[Federal Register Volume 60, Number 158 (Wednesday, August 16, 1995)]
[Rules and Regulations]
[Pages 42657-42659]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19860]
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DEPARTMENT OF DEFENSE
48 CFR Parts 31, 42, and 52
[FAC 90-31; FAR Case 94-751; Item III]
RIN 9000-AG20
Federal Acquisition Regulation; Penalties on Unallowable Indirect
Costs
AGENCIES: Department of Defense (DOD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Final rule.
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SUMMARY: This final rule is issued pursuant to the Federal Acquisition
Streamlining Act of 1994 to amend the Federal Acquisition Regulation
(FAR) to implement the requirements for penalties for unallowable
costs. This regulatory action was subject to Office of Management and
Budget review under Executive Order 12866, dated September 30, 1993.
EFFECTIVE DATE: October 1, 1995.
FOR FURTHER INFORMATION CONTACT:
Mr. Clarence Belton, Cost Principles Team Leader, at (703) 602-2357 in
reference to this FAR case. For general information, contact the FAR
Secretariat, Room 4037, GS Building, Washington, DC 20405 (202) 501-
4755. Please cite FAC 90-31, FAR case 94-751.
SUPPLEMENTARY INFORMATION:
A. Background
The Federal Acquisition Streamlining Act of 1994, Pub. L. 103-355
(the Act), provides authorities that streamline the acquisition process
and minimize burdensome Government-unique requirements. Major changes
that can be expected in the acquisition process as a result of the
Act's implementation include changes in the areas of Commercial Item
Acquisition, the Truth in Negotiations Act, and introduction of the
Federal Acquisition Computer Network (FACNET).
Sections 2101 and 2151 of the Federal Acquisition Streamlining Act
of 1994 change the contract value threshold for assessment of penalties
on unallowable costs from $100,000 to $500,000 and expand the coverage
from the Department of Defense to all executive agencies. This final
rule makes the required changes. With the exception of the threshold
value, the penalty
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provisions in the new law are the same as those implemented in the
current Defense Federal Acquisition Regulation Supplement.
B. Regulatory Flexibility Act
The Department of Defense, the General Services Administration, and
the National Aeronautics and Space Administration certify that this
final rule will not have a significant economic impact on a substantial
number of small entities under the Regulatory Flexibility Act, 5 U.S.C.
601, et seq., because most contracts awarded to small businesses are
awarded competitively on a firm-fixed-price basis and, therefore, are
not subject to the FAR cost principles.
C. Paperwork Reduction Act
The Paperwork Reduction Act does not apply because the changes to
the FAR do not impose recordkeeping or information collection
requirements, or collections of information from offerors, contractors,
or members of the public which require the approval of the Office of
Management and Budget under 44 U.S.C. 3501, et seq.
D. Public Comments
Twelve public comments were received in response to the proposed
rule published in the Federal Register on December 19, 1994 (59 FR
65460). The comments were considered in the formulation of this final
rule.
List of Subjects in 48 CFR Parts 31, 42, and 52
Government procurement.
Dated: August 7, 1995.
Edward C. Loeb,
Deputy Project Manager for the Implementation of the Federal
Acquisition Streamlining Act of 1994.
Therefore, 48 CFR Parts 31, 42, and 52 are amended as set forth
below:
1. The authority citation for 48 CFR Parts 31, 42, and 52 continues
to read as follows:
Authority: 40 U.S.C. 486(c); 10 U.S.C. chapter 137; and 42
U.S.C. 2473(c).
PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES
2. Section 31.110 is added to read as follows:
31.110 Indirect cost rate certification and penalties on unallowable
costs.
(a) Certain contracts require certification of the indirect cost
rates proposed for progress, billing, or final payment purposes. See
42.703-2 for administrative procedures regarding the certification
provisions and the related contract clause prescription.
(b) If unallowable costs are included in final indirect cost
settlement proposals, penalties may be assessed. See 42.709 for
administrative procedures regarding the penalty assessment provisions
and the related contract clause prescription.
PART 42--CONTRACT ADMINISTRATION
3. Sections 42.709 thru 42.709-6 are added to read as follows:
Sec.
42.709 Scope.
42.709-1 General.
42.709-2 Responsibilities.
42.709-3 Assessing the penalty.
42.709-4 Computing interest.
42.709-5 Waiver of the penalty.
42.709-6 Contract clause.
42.709 Scope.
(a) This section implements 10 U.S.C. 2324 (a) through (d) and 41
U.S.C. 256 (a) through (d). It covers the assessment of penalties
against contractors which include unallowable indirect costs in--
(1) Final indirect cost rate proposals; or
(2) The final statement of costs incurred or estimated to be
incurred under a fixed-price incentive contract.
(b) This section applies to all contracts in excess of $500,000,
except fixed-price contracts without cost incentives or any firm-fixed-
price contracts for the purchase of commercial items.
42.709-1 General.
(a) The following penalties apply to contracts covered by this
section:
(1) If the indirect cost is expressly unallowable under a cost
principle in the FAR, or an executive agency supplement to the FAR,
that defines the allowability of specific selected costs, the penalty
is equal to--
(i) The amount of the disallowed costs allocated to contracts that
are subject to this section for which an indirect cost proposal has
been submitted; plus
(ii) Interest on the paid portion, if any, of the disallowance.
(2) If the indirect cost was determined to be unallowable for that
contractor before proposal submission, the penalty is two times the
amount in paragraph (a)(1)(i) of this section.
(b) These penalties are in addition to other administrative, civil,
and criminal penalties provided by law.
(c) It is not necessary for unallowable costs to have been paid to
the contractor in order to assess a penalty.
42.709-2 Responsibilities.
(a) The cognizant contracting officer is responsible for--
(1) Determining whether the penalties in 42.709-1(a) should be
assessed;
(2) Determining whether such penalties should be waived pursuant to
42.709-5; and
(3) Referring the matter to the appropriate criminal investigative
organization for review and for appropriate coordination of remedies,
if there is evidence that the contractor knowingly submitted
unallowable costs.
(b) The contract auditor, in the review and/or the determination of
final indirect cost proposals for contracts subject to this section, is
responsible for--
(1) Recommending to the contracting officer which costs may be
unallowable and subject to the penalties in 42.709-1(a);
(2) Providing rationale and supporting documentation for any
recommendation; and
(3) Referring the matter to the appropriate criminal investigative
organization for review and for appropriate coordination of remedies,
if there is evidence that the contractor knowingly submitted
unallowable costs.
42.709-3 Assessing the penalty.
Unless a waiver is granted pursuant to 42.709-5, the cognizant
contracting officer shall--
(a) Assess the penalty in 42.709-1(a)(1), when the submitted cost
is expressly unallowable under a cost principle in the FAR or an
executive agency supplement that defines the allowability of specific
selected costs; or
(b) Assess the penalty in 42.709-1(a)(2), when the submitted cost
was determined to be unallowable for that contractor prior to
submission of the proposal. Prior determinations of unallowability may
be evidenced by--
(1) A DCAA Form 1, Notice of Contract Costs Suspended and/or
Disapproved (see 48 CFR 242.705-2), or any similar notice which the
contractor elected not to appeal and was not withdrawn by the cognizant
Government agency;
(2) A contracting officer final decision which was not appealed;
(3) A prior executive agency Board of Contract Appeals or court
decision involving the contractor, which upheld the cost disallowance;
or
(4) A determination or agreement of unallowability under 31.201-6.
(c) Issue a final decision (see 33.211) which includes a demand for
payment of any penalty assessed under paragraph (a) or (b) of this
section. The letter shall state that the determination is a final
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decision under the Disputes clause of the contract. (Demanding payment
of the penalty is separate from demanding repayment of any paid portion
of the disallowed cost.)
42.709-4 Computing interest.
For 42.709-1(a)(1)(ii), compute interest on any paid portion of the
disallowed cost as follows:
(a) Consider the overpayment to have occurred, and interest to have
begun accumulating, from the midpoint of the contractor's fiscal year.
Use an alternate equitable method if the cost was not paid evenly over
the fiscal year.
(b) Use the interest rate specified by the Secretary of the
Treasury pursuant to Pub. L. 92-41 (85 Stat. 97).
(c) Compute interest from the date of overpayment to the date of
the demand letter for payment of the penalty.
(d) Determine the paid portion of the disallowed costs in
consultation with the contract auditor.
42.709-5 Waiver of the penalty.
The cognizant contracting officer shall waive the penalties at
42.709-1(a) when--
(a) The contractor withdraws the proposal before the Government
formally initiates an audit of the proposal and the contractor submits
a revised proposal (an audit will be deemed to be formally initiated
when the Government provides the contractor with written notice, or
holds an entrance conference, indicating that audit work on a specific
final indirect cost proposal has begun);
(b) The amount of the unallowable costs under the proposal which
are subject to the penalty is $10,000 or less (i.e., if the amount of
expressly or previously determined unallowable costs which would be
allocated to the contracts specified in 42.709(b) is $10,000 or less);
or
(c) The contractor demonstrates, to the cognizant contracting
officer's satisfaction, that--
(1) It has established policies and personnel training and an
internal control and review system that provide assurance that
unallowable costs subject to penalties are precluded from being
included in the contractor's final indirect cost rate proposals (e.g.,
the types of controls required for satisfactory participation in the
Department of Defense sponsored self-governance programs, specific
accounting controls over indirect costs, compliance tests which
demonstrate that the controls are effective, and Government audits
which have not disclosed recurring instances of expressly unallowable
costs); and
(2) The unallowable costs subject to the penalty were inadvertently
incorporated into the proposal; i.e., their inclusion resulted from an
unintentional error, notwithstanding the exercise of due care.
42.709-6 Contract clause.
Use the clause at 52.242-3, Penalties for Unallowable Costs, in all
solicitations and contracts over $500,000 except fixed-price contracts
without cost incentives or any firm-fixed-price contract for the
purchase of commercial items. Generally, covered contracts are those
which contain one of the clauses at 52.216-7, 52.216-13, 52.216-16, or
52.216-17, or a similar clause from an executive agency's supplement to
the FAR.
PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES
5. Section 52.242-3 is added to read as follows:
52.242-3 Penalties for Unallowable Costs.
As prescribed in 42.709-6, use the following clause:
Penalties for Unallowable Costs (Oct 1995)
(a) Definition. Proposal, as used in this clause, means either--
(1) A final indirect cost rate proposal submitted by the
Contractor after the expiration of its fiscal year which--
(i) Relates to any payment made on the basis of billing rates;
or
(ii) Will be used in negotiating the final contract price; or
(2) The final statement of costs incurred and estimated to be
incurred under the Incentive Price Revision clause (if applicable),
which is used to establish the final contract price.
(b) Contractors which include unallowable indirect costs in a
proposal may be subject to penalties. The penalties are prescribed
in 10 U.S.C. 2324 or 41 U.S.C. 256, as applicable, which is
implemented in Section 42.709 of the Federal Acquisition Regulation
(FAR).
(c) The Contractor shall not include in any proposal any cost
which is unallowable, as defined in Part 31 of the FAR, or an
executive agency supplement to Part 31 of the FAR.
(d) If the Contracting Officer determines that a cost submitted
by the Contractor in its proposal is expressly unallowable under a
cost principle in the FAR, or an executive agency supplement to the
FAR, that defines the allowability of specific selected costs, the
Contractor shall be assessed a penalty equal to--
(1) The amount of the disallowed cost allocated to this
contract; plus
(2) Simple interest, to be computed--
(i) On the amount the Contractor was paid (whether as a progress
or billing payment) in excess of the amount to which the Contractor
was entitled; and
(ii) Using the applicable rate effective for each six-month
interval prescribed by the Secretary of the Treasury pursuant to
Pub. L. 92-41 (85 Stat. 97).
(e) If the Contracting Officer determines that a cost submitted
by the Contractor in its proposal includes a cost previously
determined to be unallowable for that Contractor, then the
Contractor will be assessed a penalty in an amount equal to two
times the amount of the disallowed cost allocated to this contract.
(f) Determinations under paragraphs (d) and (e) of this clause
are final decisions within the meaning of the Contract Disputes Act
of 1978 (41 U.S.C. 601, et seq.).
(g) Pursuant to the criteria in FAR 42.709-5, the Contracting
Officer may waive the penalties in paragraph (d) or (e) of this
clause.
(h) Payment by the Contractor of any penalty assessed under this
clause does not constitute repayment to the Government of any
unallowable cost which has been paid by the Government to the
Contractor.
(End of clause)
[FR Doc. 95-19860 Filed 8-15-95; 8:45 am]
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