2(a)) necessary to 
determine whether the Contractor proposed, billed, or claimed excessive 
pass-through charges.
    (2) For those subcontracts to which paragraph (f) of this clause 
applies, the Contracting Officer, or authorized representative, shall 
have the right to examine and audit all the subcontractor's records (as 
defined at FAR 52.215-2(a)) necessary to determine whether the 
subcontractor proposed, billed, or claimed excessive pass-through 
charges.
    (f) Flowdown. The Contractor shall insert the substance of this 
clause, including this paragraph (f), in all cost-reimbursement 
subcontracts under this contract that exceed the simplified acquisition 
threshold, except if the contract is with DoD, then insert in all cost-
reimbursement subcontracts and fixed-price subcontracts, except those 
identified in 15.408(n)(2)(i)(B)(2), that exceed the threshold for 
obtaining cost or pricing data in accordance with FAR 15.403-4.
    (End of clause)
    Alternate I (OCT 2009). As prescribed in 15.408(n)(2)(iii), 
substitute the following paragraph (b) for paragraph (b) of the basic 
clause:
    (b) General. The Government will not pay excessive pass-through 
charges. The Contracting Officer has determined that there will be no 
excessive pass-through charges, provided the Contractor performs the 
disclosed value-added functions.
[FR Doc. E9-24586 Filed 10-13-09; 8:45 am]
BILLING CODE 6820-EP-S