Federal Acquisition Regulation; Employee Compensation Costs

FEDERAL COMMUNICATIONS COMMISSION

DEPARTMENT OF DEFENSE

GENERAL SERVICES ADMINISTRATION

NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

48 CFR Parts 22, 31, and 42

[FAR Case 93-5]

Federal Acquisition Regulation; Employee Compensation 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 (CAAC) and the Defense

Acquisition Regulations Council (DARC) are considering changes to the

Federal Acquisition Regulation to clarify the regulations concerning

the allowability of personal services compensation costs. This

regulatory action was subject to Office of Management and Budget (OMB)

review pursuant to Executive Order No. 12866 dated September 30, 1993.

DATES: Comments should be submitted on or before December 12, 1994 to

be considered in the formulation of a final rule.

ADDRESSES: Interested parties should submit written comments to:

General Services Administration, FAR Secretariat (VRS), 18th & F

Streets, NW, Room 4037, Washington, DC 20405.

Please cite FAR case 93-5 in all correspondence related to this

case.

FOR FURTHER INFORMATION CONTACT:

Jeremy F. Olson at (202) 501-3221 in reference to this FAR case. For

general information, contact the FAR Secretariat, Room 4037, GS

Building, Washington, DC 20405; telephone: (202) 501-4755. Please cite

FAR case 93-5.

SUPPLEMENTARY INFORMATION:

A. Background

The Federal Acquisition Regulation (FAR) currently requires

contracting officers to evaluate the compensation systems of a

contractor and to make a determination as to the allowability of

personal services compensation costs claimed by the contractor (FAR

31.205-6 and 42.302(a)(1)). The Defense Contract Audit Agency has

raised concerns that the language in FAR 31.205-6(b) may be susceptible

to differing interpretations and that the FAR does not provide adequate

guidance with regard to contractor compensation systems. Some have

misinterpreted the current cost principle to place equal weight on all

factors affecting the reasonableness of compensation. Others have held

that all the factors affecting reasonableness are stated in the cost

principle.

This proposed rule is intended to make it clear that the Government

requires contractors to maintain sound compensation systems that

consistently provide employee compensation costs that are reasonable,

complaint with laws and regulations, and subject to applicable

financial controls. The proposed rule does not require a contractor to

change its compensation practices or its compensation system. The basic

requirement that the contractor demonstrate the reasonableness of its

compensation costs for personal services still exist. An adequate

system requires documented compliance with the cost principle, enforced

by internal reviews. An inadequate system does not automatically mean

that the compensation claimed is unreasonable. However, an inadequate

system may be a factor in the contracting officer's evaluation of

whether the compensation claimed is reasonable. An inadequate system

generally indicates that a contractor lacks sufficient documentation to

support the reasonableness of its compensation costs and/or lacks

adequate controls to ensure that its established policies are properly

enforced.

This proposed rule clarifies existing language at FAR 22.101-2;

adds definitions at FAR 31.001; adds a new paragraph FAR 31.205-6(a)(6)

addressing contractor compensation systems and referencing a new FAR

subpart 42.13; clarifies the standard for reasonableness of labor-

management compensation agreements at FAR 31.205-6 (b) and (c); removes

the examples from FAR 31.205-6(b); revises FAR 31.205-6(b)(2) to

clarify what special circumstances are covered, provide guidance to

contracting officers confronted with those situations, remove

references to the Internal Revenue Code, and make unallowable or place

limitations on certain high-risk type of payments; revises FAR 31.205-

6(i) to remove the current series of allowable examples and substitute

a general allowability rule to preclude the need to add further

examples to paragraph (i); clarifies FAR 42.302(a)(1); and establishes

a new FAR subpart 42.13 which contains policies, procedures, and

minimum standards applicable to contractor compensation system and

reviews of such systems.

This proposed rule also makes editorial changes, corrects

administrative errors, and adds clarifying language throughout FAR

31.205-6. Most notable of these changes is the redesignation of FAR

31.205-6(f)(2) to a restructured and renamed FAR 31.205-6(d) to improve

the flow of the cost principle and provide a more logical placement of

the language.

B. Regulatory Flexibility Act

This proposed rule clarifies a condition of cost allowability for

contractors who wish to be reimbursed under Government contracts

subject to FAR 31.2. The Regulatory Flexibility Act, 5 U.S.C. 601, et

seq., applies, but the rule is not expected to have a significant

economic impact on a substantial number of small entities because most

contracts awarded to small entities are awarded on a competitive,

fixed-price basis and the cost principles do not apply. An Initial

Regulatory Flexibility Analysis has, therefore, not been performed.

Comments from small entities concerning the affected FAR subpart will

be considered in accordance with Section 610 of the Act. Such comments

must be submitted separately and cite FAR Case 93-5 in correspondence.

C. Paperwork Reduction Act

The Paperwork Reduction Act (Pub. L. 96-511) does not apply because

the proposed rule does not impose recordkeeping requirements or

information collection requirements or collection 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.

List of Subjects in 48 CFR Parts 22, 31, and 42

Government procurement.

Dated: October 3, 1994.

Albert A. Vicchiolla,

Director, Office of Federal Acquisition Policy.

Therefore, it is proposed that 48 CFR parts 22, 31, and 42 be

amended as set forth below:

1. The authority citation for 48 CFR parts 22, 31, and 42 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 22--APPLICATION OF LABOR LAWS TO GOVERNMENT ACQUISITIONS

2. Section 22.101-2 is amended by revising paragraph (a) to read as

follows:

22.101-2 Contract pricing and administration.

(a) Contractor labor policies and compensation practices, whether

or not included in labor-management agreements, are not acceptable

bases for allowing costs in cost reimbursement contracts or for

recognition of costs in pricing fixed-price contracts if they result in

unreasonable or unallowable costs to the Government. For a discussion

of cost reasonableness, as it affects the allowability of costs

resulting from labor-management agreements, see 31.205-6(c).

* * * * *

PART 31--CONTRACT COST PRINCIPLES AND PROCEDURES

3. Section 31.001 is amended by adding in alphabetical order the

definitions ``Compensation system'', ``Job'', ``Job class of

employees'', and ``Labor market'' to read as follows:

Sec. 31.001 Definitions.

* * * * *

Compensation system, as used in this part, means the contractor's

system(s) for planning, administering, and controlling all remuneration

paid currently or accrued, in whatever form and whether paid

immediately or deferred, for services rendered by employees of a

contractor during contract performance.

* * * * *

Job, as used in this part, means a homogeneous cluster of work

tasks, the completion of which serves an enduring purpose for the

organization. Taken as a whole, the collection of tasks, duties, and

responsibilities constitutes the assignment for one or more individuals

whose work is of the same nature and is performed at the same skill/

responsibility level--as opposed to a position, which is a collection

of tasks assigned to a specific individual. Within a job, there may be

pay categories which are dependent on the degree of supervision

required by the employee while performing assigned tasks which are

performed by all persons with the same job.

Job class of employees, as used in this part, means employees

performing in positions within the same job.

* * * * *

Labor market, as used in this part, means an arena where

individuals exchange their labor for compensation. Labor markets are

identified and defined by some complex combination of the following

factors: (1) geography, (2) education and/or technical background

required, (3) experience required by the job, (4) licensing or

certification requirements, (5) occupational membership, and (6)

industry.

* * * * *

4. Section 31.205-6 is amended by revising paragraph (a), (b), (c),

(d), (f), and (i), to read as follows:

31.205-6 Compensation for personal services.

(b) General. Compensation for personal services includes all

remuneration paid currently or accrued, in whatever form and whether

paid immediately or deferred, for services rendered by employees to the

contractor during the period of contract performance (except as

otherwise provided for in other paragraphs of this subsection). It

includes, but is not limited to, salaries; wages; director's and

executive committee members' fees; bonuses (including stock bonuses);

incentive awards; employee stock options and stock appreciation rights;

employee stock ownership plans; employee insurance; fringe benefits;

contributions to pension, other post-retirement benefits, annuity, and

employee incentive compensation plans; and allowances for off-site pay,

incentive pay, location allowances, hardship pay, severance pay, and

cost of living differential. Compensation for person services is

allowable subject to the following general criteria and additional

requirements contained in other parts of this cost principle:

(1) Compensation for personal services must be for work performed

by the employee in the current year and must not represent a

retroactive adjustment of prior years' salaries or wages (but see

31.205-6(g), (h), (j), (k), (m), and (o) of this subsection). Each

element of compensation has a net present value for the current year

which expresses the cash value of the compensation paid to employees in

the year that it is earned.

(2) Compensation in total must be reasonable for the work

performed; however, specific restrictions on individual compensation

elements must be observed where they are prescribed.

(3) Each element of compensation must be based upon and conform to

the terms and conditions of the contractor's written compensation plan

that is followed consistently.

(4) No presumption of allowability will exist where the contractor

introduces major revisions to existing compensation plans or systems or

introduces new plans or systems (see 31.201-3). Advance agreements on

the allowability of increased costs are recommended (see 31.109).

(5) Costs that are otherwise unallowable under Subpart 31.2 shall

not be allowable under this subsection 31.205-6 solely on the basis

that they constitute compensation for personal services.

(6) Contractor compensation systems must have adequate internal and

administrative controls to ensure the integrity of the system and its

data (see 42.1304(b) for minimum standards).

(b) Reasonableness. The compensation for personal services paid or

accrued to each employee must be reasonable for the work performed.

Compensation will be considered reasonable if each of the allowable

elements making up the employee's compensation package is reasonable.

This paragraph addresses the reasonableness of compensation except when

the compensation is set by provisions of a labor-management agreement

under terms of the National Labor Relations Act or similar state

statues. The tests for reasonableness of labor-management agreements

are set forth in paragraph (c) of this subsection. In addition to the

provisions of 31.201-3, in testing the reasonableness of individual

elements for particular employees or job classes of employees,

consideration should be given to factors determined to be relevant by

the contracting officer.

(1) Among others, factors which may be relevant include the

adequacy of the contractor's compensation system (see subpart 42.13),

general conformity with the compensation paid by other firms of the

same size, the compensation paid by other firms in the same industry,

the compensation paid by firms in the same geographic area, the

compensation paid by firms engaged in predominantly non-Government

work, and the cost of comparable service obtainable from from outside

sources.

In addition to the adequacy of the compensation system, the

relative significance of other factors in evaluating the reasonableness

of compensation depends on the degree to which the factors are

representative of the labor market for the job being evaluated. In

administering this principle, it is recognized that not every

compensation case need be subjected in detail to the tests described in

this cost principle. The tests need be applied only when a general

review reveals amounts or types of compensation that appear

unreasonable or unjustified. Based on initial review of the facts,

contracting officers or their representatives may challenge the

reasonableness of any individual element or the sum of the individual

elements of compensation paid or accrued to particular employees or job

classes of employees. In such cases, there is no presumption of

reasonableness and, upon challenge, the contractor must demonstrate the

reasonableness of the compensation item in question. In doing so, the

contractor may introduce, and the contracting officer will consider,

not only any circumstances surrounding the compensation item

challenged, but also the magnitude of other compensation elements which

may be lower than would be considered reasonable in themselves.

However, the contractor's right to introduce offsetting compensation

elements into consideration is subject to the following limitations:

(i) Offsets will be considered only between the allowable elements

of an employee's (or a job class of employees') compensation package or

between the compensation packages of employees in jobs within the same

job grade or level.

(ii) Offsets will be considered only between the allowable portion

of the compensation elements of employees or job classes of employees.

However, any of the compensation elements or portions thereof, whose

amount is not measurable, shall not be introduced or considered as an

offset item. Compensation elements include:

(A) Wages and salaries.

(B) Incentive bonuses.

(C) Deferred compensation.

(D) Pension and savings plan benefits.

(E) Health insurance benefits.

(F) Life insurance benefits.

(G) Compensated personal absence benefits.

(iii) In considering offsets, the magnitude of the compensation

elements in question must be taken into account. In determining the

magnitude of compensation elements, the timing of receipt by the

employee must be considered.

(2) Compensation costs under certain conditions give rise to the

need for special consideration. Among such conditions are the

following:

(i) Compensation to sole proprietors, partners or persons who are

contractually entitled to acquire a partnership interest in a

contractor enterprise, persons who own 10 percent or more of an

incorporated contractor's stock, persons who are contractually entitled

to acquire at least 10 percent of an incorporated contractor's stock,

persons who are officers or directors of an incorporated contractor, or

persons who otherwise have a substantial financial interest in the

contractor's enterprise. To be allowable, compensation of each such

person or member of their family must be reasonable for the personal

services rendered. Such employees are assumed to have influence over

their own compensation and the compensation of their family members.

(A) The reasonableness of the compensation of each such employee or

family member must be separately supported for the cost to be

allowable. The determination of reasonableness for each such individual

will be based on the application of the provisions of this cost

principle to the individual with no offsets allowed from any other

employee, job class of employees, or other jobs within a job grade.

(B) If a contractor seeks to justify compensation for such

individuals in excess of the average compensation paid by comparable

firms (the reasonable compensation for the services rendered), it must

be based upon superior performance demonstrated by quantifiable

performance measurements which use comparisons with firms of similar

size and industry, consistently applied from year to year.

(C) Severance payments (see 31.205-6(g)) paid to such individuals

or to members of their families are not allowable in excess of the

payments otherwise allowable and paid in accordance with the provisions

of the contractor's severance policy in effect for the majority of the

contractor's employees for the three year period prior to the

individual's dismissal. However, severance payments are not allowable

if paid to sole proprietors, partners (or persons contractually

entitled to acquire a partnership interest in the contractor), or

persons who hold (or are contractually entitled to acquire) at least 10

percent of a corporate contractor's stock.

(D) Early retirement incentive payments (see 31.205-6(j)(7)) paid

to such individuals or to members of their families are not allowable

unless the payments are otherwise allowable, paid in accordance with

the provisions of a contractor early retirement incentive plan made

available to all other employees with similar eligibility. If the total

paid to all such individuals and members of their families exceeds 10

percent of the plan's cost, the excess over the 10 percent is not

allowable cost. However, early retirement incentive payments are not

allowable if paid to sold proprietors, partners (or persons

contractually entitled to acquire a partnership interest in the

contractor), or persons who hold (or are contractually entitled to

acquire) at least 10 percent of a corporate contractor's stock.

(E) Payment in lieu of salary for services rendered by partners and

sole proprietors is allowable as compensation to the extent that it

would otherwise be allowable and reasonable as compensation for the

same personal services if those services had been rendered by an

employee of the contractor.

(ii) Substantially increased compensation resulting from a change

in a contractor's compensation policy or system, particularly when it

is concurrent with an increase in the ratio of Government contracts to

other business, or any change in the treatment of allowability of

specific types of compensation related to changes in Government policy.

Contracting officers or their representatives should question such

increased costs unless the contractor presents supporting data to show

to the contracting officer's satisfaction that the changed compensation

plan or system produces reasonable costs to the Government (see also

31.201-3 and 31.205-6(a)(4)).

(iii) The contractor's business is such that its compensation

levels are not subject to the restraints that normally occur in the

conduct of competitive business.

(c) Labor-management agreements. If costs of compensation

established under ``arm's length'' negotiated labor-management

agreements are otherwise allowable, the costs are reasonable if, as

applied to work in performing Government contracts, they are not

determined to be unwarranted by the character and circumstances of the

work or discriminatory against the Government. The application of the

provisions of a labor-management agreement designed to apply to a given

set of circumstances and conditions of employment (e.g., work involving

extremely hazardous activities or work not requiring recurrent use of

overtime) is unwarranted when applied to a Government contract

involving significantly different circumstances and conditions of

employment (e.g., work involving less hazardous activities or work

continually requiring use of overtime). It is discriminatory against

the Government if it results in employee compensation (in whatever form

or name) in excess of that being paid for similar non-Government work

under comparable circumstances. Disallowance of costs will not be made

under this paragraph (c) unless--

(1) The contractor has been permitted an opportunity to justify the

costs; and

(2) Due consideration has been given to whether unusual conditions

pertain to Government contract work, imposing burdens, hardships, or

hazards on the contractor's employees, for which compensation that

might otherwise appear unreasonable is required to attract and hold

necessary personnel.

(d) Form of payment. (1) Compensation for current services includes

compensation paid (or to be paid in the future) to employees in the

form of cash, corporate securities, such as stocks, bonds, and other

financial instruments (see subparagraph (d)(2) of this subsection

regarding valuation), or other assets, products, or services valued at

fair market value.

(2) When compensation is paid with securities of the contractor or

of an affiliate, the following additional restrictions apply--

(i) Valuation placed on the securities shall be the fair market

value on the measurement date (e.g., the first date the number of

shares awarded is known) determined upon the most objective basis

available; and

(ii) Accruals for the cost of the securities before issuing the

securities to the employees shall be subject to adjustment according to

the possibilities that the employees will not receive the securities

and that their interest in the accruals will be forfeited.

* * * * *

(f) Bonuses and incentive compensation. (1) Incentive compensation

for management employees, cash bonuses, suggestion awards, safety

awards, and incentive compensation based on production, cost reduction,

or efficient performance are allowable provided the awards are paid or

accrued under a written plan established before the services are

rendered and the basis for the award is supported in writing according

to the criteria in the plan (see also 31.205-6(a)(3)).

(2) When the bonus and incentive compensation payments are

deferred, the costs are subject to the requirements of subparagraph

(f)(1) and paragraph (k) of this subsection.

* * * * *

(i) Compensation based on changes in the prices of corporate

securities or corporate security ownership.

(1) Any compensation which is calculated, or valued, based on

change in the price of corporate securities is unallowable.

(2) Any compensation represented by dividend payments or which is

calculated based on dividend payments is unallowable.

(3) If a contractor pays an employee in lieu of the employee

receiving or exercising a right, option, or benefit which would have

been unallowable under this paragraph (i), such payments are also

unallowable.

(4) See subparagraph (d)(2) of this subsection for valuation of

corporate securities provided as compensation and subparagraph (j)(8)

of this subsection for valuation of contributions to employee stock

ownership plans.

* * * * *

PART 42--CONTRACT ADMINISTRATION

5. Section 42.302(a)(1) is revised to read as follows:

Sec. 42.302 Contract administration functions.

(a) * * *

(1) Review the contractor's compensation system(s), as set forth in

Subpart 42.13.

* * * * *

6. Subpart 42.13 and the Table of Contents, consisting of sections

42.1300 through 42.1306, are added to read as follows:

Sec.

42.1300 Scope of subpart

42.1301 Definitions

42.1302 Policy

42.1303 Applicability

42.1304 General

42.1305 Responsibilities

42.1306 Procedures

SUBPART 42.13--CONTRACTOR COMPENSATION SYSTEMS

Sec. 42.1300 Scope of subpart.

This subpart prescribes policies, procedures, and standards for

evaluating contractor compensation systems.

42.1301 Definitions.

Compensation system has the same meaning as in 31.001.

Job has the same meaning as in 31.001.

Job analysis, as used in this subpart, means a systematic process

of collecting and evaluating relevant information about jobs to be used

in job evaluation processes.

Job evaluation, as used in this subpart, means a systematic process

of establishing the relative value of jobs within an organization based

on job analysis data and assigning jobs to a hierarchical order such as

job grades so that pay rates can be established.

Labor market has the same meaning as in 31.001.

42.1302 Policy.

All contractors subject to 42.1303 must have compensation systems

that consistently provide employee compensation costs that are

reasonable under 31.205-6, compliant with Government laws and

regulations, and subject to applicable financial control systems.

42.1303 Applicability.

(a) The specific requirements of this subpart apply to the extent

specified by the agency responsible for contract administration.

(b) This subpart applies to the total contractor organization or a

separate entity of it such as an affiliate, division, or subdivision

that performs its own compensation system administration.

(c) This subpart does not apply to small businesses; those portions

of contractor compensation systems that cover employees whose

compensation is subject to collective bargaining agreements; or

educational institutions and nonprofit organizations, unless the Office

of Management and Budget has authorized such entities to use the

commercial cost principles in Subpart 31.2.

(d) All contractors who receive prime contracts or subcontracts

must have a compensation system which conforms to the standards at

42.1304, except when all contracts and subcontracts are--

(1) Awarded under the set-aside, or section 8(a), procedures of

Part 19;

(2) Less than the small purchase threshold set forth in 13.000; or

(3) Other than cost type contracts or fixed-price contracts covered

by 31.102.

42.1304 General.

(a) Compensation system reviews are conducted to ensure that

contractor compensation systems comply with the policies in 42.1302.

(b) Compensation systems may be appropriately tailored, as

determined by the contracting officer, based on the size of the

contractor. As a minimum, such systems should--

(1) Adequately describe the policies, procedures, and operating

instructions regarding--

(i) Design and operation of job analysis and job evaluation

processes, wage and salary pay structure(s), and performance appraisal

and merit pay systems;

(ii) Pay policies, bases, and methods used to formulate pay

increases and starting rates;

(iii) Approval levels, guidelines, and supporting documentation for

all compensation actions; and

(iv) Compliance with laws, regulations, and contract requirements.

(2) Have jobs which--

(i) Are defined with valid, up-to-date documentation;

(ii) Have accurate job evaluation documentation;

(iii) Are accurately assigned to a job grade or level as determined

by job evaluation results; and

(iv) Assure that pay rates are competitive with comparable external

labor market average pay rates (i.e., are based on relevant labor

market survey data obtained, analyzed, and compared with the

contractor's benchmark jobs, including the five jobs with the highest

aggregate cost impact on the contractor).

(3) Not exceed the average of benchmark job pay rates within job

grades or levels by more than 10 percent of the average of relevant

labor market data without justification that there is no material harm

to the Government;

(4) Require periodic internal reviews of policy compliance,

administrative process measures, adequacy of documentation, and reports

to management on the results of reviews and recommendations for

improvements, and require corrective action plans to be developed,

implemented, and tested; and

(5) Provide audit trails and maintain records necessary to evaluate

and to verify through testing that the system is operating as desired.

42.1305 Responsibilities.

(a) The administrative contracting officer (ACO) will neither

approve nor disapprove a contractor's compensation system, but only

determine whether it adequately conforms to the standards set forth in

42.1304.

(b) The cognizant auditor will advise and assist the ACO in

evaluating both the contractor's compensation system and the

contractor's correction of any deficiencies. Auditors shall assess the

significance of contractor deficiencies and provide the ACO an estimate

of any adverse material impact to the Government resulting from such

deficiencies.

(c) If the contractor notifies the Government that disclosed

information relative to its compensation system contains employee,

commercial, or financial information which it regards as privileged and

confidential, such information shall be protected. Such information

shall not be released outside the Government except in accordance with

established agency procedures.

42.1306 Procedures.

(a) System evaluation. Cognizant audit and contract administration

activities will jointly establish and manage programs for evaluating

contractor compensation systems. Evaluations will be based on the

information provided by the contractor. Evaluations and reports shall

be accomplished as a contract audit and contract administration office

team effort. The ACO shall appoint a team leader and ensure

representation of appropriate functional specialties. Evaluations shall

be tailored to take full advantage of the day-to-day work done as an

integral part of both the contract audit and contract administration

activities. A system evaluation shall be conducted at least every three

years, except where the ACO, in consultation with the auditor,

determines that past experience and a current vulnerability assessment

of the contractor discloses low risk. If the ACO determines that the

Government is subject to high risk, compensation system evaluations

should be done more frequently. To the extent possible, the evaluation

team leader should inform the contractor and the ACO of significant

findings during the conduct of the evaluation. The team leader should

apprise the contractor during an exit conference of any significant

findings.

(b) Disposition of evaluation team findings--(1) Reporting on

findings. The report shall address the evaluation team findings and

recommendations. If there are significant compensation system

deficiencies, the report shall provide an estimate of any adverse

material impact to the Government resulting from those deficiencies and

a recommendation as to the acceptability of the contractor's corrective

action plan.

(2) Field pricing reports. When the report of an evaluation

indicates that there is a significant compensation system deficiency,

all field pricing reports for that contractor will contain a

recommendation relating to proposed cost and pricing data adjustments

necessary to protect the interest of the Government, until the

deficiency(ies) is (are) corrected.

(3) Initial notification to contractor. Upon receipt of the system

evaluation report, the ACO shall provide a copy to the contractor and

allow 30 days, or a reasonable extension thereto, for submission of its

written response. If no significant deficiencies are identified, the

ACO will notify the contractor in a timely manner.

(i) Contractor agreement. If the contractor agrees with the report

findings and recommendations, the contractor should be provided 60 days

from the original notification date to correct any identified

deficiencies or submit a corrective action plan showing milestones and

actions to eliminate the deficiencies.

(ii) Contractor disagreement. If the contractor disagrees with the

report findings and recommendations, the contractor's response should

contain the rationale for each area of disagreement.

(4) Evaluation of contractor's response. The ACO, in consultation

with the auditor, will evaluate the contractor's written response and

determine whether--

(i) The compensation system contains deficiencies which need

correction;

(ii) Any deficiencies are significant enough to result in the

disallowance of costs or suspension of payments under public vouchers;

and

(iii) Proposed corrective actions are adequate to correct the

deficiencies.

(5) Contracting officer responsibility. (i) When the ACO determines

that there is a significant compensation system deficiency, the ACO may

disallow, or suspend payment of, costs claimed on public vouchers in

accordance with 42.803. The disallowance or suspension of payment shall

remain in effect until the ACO determines that the contractor's

corrective action plan is adequate.

(ii) When a compensation system report indicates that there is a

significant deficiency, the ACO should ensure that the effect or the

deficiency(ies) is (are) considered in the review of the contractor's

estimating system pursuant to 15.811.

(6) Notification of determination. The ACO shall notify the

contractor and the auditor of the determination and any decision to

disallow costs or suspend payments under public vouchers. The notice

shall identify the deficiencies requiring correction and indicate

acceptance or rejection of the contractor's corrective action plan.

(7) Monitoring contractor's corrective action. The auditor and ACO

will monitor the contractor's progress toward correction of

deficiencies. If the contractor fails to make adequate progress toward

corrective action, the ACO shall take further appropriate action to

ensure that the contractor corrects the deficiency(ies). Actions which

should be considered by the ACO include, but are not limited to,

bringing the issue to the attention of higher level management,

disapproval of the contractor's cost estimating system, and/or

recommendations concerning award of future contracts.

[FR Doc. 94-24931 Filed 10-7-94; 8:45 am]

BILLING CODE 6820-34-M