[Federal Register Volume 69, Number 187 (Tuesday, September 28, 2004)]
[Proposed Rules]
[Pages 58014-58016]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-21640]
[[Page 58013]]
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Part II
Department of Defense
General Services Administration
National Aeronautics and Space Administration
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48 CFR Part 31
Federal Acquisition Regulation; Accounting for Unallowable Costs;
Proposed Rule
Federal Register / Vol. 69, No. 187 / Tuesday, September 28, 2004 /
Proposed Rules
[[Page 58014]]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Part 31
[FAR Case 2004-006]
RIN 9000-AK06
Federal Acquisition Regulation; Accounting for Unallowable Costs
AGENCIES: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Proposed rule.
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SUMMARY: The Civilian Agency Acquisition Council and the Defense
Acquisition Regulations Council (Councils) are proposing to amend the
Federal Acquisition Regulation (FAR) by revising language regarding
accounting for unallowable costs.
DATES: Interested parties should submit comments in writing on or
before November 29, 2004 to be considered in the formulation of a final
rule.
ADDRESSES: Submit comments identified by FAR case 2004-006 by any of
the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Agency Web Site: http://www.acqnet.gov/far/ProposedRules/proposed.htm. Click on the FAR case number to submit comments.
E-mail: [email protected]. Include FAR case 2004-
006 in the subject line of the message.
Fax: 202-501-4067.
Mail: General Services Administration, Regulatory
Secretariat (V), 1800 F Street, NW, Room 4035, ATTN: Laurie Duarte,
Washington, DC 20405.
Instructions: Please submit comments only and cite FAR case 2004-
006 in all correspondence related to this case. All comments received
will be posted without change to http://www.acqnet.gov/far/ProposedRules/proposed.htm, including any personal information
provided.
FOR FURTHER INFORMATION CONTACT: The FAR Secretariat at (202) 501-4755
for information pertaining to status or publication schedules. For
clarification of content, contact Mr. Richard C. Loeb, at (202) 208-
3810. Please cite FAR case 2004-006.
SUPPLEMENTARY INFORMATION:
A. Background
The DoD Director of Defense Procurement and Acquisition Policy
(DPAP) established a special interagency Ad Hoc Committee to perform a
comprehensive review of policies and procedures in FAR Part 31,
Contract Cost Principles and Procedures, relating to cost measurement,
assignment, and allocation. DPAP announced a series of public meetings
in the Federal Register notice (66 FR 13712) on March 7, 2001 (with a
``correction to notice'' published in the Federal Register (66 FR
16186) on March 23, 2001). Public meetings were held on April 19, 2001,
May 10-11, 2001, and June 12, 2001. Attendees at the public meetings
included representatives from industry, Government, and other
interested parties who provided views on potential areas for revision
in FAR Part 31. The Ad Hoc Committee reviewed the cost principles and
procedures and the input obtained during the public meetings;
identified potential changes to the FAR; and submitted several reports,
including draft proposed rules for consideration by the Councils.
The Councils reviewed the Ad Hoc Committee's reports and draft
proposed rules related to FAR 31.204, Application of principles and
procedures, and FAR 31.201-6, Accounting for unallowable costs. On May
22, 2003, a proposed rule was published for public comment in the
Federal Register (68 FR 28108) under FAR case 2002-006. No public
comments were received on the proposed rule relating to FAR 31.204. The
Councils concluded that the FAR 31.204 proposed rule should be
converted to a final rule, with no changes to the proposed rule. The
final rule version of 2002-006 was published in the Federal Register in
Federal Acquisition Circular 2001-24 (69 FR 34224 on June 18, 2004).
As a result of the public comments received under FAR case 2002-
006, the Councils also decided to make substantive changes to FAR
31.201-6 and to publish the proposed revisions under this separate
proposed rule 2004-006. The Councils' recommended changes include
adding paragraphs (iii) through (vi) to subsection 31.201-6(c)(2) to
provide specific criteria on the use of sampling as a method to
identify unallowable costs, including the applicability of penalties
for failure to exclude certain projected unallowable costs.
This is not a significant regulatory action and, therefore, was not
subject to review under Section 6(b) of Executive Order 12866,
Regulatory Planning and Review, dated September 30, 1993. This rule is
not a major rule under 5 U.S.C. 804.
In response to the proposed FAR rule published under FAR Case 2002-
006 in the Federal Register (68 FR 28108) on May 22, 2003, nine
respondents submitted comments on FAR 31.201-6. The Councils considered
all comments and concluded that, since the changes result in a rule
that differs significantly from the proposed rule, it should be
published as a proposed rule under a new FAR Case 2004-006. Differences
between the proposed rule under FAR Case 2002-006 and this proposed
rule are discussed in Comments 3, 4, and 7, below.
Public Comments
FAR 31.201-6(c)(1)
1. Comment: Requirement to segregate unallowable costs. One
respondent recommends removal of FAR 31.201-6(c)(1) from the proposed
rule (which is also contained in the current FAR language). The
respondent believes that non-CAS covered contractors should not be
subject to CAS requirements because of their adherence to the FAR cost
principles. The respondent also contends that incorporating such
requirements into the FAR by reference results in lowering thresholds
for CAS application and is contrary to DoD progressive initiatives such
as the DoD Panel on Measurement, Assignment, and Allocability
Provisions of FAR Part 31, and by the DFARS Transformation Project.
Another respondent believes that retaining the requirement, for all
contracts subject to FAR Part 31 (CAS and non-CAS covered), to comply
with the provisions of CAS 405 (Accounting for Unallowable Costs)
results in more clearly understood and easily applied criteria for
accounting for unallowable costs. This respondent also believes that
such requirements create a more level playing field between all
contractors.
Councils' response: The Councils agree that the provision should be
retained. Prior to the implementation of CAS 405, significant amounts
of unallowable costs were often included in proposals and billings
which necessitated significant use of Government resources to find such
costs. The Councils believe this would occur again if the requirement
was removed. In addition, unallowable costs must be segregated to
comply with the statutory penalties provisions; thus, this provision
serves to implement those statutory requirements.
FAR 31.201-6(c)(2)
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2. Comment: Use of statistical sampling. The respondent believes
that numerous disagreements may result from the proposed language. The
respondent supports the use of statistical sampling to project
unallowable costs in connection with discrete pools where the number of
differing cost elements is limited. However, the respondent
concurrently objects to the general application of statistical sampling
for the purposes of projecting unallowable costs in connection with a
universe of diverse cost elements subject to a significant number of
cost principles.
Councils' response: Nonconcur. The Councils recognize the
respondent's concern about the potential limitations of statistical
sampling. However, the Councils note that contractors are not required
to use statistical sampling, i.e., it is an optional technique for
segregating unallowable costs.
FAR 31.201-6(c)(2)(iii), (iv), and (v)
3. Comment: Statistical sampling verification versus segregation.
The respondent disagrees with the proposed amendment to FAR 31.201-
6(c)(2). The respondent believes that the use of statistical sampling
should not replace accounting policies and procedures for identifying
and segregating unallowable costs when the costs are initially incurred
and recorded. The respondent asserts that initial identification of
unallowable costs is necessary to meet the requirements of 10 U.S.C.
2324, which provides penalties against a contractor if expressly
unallowable costs are included in its claims to the Government.
Therefore, the respondent recommends adding the following language:
``Statistical sampling is an acceptable practice for verifying
that a contractor's accounting practices and procedures for
segregating and presenting unallowable costs are operating as
intended.''
Councils' response: Concur in part. The Councils do not believe
that sampling is precluded by 10 U.S.C. 2324. The Councils note that
there is no requirement in 10 U.S.C. 2324 to specifically segregate
every item of unallowable cost. Statistical sampling, when properly
applied, is acceptable for both segregating unallowable costs and
verifying that such costs have been properly segregated (either by
specific identification or using appropriate sampling techniques).
However, the Councils recognize that the sampling must appropriately
consider the requirements of 10 U.S.C. 2324 related to the application
of penalties on unallowable costs. To avoid potential disputes in this
area, a new paragraph (c)(3) has been added at 31.201-6 to explicitly
include these appropriate considerations.
FAR 31.201-6(c)(2)(vi)
4. Comment: Statistical sampling advance agreements. A respondent
states that up-front coordination and agreement between the contractor
and the auditor regarding the sampling plan (e.g., sampling method,
expense accounts, stratification, precision, confidence, and
projection) is essential in order to avoid subsequent disputes over the
adequacy of the sampling plan used by the contractor. The respondent
asserts that such disputes, as well as differing interpretations of
statistical terms and methodologies, could delay a timely settlement of
the contractor's incurred cost submissions and adversely impact the
contract close-out process. The respondent proposes adding the
following language to FAR 31.201-6(c):
(3) Use of statistical sampling methods for identifying and
segregating unallowable costs should be the subject of an advance
agreement under the provisions of FAR 31.109.
Councils' response: Concur. The Councils believe it will streamline
the review process and avoid potential disputes if the parties agree
up-front on the sampling plan. The Councils have added the respondent's
proposed language as well as an additional sentence on advance
agreements at new paragraph (c)(4) of 31.201-6.
FAR 31.201-6(e)(1)
5. Comment: Materiality threshold applied to directly associated
unallowable costs. The respondent recommends the Council adopt the ``30
percent rule'' that was contained in 1976 DoD guidance issued by the
then Assistant Secretary of Defense (Installations and Logistics) Mr.
Dale Babione. The respondent states that this guidance instructed DoD
personnel how to interpret the materiality threshold applied to
directly associated unallowable costs. The respondent further states
that this 1976 guidance established a threshold of 30 percent of total
time, over which salary costs are determined to be unallowable and
under which further evaluation is required. The respondent asserts that
many contractors and contracting officers have successfully implemented
this guidance over the past 25 years.
Councils' response: Nonconcur. The Councils believe that a decision
on materiality should be made by the contracting officer on a case-by-
case basis after consideration of the three factors listed at 31.201-
6(e)(1): the actual dollar amount, the cumulative effect of all
directly associated costs in a cost pool, and the ultimate effect on
the cost of Government contracts.
The Councils believe that materiality should not be determined
based solely on a percentage. For example, 25 percent may have a
material impact to the Government for a company in which every employee
spends 25 percent of their time on directly associated unallowable
costs. Conversely, the impact to the Government may be immaterial if
the Government participation in the indirect cost base is small, even
if an employee is spending more than 30 percent of his/her time on
directly associated unallowable costs. Using a similar analysis, 50
percent may have a material impact to the Government if the total
amount involved is large and/or the Government has a large share of the
allocation base. Conversely, 50 percent may have an immaterial impact
to the Government if the total amount involved is small and/or the
Government share of the allocation base is small.
FAR 31.201-6(e)(2)
6. Comment: Definition of directly associated cost. Two respondents
contend that CAS 405 (Accounting for Unallowable Costs) does not
distinguish among types of directly associated costs. They assert that
CAS 405 prescribes a general rule of cost recognition, measurement and
allocation, which applies to all types of cost, without distinction.
They further state that CAS 405 prescribes the following ``but for''
test: Directly associated cost means any cost which is generated solely
as a result of the incurrence of another cost, and which would not have
been incurred had the other cost not been incurred. The respondents
contend that FAR 31.201-6(e) abandons this ``but for'' test and
substitutes a materiality test for recognizing and measuring the
``salary expenses of employees who participate in activities that
generate unallowable costs.'' Accordingly, the respondents believe it
is confusing as to whether salaries and expenses are governed by the
``but for'' test or by a new ``materiality'' test. Therefore, one
respondent recommends amending FAR 31.201-6(e) so that it complies with
CAS 405 in the application of the ``but for'' test and delete the
``materiality'' test. As an alternative, the other respondent
recommends that FAR 31.201-6(e) be amended to establish a rebuttable
presumption that material amounts of time devoted to unallowable
activities would, in the normal course of business, influence the
employee's compensation. Under the respondent's proposal, contractors
could rebut the presumption by showing that, in any
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individual situation, compensation would not have been affected. For
example, under the respondent's revision, compensation would not be
affected in the unusual situation of a natural disaster requiring
salaried personnel to devote material amounts of effort to unallowable
charitable activities during a particular accounting period.
Councils' response: Nonconcur. The Councils note that the current
language at FAR 31.201-6(e)(2) is not a ``new'' materiality test. This
language, which was promulgated over twenty years ago, provides
contracting personnel and contractors with specific information on when
to treat salaries and expenses as directly associated costs. The
Councils believe this language should be retained. They also believe
that the respondent's proposed alternative language would potentially
cause significant increases in the number of disputes due to arguments
regarding when compensation is and is not affected by unallowable
activities.
7. Comment: Illustration. The respondent states that it does not
object to the inclusion of an illustration in FAR 31.201-6(e)(2), but
if an illustration is to be included, it prefers the one included in
CAS 405-60(e). The respondent contends that use of a CAS illustration
will avoid potential conflicts in determining materiality.
Councils' response: Nonconcur. The proposed language at FAR 31.201-
6(e)(2) is not an illustration, but is instead criteria for determining
how to treat salary expenses of employees that participate in
activities that generate unallowable costs. The Councils believe it is
not appropriate for FAR Part 31 to include illustrations such as those
contained in CAS because they would be inconsistent with the overall
structure of the FAR, which does not include such illustrations in any
other part.
FAR 31.201-6(e)(3)
8. Comment: Incorrect reference. Two respondents noted that the
reference in 31.201-6(e)(3) is incorrect. The reference should be to
paragraphs (e)(1) and (e)(2) of that subsection, rather than (f)(1) and
(f)(2).
Councils' response: Concur. There is no paragraph (f)(1) or (f)(2)
in FAR 31.201-6. The typographical errors have been corrected in
paragraphs (e)(2), and (e)(3).
B. Regulatory Flexibility Act
The Councils do not expect this proposed 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 most contracts awarded to small entities use simplified
acquisition procedures or are awarded on a competitive, fixed-price
basis, and do not require application of the cost principles and
procedures discussed in this rule. An Initial Regulatory Flexibility
Analysis has, therefore, not been performed. We invite comments from
small businesses and other interested parties. The Councils will
consider comments from small entities concerning the affected FAR Part
in accordance with 5 U.S.C. 610. Interested parties must submit such
comments separately and should cite 5 U.S.C. 601, et seq. (FAR case
2004-006), in correspondence.
C. Paperwork Reduction Act
The Paperwork Reduction Act does not apply because the proposed
changes to the FAR do not impose information collection requirements
that require the approval of the Office of Management and Budget under
44 U.S.C. 3501, et seq.
List of Subjects in 48 CFR Part 31
Government procurement.
Dated:September 20, 2004
LAURA AULETTA,
Director,Contract Policy Division.
Therefore, DoD, GSA, and NASA propose amending 48 CFR part 31 as
set forth below:
PART 31-CONTRACT COST PRINCIPLES AND PROCEDURES
1. The authority citation for 48 CFR part 31 is revised to read as
follows:
Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42
U.S.C. 2473(c).
2. Amend section 31.201-6 by--
a. Amending paragraphs (a) and (b) by removing ``which'' and adding
``that'' in its place each time it appears;
b. Revising paragraph (c);
c. Revising the first sentence in paragraph (d);
d. Amending paragraph (e)(1)(ii) by removing ``or'' and adding
``and'' in its place; and
e. Revising paragraph (e)(3).
The revised text reads as follows:
31.201-6 Accounting for unallowable costs.
* * * * *
(c)(1) The practices for accounting for and presentation of
unallowable costs must be those described in 48 CFR 9904.405,
Accounting for Unallowable Costs.
(2) Statistical sampling is an acceptable practice for accounting
for and presenting unallowable costs provided the following criteria
are met:
(i) The statistical sampling results in an unbiased sample that is
a reasonable representation of the sampling universe.
(ii) All large dollar value and high risk transactions are
separately reviewed for unallowable costs and excluded from the
sampling process.
(iii) The statistical sampling permits audit verification.
(3) For the purposes of applying the penalty provisions at FAR
42.709, when statistical sampling is used for accounting for and
presenting unallowable costs--
(i) The following amounts must be excluded from any final indirect
rate proposal or final statement of costs incurred or estimated to be
incurred under a fixed-price incentive contract submitted to the
Government:
(A) The amounts projected to the sampling universe for any
expressly unallowable costs in the sample.
(B) The amounts projected to the sampling universe for any costs in
the sample determined to be unallowable for the contractor before
proposal submission.
(ii) Any amounts that are not excluded in accordance with paragraph
(c)(3)(i) of this subsection are subject to the penalties provisions at
FAR 42.709.
(iii) The provisions of paragraph c)(3)(ii) of this subsection do
not apply to the following:
(A) Contracts that are $500,000 or less.
(B) Fixed-price contracts without cost incentives.
(C) Firm-fixed-price contracts for the purchase of commercial
items.
(4) Use of statistical sampling methods for identifying and
segregating unallowable costs should be the subject of an advance
agreement under the provisions of FAR 31.109. The advance agreement
should specify the basic characteristics of the sampling process.
(d) If a directly associated cost is included in a cost pool that
is allocated over a base that includes the unallowable cost with which
it is associated, the directly associated cost shall remain in the cost
pool. * * *
(e) * * *
(3) When a selected item of cost under 31.205 provides that
directly associated costs be unallowable, such directly associated
costs are unallowable only if determined to be material in amount in
accordance with the criteria provided in paragraphs (e)(1) and (e)(2)
of this subsection, except in those situations where allowance of any
of the directly associated costs involved would be considered to be
contrary to public policy.
[FR Doc. 04-21640 Filed 9-27-04; 8:45 am]
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