[Federal Register Volume 68, Number 220 (Friday, November 14, 2003)]
[Rules and Regulations]
[Pages 64561-64568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-28442]
-----------------------------------------------------------------------
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
[[Page 64562]]
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,
OUSD(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.
[[Page 64563]]
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
[[Page 64564]]
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
[[Page 64565]]
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
[[Page 64566]]
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
[[Page 64567]]
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.
[[Page 64568]]
List of Subjects in 48 CFR Part 216
Government procurement.
Michele P. Peterson,
Executive Editor, Defense Acquisition Regulations Council.
0
Therefore, 48 CFR Part 216 is amended as follows:
0
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
0
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.
* * * * *
[FR Doc. 03-28442 Filed 11-13-03; 8:45 am]
BILLING CODE 5001-08-P