[Federal Register Volume 77, Number 223 (Monday, November 19, 2012)]
[Proposed Rules]
[Pages 69422-69426]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-27992]


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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

48 CFR Part 9903


Cost Accounting Standards: Revision of the Exemption From Cost 
Accounting Standards for Contracts and Subcontracts for the Acquisition 
of Commercial Items

AGENCY: Office of Management and Budget (OMB), Office of Federal 
Procurement Policy (OFPP), Cost Accounting Standards (CAS) Board.

ACTION: Proposed rule.

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SUMMARY: The OFPP and CAS Board invite public comments concerning this 
proposed rule to clarify the exemption for contracts or subcontracts 
for the acquisition of commercial items (hereafter referred to as the 
``(b)(6) commercial item exemption'') so that the regulatory text is 
more consistent with the statutory text. Specifically, the proposed 
rule clarification will eliminate the detailed listing of permissible 
contract and subcontract types, and instead the revised provision will 
contain more generalized language that reads ``contracts and 
subcontracts for the acquisition of commercial items,'' which reflects 
the statutory text.

DATES: Comment Date: Comments must be in writing and must be received 
by January 18, 2013.

ADDRESSES: All comments to this proposed rule must be in writing. 
Electronic comments may be submitted in any one of three ways:
    1. Federal eRulemaking Portal: Comments may be directly sent via 
http://www.regulations.gov--a Federal E-Government Web site that allows 
the public to find, review, and submit comments on documents that 
agencies have published in the Federal Register and that are open for 
comment. Simply type ``(b)(6) commercial item exemption'' (without 
quotation marks) in the Comment or Submission search box, click Go, and 
follow the instructions for submitting comments;
    2. Email: Comments may be included in an email message sent to 
[email protected]. The comments may be submitted in the text of the 
email message or as an attachment;
    3. Facsimile: Comments may also be submitted via facsimile to (202) 
395-5105; or
    4. Mail: If you choose to submit your responses via regular mail, 
please mail them to: Office of Federal Procurement Policy, 725 17th 
Street NW., Room 9013, Washington, DC 20503, ATTN: Raymond J. M. Wong. 
Due to delays caused by the screening and processing of mail, 
respondents are strongly encouraged to submit responses electronically.
    Be sure to include your name, title, organization, postal address, 
telephone number, and email address in the text of your public comment 
and reference ``(b)(6) commercial item exemption'' in the subject line 
irrespective of how you submit your comments. Comments received by the 
date specified above will be included as part of the official record. 
Comments delayed due to use of regular mail may not be considered.

[[Page 69423]]

    Please note that all public comments received will be available in 
their entirety at http://www.whitehouse.gov/omb/casb_index_public_comments/ and http://www.regulations.gov after the close of the comment 
period. Accordingly, you should not include any information that you 
would object to being disclosed.

FOR FURTHER INFORMATION CONTACT: Raymond J. M. Wong, Director, Cost 
Accounting Standards Board (telephone: 202-395-6805; email: [email protected]).

SUPPLEMENTARY INFORMATION:

A. Regulatory Process--Changes to 48 CFR Part 9903

    Rules, regulations, and standards issued by the CAS Board are 
codified at 48 CFR Chapter 99. This proposed rule concerns the 
amendment of a CAS Board regulation other than a Standard, and as such 
is not subject to the statutorily prescribed rulemaking process for the 
promulgation of a Standard at 41 U.S.C. 1502(c) [formerly, 41 U.S.C. 
422(g)].

B. Background and Summary

    The regulations implementing the statutory exemption from CAS 
requirements for the acquisition of commercial items are found at 48 
CFR 9903.201-1(b)(6), which provide for an exemption from CAS for 
certain specified permissible contract types for the acquisition of 
commercial items, the ``(b)(6) commercial item exemption.'' Over the 
years, the wording of this implementing regulatory exemption has 
evolved as the permissible contract types for the acquisition of 
commercial items under the applicable statutory framework (i.e., 
Federal Acquisition Streamlining Act of 1994 (FASA), Federal 
Acquisition Reform Act of 1996 (FARA), Services Acquisition Reform Act 
of 2003 (SARA)) and corresponding regulations have changed. The CAS 
Board now believes that there is an inconsistency in the regulatory 
text of the (b)(6) commercial item exemption, as found in 48 CFR 
9903.201-1(b)(6), compared to the description of this exemption and 
contract types as defined under other applicable statutory and 
regulatory provisions. To correct this inconsistency, the CAS Board 
believes that the wording of section 4205 of the FARA, which amended 
the CAS authorizing statute to state CAS are not applicable to 
``[c]ontracts or subcontracts for the acquisition of commercial 
items,'' might now be more appropriate to use in the regulatory text to 
define the permissible contract types for the acquisition of commercial 
items subject to the (b)(6) commercial item exemption. As described 
further below, the simplification and clarification of the regulatory 
text would eliminate the detailed listing of permissible contract and 
subcontract types subject to the commercial item exemption, for the 
more generalized phrase ``contracts and subcontracts for the 
acquisition of commercial items,'' which reflects the statutory text.

Historical Background

    Below is a brief description of the applicable statutory 
provisions.

1994--Federal Acquisition Streamlining Act (FASA) of 1994 (Pub. L. 103-
355)

    Section 8301(d) of the FASA contained a provision that exempted the 
following contracts from the CAS: (1) Contracts or subcontracts where 
the price negotiated is based on established catalog or market prices 
of commercial items sold in substantial quantities to the general 
public; (2) contracts or subcontracts where the price negotiated is 
based on prices set by law or regulation; or (3) any other firm fixed-
price (FFP) contract or subcontract (without cost incentives) for 
commercial items.

1996--Federal Acquisition Reform Act (FARA) of 1996 (Pub. L. 104-106)

    The FASA CAS exemptions were subsequently revised in section 4205 
of the FARA. The FARA revised FASA's CAS exemptions by eliminating the 
FASA's third exemption (for FFP contracts without cost incentives) and 
revising the language of FASA's first exemption (for FFP contract based 
on catalog pricing) to read ``[c]ontracts or subcontracts for the 
acquisition of commercial items.'' FARA did not make any changes to the 
second FASA exemption (for contracts based on prices set by law or 
regulation) (see 48 CFR 9903.201-1(b)(5)). The CAS Board had decided 
not to issue any rulemaking to implement the CAS exemptions as provided 
in the FASA because of it was certain that the FASA provisions would be 
superseded by these FARA provisions. The CAS Board implemented the CAS 
exemptions as provided in the FARA, as an interim rule on July 29, 1996 
(61 FR 39360), and as a final rule on June 6, 1997 (62 FR 31294).

1996 CAS Board Rulemaking

    The CAS Board's 1996 interim rule for the (b)(6) commercial item 
exemption largely reflected the FARA section 4205 statutory text, 
except for two differences. First, the draft regulatory text used 
``and'' rather than ``or'' as stated in the statute, so the regulatory 
text read as ``[c]ontracts and subcontracts for the acquisition of 
commercial items.'' Secondly, the CAS Board added the term ``firm 
fixed-price'' to the text so that the interim regulatory text, in its 
entirety, read as ``[f]irm fixed-price contracts and subcontractors for 
the acquisition of commercial items'' in the 1996 interim rule. To 
explain these additional terms in the preamble to its 1996 interim 
rule, the CAS Board referred to 48 CFR Part 12, where section 12.207 of 
the Federal Acquisition Regulation (FAR) used ``firm-fixed-price [FFP] 
contracts or fixed-price contracts with economic price adjustment 
[FPEPA] * * * [and i]ndefinite-delivery contracts * * * based on [FFP 
or FPEPA]'' to describe the only contract types to be used for the 
acquisition of commercial items. This section of the FAR was written to 
implement FASA (60 FR 48231, September 18, 1995). Thus, while the 
intent of the CAS Board's 1996 interim rule as expressed in the Federal 
Register preamble was to implement the FARA exemption for the 
acquisition for the acquisition of commercial items, the text of the 
interim rule reflected the more limited permissible contract types, as 
found in FAR 12.207, which had implemented the FASA permissible 
contract types for the acquisition of commercial items.
    This was further complicated because FAR 12.207 implemented FASA 
with a slightly different definition of permissible contract types for 
the acquisition of commercial items than what was called for in that 
statute. Section 8002(d) of the FASA stated that, when acquiring 
commercial items, the ``FAR shall include * * * a requirement that 
firm, fixed-price [(FFP)] contracts or fixed price with economic price 
adjustment [(FPEPA)] contracts be used to the maximum extent 
practicable'' and cost type contracts were prohibited. FAR 12.207, as 
amended by FASA, however, provided that: ``[a]gencies shall use firm-
fixed-price [(FFP)] contracts or fixed-price contracts with economic 
price adjustment [(FPEPA contracts)] for the acquisition of commercial 
items [the FASA text]. Indefinite-delivery contracts * * * may be used 
where the prices are established based on a firm-fixed-price or fixed-
price with economic price adjustment. Use of any other contract type to 
acquire commercial items is prohibited.'' This FAR implementation of 
FASA is more limiting than FASA itself because FFP and FPEPA contracts, 
as well as indefinite-delivery contracts containing FFP and FPEPA 
provisions, could only

[[Page 69424]]

be used, rather than be used to the maximum extent practicable per FASA 
(FAR Acquisition of Commercial Items, 60 FR 48231, September 18, 1995). 
Consequently, while the intent of the CAS Board's 1996 interim was to 
implement the FARA exemption from CAS for the acquisition of commercial 
items, the regulatory text reflected the more restricted interpretation 
of FAR 12.207, which in turn had implemented FASA and had done so in a 
more restrictive manner than required by that statute.

1997 CAS Board Rulemaking

    When developing the 1997 final rule, the CAS Board decided to add 
FPEPA contracts as one of the permissible contract types for the 
acquisition of commercial items subject to the (b)(6) commercial item 
exemption. The CAS Board did so to address public comments that 
recommended the inclusion of the FPEPA contract as a permissible 
contract type for the acquisition of commercial items subject to the 
(b)(6) commercial item exemption; the CAS Board had received the public 
comments in response to the interim rule, which did not include FPEPA 
contracts in the listing of permissible contract types for the 
acquisition of commercial items exempted from CAS. While the CAS Board 
added the FPEPA contract type to the list in the final rule, however, 
it specifically excluded FPEPA contracts with economic price 
adjustments based on actual incurred costs for labor and materials. As 
explained in the preamble to the 1997 final rule, ``[t]he [CAS] Board 
believes that this approach to [FPEPA] contracts comports with both the 
intent of the [FARA] statute and the [FARA] Conference Report by 
expanding the CAS [(b)(6)] commercial item exemption to [FPEPA] 
contracts in a manner that will avoid the allocation of costs to cost 
objectives based on actual contractor incurred costs.'' The FARA 
Conference Report stated that the CAS Board should issue guidance, 
consistent with commercial accounting systems and practices, to ensure 
that contractors assigned costs appropriately to commercial item 
contracts, other than FFP commercial item contracts. In promulgating 
the final rule, however, the CAS Board chose not to issue this 
guidance, thinking that it was unnecessary as commercial item contracts 
are limited by regulation to the FFP and FPEPA contract varieties. Even 
while excluding FPEPA contracts with price adjustments based on actual 
costs incurred from the list of permissible contract types subject to 
the (b)(6) commercial item exemption, the CAS Board observed in the 
preamble to the 1997 final rule that Federal procuring agencies had 
stated that FPEPA contracts using actual costs incurred were rarely, if 
ever, used. The CAS Board noted that it would reconsider the need for 
guidance when other contract types for the acquisition of commercial 
items are authorized, or until another need for such guidance arises in 
the future.

2003 FAR Rulemaking

    Subsequently, there have been changes in the applicable statutes 
and regulations on acquiring commercial items, which have broadened the 
scope of permissible contract types. First, FAR 12.207 was revised on 
March 18, 2003 (68 FR 13201), to allow the use of FFP contracts in 
conjunction with award fee incentives or performance or delivery 
incentives, when the award fee or incentive is based solely on factors 
other than cost. That is, permissible contract types could include 
certain fixed-price-incentive (FPI) contracts described in FAR Subparts 
16.4 when the award fee or incentive is based solely on factors other 
than cost. The CAS Board notes that this FAR expansion was consistent 
with FASA's section 8301(d), which had exempted ``any other firm fixed-
price contract or subcontract (without cost incentives) for commercial 
items.'' However, despite the expansion in the FAR of permissible 
contract types for the acquisition of commercial items, the CAS Board 
did not revise, and has not revised, the (b)(6) commercial item 
exemption to reflect these additional FAR permissible contract types 
for the acquisition of commercial items.

2003 Services Acquisition Reform Act (SARA) of 2003 (Pub. L. 108-136)

    Also, the SARA permitted the use of time-and-materials (T&M) 
contracts or labor-hour (LH) contracts for acquiring commercial 
services, subject to certain limitations. Accordingly, FAR 12.207 was 
revised to implement SARA on December 12, 2006 (71 FR 74667).
    The CAS Board issued a final rule implementing SARA on July 3, 2007 
(72 FR 36367), by incorporating T&M and LH contracts and subcontracts 
as additional contract types for the acquisition of commercial items 
subject to the (b)(6) commercial items exemption. During the public 
comment process leading up to the CAS Board's 2007 final rule, a 
possible discrepancy between the (b)(6) commercial item exemption and 
the permissible contract types specified at FAR 12.207 was noted. In 
particular, it was noted that there appeared to be permissible contract 
types within FAR 12.207 that might possibly be excluded under a literal 
reading of the (b)(6) commercial item exemption. For example, a literal 
reading of the term ``FFP'' contracts in the context of the (b)(6) 
commercial item exemption might exclude permissible FPI contracts 
(described in FAR Subpart 16.4) from the coverage of the (b)(6) 
commercial item exemption when the award fee or incentive is based 
solely on factors other than cost. Such a literal reading of the term 
``FFP'' contracts to exclude FPI contracts as permissible contract 
types covered by the (b)(6) commercial item exemption for the 
acquisition of commercial items was not the CAS Board's intent. In the 
preamble to the 2007 final rule in response to the public comment, the 
CAS Board stated that it ``did not deliberate this recommendation 
because it was outside of the scope of the proposed rule to provide an 
exemption for T&M/LH contracts'' and that the recommendation will be 
considered in the formulation of future agenda items. In fact, the CAS 
Board had indicated in the preamble to its FR notice for the 1997 final 
rule which implemented FARA (62 FR 31294, June 6, 1997) that it would 
reconsider the need for guidance if additional contract types for the 
acquisition of commercial items were authorized in the future.

2012 CAS Rulemaking

    Accordingly, the evolution and expansion of the scope of the 
permissible contract types for acquiring commercial items has resulted 
in an inconsistency between the wording of the (b)(6) commercial item 
exemption, as found in 48 CFR 9903.201-1(b)(6), and the permissible 
contract types as described in the applicable statutes (i.e., FASA, 
FARA, SARA) and their implementing regulations. To correct this 
confusion, the CAS Board believes the wording of FARA's section 4205, 
``[c]ontracts or subcontracts for the acquisition of commercial 
items,'' might now be more appropriate for the text of the (b)(6) 
commercial item exemption, as provided at 48 CFR 9903.201-1(b)(6). 
Using the generalized phrase ``contracts and subcontracts for the 
acquisition of commercial items,'' obviates the continuing need to 
update and keep current a detailed listing of permissible contract 
types for the acquisition of commercial items, which continues to 
evolve with the passage of time. Furthermore, the CAS Board notes that 
this FARA text is the plural version of the statutory commercial item 
exemption outlined in the CAS Board's authorizing statute at 41 U.S.C. 
1502(b)(1)(C)(i) (a result from the 2011 recodification of Title 41 of 
the U.S.

[[Page 69425]]

Code), and is identical to the text in that section's predecessor, 41 
U.S.C. 422(f)(2)B)(i), prior to the Title 41 recodification.
    Additionally, this proposed rule would result in the removal of the 
exclusion of FPEPA contracts with economic price adjustments based on 
actual incurred costs for labor and material from the permissible 
contract types for the acquisition of commercial items subject to the 
(b)(6) commercial item exemption. The proposed elimination of the 
exclusion for such FPEPA contracts from the list of permissible 
contract types for the acquisition of commercial items to which the 
(b)(6) commercial item exemption is applicable means that such FPEPA 
contracts will be exempted from CAS under the proposed (b)(6) 
commercial item exemption. The CAS Board believes this change is 
supported by several factors. First, it is not certain that this 
contract type can be used for acquiring commercial items in light of 
the FASA prohibition on the use of cost type contracts. Second, even if 
FPEPA contracts are used, FAR 16.203 contains restrictions and 
procedural controls that significantly limit the government's risk even 
if CAS is not applicable. For example, FAR 16.203-4(c) requires that 
the contracting officer specify within the contract, in a clause 
substantially the same as at FAR 52.216-4 Economic Price Adjustment--
Labor and Material: (i) The types of labor and materials subject to 
adjustment under the clause; (ii) the labor rates (including fringe 
benefits, if any) and unit prices of materials that may be increased or 
decreased; (iii) the quantities of the specified labor and materials 
allocable to each unit to be delivered under the contract; and (iv) not 
include any indirect cost (except for fringe benefits specified in the 
contract Schedule) or profit in any price adjustment. In view of these 
limitations and controls, the CAS Board does not presently find any 
substantive benefit from applying CAS to FPEPA contracts with economic 
price adjustments based on actual incurred costs for labor and 
material. While proposing to eliminate this exclusion of such FPEPA 
contracts from the list of permissible contract types for the 
acquisition of commercial items covered by the (b)(6) commercial item 
exemption, and thereby making such FPEPA contracts covered by the CAS 
exemption, the CAS Board nonetheless reserves the right to reinstate 
the exclusion of certain FPEPA contracts from the list of permissible 
contract types for the acquisition of commercial items covered by the 
(b)(6) commercial item exemption from CAS should circumstances warrant.
    In sum, the CAS Board believes that, as a general rule, the 
government benefits from CAS on those contracts whose price is based on 
actual incurred costs. At the present time, under the present framework 
of statutes and regulations governing the acquisition of commercial 
items, contracts based on actual incurred costs cannot be used (except 
for T&M and LH contracts and, as previously noted, possibly a certain 
type of FPEPA contract). If the legal framework was expanded to include 
additional permissible contract types, the CAS Board will reconsider 
the scope of the (b)(6) commercial item exemption, in accordance with 
its authority to apply CAS, in whole or in part, in such circumstances 
as it deems appropriate.

C. Conclusion

    Therefore, in order to clarify the exemption found at 48 CFR 
9903.201-1(b)(6) for contracts or subcontracts used for the acquisition 
of commercial items, the CAS Board proposes changing the wording of 
this regulatory text from ``[f]irm fixed-priced, fixed-priced with 
economic price adjustment (provided that price adjustment is not based 
on actual costs incurred), time-and-materials, and labor-hour contracts 
and subcontracts for the acquisition of commercial items'' to read: 
``[c]ontracts and subcontracts for the acquisition of commercial 
items,'' thereby eliminating the detailed listing of permissible 
contract types for the acquisition of commercial items exempted from 
CAS, as well as the current exception to the list of permissible 
contract types for the (b)(6) commercial item exemption from CAS for 
the FPEPA contract type with the price adjustments based on actual 
costs incurred.

D. Public Comments

    Interested persons are invited to participate by submitting data, 
views or arguments with respect to this proposed rule. As detailed in 
the Background and Summary part of this proposed rule, the CAS Board is 
proposing to clarify and simplify the (b)(6) commercial item exemption 
from CAS to read as ``[c]ontracts and subcontracts for the acquisition 
of commercial items.'' Doing so would eliminate the current listing of 
permissible contract types for the (b)(6) commercial item exemption, as 
well as the exception to that exemption for the FPEPA contract type 
with price adjustments based on actual incurred costs. The proposed 
elimination of the exception to the (b)(6) commercial item exemption 
would mean that the FPEPA contract type with price adjustments based on 
actual incurred costs would be exempted from CAS under the proposed 
(b)(6) commercial item exemption. With regard to the proposal to exempt 
from CAS coverage FPEPA contracts with economic price adjustments based 
on actual incurred costs for labor and material, the CAS Board notes 
that this proposal is made based on the assumption that this particular 
FPEPA contract type is not used for acquiring commercial items. 
Contract information, however, was not readily available to validate 
this assumption. As part of the public comment process, the CAS Board 
specifically requests comments on this usage assumption and any 
information on the use of this particular FPEPA type contract for 
acquiring commercial items.

E. Paperwork Reduction Act

    The Paperwork Reduction Act (44 U.S.C. Chapter 35, Subchapter I) 
does not apply to this rulemaking, because this proposed rule will 
impose no paperwork burden on offerors, affected contractors and 
subcontractors, or members of the public which requires the approval of 
OMB under 44 U.S.C. 3501, et seq. The purpose of this rule is to 
clarify the exemption at 48 CFR 9903.201-1(b)(6) for contracts or 
subcontracts for the acquisition of commercial items by eliminating the 
detailed listing of permissible contract types so that it is more 
consistent with the statutory text at section 4205 of the Federal 
Acquisition Reform Act of 1996 which amended the CAS authorizing 
statute to state CAS is not applicable to ``[c]ontracts or subcontracts 
for the acquisition of commercial items.'' In addition, this proposal 
is consistent with the intent of the objectives of the ``Streamlined 
Applicability of Cost Accounting Standards'' set forth in Section 802 
of the National Defense Authorization Act for Fiscal Year 2000 (Pub. L. 
106-65).

E. Executive Order 12866, the Congressional Review Act, and the 
Regulatory Flexibility Act

    This proposed rule will serve to clarify the elimination of certain 
administrative requirements associated with the application and 
administration of the Cost Accounting Standards by covered Government 
contractors and subcontractors, consistent with the provisions of 
Section 4205 of the Federal Acquisition Reform Act of 1996. The 
economic impact on contractors and subcontractors is, therefore, 
expected to be minor. As a result, the Board has determined that this 
proposed rule will not result in the promulgation of an ``economically

[[Page 69426]]

significant rule'' under the provisions of Executive Order 12866, and 
that a regulatory impact analysis will not be required. For the same 
reason, the Administrator of the Office of Information and Regulatory 
Affairs has determined that this proposed rule is not a ``major rule'' 
under the Congressional Review Act, 5 U.S.C. Chapter 8. Finally, this 
rule does not have a significant effect on a substantial number of 
small entities because small businesses are exempt from the application 
of the Cost Accounting Standards. Therefore, this rule does not require 
a regulatory flexibility analysis under the Regulatory Flexibility Act 
of 1980, 5 U.S.C. Chapter 6.

List of Subjects in 48 CFR Part 9903

    Cost accounting standards, Government procurement.

Joseph G. Jordan,
Chair, Cost Accounting Standards Board.

    For the reasons set forth in this preamble, chapter 99 of Title 48 
of the Code of Federal Regulations is proposed to be amended as set 
forth below:

PART 9903--CONTRACT COVERAGE

    1. The authority citation for Part 9903 continues to read as 
follows:

    Authority: Public Law 111-350, 124 Stat. 3677, 41 U.S.C. 1502.

    2. Section 9903.201-1 is amended by revising paragraph (b)(6) to 
read as follows:


9903.201-1  CAS applicability.

* * * * *
    (b) * * *
    (6) Contracts and subcontracts for the acquisition of commercial 
items.
* * * * *
[FR Doc. 2012-27992 Filed 11-16-12; 8:45 am]
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