[Federal Register Volume 79, Number 104 (Friday, May 30, 2014)]
[Rules and Regulations]
[Pages 31195-31197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-12408]


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DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 31 and 52

[FAC 2005-74; FAR Case 2012-017; Item III; Docket No. 2012-0017, 
Sequence No. 1]
RIN 9000-AM38


Federal Acquisition Regulation; Expansion of Applicability of the 
Senior Executive Compensation Benchmark

AGENCY: 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 adopting as final, without change, an 
interim rule amending the Federal Acquisition Regulation (FAR) to 
implement a section of the National Defense Authorization Act of 2012. 
This section expands the application of the senior executive 
compensation benchmark to a broader group of contractor employees on 
contracts awarded by DoD, NASA, and the Coast Guard. The senior 
executive compensation benchmark amount limits the reimbursement of 
contractor employee compensation costs.

DATES: Effective: May 30, 2014.

FOR FURTHER INFORMATION CONTACT: Mr. Edward N. 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 2005-74, FAR Case 2012-
017.

SUPPLEMENTARY INFORMATION: 

I. Background

    DoD, GSA, and NASA published an interim rule in the Federal 
Register at 78 FR 38535, on June 26, 2013 to implement section 803 of 
the National Defense Authorization Act for Fiscal Year 2012. The 
interim rule required in FAR 31.205-6(p) that the incurred compensation 
costs for all contractor employees on all DoD, NASA, and Coast Guard 
contracts awarded on or after December 31, 2011, be subject to the 
senior executive compensation amount. The reference to 31.205-6(p) in 
FAR 52.216-7 was also updated to reflect this revision in 31.205-6(p).
    Section 803(c)(2) stated that the expanded reach of the 
compensation cap ``shall apply with respect to costs of compensation 
incurred after January 1, 2012, under contracts entered into before, 
on, or after the date of the enactment of this Act'' (which was 
December 31, 2011). This final rule addresses only the prospective 
application of section 803, i.e., to contracts awarded on or after its 
enactment (December 31, 2011). A separate proposed rule (FAR Case 2012-
025) was published in the Federal Register at 78 FR 38539, on June 26, 
2013 to address the retroactive application of section 803 to contracts 
that had been awarded before its enactment.
    A technical correction was published in the Federal Register at 78 
FR 70481, on November 25, 2013, correcting the dates in 31.205-
6(p)(2)(ii).
    Three respondents submitted comments on the interim rule.

II. Discussion and Analysis

    The Civilian Agency Acquisition Council and the Defense Acquisition 
Regulations Council (the Councils) reviewed the public comments in the 
development of the final rule. A discussion of the comments is provided 
as follows:

A. Summary of Significant Changes

    Based on a review of the public comments, discussed below, the 
Councils have concluded that no change to the interim rule is 
necessary.

B. Analysis of Public Comments

1. Retroactive Application of Rule Not Appropriate
    Comment: Respondents submitted comments stating that it was 
inappropriate to retroactively apply the rule. These comments included:
    (a) The interim rule creates a breach of contract per case law 
cited in the General Dynamics and ATK Launch Systems decisions. Thus, 
the effective date of the interim rule should be June 26, 2013 (the 
effective date of the interim rule) and not the date of the statute 
(January 1, 2012).
    (b) The interim rule's premise that section 803 of the NDAA must 
automatically prevail for contracts signed prior to the effective date 
of the rule but after enactment of the NDAA is incorrect. It is well 
established in the Federal Courts that a contract that conflicts with 
Federal statute should still be honored.
    (c) Case law has established that statutory language which 
explicitly requires the issuance of implementing regulations is not 
self-executing but instead takes effect upon the promulgation of 
implementing regulations.
    (d) The Government was mistaken in its conclusion that the holdings 
in the General Dynamics and ATK Launch Systems decisions cited in the 
preamble would impact only contracts awarded before the effective date 
of the statute. A close reading of those decisions reveals the 
Government would also be in breach of FAR 52.216-7 in implementing this 
interim rule because it attempts to impose its requirements on 
contracts awarded before the published date of the interim rule (June 
26, 2013).
    (e) The retroactive application of this rule is expressly 
prohibited per FAR 1.108(d).
    Response: Section 803(c)(2) states that the expanded reach of the 
compensation cap ``shall apply with respect to costs of compensation 
incurred after January 1, 2012, under contracts entered into before, 
on, or after the date of the enactment of this Act'' (which was 
December 31, 2011). This final rule addresses only the prospective 
application of section 803, i.e., to contracts awarded on or after its 
enactment (December 31, 2011). A separate proposed rule (FAR Case 2012-
025) was published in the Federal Register at 78 FR 38539 on June 26, 
2013 to address the retroactive application of section 803 to contracts 
that had been awarded before its enactment.

[[Page 31196]]

    FAR 1.108(d) does not expressly prohibit retroactive application of 
FAR changes, but instead states that unless otherwise specified, FAR 
changes apply to solicitations issued on or after the effective date of 
the change. In this instance, however, section 803(c)(2) of the 
National Defense Authorization Act for Fiscal Year 2012 explicitly 
states that that the expanded reach of the compensation cap ``shall 
apply with respect to costs of compensation incurred after January 1, 
2012, under contracts entered into before, on, or after the date of the 
enactment of this Act'' (which was December 31, 2011). Therefore, in 
accordance with the National Defense Authorization Act for Fiscal Year 
2012 and consistent with FAR 1.108(d), the specified effective date for 
this rule is January 1, 2012. The General Dynamics and ATK Launch 
Systems decisions only addressed contracts that predate the enactment 
of the statute; those decisions did not specifically address contracts 
awarded during the period beginning on the date of enactment of the 
underlying statute through the date before implementation of the 
statute in the regulations. The Councils are required to implement the 
statute in the FAR to the maximum extent that is legally permissible.
2. Exceptions for Scientists and Engineers Must Be Addressed
    Comment: One respondent believed that the expansion of the 
executive compensation cap to all contractor employees and the 
exceptions for scientists and engineers must align. Any future Defense 
Federal Acquisition Supplement rule relative to exception for scientist 
and engineers would be in conflict with this interim rule.
    Response: This rule does not prohibit DoD from considering an 
exception for scientists and engineers.
3. Urgent and Compelling Determination Inappropriate
    Comment: One respondent stated that the urgent and compelling 
determination in the preamble was inappropriate. These comments 
included the following:
    (a) The statement in the preamble that urgent and compelling 
reasons exist to issue an interim rule without public comment was 
reached in error because the interim rule does impose reporting, 
recordkeeping, or other information collection requirements.
    (b) The 18-month time period to issue the interim rule is 
inconsistent with the statement that urgent and compelling reasons 
existed to issue the interim rule. If truly urgent and compelling, the 
interim rule would have been issued much sooner.
    Response: There are no reporting or record keeping burdens 
associated with the interim or final rule that require the approval of 
the Office of Management and Budget. The determination to issue the 
interim rule prior to the receipt of public comments was necessary 
because it allowed agencies to immediately implement the requirements 
of the law. The delay in issuing the interim rule was necessary to 
resolve issues in the development of the interim rule and obtain 
necessary clearances. The delay did not alleviate the urgency of 
implementing the rule in the FAR.
4. Impact on Contractors' Ability To Perform
    Comment: One respondent stated that application of an arbitrary cap 
on the compensation of all contractor employees will reduce 
contractors' ability to attract and retain experienced and talented 
individuals and will jeopardize contractors' ability to support 
Government mission critical requirements. The respondent also believed 
that the rule was a disincentive and created a barrier to commercial 
and small businesses entering the Federal Government market. With tight 
profit margins on Federal Government contracts, companies will evaluate 
viability of entering such a market that now imposes executive 
compensation caps which will lower profit margins even more.
    Response: GAO Report 13-566, issued June 2013, ``Defense 
Contractors Information on the Impact of Reducing the Cap on Employee 
Compensation Costs,'' did not draw any conclusions on the impact of 
compensation caps. However, it found that less than .4 percent of 
employees would be affected if the cap were set at the President's 
salary of $400,000 and the vast majority of these would be executive 
employees. Further, using the caps established by the Office of Federal 
Procurement Policy for 2010 through 2012, GAO found that fewer than .1 
percent of employees were affected, all of whom were executive 
employees (page 13 of report). In the case of small businesses 
surveyed, these businesses reported to GAO that they would only be 
minimally affected, or not affected, should the cap be reduced as low 
as $237,700, because they generally did not offer compensation above 
this threshold (page 23 of report). The FAR was revised (by the interim 
rule for this FAR case) to incorporate section 803 of the National 
Defense Authorization Act for Fiscal Year 2012 that mandated the 
expansion of the application of the contractor employee compensation 
cap.
5. Financial Impact on Contractors
    Comment: One respondent commented that this rule will have a direct 
impact on company cash flows that will act as a disincentive to 
contractors considering entering the Government market. Furthermore, 
this rule will lower profit margins and have a negative impact on cash 
flow which will force current contractors out of the Government market 
and weaken the defense industrial base.
    Response: The FAR was revised to implement section 803 of the 
National Defense Authorization Act for Fiscal Year 2012 that mandated 
the expansion of the application of the contractor employee 
compensation cap.
6. Potential To Reduce Industrial Base
    Comment: One respondent believed that application of this rule is 
contrary to Government policy to encourage small business participation 
in the Government market. In fact, contractors are given specific 
requirements for small business participation in Government contracts 
and this rule impacts the ability of contractors to comply with these 
requirements.
    Response: This rule was established to implement the National 
Defense Authorization Act for Fiscal Year 2012. The Councils do not 
anticipate that this rule will have a significant economic impact on a 
substantial number of small businesses.
7. Additional Recordkeeping Requirements
    Comment: Some respondents stated that the statement ``imposes no 
reporting, recordkeeping, or other information collection 
requirements'' is unrealistic since contractors will need to adjust 
their accounting systems to capture data required by this rule and 
maintain more than one billing structure.
    Response: The rule does not contain any additional information 
collection requirements that require the approval of the Office of 
Management and Budget under the Paperwork Reduction Act.

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

[[Page 31197]]

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 E.O. 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

    DoD, GSA, and NASA have prepared a Final Regulatory Flexibility 
Analysis (FRFA) consistent with the Regulatory Flexibility Act, 5 
U.S.C. 601, et seq. The FRFA is summarized as follows:

    DoD, GSA, and NASA do not expect this rule 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, per data from the Federal Procurement Data System for 
fiscal year 2013, most contracts awarded to small entities are 
awarded on a competitive, fixed-price basis, and do not require 
application of the cost principle contained in this rule. With 
extremely few exceptions, compensation to small business employees 
remains below the compensation caps.
    The rule imposes no reporting, recordkeeping, or other 
information collection requirements. The rule does not duplicate, 
overlap, or conflict with any other Federal rules, and there are no 
known significant alternatives to the rule.
    No comments were filed by the Chief Counsel for Advocacy of the 
Small Business Administration in response to the rule and no changes 
were made to the rule.

    Interested parties may obtain a copy of the FRFA from the 
Regulatory Secretariat. The Regulatory Secretariat has submitted a copy 
of the FRFA to the Chief Counsel for Advocacy of the Small Business 
Administration.

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 31 and 52

    Government procurement.

    Dated: May 22, 2014.
William Clark,
Acting Director, Office of Government-wide Acquisition Policy, Office 
of Acquisition Policy, Office of Government-wide Policy.

Interim Rule Adopted As Final Without Change

    Accordingly, the interim rule amending 48 CFR parts 31 and 52 which 
was published in the Federal Register at 78 FR 38535 on June 26, 2013 
is adopted as a final rule without change.

[FR Doc. 2014-12408 Filed 5-29-14; 8:45 am]
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