Federal Acquisition Regulation; Changes in Contract Administration and Audit Cognizance

SUMMARY: The Civilian Agency Acquisition Council and the Defense

Acquisition Regulations Council are proposing to amend the Federal

Acquisition Regulation (FAR) to add policies and procedures for

assigning and performing contract audit services and to clarify the

policy for assigning or delegating responsibility for establishing

forward pricing and billing rates, and final indirect cost rates. This

regulatory action was not subject to Office of Management and Budget

review under Executive Order 12866, dated September 30, 1993. This is

not a major rule under 5 U.S.C. 804.

DATES: Comments should be submitted on or before February 10, 1997 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 & F

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

E-mail comments submitted over Internet should be addressed to: www.arnet.gov">95-

[email protected]www.arnet.gov.

Please cite FAR case 95-022 in all correspondence related to this

case.

FOR FURTHER INFORMATION CONTACT: Ms. Linda Klein at (202) 501-3775 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 95-022.

SUPPLEMENTARY INFORMATION:

A. Background

In February 1994, the Office of Federal Procurement Policy formed a

Contract Audit Committee. The committee was divided into subcommittees.

This case implements recommendations of Subcommittee One to address

civilian agencies' contract administration and audit practices. The

rule amends FAR Parts 15, 42, 46, 47 and 52 to add policies and

procedures for assigning and performing contract audit services and to

clarify the policy for assigning or delegating responsibility for

establishing forward pricing and billing rates, and final indirect cost

rates.

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

proposed rule affects primarily internal Government operating

procedures. An Initial Regulatory Flexibility Analysis has, therefore,

not been performed. Comments from small entities concerning the

affected FAR parts 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 95-022), in correspondence.

C. Paperwork Reduction Act

The Paperwork Reduction Act does not apply because the proposed

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.

List of Subjects in 48 CFR Parts 15, 42, 46, 47 and 52

Government procurement.

Dated: December 4, 1996.

Edward C. Loeb,

Director, Federal Acquisition Policy Division.

Therefore, it is proposed that 48 CFR Parts 15, 42, 46, 47 and 52

be amended as set forth below:

1. The authority citation for 48 CFR Parts 15, 42, 46, 47 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 15--CONTRACTING BY NEGOTIATION

2. Section 15.809 is amended by revising the section heading and

the last sentence in paragraph (a) to read as follows:

15.809 Forward pricing rate agreements.

(a) * * * The cognizant Federal agency (see 42.003) shall determine

whether an FPRA will be established.

* * * * *

PART 42--CONTRACT ADMINISTRATION AND AUDIT SERVICES

3. Part 42 heading is revised to read as shown above.

4. Section 42.000 is revised and placed in a new subpart 42.0,

which is added to read as set forth below, and subparts 42.1 and 42.2

are revised to read as follows:

Sec.

Subpart 42.0--General

42.000 Scope of part.

42.001 Definitions.

42.002 Interagency agreements.

42.003 Cognizant Federal agency.

Subpart 42.1--Contract Audit Services

42.101 Contract audit responsibilities.

42.102 Assignment of audit services.

42.103 Audit services directory.

Subpart 42.2--Contract Administration Services

42.201 Contract administration responsibilities.

42.202 Assignment of contract administration.

42.203 Contract administration services directory.

Subpart 42.0--General

42.000 Scope of part.

This part prescribes policy and procedures for assigning and

performing contract administration and contract audit services.

42.001 Definitions.

As used in this part--

Cognizant audit agency means the agency responsible for performing

all required contract audit services at a business unit (as defined in

31.001).

Cognizant Federal agency means the Federal agency that on behalf of

all Federal agencies is responsible for establishing final indirect

cost rates and forward pricing rates, if applicable, and administering

cost accounting standards for all contracts in a business unit.

42.002 Interagency agreements.

(a) Agencies shall avoid duplicate audits, reviews, inspections,

and examinations of contractors or subcontractors, by more than one

agency, through the use of interagency agreements (see OFPP Policy

Letter 78-4, Field Contract Support Cross-Servicing Program).

[[Page 65307]]

(b) Subject to the fiscal regulations of the agencies, the

requesting agency may reimburse the servicing agency for rendered

services in accordance with the Economy Act of 1932 (31 U.S.C. 1535).

The hourly rate established under the interagency agreement between the

Department of Defense and the National Aeronautics and Space

Administration may be used by other agencies to reimburse the Defense

Contract Audit Agency for audit services.

(c) When an interagency agreement is established, the agencies are

encouraged to consider establishing procedures for the resolution of

issues that may arise under the agreement.

42.003 Cognizant Federal agency.

(a) Normally, when a contractor has contracts with more than one

agency, the agency with the largest dollar amount of negotiated

contracts should be the cognizant Federal agency.

(b) Once a Federal agency assumes cognizance for a contractor, it

shall remain cognizant for at least three years to ensure continuity

and ease of administration. If, at the end of the three years, another

agency has the largest dollar amount of negotiated contracts, the two

agencies shall coordinate and determine which will assume cognizance.

Subpart 42.1-Contract Audit Services

42.101 Contract audit responsibilities.

(a) The auditor is responsible for submitting information and

advice to the requesting activity based on the auditor's analysis of

the contractor's financial and accounting records or other related data

as to the acceptability of the contractor's incurred and estimated

costs, as well as for reviewing the financial and accounting aspects of

the contractor's cost control systems. The auditor is also responsible

for performing analyses and reviews which require access to the

contractor's financial and accounting records supporting proposed and

incurred costs.

(b) The Defense Contract Audit Agency (DCAA) is designated as the

Government cognizant audit agency for ``for-profit'' organizations and

those ``not-for-profit'' organizations identified in Attachment C to

OMB Circular A-122, Cost Principles for Nonprofit Organizations.

42.102 Assignment of audit services.

(a) As provided in agency procedures or interagency agreement,

contracting officers may request audit services directly from the

cognizant audit agency cited in the Directory of Federal Contract Audit

Offices. The audit request should include a suspense date and identify

any information needed by the contracting officer.

(b) The cognizant audit agency may decline requests for services in

accordance with interagency agreements on a case-by-case basis if

resources of the audit agency are inadequate to accomplish the tasks.

42.103 Audit services directory.

(a) DCAA maintains and distributes the Directory of Federal

Contract Audit Offices. The directory identifies cognizant audit

offices and the contractors over which they have cognizance. Changes to

audit cognizance are to be provided to DCAA for updating the directory.

(b) Agencies may obtain a copy of the directory or obtain

information concerning cognizant audit offices by contacting the

Defense Contract Audit Agency, ATTN: CMO, Publications Officer, 8725

John J. Kingman Road, Suite 2135, Fort Belvoir, Virginia 22060-6219.

Subpart 42.2--Contract Administration Services

42.201 Contract administration responsibilities.

(a) For each contract assigned for administration, the contract

administration office (CAO) (see definition at 2.101) shall----

(1) Perform the functions listed in 42.302(a) to the extent that

they apply to the contract, except for the functions specifically

withheld;

(2) Perform the functions listed in 42.302(b) only when and to the

extent specifically authorized by the contracting officer; and

(3) Request supporting contract administration under 42.202(e), and

(f) when it is required.

(b) The Defense Logistics Agency, Defense Contract Management

Command (DCMC), Fort Belvoir, Virginia, and certain civilian agencies

offer a wide variety of contract administration and support services to

other agencies.

42.202 Assignment of contract administration.

(a) Delegating functions. As provided in agency procedures,

contracting officers may delegate contract administration or

specialized support services either through interagency agreements, or

by direct request to the cognizant CAO listed in the Federal Directory

of Contract Administration Services Components. The delegation should

include----

(1) The name and address of the CAO designated to perform the

administration (this information is also to be entered in the

contract);

(2) Any special instructions, including any specific authorization

to perform functions listed in 42.302(b);

(3) A copy of the contract to be administered; copies of all

contracting agency regulations or directives that are--

(i) Incorporated into the contract by reference, or

(ii) Otherwise necessary to administer the contract, unless copies

have been provided previously.

(b) Special instructions. The contracting officer shall also advise

the CAO and the contractor (and other activities as appropriate) of any

functions withheld or additional functions delegated in the special

instructions under paragraph (a)(2) of this section.

(c) Delegating additional functions. For individual contracts or

groups of contracts, the contracting office may delegate to the CAO

functions not listed in 42.302; provided that--

(1) Prior coordination with the CAO ensures the availability of

required resources;

(2) In the case of authority to issue orders under provisioning

procedures in existing contracts and under basic ordering agreements

for items and services identified in the schedule, the head of the

contracting activity or designee approves the delegation; and

(3) The delegation does not require the CAO to undertake new or

follow-on acquisitions.

(d) Rescinding functions. The contracting officer of the requesting

agency may rescind or recall a contract or contract administration

function delegated to another agency for administration, except for

cost accounting standards, and negotiation of forward pricing rates and

indirect cost rates (see 42.003).

(e) Secondary delegations of contract administration. (1) A CAO

delegated administration of a contract under 42.202(a) or (c), or a

contracting office retaining administration, may request supporting

contract administration from the CAO cognizant of the contractor

location where performance of specific contract administration

functions is required. The request shall--

(i) Be in writing;

(ii) Clearly state the specific functions to be performed; and

(iii) Be accompanied by a copy of pertinent contractual and other

necessary documents.

(2) The prime contractor is responsible for managing its

subcontracts. The CAO's review of subcontracts is normally limited to

[[Page 65308]]

evaluating the prime contractor's management of them (see part 44).

Therefore, supporting contract administration shall not be used for

subcontracts unless--

(i) The Government would otherwise incur undue cost;

(ii) Successful completion of the prime contract is threatened; or

(iii) It is authorized under paragraph (f) of this section or

elsewhere in this part.

(f) Special surveillance. For major system acquisitions (see part

34), the contracting officer may designate certain high risk or

critical subsystems or components for special surveillance in addition

to requesting supporting contract administration. This surveillance

shall be conducted in a manner consistent with the policy of calling

upon the cognizant CAO to perform contract administration functions at

a contractor's facility (see 42.002).

(g) Refusing delegation of contract administration. An agency may

decline a request for contract administration services on a case-by-

case basis if resources of the agency are inadequate to accomplish the

tasks.

42.203 Contract administration services directory.

The Defense Contract Management Command (DCMC) maintains and

distributes the Federal Directory of Contract Administration Services

Components. The Directory lists the name and telephone number of those

DCMC and civilian agency offices which offer contract administration

services within designated geographic areas and at specified contractor

plants. Federal agencies may obtain a free copy of the Directory on CD-

ROM by writing to HQ Defense Logistics Agency, Attn: DLA-DASC-WP, 8725

John J. Kingman Road, Fort Belvoir, Virginia 22060.

5.-7. Section 42.301 is revised to read as follows:

42.301 General.

When a contract is assigned for administration under Subpart 42.2,

the contract administration office (CAO) shall perform contract

administration functions in accordance with this part, the contract

terms and, unless otherwise agreed to in an interagency agreement (see

42.002), the applicable regulations of the servicing agency.

8. Section 42.302 is amended by revising paragraphs (a)

introductory text, (a)(9), (a)(11) introductory text, (a)(11)(iv),

(a)(13), (a)(20), (a)(29), (a)(61) (a)(63) and (b) introductory text to

read as follows:

42.302 Contract administration functions.

(a) The following contract administration functions are normally

delegated to a CAO. The contracting officer may retain any of these

functions, except those in paragraphs (a) (5), (9), and (11) that

cannot be retained by the awarding agency unless it is the cognizant

Federal agency (see 42.001).

* * * * *

(9) Establish final indirect cost rates and billing rates for those

contractors meeting the criteria for contracting officer determination

in subpart 42.7 (see 42.001).

* * * * *

(11) In connection with Cost Accounting Standards (see 30.601,

42.001, and 48 CFR chapter 99 (FAR Appendix B))----

* * * * *

(iv) Negotiate price adjustments and execute supplemental

agreements under the Cost Accounting Standards clauses at 52.230-2,

52.230-3, 52.230-4, 52.230-5, and 52.230-6.

* * * * *

(13) Make payments on assigned contracts when prescribed in agency

acquisition regulations.

* * * * *

(20) For classified contracts, administer those portions of the

applicable industrial security program delegated to the CAO (see

subpart 4.4).

* * * * *

(29) Issue contract modifications requiring the contractor to

provide packing, crating, and handling services on excess Government

property. When the CAO determines it to be in the Government's

interests, the services may be secured from a contractor other than the

contractor in possession of the property.

* * * * *

(61) Obtain contractor proposals for any contract price adjustments

resulting from amended shipping instructions. CAOs shall review all

amended shipping instructions on a periodic, consolidated basis to

assure that adjustments are timely made. Except when the CAO has

settlement authority, the CAO shall forward the proposal to the

contracting officer for contract modification. The CAO shall not delay

shipments pending completion and formalization of negotiations of

revised shipping instructions.

* * * * *

(63) Cancel unilateral purchase orders when notified of

nonacceptance by the contractor. The CAO shall notify the contracting

officer when the purchase order is canceled.

* * * * *

(b) The CAO shall perform the following functions only when and to

the extent specifically authorized by the contracting office:

* * * * *

9. Section 42.602 is amended by revising paragraphs (c)(2) and (d)

to read as follows:

42.602 Assignment and location.

* * * * *

(c) * * *

(2) When the locations are under the contract administration

cognizance of more than one agency, the agencies concerned shall agree

on the responsible agency (normally on the basis of the agency with the

largest dollar balance of affected contracts). In such cases, agencies

may sometimes also consider geographic location.

(d) The directory of contract administration components referenced

in 42.203 includes a listing of CACO's and the contractors for which

they are assigned responsibility.

10. Section 42.603(a) is revised to read as follows:

42.603 Responsibilities.

(a) The CACO shall perform, on a corporate-wide basis, the contract

administration functions as designated by the responsible agency.

Typical CACO functions include--

(1) The determination of final indirect cost rates for cost-

reimbursement contracts,

(2) Establishment of advance agreements or recommendations on

corporate/home office expense allocations, and

(3) Administration of Cost Accounting Standards (CAS) applicable to

corporate-level and corporate-directed accounting practices.

* * * * *

11. Section 42.701 is amended by revising definitions for

``Business unit'' and ``Indirect cost'' and by adding in alphabetical

order a definition for ``Forward pricing rate agreement''. The revised

and added text reads as follows:

42.701 Definitions.

* * * * *

Business unit has the same meaning as defined in 31.001.

* * * * *

Forward pricing rate agreement has the same meaning as defined in

15.801.

Indirect cost has the same meaning as defined in 31.203.

* * * * *

12. Section 42.703-1 is amended by revising paragraph (a), and by

removing paragraph (c) introductory text, and revising (c)(1) to read

as follows:

[[Page 65309]]

42.703-1 Policy.

(a) A single agency (see 42.705-1) shall be responsible for

establishing final indirect cost rates for each business unit. These

rates shall be binding on all agencies and their contracting offices,

unless otherwise specifically prohibited by statute.

* * * * *

(c)(1) Final indirect cost rates shall be used for contract

closeout for a business unit unless the quick-closeout procedure in

42.708 is used. These final rates shall be binding for all cost-

reimbursement contracts at the business unit, subject to any specific

limitation in a contract or advance agreement; and

* * * * *

13. Section 42.704 is amended by revising paragraphs (a), (b), and

(c) to read as follows:

42.704 Billing rates.

(a) The contracting officer (or cognizant Federal agency official)

or auditor responsible under 42.705 for establishing the final indirect

cost rates ordinarily shall also be responsible for determining the

billing rates.

(b) The contracting officer (or cognizant Federal agency official)

or auditor shall establish billing rates on the basis of information

resulting from recent review, previous rate audits or experience, or

similar reliable data or experience of other contracting activities. In

establishing billing rates, the contracting officer (or cognizant

Federal agency official) or auditor should ensure that they are as

close as possible to the final indirect cost rates anticipated for the

contractor's fiscal period, as adjusted for any unallowable costs. When

the contracting officer (or cognizant Federal agency official) or

auditor determines that the dollar value of contracts requiring use of

billing rates does not warrant submission of a detailed billing rate

proposal, the billing rates may be established by making appropriate

adjustments from the prior year's indirect cost experience to eliminate

unallowable and nonrecurring costs and to reflect new or changed

conditions.

(c) Once established, billing rates may be prospectively or

retroactively revised by mutual agreement of the contracting officer

(or cognizant Federal agency official) or auditor and the contractor at

either party's request, to prevent substantial overpayment or

underpayment. When agreement cannot be reached, the billing rates may

be unilaterally determined by the contracting officer (or cognizant

Federal agency official.

* * * * *

14. Section 42.705-1 is amended by revising paragraphs (a)

introductory text, (a) (1), (3) and (4) and (b) (1) and (2) to read as

follows:

42.705-1 Contracting officer determination procedure.

(a) Applicability and responsibility. Contracting officer

determination shall be used for the following, with the indicated

cognizant contracting officer (or cognizant Federal agency official)

responsible for establishing the final indirect cost rates:

(1) Business units of a multi-divisional corporation under the

cognizance of a corporate administrative contracting officer (CACO)

(see subpart 42.6), with that officer responsible for the

determination, assisted, as required, by the administrative contracting

officers, assigned to the individual business units. Negotiations may

be conducted on a coordinated or centralized basis, depending upon the

degree of centralization within the contractor's organization.

* * * * *

(3) For business units not included in paragraph (a)(1) or (a)(2)

of this subsection, the contracting officer (or cognizant Federal

agency official) will determine whether the rates will be contracting

officer or auditor determined.

(4) Educational institutions (see 42.705-3.).

* * * * *

(b) Procedures. (1) In accordance with the Allowable Cost and

Payment clause at 52.216-7 or 52.216-13, the contractor shall submit to

the contracting officer (or cognizant Federal agency official) and, if

required by agency procedures, to the cognizant auditor a final

indirect cost rate proposal reflecting actual cost experience during

the covered period, together with supporting cost or pricing data.

(2) The auditor shall submit to the contracting officer an advisory

audit report--

(i) Identifying any relevant advance agreement or restrictive terms

of specific contracts, and

(ii) Including the information required by 15.805-5(e) (1) and (2).

* * * * *

15. Section 42.705-2 is amended by revising paragraphs (a)(2)

introductory teft, (a)(2)(iv), (b)(2) introductory text, and (b)(2)

(i), (ii), and (iv) to read as follows:

42.705-2 Auditor determination procedure.

(a) * * *

(2) In addition, auditor determination may be used for business

units that are covered in 42.705-1(a) when the contracting officer (or

cognizant Federal agency official) and auditor agree that the indirect

costs can be settled with little difficulty and any of the following

circumstances apply:

* * * * *

(iv) The contracting officer (or cognizant Federal agency official)

and auditor agree that special circumstances require auditor

determination.

(b) Procedures. (1) * * *

(2) Upon receipt of proposal the auditor shall--

(i) Audit the proposal and seek agreement on indirect costs with

the contractor;

(ii) Prepare an indirect cost rate agreement conforming to the

requirements of the contracts. The agreement shall be signed by the

contractor and the auditor;

* * * * *

(iv) If agreement with the contractor is not reached, forward the

audit report to the contracting officer (or cognizant Federal agency

official) identified in the Directory of Contract Administration

Services Components (see 42.203), who will then resolve the

disagreement; and

* * * * *

PART 46--QUALITY ASSURANCE

16. Section 46.103 is amended by revising paragraph (d) to read as

follows:

46.103 Contracting office responsibilities.

* * * * *

(d) When contract administration is retained (see 42.201),

verifying that the contractor fulfills the contract quality

requirements; and

* * * * *

17. Section 46.104 is amended by revising paragraph (f) to read as

follows:

46.104 Contract administration office responsibilities.

* * * * *

(f) Recommend any changes necessary to the contract,

specifications, instructions, or other requirements that will provide

more effective operations or eliminate unnecessary costs (see

46.103(c)).

18. Section 46.502 is amended by revising the second sentence to

read as follows:

46.502 Responsibility for acceptance.

* * * When this responsibility is assigned to a cognizant

contract administration office or to another agency (see 42.202(g)),

acceptance by that office or agency is binding on the Government.

[[Page 65310]]

47.301-3 Using the Defense Transportation System (DTS)

19. Section 47.301-3 is amended in paragraph (c) by removing

``42.202(d)'' and inserting ``42.202(a)''.

PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

20. Section 52.216-7 is amended by revising the clause date and the

first sentence of paragraph (d)(2) to read as follows:

52.216-7 Allowable Cost and Payment.

* * * * *

Allowable Cost and Payment (Date)

* * * * *

(d) Final indirect cost rates. (1) * * *

(2) The Contractor shall, within 90 days after the expiration of

each of its fiscal years, or by a later date approved by the

Contracting Officer, submit to the cognizant Contracting Officer (or

cognizant Federal agency official) responsible for negotiating its

final indirect cost rates and, if required by agency procedures, to

the cognizant audit activity proposed final indirect cost rates for

that period and supporting cost data specifying the contract and/or

subcontract to which the rates apply. * * *

* * * * *

(End of clause)

21. Section 52.216-13 is amended by revising the clause date and

paragraph (c)(2) to read as follows:

52.216-13 Allowable Cost and Payment--Facilities.

* * * * *

Allowable Cost and Payment--Facilities (Date)

* * * * *

(c) Negotiated indirect costs. (1) * * *

(2) The Contractor shall, within 90 days after the expiration of

each of its fiscal years, or by a later date approved by the

Contracting Officer, submit to the Contracting Officer (or cognizant

Federal agency official) and to the cognizant audit activity

proposed final indirect cost rates for that period and supporting

cost and data specifying the contract and/or subcontract to which

the rates apply. The proposed rates shall be based on the

Contractor's actual cost experience for the period. The appropriate

Government representative and the Contractor shall establish the

final indirect cost rates as promptly as practical after receipt of

the Contractor's proposal.

* * * * *

(End of clause)

[FR Doc. 96-31405 Filed 12-10-96; 8:45 am]

BILLING CODE 6820-EP-D