[Federal Register Volume 75, Number 188 (Wednesday, September 29, 2010)]
[Rules and Regulations]
[Pages 60261-60263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-24161]



[[Page 60261]]

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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Part 16

[FAC 2005-46; FAR Case 2008-008; Item IV; Docket 2009-0036, Sequence 1]
RIN 9000-AL42


Federal Acquisition Regulation; Award-Fee Language Revision

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 adopted as final, with 
changes, the interim rule amending the Federal Acquisition Regulation 
(FAR) to implement section 814 of the John Warner National Defense 
Authorization Act for Fiscal Year 2007 (Pub. L. 109-364), section 867 
of the Duncan Hunter National Defense Authorization Act for Fiscal Year 
2009 (Pub. L. 110-417), and the Office of Federal Procurement Policy 
guidance memorandum dated December 4, 2007 entitled, Appropriate Use of 
Incentive Contracts.

DATES: Effective Date: October 29, 2010.

FOR FURTHER INFORMATION CONTACT: For clarification of content, contact 
Mr. Edward Chambers, Procurement Analyst, at 202-501-3221. For 
information pertaining to status or publication schedules, contact the 
Regulatory Secretariat at (202) 501-4755. Please cite FAC 2005-46, FAR 
Case 2008-008.

SUPPLEMENTARY INFORMATION:

A. Background

    This rule implements the provisions of section 814 of the John 
Warner National Defense Authorization Act for Fiscal Year 2007 (Pub. L. 
109-364), section 867 of the Duncan Hunter National Defense 
Authorization Act for Fiscal Year 2009 (Pub. L. 110-417), and the 
Office of Federal Procurement Policy guidance memorandum dated December 
4, 2007, entitled ``Appropriate Use of Incentive Contracts,'' by 
amending and/or integrating where appropriate, FAR part 7, Acquisition 
Planning, and FAR part 16, Contract Types, to improve agency use and 
decision making when using incentive contracts.
    This final rule adopts the interim rule with one change for 
clarification. This clarification entails the addition of the phrase 
``in the aggregate'' to FAR 16.401(e)(2), Table 16-1, and FAR 
16.401(e)(3)(v), to make it clear that the objective is to consider the 
contractor's cost, schedule, and technical performance in the aggregate 
when performing award-fee assessments.

B. Discussion and Analysis

    An interim rule with request for comments was published in the 
Federal Register on October 14, 2009 (74 FR 52856). The FAR Secretariat 
received seven responses to the interim rule. These responses included 
a total of 22 comments on 15 issues. Each issue is discussed in the 
following sections.

1. Change in DFARS Rule Required

    Comment: One respondent wrote that this interim rule, without 
concurrent change to DFARS, particularly in allowing higher fixed fee, 
negates the value of this rule change.
    Response: DoD is considering a possible DFARS case to address this 
concern. The Councils further note that the rationale for allowing a 
higher fixed fee is not clear in this comment. In reading the comment 
in total, a reasonable inference is that the respondent meant to 
address base fee and not fixed fee.

2. Clarification Regarding Award-Fee Rating Definitions

    Comment: Two respondents commented on the need to clarify whether 
an unsatisfactory evaluation in one category (e.g., cost) requires an 
overall unsatisfactory rating and thus no award fee in any category 
(e.g., schedule and technical) for the evaluation period.
    Response: The Council's intent with the use of ``overall cost, 
schedule, and technical performance in the aggregate'' is to avoid the 
situation where, for example, contractors would receive no award fee in 
an evaluation period if they were rated below satisfactory on one of 
the criteria (e.g., in schedule performance) and above satisfactory in 
other criteria (e.g., technical and cost performance). The Councils 
believe that this would not be equitable. In such a situation, the 
contractor could receive a reduced percentage of the award-fee amount 
to account for the below satisfactory schedule performance, but they 
would not receive 100 percent of the award-fee amount, nor would they 
receive zero award fee for that evaluation period. The final rule adds 
clarifying language of ``in the aggregate'' to FAR 16.401(e)(2), Table 
16-1, and FAR 16.401(e)(3)(v), to make it clear that the objective is 
to consider overall cost, schedule, and technical performance in 
performing award-fee assessments.

3. Requested Clarification as to Whether Firm Fixed Price Award-Fee 
Contract Is an Incentive Fee Type Contract

    Comment: One respondent recommended that the FAR be clarified as to 
whether a firm-fixed-price award-fee contract is an incentive-type 
contract citing that the language in FAR 16.404, FAR 16.202-1, and FAR 
16.401(a) appears to be contradictory.
    Response: The Councils take no position on this recommendation 
because it is outside the scope of this case, which was limited to the 
implementation of the section 814 of the John Warner National Defense 
Authorization Act for Fiscal Year 2007 (Pub. L. 109-364), section 867 
of the Duncan Hunter National Defense Authorization Act for Fiscal Year 
2009 (Pub. L. 110-417), and the Office of Federal Procurement Policy 
guidance memorandum dated December 4, 2007, entitled ``Appropriate Use 
of Incentive Contracts.''

4. Permit Use of Rollover Within Certain Parameters

    Comment: Three respondents recommended that the language 
prohibiting the use of rollover be revised to allow rollover under 
certain circumstances and at the discretion of the head of the 
contracting activity. Respondents contend that rollover can be an 
effective incentive tool if used properly.
    Response: The Councils disagree with the respondents. Award fee is 
structured to incentivize contractors to perform throughout the 
contract. Therefore, rollover of unearned award fee provides a 
disincentive for contractors to perform throughout the entire period of 
performance. If a contractor did not perform adequately during an 
award-fee rating period and was rated appropriately and then allowed to 
recover that unearned award fee in a subsequent period, the incentive 
for the contractor to perform consistently throughout the entire 
contract would be reduced.

5. Interim Rule Presumes Award-Fee Determinations Represent Only 
Subjective Measures and Not Objective Measures as Well

    Comment: One respondent recommended that the language in FAR 
16.401(e)(1)(i) be revised to address the concept that in addition to 
subjective award-fee performance measures that we also include the use 
of objective performance measures.

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    Response: The Councils disagree with this recommendation. A key 
tenet in determining if an award-fee incentive is suitable for an 
acquisition is whether one can devise predetermined objective 
incentives applicable to cost, schedule, and technical performance. If 
one can, then an award-fee incentive is not appropriate and an 
incentive arrangement based on predetermined formula-type incentives 
should be utilized instead.

6. Eliminate Risk and Cost-Benefit Analysis

    Comment: Two respondents recommended deleting the requirement to 
perform a risk and cost-benefit analysis stating that the content and 
methodology for this analysis is not specified.
    Response: The Councils disagree with this recommendation. The FAR 
currently requires that no award-fee contract shall be awarded unless 
the contract amount, performance period, and expected benefits are 
sufficient to warrant the additional administrative effort. This 
requirement was reinforced in the Office of Federal Procurement Policy 
guidance memorandum dated December 4, 2007, entitled ``Appropriate Use 
of Incentive Contracts.'' The Councils believe it is within the purview 
of each Federal agency to provide supplemental guidance on how to 
perform this analysis.

7. Contractor Should Be Allowed To Earn Award Fee Even if Performance 
Is Less Than Satisfactory

    Comment: One respondent wrote that under an award-fee contract, 
even when performance is less than satisfactory, there should be some 
level of fee earnings but potentially at a significantly decreased rate 
of earnings since the Government received some benefit from the work 
accomplished. The respondent maintained that even under a fixed-fee 
contract, a contractor can still earn some amount of fee, even when 
performance is less than satisfactory. The respondent recommended that 
Table 16-1 include an additional rating category, entitled ``less than 
satisfactory,'' with a percentage range from 2 percent-48 percent as 
well as changing ``is below satisfactory'' in FAR 16.401(e)(3)(v) to 
``fail to meet the basic requirements of the contract''.
    Response: The Councils disagree with this recommendation. Section 
814 of the John Warner National Defense Authorization Act for Fiscal 
Year 2007 (Pub. L. 109-364) and section 867 of the Duncan Hunter 
National Defense Authorization Act for Fiscal Year 2009 (Pub. L. 110-
417) were very clear that the FAR ``shall ensure that no award fee may 
be paid for contractor performance that is judged to be below 
satisfactory performance''. The Councils note that the regulations do 
allow the use of a base fee in an award-fee incentive arrangement.

8. Award-Fee Determination Being Unilateral Decision

    Comment: One respondent recommended that the language in FAR 
16.401(e)(2) regarding the award-fee determination being a unilateral 
decision by the Government be struck since the Courts have determined 
that such decisions are reviewable under the Contract Disputes Act.
    Response: The Councils agree that award-fee determinations are 
reviewable under the Contract Disputes Act but the language in this 
section does not address that issue. This language in FAR 16.401(e)(2) 
was included to point out that while the award-fee determination may be 
subject to the Contract Disputes Act, it is still a unilateral decision 
by the Government.

9. Consider Different Language Relative to Adjectival Rating 
Descriptions

    Comment: One respondent recommended replacing the word 
``supplement'' with ``tailor'' in the FAR 16.401(e)(3)(iv) sentence, 
contracting officers may supplement the adjectival rating description.
    Response: The Councils believe that these descriptions cannot be 
tailored but can be supplemented to fit the specific needs of the 
acquisition based upon the requirements in section 814 of the John 
Warner National Defense Authorization Act for Fiscal Year 2007 (Pub. L. 
109-364) and section 867 of the Duncan Hunter National Defense 
Authorization Act for Fiscal Year 2009 (Pub. L. 110-417), which stated: 
The FAR ``shall establish standards for determining the percentage of 
the available award fee, if any, which contractors should be paid for 
performance * * * ''.

10. Clarification Regarding Adjectival Descriptions

    Comment: One respondent wrote that the imprecise adjective 
modifiers in Table 16-1 could be problematic since what distinguishes 
``almost all of'' from ``many'' or what establishes a ``significant'' 
criterion for ``insignificant'' criterion. A second respondent 
recommended revising Table 16-1 to delete the requirement to ``exceed'' 
significant award-fee criteria to earn a better than satisfactory 
rating.
    Response: The Councils disagree and maintain that the term 
``exceeds'' is a reasonable term to differentiate contractor 
performance between the various ratings. In addition, the adjectives 
used in the rating table adequately distinguish between the different 
rating levels and provide the contracting officer with the flexibility 
to supplement the descriptions as appropriate.

11. Published as Interim Rule

    Comment: One respondent wrote that they were disappointed that this 
rule change was published as an interim rule and not a proposed rule 
and recommended that the Councils publish rules of this magnitude as 
proposed rules in the future.
    Response: The Councils issued a statement of urgency which was 
published in the Federal Register notice with this interim rule.

12. Stringent Adjectival Ratings

    Comment: One respondent wrote that since Table 16-1 adjectival 
rating descriptions and associated percentages are so stringent, the 
final rule should specify that the available award-fee pool must be at 
least 20 percent of estimated costs for complex development contracts.
    Response: The Councils do not believe that a pre-established award-
fee floor is appropriate since the contracting officer negotiates a 
fair and reasonable award-fee pool for each acquisition based upon the 
effort and risk associated with that acquisition.

13. Consider Different Rating Definitions

    Comment: One respondent wrote that the final rule should include 
the rating definitions from the Office of the Under Secretary of 
Defense/Acquisition, Technology, and Logistics/Defense Procurement and 
Acquisition Policy memorandum dated April 24, 2007, since these ratings 
are based on meeting a higher percentage of award-fee criteria in order 
to earn higher ratings.
    Response: The Councils disagree. The two rating scales are very 
similar but the FAR rating scale provides contracting officers with 
more latitude in assigning ratings against subjective criteria.

14. Utilization of Base Fee

    Comment: Two respondents commented on the utilization of base fee. 
One respondent recommended that the final rule encourage contracting 
officers to award base fee on cost-plus-award-fee (CPAF) contracts 
subject only to the statutory restrictions on fee cited at FAR 15.404-
4(c)(4)(i). A second respondent suggested that a minimum fee be 
referenced in the base amount of fee noted in FAR 16.405-2.

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    Response: The Councils believe that the contracting officer 
negotiates a fair and reasonable profit or fee for each acquisition 
based upon the effort and risk associated with that acquisition. 
Consequently, it would not be appropriate to encourage the use of or 
set a minimum base-fee rate, since the establishment of base fee is 
subject to negotiation and the specific circumstances of each 
acquisition.

15. Eliminate Requirement Relative to Completing a Determination and 
Finding

    Comment: One respondent wrote that the requirement in the interim 
rule for a determination and finding (D&F) was redundant with other FAR 
requirements and increases the workload of overburdened contracting 
officers without providing any value added. The respondent recommended 
deleting this requirement in the final rule.
    Response: The Councils appreciate the respondent's concern for the 
contracting officer's workload but disagree with eliminating this 
requirement from the final rule. The completion of the D&F and Head of 
Contracting Agency approval satisfy the requirements in section 814 of 
the John Warner National Defense Authorization Act for Fiscal Year 2007 
(Pub. L. 109-364) and section 867 of the Duncan Hunter National Defense 
Authorization Act for Fiscal Year 2009 (Pub. L. 110-417) to establish 
the appropriate approval level for using award-fee contracts. They are 
also necessary to ensure that the suitability factors to use an award-
fee contract are properly addressed and documented because of the large 
investment of resources required to administer an award-fee contract.

C. Regulatory Planning and Review

    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, 1933. This rule is not a major 
rule under 5 U.S.C. 804.

D. Regulatory Flexibility Act

    The Department of Defense, the General Services Administration, and 
the National Aeronautics and Space Administration certify that this 
final rule will not have a significant economic impact on a substantial 
number of small entities within the meaning of the Regulatory 
Flexibility Act, 5 U.S.C. 601, et seq., because the rule largely covers 
a broad range of aspects of award-fee contracting, whose upshot will be 
a more consistent use and administration of award fees Governmentwide 
which will provide a small benefit to all entities both large and 
small. In addition, the changes promulgated in this final rule do not 
directly affect the current business processes of Federal contractors. 
In the matter of the rule's prohibition on the rollover of unearned 
award fee, the Councils believe this will have a negligible impact on 
small businesses for the following reasons. First, award-fee contracts 
are largely the province of large businesses with large dollar 
contracts. Second, the ability to roll over unearned award fee may have 
caused evaluators in the past to be more conservative in their ratings 
because of their awareness that contractors may have a second 
opportunity to earn unearned award fees.

E. 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. 
chapter 35, et seq.

List of Subjects in 48 CFR Part 16

    Government procurement.

    Dated: September 21, 2010.
Edward Loeb,
Director, Acquisition Policy Division.

0
Accordingly, the interim rule published in the Federal Register at 74 
FR 52856 on October 14, 2009, is adopted as a final rule with the 
following changes:

PART 16--TYPES OF CONTRACTS

0
1. The authority citation for 48 CFR part 16 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).


16.401  [Amended]

0
2. Amend section 16.401 by--
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a. Removing from paragraph (e)(2) the words ``performance is'' and 
adding ``performance in the aggregate is'' in its place each time it 
appears (twice);
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b. Removing from Table 16-1 that follows paragraph (e)(3)(iv) the words 
``contract as'' and adding ``contract in the aggregate as'' in its 
place each time it appears (five times); and
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c. Removing from paragraph (e)(3)(v) the words ``performance is'' and 
adding ``performance in the aggregate is'' in its place.

[FR Doc. 2010-24161 Filed 9-28-10; 8:45 am]
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