[Federal Register Volume 75, Number 153 (Tuesday, August 10, 2010)]
[Rules and Regulations]
[Pages 48276-48278]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-19674]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 215, 217, and 243

[DFARS Case 2008-D034]
RIN 0750-AG27


Defense Federal Acquisition Regulation Supplement; Management of 
Unpriced Change Orders

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

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Department of Defense (DoD) is adopting as final a 
proposed rule amending the DFARS to make requirements for DoD 
management and oversight of unpriced change orders consistent with 
those that apply to other undefinitized contract actions. This final 
rule adds new policy to address section 812 of the National Defense 
Authorization Act for Fiscal Year 2010.

DATES: Effective Date: August 10, 2010.

FOR FURTHER INFORMATION CONTACT: Ms. Meredith Murphy, Defense 
Acquisition Regulations System, OUSD (AT&L) DPAP/DARS, Room 3B855, 3060 
Defense Pentagon, Washington, DC 20301-3060, Telephone 703-602-1302; 
facsimile 703-602-0350. Please cite DFARS Case 2008-D034.

SUPPLEMENTARY INFORMATION:

A. Background

    The proposed rule addressed DFARS subpart 217.74, which prescribes 
policies and procedures for the management and oversight of 
undefinitized contract actions (UCAs). In the current DFARS, unpriced 
change orders that are issued in accordance with FAR part 43 and DFARS 
part 243 are excluded from the scope of subpart 217.74. A rule was 
proposed because of the need for full accountability and enhanced 
oversight of unpriced contractual actions, including unpriced change 
orders.
    The proposed rule was published in the Federal Register at 74 FR 
37669 on July 29, 2009. Two respondents submitted comments in response 
to the proposed rule. One respondent deemed this ``a new rule that is 
very much needed,'' while the other respondent requested that the 
proposed rule be withdrawn. To enhance transparency and accountability, 
DoD has determined to proceed with this rule. The comments submitted by 
the respondents are addressed in the following paragraphs.
    Comment: Make a separate limitation on obligations applicable to 
small businesses.
    One respondent addressed the percentage limitation on obligations 
prior to definitization, which the proposed rule, at DFARS 243.204-70-
4(a), set at 50 percent. There is an exception in the proposed rule 
allowing an increase from 50 percent to 75 percent when a contractor 
submits a qualifying proposal before 50 percent of the not-to-exceed 
price has been obligated by the Government. The respondent recommended 
that the latter percentage be increased from 75 percent to 95 percent 
for small, small disadvantaged, and HUBZone businesses. In support of 
its position, the respondent cited frequent instances where it believed 
that a particular agency had requested multiple audits as a delaying 
tactic to avoid definitization. When definitization is delayed, the 
contractor can perform up to half of the work that has been required 
unilaterally by the Government without being

[[Page 48277]]

reimbursed. According to the respondent, this burden would impact small 
and small disadvantaged businesses disproportionately, because they do 
not have the internal cash flow generally available to large 
businesses.
    Response: This is an issue of faulty execution on the part of the 
agency cited, not a problem with the policy. Enabling an unpriced 
contract action to continue in an unpriced state up to 95 percent of 
the not-to-exceed price, would only place contractors at greater risk 
and give contracting officers even less incentive to definitize the 
action in a timely manner.
    Comment: Limiting a contractor's profit for reduced risk doesn't 
consider that the contractor's risk is increased while a contract 
obligation is undefinitized.
    The new section 243.204-70-6 (Allowable profit) requires the 
Government to consider ``(a) Any reduced cost risk to the contractor'' 
when a substantial portion of the required performance has been 
completed before the contract action is definitized. Both respondents 
objected to the regulation's assumption that a contractor's cost risk 
declines in this situation. One respondent stated that it would be 
grossly unfair for DoD to retain the uniquely Government right to issue 
unilateral change orders and then penalize contractors by decrementing 
allowable profit on incurred costs. The other respondent claimed that 
the contractor experiences increased, not decreased, cost risk during 
the period that the change order remains undefinitized.
    Response: The respondents have not acknowledged that the Government 
also incurs increased cost risk during the period prior to 
definitization of the contract action. The intent of this coverage is 
to (1) increase transparency; (2) provide management oversight to 
prevent abuses in the definitization process; and (3) provide 
incentives for both the Government and contractors to definitize UCAs 
as quickly as reasonably possible. Therefore, this portion of the 
proposed rule will not be changed because doing so would reduce a big 
incentive to definitize an action in the minimum reasonable time. 
Further, the 50 percent and 75 percent limitations are established by 
statute (10 U.S.C. 2326(b)(3)), and DoD does not have authority to 
modify them.
    Comment: Foreign military sales, special access programs, 
congressionally mandated long-lead procurement contracts, and purchases 
under the simplified acquisition threshold are exempted from the 
definition of undefinitized contract action (UCA).
    One respondent cites 10 U.S.C. 2326 as exempting the above 
categories from the definition of UCA. Therefore, according to the 
respondent, DoD is prohibited from including these types of change 
orders in the UCA definition.
    Response: The Congress recently took a different position on this 
issue. It is a matter of statutory construction that later-enacted laws 
take precedence over prior-enacted laws. This rule of statutory 
construction is particularly relevant here. In this case, section 812 
of the National Defense Authorization Act for Fiscal Year 2010 (Pub. L. 
111-84), enacted October 28, 2009, requires DoD to extend the 
limitations on cost reimbursement and profit/fee to all categories of 
undefinitized contract actions.
    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

    DoD certifies that this final rule will not have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., 
because the change is to internal Government operating procedures. The 
rule makes requirements for DoD management and oversight of unpriced 
change orders consistent with those that apply to other undefinitized 
contract actions.

C. Paperwork Reduction Act

    The Paperwork Reduction Act does not apply because the final 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 215, 217, and 243

    Government procurement.

Ynette R. Shelkin,
Editor, Defense Acquisition Regulations System.

0
Therefore, 48 CFR parts 215, 217, and 243 are amended as follows:
0
1. The authority citation for 48 CFR parts 215, 217, and 243 continues 
to read as follows:

    Authority: 41 U.S.C. 421 and 48 CFR chapter 1.

PART 215--CONTRACTING BY NEGOTIATION


215.404-71-3  [Amended]

0
2. Amend section 215.404-71-3 in the first sentence of paragraph 
(d)(2), by revising the parenthetical to read ``(also see 217.7404-6(a) 
and 243.204-70-6)''.

PART 217--SPECIAL CONTRACTING METHODS

0
3. Amend section 217.7401 in paragraph (d) by adding a third sentence 
to read as follows:


217.7401  Definitions.

* * * * *
    (d) * * * For policy relating to definitization of change orders, 
see 243.204-70.

0
4. Revise section 217.7402 to read as follows:


217.7402  Exceptions.

    (a) The following undefinitized contract actions (UCAs) are not 
subject to this subpart. However, the contracting officer shall apply 
the policy and procedures to them to the maximum extent practicable 
(also see paragraph (b) of this section):
    (1) UCAs for foreign military sales;
    (2) Purchases at or below the simplified acquisition threshold;
    (3) Special access programs;
    (4) Congressionally mandated long-lead procurement contracts.
    (b) If the contracting officer determines that it is impracticable 
to adhere to the policy and procedures of this subpart for a particular 
contract action that falls within one of the categories in paragraph 
(a)(1), (3), or (4) of this section, the contracting officer shall 
provide prior notice, through agency channels, to the Deputy Director, 
Defense Procurement and Acquisition Policy (Contract Policy and 
International Contracting), 3060 Defense Pentagon, Washington, DC 
20301-3060.

0
5. Amend section 217.7405 by adding paragraph (c) to read as follows:


217.7405  Plans and reports.

* * * * *
    (c) Consolidated UCA Management Reports shall include information 
about all change orders that are not forward priced (i.e., unpriced) 
and have an estimated value exceeding $5 million.

0
6. Revise section 217.7406 to read as follows:


217.7406  Contract clauses.

    (a) Use the clause at FAR 52.216-24, Limitation of Government 
Liability, in--
    (1) All UCAs;
    (2) Solicitations associated with UCAs;

[[Page 48278]]

    (3) Basic ordering agreements;
    (4) Indefinite-delivery contracts;
    (5) Any other type of contract providing for the use of UCAs; and
    (6) Unpriced change orders with an estimated value exceeding $5 
million.
    (b)(1) Use the clause at 252.217-7027, Contract Definitization, 
in--
    (i) All UCAs;
    (ii) Solicitations associated with UCAs;
    (iii) Basic ordering agreements;
    (iv) Indefinite-delivery contracts;
    (v) Any other type of contract providing for the use of UCAs; and
    (vi) Unpriced change orders with an estimated value exceeding $5 
million.
    (2) Insert the applicable information in paragraphs (a), (b), and 
(d) of the clause.
    (3) If, at the time of entering into the UCA or unpriced change 
order, the contracting officer knows that the definitive contract 
action will meet the criteria of FAR 15.403-1, 15.403-2, or 15.403-3 
for not requiring submission of cost or pricing data, the words ``and 
cost or pricing data'' may be deleted from paragraph (a) of the clause.

PART 243--CONTRACT MODIFICATIONS

0
7. Revise section 243.204 to read as follows:


243.204  Administration.

    Follow the procedures at PGI 243.204 for administration of change 
orders.


243.204-70  [Redesignated as 243.204-71]

0
8. Redesignate section 243.204-70 as section 243.204-71.

0
9. Add a new section 243.204-70 to read as follows:


243.204-70  Definitization of change orders.


243.204-70-1  Scope.

    (a) This subsection applies to unpriced change orders with an 
estimated value exceeding $5 million.
    (b) Unpriced change orders for foreign military sales and special 
access programs are not subject to this subsection, but the contracting 
officer shall apply the policy and procedures to them to the maximum 
extent practicable. If the contracting officer determines that it is 
impracticable to adhere to the policy and procedures of this subsection 
for an unpriced change order for a foreign military sale or a special 
access program, the contracting officer shall provide prior notice, 
through agency channels, to the Deputy Director, Defense Procurement 
and Acquisition Policy (Contract Policy and International Contracting), 
3060 Defense Pentagon, Washington, DC 20301-3060.


243.204-70-2  Price ceiling.

    Unpriced change orders shall include a not-to-exceed price.


243.204-70-3  Definitization schedule.

    (a) Unpriced change orders shall contain definitization schedules 
that provide for definitization by the earlier of--
    (1) The date that is 180 days after issuance of the change order 
(this date may be extended but may not exceed the date that is 180 days 
after the contractor submits a qualifying proposal); or
    (2) The date on which the amount of funds obligated under the 
change order is equal to more than 50 percent of the not-to-exceed 
price.
    (b) Submission of a qualifying proposal in accordance with the 
definitization schedule is a material element of the contract. If the 
contractor does not submit a timely qualifying proposal, the contacting 
officer may suspend or reduce progress payments under FAR 32.503-6, or 
take other appropriate action.


243.204-70-4  Limitations on obligations.

    (a) The Government shall not obligate more than 50 percent of the 
not-to-exceed price before definitization. However, if a contractor 
submits a qualifying proposal before 50 percent of the not-to-exceed 
price has been obligated by the Government, the limitation on 
obligations before definitization may be increased to no more than 75 
percent (see 232.102-70 for coverage on provisional delivery payments).
    (b) Obligations should be consistent with the contractor's 
requirements for the undefinitized period.


243.204-70-5  Exceptions.

    (a) The limitations in 243.204-70-2, 243.204-70-3, and 243.204-70-4 
do not apply to unpriced change orders for the purchase of initial 
spares.
    (b) The limitations in 243.204-70-4(a) do not apply to unpriced 
change orders for ship construction and ship repair.
    (c) The head of the agency may waive the limitations in 243.204-70-
2, 243.204-70-3, and 243.204-70-4 for unpriced change orders if the 
head of the agency determines that the waiver is necessary to support--
    (1) A contingency operation; or
    (2) A humanitarian or peacekeeping operation.


243.204-70-6  Allowable profit.

    When the final price of an unpriced change order is negotiated 
after a substantial portion of the required performance has been 
completed, the head of the contracting activity shall ensure the profit 
allowed reflects--
    (a) Any reduced cost risk to the contractor for costs incurred 
during contract performance before negotiation of the final price;
    (b) The contractor's reduced cost risk for costs incurred during 
performance of the remainder of the contract; and
    (c) The extent to which costs have been incurred prior to 
definitization of the contract action (see 215.404-71-3(d)(2)). The 
risk assessment shall be documented in the contract file.


243.204-70-7  Plans and reports.

    To provide for enhanced management and oversight of unpriced change 
orders, departments and agencies shall--
    (a) Include in the Consolidated Undefinitized Contract Action (UCA) 
Management Plan required by 217.7405, the actions planned and taken to 
ensure that unpriced change orders are definitized in accordance with 
this subsection; and
    (b) Include in the Consolidated UCA Management Report required by 
217.7405, each unpriced change order with an estimated value exceeding 
$5 million.

0
10. Add section 243.205-72 to read as follows:


243.205-72  Unpriced change orders.

    See the clause prescriptions at 217.7406 for all unpriced change 
orders with an estimated value exceeding $5 million.

[FR Doc. 2010-19674 Filed 8-9-10; 8:45 am]
BILLING CODE 5001-08-P