Federal Acquisition Regulation; Consolidation and Revision of the Authority to Examine Records; Proposed Rule DEPARTMENT OF DEFENSE

SUMMARY: This proposed rule is issued pursuant to the Federal

Acquisition Streamlining Act of 1994, Public Law 103-355 (the Act). The

Federal Acquisition Regulatory Council is considering amending the

Federal Acquisition Regulation (FAR) to implement Sections 2201(a) and

2251(a) of the Act. This regulatory action was not subject to Office of

Management and Budget review under Executive Order 12866, dated

September 30, 1993.

DATES: Comments should be submitted on or before February 21, 1995 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 94-

740 in all correspondence related to this case.

FOR FURTHER INFORMATION CONTACT: Mr. Daniel J. Tucciarone at (703) 274-

7344 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 FAR case 94-740.

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, Simplified Acquisition Procedures, the Truth in

Negotiations Act, and introduction of the Federal Acquisition Computer

Network. In order to promptly achieve the benefits of the provisions of

the Act, the Government is issuing implementing regulations on an

expedited basis. We believe prompt publication of proposed rules

provides the public the opportunity to participate more fully in the

process of developing regulations.

This notice announces FAR revisions developed under FAR case 94-

740. By its terms, the Act at Sections 2201(a) and 2251(a) provides

that all cost-reimbursement, incentive, time-and-materials, labor-hour

or price-redeterminable subcontracts will be subject to audit.

Paragraph (g), therefore, requires the flowdown of the Audit and

Records--Negotiation clause into all subcontracts of these types and

into subcontracts when certified cost or pricing data is required, or

when cost performance reports are required. This rule, however, exempts

from the flowdown requirement all subcontracts below the simplified

acquisition threshold. This conforms the audit rights at the

subcontract level with those at the prime contract level.

The foregoing flowdown provisions continue to recognize that

individual flowdown paragraphs are self eliminating. This is

beneficial. For example, this means that the access to records clause

will be included in subcontracts prior to, and in anticipation of

issuance of a subcontract modification that requires cost or pricing

data. If the prime contract is modified and certified cost or pricing

data is required, the prime contractor will be in a better position to

obtain post award access to subcontractor records if the clause is

already in the subcontract and the prime contractor does not have to

negotiate the access to records clause into the subcontract at the time

the modification is negotiated. The approach is administratively more

convenient to the Government in that the burden of responsibility for

ensuring that the clause is included at the time of issuance of a

subcontract modification is removed from the contracting officer.

An Alternate III was added to provide for the waiver of the

examination of records by the Comptroller General.

The FAR Council is interested in an exchange of ideas and opinions

with respect to the regulatory implementation of the Act. For that

reason, the FAR Council is conducting a series of public meetings.

However, the FAR Council has not scheduled a public meeting on this

rule (FAR case 94-740) because of the clarity and non-controversial

nature of the rule. If the public believes such a meeting is needed

with respect to this rule, a letter requesting a public meeting and

outlining the nature of the requested meeting shall be submitted to and

received by the FAR Secretariat (see ADDRESSES caption) on or before

January 23, 1995.

The FAR Council will consider such requests in determining whether

a public meeting on this rule should be scheduled.

B. Regulatory Flexibility Act

This proposed rule is not expected to have a significant economic

impact on a substantial number of small entities within the meaning of

the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because the

majority of contracts with small businesses are not subject to the

audit requirement. 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 5 U.S.C.

610 of the Act. Such comments must be submitted separately and should

cite 5 U.S.C. 601, et seq. (FAR case 94-740), in correspondence.

C. Paperwork Reduction Act

The Paperwork Reduction Act does not apply because the proposed

changes to the FAR do not impose additional recordkeeping or

information collection requirements, or additional 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. For civilian agency procurements, recordkeeping is

reduced due to the higher cost or pricing data threshold. Overall, the

recordkeeping requirements are the minimum required by the Federal

Acquisition Streamlining Act.

D. Public Comments

Public comments are necessary because the proposed coverage may

have a significant cost or administrative impact on contractors or

offerors.

List of Subjects in 48 CFR Parts 4, 14, 15, 25, 50, and 52

Government procurement.

Dated: December 12, 1994.

CAPT. BARRY L. COHEN, SC, USN,

Project Manager for the Implementation of the Federal Acquisition

Streamlining Act of 1994.

Therefore, it is proposed that 48 CFR Parts 4, 14, 15, 25, 50, and

52 be amended as set forth below:

1. The authority citation for 48 CFR Parts 4, 14, 15, 25, 50, 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 4--ADMINISTRATIVE MATTERS

2. Section 4.702 is amended by revising paragraph (a) to read as

follows:

4.702 Applicability.

(a) This subpart applies to records generated under contracts that

contain one of the following clauses:

(1) Audit and Records--Sealed Bidding (52.214-26).

(2) Audit and Records--Negotiation (52.215-2).

(3) Audit--Commercial Items (52.215-00).

* * * * *

3. Section 4.703 is amended--

--in paragraph (a) by removing the phrase ``books, records,

documents,'' and inserting in its place ``records, which includes

books, documents, accounting procedures and practices, and other data,

regardless of type and regardless of whether such items are in written

form, in the form of computer data, or in any other form,'';

--in paragraph (b) introductory text and the first sentence of (b)(2)

by removing the word ``documents'' and inserting in its place

``records'';

--and revising paragraph (c) to read as follows:

4.703 Policy.

* * * * *

(c) Nothing in this section shall be construed to preclude a

contractor from duplicating or storing original records in electronic

form unless they contain significant information not shown on the

record copy. Original records need not be maintained or produced in an

audit if the contractor or subcontractor provides photographic or

electronic images of the original records and meets the following

requirements:

(1) The contractor or subcontractor has established procedures to

ensure that the imaging process preserves the integrity, reliability,

and security of the original records.

(2) The contractor or subcontractor maintains an effective indexing

system to permit timely and convenient access to the imaged records.

(3) The contractor or subcontractor retains the original records

for a minimum of one year after imaging to permit periodic validation

of the imaging systems.

* * * * *

PART 14--SEALED BIDDING

4. Section 14.201-7 is amended by revising paragraph (a), to read

as follows:

14.201-7 Contract clauses.

(a) When contracting by sealed bidding, the contracting officer

shall insert the clause at 52.214-26, Audit and Records--Sealed

Bidding, in solicitations and contracts if the contract amount is

expected to exceed the threshold at 15.804-2(a)(1) for submission of

cost or pricing data.

* * * * *

PART 15--CONTRACTING BY NEGOTIATION

5. Section 15.106-1 is removed and 15.106-2 is redesignated as

15.106-1 and revised to read as follows:

15.106-1 Audit and Records--Negotiation clause.

(a) This subsection implements 10 U.S.C. 2313, 41 U.S.C. 254d, and

OMB Circular No. A-133.

(b) The contracting officer shall, if contracting by negotiation,

insert the clause at 52.215-2, Audit and Records--Negotiation, in

solicitations and contracts except those (1) not exceeding the

simplified acquisition threshold in 48 CFR part 13; or (2) for

commercial items under the conditions in 15.106-2; or (3) for utility

services at rates not exceeding those established to apply uniformly to

the general public, plus any applicable reasonable connection charge.

(c) In facilities contracts, the contracting officer shall use the

clause with its Alternate I. In cost-reimbursement contracts with

educational institutions and other nonprofit organizations, the

contracting officer shall use the clause with its Alternate II. If the

examination of records by the Comptroller General is waived in

accordance with 25.901, use the clause with its Alternate III.

6. Section 15.805-5 is amended in paragraph (a)(1) introductory

text by inserting a new second and third sentence to read as follows:

15.805-5 Field pricing support.

(a)(1) * * * No preaward audit shall be performed to evaluate

proposed indirect costs under any contract, subcontract, or

modification to be entered into, in which the contracting officer

determines that the objectives of the audit can be reasonably met by

accepting the results of an audit conducted by any department or agency

within one year preceding the date of the contracting officer's

determination. The contracting officer should contact the cognizant

audit office to determine the existence of audits addressing proposed

indirect costs, and shall denote such determinations in field audit

requests. * * *

* * * * *

PART 25--FOREIGN ACQUISITION

7. Section 25.000 is amended by revising the last sentence to read

as follows:

25.000 Scope of part.

* * * This part also provides policies and procedures for the

application to foreign acquisitions of international agreements,

customs and duties, the clause at 52.215-2, Audit and Records--

Negotiation, and use of local currency for payment.

8. Section 25.901 is amended by revising paragraphs (b), (c),

(d)(2), (d)(3), and (d)(5) to read as follows:

25.901 Omission of examination of records clause.

* * * * *

(b) Policy. As required by 10 U.S.C. 2313, 41 U.S.C. 254d, and

15.106-1(b), the contracting officer shall consider for use in

negotiated contracts with foreign contractors, whenever possible, the

basic clause at 52.215-2, Audit and Records--Negotiation, which

authorizes examination of records by the Comptroller General. Use of

the clause with Alternate III should be approved only after the

contracting agency, having considered such factors as alternate sources

of supply, additional cost, and time of delivery, has made all

reasonable efforts to include the clause.

(c) Conditions for use of Alternate III. The contracting officer

may use the clause at 52.215-2, Audit and Records--Negotiation, with

its Alternate III in contracts with foreign contractors--

(1) If the agency head or designee determines, with the concurrence

of the Comptroller General, that waiver of the right to examination of

records by the Comptroller General will serve the public interest; or

(2) If the contractor is a foreign government or agency thereof or

is precluded by the laws of the country involved from making its

records, as defined at 4.703(a), available for examination, and the

agency head determines, after taking into account the price and

availability of the property or services from United States sources,

that waiver of the right to examination of records by the Comptroller

General best serves the public interest.

(d) * * *

(2) Describe the efforts to include the basic clause;

(3) State the reasons for the contractor's refusal to include the

basic clause;

* * * * *

(5) Determine that it will serve the interest of the United States

to use the clause with its Alternate III.

PART 50--EXTRAORDINARY CONTRACTUAL ACTIONS

50.307 [Amended]

9. Section 50.307 is amended in paragraph (b) by removing ``52.215-

1, Examination of Records by Comptroller General'' and inserting in its

place ``52.215-2, Audit and Records--Negotiation''.

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

10. Section 52.214-26 is revised to read as follows:

52.214-26 Audit and Records--Sealed Bidding.

As prescribed in 14.201-7(a), insert the following clause:

Audit and Records--Sealed Bidding (Date)

(a) As used in this clause, records include books, documents,

accounting procedures and practices, and other data, regardless of

type and regardless of whether such items are in written form, in

the form of computer data, or in any other form.

(b) Certified cost or pricing data. If the Contractor has been

required to submit certified cost or pricing data in connection with

the pricing of any modification to this contract, the Contracting

Officer or an authorized representative of the Contracting Officer

shall have the right to examine and audit all of the Contractor's

records, including computations and projections, related to--

(1) The development of the proposal for the modification;

(2) The discussions conducted on the proposal(s), including

those related to negotiating;

(3) Pricing of the modification; or

(4) Performance of the modification, that the Contracting

Officer or an authorized representative of the Contracting Officer

considers useful in the evaluation of the accuracy, completeness,

and currency of the certified cost or pricing data. In the case of

pricing any modification, the Comptroller General of the United

States or a representative shall have the same rights.

(c) Availability. The Contractor shall make available at its

office at all reasonable times the materials described in paragraph

(b) of this section, for examination, audit, or reproduction, until

3 years after final payment under this contract, or for any other

period specified in Subpart 4.7 of the Federal Acquisition

Regulation (FAR). FAR Subpart 4.7, Contractor Records Retention, in

effect on the date of this contract, is incorporated by reference in

its entirety and made a part of this contract.

(1) If this contract is completely or partially terminated, the

records relating to the work terminated shall be made available for

3 years after any resulting final termination settlement.

(2) Records pertaining to appeals under the Disputes clause or

to litigation or the settlement of claims arising under or relating

to the performance of this contract shall be made available until

disposition of such appeals, litigation, or claims.

(d) The Contractor shall insert a clause containing all the

provisions of this clause, including this paragraph (d), in all

subcontracts expected to exceed the threshold in FAR 15.804-2(a)(1)

for submission of cost or pricing data.

(End of clause)

52.215-1 [Reserved]

11. Section 52.215-1 is removed and reserved.

12. Section 52.215-2 is revised to read as follows:

52.215-2 Audit and Records--Negotiation.

As prescribed in 15.106(1)(b), insert the following clause:

Audit and Records--Negotiation (Date)

(a) As used in this clause, records include books, documents,

accounting procedures and practices, and other data, regardless of

type and regardless of whether such items are in written form, in

the form of computer data, or in any other form.

(b) Examination of costs. If this is a cost-reimbursement,

incentive, time-and-materials, labor-hour, or price redeterminable

contract, or any combination of these, the Contractor shall maintain

and the Contracting Officer or an authorized representative of the

Contracting Officer shall have the right to examine and audit all

records and other evidence which reflect properly all costs claimed

to have been incurred or anticipated to be incurred directly or

indirectly in performance of this contract, or which may contain

information useful in the evaluation of the allowability of such

costs. This right of examination shall include inspection at all

reasonable times of the Contractor's plants, or parts of them,

engaged in performing the contract.

(c) Certified cost or pricing data. If the Contractor has been

required to submit certified cost or pricing data in connection with

any pricing action relating to this contract, the Contracting

Officer or an authorized representative of the Contracting Officer

shall have the right to examine and audit all of the Contractor's

records, including computations and projections, related to--

(1) The development of the proposal for the contract,

subcontract, or modification;

(2) The discussions conducted on the proposal(s), including

those related to negotiating;

(3) Pricing of the contract, subcontract, or modification; or

(4) Performance of the contract, subcontract or modification,

that the Contracting Officer or an authorized representative of the

Contracting Officer considers useful in the evaluation of the

accuracy, completeness, and currency of the certified cost or

pricing data.

(d) Comptroller General--(1) The Comptroller General of the

United States, or a duly authorized representative of the

Comptroller General, shall have access to and the right to examine

any of the Contractor's directly pertinent records involving

transactions related to this contract or subcontract.

(2) This paragraph may not be construed to require the

Contractor or Subcontractor to create or maintain any record that

the Contractor or Subcontractor does not maintain in the ordinary

course of business or pursuant to a provision of law.

(e) Reports. If the Contractor is required to furnish cost,

funding, or performance reports, the Contracting Officer or an

authorized representative of the Contracting Officer shall have the

right to examine and audit the supporting records and materials, for

the purpose of evaluating (1) the effectiveness of the Contractor's

policies and procedures to produce data compatible with the

objectives of these reports and (2) the data reported.

(f) Availability. The Contractor shall make available at its

office at all reasonable times the records, materials, and other

evidence described in paragraphs (a), (b), (c), (d), and (e) of this

section, for examination, audit, or reproduction, until 3 years

after final payment under this contract or for any shorter period

specified in Subpart 4.7, Contractor Records Retention, of the

Federal Acquisition Regulation (FAR), or for any longer period

required by statute or by other clauses of this contract. In

addition--

(1) If this contract is completely or partially terminated, the

records relating to the work terminated shall be made available for

3 years after any resulting final termination settlement; and

(2) Records relating to appeals under the Disputes clause or to

litigation or the settlement of claims arising under or relating to

this contract shall be made available until such appeals,

litigation, or claims are finally resolved.

(g) The Contractor shall insert a clause containing all the

terms of this clause, including this paragraph (g), in all

subcontracts under this contract--

(1) That are cost-reimbursement, incentive, time-and-materials,

labor-hour, or price-redeterminable type or any combination of

these;

(2) For which certified cost or pricing data are required; or

(3) That require the subcontractor to furnish reports as

discussed in (e) altering the clause only as necessary to identify

properly the contracting parties and the Contracting Officer under

the Government prime contract. Subcontracts not exceeding the

simplified acquisition threshold in Part 13 are exempt from this

flowdown requirement.

(End of clause)

Alternate I (Date). As prescribed in 15.106-1(b), in facilities

contracts, add the following sentence at the end of paragraph (b) of

the basic clause:

The obligations and rights specified in this paragraph shall

extend to the use of, and charges for the use of, the facilities

under this contract.

Alternate II (Date). As prescribed in 15.106-1(b), in cost-

reimbursement contracts with educational and other non-profit

institutions, add the following paragraph (h) to the basic clause:

(h) The provisions of OMB Circular No. A-133, ``Audits of

Institutions of Higher Learning and Other Nonprofit Institutions,''

apply to this contract.

Alternate III (Date). As prescribed in 15.106-1(b), delete

paragraph (d) of the basic clause and renumber the remaining

paragraphs accordingly.

[FR Doc. 94-31532 Filed 12-22-94; 8:45 am]

[BILLING CODE 6820-34-P]