[Federal Register Volume 76, Number 180 (Friday, September 16, 2011)]

[Rules and Regulations]

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

[FR Doc No: 2011-23782]

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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 203 and 252

[DFARS Case 2010-D026]

RIN 0750-AG98

Defense Federal Acquisition Regulation Supplement; Display of DoD Inspector General Fraud Hotline Posters

AGENCY: Defense Acquisition Regulations System, Department of Defense (DoD).

ACTION: Final rule.

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SUMMARY: DoD is issuing a final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to require contractors to display the DoD fraud hotline poster in common work areas.

DATES: Effective Date: September 16, 2011.

FOR FURTHER INFORMATION CONTACT: Ms. Meredith Murphy, 703-602-1302.

SUPPLEMENTARY INFORMATION:

I. Background

This final rule implements the recommendations of the DoD Inspector General (IG) by providing a DFARS clause to use in lieu of the FAR clause at 52.203-14, Display of Hotline Poster(s).

Government Accountability Office (GAO) Report GAO-09-591, entitled ``Defense Contracting Integrity: Opportunities Exist to Improve DoD's Oversight of Contractor Ethics Programs,'' recommended that the DoD IG determine the need for defense contractors to display the DoD IG's fraud hotline poster.

The DoD IG determined that DoD contractors, including contractors that have an ethics and compliance program that includes a reporting mechanism such as a hotline poster, need to display DoD fraud hotline posters in a common work area within business segments performing work under the contract and at contract work sites.

FAR 52.203-14(c) states that ``(i)f the Contractor has implemented a business ethics and conduct awareness program, including a reporting mechanism, such as a hotline poster, then the Contractor need not display any agency fraud hotline posters, other than any required DHS posters.'' The DoD IG determined that this exemption has the potential to make the DoD hotline program less effective by ultimately reducing contractor exposure to DoD IG fraud hotline posters and diminishing the means by which fraud, waste, and abuse can be reported under the protection of Federal whistleblower protection laws. According to the DoD IG, some contractors' posters may not be as effective as the DoD poster in advertising the hotline number, which is integral to the fraud program. The DoD IG is also revising the DoD IG fraud hotline poster to inform contractor employees of their Federal whistleblower protections.

Therefore, the prescription for use of the new DFARS clause provides no exception to the use of the DoD hotline poster for contractors that have implemented a business ethics and conduct awareness program, even those that include a reporting mechanism such as a hotline poster.

II. Discussion and Analysis

DoD published a proposed rule at 76 FR 13327 on March 11, 2011, to implement the DoD IG's policy. Nine respondents submitted 25 public comments on the proposed rule. The comments are summarized and discussed in the following paragraphs.

A. Supportive Comments

Comments: Four respondents supported the DFARS rule, stating that it would assist employees in reporting fraud, waste, and abuse and might promote qui tam suits. Two respondents recommended expanding the rule's applicability by (1) Lowering the threshold or (2) making it applicable to U.S.-owned and -operated firms that perform overseas.

Response: DoD acknowledges the respondents' support. DoD declines to expand the rule's applicability because the prescription and conditions for the use of the hotline poster in DoD contracts are exactly those prescribed at FAR 3.1004(b) for the inclusion of the FAR clause at 52.203-14, Display of Hotline Poster(s). The respondents did not provide rationale supporting the proposed further expansion of requirements to use the DoD IG hotline poster clause.

B. Requirement To Post the DHS Hotline Poster

Comments: One respondent asked that the DFARS Procedures, Guidance and Information (PGI), include guidance on obtaining relevant information to be inserted in the clause regarding the title of the applicable Department of Homeland Security (DHS) fraud hotline poster and Web site(s) or other contact information. Another respondent, however, stated that the requirement, at 252.203-700X(b)(ii) of the proposed rule, to display the DHS fraud hotline posters, is unnecessary for several reasons. It is unlikely, according to the respondent, that DoD would be awarding DHS contracts for disaster recovery, and the coverage at FAR 52.203-14 relating to the display of DHS fraud hotline posters does not need to be duplicated in the DFARS.

Response: There is a reason to include in the DFARS clause a requirement to use the DHS fraud hotline poster when DHS disaster relief funding is added to a DoD contract. The DoD clause prescription has been expanded (at 203.1004(b)(2)(ii)) to explain that information regarding the DHS hotline poster is needed only when DHS disaster relief funding is added to the DoD contract. In most cases, there is no need to display the DHS hotline poster and, therefore, no need to include in the clause information about where to obtain the DHS poster. Adding this clarification to the DFARS clause prescription removes any need to add PGI guidance on relevant information regarding the applicable DHS fraud hotline poster and Web sites or other contact information.

C. Rule Does Not Pass a Cost/Benefit Analysis

Comments: Five comments were received on this issue. One respondent remarked that the new requirement will be unnecessarily burdensome with little, if any, commensurate benefit. The respondent called the rule ``an example of the stacking of regulations within and across agencies that increases the burden without any apparent benefit to achieving the mission.'' Three other respondents made essentially the same point, one suggesting that the rule could be viewed as an unintentional but unfortunate effort by DoD to discourage contractors from implementing rigorous internal mechanisms for dealing with compliance concerns. A respondent suggested that the proposed rule ignored the significant change already made to the FAR that requires mandatory reporting to the agency IG if the contractor has credible evidence of a violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity, or a violation of the civil False Claims Act in connection with Government contracts (see FAR 3.1003(b)).

According to one respondent, many company employee hotline reports simply disclose a concern about an activity or behavior without the employee knowing whether it violates only company policy or some Government contract provision or law. Posting the DoD IG hotline poster will confuse employees, asserted the respondent, and will result in company employees not reporting potentially valuable information to anyone.

Response: A requirement to hang a free poster in work areas does not appear to be measurably burdensome. Further, the DoD poster contains a prominent location for inclusion of the contractor's own fraud hotline number and does not preclude or preempt posting of a contractor's separate fraud hotline poster. As to any additional burden on the DoD IG, that office has weighed the potential cost and elected this approach.

D. Replaces the Contractor as the First Line of Defense Against Waste and Fraud

Comments: One respondent stated that this change would seriously undermine the role company hotline posters have in internal contractor compliance and ethics programs. The respondent noted that these company programs have a proven track record of inhibiting improper and/or illegal behavior. This respondent and one other respondent expressed concern that, from a purely practical perspective, removing the exemption and requiring the use of the DoD hotline posters will usurp the company's position as the first line of defense against waste and fraud and, instead, place the DoD/IG in that role.

Response: There is no intent to replace the company hotline poster. This rule supplements the Government defense against fraud, waste, and abuse.

E. Will Result in Inefficiencies for Both Contractors and the DoD IG

Comments: Five comments were received from two respondents. A respondent concluded that posting the DoD IG fraud hotline poster will result in the DoD IG becoming involved in matters of an urgent nature, as well as a significant number of day-to-day issues. Both respondents pointed out that the majority of the matters reported to company hotlines are human resource-related issues that have little or nothing to do with the direct performance and final deliverables under DoD-funded contracts and subcontracts. The respondents were concerned that, if such matters are reported through the DoD IG fraud hotline rather than directly to the contractor, the latter will be left to learn about them from the DoD IG and will be unable to respond quickly, which ultimately will have a negative impact on employee morale. Further, display of the DoD IG fraud hotline posters, according to a respondent, will assuredly result in the DoD IG being quickly drawn into a myriad of personnel and related issues, thus bogging down the system. The respondents considered that result to be against the best interests of both DoD and its contractors.

The respondents also noted that, if employees choose to contact the DoD IG hotline regarding more serious potential workplace-safety or product-quality matters, the contractor may not learn about these matters in a timely manner, thereby increasing the possibility of injury or deficient product quality. The respondents suggested that directly inserting the DoD IG into these matters could potentially result in DoD ``taking on some measure of responsibility for failing to respond in a timely manner.'' One of the respondents quoted the GAO report as recognizing these potential issues:

``* * * there might be practical reasons for continuing to exempt some defense contractors with their own hotlines from displaying DOD's hotline poster, such as avoiding the confusion or duplication that could occur with too many hotline posters on display in one place * * *''

Response: This rule provides contractor employees with more than one option for reporting matters of concern. Further, the Office of the DoD IG advises that its fraud hotline is adequately staffed with personnel trained to recognize and react appropriately to reports with the potential to affect safety or quality. They further advise that the staff is trained to distinguish between routine personnel issues and those that impact Government contracts.

F. Unnecessary Because of Contractors' Existing Duty

Comments: Four respondents raised issues on this subject. One respondent pointed out that contractors already have existing contractual and regulatory duties to notify the Government of certain significant events that occur in connection with contract performance. Another respondent stated that the requirement is likely to lead to confusion as to appropriate reporting channels and mechanisms. The respondents asserted that defense industry and research institutions, as well as other segments of DoD's contracting community, take most seriously the responsibility to self-report or voluntarily disclose violations to the Government. Contractors also take very seriously the need to have open and accessible reporting mechanisms and respond expeditiously and thoroughly to matters raised through those reporting mechanisms. Creating an alternate reporting mechanism without the same level of accountability as the contractor's in-house or external reporting mechanism, according to respondents, adds no value to the process and undermines existing systems, processes, and programs already in place. A respondent took issue with the DoD IG implication, made in the background section of the proposed rule (76 FR 13328, March 11, 2011), that reports made to a contractor hotline diminished the protections available under Federal whistleblower-protection laws. This respondent expressed the strong belief that adequate provisions ensure that employees who in good faith report information to a company hotline, but who are not themselves culpable, have full whistleblower protection for their disclosures.

Response: For those contractors that have existing internal compliance programs with a fraud hotline number, the posting of the DoD IG fraud hotline poster supplements the existing reporting mechanisms. A contractor's existing duty to self-report or voluntarily disclose violations to the Government is not preempted by posting the DoD IG fraud hotline poster.

G. Exclusions and Flowdown Requirement

Comments: One respondent expressed strong support for the $5 million threshold and the exclusions provided for prime contracts that are for commercial items or that will be performed entirely outside the U.S. This respondent also strongly supported the $5 million threshold for flowdown of the requirement to subcontracts, as well as the exclusion from the flowdown requirement for subcontracts that are for commercial items or that will be performed entirely outside the U.S. However, the respondent recommended that the flowdown requirement be further limited to first-tier subcontracts.

Response: DoD has adopted the same criteria for flowdown of the new clause at DFARS 252.203-7004, Display of Fraud Hotline Posters, as is used for the comparable clause at FAR 52.203-14, Display of Hotline Posters. Because DoD is using DFARS 252.203-7004 in lieu of the clause at FAR 52.203-14, DoD has retained the same criteria for flowdown to subcontractors.

H. Allow Electronic, as an Alternate to Physical, Display of Poster

Comment: A respondent noted that the nature of the workplace has changed significantly, making the requirement to display the DoD IG hotline poster in traditional office locations less effective than it might have been in the past. The respondent, noting that the clause at FAR 52.203-14 already requires each company to display the hotline poster on the company's Web site, if a Web site is maintained, recommended that the DFARS final rule allow electronic posting to satisfy the regulatory requirement to ``display the hotline poster in common work areas.''

Response: The DFARS coverage specifically requires electronic display, if the contractor maintains a Web site, in addition to physical display. These are the same posting rules as are used in the comparable FAR clause, 52.203-14, Display of Fraud Hotline Posters.

III. Executive Orders 12866 and 13563

Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This is not a significant regulatory action and, therefore, was not 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 does not expect this final 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 requirement to display posters has minimal economic impact and the rule only applies to contracts and subcontracts that exceed $5 million in value, so few small business concerns are impacted. However, a final regulatory flexibility analysis has been performed and is summarized as follows:

This rule was initiated in response to a Government Accountability Office (GAO-09-591) recommendation that the DoD IG should determine the need for defense contractors to display the DoD IG's fraud hotline poster. The DoD IG subsequently determined that DoD contractors, including contractors with an ethics and compliance program that includes a reporting mechanism such as a hotline poster (currently exempt), need to display DoD fraud hotline posters in a common work area within business segments performing work under the contract and at contract work sites.

The final rule does not include an exemption for DoD contractors to post their own company posters instead of the DoD IG hotline poster and requires all DoD contractors with contracts that exceed $5 million to post the DoD IG fraud hotline poster. The DoD IG determined that this FAR exemption to the posting of an agency's fraud hotline poster had the potential to make the DoD IG hotline program less effective by ultimately reducing contractor exposure to DoD IG fraud hotline posters and diminishing the means by which fraud, waste, and abuse can be reported under the protection of Federal whistleblower protection laws. The DOD IG further determined that some contractors' posters may not be as effective as the DoD poster in advertising the hotline number, which is integral to the DoD fraud program. The legal basis for the rule is 41 U.S.C. 1303 and 48 CFR chapter 1.

The rule applies to all contractors with DoD contracts with a value that exceeds $5 million. Many small businesses, therefore, are not impacted.

Paragraph (c) of the clause at FAR 52.203-14 provides that a contractor need not display any agency fraud hotline posters (other than required DHS posters) if the contractor has implemented a business ethics and conduct awareness program that includes a reporting mechanism such as a hotline poster. The DFARS rule differs only in that it removes this FAR exemption.

There is no reporting or recordkeeping requirement established by this rule. The rule does not duplicate, overlap, or conflict with any other Federal rules. There are no alternatives that would achieve the objectives of the final rule. No comments were received on the small business impact in response to the initial regulatory flexibility analysis.

Interested parties may obtain a copy of the final regulatory flexibility analysis (FRFA) from the point of contact named herein. A copy of the FRFA has been submitted to the Chief Counsel for Advocacy of the Small Business Administration.

V. Paperwork Reduction Act

The 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 203 and 252

Government procurement.

Ynette R. Shelkin,

Editor, Defense Acquisition Regulations System.

Therefore, 48 CFR parts 203 and 252 are amended as follows:

1. The authority citation for 48 CFR parts 203 and 252 continues to read as follows:

Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.

PART 203--IMPROPER BUSINESS PRACTICES AND PERSONAL CONFLICTS OF INTEREST

2. Amend section 203.1004 by revising paragraph (b)(2)(ii) to read as follows:

203.1004 Contract clauses.

(a) * * *

(b)(2)(ii) Unless the contract is for the acquisition of a commercial item or will be performed entirely outside the United States, if the contract exceeds $5 million, use the clause at 252.203-7004, Display of Fraud Hotline Poster(s), in lieu of the clause at FAR 52.203-14, Display of Hotline Poster(s). If the Department of Homeland Security (DHS) provides disaster relief funds for the contract, DHS will provide information on how to obtain and display the DHS fraud hotline poster.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

3. Add section 252.203-7004 to read as follows:

252.203-7004 Display of fraud hotline poster(s).

As prescribed in 203.1004(b)(2)(ii), use the following clause:

Display of Fraud Hotline Poster(s) (Sep 2011)

(a) Definition. United States, as used in this clause, means the 50 States, the District of Columbia, and outlying areas.

(b) Display of fraud hotline poster(s).

(1) The Contractor shall display prominently in common work areas within business segments performing work in the United States under Department of Defense (DoD) contracts DoD fraud hotline posters prepared by the DoD Office of the Inspector General. DoD fraud hotline posters may be obtained from the DoD Inspector General, Attn: Defense Hotline, 400 Army Navy Drive, Washington, DC 22202-2884.

(2) If the contract is funded, in whole or in part, by Department of Homeland Security (DHS) disaster relief funds, the DHS fraud hotline poster shall be displayed in addition to the DoD fraud hotline poster. If a display of a DHS fraud hotline poster is required, the Contractor may obtain such poster from:

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[Contracting Officer shall insert the appropriate DHS contact information or website.]

(3) Additionally, if the Contractor maintains a company website as a method of providing information to employees, the Contractor shall display an electronic version of the poster(s) at the website.

(c) Subcontracts. The Contractor shall include the substance of this clause, including this paragraph (c), in all subcontracts that exceed $5 million except when the subcontract--

(1) Is for the acquisition of a commercial item; or

(2) Is performed entirely outside the United States.

(End of clause)

[FR Doc. 2011-23782 Filed 9-15-11; 8:45 am]

BILLING CODE 5001-08-P

[Federal Register Volume 76, Number 180 (Friday, September 16, 2011)]

[Rules and Regulations]

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

[FR Doc No: 2011-23630]

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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 209, 216, and 252

[DFARS Case 2011-D033]

RIN-0750-AH37

Defense Federal Acquisition Regulation Supplement; Award Fee Reduction or Denial for Health or Safety Issues

AGENCY: Defense Acquisition Regulations System, Department of Defense (DOD).

ACTION: Interim rule.

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SUMMARY: DoD is issuing an interim rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to implement those sections of the National Defense Authorization Acts (NDAA) for Fiscal Years (FY) 2011 and 2010 providing increased statutory authorities to reduce or deny award fees to companies found to jeopardize the health or safety of Government personnel and adding a mechanism to decrease or eliminate a contractor's award fee for a specific performance period. In addition, this rule modifies the section of the NDAA for FY 2009 that requires that information on the final determination of award fee be entered into the Federal Awardee Performance and Integrity Information System (FAPIIS).

DATES: Effective Date: September 16, 2011.

Applicability Date: This interim rule is applicable to any contract entered into on or after the effective date. This interim rule is applicable to any task order or delivery order issued on or after the effective date of this interim rule, under a contract entered into before, on, or after the effective date.

Comments Date: Comments on the interim rule should be submitted in writing to the address shown below on or before November 15, 2011 to be considered in the formation of the final rule.

ADDRESSES: Submit comments identified by DFARS Case 2011-D033, using any of the following methods:

Regulations.gov: http://www.regulations.gov. Submit comments via the Federal eRulemaking portal by entering ``DFARS Case 2011-D033'' under the heading ``Enter keyword or ID'' and selecting ``Search.'' Select the link ``Submit a Comment'' that corresponds with ``DFARS Case 2011-D033.'' Follow the instructions provided at the ``Submit a Comment'' screen.

Please include your name, company name (if any), and ``DFARS Case 2011-D033'' on your attached document. Follow the instructions for submitting comments.

E-mail: dfars@osd.mil. Include DFARS Case 2011-D033 in the subject line of the message.

Fax: 703-602-0350.

Mail: Defense Acquisition Regulations System, ATTN: Meredith Murphy, OUSD (AT&L) DPAP/DARS, Room 3B855, 3060 Defense Pentagon, Washington, DC 20301-3060. Comments received generally will be posted without change to http://www.regulations.gov, including any personal information provided. To confirm receipt of your comment(s), please check http://www.regulations.gov approximately two to three days after submission to verify posting (except allow 30 days for posting of comments submitted by mail).

FOR FURTHER INFORMATION CONTACT: Meredith Murphy, telephone 703-602-1302.

SUPPLEMENTARY INFORMATION:

I. Background

An interim rule was published in the Federal Register under DFARS Case 2009-D039, Award-Fee Reductions for Health and Safety Issues, on November 12, 2010, at 75 FR 69360 to implement section 823 of the National Defense Authorization Act for Fiscal Year 2010 (Pub. L. 111-84). This interim rule includes the review of public comments received in response to the Federal Register notice for DFARS Case 2009-D039. DFARS Case 2009-D039 was merged into this case, DFARS Case 2011-D033, after the NDAA for FY 2011 (Pub. L. 111-383) was enacted on January 7, 2011, in order to combine related sections of the NDAAs for FY 2010 and FY 2011 affecting identical sections of the DFARS.

A. Section 834 Interim Rule

The NDAA for FY 2011 was enacted on January 7, 2011. Section 834 of the statute added to existing statutory authorities to decrease or eliminate a contractor's award fee for a performance period based on a final determination resulting from a DoD investigation of a serious bodily injury or death of any civilian or military personnel alleged to have been caused by a contractor or subcontractor.

Section 834 applies only to contractors and subcontractors at any tier that are not subject to the jurisdiction of U.S. courts. A contractor's award fee is affected if, after the investigation, a determination is made that the serious bodily injury or death was caused by the contractor's or subcontractor's gross negligence or with reckless disregard for the safety of civilian or military personnel of the Government.

Senate Report 111-201, ``to accompany S. 3454, the National Defense Authorization Act for Fiscal Year 2011,'' associated with section 834, stated that investigations under the provision would be conducted pursuant to existing DoD procedures for administrative fact-finding investigations, such as those provided by Army Regulation 15-6 and the Manual of the Judge Advocate General of the Navy. Defense Criminal Investigative Organizations (DCIOs) have procedures in place currently for conducting criminal investigations of contractor misconduct. In addition, the Military Services have procedures for conducting administrative investigations involving actions related to civilian and military personnel. Findings of criminal misconduct are made at the conclusion of the DCIO investigations.

The statute also modifies section 872 of the NDAA for FY 2009 (Pub. L. 110-417), and requires that information on the final determination be entered into the Federal Awardee Performance and Integrity Information System (FAPIIS) (see DFARS 209.105-2-70) and will be available to the public.

DoD has added a provision at DFARS 209.105-2-70 to provide for the inclusion of a final determination of contractor fault in the FAPIIS (see FAR 9.104-6 and http://www.ppirs.gov). In addition, the requirements of section 834 have been included at DFARS 216.405-2-70, Award fee reduction or denial for jeopardizing the health or safety of Government personnel, and added as a fifth cause for reducing or denying a contractor's award fee in the clause at DFARS 252.216-7004.

B. Section 823 Interim Rule

The related statutory provision, section 823 of the NDAA for FY 2010, currently is addressed at DFARS 216.405-2-70, Award fee reduction for jeopardizing the health or safety of Government personnel, and the clause at DFARS 252.216-7004 (similarly titled), which require the contracting officer to include in the evaluation criteria of any award-fee plan a review of contractor actions that jeopardized the health and safety of Government personnel. As previously discussed, the section 823 requirement was implemented in the DFARS by DFARS Case 2009-D039, published in the Federal Register as an interim rule on November 12, 2010, at 75 FR 69360, prior to its being merged into this case, 2011-D033, Award Fee Reduction or Denial for Health or Safety Issues.

II. Discussion and Analysis

The public comment period for the interim rule issued under DFARS Case 2009-D039 closed January 24, 2011. Two respondents submitted comments on the interim rule. The individual comments are discussed below.

A. Applicability

Comment: A respondent recommended that the rule be applied to harm caused to any person (not just Government employees).

Response: Section 823 addresses ``serious bodily injury or death to any civilian or military personnel of the Government.'' Extension of the application of this rule to any person is outside the scope of the statute.

Comment: The respondent commented that the definition of ``covered incident'' should be broadened, such that contractors are not encouraged to settle out of court and thus deny any liability or wrong-doing and protect their award fees.

Response: The rule implements the statutory definition of a ``covered incident'' in section 823 of the NDAA for FY 2010, which provides instructions to the contracting officer to reduce the award fee if the contractor is found at fault for a covered incident. It does not instruct the Government on how to proceed with any investigation or resolve covered incidents. No changes to the statutory definition are determined necessary in response to this comment.

Comment: A respondent called for the contracting officer to be allowed to consider any incident that calls into question a contractor's integrity or responsibility when deciding whether to reduce or deny award fees.

Response: Extension of the application of this rule to any incident that calls into question a contractor's integrity or responsibility is outside the scope of the statute; however, other parts of the FAR, such as FAR parts 3, Improper Business Practices and Personal Conflicts of Interest, and 9, Contractor Qualifications, and the related DFARS parts, provide information on dealing with contractor responsibility and improper business practices.

B. Documentation

Comment: A respondent stated that contracting officers should be required to make a written determination regarding decisions to reduce or deny the award fee or decline to do so. The statements should also be made available to the public, according to this respondent.

Response: FAR 16.401(e)(2) states that ``(t)he basis for all award-fee determinations shall be documented in the contract file, to include, at a minimum, a determination that overall cost, schedule, and technical performance in the aggregate is or is not at a satisfactory level.'' The award-fee determination does not go into FAPIIS. It is the ``final determination of contractor fault by the Secretary of Defense'' (section 834(d)) that is required to be submitted into FAPIIS. While the latter determination impacts the former determination, they are not the same thing. A requirement for public posting of award-fee determinations is outside the scope of the statute.

C. Contractor Liability

Comment: The respondent noted that contractors performing on contracts within Government facilities have little control over the conditions of the facilities, the funding to provide for repairs to facilities, or the priorities of the repairs.

Response: The DFARS clause at 252.216-7004, Award Fee Reduction or Denial for Jeopardizing the Health or Safety of Government Personnel, applies only when a direct, causal connection is found between a contractor's actions and a serious bodily injury to a Government employee.

Comment: The respondent expressed concern that, if a contractor is found partially liable under the Occupational Safety and Health Administration multi-employer worksite policy for a hazardous worksite condition that caused serious injury, then the contractor's future/past award fee could be reduced or denied.

Response: The statute as implemented in DFARS clause 252.216-7004, requires that if a contractor is found liable in a covered incident for causing serious bodily injury to a Government employee, the contracting officer must consider reducing or denying the relevant award fee.

III. Executive Orders 12866 and 13563

Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This is a significant regulatory action and therefore was subject to review under section 6(b) of E.O. 12866, Regulatory Planning and Review, dated September 30, 1993. This is not a major rule under 5 U.S.C. 804.

IV. Regulatory Flexibility Act

On November 12, 2010, DoD published an interim rule at 75 FR 69360 implementing section 823 of the NDAA for FY 2010. The interim rule was immediately effective upon publication. Section 823 required contracting officers to consider reduction or denial of award fee if the actions of the contractor or a subcontractor at any tier jeopardize the health or safety of Government personnel. DoD did not prepare an initial regulatory flexibility analysis at that time because generally, contracts awarded to small business are not likely to utilize incentive- and award-fee contract structures. No comments were received on the regulatory flexibility section of the notice for the interim rule implementing section 823.

DoD does not expect this interim rule implementing section 834 of the NDAA for FY 2011 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. This rule does not apply to firms that are subject to the jurisdiction of U.S. courts. By definition, small businesses are U.S. businesses and, therefore, are subject to the jurisdiction of the U.S. courts. Accordingly, this rule will not affect small businesses. An initial regulatory flexibility analysis has not been performed because this rule will apply only to primes and subcontractors at any tier that are not subject to the jurisdiction of the U.S. courts. DoD invites comments from small business concerns and other interested parties on the expected impact of this rule on small entities.

DoD will also consider comments from small entities concerning the existing regulations in subparts affected by the rule in accordance with 5 U.S.C. 610. Interested parties must submit such comments separately and should cite 5 U.S.C. 610 (DFARS Case 2011-D033) in correspondence.

V. Paperwork Reduction Act

The interim 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).

VI. Determination To Issue an Interim Rule

A determination has been made under the authority of the Secretary of Defense (DoD) that urgent and compelling reasons exist to promulgate this interim rule without prior opportunity for public comment. Pursuant to section 823 of the NDAA for FY 2010, contracting officers shall include in the evaluation criteria of any award-fee plan, a review of contractor and subcontractor actions that jeopardize the health and safety of Government personnel, through gross negligence or reckless disregard for the safety of such personnel, as determined through conviction in a criminal proceeding or finding of fault and liability in a civil or administrative proceeding. Additionally, pursuant to section 834 of the NDAA for FY 2011, which became effective on enactment, January 7, 2011, contracting officers are authorized to make a determination of contractor or subcontractor fault where DoD has reason to believe that a contractor or subcontractor may have caused the serious bodily injury or death of civilian or military personnel and the contractor or any subcontractor is not subject to the jurisdiction of the U.S. courts. If DoD finds that a contractor or subcontractor caused the death or serious injury through gross negligence or with reckless disregard for the safety of such personnel, this final determination shall be included in award-fee determinations, thereby providing an important remedy for those situations where a DoD contractor or subcontractor is not otherwise subject to U.S. court jurisdiction. Issuing an interim rule will provide contracting officers with this important remedy immediately upon publication of the rule. However, pursuant to 41 U.S.C. 1707 (formerly 41 U.S.C. 418b) and FAR 1.501-3(b), DoD will consider public comments received in response to this interim rule in the formation of the final rule.

List of Subjects in 48 CFR Parts 209, 216, and 252

Government procurement.

Ynette R. Shelkin,

Editor, Defense Acquisition Regulations System.

Therefore, 48 CFR parts 209, 216, and 252 are amended as follows:

1. The authority citation for 48 CFR parts 209, 216, and 252 continues to read as follows:

Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.

PART 209--CONTRACTOR QUALIFICATIONS

2. Add section 209.105 to subpart 209.1 to read as follows:

209.105 Procedures

3. Add section 209.105-2-70 to read as follows:

209.105-2-70 Inclusion of determination of contractor fault in Federal Awardee Performance and Integrity Information System (FAPIIS).

If the contractor or a subcontractor at any tier is not subject to the jurisdiction of the U.S. courts and the DoD appointing official that requested a DoD investigation makes a final determination that a contractor's or subcontractor's gross negligence or reckless disregard for the safety of civilian or military personnel of the Government caused serious bodily injury or death of such personnel, the contracting officer shall enter in FAPIIS the appropriate information regarding such determination within three days of receiving notice of the determination, pursuant to section 834 of the National Defense Authorization Act for Fiscal Year 2011 (Pub. L. 111-383). Information posted in FAPIIS regarding such determinations will be publicly available.

PART 216--TYPES OF CONTRACTS

4. Amend section 216.405-2-70 by revising paragraphs (b) and (c) to read as follows:

216.405-2-70 Award fee reduction or denial for jeopardizing the health or safety of Government personnel.

* * * * *

(b) The contracting officer shall include in the evaluation criteria of any award-fee plan, a review of contractor and subcontractor actions that jeopardized the health or safety of Government personnel, through gross negligence or reckless disregard for the safety of such personnel, as determined through--

(1) Conviction in a criminal proceeding, or finding of fault and liability in a civil or administrative proceeding (in accordance with section 823 of the National Defense Authorization Act for Fiscal Year 2010 (Pub. L. 111-84)); or

(2) If a contractor or a subcontractor at any tier is not subject to the jurisdiction of the U.S. courts, a final determination of contractor or subcontractor fault resulting from a DoD investigation (in accordance with section 834 of the National Defense Authorization Act for Fiscal Year 2011 (Pub. L. 111-383)).

(c) In evaluating the contractor's performance under a contract that includes the clause at 252.216-7004, Award Fee Reduction or Denial for Jeopardizing the Health or Safety of Government Personnel, the contracting officer shall consider reducing or denying award fees for a period if contractor or subcontractor actions cause serious bodily injury or death of civilian or military Government personnel during such period. The contracting officer's evaluation also shall consider recovering all or part of award fees previously paid for such period.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

5. Revise section 252.216-7004 to read as follows:

252.216-7004 Award Fee Reduction or Denial for Jeopardizing the Health or Safety of Government Personnel.

As prescribed in 216.406 use the following clause:

Award Fee Reduction or Denial for Jeopardizing the Health or Safety of Government Personnel (SEP 2011)

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

Covered incident--

(i) Means any incident in which the Contractor, through a criminal, civil, or administrative proceeding that results in a disposition listed in paragraph (a)(ii) of this definition--

(A) Has been determined in the performance of this contract to have caused serious bodily injury or death of any civilian or military personnel of the Government through gross negligence or with reckless disregard for the safety of such personnel; or

(B) Has been determined to be liable for actions of a subcontractor of the Contractor that caused serious bodily injury or death of any civilian or military personnel of the Government through gross negligence or with reckless disregard for the safety of such personnel.

(ii) Includes those incidents that have resulted in any of the following dispositions:

(A) In a criminal proceeding, a conviction.

(B) In a civil proceeding, a finding of fault or liability that results in the payment of a monetary fine, penalty, reimbursement, restitution, or damage of $5,000 or more.

(C) In an administrative proceeding, a finding of fault and liability that results in--

(1) The payment of a monetary fine or penalty of $5,000 or more; or

(2) The payment of a reimbursement, restitution, or damages in excess of $100,000.

(D) In a criminal, civil, or administrative proceeding, a disposition of the matter by consent or compromise with an acknowledgment of fault by the Contractor if the proceeding could have led to any of the outcomes specified in subparagraphs (a)(ii)(A), (a)(ii)(B), or (a)(ii)(C).

(E) In a DoD investigation of the Contractor or its subcontractors at any tier not subject to the jurisdiction of the U.S. courts, a final determination by the Secretary of Defense of Contractor or subcontractor fault (see DFARS 216.405-2-70. Serious bodily injury means a grievous physical harm that results in a permanent disability.

(b) If, in the performance of this contract, the Contractor's or its subcontractor's actions cause serious bodily injury or death of civilian or military Government personnel, the Government may reduce or deny the award fee for the period in which the covered incident occurred, including the recovery of all or part of any award fees paid for any previous period during which the covered incident occurred.

(End of clause)

[FR Doc. 2011-23630 Filed 9-15-11; 8:45 am]

BILLING CODE 5001-08-P

[Federal Register Volume 76, Number 180 (Friday, September 16, 2011)]

[Rules and Regulations]

From the Federal Register Online via the Government Printing Office [www.gpo.gov]

[FR Doc No: 2011-23779]

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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Part 216

[DFARS Case 2011-D010]

RIN 0750-AH15

Defense Federal Acquisition Regulation Supplement; Increase the Use of Fixed-Price Incentive (Firm Target) Contracts

AGENCY: Defense Acquisition Regulations System, Department of Defense (DoD).

ACTION: Final rule.

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SUMMARY: DoD is issuing a final rule amending the DFARS to increase the use of fixed-price incentive (firm target) contracts, with particular attention to share lines and ceiling prices.

DATES: Effective date: September 16, 2011.

FOR FURTHER INFORMATION CONTACT: Ms. Amy Williams, telephone 703-602-0328.

SUPPLEMENTARY INFORMATION:

I. Background

This DFARS case was initiated to implement an initiative to incentivize productivity and innovation in industry, as set forth in a memorandum from the Under Secretary of Defense for Acquisition, Technology, & Logistics (USD(AT&L)), dated November 3, 2010. The memorandum provided guidance to the secretaries of the military departments and directors of defense agencies on obtaining greater efficiency and productivity in defense spending. In support of this initiative, DoD published a proposed rule in the Federal Register on March 2, 2011 (76 FR 11410). The proposed rule required that contracting officers must--

(1) Give particular consideration to the use of fixed-price incentive (firm target) contracts, especially for acquisitions moving from development to production; and

(2) Pay particular attention to share line and ceiling prices for fixed-price incentive (firm target) contracts, with 120 percent ceiling and a 50/50 share ratio as the default arrangement.

The comment period closed on May 2, 2011. DoD received comments from one respondent.

II. Discussion/Analysis

The respondent considered that the incorporation of a broad preference to use a 50/50 share line with a ceiling of 120 percent is a mistake for Government acquisitions for the reasons discussed in the following comments.

Comment: The respondent provided anecdotal evidence that currently acquisition leadership translates this preference as a mandatory requirement.

Response: All of the documentation for this case, and all of the presentations by senior acquisition leaders within DoD, have emphasized that this initiative is to be implemented in a way that makes sense for each individual acquisition. The guidance in the DFARS companion Procedures, Guidance, and Information (PGI) reiterates that each situation must be evaluated in terms of the degree and nature of the risk presented in order to select the proper contract type. The PGI also provides additional guidance on establishing the target cost, share lines, and ceiling price. This regulation is not a ``one-size-fits-all'' mandate.

However, to make the final rule more consistent with the terminology of the USD(AT&L) memo of November 3, 2010, and to clarify that each contract must be considered on a case-by-case basis, DoD has revised the description of the use of a fixed-price incentive (firm target) contract with a 50/50 share ratio and a 120 percent ceiling from ``the default arrangement'' to ``the point of departure for establishing the incentive arrangement.''

Comment: According to the respondent, the Institute for Defense Analyses (IDA) study, Can Profit Policy and Contract Incentives Improve Defense Contract Outcomes?, makes a strong case for the ineffectiveness of incentive contracts.

Response: The majority of incentive contracts covered by the IDA study were award-fee contracts, not fixed-price incentive (firm target) contracts. Furthermore, DoD is actively taking steps to ensure that incentives are linked to acquisition outcomes and the profits are tied to performance in achieving those outcomes.

Comment: The respondent stated that in order to correct the use of incentives, DoD should mandate that contracting officers use a true pessimistic/optimistic weighted average and ensure that their cost curves do not mirror cost-plus-fixed-fee cost curves.

Response: DoD endorses the respondent's concept that contracting officers should carefully develop a realistic target cost and that an incentive contract should provide adequate incentives. The reason for specifying the 120 percent ceiling and the 50/50 cost sharing arrangement as the point of departure for establishing the incentive arrangement is to promote cost realism and discourage an incentive arrangement that does not provide adequate incentive to the contractor to control costs. An excessively flat share line approaches a cost-plus-fixed-fee arrangement (100/0), thereby providing almost no incentive to the contractor to control costs. A 50/50 share line suggests that the Government and the contractor have a common view of the likely contract execution cost. A 50/50 share line should represent a point where the estimate is deemed equally likely to be too high or too low. However, as already stated, rather than issuing mandates, DoD encourages the evaluation of each situation in terms of the degree and nature of the risk presented in order to select the proper contract type and, if an incentive contract type is selected, the appropriate incentive arrangement.

III. Executive Orders 12866 and 13563

Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). E.O. 13563 emphasizes the importance of quantifying both costs and benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. This is not a significant regulatory action and, therefore, was not 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 has 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:

This rule amends the Defense Federal Acquisition Regulation Supplement to implement the initiative on incentivizing productivity and innovation in industry, as presented by the Under Secretary of Defense for Acquisition, Technology, & Logistics in a memorandum dated November 3, 2010. The objective of the rule is to incentivize contractors to control costs. The legal basis is 41 U.S.C. 1303 and 48 CFR chapter 1.

There were no public comments in response to the initial regulatory flexibility analysis.

The final rule will not have much impact on small entities, because the focus of the rule is on development efforts that are moving into early production. Small entities are more likely to receive awards for commercial products, including commercially available off-the-shelf products, for which firm-fixed-price contracts are appropriate. In Fiscal Year 2010, 93 percent of awards to small businesses were firm-fixed-price contracts, and 99.99 percent of awards to small businesses were other than fixed-price incentive contracts.

The final rule imposes no reporting, recordkeeping, or other information collection requirements.

There are no known alternatives to the rule that would adequately implement the DoD policy. There is no significant economic impact on small entities.

There are no other alternatives that will accomplish the objectives of the rule.

V. Paperwork Reduction Act

The final rule does not contain any information collection requirements that require 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 Part 216

Government procurement.

Ynette R. Shelkin,

Editor, Defense Acquisition Regulations System.

Therefore, 48 CFR part 216 is amended as follows:

PART 216--TYPES OF CONTRACTS

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

Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.

2. Add section 216.403-1 to read as follows:

216.403-1 Fixed-price incentive (firm target) contracts.

(b) Application.

(1) The contracting officer shall give particular consideration to the use of fixed-price incentive (firm target) contracts, especially for acquisitions moving from development to production.

(2) The contracting officer shall pay particular attention to share lines and ceiling prices for fixed-price incentive (firm target) contracts, with a 120 percent ceiling and a 50/50 share ratio as the point of departure for establishing the incentive arrangement.

(3) See PGI 216.403-1 for guidance on the use of fixed-price incentive (firm target) contracts.

[FR Doc. 2011-23779 Filed 9-15-11; 8:45 am]

BILLING CODE 5001-08-P