[Federal Register Volume 77, Number 1 (Tuesday, January 3, 2012)]
[Rules and Regulations]
[Pages 194-197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-33418]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 8, 12, and 16

[FAC 2005-55; FAR Case 2009-043; Item IV; Docket 2010-0100, Sequence 1]
RIN 9000-AL74


Federal Acquisition Regulation; Time-and-Materials and Labor-Hour 
Contracts for Commercial Items

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

ACTION: Final rule.

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SUMMARY: DoD, GSA, and NASA are issuing a final rule amending the 
Federal Acquisition Regulation (FAR) to implement Government 
Accountability Office (GAO) recommendations to: ensure that time-and-
materials and labor-hour contracts are used to acquire commercial 
services only when no other contract type is suitable; and instill 
discipline in the determination of contract type with a view toward 
managing the risk to the Government.

DATES: Effective Date: February 2, 2012.

FOR FURTHER INFORMATION CONTACT: Ms. Lori Sakalos, Procurement Analyst, 
at (202) 208-0498, for clarification of content. For information 
pertaining to status or publication schedules, contact the Regulatory 
Secretariat at (202) 501-4755. Please cite FAC 2005-55, FAR Case 2009-
043.

SUPPLEMENTARY INFORMATION:

I. Background

    DoD, GSA, and NASA published a proposed rule in the Federal 
Register at 75 FR 59195 on September 27, 2010. The due date for public 
comments was November 26, 2010.
    Eleven comments were received from four respondents. The comments 
are separated into eight categories, addressed in the following 
sections.

II. Discussion and Analysis

    The Civilian Agency Acquisition Council and the Defense Acquisition 
Regulations Council (the Councils) reviewed the comments in the 
development of the final rule.

A. Summary of Significant Changes

    Changes were made to the proposed rule as a result of the public 
comments and the publication of FAR Case 2007-012 in the Federal 
Register at 76 FR 14548 on March 16, 2011. Specifically, all text in 
the proposed rule under FAR 8.405-2(e) has been relocated to FAR 
8.404(h). FAR Case 2007-012 strengthened competition requirements for 
orders placed under the Federal Supply Schedules. As a result, FAR 
8.405-2(e)(2)(ii) has been deleted and references to FAR part 12 at FAR 
subpart 8.4 have been removed.
    Additional changes were made during deliberation of the final rule 
to require these same safeguards on the use of time-and-materials (T&M) 
and labor-hour (LH) orders for Blanket Purchase Agreements awarded 
under the Federal Supply Schedule Program.

B. Analysis of Public Comments

    Respondents submitted comments covering the following seven 
categories: (1) Cross references; (2) Combine guidance from this case 
with FAR Case 2007-012; (3) Eliminate redundant material; (4) Clarify 
contract types; (5) Potential for rule to limit the use of T&M 
contracts; (6) Requirement for determination and findings at the order 
level; and (7) Address fixed-price level-of-effort (FP LOE) contracts.

[[Page 195]]

1. Cross References
    Comment: One respondent stated that there is a contradiction 
between FAR 12.207 and proposed FAR 16.201, which states that the 
contracting officer shall use firm-fixed-price or fixed-price with 
economic price adjustment contracts when acquiring commercial items. 
The respondent recommended revising FAR 16.201 to reference FAR 
12.207(b), which states the conditions for use of T&M or LH contracts 
to acquire commercial services, which are a subset of commercial items.
    Response: A cross-reference to FAR 12.207(b) has been added at FAR 
16.201, to reference the exception to the required use of fixed-price 
contracts for acquisition of commercial items.
    Comment: A respondent noted that FAR 8.405-2(e)(2)(ii) would 
require the contracting officer to follow the competitive procedures at 
FAR 8.405-2(c), but, in contrast, FAR 12.207(b)(1)(i)(B) provides that 
procedures for other than full and open competition may be used if the 
agency receives at least two offers. The respondent believed that it 
would be consistent with the latter approach to give an agency the 
discretion to use other than the competitive procedures at FAR 8.405-
2(c) if at least two quotes are received for the task order.
    Response: FAR Case 2007-012, which was published in the Federal 
Register at 76 FR 14548 on March 16, 2011 (FAC 2005-50), provides an 
interim rule that sets forth the requirements for the use of limited 
sources and strengthens competition rules in FAR subpart 8.4. FAR 
8.405-2(c) does not preclude the acquisition of commercial services 
under T&M and LH contracts on other than a competitive basis under 
8.405-2(c)(3)(i), provided the procedures outlined in FAR 8.405-6 are 
followed. The references to FAR part 12 in the proposed rule will be 
deleted.
    Comment: One respondent stated that, with regard to orders placed 
under the Federal Supply Schedule program and indefinite-delivery 
contracts, FAR 12.207(c)(2) references both FAR subparts 8.4 and 16.5, 
while FAR 12.207(c)(3) references only FAR subpart 16.5. The respondent 
recommended that, for the sake of clarity, either (a) only FAR 12.207 
should include all guidance regarding T&M or LH orders or (b) guidance 
should be included in both FAR subparts 8.4 and 16.5.
    Response: It is not necessary to cross-reference to FAR subpart 8.4 
at FAR 12.207(c)(3) because the requirement for a determination and 
findings does not apply to individual orders when the basic contract 
allows only for T&M or LH orders, which is not the case for Federal 
Supply Schedule contracts.
2. Combine Guidance From This Case With FAR Case 2007-012
    Comment: A respondent noted that DoD, GSA, and NASA will be issuing 
guidance implementing section 863 of the National Defense Authorization 
Act for FY 2009 and recommended that any guidance regarding the use of 
T&M or LH orders be included in that rule, not in this case, FAR Case 
2009-043. Such an approach, according to the respondent, would provide 
for clarity in the process and allow for a comprehensive review by all 
the stakeholders.
    Response: FAR Case 2007-012 implements a statutory requirement. The 
basis for FAR Case 2009-043 is not statutory; rather, the case was 
opened in response to a June 2009 GAO report entitled: ``Minimal 
Compliance with New Safeguards for Time-and-Materials Contracts for 
Commercial Services and Safeguards Have Not Been Applied to GSA 
Schedules Program'' (GAO-09-579, June 2009). Given the different 
purposes of the two cases, combining them would not be practical.
3. Eliminate Redundant Material
    Comment: One respondent recommended deletion of the proposed 
language at FAR 8.405-2(e)(2)(i), which states that a T&M or LH order 
may only be used when it is not possible to accurately estimate the 
extent or duration of the work or anticipated costs with any degree of 
confidence. The respondent stated that the proposed language at FAR 
8.405-2(e)(2)(i) is redundant to the proposed language at FAR 8.405-
2(e)(4)(ii), which describes the content requirements of a 
determination and findings that, among other things, it is not possible 
at the time of placing the order to accurately estimate the extent or 
duration of the work or anticipate the costs with any reasonable degree 
of certainty.
    Response: The proposed language at FAR 8.405-2(e)(2)(i) (which has 
been relocated to FAR 8.404(h)(3)(i)) is not redundant with language at 
FAR 8.405-2(e)(4)(ii) (which has been relocated to 
8.404(h)(3)(iii)(B)).
     The proposed language at FAR 8.405-2(e)(2)(i) (relocated 
to FAR 8.404(h)(3)(i)) describes one of the policy conditions that must 
be met before a T&M order may be placed.
     The proposed language at FAR 8.405-2(e)(4)(ii) (relocated 
to FAR 8.404(h)(3)(iii)(B)) describes the circumstances under which the 
T&M or LH order may be placed, and FAR 8.405-2(e)(3)(i) (relocated to 
FAR 8.404(h)(3)(ii)(A)) describes an element of the documentation that 
must be prepared by the contracting officer to support the decision.
    Although the two sections share the same idea and similar words, 
their separate citations serve two distinct purposes.
4. Clarify Contract Types
    Comment: Two respondents expressed concern that the proposed 
language at FAR 16.600, which states that T&M and LH contracts are not 
fixed-price contracts, may create confusion or be taken out of context 
because it does not state that T&M and LH contracts are not cost-
reimbursement contracts. The respondents believe that this could blur 
the lines between T&M and LH contracts and cost-reimbursement 
contracts, creating confusion on how to administer T&M and LH contracts 
and orders. The respondents recommended revising the FAR to clarify the 
nature of the T&M and LH contracts as a hybrid contract type that is 
neither fixed-price nor cost-reimbursement but does include elements of 
each; or to describe the attributes and cross-reference to the 
applicable FAR subparts.
    Response: T&M and LH contracts are neither fixed-price contracts 
nor cost-reimbursement contract types. T&M and LH contracts comprise 
unique contract types and are described in a separate FAR subpart, 
16.6.
    This rule addresses the use of T&M and LH contracts for the 
acquisition of commercial services. The revisions made in this rule are 
intended to clarify the requirement to use fixed-price contract types 
for the acquisition of commercial items, unless specific requirements 
and conditions are documented to support the decision to use the T&M 
and LH contracts to acquire commercial services, a subset of commercial 
items.
5. Potential for Rule To Limit the Use of T&M Contracts
    Comment: One respondent expressed concern that the proposed rule 
could curtail the use of T&M and LH contracts in circumstances where 
those contract types would be the most advantageous to the Government.
    Response: There are circumstances warranting the use of T&M and LH 
contracts and orders. This rule is intended to clarify and 
appropriately limit their use to those circumstances.

[[Page 196]]

6. Requirement for Determination and Findings at the Order Level
    Comments: The respondents strongly recommended that the Government 
reconsider requiring agencies to execute a new determination and 
findings prior to issuing each T&M or LH order placed under the Federal 
Supply Schedules program. The respondent noted that Congress has not 
legislated such an approach. The respondent pointed out that the 
Federal Acquisition Streamlining Act, as amended, requires issuance of 
a determination and findings at the contract level, not at the order 
level.
    Response: The Federal Acquisition Streamlining Act does require the 
issuance of a determination and findings at the contract level, but 
note that a requirement for a determination and findings at the order 
level is not precluded by that statute. In situations where the basic 
contract allows for the issuance of individual orders using more than 
one contract type, the over-reliance on T&M and LH pricing has resulted 
in increased risk to the Government (see GAO Report 09-579, June 2009). 
The GAO has recommended this change to FAR subpart 8.4 explicitly to 
require the same safeguards for the acquisition of commercial services 
acquired on a T&M or LH basis as required by FAR 12.207 and FAR 
16.601(d) (i.e., require a detailed determination and findings stating 
that no other contract type is suitable). Further, Federal Supply 
Schedules generally are long-term contracts, and a determination and 
findings generated at the initiation of a schedule contract may no 
longer reflect current market conditions. The intent is to ensure that 
this contract type is used only when no other contract type is suitable 
and to instill discipline in the determination of contract type with a 
view toward managing the risk to the Government.
7. Address Fixed-Price Level-of-Effort Contracts
    Comment: One respondent expressed concern that the proposed 
language at FAR 16.600 stating T&M and LH contracts are not fixed-price 
contracts does not clarify the issue or address the fact that what is 
actually happening is the contracting officer is using a FP LOE 
contract without the appropriate approval. The respondent recommended 
adding a definition to FAR part 16 that clearly defines a LOE contract 
and identifies that a LOE contract type is considered to be either T&M/
LH, FP LOE, or a cost-plus term. Otherwise, the respondent thinks 
contracting officers are likely to read the proposed change to FAR part 
16 as something they already knew and continue calling LOE contracts 
firm-fixed price.
    Response: T&M and LH contracts are neither fixed-price contracts 
nor cost-reimbursement contract types. It is for this reason that the 
FAR addresses T&M and LH contracts in a separate subpart, FAR subpart 
16.6. This rule addresses the use of T&M and LH contracts for 
commercial items; therefore, the respondent's request to define LOE 
contracts is outside the scope of this case.

C. Other Changes

    The Councils have also amended the language proposed for FAR part 8 
(now set forth at FAR 8.404(h)(3)(iv)) addressing increases in the 
ceiling price of T&M contracts to more closely track the language set 
forth in FAR 12.207(b)(1)(ii)(C). Section 1423 of the Services 
Acquisition Reform Act of 2003 provides that any change in the ceiling 
price of a T&M or LH contract is authorized only upon a determination, 
documented in the contract file, that it is in the best interest of the 
procuring agency to change such ceiling price.
    The Councils have opened FAR Case 2011-025 for the purpose of 
considering additional guidance addressing the actions required when 
raising the ceiling price or otherwise changing the scope of work for a 
T&M or LH contract or order. The case will consider appropriate 
guidance to address this issue for the respective parts of the FAR 
addressing T&M or LH contracts or orders, such as FAR 8.404, FAR 
12.207, and FAR 16.601.

III. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). E.O. 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility. 
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.

IV. 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 does not 
impose any requirements on small entities. An Initial Regulatory 
Flexibility Analysis was not conducted. No comments were received from 
small entities in response to the proposed rule.

V. Paperwork Reduction Act

    The final rule does not contain any information collection 
requirements that require the approval of the Office of Management and 
Budget under the Paperwork Reduction Act (44 U.S.C. chapter 35).

List of Subjects in 48 CFR Parts 8, 12, and 16

    Government procurement.

    Dated: December 21, 2011.
Laura Auletta,
Director, Office of Governmentwide Acquisition Policy, Office of 
Acquisition Policy, Office of Governmentwide Policy.

    Therefore, DoD, GSA, and NASA amend 48 CFR parts 8, 12, and 16 as 
set forth below:

0
1. The authority citation for 48 CFR parts 8, 12, and 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).

PART 8--REQUIRED SOURCES OF SUPPLIES AND SERVICES

0
2. Amend section 8.404 by adding paragraph (h) to read as follows:


8.404  Use of Federal Supply Schedules.

* * * * *
    (h) Type-of-order preference for services. (1) The ordering 
activity shall specify the order type (i.e., firm-fixed price, time-
and-materials, or labor-hour) for the services offered on the schedule 
priced at hourly rates.
    (2) Agencies shall use fixed-price orders for the acquisition of 
commercial services to the maximum extent practicable.
    (3)(i) A time-and-materials or labor-hour order may be used for the 
acquisition of commercial services only when it is not possible at the 
time of placing the order to estimate accurately the extent or duration 
of the work or to anticipate costs with any reasonable degree of 
confidence.
    (ii) Prior to the issuance of a time-and-materials or labor-hour 
order, the contracting officer shall--
    (A) Execute a determination and findings (D&F) for the order, in

[[Page 197]]

accordance with paragraph (h)(3)(iii) of this section that a fixed-
price order is not suitable;
    (B) Include a ceiling price in the order that the contractor 
exceeds at its own risk; and
    (C) When the total performance period, including options, is more 
than three years, the D&F prepared in accordance with this paragraph 
shall be signed by the contracting officer and approved by the head of 
the contracting activity prior to the execution of the base period.
    (iii) The D&F required by paragraph (h)(3)(ii)(A) of this section 
shall contain sufficient facts and rationale to justify that a fixed-
price order is not suitable. At a minimum, the D&F shall--
    (A) Include a description of the market research conducted (see 
8.404(c) and 10.002(e));
    (B) Establish that it is not possible at the time of placing the 
order to accurately estimate the extent or duration of the work or 
anticipate costs with any reasonable degree of confidence;
    (C) Establish that the current requirement has been structured to 
maximize the use of fixed-price orders (e.g., by limiting the value or 
length of the time-and-materials/labor-hour order; or, establishing 
fixed prices for portions of the requirement) on future acquisitions 
for the same or similar requirements; and
    (D) Describe actions to maximize the use of fixed-price orders on 
future acquisitions for the same requirements.
    (iv) The contracting officer shall authorize any subsequent change 
in the order ceiling price only upon a determination, documented in the 
order file, that it is in the best interest of the ordering activity to 
change the ceiling price.

0
3. Amend section 8.405-2 by redesignating paragraph (e) as paragraph 
(f); and adding a new paragraph (e) to read as follows:


8.405-2  Ordering procedures for services requiring a statement of 
work.

* * * * *
    (e) Use of time-and-materials and labor-hour orders for services. 
When placing a time-and-materials or labor-hour order for services, see 
8.404(h).
* * * * *
0
4. Amend section 8.405-3 by revising paragraphs (b)(2)(ii) and (c)(3) 
to read as follows:


8.405-3  Blanket purchase agreements (BPAs).

* * * * *
    (b) * * *
    (2) * * *
    (ii) Type-of-order preference. The ordering activity shall specify 
the order type (i.e., firm-fixed price, time-and-materials, or labor-
hour) for the services identified in the statement of work. The 
contracting officer should establish firm-fixed priced orders to the 
maximum extent practicable. For time-and-materials and labor-hour 
orders, the contracting officer shall follow the procedures at 
8.404(h).
* * * * *
    (c) * * *
    (3) BPAs for hourly-rate services. If the BPA is for hourly-rate 
services, the ordering activity shall develop a statement of work for 
each order covered by the BPA. Ordering activities should place these 
orders on a firm-fixed price basis to the maximum extent practicable. 
For time-and-materials and labor-hour orders, the contracting officer 
shall follow the procedures at 8.404(h). All orders under the BPA shall 
specify a price for the performance of the tasks identified in the 
statement of work.
* * * * *

PART 12--ACQUISITION OF COMMERCIAL ITEMS

0
5. Amend section 12.207 by removing from paragraph (b)(2)(ii) ``degree 
of certainty'' and adding ``degree of confidence'' in its place; and 
adding paragraph (b)(4) to read as follows:


12.207  Contract type.

* * * * *
    (b) * * *
    (4) See 8.404(h) for the requirement for determination and findings 
when using Federal Supply Schedules.
* * * * *

PART 16--TYPES OF CONTRACTS

0
6. Revise section 16.201 to read as follows:


16.201  General.

    (a) Fixed-price types of contracts provide for a firm price or, in 
appropriate cases, an adjustable price. Fixed-price contracts providing 
for an adjustable price may include a ceiling price, a target price 
(including target cost), or both. Unless otherwise specified in the 
contract, the ceiling price or target price is subject to adjustment 
only by operation of contract clauses providing for equitable 
adjustment or other revision of the contract price under stated 
circumstances. The contracting officer shall use firm-fixed-price or 
fixed-price with economic price adjustment contracts when acquiring 
commercial items, except as provided in 12.207(b).
    (b) Time-and-materials contracts and labor-hour contracts are not 
fixed-price contracts.

0
7. Add section 16.600 to read as follows:


16.600  Scope.

    Time-and-materials contracts and labor-hour contracts are not 
fixed-price contracts.

[FR Doc. 2011-33418 Filed 12-30-11; 8:45 am]
BILLING CODE 6820-EP-P