DFARS Change Notice 20031114

[Federal Register: November 14, 2003 (Volume 68, Number 220)]

[Rules and Regulations]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

DEPARTMENT OF DEFENSE

48 CFR Part 204 and Appendix G to Chapter 2

[DFARS Case 2003-D005]

Defense Federal Acquisition Regulation Supplement; DoD Activity Address Codes in Contract Numbers

AGENCY: Department of Defense (DoD).

ACTION: Final rule.

SUMMARY: DoD has issued a final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to prescribe the use of DoD activity address codes in the first six positions of solicitation and contract numbers. This change provides consistency in the method of identifying DoD activities and eliminates the need for maintenance of the list of DoD activity address numbers in DFARS appendix G.

EFFECTIVE DATE: November 14, 2003.

FOR FURTHER INFORMATION CONTACT: Mr. Euclides Barrera, (703) 602-0296.

SUPPLEMENTARY INFORMATION:

A. Background This rule amends DFARS subpart 204.70 to prescribe the use of a contracting office's DoD activity address code in the first six positions of a solicitation or contract number, instead of the DoD activity address number found in DFARS appendix G. DoD activity address codes are maintained by the Defense Logistics Agency and are available at http://www.daas.dla.mil/daashome/.

This rule removes appendix G from the DFARS, as there is no longer a need for maintenance of DoD activity address numbers. The two-position codes in appendix G, that contracting offices use when placing an order against another activity's contract or agreement, are now available at a separate location on the Defense Acquisition Regulations Web page (http://www.acq.osd.mil/dp/dars/dfars.html). For reference purposes, archived versions of appendix G are available in the HTML version of the DFARS on the Defense Acquisition Regulations Web page, by using the ``Prior Version'' option shown at the beginning of each appendix G part.

DoD published a proposed rule at 68 FR 34879 on June 11, 2003. Four sources submitted comments on the proposed rule. A discussion of the comments is provided below. Differences between the proposed and final rules are addressed in the DoD Response to Comments 1 and 5 below. In addition, DoD has made editorial changes at 204.7005 to update address information.

1. Comment: The text at 204.7000(b) should be revised to clarify that the numbering requirements of DFARS subpart 204.70 do not apply to solicitations and orders that precede issuance of communication service authorizations.

DoD Response: Concur. The text at 204.7000(b) has been revised to incorporate this clarification.

2. Comment: Some of the DoDAACs are not six characters. Will the remaining characters be filled in with zeros? Will this result in duplicate DoDAACs for two different locations?

DoD Response: DFARS subpart 204.70 prescribes use of only those DoDAACs assigned to contracting activities, which are all six characters in length.

3. Comment: The rule should retain the existing language at 204.7000(b) that allows for optional procedures when assigning numbers to solicitations, contracts, and related instruments that will be completely administered by the purchasing office or the consignee. DoD Response: Optional procedures are no longer permitted, as a result of the interim FAR rule published at 68 FR 56679 on October 1, 2003 (FAC 2001-16, Item III), which requires agencies to assign a unique identifier to every procurement instrument.

4. Comment: DFARS 204.7001(b) requires that the basic procurement instrument identification number be unchanged for the life of the instrument. To prevent duplication of call and/or order numbers, this policy should be changed to allow contracting officers to re-issue contracts with new identification numbers for administrative purposes. DoD Response: The comment is outside the scope of this case. However, DoD is considering this concept under a separate case (DFARS Case 2003-D052).

5. Comment: DFARS 204.7002(c) requires that the major elements of a contract number be separated by dashes. This policy is reflective of a paper-based environment and should provide an exception for instances where the contract number is transmitted electronically.

DoD Response: Concur. The final rule amends 204.7002(c) to clarify that use of dashes is unnecessary in electronic transmission of contract numbers.

6. Comment: Does DoD plan to change the numbers of any existing contracts? We presume modifications to long-term contracts would be required to continue to carry the basic contract number. If contract numbers are not changed, the maintenance of DFARS appendix G could not be eliminated.

DoD Response: The rule does not require change to the numbers of existing contracts. This final rule removes appendix G from the DFARS. However, an archived version of appendix G is available through the Defense Acquisition Regulations web page for reference purposes.

7. Comment: Some military bases have multiple DoDAACs. We assume DoD will publish a list of the ones that will be used to identify contracts.

DoD Response: Each DoD component listed in DFARS 204.7005(c) will maintain a list of the DoDAACs it uses for contracts and will provide this information upon request.

8. Comment: DoDAACs should be maintained with the same rigor as the DoDAANs to ensure that shipments and payments are not delayed. DoD Response: The DoD Activity Address File, which contains all DoDAACs, is updated on a daily basis.

This rule was not subject to Office of Management and Budget review under Executive Order 12866, dated September 30, 1993.

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 assignment of solicitation and contract numbers is an administrative function performed by the Government. The rule makes no change to the number of characters in a solicitation or contract number and, therefore, will not have a significant effect on the operation of automated systems.

C. Paperwork Reduction Act The Paperwork Reduction Act does not apply because the 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 Part 204

Government procurement.Michele P. Peterson, Executive Editor, Defense Acquisition Regulations Council.

Therefore, 48 CFR part 204 and appendix G to chapter 2 are amended as follows:

1. The authority citation for 48 CFR part 204 and appendix G to subchapter I continues to read as follows:

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

PART 204--ADMINISTRATIVE MATTERS

2. Section 204.7000 is revised to read as follows:

204.7000 Scope.

This subpart--

(a) Prescribes policies and procedures for assigning numbers to all solicitations, contracts, and related instruments; and

(b) Does not apply to solicitations or orders for communication service authorizations issued by the Defense Information Technology Contracting Organization of the Defense Information Systems Agency in accordance with 239.7407-2.

204.7002 [Amended]

3. Section 204.7002 is amended in paragraph (c) in the second sentence by adding, before the final period, the parenthetical ``(not necessary in electronic transmission)''.

4. Section 204.7003 is amended by revising paragraph (a)(1) to read as follows:

204.7003 Basic PII number.

(a) * * *

(1) Positions 1 through 6. The first six positions identify the department/agency and office issuing the instrument. Use the DoD Activity Address Code (DoDAAC) assigned to the issuing office. DoDAACs can be found at https://www.daas.dla.mil/daashome/.

* * * * *

5. Section 204.7004 is amended in paragraph (d)(2)(i) by revising the second sentence to read as follows:

204.7004 Supplementary PII numbers.

* * * * *

(d) * * *

(2) * * *

(i) * * * The first and second positions contain the call/order code assigned to the ordering office in accordance with 204.7005. * * *

* * * * *

6. Section 204.7005 is added to read as follows:

204.7005 Assignment of order codes.

(a) The Defense Logistics Agency, Acquisition Policy Branch (J-3311), Fort Belvoir, VA 22060-6221, is the executive agent for maintenance of code assignments for use in the first two positions of an order number when an activity places an order against another activity's contract or agreement (see 204.7004(d)(2)). The executive agent distributes blocks of two-character order codes to department/agency monitors for further assignment.

(b) Contracting activities submit requests for assignment of or changes in two-character order codes to their respective monitors in accordance with department/agency procedures. Order code monitors--

(1) Approve requests for additions, deletions, or changes; and

(2) Provide notification of additions, deletions, or changes to--

(i) The executive agent; and

(ii) The executive editor, Defense Acquisition Regulations, OUSD(AT&L)DPAP(DAR), 3062 Defense Pentagon, Washington, DC 20301-3062.

(c) Order code monitors are--

Army: Army Contracting Agency, Attn: SFCA-IT, 5109 Leesburg Pike, Suite 302, Falls Church, VA 22041-3201

Navy and Marine Corps: Office of the Assistant Secretary of the Navy (RD&A), 1000 Navy Pentagon, Room BF992, Washington, DC 20350-1000

Air Force: SAF/AQCX, 1060 Air Force Pentagon, Washington, DC 20330-1060

Defense Logistics Agency: Defense Logistics Agency, Acquisition Policy Branch (J-3311), John J. Kingman Road, Fort Belvoir, VA 22060-6221

Other Defense Agencies: Army Contracting Agency, Attn: SFCA-IT 5109 Leesburg Pike, Suite 302, Falls Church, VA 22041-3201

(d) Order code assignments can be found at http://www.acq.osd.mil/dp/dars/dfars.html

.

Appendix G to Chapter 2 [Removed and Reserved]

7. Appendix G to chapter 2 is removed and reserved.

[Federal Register: November 14, 2003 (Volume 68, Number 220)]

DEPARTMENT OF DEFENSE

48 CFR Parts 204, 212, 213, and 252

[DFARS Case 2003-D040]

Defense Federal Acquisition Regulation Supplement; Central Contractor Registration

AGENCY: Department of Defense (DoD).

ACTION: Interim rule with request for comments.

SUMMARY: DoD has issued an interim rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to remove policy on Central Contractor Registration (CCR) that duplicates policy added to the Federal Acquisition Regulation (FAR) on October 1, 2003. This rule also addresses requirements for use of Commercial and Government Entity (CAGE) codes to accommodate DoD payment systems.

DATES: Effective date: November 14, 2003.

Comment date: Comments on the interim rule should be submitted to the address shown below on or before January 13, 2004, to be considered in the formation of the final rule.

ADDRESSES: Respondents may submit comments directly on the World Wide Web at http://emissary.acq.osd.mil/dar/dfars.nsf/pubcomm. As an alternative, respondents may e-mail comments to: dfars@osd.mil. Please cite DFARS Case 2003-D040 in the subject line of e-mailed comments. Respondents that cannot submit comments using either of the above methods may submit comments to: Defense Acquisition Regulations Council, Attn: Ms. Angelena Moy, OUSD(AT&L)DPAP(DAR), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062; facsimile (703) 602-0350. Please cite DFARS Case 2003-D040.

At the end of the comment period, interested parties may view public comments on the World Wide Web at http://emissary.acq.osd.mil/dar/dfars.nsf.

FOR FURTHER INFORMATION CONTACT: Ms. Angelena Moy, (703) 602-1302.

SUPPLEMENTARY INFORMATION:

A. Background This interim rule supplements the final FAR rule published at 68 FR 56669 on October 1, 2003 (FAC 2001-16; Item I). The FAR rule contained requirements for contractors to register in the CCR database prior to award of any contract or agreement. Similar policy had been in the DFARS since March 31, 1998 (63 FR 15316). Since the DFARS policy has been superseded by the FAR policy, this interim rule removes most DFARS policy pertaining to CCR. However, there is still a need to address requirements for CAGE code information to accommodate DoD payment systems. Therefore, this interim rule retains DoD equirements for inclusion of CAGE codes on contracts and in the CCR database.

This rule was not subject to Office of Management and Budget review under Executive Order 12866, dated September 30, 1993.

B. Regulatory Flexibility Act

DoD does 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 the rule adds no new requirements for DoD contractors. The rule removes DFARS text that has become obsolete as a result of policy that has been added to the FAR, and retains existing DoD requirements for use of CAGE codes. Therefore, DoD has not performed an initial regulatory flexibility analysis. DoD invites comments from small businesses and other interested parties. DoD also will consider comments from small entities concerning the affected DFARS subparts in accordance with 5 U.S.C. 610. Such comments should be submitted separately and should cite DFARS Case 2003-D040.

C. Paperwork Reduction Act

The Paperwork Reduction Act does not apply because the 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.

D. Determination To Issue an Interim Rule A determination has been made under the authority of the Secretary of Defense that urgent and compelling reasons exist to publish an interim rule prior to affording the public an opportunity to comment. This interim rule removes DFARS text that has become obsolete as a result of policy on Central Contractor Registration that was added to the FAR on October 1, 2003. In addition, this rule addresses DoD requirements for inclusion of CAGE codes on contracts and in the CCR database. The FAR does not address CAGE code requirements, and DoD payment offices cannot match to CCR without CAGE code information. Comments received in response to this interim rule will be considered in the formation of the final rule.

List of Subjects in 48 CFR Part 204, 212, 213, and 252

Government procurement. Michele P. Peterson, Executive Editor, Defense Acquisition Regulations Council.

Therefore, 48 CFR parts 204, 212, 213, and 252 are amended as follows:

1. The authority citation for 48 CFR Parts 204, 212, 213, and 252 continues to read as follows:

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

PART 204--ADMINISTRATIVE MATTERS

2. Section 204.203 is revised to read as follows:

Sec. 204.203 Taxpayer identification information.

(b) The procedure at FAR 4.203(b) does not apply to contracts that include the clause at FAR 52.204-7, Central Contractor Registration. The payment office obtains the taxpayer identification number and the type of organization from the Central Contractor Registration database.

Sec. 204.603 [Removed]

3. Section 204.603 is removed.

4. Section 204.904 is amended by revising paragraph (2) introductory text and paragraph (2)(ii) to read as follows:

Sec. 204.904 Reporting payment information to the IRS.

* * * * *

(2) Unless an exception in paragraph (1) of this section applies, provide as the last page of the copy of the contract sent to the payment office--

* * * * *

(ii) The contractor's Taxpayer Identification Number and type of organization, if the contract does not include the clause at FAR 52.204-7, Central Contractor Registration.

Sec. 204.905 [Removed]

5. Section 204.905 is removed.

6. Subpart 204.11 is added to read as follows:

Subpart 204.11--Central Contractor Registration

Sec.

204.1103 Procedures.

204.1104 Solicitation provision and contract clauses.

Sec. 204.1103 Procedures.

(e) On contractual documents transmitted to the payment office, also provide the Commercial and Government Entity code in accordance with agency procedures.

Sec. 204.1104 Solicitation provision and contract clauses.

When using the clause at FAR 52.204-7, Central Contractor Registration, use the clause with 252.204-7004, Alternate A.

7. Section 204.7202-1 is amended by revising paragraph (b)(1) to read as follows:

Sec. 204.7202-1 Cage codes.

* * * * *

(b)(1) If a prospective contractor located in the United States

must register in the Central Contractor Registration (CCR) database

(see FAR Subpart 4.11) and does not have a CAGE code, DLIS will assign

a CAGE code when the prospective contractor submits its request for

registration in the CCR database. Foreign registrants must obtain a

North Atlantic Treaty Organization CAGE (NCAGE) code in order to

register in the CCR database. NCAGE codes may be obtained from the

Codification Bureau in the foreign registrant's country. Additional

information on obtaining NCAGE codes is available at http://www.dlis.dla.mil/Forms/Form_AC135.asp

.

* * * * *

8. Section 204.7207 is amended by revising paragraph (a) to read as follows:

Sec. 204.7207 Solicitation provision.

* * * * *

(a) The solicitation does not include the clause at FAR 52.204-7, Central Contractor Registration; and

* * * * *

Subpart 204.73--[Removed]

9. Subpart 204.73 is removed.

PART 212--ACQUISITION OF COMMERCIAL ITEMS

Sec. 212.301 [Amended]

10. Section 212.301 is amended as follows:

a. By removing paragraphs (b)(2) and (f)(iv); and

b. By redesignating paragraphs (f)(v) and (vi) as paragraphs (f)(iv) and (v) respectively.

PART 213--SIMPLIFIED ACQUISITION PROCEDURES 213.106-3 [Removed]

11. Section 213.106-3 is removed.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

12. Section 252.204-7004 is revised to read as follows:

Sec. 252.204-7004 Alternate A.

Alternate A (Nov 2003)

As prescribed in 204.1104, substitute the following paragraph

(a) for paragraph (a) of the clause at FAR 52.204-7:

(a) Definitions. As used in this clause--

``Central Contractor Registration (CCR) database'' means the primary Government repository for contractor information required for the conduct of business with the Government.

``Commercial and Government Entity (CAGE) code'' means--

(1) A code assigned by the Defense Logistics Information Service (DLIS) to identify a commercial or Government entity; or

(2) A code assigned by a member of the North Atlantic Treaty Organization that DLIS records and maintains in the CAGE master file. This type of code is known as an ``NCAGE code.''

``Data Universal Numbering System (DUNS) number'' means the 9-digit number assigned by Dun and Bradstreet, Inc. (D&B) to identify

unique business entities.

``Data Universal Numbering System +4 (DUNS+4) number'' means the DUNS number assigned by D&B plus a 4-character suffix that may be assigned by a business concern. (D&B has no affiliation with this 4-character suffix.) This 4-character suffix may be assigned at the discretion of the business concern to establish additional CCR records for identifying alternative Electronic Funds Transfer (EFT) accounts (see Subpart 32.11 of the Federal Acquisition Regulation) for the same parent concern.

``Registered in the CCR database'' means that--

(1) The Contractor has entered all mandatory information, including the DUNS number or the DUNS+4 number, into the CCR database;

(2) The Contractor's CAGE code is in the CCR database; and

(3) The Government has validated all mandatory data fields and has marked the records ``Active.''

[Federal Register: November 14, 2003 (Volume 68, Number 220)]

DEPARTMENT OF DEFENSE

48 CFR Part 216

[DFARS Case 2001-D013]

Defense Federal Acquisition Regulation Supplement; Provisional Award Fee Payments

AGENCY: Department of Defense (DoD).

ACTION: Final rule.

SUMMARY: DoD has issued a final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to address the use of provisional award fee payments under cost-plus-award-fee contracts. The rule provides for successfully performing contractors to receive a portion of award fees within an evaluation period prior to a final evaluation for that period.

DATES: Effective date: January 13, 2004.

Applicability date: The DFARS changes in this rule apply to solicitations issued on or after January 13, 2004. Contracting officers may, at their discretion, apply the DFARS changes to solicitations issued before January 13, 2004, provided award of the resulting contract(s) occurs on or after January 13, 2004. Contracting officers may, at their discretion, apply the DFARS changes to any existing contract with appropriate consideration.

FOR FURTHER INFORMATION CONTACT: Mr. Ted Godlewski, USD(AT&L)DPAP(DAR), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062. Telephone (703) 602-2022; facsimile (703) 602-0350. Please cite DFARS Case 2001-D013.

SUPPLEMENTARY INFORMATION:

A. Background This final rule provides for the payment of provisional award fees within an evaluation period prior to a final evaluation for that period. The provisional payments would be based on (1) successful evaluations for prior evaluation periods, and (2) the expectation that payment of provisional fee amounts will not reduce the overall effectiveness of the award fee incentive. A training module on the use of provisional award fee payments is available on the Defense Acquisition University Web site at http://www.dau.mil, under ``Continuous Learning.''

DoD published a proposed rule at 67 FR 70388 on November 22, 2002. Seven respondents submitted comments on the proposed rule. A discussion of the comments is provided below. Differences between the proposed and final rules are explained in the DoD Response to Comments 5 and 10. 1. Comment: The proposed policy appears to conflict with the Defense Finance and Accounting Service (DFAS) DFAS-IN Regulation 37-1, Table 8-1, which states that award fee must not be obligated until its amount is determined. If provisional award fee is allowed, the DFAS regulation should be revised to preclude confusion.

DoD Response: Concur that DFAS may need to review its regulations to determine if revisions are required based on this DFARS rule.

2. Comment: It is not clear what the difference is between doing provisional award fee determinations and simply doing more frequent final award fee determinations. Presumably, the process for doing a provisional award fee payment would not be as formal as that for doing a final award fee determination. Suggest that the policy state that the agency should use a streamlined process for doing a provisional award fee determination.

DoD Response: DoD concurs with using a streamlined process for doing a provisional award fee determination, but this approach (i.e., the payment of part of available award fee without using all the formalities of a full-scale award fee determination) is already implied by the wording of the rule. The rule provides a framework, with the flexibility for contracting officers to implement the rule using processes that best fit their particular business needs.

3. Comment: It may be advisable to establish a ceiling on the amount that may be given as a provisional award fee.

DoD Response: Concur that there should be a ceiling; however, the rule already establishes a ceiling at 216.405-2(b)(3)(B)(1) and (2). The rule states that provisional award fee payments may not exceed 50 percent of the award fee available for the initial award fee period, and may not exceed 80 percent of the evaluation score for the prior evaluation period times the award fee available for the current period. Contracting officers are free to establish lower provisional award fee amounts if they deem it to be in the Government's best interests.

4. Comment: The policy should recognize that provisional award fees might not be feasible or appropriate in all situations. The agency may need to consider the ability of the vendor to provide data on incurred costs. It is common for a vendor with subcontractors to be several months behind in billing. Thus, a provisional determination linked to the value of work performed might be inaccurate. Or if the award fee is based on achievement of a milestone by a particular date, the argument could be made that giving a provisional award fee payment would actually reduce the effectiveness of the incentive. Therefore, the policy should cite examples of situations in which a provisional award fee payment would be appropriate.

DoD Response: Partially concur. DoD agrees that provisional award fee payments may not be feasible or appropriate in all situations and, therefore, should be optional. The rule provides contracting officers the flexibility to determine where and how provisional award fee payments can best be employed. The rule reflects this position at DFARS 216.405-2(b)(3), which states ``The CPAF contract may include provisional award fee payments.'' (emphasis added) However, it is not prudent to cite examples of situations in which a provisional award fee payment would be appropriate, because examples may be misinterpreted as the only situations in which this type of payment may be used.

5. Comment: If the provisional award fee payment process is too informal, it would be subject to abuse or misapplication, e.g., if given without adequate justification or if given based on inaccurate data. This could lead to overpayment of award fee. Therefore, the policy should address recovery of any overpayment (e.g., by setoff or reduction in future award fee payments).

DoD Response: Concur that the rule should address recovery of an overpayment. The proposed rule, at 216.405-2(b)(3)(C), required the contractor to either credit any overpayment on the next payment voucher or refund any overpayment, in accordance with directions from the contracting officer. Since the overpayment is actually a debt due the Government, the final rule contains a change in this paragraph to require the contracting officer to collect the debt in accordance with FAR 32.606, Debt determination and collection.

6. Comment: The rule defeats the purpose of an award fee contract. By giving the contractor provisional payments on a monthly basis, you are in a sense turning an award fee contract into a fixed fee contract. The award fee pool is supposed to be tied to contractor performance, and provisional payments circumvent that by paying out a large percentage of the pool prior to the end of the evaluation period. Where is the incentive to perform? Furthermore, how can a contractor, deemed to have an adequate accounting system to support a cost-type contract, experience cash flow problems, especially when a large business can voucher for allowable costs every two weeks. In addition, has DoD considered the administrative burden of monthly provisional payments on the Government, i.e., monthly modifications?

DoD Response: Provisional award fee payments do not turn an award fee contract into a fixed fee contract. The issue of entitlement is significantly different from the issue of timing. Provisional award fee payments only change the timing of the payments, not the entitlement to those payments. The contractor is incentivized, since the contractor must earn the award fee in exactly the same way as if there were no provisional award fee payments, i.e., entitlement to the award fee continues to be tied to contractor performance. Should the Government determine that the contractor is not entitled to the award fee, the contractor must return the provisional payments to the Government.

As to the observation that contractors can voucher for all allowable costs on cost-type contracts every two weeks, it should be noted that not all unallowable costs are unavoidable. Contractors normally rely on the partial payment of fee for work accomplishment to cover unallowable costs, and to keep them out of a loss position on the contract as a whole. In particular, on high-dollar award fee contracts, the amount of award fee that is being held pending a formal award fee determination can be significant. As such, a standard award fee structure, instead of motivating and rewarding outstanding performance, can be a financial negative for a contractor. Without provisional award fee payments, some contractors may well prefer a smaller fixed fee that they know will arrive on a monthly basis to an award fee that, while possibly larger in amount, will be paid less frequently (e.g., not paid until the end of the award fee period).

The use of provisional award fee payments is entirely optional. Contracting officers may choose to not employ provisional award fee payments when they believe such use would dilute the effectiveness of the award fee in a particular contract, would be an undue administrative burden, or would otherwise not be in the Government's best interests.

7. Comment: Award fee administration is a very time consuming process. In accomplishing performance evaluations, great care is taken to adequately support awarding or withholding of award fee. This effort is done in a very careful, concise, and professional manner to avoid any appearance of arbitrary or capricious application of award fee criterion and to ensure that the contractor receives appropriate consideration for performance efforts.

The ``Background'' information in the Federal Register notice of the proposed rule stated, ``Cost-reimbursement contracts containing award fees typically provide for an award fee payment no more frequently than every 6 months.'' However, the respondent's experience in working with cost-reimbursement contracts is that ``no more frequently'' is more appropriately ``no less frequently.'' Many of these contracts begin with 6-month evaluation periods. As complexity or dollar value increase, evaluation periods are reduced to as low as 3-months (quarterly).

Prior to awarding cost-reimbursement contracts, audits are requested to ensure that the contractor has a financial system in place to support adequately identifying cost and that the company has the financial capability to perform the contract. Normally the proposed award fee periods are identified in a solicitation, putting the contractor on notice of the Government's intent for award fee evaluation. Also, there is no prohibition against a contractor requesting contracting officer consideration for reducing the length of award fee periods should the contractor begin experiencing ``an undue financial burden.''

If a contracting officer implements this rule, it would result in an arbitrary determination of potential award fee earnings based on past performance. This practice would not only increase Government administration of the process, but could potentially allow a contractor the use of Government funds prior to a true determination of actual earnings with no consideration (such as interest) being afforded the Government, should the funds ultimately be credited back to the Government following a proper performance evaluation. Award fee should always be earned, not paid on a credit or assumptive basis in order to fulfill the intended purpose of award fee, which is to incentivize a contractor's performance. Unless the provisional payment is tied to some performance period, it could be construed as a form of advance payment. Also, since other remedies are available should a contractor (probably a large business) experience ``undue financial burden,'' no need exists for this provision.

DoD Response: Do not concur. Provisional award fee payments do not result in an arbitrary determination of potential award fee earnings based on past performance. The issues of entitlement, administrative burden, incentive to perform, and contractor cash flow are addressed in the DoD Response to Comment 6. With respect to the issue of interest on overpayments, as explained in the DoD Response to Comment 5, the final rule requires contractors to return any overpayment in accordance with FAR 32.606. FAR 32.610, Demand for payment of contract debt, states that any amounts not paid within 30 days from the date of the demand for payment will bear interest.

Furthermore, provisional award fee payments are different from advance payments, since the amount of the payment for periods subsequent to the first evaluation period is based on performance in the prior evaluation period.

8. Comment: The pitfalls associated with this proposal are greater than whatever benefits there may be for either party. The concept of award fees was established to provide incentive for performance such that if performance was provided in excess of certain thresholds, an award fee determining official would so declare after review of findings from an award fee board. The proposed change negates the concept of award fee to provide incentive for performance and, instead, establishes a means of cash payment to contractors for reasons other than incentive. In fact, this proposed change does nothing other than to establish cash flow expectations on the part of contractors that bear no relationship to fee earned in current periods until well after such determinations could be made AND related outlays have already been made.

The Government assumes a greater share of risk when using cost-reimbursable contracts, and compensates for this by providing the contractor with frequent billing provisions to cover all aggregated costs and fees incurred in each billing period (usually on a monthly basis). Therefore, contractor cash flow considerations are NOT factors in deciding whether or not to have award fee provisions in the first place, and they are also NOT factors in determinations of performance in award fee periods.

The proposed change, if adopted, would pressure program managers to incorporate these provisions into existing contracts, especially those large systems contracts involving millions of dollars. Such adoption would subsequently give rise to the inherent presumption of entitlement during current award fee periods, even though actual entitlement determinations would not take place until after funds have been disbursed. As a result, additional administrative burdens on top of those already created by award fee provisions would be placed on program managers and contracting officers. This would be especially true in instances cited in proposed DFARS 216.405-2(b)(3)(C).

This change would also create potential legal problems, especially in instances where DFARS 216.405-2(b)(3)(D) would be imposed. How does one protect the contracting officer determination from being appealed as being ``arbitrary and capricious,'' and how would such disputes alter or hinder ongoing contract performance until such matters are resolved?

DoD Response: Do not concur. With respect to the comments on the incentive for performance, cash flow, entitlement, and administrative burden considerations, see the DoD Response to Comment 6.

With respect to the comment on modifying existing contracts to include the requirement for provisional award fee payments, such modification could only be considered if the contracting officer obtained adequate consideration. For future contracts, the rule relies upon agency procedures and contracting officer business judgment to determine if provisional award fee payments are appropriate for a particular contracting environment, rather than a ``one size fits all'' requirement.

As to the respondent's perceived legal problems, the provisional award fee payment requirement falls within the award fee provisions of the contract, including the requirements in the FAR. FAR 16.405-2(a) states ``* * * The amount of the award fee to be paid is determined by the Government's judgmental evaluation of the contractor's performance in terms of the criteria stated in the contract. This determination and the methodology for determining the award fee are unilateral decisions made solely at the discretion of the Government.'' Although the determinations are unilateral, the United States Court of Appeals in Burnside-Ott Aviation Training Center v. Dalton, Secretary of the Navy, 107F.3d 854 (Fed. Cir. 1997), held that disputes concerning the amount of the award fee are subject to the Contract Disputes Act. The Court

also held that award fee determinations could continue to be committed to the discretion of contracting officers under the terms of the contract and would be upheld as long as they were not arbitrary or capricious. Therefore, the rule cannot state that provisional award fee payments are or are not disputable, since that determination may depend on other factors.

This rule does not impose any significant additional risk of litigation. For periods subsequent to the initial evaluation period, the payments are based on the evaluation for the prior period. Thus, provided the prior evaluations are not arbitrary and capricious, there would be little, if any, basis for determining the provisional award fee payments to be arbitrary and capricious.

However, should a dispute arise, such dispute would not alter or hinder ongoing contract performance. Paragraph (i) of the clause at FAR 52.233-1, Disputes, states ``The Contractor shall proceed diligently with performance of this contract, pending final resolution of any request for relief, claim, appeal, or action arising under the contract, and comply with any decision of the Contracting Officer.''

9. Comment. There is a need for an initial assessment of contractor performance by the fee determining official before the contracting officer pays any provisional award fees. This initial assessment can be done during the first interim evaluation. In return (for the initial wait), recommend up to 80% (vice proposed 50%) be awarded. In addition, also recommend that provisional award fee payments apply to fixed-price contracts with award fees.

DoD Response: Do not concur. The role of the fee determining official in the provisional award fee payment process should be determined by the DoD department or agency based on the particular contracting environment. Accordingly, there is no standard guidance on the role of the fee determining official or even a standard award fee clause used throughout DoD. Buying activities may provide implementing guidance to the extent they deem it necessary to provide additional information regarding the role of the fee determining official in the payment of provisional award fees.

Since the contractor's ``track record'' of performance on the contract will be limited for the initial award fee evaluation, it may be difficult to conclude that the contractor's performance for the initial contract period reflects a reasonable expectation of the performance for subsequent periods. Thus, it would not be prudent to build a higher limitation (i.e., 80 percent) for the initial period.

Although DoD does not concur with increasing the ceiling for the initial period, a DoD department or agency may consider granting an individual, one-time deviation to this requirement if the department or agency believes that a specific contract is essentially a continuation of prior contracts for the same item or service and, hence, the 50 percent limitation on the initial provisional payment is not really needed to protect the Government's interests.

As to the use of provisional award fees in fixed-price-award-fee contracts, it should be noted that FAR 16.404(a)(1) indicates that a fixed-price-award-fee contract is a fixed-price contract that already has a normal profit included in the fixed price, which is paid for satisfactory performance. When other types of incentives cannot be used, a separate award fee provision can be added to a fixed-price contract to provide additional motivation and reward to a contractor for various achievements. The rationale that a provisional payment of award fee is necessary in order to allow the contractor to receive some profit or fee on work accomplished is greatly diminished, because a normal profit is already included within the fixed-price-award-fee contract structure. However, it is within a DoD department's or agency's deviation authority, on a one-time basis, to permit the use of provisional award fee payments under a fixed-price-award-fee contract if it is in the best interests of DoD.

10. Comment: The following sentence from the rule (DFARS 216.405-2(b)(3)) is misleading: ``A provisional award fee payment is a payment made within an evaluation period prior to an interim or final evaluation for that period.''

The fee determining official must make a determination that contractor performance warrants payment of the interim award fee amount. This ``interim evaluation'' may be confused with any interim performance evaluations called out in the award fee plan that are not linked to periodic billings (and which may or may not occur before a periodic award fee billing).

Suggest changing the sentence in the rule to read: ``A provisional award fee payment is a payment made within an evaluation period prior to the final determination for that period.''

DoD Response: Concur that the rule may not be clear as to the timing of a provisional award fee payment. The rule was intended to define a provisional award fee payment as any payment made prior to an evaluation for the period. The language in the proposed rule could be misinterpreted to mean that, when provisional payments are used, they must provide for payments prior to any interim evaluation period. The rule is intended to provide flexibility to contracting officers in determining when to permit provisional payments, rather than requiring such payments prior to interim evaluation periods. Therefore, the sentence has been revised to read: ``A provisional award fee payment is a payment made within an evaluation period prior to a final evaluation for that period.''

11. Comment: Recommend DFARS address the following:

a. Contractor's performance must be commensurate with the provisional award fee payment.

b. Contractor shall liquidate the debt as prescribed in FAR 32.6, Contract Debts, for overpayments made to the contractor by the Government.

c. Provisional award fee payment determinations are/are not disputable.

d. Role of the fee determining official in the provisional award fee payment process.

DoD Response:

a. Concur. The proposed rule already contained language at 216.405-2(b)(3)(D) that ties the payment of provisional award fees to the contracting officer's determination that the contractor is performing at an.appropriate level commensurate with the proposed provisional award fee payment. This language has been retained in the final rule.

b. Concur. DoD has added a reference to FAR 32.606 in the final rule at 216.405-2(b)(3)(C). Also see the DoD Response to Comment 5. c. Do not concur. See the DoD Response to Comment 8.

d. Do not concur. See the DoD Response to Comment 9.

12. Comment: The proposed change should not be incorporated as drafted. The reason stated for the change is that cost-reimbursement award fee contracts typically provide for an award fee payment no more frequently than every 6 months and that this may place an undue financial burden on a contractor. This premise seems unfounded. It is hard to rationalize that a contractor faces an undue financial burden under a contract arrangement that provides for the Government to reimburse all allowable contract costs as frequently as every two weeks (FAR 52.216-7, Allowable Cost and Payment). In cost-reimbursement contracts, it is the Government that assumes a greater share of the risk and compensates for this by providing the contractor with frequent billing provisions. Furthermore, contractor cash flow considerations are not factors in determining whether or not to have award fee provisions in the first place and are not factors in determinations of performance in award fee periods.

DoD Response: Do not concur. See the DoD Response to Comment 6.

13. Comment: This change would have the unintended consequence of defeating a prime benefit of an award fee contract. In an award fee type contract, the Government is able to hold the contractor's motivation and focus, since the contractor knows the award fee is not a given and is only obtained through successful performance each and every period. The proposed change diminishes this performance incentive concept and instead establishes a means of cash payment to contractors for reasons other than incentive. In fact, the proposed change does nothing other than to establish cash flow expectations on the part of contractors that bear no relationship to fee earned in current periods until well after such formal determinations and related outlays have been made. Also, there is no mention of base fee in this proposed change. Recommend, if this change is incorporated, that the provisional award fee payment only be used in cost-plus-award-fee contracts with zero base fee.

DoD Response. Do not concur. See the DoD Response to Comment 6 for a discussion of performance incentive and cash flow. Regarding the recommendation that provisional award fee payments only be employed in contracts with zero base fees, the rule leaves that determination to the management discretion of DoD departments and agencies.

14. Comment: Although there are procedures in the proposed rule for reimbursing the Government if the actual award fee determination is less than the provisional payment, the reality is that once received, the contractor is not going to be motivated to give the money back, thus leading to increased probability of disputes and potentially requiring significant additional time and effort to resolve. This type of ``tug of war'' will not add value to the contract administration process or to Government/contractor relationships.

DoD Response: Do not concur. The maximum amount permitted for provisional payments (after the initial payment) is calculated at 80 (not 100) percent of the evaluation score for the prior evaluation period times the award fee available for the current period. Therefore, it is anticipated that a very limited number of provisional award fee payments will be more than the actual award fee determinations for the current period. However, for those limited situations in which there are overpayments, see the DoD Response to Comment 5, which addresses Government procedures for collecting debt, and to Comment 8 for a discussion of contractor disputes.

15. Comment: The change could create potential legal problems when the instances of DFARS 216.405-2(b)(3)(D) are imposed, whereby the contracting officer reduces or discontinues the provisional payment. Since this is proposed as a contracting officer determination, without mention of the award fee board or fee determining official, how does one protect the contracting officer's determination from being appealed as being arbitrary and capricious, and how would such disputes alter or hinder ongoing contract performance until such matters are resolved?

DoD Response: As indicated in the DoD Response to Comment 14, it is anticipated that the overpayment of a provisional award fee payment will happen in a limited number of circumstances. However, when it does occur, it is expected that the contracting officer will have a reasonable basis for making such a decision. When the decision is based on a probability that the contractor is not going to earn the award fee, the contracting officer almost certainly will have obtained input from the award fee board or the fee determining official. However, there could be other instances, such as pending bankruptcy proceedings, which may make it necessary for the contracting officer to act without first consulting the award fee board or the fee determining official. In any case, it is anticipated that the contracting officer will use sound business judgment and will not make an ``arbitrary and capricious'' decision. If there is a dispute, the dispute would not alter or hinder ongoing contract performance, as explained in the DoD Response to Comment 8.

16. Comment: The need for additional documentation and funding tracking will put an additional burden on program offices and may discourage the use of award fee arrangements, since the Government may not believe that the expected benefits are sufficient to warrant the additional effort and cost involved with managing and administering a more resource demanding award fee process. Program offices may also believe that the process of giving the contractor part of the award fee without having the payment tied to an interim evaluation (based on the award fee plan's criteria) dilutes the effectiveness of interim evaluations as motivators for increased performance.

DoD Response: Partially concur. Although this type of payment may be administratively burdensome, its use is entirely optional. However, as explained in the DoD Response to Comment 6, DoD does not concur that provisional award fee payments will dilute the effectiveness of the interim evaluations.

17. Comment: This proposed change blurs the line between a cost-plus-award-fee and a cost-plus-fixed-fee type contract. A cost-plus-award-fee contract should not be used when a cost-plus-fixed-fee contract is more appropriate, but since there is a 15% statutory fee limitation on a cost-plus-fixed-fee contract, but not on a cost-plus-award-fee contract, contractors may use this change as an increased opportunity for optimal fee by pushing the Government to use a cost-plus-award-fee contract when a more appropriate type would be cost-plus-fixed-fee. Because the contract types are distinctively different, the payment of fee on a cost-plus-award-fee contract was not intended to be handled the same way it is handled on a cost-plus-fixed-fee contract. This proposed change moves award fee payment from the realm of subjective evaluation of fee earned to a type of numerical calculation (which is based on projected performance). A policy of interim payments based on assessments of contractor performance and fee determining official concurrence

provides a much better framework than that set forth in the DFARS language.

DoD Response: Do not concur. Provisional award fee payments do not change the contract from a cost-plus-award-fee to a cost-plus-fixed-fee contract. As explained in the DoD Response to Comment 6, provisional award fee payments only change the timing of the payments, not the entitlement to those payments.

Payment of a provisional award fee is not based purely on a numerical calculation. The numerical calculation merely establishes the maximum amount that might be paid as a provisional award fee. The actual amounts of provisional award fee payments are based on the assumption that the contracting officer has determined that those provisional payment amounts are commensurate with the contractor's performance.

The rule does not provide specific procedures or rigid requirements. Thus, contracting officers have significant flexibility to implement provisional award fee payments as they deem appropriate for their particular contracting environments, e.g., using interim payments based on assessments of contractor performance and fee determining official concurrence.

18. Comment: There are some differences between one DoD department's guidance and the proposed DFARS language. For example, DFARS--

a. Does not restrict provisional award fee payments to cost-plus-award-fee contracts with zero base fee;

b. Does not prescribe a monthly payment option;

c. Treats provisional payments almost as a normal business practice, which is appropriate since provisional payments benefit both the contractor and the Government. The contractor gets increased cash flow and the Government gets an increase in expenditures;

d. Does not reference FAR Subpart 32.6 with respect to overpayments;

e. Permits a smaller percentage (i.e., 50 percent) for the initial period;

f. Does not say the contracting officer has the unilateral right to reduce or suspend, but does say payments may be reduced or discontinued; and

g. Does not prescribe provisional award fee payments for fixed-price-award-fee contracts.

DoD Response: Concur that there may be differences between guidance issued by DoD departments and agencies, and the DFARS. DoD departments and agencies will be able to continue using their guidance, provided such guidance does not fall outside the general framework of this DFARS rule. Since the DFARS rule does not provide specific procedures or rigid requirements, DoD departments and agencies have significant flexibility to implement provisional award fee payments as they deem appropriate for their particular contracting environments. This includes specifying when provisional award fee payments are appropriate (e.g., only when there is zero based fee) and the frequency of payments (e.g., monthly, every two months). Zero based fee is also addressed in the DoD Response to Comment 13.

DoD concurs with adding a reference to FAR Subpart 32.6 (see the DoD Response to Comment 5), and that the contracting office has certain unilateral rights (see the DoD Response to Comment 8). DoD does not concur with permitting the use of a percentage rate higher than 50 percent for the initial period (see DoD Response to Comment 9), or to the use of provisional award fee payments for fixed-price-award-fee contracts (see DoD Response to Comment 9).

19. Comment: The Financial Management Regulation and paragraphs 4.1 and 45.2 of the Air Force Material Command Award Fee guide may need to be revised to be consistent with the DFARS rule. Will the DFARS be revised to allow provisional award fee payments and interim payments on fixed-price-award-fee contracts also?

DoD Response: Other regulations and department/agency guidance may need to be revised based on implementation of this DFARS rule. However, as indicated in the DoD Response to Comment 18, DoD departments and agencies will be able to continue using their guidance, provided such guidance does not fall outside of the general framework of this rule.

Regarding the use of provisional award fee payments for fixed-price-award-fee contracts, as noted in the DoD Response to Comment 9, DoD does not concur with revising the DFARS to permit this type of payment under fixed-price-award-fee contracts.

20. Comment: There is concern that the financial incentive/ motivation for outstanding performance will decrease if the contractor is paid a percentage of the potential award fee on a monthly basis prior to any type of formal evaluation/determination. What was once a true incentive contract is now a highbred cost-plus-fixed-fee type contract (with minimum incentive to control costs) with no financial tie into any type of performance based criteria (or at least not until much later in the award fee period).

DoD Response: Do not concur. See the DoD Response to Comment 6.

21. Comment: This puts the Government in a position to deal with additional administrative burden (i.e., modifications to add funding to a contract--as well as documentation to confirm that the contractor is performing successfully on a monthly basis) to pay the contractor a percentage of the award fee on a frequent basis. The intent is to use provisional award fee payments on a case-by-case basis, but will this really be true?

Will the contracting officer authorize the monthly payments unilaterally or will the fee determining official have input on the decision (along with documentation)? If it is a contracting officer determination, what will happen if the contracting officer discontinues the payments and the contractor disputes it? There are also serious concerns over the potential situation of having to collect overpayments if the contractor does not earn the fee determining official's final determination for the period. What happens if the contract is terminated? Or if the contractor files bankruptcy? How will the fiscal year rules apply to overpayments?

The Government is being placed in a position to relieve the financial burden (on a cost contract?) of a contractor. FAR 52.216-7 permits payments on reimbursable costs as frequently as every two weeks. It is difficult to believe that a contractor would be put into an undue financial burden when in this position. Will the contractor be required to provide justification to the Government on their undue financial burden?

If it has been determined that reducing the length of time between award fee periods is not feasible due to contract restraints, recommend that, if any type of partial payment is authorized, it should be tied directly to the interim evaluation based on the contractor successfully completing the evaluated performance criteria (i.e., one-time interim evaluation payment). This could be done approximately mid-point through the award fee period with the remainder of the potential award fee paid to the contractor at the end of the period, based on the fee determining official's final determination.

DoD Response: Do not concur. The use of provisional award fee payments is entirely optional. DoD departments and agencies may choose not to employ provisional award fee payments when they believe such use would dilute the effectiveness of the award fee in a particular contract, is an undue administrative burden, or is otherwise not in the Government's best interests.

Under the rule, provisional award fee payments can be discontinued or reduced as deemed appropriate by the contracting officer. In applying this rule, it is anticipated that the contracting officer will have a reasonable basis for making such a decision. When the decision is based on a probability that the contractor is not going to earn the award fee, the contracting officer almost certainly will have obtained input from the award fee board or fee determining official. However, there could be other instances, such as pending bankruptcy proceedings, which may require the contracting officer to act without first consulting the award fee board or fee determining official. In any case, it is anticipated that the contracting officer will use sound business judgment and not make an arbitrary and capricious decision. For further information, see the DoD Response to Comment 6 (administrative and financial burden), Comment 9 (role of the fee determining official), Comment 8 (contractor disputes), Comment 5 (overpayments), and Comment 10 (timing of provisional payments).

22. Comment: The incentive effect and cash flow benefits of provisional award fee payments will be achieved only if the provisional award fee payment provision is introduced as a customary practice. Fee is paid during performance on cost-plus-fixed-fee and cost-plus-incentive-fee contracts, and it should be the same for cost-plus-award-fee contracts. Since the Government is protected from risk by the terms included in the provisional award fee payment provision, there should be no hesitancy in making its use a customary and desirable incentive feature. Successfully performing contractors should be able to benefit from the improved cash flow that provisional award fee payments facilitate. Establishing criteria that standardize use of the provisional award fee payment, subject to the contracting officer's determination of continued successful performance, will encourage use of this important new provision, while not diminishing the ability of the contracting officer to discontinue or reduce the provisional award fee payment if the contractor's performance warrants a reduction. Recommend changing the last sentence in 216.405-2(b)(3) of the proposed rule to read: ``The contracting officer should include provisional award fee payments in a cost-plus-award-fee contract when the period of performance for the contract exceeds 12 months, provided those payments * * *.''

DoD Response: Do not concur. As indicated in the DoD Response to Comment 4, the rule is optional, because a mandatory requirement to use provisional award fee payments could result in such payments being applied in situations where they would be inappropriate.

23. Comment: DoD should strive to establish parity in how fee is billed for cost-plus-award-fee contracts, compared to how fee is billed under other incentive arrangements. Cost-plus-incentive-fee and fixed-price-incentive contracts both include provisions for billing target fee or profit at a rate consistent with contractor performance. Just as contemplated in the provisional award fee payment approach, there is a provision for adjusting the fee or profit if the contractor's performance is above or below the projected target. In the case of the cost-plus-award-fee contract, where there is no pre-set formula, the best indication of projected performance is the contractor's performance evaluation from prior periods. Successfully performing contractors should continue receiving provisional award fee payments at the level they have demonstrated in prior periods, similar to the target with appropriate adjustments made in cost-plus-incentive-fee and fixed-price-incentive-fee contracts. This approach poses no risk to the Government, since the contracting officer can reduce or eliminate the provisional award fee payment when performance is not commensurate with the provisional payment, and any overpayment is fully recoverable. Such an approach will also simplify administration of the provisional award fee payments. Recommend replacing paragraph 216.405-2(b)(3)(B)(1) of the proposed rule with the following: ``For subsequent award fee periods, the evaluation score for the prior evaluation period shall be used as the provisional award fee payment rate.''

DoD Response: Do not concur. The rule establishes a reasonable outside boundary, i.e., not to exceed 80 percent of the evaluation score for the prior evaluation period, assuming continued contractor performance at current levels of performance. The rule is not intended to create an automatic entitlement to award fee at the same level as that previously earned for the prior evaluation period. In addition, as indicated in the DoD Response to Comment 14, a ceiling of 80 percent should reduce the number of overpayments.

24. Comment: Follow-on contracts represent a continuation of effort from the prior contract. Assuming successful performance on the prior contract, continuation of provisional award fee payments at the same rate experienced on the prior contract is appropriate, instead of reducing the rate to 50% for the first period of the follow-on contract. Suggest the following language be added to 216.405-2(b)(3)(B)(3): ``(3) For follow-on contracts, the rate for the initial period will be the same as that awarded in the last period of the immediately preceding contract.''

DoD Response: Do not concur. See the DoD Response to Comment 9.

25. Comment: The training of the acquisition workforce and industry counterparts is essential for success and for achieving the desired result.

DoD Response: Concur that training is important. A training module on the use of provisional award fee payments is available on the Defense Acquisition University Web site at http://www.dau.mil, under ``Continuous Learning.''

26. Comment: Recommend that DoD initiate the process to make these provisions applicable on a Governmentwide basis through FAR revisions.

DoD Response: Do not concur, since individual agencies (e.g., the National Aeronautics and Space Administration) craft their own versions of award fee provisions, and their own guidance for the use of those provisions. Governmentwide application of this coverage would only be appropriate if it is someday deemed advisable to create a single award fee provision and policy for use by all Government agencies.

This rule was not subject to Office of Management and Budget review under Executive Order 12866, dated September 30, 1993.

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 rule applies only to cost-plus-award-fee contracts. Most contracts awarded to small entities use simplified acquisition procedures or are awarded on a competitive, fixed-price basis.

C. Paperwork Reduction Act The Paperwork Reduction Act does not apply because the 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 Part 216

Government procurement.Michele P. Peterson, Executive Editor, Defense Acquisition Regulations Council.

Therefore, 48 CFR Part 216 is amended as follows:

1. The authority citation for 48 CFR Part 216 continues to read as follows:

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

PART 216--TYPES OF CONTRACTS

2. Section 216.405-2 is amended by adding paragraph (b)(3) to read as follows:

216.405-2 Cost-plus-award-fee contracts.

* * * * *

(b) * * *

(3) The CPAF contract may include provisional award fee payments. A provisional award fee payment is a payment made within an evaluation period prior to a final evaluation for that period. The contracting officer may include provisional award fee payments in a CPAF contract on a case-by-case basis, provided those payments--

(A) Are made no more frequently than monthly;

(B) Are limited to no more than--

(1) For the initial award fee evaluation period, 50 percent of the award fee available for that period; and

(2) For subsequent award fee evaluation periods, 80 percent of the evaluation score for the prior evaluation period times the award fee available for the current period, e.g., if the contractor received 90 percent of the award fee available for the prior evaluation period, provisional payments for the current period shall not exceed 72 percent (90 percent x 80 percent) of the award fee available for the current period;

(C) Are superceded by an interim or final award fee evaluation for the applicable evaluation period. If provisional payments have exceeded the payment determined by the evaluation score for the applicable period, the contracting officer shall collect the debt in accordance with FAR 32.606; and

(D) May be discontinued, or reduced in such amounts deemed appropriate by the contracting officer, when the contracting officer determines that the contractor will not achieve a level of performance commensurate with the provisional payment. The contracting officer shall notify the contractor in writing of any discontinuance or reduction in provisional award fee payments.

* * * * *

[Federal Register: November 14, 2003 (Volume 68, Number 220)][Rules and Regulations

DEPARTMENT OF DEFENSE

48 CFR Parts 208, 210, 219, and 252

[DFARS Case 2002-D003]

Defense Federal Acquisition Regulation Supplement; Competition Requirements for Purchases From a Required Source

AGENCY: Department of Defense (DoD).

ACTION: Final rule.

SUMMARY: DoD has issued a final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to implement section 811 of the National Defense Authorization Act for Fiscal Year 2002 and section 819 of the National Defense Authorization Act for Fiscal Year 2003. Sections 811 and 819 address requirements for conducting market research before purchasing a product listed in the Federal Prison Industries (FPI) catalog, and for use of competitive procedures if an FPI product is found to be noncomparable to products available from the private sector. Section 819 also addresses limitations on an inmate worker's access to information and on use of FPI as a subcontractor.

EFFECTIVE DATE: December 15, 2003.

FOR FURTHER INFORMATION CONTACT: Ms. Michele Peterson, Defense Acquisition Regulations Council, OUSD(AT&L)DPAP(DAR), IMD 3C132, 3062 Defense Pentagon, Washington, DC 20301-3062. Telephone (703) 602-0311; facsimile (703) 602-0350. Please cite DFARS Case 2002-D003.

SUPPLEMENTARY INFORMATION:

A. Background Section 811 of the National Defense Authorization Act for Fiscal Year 2002 (Pub. L. 107-107) added 10 U.S.C. 2410n, providing that (1) before purchasing a product listed in the FPI catalog, DoD must conduct market research to determine whether the FPI product is comparable in price, quality, and time of delivery to products available from the private sector; (2) if the FPI product is not comparable in price, quality, and time of delivery, DoD must use competitive procedures to acquire the product; and (3) in conducting such a competition, DoD must consider a timely offer from FPI for award in accordance with the specifications and evaluation factors in the solicitation.

DoD published an interim rule at 67 FR 20687 on April 26, 2002, to implement section 811 of Public Law 107-107. On December 2, 2002, section 819 of the National Defense Authorization Act for Fiscal Year 2003 (Pub. L. 107-314) amended 10 U.S.C. 2410n to (1) clarify requirements for conducting market research before purchasing a product listed in the FPI catalog; (2) specify requirements for use of competitive procedures or for making a purchase under a multiple award contract if an FPI product is found to be noncomparable to products available from the private sector; (3) specify that a contracting officer's determination, regarding the comparability of an FPI product to products available from the private sector, is not subject to the arbitration provisions of 18 U.S.C. 4124(b); (4) specify that a DoD contractor may not be required to use FPI as a subcontractor; and (5) prohibit the award of a contract to FPI that would allow an inmate worker access to classified or sensitive information.

DoD published a proposed rule at 68 FR 26265 on May 15, 2003, to further implement the requirements of section 811 of Public Law 107-107, to implement section 819 of Public Law 107-314, and to address public comments received in response to the interim rule published on April 26, 2002. A discussion of the comments received in response to the proposed rule published on May 15, 2003, is provided below. DoD has adopted the proposed rule as a final rule without change.

1. Comment: FPI is not a small business concern and should not be permitted to participate in small business set-asides.

DoD Response: Concur that FPI is not a small business concern. The small business set-aside procedures in the rule apply only when an FPI product is found to be noncomparable to private sector products. In these situations, competitive procedures must be used and FPI must be given an opportunity to compete. Because the definition of competitive procedures in 10 U.S.C. 2410n includes procurements conducted in furtherance of the Small Business Act, the DFARS rule permits restriction of the competition to FPI and small business concerns.

2. Comment: The rule should prohibit a Federal contractor from being required to specify FPI products in the designs, specifications, or standards it develops for DoD.

DoD Response: Concur. Section 208.670 of the rule prohibits such an

action.

3. Comment: The rule should clarify that DoD contracts, particularly architect-engineer contracts, should specify that FPI goods must be used to supply DoD unless excepted by 208.602. For example, DoD would not be permitted by law to procure office furniture as part of a consolidated or prime contract for the construction or renovation of a building if such a contracting method is used to preclude the necessity for a comparability determination or competitive procedures under sections 811 and 819.

DoD Response: Concur that consolidation of requirements merely to avoid a comparability determination or competitive procedures would be improper, as would any other action taken to circumvent statutory or regulatory requirements. However, consolidation where appropriate appears to be consistent with 10 U.S.C. 2410(e), which addresses the issue of subcontracting and specifically prohibits DoD from requiring a contractor to use FPI as a subcontractor or supplier. The provisions of 10 U.S.C. 2410(e) are reflected in the rule at 208.670.

4. Comment: A paragraph should be added to 208.670 to state that nothing in that section prohibits FPI from voluntarily entering into a subcontract with, or from being accepted as a subcontractor by, any prime contractor doing business with a DoD component.

DoD Response: Nothing in the rule precludes FPI from acting as a subcontractor. Specific mention of this subject in the rule is unnecessary.

5. Comment: The rule should clarify that use of multiple award schedule contracts is a legitimate competitive procedure.

DoD Response: This point is clear from the definition of ``competitive procedures'' at 208.601-70, which permits use of the procedures in FAR 6.102, to include the use of multiple award schedule contracts.

6. Comment: The first sentence of 208.602(a)(i) should make it clear that it is mandatory for contracting officers to conduct market research before purchasing a product listed in the FPI Schedule.

DoD Response: The first sentence of 208.602(a)(i) is an imperative statement and is clearly mandatory.

7. Comment: The way the rule is written, if FPI's product is found to be noncomparable in price, quality, and delivery time, FPI is given a second chance to meet these criteria through the competition phase. The rule should be revised to eliminate the second redundant step.

DoD Response: Do not concur. The two-step process is consistent with 10 U.S.C. 2410n(b), which clearly establishes an ``if-then'' situation, i.e., if DoD makes a noncomparability determination, then competitive procedures must be used.

8. Comment: The rule should emphasize the two-step nature of the procedures, add a definition of ``comparable'' to 208.601-70, and clarify that DoD purchasers may request waiver if an FPI product has been determined to be comparable.

DoD Response: The rule is clear with regard to the two-step nature of the procedures. A definition of ``comparable'' is unnecessary, as this term is already used throughout the FAR and DFARS with its common dictionary meaning. If an FPI product is determined to be comparable to a private sector product, the rule requires use of the procedures in FAR subpart 8.6, which addresses clearance/waiver provisions. It is unnecessary to repeat these provisions in the DFARS.

9. Comment: The requirement for a written comparability determination takes discretion away from the contracting officer and should be eliminated.

DoD Response: Do not concur. It is common business practice to document the decision-making process.

10. Comment: The ``unilateral decision'' language at 208.602(a) should be removed. It does not provide any guidance to contracting officers in exercising their discretion.

DoD Response: Do not concur. This language clarifies the contracting officer's role in the determination process and is consistent with the provisions of 10 U.S.C. 2410n(d).

11. Comment: The rule should include language requiring FPI to adhere to its contractual obligations to the same extent as any other DoD contractor.

DoD Response: Concur that FPI should be held accountable for its performance. In accordance with FAR 8.607, the Government may collect past performance information for use in supporting a clearance request for future purchases. However, it is unnecessary to address this issue in this DFARS rule.

12. Comment: The rule overlooks the statutory requirement to give NIB second priority, behind FPI, for sales of products to the Government. The language at 208.602(a)(iv) should be revised to state that in the event that FPI is found to be non-comparable, JWOD products would be given first priority; if the product is not on the JWOD Procurement List, then competitive procedures may be used.

DoD Response: Do not concur. In accordance with 41 U.S.C. 48, NIB is given priority only if the required supplies or services are not available from FPI. If FPI can fulfill the requirement, even though it is determined to be noncomparable, 10 U.S.C. 2410n requires use of competitive procedures that include FPI.

13. Comment: The requirement in 208.602(a)(iv)(C)(1), to ``Establish and communicate to FPI the requirements and evaluation factors that will be used as the basis for selecting a source, so that an offer from FPI can be evaluated on the same basis as the schedule holder'' is too solicitous of FPI, exceeds the requirements of the law, and should be removed.

DoD Response: Do not concur. Since a formal solicitation will not be issued for purchases made using multiple award schedules, there must be a means of communicating this information to enable FPI to compete in accordance with 10 U.S.C. 2410n.

14. Comment: The language at 208.602(a)(iv) should specify how FPI will be notified of a solicitation.

DoD Response: Do not concur. This level of detail is more appropriately left to the discretion of the contracting officer.

15. Comment: The FPI Board of Directors adopted a resolution that directs FPI to grant waivers in all cases where the private sector provides a lower price for a comparable product that FPI does not meet. The rule should clarify that, because of sections 811 and 819, DoD contracting officers are exempt from this resolution and are therefore not required to obtain a waiver from FPI.

DoD Response: Section 208.606 of the rule provides a blanket exception from FPI clearance requirements, to apply when a contracting officer determines that an FPI product is not comparable to private sector products and the procedures at 208.602(a)(iv) are used. A specific exemption from the Board of Directors resolution is unnecessary.

16. Comment: The initial regulatory flexibility analysis concluded that the rule could benefit small business concerns that offer products comparable to FPI. The analysis should also consider and include the impact on FPI and the small business concerns that support FPI.

DoD Response: Concur. The final regulatory flexibility analysis addresses FPI and the small business concerns that provide supplies and services to FPI.

This rule was subject to Office of Management and Budget review under Executive Order 12866, dated September 30, 1993.

B. Regulatory Flexibility Act

This rule may 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 will permit small entities to compete with FPI for DoD contract awards under certain conditions. A final regulatory flexibility analysis has been prepared and is summarized as follows:

This rule amends DoD policy pertaining to the acquisition of products from FPI. The rule implements 10 U.S.C. 2410n. The net effect of the rule is unknown at this time. The rule is expected to benefit small business concerns that offer products comparable to those listed in the FPI catalog, by permitting those concerns to compete for DoD contract awards. The rule could also have a negative impact on small business concerns that provide supplies or services to FPI in support of its products. There are no known significant alternatives to the rule that would meet the requirements of 10 U.S.C. 2410n.

A copy of the analysis may be obtained from the point of contact specified herein.

C. Paperwork Reduction Act

The Paperwork Reduction Act does not apply because the 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 208, 210, 219, and 252

Government procurement. Michele P. Peterson, Executive Editor, Defense Acquisition Regulations Council.

Accordingly, the interim rule amending 48 CFR parts 208 and 210 which was published at 67 FR 20687 on April 26, 2002, is adopted as a final rule with the following changes:

1. The authority citation for 48 CFR parts 208, 210, 219, and 252 continues to read as follows:

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

PART 208--REQUIRED SOURCES OF SUPPLIES AND SERVICES

2. Section 208.601-70 is added to read as follows:

208.601-70 Definitions.

As used in this subpart--

Competitive procedures includes the procedures in FAR 6.102, the set-aside procedures in FAR subpart 19.5, and competition conducted in accordance with FAR part 13.

Market research means obtaining specific information about the price, quality, and time of delivery of products available in the private sector and may include techniques described in FAR 10.002(b)(2).

3. Sections 208.602 and 208.606 are revised to read as follows:

208.602 Policy.

(a)(i) Before purchasing a product listed in the FPI Schedule, conduct market research to determine whether the FPI product is comparable to products available from the private sector that best meet the Government's needs in terms of price, quality, and time of delivery (10 U.S.C. 2410n). This is a unilateral determination made at the discretion of the contracting officer. The procedures of FAR 8.605 do not apply.

(ii) Prepare a written determination that includes supporting rationale explaining the assessment of price, quality, and time of delivery, based on the results of market research comparing FPI products to those available from the private sector.

(iii) If the FPI product is comparable, follow the policy at FAR 8.602(a).

(iv) If the FPI product is not comparable in one or more of the areas of price, quality, and time of delivery--

(A) Acquire the product using--

(1) Competitive procedures; or

(2) The fair opportunity procedures in FAR 16.505, if placing an order under a multiple award task or delivery order contract;

(B) Include FPI in the solicitation process and consider a timely offer from FPI for award in accordance with the requirements and evaluation factors in the solicitation, including solicitations issued using small business set-aside procedures; and

(C) When using a multiple award schedule issued under the procedures of FAR subpart 8.4--

(1) Establish and communicate to FPI the requirements and evaluation factors that will be used as the basis for selecting a source, so that an offer from FPI can be evaluated on the same basis as the schedule holder; and

(2) Consider a timely offer from FPI.

208.606 Exceptions.

For DoD, FPI clearances also are not required when--

(1) The contracting officer makes a determination that the FPI product is not comparable to products available from the private sector that best meet the Government's needs in terms of price, quality, and time of delivery; and

(2) The procedures at 208.602(a)(iv) are used.

4. Sections 208.670 and 208.671 are added to read as follows:

208.670 Performance as a subcontractor.

Do not require a contractor, or subcontractor at any tier, to use FPI as a subcontractor for performance of a contract by any means, including means such as--

(a) A solicitation provision requiring a potential contractor to offer to make use of FPI products or services;

(b) A contract specification requiring the contractor to use specific products or services (or classes of products or services) offered by FPI; or

(c) Any contract modification directing the use of FPI products or services.

208.671 Protection of classified and sensitive information.

Do not enter into any contract with FPI that allows an inmate worker access to any--

(a) Classified data;

(b) Geographic data regarding the location of--

(1) Surface and subsurface infrastructure providing communications or water or electrical power distribution;

(2) Pipelines for the distribution of natural gas, bulk petroleum products, or other commodities; or

(3) Other utilities; or

(c) Personal or financial information about any individual private citizen, including information relating to such person's real property however described, without the prior consent of the individual.

PART 219--SMALL BUSINESS PROGRAMS

5. Section 219.502-70 is added to read as follows:

219.502-70 Inclusion of Federal Prison Industries, Inc.

When using competitive procedures in accordance with 208.602(a)(iv), include Federal Prison Industries, Inc. (FPI), in the solicitation process and consider a timely offer from FPI.

6. Section 219.508 is added to read as follows:

219.508 Solicitation provisions and contract clauses.

(c) Use the clause at FAR 52.219-6, Notice of Total Small Business

Set-Aside, with 252.219-7005, Alternate A, when the procedures of 208.602(a)(iv) apply to the acquisition.

(d) Use the clause at FAR 52.219-7, Notice of Partial Small Business Set-Aside, with 252.219-7006, Alternate A, when the procedures of 208.602(a)(iv) apply to the acquisition.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

7. Sections 252.219-7005 and 252.219-7006 are added to read as follows:

252.219-7005 Alternate A.

Alternate A (Dec 2003)

As prescribed in 219.508(c), substitute the following paragraph (b) for paragraph (b) of the clause at FAR 52.219-6:

(b) General. (1) Offers are solicited only from small business concerns and Federal Prison Industries, Inc. (FPI). Offers received from concerns that are not small business concerns or FPI shall be considered nonresponsive and will be rejected.

(2) Any award resulting from this solicitation will be made to either a small business concern or FPI.

252.219-7006 Alternate A.

Alternate A (Dec 2003)

As prescribed in 219.508(d), add the following paragraph (d) to the clause at FAR 52.219-7:

(d) Notwithstanding paragraph (b) of this clause, offers will be solicited and considered from Federal Prison Industries, Inc., for both the set-aside and non-set-aside portion of this requirement.

End of DFARS Change Notice 20031114