Federal Acquisition Regulation; Service Contracting

SUMMARY: The Civilian Agency Acquisition Council and the Defense

Acquisition Regulations Council are proposing to amend the Federal

Acquisition Regulation to implement Office of Federal Procurement

Policy (OFPP) Policy Letter 91-2, Service Contracting (previously

considered under withdrawn FAR Case 91-85, Services Contracting). The

OFPP policy letter prescribes policies and procedures for use of

performance-based contracting methods. This regulatory action was not

subject to Office of Management and Budget review under Executive Order

12866, dated September 30, 1993. This action is not a major rule under

5 U.S.C. 804.

DATES: Comments should be submitted on or before September 30, 1996 to

be considered in the formulation of a final rule.

ADDRESSES: Interested parties should submit written comments to:

General Services Administration, FAR Secretariat (MVRS), 18th and F

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

Please cite FAR case 95-311 in all correspondence related to this

case.

FOR FURTHER INFORMATION CONTACT:

Mr. Peter O'Such at (202) 501-1759 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 95-

311.

SUPPLEMENTARY INFORMATION:

A. Background

This proposed rule amends FAR Parts 7, 15, 16, 37, 46, and 52 to

establish policy for the Government's acquisition of services through

the use of performance-based contracting methods.

B. Regulatory Flexibility Act

The proposed changes may 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 of the

burden associated with identifying uncompensated overtime hours and

rates included in proposals and subcontractor proposals under the new

provision 52.327-XX, Identification of Uncompensated Overtime. An

Initial Regulatory Flexibility Analysis has been prepared and is

summarized as follows:

The proposed rule amends the Federal Acquisition Regulation (FAR)

Parts 7, 15, 16, 37, 46, and 52 to implement the Office of Federal

Procurement Policy (OFPP) Policy Letter 91-2, Service Contracting, and

makes other revisions to part 37. One of the revisions implements the

statutory requirement of section 834, Public Law 103-510, concerning

uncompensated overtime. Although the statutory requirement applies only

to DOD, both GSA and NASA have agreed the language is appropriate for

Governmentwide use. The Regulatory Flexibility Act applies only to the

language being added to the FAR concerning uncompensated overtime. The

rule will affect all small businesses that submit offers for services

estimated at $100,000 or more. Work hours provided, not the task to be

performed, are addressed by this rule.

The requirements concerning uncompensated overtime in this proposed

rule are currently in the Defense Federal Acquisition Regulation

(DFARS). When this proposed rule is implemented in the FAR as a final

rule, the DFARS language will be removed. There are no alternatives.

The Initial Regulatory Flexibility Analysis (IRFA) will be provided

to the Chief Counsel for Advocacy for the Small Business

Administration. A copy of the IRFA may be obtained from the FAR

Secretariat. Comments are invited. Comments from small entities

concerning the affected FAR subpart will be considered in accordance

with 5 U.S.C. 610. Such comments must be submitted separately and

should cite 5 U.S.C. 601, et seq. (FAR case 95-311), in correspondence.

C. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (Public Law 104-13) is deemed

to apply because the proposed rule contains information collection

requirements. Accordingly, a request for approval of a new information

collection requirement concerning the Service Contracting/Solicitation

provision, ``Identification of Uncompensated Overtime'', is being

submitted to the Office of Management and Budget under 44 U.S.C.

3507(d), et seq. Public comments concerning this request will be

invited through a Federal Register notice appearing in the Notices

section of this issue.

List of Subjects in 48 CFR Parts 7, 15, 16, 37, 46, and 52

Government procurement.

Dated: July 25, 1996.

Edward C. Loeb,

Director, Federal Acquisition Policy Division.

Therefore, it is proposed that 48 CFR Parts 7, 15, 16, 37, 46, and

52 be amended as set forth below:

1. The authority citation for 48 CFR Parts 7, 15, 16, 37, 46, 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 7--ACQUISITION PLANNING

2. Section 7.103 is amended by adding paragraph (q) to read as

follows:

7.103 Agency-head responsibilities.

* * * * *

(q) Ensuring that knowledge gained from prior acquisitions is used

to further refine requirements and acquisition strategies. For

services, greater use of performance-based contracting methods should

occur for follow-on acquisitions.

3. Section 7.105 is amended in the introductory text by adding a

sentence at the end of the paragraph; by revising paragraphs (a)(1),

(a)(4), and (b)(6); by redesignating paragraphs (b)(18) through (b)(20)

as (b)(19) through (b)(21) and adding a new (b)(18) to read as follows:

7.105 Contents of written acquisition plans.

* * * Acquisition plans for service contracts shall describe the

strategies for implementing performance-based contracting methods or

provide rationale for not using those methods (see subpart 37.5).

(a) Acquisition background and objectives. (1) Statement of need.

Introduce the plan by a brief statement of need. Summarize the

technical and contractual history of the acquisition. Discuss feasible

acquisition alternatives, the impact of prior acquisitions on those

alternatives, the impact of prior acquisitions on those alternatives,

and any related in-house effort.

* * * * *

(4) Capability or performance. Specify the required capabilities or

performance characteristics of the supplies or the performance

standards of the services

[[Page 40285]]

being acquired and state how they are related to the need.

* * * * *

(b) * * *

(6) Product or service descriptions. Explain the choice of product

or service description types (including performance-based contracting

descriptions) to be used in the acquisition.

* * * * *

(18) Contract administration. Describe how the contract will be

administered. In contracts for services, include how inspection and

acceptance corresponding to the work statement's performance criteria

will be enforced.

* * * * *

PART 15--CONTRACTING BY NEGOTIATION

4. Section 15.611 is amended in paragraph (c) by revising the

second sentence to read as follows:

15.611 Best and final offers.

* * * * *

(c) * * * If discussions are reopened, the contracting officer

shall, in accordance with agency procedures, issue an additional

request for best and final offers to all offerors still within the

competitive range.

* * * * *

PART 16--TYPES OF CONTRACTS

5. Section 16.104 is amended by adding paragraph (k) to read as

follows:

16. 104 Factors in selecting contract types.

* * * * *

(k) Acquisition history. Contractor risk usually decreases as the

requirement is repetitively acquired. Also, product descriptions or

descriptions of services to be performed can be more clearly defined.

6. Section 16.402-2 is amended by revising the heading and

paragraph (a); by redesignating paragraphs (b) through (g) as (c)

through (h) and adding a new paragraph (b); and by revising the newly

designated paragraph (e) to read as follows:

16.402-2 Performance incentives.

(a) Performance incentives may be considered in connection with

specific product characteristics (e.g., a missile range, an aircraft

speed, an engine thrust, or a vehicle maneuverability) or other

specific elements of the contractor's performance. These incentives

should be designed to relate profit or fee to results achieved by the

contractor, compared with specified targets.

(b) Performance incentives may be considered in connection with

service contracts for performance of objectively measurable tasks when

quality of performance is critical and incentives are likely to

motivate the contractor.

* * * * *

(e) Performance tests and/or assessments of work performance are

generally essential in order to determine the degree of attainment of

performance targets. Therefore, the contract must be as specified as

possible in establishing test criteria (such as testing conditions,

instrumentation precision, and data interpretation), and performance

standards (such as the quality levels of services to be provided).

* * * * *

7. Section 16.404-1 is amended by revising the introductory text of

paragraph (b)(1), and the last sentence of paragraph (b)(2) to read as

follows:

16.404-1 Cost-plus-incentive-fee contracts.

* * * * *

(b) Application. (1) A cost-plus-incentive-fee contract is

appropriate for services or development and test programs when (i) * *

*.

* * * * *

(2) * * * This approach may also apply to other acquisitions, if

the use of both cost and technical performance incentives is desirable

and administratively practical.

* * * * *

PART 37--SERVICE CONTRACTING

8. Section 37.000 is revised to read as follows:

37.000 Scope of part.

This part prescribes general policy and procedures for acquiring

services by contract, and includes but does not limit coverage to only

those services to which the Service Contract Act of 1965 applies (see

37.107). This part requires the use of performance-based contracting to

the maximum extent practicable and prescribes policies and procedures

for use of performance-based contracting methods; distinguishes between

contracts for personal services and those for nonpersonal services; and

includes special conditions to be observed in acquiring advisory and

assistance services. Dismantling, demolition, or removal of

improvements is covered in subpart 37.3. This part does not regulate

the obtaining of services by direct appointment, under normal civil

service employment procedures, or by cooperative agreement.

9. Section 37.101 is amended by adding, in alphabetical order, the

definition ``Performance-based contracting'' to read as follows:

37.101 Definitions.

* * * * *

Performance-based contracting means structuring all aspects of an

acquisition around the purpose of the work to be performed as opposed

to the manner by which the work is to be performed or broad and

imprecise statements of work.

* * * * *

10. Section 37.102 is amended by adding paragraph (d) to read as

follows:

37.102 Policy.

* * * * *

(d) The preferred way of acquiring services is through use of

performance-based contracting methods rather than on the basis of

buying hours.

11. Section 37.103 is amended by redesignating paragraphs (d) and

(e) and adding a new paragraph (d) to read as follows:

37.103 Contracting officer responsibility.

* * * * *

(d) Ensure that performance-based contracting methods are used to

the maximum extent practicable when acquiring services.

* * * * *

12. Section 37.106 is amended by adding paragraph (c) to read as

follows:

37.106 Funding and term of service contracts.

* * * * *

(c) Agencies with statutory multiyear authority shall consider the

use of this authority to encourage and promote economical business

operations when acquiring services.

13. Sections 37.115 through 37.115-3 are added to read as follows:

Sec.

37.115 Uncompensated overtime.

37.115-1 Scope.

37.115-2 General policy.

37.115-3 Solicitation provision.

* * * * *

37.115 Uncompensated overtime.

37.115-1 Scope.

This section implements Section 834 of Public Law 101-510 (10

U.S.C. 2331).

37.115-2 General policy.

(a) When professional or technical services are acquired on the

basis of the number of hours to be provided, rather than on the task to

be performed, the solicitation shall require offerors to identify

uncompensated overtime hours and the uncompensated overtime rate for

direct charge Fair Labor Standards Act--exempt personnel included in

their proposals and subcontractor

[[Page 40286]]

proposals. This includes uncompensated overtime hours that are in

indirect cost pools for personnel whose regular hours are normally

charged direct.

(b) Use of uncompensated overtime is not encouraged.

37.115-3 Solicitation provision.

Use the provision at 52.237-XX, Identification of Uncompensated

Overtime, in all solicitations valued at $100,000 or more, for

professional or technical services to be acquired on the basis of the

number of hours to be provided.

14. Subpart 37.5, consisting of sections 37.500 through 37.502-5 is

added to read as follows:

Subpart 37.5--Performance-Based Contracting

Sec.

37.500 Scope of subpart.

37.501 General.

37.502 Elements of performance-based contracting.

37.502-1 Statements or work.

37.502-2 Quality assurance.

37.502-3 Selection procedures.

37.502-4 Contract type.

37.502-5 Follow-on and repetitive requirements.

37.500 Scope of subpart.

This subpart prescribes policies and procedures for use of

performance-based contracting methods. It implements OFPP Policy Letter

91-2, Service Contracting.

37.501 General.

Performance-based contracting methods provide the means to ensure

that required performance quality levels are achieved and that with

respect to fixed price contracts, payment is made only for services

which meet contract standards. Performance-based contracts--

(a) Describe the requirements in terms of results required rather

than the methods of performance of the work;

(b) Use measurable (i.e., terms of quality, timeliness, quantity,

etc.) performance and quality assurance surveillance plans (see

46.103(a), and 46.401(a));

(c) Specify procedures for reduction of award fee or for reductions

to the price of a fixed-price contract when services are not performed

or do not meet contract requirements (see 46.407(f)); and

(d) Include performance incentives where appropriate.

37.502 Elements of performance-based contracting.

37.502-1 Statements of work.

Generally, statements or work shall define requirement in clear,

concise language identifying specific work to be accomplished.

Statements of work must be individually tailored to consider the period

of performance, deliverable items, if any, and the desired degree of

performance flexibility (see 11.105). However, in the case of task

order contracts, the statement of work need only define the scope of

the overall contract (see 16.504(a)(4)(iii)). Each task issued under a

task order contract shall clearly describe all services to be performed

(see 16.505(a)(2)). When preparing statements or work, agencies shall,

to the maximum extent practicable--

(a) Describe the work in terms of ``what'' is to be the required

output rather than either ``how'' the work is to be accomplished or the

number of hours to be provided;

(b) Enable assessment of work performance against measurable

performance standards;

(c) Rely on the use of measurable performance standards and

financial incentives in a competitive environment to encourage

competitors to develop and institute innovative and cost effective

methods of performing the work; and

(d) Avoid combining requirements into a single acquisition that is

too broad for the agency or a prospective contractor to manage

effectively.

37.502-2 Quality assurance.

Agencies shall develop quality assurance surveillance plans when

acquiring services (see subpart 46.2). These plans shall recognize the

responsibility of the contractor (see 46.105) to carry out its quality

control obligations and shall contain measurable inspection and

acceptance criteria corresponding to the performance standards

contained in the statement of work. The quality assurance plans shall

focus on the level of performance required by the statement of work,

rather than the methodology used by the contractor to achieve that

level of performance.

37.502-3 Selection procedures.

Agencies shall use competitive negotiations where appropriate to

ensure selection of services that offer the best value to the

Government, cost and other factors considered.

37.502-4 Contract type.

Contract types most likely to motivate contractors to perform at

optimal levels shall be chosen (see subpart 16.1). To the maximum

extent practicable, performance incentives, either positive or negative

or both, shall be incorporated into the contract to encourage

contractors to increase efficiency and maximize performance (see

subpart 16.4). These incentives shall correspond to the specific

performance standards in the quality assurance surveillance plan and

shall be capable of being objectively measured.

37.502-5 Follow-on and repetitive requirements.

When acquiring services which previously have been provided by

contract, agencies shall rely on the experience gained from the prior

contract to incorporate performance-based contracting methods to the

maximum extent practicable.

PART 46--QUALITY ASSURANCE

15. Section 46.103 is amended by revising paragraph (a) to read as

follows:

46.103 Contracting office responsibilities.

* * * * *

(a) Receiving from the activity responsible for technical

requirements any specifications for inspection, testing, and other

contract quality requirements essential to ensure the integrity of the

supplies or services (the activity responsible for technical

requirements is responsible for prescribing contract quality

requirements, such as inspection and testing requirements or, for

service contracts, a quality assurance surveillance plan);

* * * * *

16. Section 46.401 is amended by revising paragraph (a) to read as

follows:

46.401 General.

(a) Government contract quality assurance shall be performed at

such times (including any stage of manufacture or performance of

services) and places (including subcontractors' plants) as may be

necessary to determine that the supplies or services conform to

contract requirements. Quality assurance surveillance plans should be

prepared in conjunction with the preparation of the statement of work.

The plans should specify--

(1) All work requiring surveillance, and

(2) The method of surveillance.

* * * * *

17. Section 46.407 is amended by revising the introductory

paragraph (c)(1), and adding a new second and third sentence to (f) to

read as follows:

[[Page 40287]]

46.407 Noncomforming supplies or services.

* * * * *

(c)(1) In situations not covered by paragraph (b) of this section,

the contracting officer shall ordinarily reject supplies or services

when the nonconformance is critical or major. However, there may be

circumstances (e.g., reasons of economy or urgency) when acceptance of

such supplies or services is determined by the contracting officer to

be in the Government's interest. The contracting officer shall make

this determination, based upon--

* * * * *

(f) * * * For services, the contracting officer can consider

identifying the value of the individual work requirements or tasks

(subdivisions) which may be subject to price or fee reduction. This

value may be used to determine an equitable adjustment for

nonconforming services. * * *

* * * * *

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

18. Section 52.237-XX is added to read as follows:

52.237-XX Identification of uncompensated overtime.

As prescribed in 37.115-3, insert the following provision:

Identification of Uncompensated Overtime (Date)

(a) Definitions. As used in this provision--

Uncompensated overtime means the hours worked in excess of an

average of 40 hours per week by direct charge employees who are

exempt from the Fair Labor Standards Act, without additional

compensation. Compensated personal absences such as holidays,

vacations, and sick leave shall be included in the normal work week

for purposes of computing uncompensated overtime hours.

Uncompensated overtime rate is the rate which results from

multiplying the hourly rate for a 40 hour work week by 40, and then

dividing by the proposed hours per week. For example, 45 hours

proposed on a 40 hour work week basis at $20 per hour would be

converted to an uncompensated overtime rate of $17.78 per hour

($20.00 x 40 divided by 45 = $17.78).

(b) For any hours proposed against which an uncompensated

overtime rate is applied, the offeror shall identity in its proposal

the hours in excess of an average of 40 hours per week, by labor

category at the same level of detail as compensated hours, and the

uncompensated overtime rate per hour, whether at the prime or

subcontract level. This includes uncompensated overtime hours that

are in indirect cost pools for personnel whose regular hours are

normally charged direct.

(c) The offeror's accounting practices used to estimate

uncompensated overtime must be consistent with its cost accounting

practices used to accumulate and report uncompensated overtime

hours.

(d) Proposals which include unrealistically low labor rates, or

which do not otherwise demonstrate cost realism, will be considered

in a risk assessment and evaluated for award in accordance with that

assessment.

(e) The offeror shall include a copy of its policy addressing

uncompensated overtime with its proposals.

(End of provision)

[FR Doc. 96-19486 Filed 7-31-96; 8:45 am]

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